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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ____________________ to ____________________
Commission file number 026573
------
PHYSICAL SPA & FITNESS INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer in its charter)
DELAWARE 98-0203281
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14/F Lee Theatre Plaza
99 Percival St., Causeway Bay
Hong Kong Not applicable
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 852 2572-8888
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ] NO [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
State issuer's revenues for its most recent fiscal year: $38,887,000
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of December 31, 2000 was $374,000 based upon the average of
the last available bid and asked price of the Common Stock of $0.187 as of
December, 2000.
The number of shares outstanding of the issuer's classes of Common
Stock as of December 31, 2000: 10,000,000
Common Stock, $.001 Par Value 10,000,000 shares
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
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. 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.
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND OF THE COMPANY
Physical Spa & Fitness Inc. (the "Company"), through its subsidiaries,
operates fitness and spa centers in Hong Kong and the People's Republic of China
("China" or the "PRC"). The Company currently operates fourteen facilities: ten
in Hong Kong and four in China (including one in Macau) under the name
"PHYSICAL", with the exception of Renaissance Beauty Centre (see "Company
Organization"). All of the Company's operations, including the operating of the
fitness and spa centers, property holding, investment holding and other
corporate activities are conducted through the Company's wholly-owned or
majority-owned subsidiaries or joint ventures (see "Business of the Company
Organization"). The fitness and spa centers in Hong Kong are operated by the
Company's subsidiaries. Physical Health Centre Hong Kong Limited, a Hong Kong
corporation and a majority (91.4%) owned subsidiary of the Company, operates the
following centers in Hong Kong: Causeway Bay, Tsimshatsui, Shatin, Mei Foo and
Kowloon City. Another four wholly owned subsidiaries of the Company, Physical
Health Centre (Tsuen Wan) Limited, Physical Health Center (TST) Limited,
Physical Health Centre (Tuen Mun) Limited and Physical Health Centre (E House)
Limited (formerly known as Global Resources Limited) respectively operates the
Tsuen Wan Centre (opened in July, 1998), the Sheraton Hotel center (opened in
July, 1999), the Tuen Mun Centre (opened in July, 2000), and the Elizabeth House
Centre (opened in April, 2001). All of these companies are Hong Kong
corporations. Renaissance Beauty Centre is operated by Supreme Resources
Limited, which was previously a majority (70%) owned subsidiary of the Company
and became a wholly-owned subsidiary in 2000. Supreme Resources Limited is also
a Hong Kong corporation.
1
The Company's facilities in China are operated by two joint ventures:
Shanghai Physical Ladies' Club Co., Ltd. ("Shanghai Joint Venture"), which
operates two centers in the city of Shanghai, and Dalian Physical Ladies' Club
Co., Ltd. ("Dalian Joint Venture"), which operates fitness and spa facility in
the city of Dalian. The Company, through its subsidiaries, holds 100% (increased
from 92.5% in 2000) interest in the Shanghai Joint Venture and a 90% interest in
the Dalian Joint Venture. The minority interest in the Dalian joint ventures is
held by the joint venture's Chinese partner. China regulations of the fitness
and spa facilities encourage joint ventures with a foreign company and provide
less restrictive regulations of such form of business entities. See "Government
Regulation - China".
The Company's facility in Macau is operated by a wholly-owned
subsidiary of the Company, Su Sec Pou Physical Health Centre (Macau) Limited,
which is a Macau corporation.
The Company provides its customers, at each location, with access to a
wide range of U.S.- styled fitness and spa services. The Company offers to its
customers a membership for the use of its fitness facilities, which include
extensive aerobics programs, personalized training, cardiovascular conditioning
and strength training. The facilities are equipped with the latest Western
exercise equipment, including Life Fitness, Cybex, Flex and Precor. Spa and
beauty treatment services are provided to both members and visitors, and include
skin care and facial treatments, massage, relaxation programs and
weight-management programs. The Company also sells at the facilities a variety
of exercise clothing and European beauty products. Based on the number of the
Company's facilities members, management believes that the Company is among the
top providers of fitness, exercise, and spa/beauty treatment services in Hong
Kong and China, with approximately 70,000 members.
The Company's strategy is to provide a one-stop fitness and beauty
center for its customers. With the exception of the Mei Foo and Elizabeth House
locations in Hong Kong, all other facilities in Hong Kong and China are
exclusively for women. Management believes that the Company's strong market
presence in Hong Kong and its successful entrance into China's market is a
result of its strategy of combining fitness and beauty services in a single
facility that offers state-of-the-art exercise equipment, high quality beauty
treatments and professional staff.
The Company believes that it is one of the first companies to provide
Western fitness and spa services in China. In 1994, the predecessor companies of
Physical Beauty & Fitness Holdings Limited, a British Virgin Islands corporation
("Physical Limited"), the holding company of the Company's subsidiaries, began a
process of expansion into targeted market segments in China. In 1994, the
Company through Shanghai Joint Venture opened the Company's first China
operation in Huangpu, Shanghai, with a fitness center comprising of
approximately 15,000 square feet to provide fitness and spa treatment
facilities. Another center of similar size was opened in Hongqiao, Shanghai in
September 1995,through Shanghai Joint Venture. The Hongqiao outlet was relocated
to Xu Hui with enhanced facilities in early March, 2001. A third China operation
in Dalian commenced in April 1996 and is conducted through Dalian Joint Venture.
See "Business of the Company - Organization". The Company's facilities in China
are operated under the name "Physical Ladies' Club", and the Company registered
a servicemark under that name in Chinese language, which precludes others from
the use of the same name. See "Business of the Company - Trademarks and Trade
Names".
In the opinion of the Company's management, current competition in China
is, in general, comprised mainly of government operated facilities that offer
either fitness or beauty services, in small facilities that lack modern
equipment. The Company is aware of no Western quality facilities of comparable
size to that of the Company's facilities currently operating in China. The
Company expects that rising consumer incomes, increasing health awareness and
growing access to foreign goods and trends, should continue to create increased
demand for fitness and spa services in China. In 1996, the Company (through its
subsidiaries) entered into two additional joint ventures in Zhongshan (Zhongshan
Joint Venture) and Shenzhen (Shenzhen Joint Venture), China, however, such joint
ventures have not commenced any operations yet. The Company explores the
possibilities of opening the centers in Zhongshan and Shenzhen in the future,
however, there can be no assurances given that such joint ventures will start
operations or that such centers will be opened as currently contemplated by the
management. See "Business of the Company - Business Strategy".
2
The Company's strategy for maintaining its strong presence in Hong Kong
is to continue to provide existing and new members with high quality services at
an affordable price and by periodically upgrading the facilities as new
developments and technology emerge in the industry. The Company's objective is
to add new services and treatments to keep the Company current with market
trends and to promote and enhance the Company's reputation of providing value-
driven services to its customers. The Company places heavy emphasis on staff
training which is supported by an in-house training department and on-going
classes. In 2000, the Company opened two new fitness centers. One is in Tuen
Mun, a densely populated district in the New Territories, Hong Kong. Another is
in Macau which is strategically located at the mouth of Pearl River on the
border of China. The Company also opened a new center in Elizabeth House,
Causeway Bay, Hong Kong in early April, 2001 which is offering fitness services
to both male and female customers. See "Business of the Company - Properties".
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions. Prior to acquisition of Physical Limited,
the Company had no revenue producing operations, but planned to enter into joint
ventures and/or acquisitions originally in the area of real estate to expand its
operations. In October, 1996, the Company closed a transaction with Ngai Keung
Luk (Serleo), a 100% shareholder of Physical Limited, whereby the Company
entered into a Share Exchange Agreement with Ngai Keung Luk (Serleo), pursuant
to which the Company issued 8,000,000 shares of its Common Stock to Ngai Keung
Luk (Serleo) in exchange for all of the outstanding shares of Physical Limited
(the "Closing"). Subsequently, the Company changed its name to "Physical Spa &
Fitness Inc." in November, 1996, to reflect the new business operations of the
Company. At the Closing the then current management of the Company resigned and
was replaced by the current management of the Company. See "Management."
The Company effected a 1.333333-for-1 reverse split of its common stock
in October 1997 and a 1-for-1.333333 forward split of its common stock in June
1998. All references in this Report to shares of Common Stock of the Company
have been adjusted for the effects of the reverse stock split and forward stock
split.
The Company maintains its executive and administrative office Hong Kong
at:
14/F., Lee Theatre Plaza
99 Percival St., Causeway Bay, HONG KONG
The telephone number of the Company in Hong Kong is (852) 2572-8888.
Unless the context requires otherwise, as used herein, any reference to
the Company includes the Company's subsidiaries - Physical Beauty & Fitness
Holdings Limited, Physical Health Centre Hong Kong Ltd., Regent Town Holdings
Ltd., Supreme Resources Ltd., Physical Health Centre (Tuen Mun) Ltd. (formerly
known as Physical Health Centre (Zhong Shan) Limited), Zhongshan Physical
Ladies' Club, Ltd., Ever Growth Ltd., Proline Holdings Ltd., Shanghai Physical
Ladies' Club Company Ltd., Shanghai Physical Ladies' Club Co., Ltd., Jade Regal
Holdings Ltd., Physical Health Centre( Dalian) Ltd., Dalian Physical Ladies'
Club Co. Ltd., Star Perfection Holdings Ltd., Physical Health Centre (Shenzhen)
Ltd., Shenzhen Physical Ladies' Club Company Ltd., Physical Health Centre (Tsuen
Wan) Limited, Physical Health Centre (Macau) Limited, Su Sec Pou Physical Health
Centre (Macau) Limited, Physical Health Centre (TST) Limited, and Physical
Health Centre (E House) Limited (formerly known as Global Resources Limited).
See also "Business - Organization".
3
THE COMPANY'S BUSINESS
General
- -------
The Company's fitness and spa centers are located in or near urban areas
in highly populated areas of Hong Kong and major metropolitan cities in China
and most of them are operated under long-term leases. With the exception of Mei
Foo center, a portion of which is owned by the Company (see "Business -
Properties"), the Company does not own the real property on which the centers
are located, but owns the leasehold improvements and equipment with respect to
each center. Generally, the Company's centers average 20,000 square feet and
include a workout area including a broad range of fitness equipment, changing
room, sauna and steam facilities and a separate area devoted exclusively to
professional spa and beauty treatment programs. Each center typically includes a
laser TV room with lounge, health drink bar and sells a range of exercise
clothing, European beauty products and cosmetics.
The Company's strategy is to grow through expansion of its fitness and
spa facilities in Hong Kong and China, as well as to explore the opportunities
for its fitness and spa services in other countries of Far East. The Company
intends to build on its continuous operating presence (over 10 years) in Hong
Kong, the relationships in China established by the Company's executives and
senior staff and the Company's policy of offering what it believes are the
state-of-the-art exercise and spa facilities and beauty treatments at affordable
prices in their respective markets. In addition, the Company is closely
monitoring potential opportunities in the Philippines, Taiwan, Malaysia and
Indonesia.
Organization
- ------------
The Company's operations are conducted through its subsidiaries in Hong
Kong and Sino-foreign joint ventures in China. A number of the Company's
subsidiaries have been incorporated in the British Virgin Islands, primarily for
tax reasons. Such structure provides greater flexibility for the Company in
obtaining tax benefits, especially in case of corporate accounts. Set forth
below is the description of the Company's subsidiaries and their respective
roles in the organizational structure of the Company.
EQUITY INTEREST
DATE OF ACQUISITION / PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY FORMATION INCORPORATION COMPANY ACTIVITIES
Direct Indirect
------ --------
Physical Beauty and March 8, 1996 BVI 100% - Investment
Fitness Holdings holding
Limited ("Physical
Limited")
Ever Growth Limited September 29, 1994 HK - 100% Property
("Ever Growth") holding
Physical Health Centre December 1, 1998 HK - 100% Operate a
(E House) Limited Fitness
(formerly known as Center
Global Resources in
Limited) Hong Kong
Jade Regal Holdings March 15, 1996 BVI - 100% Investment
Limited ("Jade Regal") holding
4
Organization (Continued)
- ------------
EQUITY INTEREST
DATE OF ACQUISITION PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY / FORMATION INCORPORATION COMPANY ACTIVITIES
Direct Indirect
------ --------
Physical Health Centre March 15, 1996 HK - 100% Investment
(Dalian) Limited holding
("Dailan Physical")
Physical Health Centre March 21, 1997 HK - 100% Investment
(Macau) Limited holding
Physical Health Centre April 15, 1996 HK - 100% Investment
(Shenzhen) Limied holding
("Shenzhen Physical")
Physical Health Centre November 18, 1998 HK - 100% Operating a
(TST) Limited Fitness
("Physical TST") Center in
Hong Kong
Physical Health Centre September 8, 1997 HK - 100% Operating a
(Tsuen Wan) Limited Fitness
("Physical Tsuen Wan") Center in
Hong Kong
Physical Health Centre September 29, 1994 HK - 100% Operating a
(Tuen Mun) Limited Fitness
Center in
Hong Kong
Physical Health Centre March 2, 1990 HK - 91.4% Operating 5
Hong Kong Limited Fitness
("Hong Kong Limited") Centers in
Hong Kong
Proline Holdings Limited September 28, 1994 BVI - 100% Investment
("Proline") holding
Regent Town Holdings September 20, 1993 BVI - 100% Investment
Limited ("Regent") holding
Shanghai Physical Ladies' September 28, 1994 HK - 100% Investment
Club Company Limited holding
("Shanghai Physical")
Star Perfection Holdings April 15, 1996 BVI - 100% Investment
Limited ("Star holding
Perfection")
Supreme Resources Limited September 29, 1994 HK - 100% Operating a
("Supreme") beauty
treatment
center in
Hong Kong
Su Sec Pou Physical Health August 18, 1997 Macau - 100% Operating a
Centre (Macau), Limited Fitness
Center in
Macau
See also Notes to the Financial Statements
5
See also "Company" - Properties". The Company's organizational chart is set
forth below.
ORGANIZATION CHART OF PHYSICAL SPA & FITNESS INC.
--------------------------------------------------
Physical Spa & Fitness Inc.
US
|
|100%
|
Physical Beauty & Fitness
Holdings Limited
BVI
|
|
- ---|-----------|----------|----------|----------|----------|-----------|--------------|---------------|---------|----------|-------
|100%** |100%* |100% |100% |91.40% |100%* |100%* |100%* |100%* |100%* |100%*
- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ----------------- ---------- --------- -----------
Supreme Physical Regent Jade Physical Physical Star Physical Physical Ever Physical
Resources Health Town Regal Health Health Perfection Health Health Growth Health
Limited Centre Holdings Holdings Centre Centre Holdings Centre Centre Limited Centre
(E House) Limited Limited Hong Kong (Tsuen Wan) Limited (Tuen Mun) (TST) (Macau)
Limited Limited Limited Limited Limited Limited
HK HK BVI BVI HK HK BVI HK HK HK HK
- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ----------------- ---------- --------- -----------
| | | | | | | | | | |
|100% |100% |100% |100%* |100% |100% |100%* 100%---|---95% |100% |100% |100%
Renaissance Causeway Proline Physical | Tsuen Wan Physical Tuen Mun| Zhongshan Tsim- Property Su Sec Pou
Beauty Bay Holdings Health | Health Centre Health | Joint shatsui in Health
Center -E House Limited Centre | Centre | Venture -Sheraton Mei Foo Centre
(Central (Dalian) | (Shenzhen) (Macau),
Branch Limited | Limited Limited
Operation) |
HK HK BVI HK | HK HK HK HK Macau
- ----------- ---------- ---------- --------- | ----------- ----------- --------- ---------- ---------
| | | |
|100%* |90% | |90%
Shanghai | | |
Physical | | |
Ladies' | | |
Club | | |
Company | | |
Limited | | |
HK | Causeway Bay |
---------- | Tsimshatsui |
| Shatin |
|100% | Mei Foo |
| | Kowloon City |
Shanghai Dalian Shenzhen
Joint Joint Joint
Venture Venture HK Venture
----------
*50% held by one nominee shareholder. Since the Companies Ordinance of Hong Kong
requires a minimum of 2 shareholders for each limited company, Mr. Luk holds the
remaining shares on behalf of Physical Beauty & Fitness Holdings Ltd.
**30% held by one nominee shareholder. Since the Companies Ordinance of Hong
Kong requires a minimum of 2 shareholders for each limited company, Mr. Luk
holds the remaining shares on behalf of Physical Beauty & Fitness Holdings Ltd.
6
OWNERSHIP STRUCTURES IN CHINA
The organizational structure of the Company's operations in China is set
forth below.
INTEREST TERM REGISTERED
TYPE OF OWNED BY OF THE CAPITAL
NAME OF THE JOINT THE JOINT (AMOUNT IN
JOINT VENTURE LOCATION VENTURE COMPANY VENTURE THOUSAND) PROFIT SHARING ARRANGEMENT
- ----------------- ------------ ---------- ---------- -------- ---------------- ------------------------------------
Shanghai Huangpu Co-operative 100% 10 Originally None. Joint venturer receives
Physical and Xu Hui years US$1,000 in rent for locations and will
Ladies' Club (formerly cash and receive equipment when the Joint
Co., Ltd. known as increased to venture is dissolved.
("Shanghai Hongqiao), US$2,000 in
Joint Venture") Shanghai cash in 1995
Dalian Physical Dalian Equity 90% 12 Originally Pro-rata to equity interests
Ladies' Club years Rmb10,000 in
Co., Ltd. cash and
("Dalian Joint changed to
Venture") Rmb1,000 in
cash and
Rmb9,000
in form of
fixed assets
and renovation
materials in
1996
Shenzhen Shenzhen Co-operative 90% 10 HK$4,600 in Pro-rata to equity interests
Physical years form of cash
Ladies' Club and fixed
Co. Ltd. assets
("Shenzhen
Joint
Venture")
Zhongshan Zhongshan Co-operative 95% 10 US$500 in form Pro-rata to equity interests
Physical years of cash and
Ladies' Club fixed assets
Co. Ltd.
