Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002.
( ) TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 0-26573
PHYSICAL SPA & FITNESS INC.
(Exact name of small business as specified in its charter)
Delaware 98-0203281
-------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
40/F NatWest Tower, Times Square
No. 1 Matheson Street, Causeway Bay
Hong Kong
(Address of principal executive offices)
(011) (852) 2917-0000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: June 30, 2002, 10,000,000
shares.
Transitional Small Business Disclosure Format (check one) :
Yes No X
---- ----
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Operations 1
for the three-month and six-month period
ended June 30, 2002 and 2001 (Unaudited)
Consolidated Balance Sheets at June 30, 2002 (Unaudited) 2
and December 31, 2001
Consolidated Statements of Cash Flows 3
for the six-month periods ended
June 30, 2002 and 2001 (Unaudited)
Notes to Financial Statements 4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 12
ITEM 2 - CHANGE IN SECURITIES 12
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE 12
OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION 12
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 12
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except share and per share data)
Three months ended June 30 Six months ended June 30
2001 2002 2002 2001 2002 2002
---------- ---------- ---------- ---------- ---------- ----------
HK$ HK$ US$ HK$ HK$ US$
Operating Revenues
Fitness service 69,050 68,337 8,761 125,154 137,691 17,653
Beauty treatments 36,675 35,087 4,499 63,650 63,506 8,142
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues 105,725 103,424 13,260 188,804 201,197 25,795
---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses
Salaries and commissions 28,190 34,082 4,370 52,839 64,295 8,243
Rent and related expenses 25,726 32,979 4,228 45,978 62,445 8,006
Depreciation 14,588 18,770 2,406 26,716 34,376 4,407
Other selling and administrative expenses 28,527 25,481 3,267 52,570 48,665 6,239
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 97,031 111,312 14,271 178,103 209,781 26,895
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) from operations 8,694 (7,888) (1,011) 10,701 (8,584) (1,100)
---------- ---------- ---------- ---------- ---------- ----------
Non-operating (income) expenses
Other (income), net (385) (84) (11) (430) (197) (25)
Interest expenses 1,425 1,174 151 2,472 1,957 251
---------- ---------- ---------- ---------- ---------- ----------
Total non-operating expenses 1,040 1,090 140 2,042 1,760 226
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) before income taxes and
minority interests 7,654 (8,978) (1,151) 8,659 (10,344) (1,326)
Provision for income taxes 2,436 91 12 3,487 737 95
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) before minority interests 5,218 (9,069) (1,163) 5,172 (11,081) (1,421)
Minority interests 841 (22) (3) 978 89 11
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) before cumulative effect of
a change in an accounting principle 4,377 (9,047) (1,160) 4,194 (11,170) (1,432)
Cumulative effect on prior years (to December
31, 2001) of deferral of sales rebates, net
of income taxes and minority interests - (1,293) (166) - 1,100 141
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) 4,377 (10,340) (1,326) 4,194 (10,070) (1,291)
Other comprehensive loss
- - Foreign currency translation adjustments - - - - (11) (1)
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income (loss) 4,377 (10,340) (1,326) 4,194 (10,081) (1,292)
========== ========== ========== ========== ========== ==========
Income (Loss) per share before cumulative
effect of a change in accounting principle 0.44 (0.90) (0.12) 0.42 (1.12) (0.14)
Cumulative effect on prior years (to December
31, 2001) of deferral of sales rebates - (0.13) (0.01) - 0.11 0.01
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) per common share 0.44 (1.03) (0.13) 0.42 (1.01) (0.13)
========== ========== ========== ========== ========== ==========
Number of shares outstanding (in
thousands) 10,000 10,000 10,000 10,000 10,000 10,000
========== ========== ========== ========== ========== ==========
Pro forma portion
Net income (loss), assuming accounting
change is applied retroactively 6,184 (9,047) (1,160) 6,001 (11,170) (1,432)
========== ========== ========== ========== ========== ==========
Income (Loss) per common share 0.62 (0.90) (0.12) 0.60 (1.12) (0.14)
========== ========== ========== ========== ========== ==========
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on June 30, 2002 or at any other certain rate.