("Zhongshan
Joint Venture")
See also Notes to the Financial Statements
SHANGHAI JOINT VENTURE. The Shanghai Joint Venture is a Sino-foreign
cooperative joint venture established on September 7, 1993 in Shanghai, China.
The Chinese joint venture partner is a state-owned enterprise in the PRC,
Shanghai Ti Yu Guan (SHTYG). Shanghai Physical Ladies' Club Company Limited, a
Hong Kong corporation ("Shanghai Physical") authorized Physical Health Centre
Hong Kong Limited, a Hong Kong corporation, to enter into a joint venture
contract with SHTYG. The joint venture period is 10 years from the date of issue
of the business license on September 7, 1993. SHTYG is paid rent of RMB950,000
for the first 3 years of the joint venture. Rent for the fourth to tenth years
will be 110% of the preceding year, except where the inflation rate in the PRC
exceeds 16% in which case, the rental increase would be indexed to the inflation
rate.
DALIAN JOINT VENTURE. On April 11, 1995, Physical Health Centre
(Dalian) Limited, a Hong Kong corporation ("Dalian Physical") formed a
Sino-foreign equity joint venture with a Chinese enterprise to operate a
fitness/ spa center in Dalian, China. The joint venture period is 12 years from
the issue of the business license on April 11, 1995. The equity interest of
Dalian Physical is 90% and the Chinese joint venture partner's equity interest
is 10%. The joint venture commenced effective operations in April 1996.
7
ZHONGSHAN JOINT VENTURE. In June 1996, Physical Health Center (Zhong
Shan) Ltd. ("Zhongshan Physical", now known as Physical Health Centre (Tuen Mun)
Limited), entered into a joint venture contract, as supplemented in August,
1996, with a Chinese enterprise in Zhongshan, China to establish a Sino-foreign
cooperative joint venture for the provision of fitness and spa services. Prior
to the date of this report, however, the Company has verbally agreed with the
Chinese enterprise to terminate the joint venture contract.
SHENZHEN JOINT VENTURE. In 1996, Shenzhen Physical Ladies' Club Co.,
Ltd., entered into a joint venture contract with a Chinese enterprise in
Shenzhen, China to establish a Sino-foreign cooperative joint venture for the
provision of fitness and spa services. Prior to the date of this report,
however, the Company has verbally agreed with the Chinese partner to terminate
the joint venture contract.
Since Shanghai Joint Venture and Dalian Joint Venture operate in China,
they are subject to special considerations and significant risks not typically
associated with investments in equity securities of the United States or Western
European countries.
OVERVIEW OF THE COMPANY'S MARKETS
HONG KONG
- ---------
FITNESS
- -------
The concept of preventive health care and physical fitness, which
became popular in Hong Kong in the early 1980's, was introduced from the United
States and Europe. With the growing affluence of the local population and
improvement in their standard of living, people began to immerse in physical
exercise to maintain a fit and healthy body. The fitness trend grew in Hong Kong
and gained popularity within the high income group initially.
To cater to this new industry, a number of fitness centers were
established in Hong Kong which provided a variety of exercise equipment as well
as aerobic dance classes. Private clubs (dining clubs, marina clubs,
entertainment clubs) targeted towards the upper income group also began to
provide similar services to their members or expanded their existing facilities.
The majority of these fitness centers targeted the high income group,
were very exclusive, and entrance fees or membership fees were generally high.
Under this marketing strategy, these fitness centers were restricted to a
comparatively small number of potential customers. Additionally, some of these
fitness centers were affected by the migration boom of Hong Kong in the mid
1980's. At that time, a large number of professionals migrated from Hong Kong to
other countries to pursue educational and economic opportunities. This migration
boom affected the customer base of these fitness centers and thus decreased the
viability of their business. As a result, fitness centers targeting the high
income group in Hong Kong were vulnerable and underwent a period of
consolidation. Later on, as the market developed, a market niche emerged for
fitness centers catering to the middle income group.
8
SPA
- ---
The spa industry in Hong Kong, which includes the skin care or beauty
industry, is rather fragmented with a large number of small operations. It is
common that certain spa and beauty treatments are provided by a wide range of
establishments including beauty salons, hair salons, and even cosmetic counters
situated in department stores. The standard of services for beauty treatments
varies widely. Normally, the customer base of these operations is confined to a
relatively limited number of frequent customers. Exclusive private clubs that
cater to a small percentage of wealthy Hong Kong women and the inconsistent
quality and skill level of small operations have increased the demand for middle
market skin care treatments in the recent years.
CHINA
- -----
FITNESS
- -------
In China, the concept of physical fitness has a long history, but it was
not widely practiced, except by the 50+ generation. Even China's famous Tai' Chi
is seldom practiced by young people. Organized sports for recreation are more
popular, though sports centers are in the Management's opinion generally ill
equipped and out of date. It appears that intensive training in a particular
sport is only available to a minority of people. Physical fitness centers are
usually in the form of gymnasiums run by state-owned sports authorities.
A handful of small clubs with standard facilities have opened in recent
years, but offer, in the Management's opinion, a limited selection of locally
made, out-of-date equipment (as compared to the equipment used in the Company's
centers). Such facilities are frequented by more men than women, as they tend to
be equipped with barbells and weights.
The Company believes that aerobics is gaining popularity with the recent
influx of follow-along television programs. The Management observed that the
overall improved lifestyle; availability of fast food and convenience foods,
increased spending power, and increasingly sedentary lifestyles of Chinese
people, has led to a widespread concern for weight control. The Management
believes that aerobics especially appeals to women in China, as large
percentages of women seem to be concerned with losing weight.
A number of five-star hotels in China have luxury spas and fitness
centers, well-equipped with the latest brands of Western-styled exercise
machines (as compared to the Company's facilities). However, the Management
believes that the exorbitant fees (in the Company's opinion) prevent any
significant competitive impact on the industry. Private dining clubs have become
increasingly popular throughout China in the recent years, and usually include
small fitness and beauty centers. However, the Company believes that as the
focus of these clubs is usually dining, drinking, karaoke and entertainment,
they have contributed insignificantly to the industry. (See "Competition")
SPA
- ---
The Company noted that Western-styled spa and beauty treatments has
become increasingly common and popular in China. Home-treatments, using
cosmetics purchased in department stores, have also become very common. However,
in the Management's opinion standards of skill and hygiene tend to be poor, as
is the quality of products used, as compared to those provided by the Company's
centers.
9
In recent years, several Hong Kong and Japanese companies have entered
the market with small, limited service salons. Several internationally
recognized skin care lines, such as Dior, Channel and Elizabeth Arden have
become available in department stores. Those department stores often hold
in-house promotions to demonstrate their products and educate potential
customers. It appears that the desire to own anything imported, including skin
care products, is considered prestigious and is therefore highly desired by
Chinese women. The Management noticed that the demand for "foreign" spa
treatments and beauty salons, and imported products is high. The local and
international media is introducing fitness and skin care news to a growing
receptive audience. The Company believes that the demand for affordable,
value-driven beauty and skin care has increased.
HISTORY
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions. Prior to acquisition of Physical Beauty &
Fitness Holdings Limited, a British Virgin Islands corporation ("Physical
Limited"), the Company had no revenue producing operations, but planned to enter
into joint ventures and/or acquisitions originally in the area of real estate,
to expand its operations. In October, 1996, the Company closed a transaction
with Ngai Keung Luk (Serleo), a 100% shareholder of Physical Limited, whereby
the Company entered into a Share Exchange Agreement with Ngai Keung Luk
(Serleo). Physical Limited was incorporated on March 8, 1996 under the laws of
British Virgin Islands and has interests in various companies operating fitness
and beauty centers and other related businesses in Hong Kong and China (see
"Company-Organization"). Pursuant to the Share Exchange Agreement, the Company
issued 8,000,000 shares of its Common Stock to Ngai Keung Luk (Serleo) in
exchange for all of the outstanding shares of Physical Limited (the "Closing").
Subsequently, the Company changed its name to "Physical Spa & Fitness Inc." in
November, 1996, to reflect the new business operations of the Company. At the
Closing the then current management of the Company resigned and was replaced by
the current management of the Company. See "Management."
In 1986, the founder and principal shareholder of the Company, Ngai
Keung Luk (Serleo), set up the first fitness center under the name of "Physical
Health Club" with the objective of providing physical fitness and spa treatment
services at prices which could be afforded by a rapidly growing middle class
population in Hong Kong. Two years later in 1988, another center was founded
under the name of "Physical Ladies' Club" in Hong Kong. The businesses of these
centers were operated in a form of a sole proprietorship and were subsequently
transferred to Physical Health Centre Hong Kong Limited, a Hong Kong corporation
established on March 2, 1990 ("Hong Kong Limited"). During the period from 1990
to 1996, Hong Kong Limited and Physical Limited expanded their scope of
operations by acquiring and establishing several subsidiaries and by forming
Sino-foreign joint ventures in China to operate six additional fitness/spa
centers in Hong Kong, three in China and other related businesses (see "Company
- - Organization"). The subsidiary companies were all formerly owned by Mr. Luk
and other principal shareholders, or solely by Mr. Luk. The respective equity
interests were transferred by Mr. Luk and other principal shareholders to Hong
Kong Limited or Physical Limited throughout 1993 to 1996 at the original cost of
the respective investments. In October, 1996, 91.4% of the equity interests of
Hong Kong Limited was transferred by the principal and other shareholders
(including Mr. Luk) to Physical Limited at the par value of the shares
transferred. In addition, all the equity interests of Hong Kong Limited in
various subsidiaries and Sino-foreign joint-ventures were also transferred to
Physical Limited at the recorded cost of these investments.
10
HONG KONG
The first facility was opened in the Mei Foo Sun Chuen area of Hong
Kong, which has a population of approximately 680,000. The Company's first
center offered fitness training and spa treatment facilities at a price thought
to be affordable by its target middle-class customers. The Mei Foo Center
operates under a membership basis and is open to both male and female customers.
The Mei Foo Center proved profitable and within a year, it had enrolled more
than 700 members and 1,000 clients for spa treatments. In 1990 the Mei Foo
Center was expanded by acquiring by the Company's subsidiary an additional 700
square feet, immediately above the existing facility. In December 1999 and
October 2000, the spa and fitness facilities were respectively expanded by
approximately 4,000 square feet, resulting in a total of 12,000 square feet.
The second fitness and spa center under the name "Physical Ladies' Club"
was opened in July 1988 on Nathan Road, Tsimshatsui, Kowloon, which is one of
the busiest commercial and entertainment areas in the Kowloon area of Hong Kong.
The Tsimshatsui Center, consisting at that time of 12,000 sq. ft. (subsequently
expanded to 25,000 sq. ft) is, to the best of the Management's knowledge, to be
the first fitness and spa center to provide high quality, Western-styled
professional services for fitness training and spa treatment for middle income
women customers in Hong Kong. Tsimshatsui Center within a year of its opening,
had approximately 2,000 fitness members and 2,000 patrons for spa treatments.
In March 1990, the business of Physical Health Club and Physical Ladies'
Club was transferred to, and consolidated under, Hong Kong Limited (see above).
To broaden its geographical diversification, Hong Kong Limited opened
its third fitness and spa center in Causeway Bay Plaza, Causeway Bay in August,
1990. Located in one of the most popular entertainment areas on Hong Kong
Island, the Causeway Bay Center initially occupied a floor space of
approximately 18,000 square feet. In the first year of operation, the Causeway
Bay Center had approximately 5,000 members and 2,000 patrons for spa services.
The Causeway Bay Center experienced an ongoing strong demand for its fitness and
spa services, and the Company relocated the Causeway Bay Center to a new 30,000
sq. ft center in June 1997.
In order to cater to the market demand in the New Territories area of
Hong Kong, Hong Kong Limited opened its fourth fitness and spa center in New
Town Tower, Shatin, in September 1992. The Shatin Center is located in a
commercial complex in the heart of the densely populated residential and popular
entertainment areas in the New Territories. It occupies a floor space of
approximately 15,000 square feet. In October 1998, the Shatin Center is
relocated to a brand new shopping mall nearby, Grand Central Plaza, at the
expiration of the original tenancy.
In March 1993, Hong Kong Limited opened another fitness and spa center
of approximately 3,000 square feet in Kowloon City to provide facilities to
members residing in the south-eastern area of Kowloon.
As a result of a growing demand for upscale facilities and amenities for
spa services in the upper middle market, the Company opened through a
subsidiary, Supreme Resources Limited (see "Company - Organization"), its first
upscale market spa treatment center; "Renaissance Beauty Centre". The
Renaissance center is situated in an upper income residential area in Central,
Hong Kong and provides spa treatment services.
From Mid-1998 to end of 2000, the Company opened three additional
centers in Hong Kong through its wholly owned subsidiaries, Physical Health
Centre (Tsuen Wan) Limited, Physical Health Centre (TST) Limited, and Physical
Health Centre (Tuen Mun) Limited respectively.
The Company opened its tenth center in Elizabeth House, Causeway Bay in
April 2001 which provides fitness service to both male and female customers.
These collectively make up a total of ten centers in Hong Kong.
See also "Description of Property".
11
CHINA
Commencing in the mid-1980's, China commenced market-oriented reforms
that were designed to open up and improve the economy and the Chinese standard
of living. As economic reforms became successful in China and a large,
middle-class market developed, China was targeted as an expansion market where
the success in Hong Kong could be duplicated.
Shanghai, with a booming economy, an influx of foreign investment, and a
population of 14 million, was the logical choice for the Company to start its
first China location. In January of 1994, the Huang Pu branch was opened in one
of Shanghai's busiest shopping districts, through a joint venture company formed
between a Chinese enterprise and a newly formed subsidiary of the Company. The
center has an area of 15,000 sq. ft. (which was expanded to 23,000 sq. ft. in
1998), and within the first year there were over 2,000 fitness members and spa
clients. Based upon the positive response to the first facility in Shanghai, the
decision was made to open a second Shanghai branch.
September, 1995 marked the opening of the second center in Shanghai-Hong
Qiao branch in Shanghai, situated in the fashionable Hong Qiao Special Economic
Development Zone. This center contains approximately 12,000 sq. ft. and is
easily accessible to a large residential area and busy commercial district. In
March, 2001, the Hong Qiao Center was relocated to Metro City, Xu Hui District
which is one of the busiest shopping districts in Shanghai with enhanced
facilities of approximately 24,000 sq. ft.
In April, 1996, the Company opened its third fitness/spa center in China
in the city of Dalian. Dalian, China, located on the northern peninsula near
Korea, is the third largest seaport in China and has a population of
approximately 5,600,000. Dalian is the fashion capital of China, hosting the
world renowned International Fashion Festival annually, and is also a major
tourist destination. Dalian has seen an influx of foreign investment in the past
several years, and the purchasing power of these citizens ranks high in the
nation. The Company's market research showed a strong existing interest in
fitness and spa services, with few choices available to potential customers.
Within the first six months of opening, Dalian center had over one thousand
fitness members and nearly one thousand spa clients.
In October, 2000, the Company opened its first fitness center in Macau.
Macau has been a Portuguese colony (until December 20, 1999) strategically
located at the mouth of the Pearl River on the border of China. Macau is easily
accessible by Hong Kong residents via a 45- minute jet foil ride and is a
popular vacation destination for both Hong Kong and Chinese residents. Macau has
a population of approximately 500,000 of which 50% is female (Hong Kong Trade
Development Council). The Company plans to target primarily Macau's local
residents.
See also "Description of Properties".
BUSINESS STRATEGY
The Company believes that it has a strong reputation in the Hong Kong
and China markets in which it presently operates. This belief is based on
several factors, including continuous operating presence of the Company in Hong
Kong for the past years (since 1986), and the relationships in China established
by the Company's executives, management and staff over the last several years.
The Company intends to continue its policy of providing what it believes are
first-quality, comprehensive fitness and spa services in their respective
markets at affordable prices.
12
The Company seeks to expand its fitness and spa business from the ground
up as opposed to acquiring health and fitness clubs that are poorly managed
and/or financially distressed. The Company believes that the end result of
repositioning an existing center, which typically includes rebuilding a
membership base, renovations, additional equipment leasing, and re-training
existing staff, is less desirable than developing a new center.
The Company intends to build on its momentum, relationships and standard
of quality in several ways. First, the Company intends to expand its presence in
Hong Kong and China through the establishment of new fitness and spa centers in
Hong Kong (see "Business-Organization-Hong Kong") and China, and through the
addition of qualified personnel, including fitness instructors and spa personnel
in the existing facilities. Second, in conjunction with its expansion, the
Company intends to increase the variety of fitness and spa services provided and
products sold on a retail basis at each location.
The Company believes that its experience in and knowledge of the fitness
and spa industry in Hong Kong and China, as well as management's continuous
presence in Hong Kong (since 1986) and China (since 1994), positions the Company
to take advantage of perceived opportunities in this market. Further,
demographic developments in Hong Kong and China, continue to create increasing
demand for certain fitness and spa services. In this regard, the Company opened
planned centers in Tsuen Wan, Hong Kong (July, 1998), Sheraton Hotel,
Tsimatshui, Hong Kong (July, 1999), Tuen Mun, Hong Kong (July, 2000), Macau
(October, 2000), and Elizabeth House, Causeway Bay, Hong Kong (April, 2001). The
Company also expects to establish additional fitness and spa centers in other
major metropolitan centers in China over the next several years. There is no
assurance that such centers will be opened as currently planned, since they are
subject to changing political and economic conditions, as well as the Company's
evaluation of the applicable market conditions.