-1-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED BALANCE SHEET
-----------------------------------
AS OF DECEMBER 31, 2001
AND
UNAUDITED CONSOLIDATED BALANCE SHEET
------------------------------------
AS OF JUNE 30, 2002
(Amounts in thousands, except number of shares and share data)
As of
-------------------------------------------------------
December 31, 2001 June 30, 2002
HK$ HK$ US$
ASSETS
Current assets
Cash and cash equivalents 4,787 1,691 217
Trade receivables 13,568 11,482 1,472
Rental and utility deposits 21,733 25,037 3,210
Prepayments to vendors and suppliers and other current assets 9,380 10,264 1,316
Inventories 2,373 2,373 304
Due from related companies - 3,751 481
----------------- ----------------- -----------------
Total current assets 51,841 54,598 7,000
----------------- ----------------- -----------------
Bank deposits and securities, collateralized 6,935 10,250 1,314
Due from a stockholder 11,695 11,939 1,531
Prepayments for construction-in-progress 11,970 6,656 853
Property, plant and equipment, net 175,634 227,996 29,230
----------------- ----------------- -----------------
Total assets 258,075 311,439 39,928
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Due to a related company 5 - -
Short-term bank loans 1,769 10,693 1,371
Long-term bank loans - current portion 12,462 22,612 2,899
Accounts payable and accrued expenses 20,644 59,833 7,671
Obligations under finance leases - current portion 5,668 9,445 1,211
Deferred income - current portion 71,000 69,154 8,866
Deferred liabilities - current portion 4,372 6,507 834
Income taxes payable 963 325 42
Taxes other than income 5,973 5,993 768
----------------- ----------------- -----------------
Total current liabilities 122,856 184,562 23,662
----------------- ----------------- -----------------
Deferred income - non-current portion 6,691 5,807 744
Deferred liabilities - non-current portion 5,211 6,493 833
Long-term bank loans - non-current portion 2,781 3,654 468
Obligations under finance leases - non-current portion 9,342 9,694 1,243
Deferred taxation 7,434 7,434 953
Minority interests 7,079 7,195 922
Stockholders' equity:
Common stock, par value US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 173 162 21
Retained earnings 96,430 86,360 11,072
----------------- ----------------- -----------------
Total stockholders' equity 96,681 86,600 11,103
----------------- ----------------- -----------------
Total liabilities and stockholders' equity 258,075 311,439 39,928
================= ================= =================
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on June 30, 2002 or at any other certain rate.
-2-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE SIX MONTHS FROM JANUARY 1, 2001 TO JUNE 30, 2001
AND JANUARY 1, 2002 TO JUNE 30, 2002
(in thousands)
Six Months Ended June 30
----------------------------------------------
2001 2002 2002
HK$ HK$ US$
Cash flows from operating activities:
Net income (loss) 4,194 (10,070) (1,291)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Minority interests 978 116 15
Depreciation 26,716 34,376 4,407
Loss on disposal of property, plant and equipment 129 244 31
Changes in working capital:
Trade receivables (9,824) 2,086 267
Deposits, prepayments and other current assets 377 (4,188) (537)
Due from related companies 503 (3,756) (481)
Due from a stockholder (3,289) - -
Accounts payable and accrued expenses (3,786) 39,189 5,024
Deferred income 26,581 (2,730) (350)
Deferred liabilities 378 3,417 438
Income taxes payable 2,808 (638) (82)
Taxes other than income 31 20 3
-------------- -------------- --------------
Net cash provided by operating activities 45,796 58,066 7,444
-------------- -------------- --------------
Cash flows from investing activities:
Prepayments for construction-in-progress 6,897 5,314 681
Acquisition of property, plant and equipment (52,955) (87,385) (11,203)
Sales proceeds from disposal of property, plant and equipment 1,823 403 52
-------------- -------------- --------------
Net cash used in investing activities (44,235) (81,668) (10,470)
-------------- -------------- --------------
Cash flows from financing activities:
Increase in bank deposits and securities (1,315) (3,315) (425)
Due from a stockholder - (244) (31)
(Settlement of) proceeds from short-term bank loans (4,153) 8,924 1,144
Proceeds from long-term bank loans 5,000 20,530 2,632
Repayment of long-term bank loans (4,277) (9,507) (1,219)
Assumption of finance lease obligations 8,074 7,982 1,023
Capital element of finance lease rental payments (3,217) (3,853) (494)
-------------- -------------- --------------
Net cash provided by financing activities 112 20,517 2,630
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 1,673 (3,085) (396)
Cash and cash equivalents at beginning of period 1,759 4,787 614
Cumulative translation adjustments 2 (11) (1)
-------------- -------------- --------------
Cash and cash equivalents at end of period 3,434 1,691 217
============== ============== ==============
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on June 30, 2002 or at any other certain rate.
-3-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------
(Amounts in thousands, except share and per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Physical Spa & Fitness Inc. ("the Company") and the
subsidiaries that it controls. The Company, through its subsidiaries,
operates fitness and spa/beauty centers in Hong Kong and China. Unless
otherwise specified in the text, references to the Company include the
Company and its subsidiaries. These financial statements should be read
in conjunction with the consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30,
2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
2. PREPARATION OF FINANCIAL STATEMENTS
The Group has a negative working capital of HK$71,015 and HK$129,964 as
of December 31, 2001 and June 30, 2002. Besides, the Group has a net
loss of HK$10,070 and a net income of HK$4,194 for the six-month
periods ended June 30, 2002 and 2001. 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.
3. NEW ACCOUNTING PRONOUNCEMENTS
In November 2001, the Financial Accounting Standards Board's Emerging
Issues Task Force (EITF) reached consensus on Issue 01-9, "Accounting
for consideration given by a vendor to a customer or a reseller of the
vendor's products". The issue provides guidance on accounting for
certain payments made by a vendor of goods and services to a customer.
Under certain conditions, amount paid to customers are required to be
shown as a reduction in the corresponding revenues recorded from those
customers, rather than be shown as expenses in the income statement.
EITF 01-9 is generally effective for fiscal years or interim periods
beginning after December 15, 2001. Since January 1, 2002, the
consolidated financial statements have been prepared in conformity with
EITF 01-9. Upon adoption in the current period, sales rebates incurred
were accounted for as a reduction in the corresponding revenues instead
of being included in other selling and administrative expenses. In
addition, the sales rebates incurred have been deferred in
synchronization with the deferral of revenue in accordance with the
Group's accounting policy. As a result, deferred income for the current
quarter have been increased by HK$810 while expenses and revenues for
the current quarter have been reduced by HK$2,811 and HK$2,002. In
addition, revenues, expenses and deferred income for the six-month
period ended June 30, 2002 have been reduced by HK$2,953, HK$8,565 and
HK$6,850 respectively.
Had the change in accounting for the deferral of sales rebates been
effective for the six-month period ended June 30, 2001, revenues,
expenses and deferred income would have been reduced by HK$268,
HK$2,075 and HK$1,807 respectively. There would have no effect on the
statements of operations nor the balance sheet for the three-month
period ended March 31, 2001 as the sales rebates have only been granted
to customers since May, 2001.
-4-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------
(Amounts in thousands, except share and per share data)
4. REPORT ON SEGMENT INFORMATION
The Group's operations are classified into two reportable business
segments: provision of physical fitness and beauty treatment services.
Each separately managed segment offers different products requiring
different marketing and distribution strategies.