- - BECOMING THE MARKET LEADER IN CHINA
In China, the fitness and spa industry is in its formative stage. In
addition there is an image associated with Western luxury consumer goods. The
Company is not aware of any Western-style facilities of comparable size or
competitors in the fitness and spa industry whose market position is more
established than the Company's. Management plans to take advantage of those
circumstances and in doing so, become the first entrant into China market.
The planned expansion into China includes opening facilities in most
major cities and economically developing urban areas throughout the country,
subject to then current market and other conditions. According to the State
Statistic Bureau of China, the population of China is 1.2 billion and there are
currently thirty cities with populations in excess of 1 million. The population
of China is becoming increasingly urbanized, and the tastes of the urban
population is becoming increasingly sophisticated. (Source: Hong Kong Trade
Development Council).
Forty percent of the population of China lives in coastal areas, where
retail sales account for 60% of the country's total retail sales. Population
factors and strong spending power have led the Company to target coastal areas
for the spas to be developed (i.e. Dalian). Facilities can be linked by a
reciprocal membership system, allowing members to use another facility when
traveling to other parts of the country. Marketing programs carried out
nationwide, in the management's opinion, will enable the Company to benefit from
economies of scale, similar to what the Company experiences in Hong Kong.
13
- - MAINTAINING A STRONG PRESENCE IN HONG KONG
The Company has well-established customer base and pre-dominant market
share in Hong Kong and opened two new locations in July, 2000 (Tuen Mun center)
and April, 2001 (Elizabeth House, Causeway Bay) respectively in Hong Kong. The
Board of Directors estimates that over 80 percent of the Company's patrons are
between the age of 20 to 40. Based on the reports of the Hong Kong Census and
Statistics Department, the number of women within the age group of 25 to 45 rose
from 850,000 to 1,200,000 between 1986 and mid-1996, representing an increase of
41%. Management believes that the strong position held in the Hong Kong market
can be maintained by continuously upgrading facilities and services. The Company
monitors this situation continuously, and upgrades the fitness and spa areas on
a regular basis. The number of members in each location is also carefully
monitored in order to ensure adequate levels of service to individual customers,
particularly during peak work-out periods. Branch Managers monitor the situation
through direct observation, customer feedback and surveys.
For spa personnel, intensive training is conducted in the in-house
training center and thorough on-the-job instruction. Selected employees are sent
to France and Italy to study the latest techniques and to learn about new
products on the market. The Company seeks to satisfy its spa clients' needs with
the latest technology, expertise and a high level of service.
- - EXPLORING POTENTIAL MARKETS
The Company considers its market to be the greater Asia region. The
Company is also closely monitoring the market opportunities in other South East
Asian countries such as Taiwan, the Philippines, Thailand, Malaysia and
Indonesia.
FITNESS
The Centers emphasize the benefits of health, physical fitness and
exercise by providing a wide range of exercise equipment from the United States
and Europe including free-weights, strength systems and cardiovascular machines
from manufacturers such as Life Fitness, Cybex , Flex, and Precor. The Company
places a particular emphasis on the quality of its fitness managers and
instructors by providing continuous training both in Hong Kong and overseas.
The centers also conduct daily dance classes which run for approximately
45 minutes and are on a first-come, first-served basis. The Company believes
that the number of dance classes conducted by the Centers per day is among the
highest in Hong Kong. The variety of dance classes include aerobic dance, step,
arms and thighs workout, funk and jazz and are taught by experienced
instructors. The dance classes are reviewed on a monthly basis and new dance
classes are introduced approximately every three months in order to appeal to
the interests of members. Since 1995, the Company has recruited fully qualified
and experienced aerobic instructors from Australia.
The Company believes, based on member survey responses, utilization
rates and the existence of underutilized space in its centers, that it has
sufficient excess capacity at its existing fitness centers to accommodate new
membership growth as well as comfortable usage by present members.
14
SPA SERVICES
Spa services are open to both members and non-members. However, members
of the centers have priority for such service facilities. Over 80 types of spa
treatments are offered including facial treatments, various skin care
treatments, relaxation programs, massage, and weight-management programs.
All of the centers have designated rooms for spa treatments in order to
ensure privacy. In view of the popularity of the spa treatments, the centers
have a booking system whereby sessions for such treatment are reserved in
advance. The centers offer special discounts to patrons for beauty treatments
during off-peak hours in order to maintain an even level of customers during the
day. In promoting the fitness training services provided by the centers, patrons
for spa treatments, who are not members of the centers, are eligible to use all
facilities of the centers including fitness training, on the day of their visits
for a spa treatment. The Company believes that this additional service offers an
advantage over its competitors who engage only in beauty treatments.
The Company has a broad scale of fees for its spa services and believes
that these fees are both affordable and competitive in terms of the quality and
variety of services provided at the centers. The centers typically charge the
normal fee on spa treatment per session. However, discounts are given to those
patrons who purchase prepaid coupons. These coupons are valid within a specified
period of time.
The Company employs professional spa personnel who hold recognized
qualifications and adequate experience. Each center retains a specific manager
for spa treatments that supervises the spa personnel and other staff members of
the center. Each spa employee serves only one patron during the entire session
of spa treatment. The Company places great emphasis on providing continuous
training programs for its spa personnel. In order to remain informed of the
latest international developments in spa treatments, applications, technology
and equipment, the Company arranges both local and overseas training.
RETAIL
The Company sells a range of products at each center such as leotards,
shorts, T-shirts, training shoes, socks and training suits, including Nike and
several U.S. and Australian brand products. The Company also sells European skin
care products manufactured in France and Spain by Guinot, Sothys and Anubis,
respectively. The fitness and beauty related products are available in the
centers to facilitate the needs of their members.
MEMBERSHIP
The Company currently offers prospective members a membership plan. Fees
for services at each facility depend on the location and demand for such
services at that facility. Marketing of the Company's services is targeted
towards the middle income female population in the 18 to 34 years old range.
15
Under the plans, new members are charged a membership fee upon admission
and a monthly fee each month to maintain their membership privileges. The
initial membership fees are non-refundable and range from approximately HK$800
(US$103) to HK$1,500 (US$192), depending on the diversity of facilities and
services available at the club of enrollment, the local competitive environment,
as well as the effects of seasonal price strategies. Monthly dues for
memberships generally range from HK$168 (US$22) to HK$299 (US$38) during the
typical membership period. Prepayment of the monthly fee is encouraged by
offering a discount for members who prepay for six or twelve months. Members are
also provided on a monthly basis 10 aerobic coupons on free-of-charge basis at
Hong Kong locations. Any member who attends additional classes has to purchase
coupons at HK$15 (US$2) each. China locations include aerobics classes with
monthly dues.
In order to allow greater flexibility to its members, the Company
operates a network system where members may use the facilities in any fitness
Centers of the Company in Hong Kong at no extra cost. The centers have long
opening hours and are open all year round (except for Chinese New Year), in
order to provide continuous service to its members and customers. Generally,
they are open from 7:00 a.m. to 10:30 p.m. As with any consumer driven market,
it is essential that the services provided by the Company are constantly
reviewed, updated and improved. To achieve this, managers from each of the
Centers regularly invite comments from members in relation to the services
provided. Additionally, the Company constantly seeks to introduce new products
and techniques on fitness training and spa treatments in order to improve its
services and thus enhance its competitive position.
SALES AND MARKETING
The Company devotes substantial resources to the marketing and promotion
of its fitness and spa centers and their services because the Company believes
strong marketing support is critical to attracting new members both at existing
and new fitness centers. Since July, 1988, the Company and its predecessor began
to market substantially all of its fitness centers under the service name
"Physical Ladies' Club", thereby eliminating the prior practice of using
different names for individual locations. See "Business - Trademarks and Trade
Names".
A key component of the Company's marketing strategy is to cluster
numerous fitness centers in major media markets in order to increase the
efficiency and cost effectiveness of its marketing and advertising programs.
Advertising consists of (i) television and (ii) newspapers, magazines, leaflets,
light box, and other promotional activities, which were accounted for
approximately 10%, and 90%, respectively, of the Company's total advertising
expenses in 2000.
The Company's sales and marketing programs emphasize the benefits of
health, physical fitness and exercise by appealing to the public's desire to
look and feel better. The success of the Company's marketing efforts are
dependent upon the ability of its sales personnel to make effective personal
presentations of the benefits of membership to prospective members. The Company
believes that these presentations are enhanced by its well-equipped, attractive
centers and its "value pricing" membership programs. The Company conducts a
variety of marketing efforts. The Company's executives and sales personnel
attend trade shows and exhibitions throughout Hong Kong and China. At these
trade shows, the Company usually operates a separate promotional exhibit. The
Company's executives and marketing personnel also attend and sponsor seminars
given to individual end-user organizations or industry groups.
16
Since 1993, the Company has begun marketing, on a retail basis products
to its members including apparel manufactured by leading U.S. and Australian
fitness apparel brands. These products are intended to add value to the
memberships and increase the Company's revenues. The Company's marketing focus
also includes corporate membership sales which are designed to improve
productivity. The Company has introduced programs such as corporate on-site
aerobics classes to expand the market for its services. In addition to its
advertising, personal sales presentations and targeted marketing efforts, the
Company is increasingly utilizing in-club marketing programs. Open days are
organized to introduce the centers to prospective customers and referral
incentive programs involve current members in the process of new member
enrollments that effectively help foster member loyalty.
ACCOUNT COLLECTION
All collections of past-due accounts are handled internally by the
Company. Customers who have outstanding unpaid balances are not provided further
services until such balances are paid in full. Corporate accounts are handled
pursuant to the applicable terms of credit agreements. Local corporate accounts
are normally not allowed any special credit. International corporate accounts,
which are much larger than the local accounts, can be allowed one to two months'
credit, with a possibility of extending such period, depending on the account's
size and record.
COMPETITION
HONG KONG
The competition of the Company consists of the following.
Upscale Market
- --------------
The Hong Kong upscale market consists of exclusive private clubs which
usually provide both fitness services and spa treatments at very high prices.
These private clubs are typically oriented towards women and offer a great deal
of variety to their customers. Annual membership fees average approximately
HK$19,000 (US$2,400) and beauty treatments are charged separately upon usage.
These facilities use expensive, name-brand equipment, luxurious decoration,
large areas of space averaging 30,000 sq ft, and offer a wide range of services
to attract customers. The two primary clubs in this category are Philip-Wain and
Body by Deborah International Health Spa. There are certain upscale market
establishments which provide fitness services only, most are for both male and
female, and are concentrated in one area of Hong Kong. The joining fees range
from HK$2,000 (US$256) to HK$7,000 (US$897) with monthly membership fees ranging
from HK$350 (US$45) to HK$800 (US$103). These establishments range in size from
10,000 sq ft to 30,000 sq ft. Examples are Ray Wilson's California Gym and New
York Fitness. Another fitness only company, Tom Turk, was the earliest entrant
into the Hong Kong Market, with the first outlet opening in the early 1980's.
The Tom Turk facilities have fees that target between the upper and middle
market customer, and their two locations are each approximately 30,000 sq. ft.
Tom Turk attracts primarily a male clientele and emphasizes their extensive line
of free weights, workout equipment and swimming pools. The Company's fitness/spa
facilities compete directly primarily with the middle markets (see below), with
the exception of Renaissance Beauty Center, which targets upscale market.
17
Middle Market
- -------------
There are very few establishments in this class which provide both
fitness services and spa/ beauty treatments in a single facility. The closest
competitor in the same category is Modern Beauty Salon with nine locations of
average size of approximately 20,000 sq. ft. A monthly subscription of HK$150
(US$19) is required to become a member of the above center. Another
establishment which provides only fitness services is The Lift Club. The Lift
Club has three outlets in prime locations, with approximately 10,000 sq ft each.
The joining fee is HK$1,600 (US$205) and the monthly fee is HK$550 (US$71). The
operators of spa/beauty services only which are in direct competition with the
Company include Expression, with one location, Angel Face Beauty Creations
(International) Ltd., with nine locations, and Marie France Bodyline, with six
outlets. The management believes that, these facilities do not offer as high a
level of fitness equipment and instruction as the Company does and that the
Company offers a more comprehensive level of spa treatments than these
facilities. The Company targets primarily the middle market.
Low-End Market
- --------------
In this category, most establishments only provide either fitness
services or simple beauty treatments. These establishments are usually much
smaller in size and have a limited range of services. Representatives of the
low-end market include The Fitness Gym, Paradise Health Club, Tess Beauty, and
Health City. Joining fee to these facilities vary from HK$600 (US$77) to
HK$2,000 (US$256), and monthly fees average approximately HK$430 (US$55). In
addition, there are numerous smaller facilities operating inside the shopping
arcades, and/or associated with hair salons and department stores. Management
believes that the Company does not directly compete with this market.
In the low-end fitness market, the government operates a small number of
gymnasium facilities. These are public facilities, open to both men and women
for nominal fees.
18
CHINA
SPA SERVICES. Certain spa services are provided by beauty salons, which
are very popular in China and have been in existence for several years. However,
most are small scale and offer only basic services in the Company's opinion and
as compared to the Company's facilities. Most salons are not modern and do not
possess certain international standards of skill and hygiene as most facilities
in Hong Kong. In the Management's view, these salons only have access to locally
manufactured skin care products, which tend to be low-tech and chemically-based,
since it is too costly for a small salon to use imported products. The Company,
as an exclusive agent for several professional European skin care lines,
maintains the leading edge in skin care. The closest competitors in the spa
industry would be several beauty salons with Hong Kong and Japanese investors,
including Carita in Shanghai, and Marco, in Dalian. Services in these facilities
are somewhat more up to date, though most do not exceed the Company's facilities
in size, nor in number of services available, in management's opinion. Most of
these salons use common department store skin care products, which prevents them
from differentiating themselves in the market. The Company believes that no
other salons offer a professional line of skin care products for purchase,
except for common, famous-name brands which are also available in department
stores.
FITNESS CENTER. There are several fitness centers in China, especially
following the opening of the Company's China facilities in Shanghai and Dalian.
The Company believes that its early entry into the market has helped it to
achieve the leading name in fitness. The Company believes that it was the first
to offer professional, up to date fitness services, up to date group exercise
(aerobics) classes, and a full range of modern exercise equipment. Though the
Company currently has only three facilities operating in China, the management
believes that its name has become already known as the Company has set the
standards for the fitness and spa industry for China. The closest competitors
are as follows:
Upscale Market
- --------------
There are many upscale recreation clubs in the major cities of China,
including Hong Kong City, Shanghai, and the Friendship Club in Dalian. These
facilities usually offer dining, bars, karaoke, massage, sauna, exercise, beauty
treatments, and occasionally bowling, tennis or golf. However, the trend for
such clubs has proven to be most successful when utilized as men's clubs. These
clubs are used primarily for entertaining business clients or for high-income
business men. Therefore, very little emphasis is placed on the level of service
and amenities within the fitness areas. Typically, most are staffed only with
receptionists as there is no demand for fitness professionals. Very few women
use such facilities. These clubs charge very high joining fees, usually upwards
of several thousand US dollars.
The majority of four and five star hotels have health clubs for outside
membership as well as for hotel guests. Usually these clubs have expensive,
brand name equipment, and often offer aerobics classes. Most also have luxury
shower and spa facilities. However, the price structure is usually comparable to
an upscale U.S. health club, and therefore is not affordable to the vast
majority of Chinese people. Such clubs cater to the expatriate business
community, and some are exclusive to such community. Their location, being
situated on the hotel premises, often limits size, and they tend to reach full
capacity with a low number of members. Since most hotels do not depend on the
health club as a major source of revenue, typically very little marketing or
membership incentives are used.
19
Middle Market
- -------------
There are several middle market fitness centers in some of the larger
cities in China. Many newly built housing complexes (upscale apartment buildings
and "western" style housing villages) have recreation centers. They typically
include swimming pools, tennis courts and gyms. In the management's opinion,
such facilities are luxurious by Chinese standards, but gyms are commonly
unstaffed or only have a receptionist. More and more such centers are providing
exercise classes as well, but lack of qualified instructors, in the management's
opinion, inhibits growth in this area. Such clubs have recently been opened in
Dalian, however, in the management's opinion, none of them matches the Company
in size, nor in the range of exercise equipment available, and classes offered
and the Company does not see them as the same level competitors. Shanghai has
several recently opened middle market clubs, such as DD's Personal Club and
YMCA. DD's Personal Club caters primarily to the expatriate market and is
therefore limited in growth. YMCA is not situated in a prime location and has
not used, in the management's opinion aggressive marketing, and in the
management's view to date has not made significant impact on the fitness
industry in Shanghai.
Low-End Market
- --------------
Group exercise is an extremely popular activity in China, but mainly
done by elderly people. As more interest is created in the younger market, a
wider variety of classes are now being offered in government facilities such as
gymnasiums, parks and town squares. Such facilities usually are held on a
basketball court in a gym, or a recreation hall with large open space. Typically
there are no shower, locker, or spa facilities available. The management
believes that the popularity of these facilities is due to the nominal fees
charged.
Trademarks and Trade Names
In July 1988, the Company and its predecessor began to market
substantially all its fitness centers under the servicemark "Physical Ladies'
Club" thereby eliminating the prior practice of using a different trade names
for each Center. The Company registered a servicemark under its trade name
"Physical Ladies' Club" in Hong Kong and its Chinese equivalent name in China.
In the opinion of the Company's trademark counsel in Hong Kong, the registration
enables the mark to distinguish the Company's services from similar services of
others, although it gives the Company no right to the exclusive use of the
words. The servicemark gives the Company a priority over the use of the
servicemark by others and the right to reject others from the use of the same
name. In China, the Company was only able to register the name in Chinese
language pursuant to the Chinese Trademark Law. In the opinion of the Company's
trademark counsel, the name "Physical Ladies' Club" is considered a direct
reference to the contents and features of the services in the servicemark and as
such it cannot be registered as a trademark under the Chinese Trademark Law. The
registration of the Chinese name, however, provides the Company with protection
of its name on a nation-wide basis and precludes others in China from using the
same name as the Company's.
Seasonality
Historically, the Company has experienced greater sales in the third
quarter of each year. In recent years, the Company has lessened this seasonal
effect by the use of sales incentives and awards for its sales personnel and
members, as well as other marketing initiatives.
Insurance
The Company maintains liability insurance providing coverage to the
Company with respect to accidental bodily injury and accidental loss of or
damage to property of any customer or employee of the Company, which would occur
in connection with the business of the Company and on the premises of the
Company. The Company does not maintain product liability insurance with respect
to the beauty products used in its spa treatments.
20
Research and Development
The Company's business is service-oriented, therefore it does not have
a formal Research & Development department, however, its marketing and training
departments are closely following the evolution of international fitness and
beauty trends.
Employees
The Company has approximately 900 employees, including approximately 30
commission based sales executives. Approximately 480 employees are involved in
fitness operations, including sales personnel, instructors, and supervisory
personnel. Approximately 300 employees are involved in beauty and spa
operations. Approximately 90 are administrative support personnel, including
accounting, marketing, training and other services.
The Company is not a party to any collective bargaining agreement with
its employees. The Company has not experienced a high turnover of non-management
personnel and also has not had difficulty in obtaining adequate replacement
personnel, except with respect to sales personnel, which the Company believes
have become somewhat more difficult to replace due, in part, to increased
competition for skilled retail sales personnel.
Government Regulation
Hong Kong
The Hong Kong operations and business practices of the Company are
subject to regulation at the local level. General rules and regulations,
including those of the local consumer protection agencies, apply to the
Company's advertising, sales and other trade practices.
Statutes and regulations affecting the fitness, spa and beauty
industries have been enacted or proposed in all of the areas in which the
Company conducts business. Typically, these statutes and regulations prescribe
certain forms and regulate the terms and provisions of membership contracts,
allowing the member the right to cancel the contract within, in most cases, 14
business days after signing, requiring an escrow for funds received from
pre-opening sales or the posting of a bond or proof of financial responsibility,
and, in some cases, establishing maximum prices and terms for membership
contracts and limitations on the term of contracts. In addition, the Company is
subject to several other types of regulations governing the sale and collection
of memberships, as well as laws governing the collection of debts. These laws
and regulations are subject to varying interpretations by local consumer
protection agencies and the courts. The Company maintains internal review
procedures in order to comply with these requirements and it believes that its
activities are in substantial compliance with all applicable statutes, rules and
decisions.
21
Under typical regulations, members of fitness centers have the right to
cancel their un-used memberships for a period of 30 to 60 days after the date
the contract was entered into (depending on the applicable law) and are entitled
to refunds of any payment made. The specific procedures for cancellation in
these circumstances vary according to differing local laws. In each instance,
the canceling member is entitled to a refund of prepaid amounts only.
Furthermore, where permitted by law, a cancellation fee is due to the Company
upon cancellation and the Company may offset such amount against any refund
owed. The Company's membership contracts provide that a member's one-time
membership fee is non-refundable in case of cancellation.
The Consumer Council of Hong Kong protects the rights of consumers,
including memberships, such as those offered by the Company. The members have a
right to dispute the price or quality of the service, if they find it
unsatisfactory. The Council also assists consumers in cases of false claims made
by the companies with respect to a specific service offered by them. The Company
is cautious in advertising its services, and it never promotes or guarantees
unrealistic results concerning skin care or fitness services, therefore the
Company rarely faces complaints in this respect from its consumers.
The Company's facilities are also subject to building, health and
safety laws. The laws require a normal building inspection at the time of
renovation of the club facilities and/or fire safety inspection. Since the
Company's facilities typically are a part of a large office building for which a
license is granted, if the Company does not comply with all the regulations, the
landlord would not be granted a license. The Board of Health carries out an
inspection of shower and restroom facilities to make sure that they comply with
the standards imposed by the Board. In order to have massage services, the law
requires a special massage license. The Board of Health and Police Department
also hold random inspections of the facilities providing massage services, since
there are strict laws requiring that massage therapists be of the same sex as
the customers. As the Company is exclusively open to women in all centers, but
one, there have been no concerns with this regulation.
China
In China, the Company's operations and business practices are subject
to regulation from the central government, which is often carried out at local
levels. There is a Consumer Council in China which is now expanded to most urban
areas and whose role is to protect consumers and enforce consumer rights in
cases of dispute regarding quality of the product or service or misleading
claims. The Consumer Council holds considerable power in China and can impose
large fines upon a company it finds in violation of consumer laws. The Consumer
Council would often publish a statement against a fined company in a local
newspaper.
China requires a fire safety inspection and license before completion
of renovation of the facility. The safety department performs unannounced
inspections every year to ensure proper compliance with the regulations, such as
maintenance of clear fire exits, extinguishers, smoke detectors and other safety
equipment.
The Board of Health has strict regulations regarding spa facilities and
fitness/beauty equipment that is used by many people per day. The Board requires
an initial license before opening of the facilities and requires installation of
certain anti-bacterial and hygiene equipment. For example, the beauty treatment
area is required to have ultra-violet ("UV") disinfection lamps installed within
every 5 feet of public space. The law also requires UV disinfection every night
for the air, beds and chairs in the area. The Board also requires "hot cabinet"
disinfection units for small beauty tools and equipment. In the Company's
experience, random inspections of those areas of the spa are often done by the
Board of Health.
22
The Board of Health also requires an inspection and license for each
imported cosmetic or skin care product. The license must be obtained from the
Central Government in Beijing and a substantial fee is charged for the testing
of each imported product.
In China, the Board of Health is responsible for monitoring the
operation of the Company's spas, however, their strict regulations fall in line
with the standards of the Company and therefore, to date, there has been no fine
or restriction of the operation of any fitness or spa facility.
There is a Council for Fair Pricing in China, and every business that
sells products or provides services must register their fees with this
department. The Council has a right to dispute fees if it deems them
unreasonable, however to date, the Council's directives are just a formality
which is limited to collecting a registration fee from each business and rarely
questions the pricing.
The Police Department has strict regulations in China regarding massage
services and requires (although in the management's experience, it seldom checks
for compliance) the Company to ensure that the massage therapist is of the same
sex as the customer. A special license is required for massage services, which
is in the management's opinion, difficult to obtain. The massage therapist must
be certified and licensed by a government affiliation, and must have an annual
health examination. Since all the Company's centers in China are exclusively for
women and include only female staff, the Company has not been impacted by those
regulations.
China has also regulations which are so restricting, that, in fact,
amount to not allowing independently owned fitness and beauty spas by foreign
companies. Instead, the regulations encourage joint ventures with a foreign
company. Fitness and beauty spas fall under the category of "Entertainment and
Recreation", which to date have always been business entities in a form of joint
ventures.
23
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters which include the Company's executive and
administrative offices are located at a 30,000 square feet facility in Hong Kong
pursuant to a lease expiring February 28, 2003. The Company relocated its
headquarters and its Causeway Bay location to this location in Mid-1997 in order
to accommodate additional customers, and more extensive lines of fitness and spa
treatment equipment.
Aggregate rental expense was approximately HK$36.0 million (US$4.6
million), HK$47.2 million (US$6.1 million) and HK$56.5 million (US$7.2 million)
for the year ended December 31, 1998, 1999 and 2000, respectively.
Mei Foo is the only location indirectly partially owned by the Company.
The Company (through its subsidiary, Ever Growth Limited), directly owns 700 sq.
ft. of the property where the Mei Foo center is located. There are 7,300 sq. ft.
located in the same building and 2,000 sq. ft. in the neighborhood for fitness
facility and an additional 2,000 sq. ft. for the spa facility located in the
same district.
Set forth below is the information regarding the Company's centers in
Hong Kong and China.
FITNESS/SPA CENTERS - HONG KONG AND CHINA
-----------------------------------------
HONG KONG Size Own / Lease Term Expiration Renewal Option Monthly Rent(1)(2)
---- ----------- --------------- -------------- ------------------
Shop A on 11/F, 30,000 sq. ft. Lease 2/28/2003 None HK$1,122,236
12/F-15/F.,
Lee Theatre Plaza
99 Percival Street
Causeway Bay,
Hong Kong
701B, 7/F 1,500 sq. ft. Lease 9/10/2003 None HK$28,119
One Hysan Avenue
Causeway Bay
Hong Kong
10/F-12/F., Storeroom on 25,000 sq. ft. Lease 1/31/2003 (3) None HK$564,905
5/F, Room 701A,
Prestige Tower
23-25 Nathan Road
Tsimshatsui, Hong Kong
Shop Nos. 125, 126 and 10,200 sq. ft. Lease 5/19/2001 (4) 2 Years HK$423,667
131-133, Level 1,
Grand Central Plaza
Shatin, Hong Kong
18/F - 21/F 50,000 sq. ft. Lease 3/31/2001 5 Years HK$1,048,287
City Landmark
No. 68 Chung On Street
Tsuen Wan, Hong Kong
24
HONG KONG (Continued) Size Own / Lease Term Expiration Renewal Option Monthly Rent(1)(2)
---- ----------- --------------- -------------- ------------------
P/F., Stage 8 8,000 sq. ft. Own/lease 4/30/2001 6 Years HK$101,108
122B Broadway Street
Mei Foo Sun Chuen,
Hong Kong
Fourth Podium Floor 2,000 sq. ft. Lease 4/17/2003 None HK$35,214
Stage 8, 114 & 118
Broadway Street
Mei Foo Sun Chuen,
Hong Kong
Shop 66, P/F, Stage 3 2,000 sq. ft. Lease 9/1/2002 None HK$85,673
26-50 Broadway
Mei Foo Sun Chuen
Hong Kong
14/F., Coda Plaza 5,000 sq. ft. Lease 6/30/2003 None HK$131,762
51 Garden Road
Central, Hong Kong
G/F., 5 Junction Road 3,000 sq. ft. Lease 6/30/2001 None HK$51,000
Kowloon City,Hong Kong
Shops 108, G08, S17 & B08, 43,464 sq. ft. Lease 3/5/2005 2 Years HK$1,895,033
The Elegance at Sheraton,
Tsimshatsui, Hong Kong
Whole Wet Market on Ground 20,000 sq. ft. Lease 5/31/2003 5 Years HK$511,813
Floor, Tuen Mun Town Plaza
Phase I, Tuen Mun, N.T.
3/F of Podium 33,864 sq. ft. Lease 11/30/2003 3 Years HK$944,660
Elizabeth House
250-254 Gloucester Road
Hong Kong
- ---------------------
(1) Monthly rent is paid in HK Dollars
(2) Monthly rent also includes the management fee for property management.
Excludes utilities and rates.
(3) Lease for Room 701A expires on July 31, 2002.
CHINA Size Own / Lease Term Expiration Renewal Option Monthly Rent(1)
- ----- ---- ----------- --------------- -------------- ---------------
5/F-7/F., Huangpu Gymnasium 23,000 sq. ft. Lease 9/30/2003 None HK$131,000 (2)
No. 311 Shandong Road
(Mid) Shanghai
4/F., China Wanda Bldg 15,000 sq. ft. Lease 2/28/2008 None HK$106,000 (3)
No. 18 Hongda Road
Zhongshan District, Dalian
2/F, 3/F, 4/F, Block B No. 12,000 sq. ft. Lease 12/14/2004 None HK$196,000 (4)
808 Hong Qiao Road
Shanghai
5/F-6/F., Metro City 24,020 sq. ft. Lease 8/31/2010 None HK$236,000
No. 1111 Zhao Jia Bang Road
Shanghai
2/F, Macau Landmark 40,000 sq. ft. Lease 8/14/2009 None HK$535,000
555 Avenida da Amizade
ZAPE, Macau
- --------------
(1) Monthly rent is paid in Rmb except for the Macau Center which rent in
paid in HK$.
(2) Lease agreement was revised in August 1999 to fix the annual rental for
the remaining tenancy period.
(3) Rental was reduced from March 1, 1999 and agreed to increase by 5% from
March 1, 2002.
(4) Combined monthly rent includes management fee. The monthly rent will
increase by the inflation rate (1999 - 2.24%) beginning May 1, 1999 for
2/F space and June 30, 1999 for 3/F and 4/F space. The premises was
surrendered earlier in March 2001.
25
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or
any of its properties is subject, nor to the knowledge of the Company, are any
such legal proceedings threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
through the solicitation of proxies, or otherwise, during the fourth quarter of
the Company's fiscal year ended December 31, 2000.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been listed on the Bulletin Board of the
NASD's over-the-counter market under the symbol PFIT, since December 1996, but
has been traded only sporadically. As of March 31, 1999, the 52-week trading
range was between $6.00 to $0.15 per share. The last reported sale was on
December 22, 2000 at $0.187 per share. The reported sporadic sales in the fiscal
year 2000, are set forth below*.
Date Open High Low Close
Oct-00 0.187 0.187 0.187 0.187
Aug-00 0.25 0.406 0.25 0.406
- ---------------------
* Historical quotes provided by Commodity Systems, Inc.
As of December 31, 2000, there were approximately 624 record holders of
the Company's Common Stock. The Company effected a 1.333333-for-1 reverse split
of its Common Stock in October 1997 and a 1-for-1.333333 forward stock split in
June 1998.
DIVIDEND POLICY
- ---------------
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the future. Physical Health
Centre Hong Kong Limited, the subsidiary of the company acquired by the Company
in October, 1996, paid dividends out in 1995. The Company currently intends to
retain future earnings, if any, to fund the development and growth of its
business.
27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data are qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements, related
Notes to Consolidated Financial Statements and Report of Independent Public
Accountants, and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere herein. The following table summarizes
certain selected financial data of the Company for the fiscal years ended
December 31, 1996 through December 31, 2000. The data has been derived from
Consolidated Financial Statements (audited) included in Item 8 of this Report.
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1996 1997 1998 1999 2000 2000
HK$ HK$ HK$ HK$ HK$ US$
Consolidated Statements of Operations Data
OPERATING REVENUES 111,230 148,954 210,209 253,172 303,312 38,887
------- ------- ------- ------- ------- ------
OPERATING EXPENSES
Salaries and commissions (23,797) (34,459) (56,415) (70,729) (88,999) (11,411)
Rent and related expenses (21,185) (36,222) (46,527) (63,931) (74,685) (9,575)
Depreciation (11,393) (18,274) (25,781) (33,187) (41,335) (5,299)
Other selling and administrative expenses (23,178) (34,849) (60,572) (57,520) (80,634) (10,338)
-------- -------- -------- -------- -------- -------
Total operating expenses (79,553) (123,804) (189,295) (225,367) (285,653) (36,623)
-------- --------- --------- --------- --------- -------
INCOME FROM OPERATIONS 31,677 25,150 20,914 27,805 17,659 2,264
------- ------- -------- -------- -------- -------
NON-OPERATING INCOME (EXPENSES)
Other income, net 885 2,186 645 452 853 109
Interest expenses (842) (4,151) (3,933) (4,245) (3,379) (433)
Goodwill write-off - - - - (1,113) (143)
----- ----- -------- --------- --------- --------
Total non-operating income (expenses) 43 (1,965) (3,288) (3,793) (3,639) (467)
----- ------- --------- ---------- ---------- --------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS 31,720 23,185 17,626 24,012 14,020 1,797
(Provision) Credit for income taxes (8,398) (6,969) 108 (4,933) (3,312) (424)
------- ------- ------- --------- --------- --------
INCOME BEFORE MINORITY INTERESTS 23,322 16,216 17,734 19,079 10,708 1,373
Minority interests (2,211) (1,460) (1,198) (577) (1,010) (129)
------- ------- -------- ---------- ---------- --------
NET INCOME 21,111 14,756 16,536 18,502 9,698 1,244
====== ======= ======= ========= ========== ========
Net income per share 2.11 1.48 1.65 1.85 0.97 0.12
====== ======= ======= ========= ========== ========
Number of shares of stock outstanding
(in thousands) 10,000 10,000 10,000 10,000 10,000 10,000
====== ====== ======== ========== ========= ========
Balance Sheet Data
Current assets 47,880 46,964 39,467 41,206 33,243 4,262
Total assets 117,693 168,170 169,641 186,131 212,931 27,299
Current liabilities 64,079 92,439 81,976 67,809 88,677 11,369
Long-term obligations other than finance leases 19,316 15,479 13,592 16,319 14,947 1,916
Working capital (16,199) (45,475) (42,509) (26,603) (55,434) (7,107)
Obligations under finance leases-non current 1,698 8,252 4,215 12,114 8,191 1,050
Deferred taxation 1,451 4,574 4,712 5,661 6,312 809
Minority interests 2,483 3,945 5,144 5,721 6,544 839
Shareholders' equity 28,666 43,481 60,002 78,507 88,260 11,316
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Income Data" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this report.
Overview
- --------
The Company, through its predecessor companies and its subsidiaries, has
been an established commercial operator of fitness and spa centers in Hong Kong
and China since 1986 (see "Company - History"). The Company currently operates
fourteen facilities: ten in Hong Kong and four in China (including one in
Macau). Based on the number of the members of the Company's facilities,
management believes that the Company is one of the top providers of fitness
facilities and spa and beauty treatment services in Hong Kong and China, with
approximately 70,000 members. The Company offers to its customers, at each
location, access to a wide range of U.S.-styled fitness and spa services.
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions with no material assets or liabilities. Prior
to acquisition of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ("Physical Limited"), the Company had no revenue producing
operations, but planned to enter into joint ventures and/or acquisitions
originally in the area of real estate, to expand its operations. In October,
1996, the Company closed a transaction with Ngai Keung Luk (Serleo), a 100%
shareholder of Physical Limited, whereby the Company entered into a Share
Exchange Agreement with Ngai Keung Luk (Serleo), pursuant to which the Company
issued 8,000,000 shares of its Common Stock to Ngai Keung Luk (Serleo) in
exchange for all of the outstanding shares of Physical Limited (the "Closing").
At the Closing, the then current management of the Company resigned and was
replaced by the current management of the Company. See "Management."
29
RESULTS OF OPERATIONS
The Company's revenues are derived from its two main lines of business
of fitness and spa services in three principal ways: sale of memberships to
fitness facilities, monthly membership fees and the sale of beauty treatments.
The sale of beauty products and exercise clothing also contributes an
insignificant amount to the total revenues. In respect to fitness services,
customers are invited to join as a member at a fee currently set at
HK$2,000(US$256) 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.
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$1,670).
The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.
Years Ended December 31,
--------------------------
1998 1999 2000
---- ---- ----
Operating Revenues 100.00% 100.00% 100.00%
Total operating expenses 90.05% 89.02% 94.18%
Operating income 9.95% 10.98% 5.82%
Income before income taxes and minority
Interests 8.38% 9.48% 4.62%
Provision for income and deferred taxes (0.05%) 1.95% 1.09%
Minority interests 0.57% 0.23% 0.33%
Net income 7.87% 7.31% 3.20%
======== ======== ========
30
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1999
- ----
OPERATING REVENUES. The Company's operating revenues showed the
continuous growth in the fiscal year ended December 31, 2000 as compared to the
fiscal year ended December 31, 1999. Operating revenues for the fiscal year
ended 2000 totaled HK$303,312,000 (US$38,887,000) compared to HK$253,172,000
(US$32,458,000) in the fiscal year ended December 31, 1999, representing an
increase of 20%. Operating revenues derived by the Company's fitness services
increased 22% to HK$203,758,000 (US$26,123,000) compared to HK$166,917,000
(US$21,400,000) in the fiscal year ended December 31, 1999. Fitness revenues as
a percentage of total revenues were 67% in the fiscal year ended December 31,
2000 as compared to 66% in the fiscal year ended December 31, 1999.
Operating revenues for the Company's beauty treatments totaled
HK$99,553,000 (US$12,764,000) compared to HK$86,225,000 (US$11,054,000) in the
fiscal year ended December 31, 1999, representing an increase of 15%. Beauty
revenues as a percentage of total revenues were 33% in the fiscal year ended
December 31, 2000 as compared to 34% in the fiscal year ended December 31, 1999.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$284,007,000
(US$36,412,000), or 94% of total operating revenues in the fiscal year ended
December 31, 2000 as compared to HK$238,096,000 (US$30,525,000) or 94% of total
operating revenues in the fiscal year ended December 31, 1999.
Operating revenues derived from the Company's China locations generated
HK$19,305,000 (US$2,475,000), or 6% of total operating revenues in the fiscal
year ended December 31, 2000 as compared to HK$15,076,000 (US$1,933,000) or 6%
of total operating revenues in the fiscal year ended December 31, 1999.
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 2000 totaled HK$285,653,000 (US$36,623,000) compared to
HK$225,367,000 (US$28,893,000) in the fiscal year ended December 31, 1999,
representing an increase of 27%. The increase in the operating expenses was
primarily due to higher salaries and commissions as a result of increased
revenues and additional rent and related expenses incurred by the new Sheraton
Hotel center, Tuen Mun center and Macau center which opened in July 1999, July
2000 and October 2000 respectively. Total operating expenses, after taking into
account all corporate expenses, were 94% of total operating revenue as compared
to 89% of last year.
Operating expenses associated with the Company's Hong Kong locations
were HK$258,105,000 (US$33,091,000) in the fiscal year ended December 31, 2000,
representing an increase of HK$51,283,000 (US$6,576,000) or 25% as compared to
HK$206,822,000 (US$26,515,000) in 1999. Hong Kong operating expenses represented
90% of total operating expenses in the fiscal year ended December 31, 2000 as
compared to 92% in 1999. The increase in operating expenses was primarily
incurred by the new branch in Tuen Mun, Hong Kong which has not yet been opened
in 1999. The operating expenses for the Tuen Mun center amounted to
HK$13,651,000 (US$1,750,000) in 2000. In addition, the Sheraton Hotel center
incurred operating expenses of HK$59,738,000 (US$7,659,000), representing an
increase of HK$28,901,000 (US$3,705,000) over last year which reflected the
6-month operation since July 1999.
31
Operating expenses associated with the Company's China locations were
HK$27,548,000 (US$3,532,000) in the fiscal year ended December 31, 2000,
representing an increase of 49% as compared to HK$18,545,000 (US$2,378,000) in
1999. Operating expenses in China represented 10% of total operating expenses in
the fiscal year ended December 31, 2000 as compared to 8% in 1999. The increase
in operating expenses was primarily incurred by the new branch in Macau which
has not yet been opened in 1999. The operating expenses for the new branch
totaled HK$6,543,000 (US$839,000) in 2000.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses for
the fiscal year ended December 31, 2000 totaled HK$3,639,000 (US$467,000)
compared to HK$3,793,000 (US$486,000) in the fiscal year ended December 31,
1999, representing a decrease of 4% due to lower interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 2000 totaled HK$3,312,000 (US$424,000). The effective
tax rate of the year was 23.6% as compared with 20.5% of last year, representing
an increase of 15%. The increase is mainly due to a profits tax rate of 16%
being charged on the Company's Hong Kong locations whereas the income of these
profits contributors was partially offset by the losses incurred by the
Company's China locations.
NET INCOME. The Company's net income for the fiscal year ended December
31, 2000 totaled HK$9,698,000 (US$1,244,000) compared to HK$18,502,000
(US$2,372,000) for the fiscal year ended December 31, 1999, representing a
decrease of 48%. The decrease in the net income was mainly due to a substantial
portion of expansion overhead being recognized in the fiscal year ended December
31, 2000, however, the revenues derived in association with such expansion were
not fully recognized in the same time period in accordance with the Company's
accounting policy.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1998
- ----
OPERATING REVENUES. The Company's operating revenues showed the
continuous growth in the fiscal year ended December 31, 1999 as compared to the
fiscal year ended December 31, 1998. Operating revenues for the fiscal year
ended 1999 totaled HK$253,172,000 (US$32,458,000) compared to HK$210,209,000
(US$26,950,000) in the fiscal year ended December 31, 1998, representing an
increase of 20%. Operating revenues derived by the Company's fitness services
increased 19% to HK$166,917,000 (US$21,400,000)compared to HK$139,829,000
(US$17,927,000) in the fiscal year ended December 31, 1998. Fitness revenues as
a percentage of total revenues were 66% in the fiscal year ended December 31,
1999 as compared to 67% in the fiscal year ended December 31, 1998.
Operating revenues for the Company's beauty treatments totaled
HK$86,225,000 (US$11,054,000)compared to HK$70,317,000 (US$9,015,000) in the
fiscal year ended December 31, 1998, representing an increase of 23%. Beauty
revenues as a percentage of total revenues were 34% in the fiscal year ended
December 31, 1999 as compared to 33% in the fiscal year ended December 31, 1998.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$238,096,000
(US$30,525,000), or 94% of total operating revenues in the fiscal year ended
December 31, 1999 as compared to HK$192,692,000 (US$24,704,000) or 92% of total
operating revenues in the fiscal year ended December 31, 1998.
Operating revenues derived from the Company's China locations generated
HK$15,076,000 (US$1,933,000), or 6% of total operating revenues in the fiscal
year ended December 31, 1999 as compared to HK$17,517,000 (US$2,246,000) or 8%
of total operating revenues in the fiscal year ended December 31, 1998.
32
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 1999 totaled HK$225,367,000 (US$28,893,000)compared to
HK$189,295,000 (US$24,269,000)in the fiscal year ended December 31, 1998,
representing an increase of 19%. The increase in the operating expenses was
primarily due to higher salaries and commissions as a result of increased
revenues and additional rent and related expenses incurred by the new Tsuen Wan
branch and Sheraton branch which opened in July 1998 and July 1999 respectively.
Total operating expenses, after taking into account all corporate expenses, were
89% of total operating revenue as compared to 90% of last year.
Operating expenses associated with the Company's Hong Kong locations
were HK$206,822,000 (US$26,516,000) in the fiscal year ended December 31, 1999,
representing an increase of HK$39,716,000 (US$5,092,000) or 24% as compared to
HK$167,106,000 (US$21,424,000) in 1998. Hong Kong operating expenses represented
92% of total operating expenses in the fiscal year ended December 31, 1999 as
compared to 88% in 1998. The increase in operating expenses was primarily
incurred by a new branch in Sheraton Hotel, Hong Kong which has not yet been
opened in 1998. The operating expenses for the Sheraton Hotel center amounted to
HK$30,837,000 (US$3,953,000) in 1999. In addition, the Tsuen Wan center incurred
operating expenses of HK$45,059,000 (US$5,777,000), representing an increase of
HK$18,738,000 (US$2,402,000) over last year which reflected the 6-month
operation since July 1998.
Operating expenses associated with the Company's China locations were
HK$18,545,000 (US$2,378,000) in the fiscal year ended December 31, 1999,
representing a decrease of 16% as compared to HK$22,189,000 (US$2,845,000) in
1998. Operating expenses in China represented 8% of total operating expenses in
the fiscal year ended December 31, 1999 as compared to 12% in 1998. The decrease
in operating expenses was primarily due to less selling and administrative
expenses incurred in the year.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses for
the fiscal year ended December 31, 1999 totaled HK$3,793,000 (US$486,000)
compared to HK$3,288,000 (US$422,000) in the fiscal year ended December 31,
1998, representing an increase of 15% due to higher interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 1999 totaled HK$4,933,000 (US$632,000). The effective
tax rate of the year was 20.5%. For the fiscal year ended December 31, 1998, the
Company provided income taxes of HK$4,382,000 (US$562,000) against which the
Company settled prior years taxes and recorded the amount over provided in prior
years in the amount of HK$4,490,000 (US$576,000). This resulted in a negative
provision of HK$108,000 (US$14,000) in the fiscal year ended December 31, 1998.
NET INCOME. The Company's net income for the fiscal year ended December
31, 1999 totaled HK$18,502,000 (US$2,372,000)compared to HK$16,536,000
(US$2,120,000) for the fiscal year ended December 31, 1998, representing an
increase of 12%. The increase in the net income was mainly due to the additional
contribution of the Sheraton Hotel center and Tsuen Wan center.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1997
- ----
OPERATING REVENUES. The Company's operating revenues showed a
significant growth in the fiscal year ended December 31, 1998 as compared to the
fiscal year ended December 31, 1997. Operating revenues for the fiscal year
ended 1998 totaled HK$210,209,000 (US$26,950,000) compared to HK$148,954,000
(US$19,097,000) in the fiscal year ended December 31, 1997, representing an
increase of 41%. Operating revenues derived by the Company's fitness services
increased 70% to HK$139,829,000 (US$17,927,000)compared to HK$82,311,000
(US$10,553,000) in the fiscal year ended December 31, 1997. Fitness revenues as
a percentage of total revenues were 67% in the fiscal year ended December 31,
1998 as compared to 55% in the fiscal year ended December 31, 1997.
33
Operating revenues for the Company's beauty treatments totaled
HK$70,317,000 (US$9,015,000) compared to HK$66,496,000 (US$8,525,000) in the
fiscal year ended December 31, 1997, representing an increase of 6%. Beauty
revenues as a percentage of total revenues were 33% in the fiscal year ended
December 31, 1998 as compared to 45% in the fiscal year ended December 31, 1997.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$192,692,000
(US$24,704,000), or 92% of total operating revenues in the fiscal year ended
December 31, 1998 as compared to HK$126,939,000 (US$16,274,000) or 85% of total
operating revenues in the fiscal year ended December 31, 1997.
Operating revenues derived from the Company's China locations generated
HK$17,517,000 (US$2,246,000), or 8% of total operating revenues in the fiscal
year ended December 31, 1998 as compared to HK$22,015,000 (US$2,823,000) or 15%
of total operating revenues in the fiscal year ended December 31, 1997.
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 1998 totaled HK$189,295,000 (US$24,269,000)compared to
$HK123,804,000 (US$15,872,000)in the fiscal year ended December 31, 1997,
representing an increase of 53%. The increase in the operating expenses was
primarily due to the following factors: expenses incurred in connection with the
opening of a new center (Tsuen Wan), a general increase in staff salaries as a
result of higher revenues generated, depreciation charges and rental expenses
incurred for enhanced facilities. Total operating expenses, after taking into
account all corporate expenses, were 90% of total operating revenue as compared
to 83% of last year.
Operating expenses associated with the Company's Hong Kong locations
were HK$167,106,000 (US$21,424,000) in the fiscal year ended December 31, 1998,
representing an increase of HK$62,735,000 (US$8,043,000) or 60% as compared to
HK$104,371,000 (US$13,381,000) in 1998. Hong Kong operating expenses represented
88% of total operating expenses in the fiscal year ended December 31, 1998 as
compared to 84% in 1997. The increase was primarily due to increased marketing
expenses of HK$10,238,000 (US$1,313,000), additional salary costs of
HK$15,400,000 (US$1,974,000) as a result of higher revenues, increased
depreciation charges of HK$3,682,000 (US$472,000) for the two enhanced premises
which were relocated in Mid-1997, and additional expenses of HK$26,320,000
(US$3,374,000) incurred by a new branch in Tsuen Wan, Hong Kong which opened in
July 1998.
Operating expenses associated with the Company's China locations were
HK$22,189,000 (US$2,845,000) in the fiscal year ended December 31, 1998,
representing an increase of 14% as compared to HK$19,433,000 (US$2,491,000) in
1997. Operating expenses in China represented 12% of total operating expenses in
the fiscal year ended December 31, 1998 as compared to 16% in 1997. The increase
in operating expenses was primarily due to inflation and increased rental for
the enhanced facility in Huang Pu, Shanghai.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses for
the fiscal year ended December 31, 1998 totaled HK$3,288,000 (US$422,000)
compared to HK$1,965,000 (US$252,000) in the fiscal year ended December 31,
1997, representing an increase of HK$1,323,000 (US$170,000) due to less interest
income.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 1998 totaled HK$(108,000)(US$(14,000))as compared to
HK$6,969,000 (US$893,000)in the fiscal year ended December 31, 1997,
representing a decrease of 102%.
NET INCOME. The Company's net income for the fiscal year ended December
31, 1998 totaled HK$16,536,000 (US$2,120,000)compared to HK$14,756,000
(US$1,892,000) for the fiscal year ended December 31, 1997, representing an
increase of 12%. The increase in the net income was mainly due to additional
contribution from the new Tsuen Wan center.
34
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash generated
from operations, short-term bank credit, long-term bank loans, loans from third
parties (outside investors ) and minority shareholders of subsidiaries, advances
from customers relating to prepaid fitness and spa income, and leasing
arrangements with financial institutions. See Notes to Financial Statements
(Note 6 "Short-Term Bank Loans"; Note 7 "Long-Term Bank Loans"; and Note 10
"Obligations under Finance Leases").
Cash and cash equivalent balances for the fiscal years ended December
31, 2000 and December 31,1999 were HK$1,759,000 (US$226,000) and HK$2,896,000
(US$372,000) respectively.
Net cash provided by operating activities were HK$76,854,000
(US$9,853,000), HK$42,618,000(US$5,464,000), and HK$47,075,000 (US$6,035,000)
for fiscal year 2000, fiscal year 1999, and fiscal year 1998 respectively. The
Company's operating activities are historically financed by cash flows from
operations. Net cash used in investing activities were HK$78,127,000
(US$10,016,000), HK$44,612,000 (US$5,719,000), and HK$37,700,000 (US$4,833,000)
for fiscal year 2000, fiscal year 1999, and fiscal year 1998 respectively,
primarily as a result of expenditures for property, plant and equipment. Net
cash provided (used) in financing activities, which mainly include bank loan
repayments, net of proceeds from new bank loans, were HK$81,000 (US$11,000),
HK$3,166,000 (US$406,000), and HK$(9,593,000) (US$(1,230,000)) for fiscal year
2000, fiscal year 1999, and fiscal year 1998 respectively.
The Company's long-term loans bear interest rates varying currently from
6.25% to 10.5% per annum. The total balance outstanding as of December 31, 2000
on such loans was HK$15,789,000 (US$2,024,000). The last repayment on the loans
is due in 2007. The Company also had various banking facilities available from
financial institutions amounting to approximately HK$18,873,000 (US$2,420,000).
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.
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 December 31, 2000, was
HK$4,827,000 (US$619,000). The Company has never experienced any significant
problems with collection of accounts receivable from its customers.
Capital expenditures for fiscal years 2000, 1999 and 1998 were
HK$71,934,000 (US$9,222,000), HK$51,010,000 (US$6,540,000) and HK$48,813,000
(US$6,258,000), 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.
35
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 has undergone 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 Company has incurred total costs of HK$800,000 (US$103,000) in
development of a new system which is year 2000 compliant. The implementation of
the new system was completed by July 1999. The Company has already obtained an
estimate of the cost from the software service company, and in the opinion of
the Management such cost can be controlled as proposed. The Company's
maintenance charges for the new system were as follows:
1999 HK$ 96,000 (US$12,300)
2000 and onwards HK$ 64,000 (US$8,200)
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company required to be included in
Item 7 are set forth in the Financial Statements Index.
Independent Auditors' Report of William D. Lindberg. F-1
Independent Auditors' Report of Moores Rowland F-3
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1999 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 F-7
Notes to Consolidated Financial Statements F-8
37
WILLIAM D. LINDBERG
CERTIFIED PUBLIC ACCOUNTANT
1064 CLIPPER COURT
COSTA MESA, CA. 92627
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO PHYSICAL SPA & FITNESS INC.
I have audited the accompanying consolidated balance sheets of Physical Spa &
Fitness Inc. (a Delaware corporation) (the "Company") and its subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of income,
cash flows and changes in shareholders' equity for the years ended December 31,
1996, 1997 and 1998 expressed in Hong Kong Dollars. These financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Physical Spa &
Fitness Inc. and its subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1996, 1997 and 1998 in conformity with generally accepted accounting
principles.
/S/ WILLIAM D. LINDBERG
Costa Mesa, California,
June 30, 1999
F-1
INDEPENDENT AUDITORS' REPORT
AUDITED FINANCIAL STATEMENTS
PHYSICAL SPA & FITNESS INC.
DECEMBER 31, 2000
F-2
We have audited the accompanying consolidated balance sheets of Physical Spa &
Fitness Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1999
and 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of December 31, 1999 and 2000 and the results of their
operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
MOORES ROWLAND
CHARTERED ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS
Hong Kong
Date: 9 March 2001
F-3
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=======================================================================================================================
(In thousands, except share and per share data)
NOTE AS OF DECEMBER 31
--------------------------------------
1999 2000 2000
HK$ HK$ US$
ASSETS
CURRENT ASSETS
Cash and cash equivalents 2,896 1,759 226
Trade receivables 3,895 4,827 619
Rental and utility deposits 11,654 15,137 1,941
Prepayments to vendors and suppliers and other current assets 7,727 6,427 824
Inventories 3(E) 2,551 2,070 265
Due from related companies 11(D) 8,373 915 117
Due from a stockholder 4,110 2,108 270
---------- ---------- ----------
TOTAL CURRENT ASSETS 41,206 33,243 4,262
---------- ---------- ----------
Bank deposits, collateralized 3,522 3,567 457
Prepayments for construction-in-progress 467 6,954 892
Property, plant and equipment, net 5 140,936 169,167 21,688
---------- ---------- ----------
TOTAL ASSETS 186,131 212,931 27,299
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank loans 6 8,606 8,292 1,063
Long-term bank loans - current portion 7 1,851 7,685 985
Accounts payable and accrued expenses 18,300 23,618 3,028
Obligations under finance leases - current portion 9 4,747 4,959 636
Deferred income - current portion 22,828 35,873 4,599
Deferred liabilities - current portion 2,304 4,177 536
Income taxes payable 5,991 757 97
Taxes other than income 3,182 3,316 425
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 67,809 88,677 11,369
---------- ---------- ----------
Deferred income - non-current portion 999 1,957 251
Deferred liabilities - non-current portion 5,533 4,886 626
Long-term bank loans - non-current portion 7 5,587 8,104 1,039
Loans from minority stockholders of subsidiaries 4,200 - -
Obligations under finance leases - non-current portion 9 12,114 8,191 1,050
Deferred taxation 5,661 6,312 809
Minority interests 5,721 6,544 839
STOCKHOLDERS' EQUITY:
Common stock, par value of US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 119 174 22
Retained earnings 78,310 88,008 11,284
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 78,507 88,260 11,316
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 186,131 212,931 27,299
========== ========== ==========
The financial statements should be read in conjunction with the accompanying
notes.
- -----------------------------------------------------------------------------------------------------------------------
F-4
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=====================================================================================================================
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1998 1999 2000 2000
NOTE HK$ HK$ HK$ US$
OPERATING REVENUES 210,209 253,172 303,312 38,887
------------- ------------- ------------ -----------
OPERATING EXPENSES
Salaries and commissions (56,415) (70,729) (88,999) (11,411)
Rent and related expenses (46,527) (63,931) (74,685) (9,575)
Depreciation (25,781) (33,187) (41,335) (5,299)
Other selling and administrative expenses (60,572) (57,520) (80,634) (10,338)
------------- ------------- ------------ -----------
Total operating expenses (189,295) (225,367) (285,653) (36,623)
------------- ------------- ------------ -----------
INCOME FROM OPERATIONS 20,914 27,805 17,659 2,264
------------- ------------- ------------ -----------
NON-OPERATING INCOME (EXPENSES)
Other income, net 645 452 853 109
Interest expenses (3,933) (4,245) (3,379) (433)
Goodwill write-off 8 - - (1,113) (143)
------------- ------------- ------------ -----------
Total non-operating expenses (3,288) (3,793) (3,639) (467)
------------- ------------- ------------ -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS 17,626 24,012 14,020 1,797
Provision (Credit) for income taxes 9 108 (4,933) (3,312) (424)
------------- ------------- ------------ -----------
INCOME BEFORE MINORITY INTERESTS 17,734 19,079 10,708 1,373
Minority interests (1,198) (577) (1,010) (129)
------------- ------------- ------------ -----------
NET INCOME 16,536 18,502 9,698 1,244
Other comprehensive income (loss)
- - Foreign currency translation adjustments (15) 3 55 7
------------- ------------- ------------ -----------
COMPREHENSIVE INCOME 16,521 18,505 9,753 1,251
============= ============= ============ ===========
Earnings per share of common stock - Basic 1.65 1.85 0.98 0.13
============= ============= ============ ===========
Number of shares of stock outstanding
(in thousands) 10,000 10,000 10,000 10,000
============= ============= ============ ===========
The financial statements should be read in conjunction with the accompanying
notes.
- ---------------------------------------------------------------------------------------------------------------------
F-5
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
========================================================================================================================
(In thousands, except share and per share data)
CUMULATIVE
RETAINED TRANSLATION
COMMON STOCK EARNINGS ADJUSTMENTS TOTAL
---------------------------- ------------ ----------------- -----------
NOTE NUMBER HK$ HK$ HK$ HK$
Balance as of January 1, 1998 10,000,000 78 44,608 131 44,817
Prior year adjustments 4 - - (1,336) - (1,336)
-------------- ------------ ------------- ---------------- -----------
Balance as of January 1, 1998
(Restated) 10,000,000 78 43,272 131 43,481
Net income - - 17,342 - 17,342
Prior year adjustments 4 - - (806) - (806)
Translation adjustment - - - (15) (15)
-------------- ------------ ------------- ---------------- -----------
Balance as of December 31, 1998
(Restated) 10,000,000 78 59,808 116 60,002
Net income - - 18,502 - 18,502
Translation adjustment - - - 3 3
-------------- ------------ ------------- ---------------- -----------
Balance as of December 31, 1999 10,000,000 78 78,310 119 78,507
Net income - - 9,698 - 9,698
Translation adjustment - - - 55 55
-------------- ------------ ------------- ---------------- -----------
BALANCE AS OF DECEMBER 31, 2000 10,000,000 78 88,008 174 88,260
============== ============ ============= ================ ===========
The financial statements should be read in conjunction with the accompanying
notes.
- ------------------------------------------------------------------------------------------------------------------------
F-6
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=========================================================================================================================
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31
------------------------------------------------------
1998 1999 2000 2000
HK$ HK$ HK$ US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 16,536 18,502 9,698 1,244
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interests 1,198 577 1,010 129
Depreciation 25,781 33,187 41,335 5,299
Loss on disposal of property, plant and equipment 592 196 774 99
Goodwill on acquisition of further interests in
subsidiaries written off - - 1,113 143
Changes in working capital:
Trade receivables 2,209 3,469 (932) (119)
Deposits, prepayments and other current assets 3,008 (4,320) (2,183) (280)
Inventories 1,518 (47) 481 62
Due form related companies (3,481) 40 7,458 956
Due from a stockholder - 294 2,002 257
Accounts payable and accrued expenses 13,125 (3,062) 5,318 682
Deferred income (7,598) (6,271) 14,003 1,795
Deferred liabilities 806 2,949 1,226 157
Income taxes payable (5,829) 1,925 (5,234) (671)
Taxes other than income (928) (5,770) 134 17
Deferred taxation 138 949 651 83
---------- ---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 47,075 42,618 76,854 9,853
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Prepayments for construction-in-progress 10,397 6,147 (6,487) (831)
Acquisition of property, plant and equipment (48,813) (51,010) (71,934) (9,222)
Acquisition of further interests in subsidiaries from
minority interests - - (1,300) (167)
Sales proceeds from disposal of property, plant and 716 251 1,594 204
equipment
---------- ---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (37,700) (44,612) (78,127) (10,016)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank deposits - (3,522) (45) (6)
Proceeds from (Settlement of) short-term bank loans 636 2,374 (314) (40)
Decrease in due from a stockholder 6,371 - - -
Proceeds form long-term bank loans 4,000 1,000 17,000 2,179
Repayment of long-term bank loans (6,208) (4,408) (8,649) (1,109)
Settlement of long-term loans from third parties (9,741) - - -
Assumption of finance lease obligations 847 14,753 1,300 167
Capital element of finance lease rental payments (4,538) (7,031) (5,011) (642)
Repayment of loans from minority shareholders of subsidiaries (960) - (4,200) (538)
---------- ---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,593) 3,166 81 11
---------- ---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15) 3 55 7
---------- ---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (233) 1,175 (1,137) (145)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,954 1,721 2,896 371
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 1,721 2,896 1,759 226
========== ========== ========== ==========
The financial statements should be read in conjunction with the accompanying
notes.
- ------------------------------------------------------------------------------------------------------------------------
F-7
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
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 shares of common stock
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 Principal 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 Principal 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 Principal Stockholder and Goodchild
became the major shareholders of the Company. In February, 1999,
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 Principal 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 Principal 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:
EQUITY INTEREST
DATE OF ACQUISITION / PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY FORMATION INCORPORATION COMPANY ACTIVITIES
Direct Indirect
------ --------
Physical Holdings March 8, 1996 BVI 100% - Investment
holding
Ever Growth Limited September 29, 1994 HK - 100% Property
("Ever Growth") holding
Physical Health Centre December 1, 1998 HK - 100% Will operate a
(E House) Limited Fitness Centre
(formerly known as in Hong Kong
Global Resources
Limited)
Jade Regal Holdings March 15, 1996 BVI - 100% Investment
Limited holding
- --------------------------------------------------------------------------------
F-8
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
====================================================================================================================
(Amounts in thousands, except share and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
EQUITY INTEREST
DATE OF ACQUISITION PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY / FORMATION INCORPORATION COMPANY ACTIVITIES
Direct Indirect
------ --------
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) Limied holding
("Physical Shenzhen")
Physical Health Centre November 18, 1998 HK - 100% Operating a
(TST) Limited ("Physical Fitness
TST") Centre in
Hong Kong
Physical Health Centre September 8, 1997 HK - 100% Operating a
(Tsuen Wan) Limited Fitness
("Physical Tsuen Wan") Centre in
Hong Kong
Physical Health Centre September 29, 1994 HK - 100% Operating a
(Tuen Mun) Limited Fitness
("Physical Tuen Mun") Centre in
Hong Kong
Physical Health Centre March 2, 1990 HK - 91.4% Operating 5
Hong Kong Limited Fitness
Centres in
Hong Kong
Proline Holdings Limited September 28, 1994 BVI - 100% Investment
holding
Regent Town Holdings September 20, 1993 BVI - 100% Investment
Limited ("Regent Town") holding
Shanghai Physical Ladies' September 28, 1994 HK - 100% Investment
Club Company Limited holding
("Physical Shanghai")
Star Perfection Holdings April 15, 1996 BVI - 100% Investment
Limited holding
Supreme Resources Limited September 29, 1994 HK - 100% Operating a
("Supreme") beauty
treatment
centre in
Hong Kong
Su Sec Pou Physical Health August 18, 1997 Macau - 100% Operating a
Centre (Macau), Limited Fitness
Centre in
Macau
- ---------------------------------------------------------------------------------------------------------------------
F-9
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
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
Shanghai 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 the
Shanghai JV will be taken over by the Chinese JV partner while
Physical Shanghai 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 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 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.
According to the directors, the Group has verbally agreed with
the Chinese enterprise to terminate the JV contract even
though no formal notice has yet been submitted to the PRC
authority.
- --------------------------------------------------------------------------------
F-10
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
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 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.
According to the directors, the Group has verbally agreed with
the Chinese enterprise to terminate the JV contract even
though no formal notice has yet been submitted to the PRC
authority.
2. BASIS OF PRESENTATION
The financial statements 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.
The financial statements are presented in Hong Kong dollars which is
the Group's functional currency because the Group's operations are
primarily located in Hong Kong. For illustrative purposes, the exchange
rate adopted for the presentations of financial information as of and
for the year ended December 31, 2000 has been made at HK$7.8 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
December 31, 2000 or at any other rate.
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) PREPARATION OF FINANCIAL STATEMENTS
The Group has a negative working capital of HK$26,603 and
HK$55,434 as of December 31, 1999 and 2000 respectively. These
conditions raise doubt about the Group's ability to continue
as a going concern.
Continuation of the Group as a going concern is dependent upon
obtaining additional working capital and attaining profitable
operations in the future. The Principal Stockholder has
undertaken to make available adequate funds to the Group as
and when required to maintain the Group as a going concern. As
a result, the financial statements have been prepared in
conformity with the principles applicable to a going concern.
- --------------------------------------------------------------------------------
F-11
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c) 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.
d) 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.
e) GOODWILL ON CONSOLIDATION
Goodwill arising on consolidation, being the excess of the
purchase consideration payable at the time of acquisition of
the subsidiaries over the fair values of the net underlying
assets acquired, is recognised as an expense in the period it
arises.
f) INVENTORIES
Inventories, mainly comprise beauty products for treatment and
sale, are stated at the lower of cost and net realizable
value. Cost, which comprises all costs of purchase and, where
applicable, 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.
Inventories consisted of the following:
AS OF DECEMBER 31
---------------------------------
1999 2000 2000
HK$ HK$ US$
Beauty products for treatment 1,907 1,300 166
Beauty products for sale 644 770 99
-------- --------- --------
2,551 2070 265
======== ========= ========
g) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
PPE is stated at cost less accumulated depreciation.
The cost of an asset comprises 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 normally
recognized as an expense 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 and accumulated
depreciation are eliminated from the accounts and any gain or
loss resulting from their disposal is included in the
statement of operations.
- --------------------------------------------------------------------------------
F-12
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION (CONTINUED)
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 provided to write off the cost of PPE over
their estimated useful lives from the date on which they
become fully operational and after taking into account their
estimated residual values, using the straight-line method at
the following rates per annum:
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.
h) REVENUE RECOGNITION
Revenue represents 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 duration whereas the
monthly dues, service income and other related income are
recognized as revenue when services are rendered.
i) DEFERRED INCOME
Deferred income represents unamortized non-refundable
admission fees and service fees billed but for which the
related services, or portion of the services have not yet been
rendered.
j) 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(f) 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.
- --------------------------------------------------------------------------------
F-13
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
k) 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.
l) 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.
m) 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.
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.
n) FOREIGN CURRENCY TRANSLATION
The Company and its subsidiaries maintain their accounting
books and records in Hong Kong Dollars ("HK$"), except for the
PRC JV and Macau subsidiary which maintain their accounting
books and records in RMB and MOP respectively. Foreign
currency transactions during the year are translated to HK$ 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 and
Macau subsidiary are translated into HK$ using the closing
rate method, whereby the balance sheet items are translated
into HK$ using the exchange rates at the respective balance
sheet dates. The share capital and retained earnings are
translated at exchange rates prevailing at the time of the
transactions while income and expenses items are translated at
the average 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.
- --------------------------------------------------------------------------------
F-14
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o) 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.
p) EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by
dividing earnings available to common shareholders by the
weighted average number of common shares outstanding for the
periods.
Diluted earnings per share is computed by dividing earnings
available to common shareholders by the weighted average
number of common shares outstanding adjusted to reflect
potentially dilutive securities. There were no potentially
dilutive securities outstanding during any of the years and,
accordingly, basic and diluted earnings per share are the
same.
q) USES OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires the Group'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.
r) ADVERTISING AND MARKETING COSTS
All advertising and marketing costs are to be expensed off in
the periods in which those costs are incurred or the first
time the advertising takes place.
s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") 101, "Revenue
recognition in financial statements", which provides guidance
on applying generally accepted accounting principles for
recognizing revenue. SAB 101 is effective for fiscal years
beginning after December 15, 1999. The adoption of SAB 101 has
no material impact on the Group's consolidated financial
position, results of operations and cash flows.
In June 1999, the Financial Accounting Standards Board issued
SFAS No. 137, "Accounting for derivative instruments and
hedging activities" which delayed the effective date of SFAS
No. 133 "Accounting for derivative instruments and hedging
activities" for one year. SFAS No. 133 provides guidance for
the recognition and measurement of derivatives and hedging
activities. It requires an entity to record, at fair value,
all derivatives as either assets or liabilities in the balance
sheet, and it establishes specific accounting rules for
certain types of hedges. SFAS No. 133 is now effective for
fiscal years beginning after June 15, 2000 and will be adopted
by the Group when required, if not earlier. The impact, if
any, of adopting SFAS No. 133 on the Group's consolidated
financial position, results of operations and cash flows, has
not been finalized.
- --------------------------------------------------------------------------------
F-15
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In March 2000, the Financial Accounting Standards Board issued
FIN No. 44, "Accounting for certain transactions involving
stock compensation". FIN No. 44 provides guidance for applying
APB Opinion No. 25, "Accounting for stock issued to
employees". With certain exceptions, FIN No. 44 applies
prospectively to new awards, exchange of awards in a business
combination, after July 1, 2000. The implementation of FIN No.
44 did not have a material effect on the Company's results of
operations.
4. PRIOR YEAR ADJUSTMENTS
Prior year adjustments are analysed as follows:
Prior
1997 1998 1999 2000
NOTE HK$ HK$ HK$ HK$
Overstatement of profits shared by
minority interests in previous years a 2,374 - - -
Understatement of rental expenses in
prior years b (4,508) (1,549) - -
Overprovision of depreciation in prior years
c 426 798 - -
Loss (Profit) arising from prior year
adjustments shared by minority interest d
372 (55) - -
---------- ---------- --------- --------
(1,336) (806) - -
========== ========== ========= ========
a) The overstatement of profits shared by minority interests was
mainly attributable to the fact that minority interests have
not been updated/reversed when the Group increased its
shareholdings in Regent Town from 67% to 92.5% progressively
since 1995.
b) In prior years, the amount of benefit arose from the rent-free
period of the operating leases capitalised as deferred
liabilities was incorrect as a result of calculation error.
The respective amortization to the statement of operations was
also affected. The cumulative effect is that both liabilities
and retained earnings had been understated and overstated by
HK$6,057.
c) In prior years, the Group recognized certain benefit arose
from the rent-free period of the operating leases as leasehold
improvements and depreciated over the lease period.
Accordingly, both assets and retained earnings had been
overstated and understated by HK$1,224.
d) As a result of the restatement of the results in prior years
as mentioned in notes b and c above, the profits/loss shared
by minority interests was decreased by HK$317.
Accordingly, the earnings per share of common stock for the years ended
December 31, 1998 were revised from HK$1.73 to HK$1.65.
- --------------------------------------------------------------------------------
F-16
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
5. PROPERTY, PLANT AND EQUIPMENT, NET
AS OF DECEMBER 31
-----------------------------------------
1999 2000 2000
HK$ HK$ US$
Land and buildings 3,140 3,137 403
Leasehold improvements 89,010 112,156 14,416
Machinery and equipment 100,819 135,551 17,423
Furniture and fixtures 29,024 35,337 4,542
Computers 3,235 4,347 558
Motor vehicles 3,339 4,992 642
Less: Accumulated depreciation (87,631) (126,353) (16,296)
----------- ----------- -----------
Net book value 140,936 169,167 21,688
=========== =========== ===========
As of December 31, 2000, the cost and accumulated depreciation of PPE
held under finance leases amounted to approximately HK$22,844 (1999:
HK$35,609) and HK$11,348 (1999: HK$11,793) respectively.
6. SHORT-TERM BANK LOANS
The short-term bank loans are collateralized and repayable within one
year. Please refer to Note 7 for details of collateral for such
facilities.
Supplemental information with respect to the short-term bank loans was
as follows:
YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1999 2000
Maximum amount outstanding during the years HK$6,842 HK$8,452 HK$8,292
Average amount outstanding during the years HK$5,448 HK$6,432 HK$4,973
Weighted average interest rate at the end of the years 10% 11% 8%
Weighted average interest rate during the years 11% 11% 9%
- --------------------------------------------------------------------------------
F-17
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
7. LONG-TERM BANK LOANS
The Group obtained various lines of credit under banking facilities
which aggregated HK$34,662 as of December 31, 2000 from creditworthy
commercial banks in HK to finance its operations. These loans were
collateralized by certain of the assets of the Group and its
stockholders. As of December 31, 2000, the loans consist of the
following:
PRINCIPAL INTEREST RATE MATURITY
HK$
4,621 HK$ prime + 1.5% Serially from 2000 to 2002
5,000 HK$ prime + 1.5% Serially from 2001 to 2002
3,296 HK$ prime + 2.5% Serially from 2000 to 2002
2,410 HK$ prime + 1.5% Serially from 2000 to 2007
462 HK$ prime - 1.75% Serially from 2000 to 2003
----------
15,789
==========
Aggregate maturities of the long-term bank loans are as follows:
PRINCIPAL PAYABLES DURING THE FOLLOWING PERIODS
HK$
7,685 2001
----------
6,394 2002
380 2003
360 2004
360 2005
610 2006 -2010
---------
8,104
---------
15,789
=========
The collateral of the loans include:
(i) leasehold property in Hong Kong owned by Ever Growth;
(ii) fixed deposits owned by Physical Tsuen Wan and Physical TST;
(iii) leasehold property in Hong Kong owned by relatives of the
Principal Stockholder;
(vi) leasehold property in Hong Kong owned by a related company;
and
(v) personal guarantees from the Principal Stockholder.
- --------------------------------------------------------------------------------
F-18
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
8. GOODWILL WRITE-OFF
The goodwill was arose from the acquisition of 30% and 7.5% interests
in Supreme and Regent Town from the minority shareholders during the
year. Aggregate consideration for such acquisition was HK$1,300. Since
then, Supreme and Regent Town have become wholly-owned subsidiaries of
the Group.
9. INCOME TAXES
Reconciliation to the expected statutory tax rate in Hong Kong of 16.0%
(1999: 16% AND 1998: 16.1%) is as follows:
YEAR ENDED DECEMBER 31
------------------------------
1998 1999 2000
% % %
Weighted average statutory rate 16.1 16.0 16.0
Tax effect of net operating losses 7.4 2.6 11.7
Tax effect of timing differences - - 9.8
Effect of prior year adjustments 0.7 2.3 -
Write back of overprovision for
taxation in prior years (25.5) - (13.4)
Others 0.7 (0.4) (0.5)
-------- -------- --------
Effective rate (0.6) 20.5 23.6
======== ======== ========
Income tax expense is comprised of the following:
YEAR ENDED DECEMBER 31
----------------------------------------------
1998 1999 2000 2000
HK$ HK$ HK$ US$
Current taxes (246) 3,984 2,661 341
Deferred taxes 138 949 651 83
--------- -------- --------- --------
Income tax expense (108) 4,933 3,312 424
========= ======== ========= ========
The Group is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which it is
domiciled and operates.
The Hong Kong subsidiaries are subject to Hong Kong profits tax at a
rate of 16% (1999 AND 1998: 16%).
Since those PRC JV have sustained losses for the PRC income tax
purposes, the Company has not recorded any PRC income tax expense. PRC
income tax in the future will be calculated at the applicable rates
relevant to the PRC JV which currently are 33%.
As the fitness centre operated in Macau has incurred a loss for
taxation purposes for the period, the Group has not recorded any Macau
income tax expenses. Macau profits tax is currently charged at sliding
rates with maximum rate of 15% on assessable profits.
- --------------------------------------------------------------------------------
F-19
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
10. OBLIGATIONS UNDER FINANCE LEASES
Physical HK and Physical TST lease fitness equipment and motor vehicles
under several finance leases. The scheduled future minimum lease
payments was as follows:
AS OF DECEMBER 31
---------------------------
1999 2000
HK$ HK$
Payable during the following period:
Within one year 6,640 6,679
Over one year but not exceeding two years 5,936 4,667
Over two years but not exceeding three years 4,237 3,763
Over three years but not exceeding four years 3,763 3,763
Over four years but not exceeding five years 3,763 627
Thereafter 658 -
------------ -----------
Total minimum lease payments 24,997 19,499
Less: Amount representing interest 8,136 6,349
------------ -----------
Present value of net minimum lease payments 16,861 13,150
============ ===========
11. COMMITMENTS
CAPITAL EXPENDITURE COMMITMENTS
AS OF DECEMBER 31
---------------------------
1999 2000
HK$ HK$
Contracted but not provided net of deposit paid in the
financial statements 6,608 16,667
============ ===========
COMMITMENTS UNDER OPERATING LEASES
The Group had outstanding commitments not provided for under
non-cancellable operating leases in respect of land and buildings, the
portion of these commitments which are payable in the following periods
is as follows:
AS OF DECEMBER 31
---------------------------
1999 2000
HK$ HK$
Payable during the following periods:
Within one year 54,504 66,004
Over one year but not exceeding two years 48,481 71,023
Over two years but not exceeding three years 49,582 50,499
Over three years but not exceeding four years 29,716 33,303
Over fours years but not exceeding five years 23,719 15,859
Thereafter 9,890 44,346
------------ -----------
Total operating lease commitments 215,892 281,034
============ ===========
- --------------------------------------------------------------------------------
F-20
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
12. RELATED PARTY TRANSACTIONS
The Group had the following transactions with related companies:
YEAR ENDED DECEMBER 31
--------------------------------
1998 1999 2000
HK$ HK$ HK$
Rental of a director's quarter 720 720 1,080
Purchase of beauty and fitness equipment 1,881 444 -
Prepayments for equipment related to construction-in-progress 3,961 - -
Management fee received 12 - -
a) Certain general and administrative expenses incurred by the
Group companies during the relevant years on behalf of the
related companies were reimbursed by the respective related
companies at cost.
b) The Principal Stockholder of the Group had beneficial
interests in all the aforementioned related companies or the
stockholder of the related companies were related to the
Principal Stockholder.
c) The Group made certain advances to the Principal Stockholder
during the years. The balance due to the Group as at December
31, 2000 was HK$2,108. Under an agreement with the Group, the
Principal Stockholder has pledged 1,500,000 shares of the
Company's stock as collateral.
d) The Principal Stockholder has undertaken to indemnify the
Group against losses arising from any non-recoverability of
various amounts due from related companies. Any such payments
by the Principal Stockholder will be recorded as expenses by
the Group with the corresponding credit to the equity.
e) The Principal Stockholder has also undertaken to indemnify the
Group against any contingent liabilities including tax
liabilities and claims that may result from the operating
activities of the Group in Hong Kong, the PRC and elsewhere
occurring prior to the balance sheet date.
f) The Group disposed its wholly-owned subsidiary, Mighty System
Limited, to the Principal Stockholder at a consideration of
US$1.00 on November 1, 2000.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31
--------------------------------------
1998 1999 2000
HK$ HK$ HK$
Cash paid for:
Interest expense 3,933 4,245 3,379
Income taxes 5,230 2,059 7,895
- --------------------------------------------------------------------------------
F-21
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
14. OTHER SUPPLEMENTAL INFORMATION
The following items are included in the consolidated statements of
operations:
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1999 2000
NOTE HK$ HK$ HK$
Foreign exchange gain a 36 8 47
Interest expense on:
Finance leases 1,325 2,346 1,961
Overdrafts and bank loans 1,984 1,846 1,351
Loans from third parties 624 - -
Others - 53 67
Interest income a 12 53 332
Sales taxes b (492) 748 843
Advertising and marketing expenses c 19,152 15,323 28,534
Rental expenses under operating leases 35,985 47,249 56,484
a) Foreign exchange gain and interest income are included in
"Other income, net" in the Consolidated Statements of
Operations.
b) Sales tax is deducted from "Operating revenue" in the
Consolidated Statements of Operations.
c) Advertising and marketing expenses are included in "Other
selling and administrative expenses" in the Consolidated
Statements of Operations.
15. DISTRIBUTION OF PROFIT
In the opinion of management, any undistributed earnings of Physical
Holdings and the Operating Subsidiaries will be reinvested
indefinitely.
16. RETIREMENT PLAN
The Group did not operate any retirement plan before December 2000.
Following the implementation of the Mandatory Provident Fund ("MPF") in
Hong Kong with effect from December 2000, the Group operates a MPF plan
for its Hong Kong employees. The assets of the MPF are held separately
from those of the Group in a provident fund managed by an independent
trustee. The Group is required to make contributions to the MPF in
January 2001 and accordingly, no pension expenses have been incurred by
the Group during the years ended December 31, 1998, 1999 and 2000.
- --------------------------------------------------------------------------------
F-22
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
(Amounts in thousands, except share and per share data)
17. 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.
18. OPERATING RISKS
a) CONCENTRATION OF SUPPLIERS
The Group purchases beauty products from a number of
suppliers. Details of individual suppliers accounting for more
than 10% of the Group's purchases are as follows:
YEAR ENDED DECEMBER 31
----------------------
1998 1999 2000
% % %
Hope Key Development Limited 13 15 N/A
Kingstar International Trading Limited N/A N/A 10
b) CONCENTRATION OF CREDIT RISK
None of the sales to the customers accounted for more than 10%
of the Group's turnover for the year.
- --------------------------------------------------------------------------------
F-23
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
==============================================================================================================
(Amounts in thousands, except share and per share data)
19. REPORT ON SEGMENT INFORMATION
The Group's operations are classified into two reportable business
segments: provision of physical fitness and beauty treatment services.
Each separately managed segment offers different products requiring
different marketing and distribution strategies.
Information concerning consolidated operations by business segment and
geographic area is presented in the tables below and on the following
pages:
CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1998 1999 2000 2000
HK$ HK$ HK$ US$
Operating revenues
- Physical fitness 139,829 166,917 203,758 26,123
- Beauty treatments 70,317 86,225 99,553 12,764
- Others 63 30 1 -
----------- ----------- ----------- -----------
210,209 253,172 303,312 38,887
=========== =========== =========== ===========
Operating profit
- Physical fitness 12,824 14,832 7,082 908
- Beauty treatments 3,712 3,670 2,616 336
- Others - - - -
----------- ----------- ----------- -----------
16,536 18,502 9,698 1,244
=========== =========== =========== ===========
Depreciation
- Physical fitness 14,020 20,879 28,230 3,619
- Beauty treatments 11,761 12,308 13,105 1,680
----------- ----------- ----------- -----------
25,781 33,187 41,335 5,299
=========== =========== =========== ===========
Total assets
- Physical fitness 91,606 117,263 114,983 14,741
- Beauty treatments 78,035 68,868 97,948 12,558
----------- ----------- ----------- -----------
169,641 186,131 212,931 27,299
=========== =========== =========== ===========
Property, plant and equipment additions
- Physical fitness 36,411 41,656 60,410 7,745
- Beauty treatments 12,402 9,354 11,524 1,477
----------- ----------- ----------- -----------
48,813 51,010 71,934 9,222
=========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
F-24
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
===================================================================================================
(Amounts in thousands, except share and per share data)
19. REPORT ON SEGMENT INFORMATION (CONTINUED)
CONSOLIDATED OPERATIONS BY GEOGRAPHIC AREA
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1998 1999 2000 2000
HK$ HK$ HK$ US$
Operating revenues
- Hong Kong 192,692 238,096 284,007 36,412
- PRC 17,517 15,076 19,305 2,475
----------- ----------- ----------- -----------
210,209 253,172 303,312 38,887
=========== =========== =========== ===========
Operating profit (loss)
- Hong Kong 21,315 25,851 19,959 2,559
- PRC (858) (3,157) (6,101) (782)
Interest income 12 53 332 43
Interest expenses (3,933) (4,245) (3,379) (433)
Goodwill write-off - - (1,113) (143)
----------- ----------- ----------- -----------
Net income 16,536 18,502 9,698 1,244
=========== =========== =========== ===========
Segment assets
- Hong Kong 127,551 154,482 156,815 20,105
- PRC 42,090 31,649 56,116 7,194
----------- ----------- ----------- -----------
169,641 186,131 212,931 27,299
=========== =========== =========== ===========
- ---------------------------------------------------------------------------------------------------
F-25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors of the Registrant approved the engagement of
William D. Lindberg, CPA on June 2, 1999 to serve as the Registrant's
independent public auditor and to conduct the audit of the Company's financial
statements for the fiscal years ended 1996, 1997 and 1998. The decision to
change the certifying accountant was made by the Board of Directors of the
Registrant, and resulted from the fact that on November 3, 1998, Arthur Andersen
withdrew its previously issued audited reports for the years ended December 31,
1997 and December 31, 1996. The Registrant sent a termination letter to Arthur
Andersen dated November 3, 1998, and Arthur Andersen sent a resignation letter
to the Registrant dated as of the same date.
The audit reports provided by Arthur Andersen for the fiscal years
ended December 31, 1996 and 1997 did not contain any adverse opinion or
disclaimer of opinion nor was any report modified as to uncertainty, audit scope
or accounting principles. There were discussions between Arthur Andersen and the
Registrant with respect to the related party nature of certain transactions and
related disclosures undertaken by certain subsidiaries of the Registrant in the
fiscal year ended December 31, 1996. However, Arthur Andersen has never made any
recommendations to the Registrant as to what changes in the disclosure should be
made by the Registrant. Due to the fact that the relationship between Arthur
Andersen and the Registrant ceased as of November 3, 1998, the matter regarding
the related party transaction was never resolved to their satisfaction prior to
November 3, 1998.
Upon appointment of William D. Lindberg, CPA, the Registrant authorized
the former accountant, Arthur Andersen, to respond fully to the inquiries of the
successor accountant concerning the issue of the related party transaction with
respect to the fiscal year ended December 31, 1996.
Except as disclosed above, there have been no other past disagreements
between the Registrant and Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure or auditing, scope or
procedure for the fiscal years ended December 31, 1996, December 31, 1997 and
the interim period ended November 3, 1998.
The Board of Directors of the Registrant approved the engagement of
Moores Rowland, Certified Public Accounts as of February 24, 2000 to serve as
the Registrant's independent public auditor and to conduct the audit of the
Company's financial statements for the fiscal year ended 1999. The decision to
change the certifying accountant was made by the Board of Directors of the
Registrant.
The audit reports provided by William Lindberg, CPA for the fiscal
years ended December 31, 1996, 1997 and 1998 did not contain any adverse opinion
or disclaimer of opinion nor was any report modified as to uncertainty, audit
scope or accounting principles.
Upon appointment of Moores Rowland, Certified Public Accountants, the
Registrant authorized the former accountant, William Lindberg, CPA, to respond
fully to any inquiries of the successor accountant.
There have been no other past disagreements between the Registrant and
William Lindberg, CPA on any matter of accounting principles or practices,
financial statement disclosure or auditing, scope or procedure for the fiscal
years ended December 31, 1996, December 31, 1997, December 31, 1998.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The officers and directors of the Company, their ages and present
positions held with the Company are as follows:
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Ngai Keung Luk (Serleo) 44 Chairman of the Board of Directors,
Chief Executive Officer
Yuk Wah Ho 45 President and Director
Robert Chui 44 Chief Financial Officer and Director
Darrie Lam 37 Executive Vice President, Secretary
and Director
Yat Ming Lam 43 Director
Allan Wah Chung Li 43 Director
The following is a brief summary of the background of each director,
executive officer and key employees of the Company:
NGAI KEUNG LUK (SERLEO), CHIEF EXECUTIVE OFFICER, CHAIRMAN. Mr. Luk has
been the Chairman of the Board of Directors and Chief Executive Officer of the
Company since October, 1996. He is the founder of Physical Spa & Fitness and has
over twelve years' experience in the physical health service business. Mr. Luk
was previously employed as a trader on the floor of the Hong Kong gold exchange.
Mr. Luk is a controlling shareholder of the Company and owns beneficially
approximately 80% of the Company's Common Stock (see "Principal Shareholders").
YUK WAH HO, PRESIDENT, DIRECTOR. Ms. Ho has over eighteen years'
experience in beauty and skin care and has attended various international beauty
workshops held in Europe. Ms. Ho holds many certificates in beauty therapy, skin
care, and cosmetic applications from France, England, Taiwan and Hong Kong,
including Rene Guinot, Germain de Cappucini, and Sothy's. Ms. Ho is responsible
for the business development and staff training of the Company's beauty
treatment business. Ms. Ho is the wife of Mr. Luk.
ROBERT CHUI CHI YUN, CHIEF FINANCIAL OFFICER, DIRECTOR. Mr. Chui has
been Chief Financial Officer of the Company since October, 1996. Mr. Chui
graduated from Concordia University, Canada. He is a practicing Certified Public
Accountant in Hong Kong and a fellow member of the Chartered Association of
Certified Accountants (UK). Mr. Chui has twelve years of experience with the
international accounting firm, Ernst and Young. Mr. Chui is responsible for
corporate planning and financial control.
37
DARRIE LAM HAU YIN, EXECUTIVE VICE PRESIDENT, SECRETARY, DIRECTOR. Ms.
Lam has been a Vice-President and Secretary of the Company since October, 1996.
Ms. Lam is a member of the Hong Kong Society of Accountants and a fellow member
of the Chartered Association of Certified Accountants (UK). She joined the
Company in 1994 and before that she worked with a major Hong Kong listed
company, Wharf Group, as a Financial Analyst. Ms. Lam is responsible for the
Company's secretarial affairs, finance and administration functions. Ms. Lam
received a MBA degree from the University of Manchester, U.K.
YAT MING LAM, DIRECTOR. Mr. Lam has been a Director of the Company
since August, 1997. In the past four years, Mr. Lam has been employed as a Sales
Manager with Fitness Concept Leisure Supplies Ltd., one of the leading fitness
equipment and product suppliers. Previously, Mr. Lam was employed as a trader
with the Hong Kong gold exchange.
ALLAN WAH CHUNG LI, DIRECTOR. Mr. Li has been a director of the Company
since June, 1998. Mr. Li is a solicitor qualified to practice law in Canada,
England and Hong Kong. For the last ten years, Mr. Li practiced law in
Vancouver, Toronto and Hong Kong and had also worked for the Listing Division of
the Stock Exchange of Hong Kong. Since 1994, Mr. Li has been with Lai Sun
Development Company Limited, a company listed on the Stock Exchange of Hong
Kong, where he is currently serving as a vice-president, and is involved in
hotels and corporate transactions. Mr. Li received B.Comm. and L.L.B degrees
from the University of British Columbia, Canada.
LAM WAI KEE, GENERAL MANAGER. Mr. Lam holds a Diploma in Business
Management awarded by the Hong Kong Management Association. Prior to joining the
Company in October 1997, Mr. Lam was the Director and General Manager of Fitness
Concept Leisure Supplies Ltd., one of the leading fitness equipment and product
suppliers. Mr. Lam is responsible for the Company's fitness operation in both
Hong Kong and China branches.
SIU LING CHENG, MARKETING MANAGER. Ms. Cheng holds a Bachelor Degree in
Marketing at the University of Southern Queensland, Australia. Ms. Cheng joined
the Company since 1992 as a marketing executive, and was promoted to marketing
manager the following year. Ms. Cheng is responsible for the Company's
promotional and marketing activities and public relations. Ms. Cheng also
coordinates and assists the marketing teams in China branches.
GILLIAN LOUISE HOLLOWAY, SENIOR FITNESS MANAGER. Ms. Holloway is a
member of the Association for Fitness Professionals. Ms. Holloway obtained the
qualifications of Certified Aerobics Instructor and Certified Personal Trainer
issued by the American Council on Exercise. Ms. Holloway joined the Company in
1991 and is responsible for the Company's fitness training services and
membership. Ms. Holloway received a Graduate Certificate in Recreation and
Sports Management issued by the Victoria University, Australia.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company during the fiscal year ended
December 31, 2000 ("Fiscal 2000"), the fiscal year ended December 31, 1999
("Fiscal 1999") and the fiscal year ended December 31, 1998 ("Fiscal 1998") by
those persons who served as Chief Executive Officer and any Named Executive
Officer who received compensation in excess of $100,000 during such years.
38
SUMMARY COMPENSATION TABLE (US$)
Name and Principal Position Year Salary(1) Annual Awards(2)
- --------------------------- ---- --------- -----------------------------------
Bonus (3) Other compensation (4)
-------- ----------------------
Ngai Keung Luk, CEO, Chairman 2000 385,000 - 138,000
1999 385,000 - 92,000
1998 387,000 - 92,000
Jill Bodnar, former President 2000 - - -
1999 45,000 4,900 -
1998 75,000 3,900 -
Yuk Wah Ho, President, COO 2000 213,000 - -
(1) No officers received or will receive any bonus or other annual
compensation other than salaries during fiscal year 2000, other than
stated above. The table does not include any amounts for personal
benefits extended to officers of the Company, such as the cost of
automobiles, life insurance and supplemental medical insurance, because
the specific dollar amounts of such personal benefits cannot be
ascertained. Management believes that the value of non-cash benefits
and compensation distributed to executive officers of the Company
individually or as a group during fiscal year 2000 did not exceed the
lesser of US$50,000 or ten percent of such officers' individual cash
compensation or, with respect to the group, US$50,000 times the number
of persons in the group or ten percent of the group's aggregate cash
compensation.
(2) No officers received or will receive any long term incentive plan
(LTIP) payouts or other payouts during fiscal year 2000.
(3) Bonus awarded based on performance.
39
(4) Other compensation for Mr. Luk included an allowance for Mr. Luk's
living accommodations. The yearly allowance of HK$1,080,000
(US$138,000) and HK$720,000 (US$92,000) respectively for the fiscal
years 2000 and 1999, represents 50% (up to June 2000) and 100% (from
July 2000) of the fair market rent of the property owned by a related
company, Silver Policy Development Limited. Up to June 2000, the
remaining portion is shared by another related company, Williluck
International Limited. Mr. Luk and his wife are the shareholders and
directors of both Silver Policy Development Limited and Williluck
International Limited. The current market rent of the property, which
is exclusively used for residential purpose by Mr. Luk and his family,
is HK$120,000 (US$15,400) per month effective November, 1997. Up to
June 2000, the Company and Williluck International Limited each paid
HK$60,000 (US$7,700) per month to Silver Policy Development Limited.
Starting July 2000, the Company paid the full amount of HK$120,000
(US$15,400) per month to Silver Policy Development Limited. Yearly
allowance to Mr. Luk is recorded on the Company's books as HK$1,080,000
(US$138,000) in 2000. The money is paid directly to Silver Policy
Development Limited. Physical Health Centre Hong Kong Limited is using
the property as security to obtain a full line of credit from the
Hongkong and Shanghai Bank. See also "Certain Transactions".
COMPENSATION OF DIRECTORS
The Company reimburses each Director for reasonable expenses (such as
travel and out-of -pocket expenses) in attending meetings of the Board of
Directors. Directors are not separately compensated for their services as
Directors.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee, composed of the
two outside directors and Robert Chui, Chief Financial Officer. The principal
functions of the Audit Committee will include making recommendations to the
Board regarding the selection of independent public accountants to audit
annually the books and records of the Company , reviewing the proposed scope of
each audit and reviewing the recommendations of the independent public
accountants as a result of their audit of the Company. The Audit Committee will
also periodically review the activities of the Company's accounting staff and
the adequacy of the Company's internal controls.
EMPLOYMENT AND RELATED AGREEMENTS
There are no employment agreements with the Company's key employees at
this time.
40
Limitation of Liability of Directors
- ------------------------------------
The laws of the State of Delaware and the Company's By-laws provide for
indemnification of the Company's directors for liabilities and expenses that
they may incur in such capacities. In general, directors and officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, and
with respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful.
The Company has been advised that in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
1997 STOCK OPTION PLAN
The Company has a Stock Option Plan which was adopted by the Company's
stockholders and its Board of Directors on April 23, 1997 as "1997 Stock Option
Plan" (the "Plan"). Under the Plan, the Company may issue incentive stock
options, non-qualified options, restricted stock grants, and stock appreciation
rights to selected directors, officers, advisors and employees of the Company.
Under the Plan, a total of 500,000 shares of Common Stock are reserved for
issuance. The Plan provides for appropriate adjustments in the number and kind
of shares subject to the Plan and to outstanding options in the event of a stock
split, stock dividend, or certain other types of recapitalization. Stock options
may be granted as non-qualified stock options or incentive stock options, but
incentive stock options may not be granted at a price less than 100% of the fair
market value of the stock as of the date of grant (110% as to any 10%
shareholder at the time of grant); non-qualified stock options may not be
granted at a price less than 85% of the fair market value of the stock as of the
date of grant. The Plan shall be administered by an Option Committee which is to
be composed of two or more members of the Board of Directors who are
disinterested directors. No persons have been named to the Option Committee as
of the date of this Report. Stock options may be exercised during a period of
time fixed by the Option Committee except that no stock option may be exercised
more than ten years after the date of grant or three years after death or
disability, whichever is later. As of the date hereof, no options have been
granted by the Company.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2000, the stock
ownership of all persons known to own beneficially five percent or more of the
Company's Common Stock and all directors and officers of the Company,
individually and as a group. Each person has sole voting and investment power
over the shares indicated, except as noted. Unless otherwise indicated, the
address for each stockholder is 12/F - 15/F Lee Theatre Plaza, 99 Percival St.,
Causeway Bay, Hong Kong.
NAME AND AMOUNT AND
ADDRESS OF NATURE PERCENTAGE
BENEFICIAL OF BENEFICIAL BENEFICAILLY
OWNER OWNERSHIP (1) OWNED(2)
- ---------- ------------- ------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
NGAI KEUNG LUK (SERLEO)(3) 8,000,000 80.00%
YUK WAH HO, VICE PRESIDENT (4) 8,000,000 80.00%
YAT MING LAM, DIRECTOR 0 0.00%
ROBERT CHUI, CFO 0 0.00%
DARRIE LAM, VICE PRESIDENT 0 0.00%
ALLAN WAH CHUNG LI, DIRECTOR 0 0.00%
JILL BODNAR, FORMER PRESIDENT (5) 0 0.00%
ALL OFFICERS AND DIRECTORS 8,000,000 80.00%
AS A GROUP (6 PERSONS)(3)
- ----------
* Less than 1%
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed below, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the percentage
of the person holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any other
person.
(2) Based upon 10,000,000 shares of Common Stock outstanding.
(3) Mr. Luk pledged 1,500,000 shares of Common Stock for the loans received
the Company under that certain Pledge Agreement dated September 30,
1997.
(4) Ms. Ho is the wife of Ngai Keung Luk (Serleo). Accordingly the number
of common stock owned by Mr. Luk and Ms. Ho overlap.
(5) Jill Bodnar resigned from her position as the President of the
Registrant in December, 2000.
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company made certain advances to Mr. Luk, the Company's Chief
Executive Officer and the Chairman of its Board of Directors, during the years.
The balance due to the Company and its subsidiaries at December 31, 2000 was
HK$2,108,000 (US$270,000). Under an agreement with the Company, Mr. Luk has
pledged 1,500,000 shares of the Company stock as collateral. See Note 12 to
Financial Statements.
In January 1997, the Company approved an advance to Mr. Luk in the
amount of HK$ 6 million (US$780,000), which loan was repaid in full by Mr. Luk
on April 22, 1997.
In October, 1996, the Company closed a transaction with Mr. Luk, a 100%
shareholder of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ("Physical Limited"), whereby the Company entered into a
Share Exchange Agreement with Mr. Luk, pursuant to which the Company issued
8,000,000 of its Common Stock to Mr. Luk in exchange for all of the outstanding
shares of Physical Limited (the "Closing"). As a part of the above transaction
certain shareholders of the Company transferred 990,000 shares of Common Stock
of the Company to Goodchild Investments Limited, a British Virgin Islands
corporation ("Goodchild"), whose beneficial owner is Wong Kui Tak Henry, as
consideration for Goodchild's beneficial owners' prior interest in Physical
Health Centre Hong Kong Limited, pursuant to an arrangement between Goodchild
and Mr. Luk. Neither Mr. Luk nor Goodchild were parties affiliated with the
Company prior to or at the time of the acquisition of Physical Limited. At the
Closing the then current management of the Company resigned and was replaced by
the current management of the Company.
In February, 1998, Goodchild sold all of its shares of common stock of
the Company in open market public transactions.
Mr. Luk receives a monthly allowance of HK$120,000 (US$15,400) for the
fiscal year 2000 for his living accommodations. Such allowance represents the
fair market rent of the property owned by a related company, Silver Policy
Development Limited ("Silver Policy"). Silver Policy is a limited company
incorporated in Hong Kong. Mr. Luk and Mrs. Luk respectively hold 0.01% and
99.99% shares in Silver Policy. They also act as directors of Silver Policy.
Since April 1994, Physical Health Centre Hong Kong Limited ("Hong Kong
Limited") has concluded a tenancy agreement with Silver Policy for the property
to be used exclusively for residential purpose by Mr. Luk and his family. In
April 1996, Silver Policy increased the rent from HK$90,000 (US$11,500) to
HK$106,000 (US$13,600) per month and further increased to HK$120,000 (US$15,400)
from November 1997. Hong Kong Limited and Williluck International Limited
("Williluck") each paid HK$60,000 (US$7,700) per month up to June 2000 to Silver
Policy. The annual rent allowance costs as recorded by Physical totaled
HK$1,440,000 (US$185,000) in 2000. Pursuant to the lease agreement between
Sliver Policy and Hong Kong Limited, the premises for Mr. Luk and his family are
rented by Hong Kong Limited from Silver Policy for HK$120,000 (US$15,400) per
month. Hong Kong Limited then charges back, up to June 2000, Williluck, for a
50% share of the rent. Mr. Luk is a director of Williluck. Hong Kong Limited is
using the property as security to obtain a full line of credit from the Hongkong
and Shanghai Banking Corporation. See also "Management - Compensation".
The Company had the transactions with related companies as provided in
the Financial Statements, Note 12.
43
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
The following exhibits of the Company are included herein.
2.1 Share Exchange Agreement between Foreclosed Realty Exchange, Inc. and
Ngai Keung Luk, together with amendments*
3.1 Articles of Incorporation of Physical Spa & Fitness Inc., a Delaware
Corporation*
3.2 Certificate of Amendment of Articles of Incorporation changing the
number of directors*
3.3 Certificate of Amendment of Articles of Incorporation changing the
Company's name*
3.4 Certificate of Amendment of Articles of Incorporation changing the
authorized capital*
3.5 By-Laws of Physical Spa & Fitness Inc.*
3.6 Amended By-Laws of Physical Spa & Fitness Inc.
10.1 Lease Agreement by and between Lee Theatre Realty Limited and Physical
Health Centre Hong Kong Limited (Causeway Bay Center)*
10.2 Tenancy Agreement between Benefit Plus Company Limited and Physical
Health Centre Hong Kong Limited (Tsimshatsui Center)*
10.3 Lease Agreement between East Asia Property Agency Limited and Physical
Health Centre Hong Kong Limited (Kowloon Center)*
10.4 Lease Agreement between Broadway-Nassau Investments Limited and Ho Yuk
Wah (Mei Foo Center)*
10.5 New Town Tower, S.T.T.L.183 Confirmation of Tenancy (Shatin)*
10.6 Tenancy Agreement by and between Kamoton Investments Limited and
Supreme Resources Limited (Renaissance Beauty Centre)*
10.7 Repayment Agreement between the Company and Ngai Keung Luk*
10.8 Pledge Agreement between the Company and Ngai Keung Luk*
10.9 1997 Stock Option Plan and form of Stock Option Agreement*
16. Letter on changes in certifying accountant**.
44
21. Subsidiaries of the Registrant
23. Consent of Moores & Rowlands, Independent Auditors.
- ----------
* Filed with the Commission as exhibit to the Registration Statement or
amendments to the Registration Statement. ** Filed with the Commission as
exhibit 16 to Form 10-KSB for the fiscal year 1999.
(b) Reports on Form 8-K
-------------------
Forms 8-K/A, Item 4. Change in Certifying Accountants.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on April 16, 2001.
PHYSICAL SPA & FITNESS, INC.
By: /s/ Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Ngai Keung Luk Chairman and Chief Executive Officer Date: 4/16/01
- ------------------------ (principal executive officer)
Ngai Keung Luk
/s/ Yuk Wah Ho President and Director Date: 4/16/01
- ------------------------
Yuk Wah Ho
/s/ Robert Chui Chief Financial Officer and Director Date: 4/16/01
- ------------------------ (Principal accounting and financial officer)
Robert Chui
/s/ Darrie Lam Executive Vice President, Secretary Date: 4/16/01
- ------------------------ and Director
Darrie Lam
/s/ Yat Ming Lam Director Date: 4/16/01
- ------------------------
Yat Ming Lam
/s/ Allan Wah Chung Li Director Date: 4/16/01
- ------------------------
Allan Wah Chung Li