Information concerning consolidated operations by business segment and
geographic area is presented in the tables below and on the following
pages:
CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------- ------------------------------
2001 2002 2001 2002
HK$ HK$ HK$ HK$
Operating revenues
- Physical fitness 69,050 68,337 125,154 137,691
- Beauty treatments 36,675 35,087 63,650 63,506
----------- ----------- ----------- -----------
105,725 103,424 188,804 201,197
=========== =========== =========== ===========
Operating profit (loss)
- Physical fitness (119) (8,996) 1,555 (4,724)
- Beauty treatments 4,496 (1,344) 2,639 (5,346)
----------- ----------- ----------- -----------
4,377 (10,340) 4,194 (10,070)
=========== =========== =========== ===========
Depreciation
- Physical fitness 11,381 13,571 20,320 25,820
- Beauty treatments 3,207 5,199 6,396 8,556
----------- ----------- ----------- -----------
14,588 18,770 26,716 34,376
=========== =========== =========== ===========
Total assets
- Physical fitness 10,859 18,298 132,593 168,177
- Beauty treatments 9,251 15,587 112,950 143,262
----------- ----------- ----------- -----------
20,110 33,885 245,543 311,439
=========== =========== =========== ===========
Property, plant and equipment additions
- Physical fitness 42,069 41,564 48,317 53,196
- Beauty treatments 2,714 32,114 4,638 34,189
----------- ----------- ----------- -----------
44,783 73,678 52,955 87,385
=========== =========== =========== ===========
-5-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------
(Amounts in thousands, except share and per share data)
4. REPORT ON SEGMENT INFORMATION (CONTINUED)
CONSOLIDATED OPERATIONS BY GEOGRAPHIC AREA
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- --------------------------
2001 2002 2001 2002
HK$ HK$ HK$ HK$
Operating revenues
- Hong Kong 97,287 93,905 173,207 182,739
- PRC 8,438 9,519 15,597 18,458
----------- ----------- ----------- -----------
105,725 103,424 188,804 201,197
=========== =========== =========== ===========
Operating profit (loss)
- Hong Kong 6,686 (6,618) 9,777 (3,154)
- PRC (1,093) (2,563) (3,346) (4,998)
Interest income 208 15 235 39
Interest expenses (1,424) (1,174) (2,472) (1,957)
----------- ----------- ----------- -----------
Net income 4,377 (10,340) 4,194 (10,070)
=========== =========== =========== ===========
Segment assets
- Hong Kong 22,872 32,241 189,082 249,188
- PRC (2,762) 1,644 56,461 62,251
----------- ----------- ----------- -----------
20,110 33,885 245,543 311,439
=========== =========== =========== ===========
5. LONG-TERM BANK LOANS
During the six-month period ended June 30, 2002, the Group has obtained
additional banking facilities of HK$20,798 from creditworthy commercial
banks in Hong Kong to finance its expansion. These facilities are
mainly collateralized by personal guarantee from its stockholder.
During the period ended March 31, 2002 and June 30, 2002, additional
long-term bank loans of HK$13,330 and HK$7,468 respectively have been
drawndown under these facilities.
-6-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
Overview of Company's Business:
The Company, through its predecessor companies and its subsidiaries,
has been an established commercial operator of fitness and spa centers in Hong
Kong and China since 1986. The Company currently operates sixteen facilities:
twelve in Hong Kong and four in China (including one in Macau). 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
80,000 customers. The Company offers to its customers, at each location, access
to a wide range of U.S.- styled fitness and spa services.
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions with no material assets or liabilities. Prior
to acquisition of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ("Physical Limited"), the Company had no revenue producing
operations, but planned to enter into joint ventures and/or acquisitions
originally in the area of real estate, to expand its operations. In October,
1996, the Company closed a transaction with Ngai Keung Luk (Serleo), a 100%
shareholder of Physical Limited, whereby the Company entered into a Share
Exchange Agreement with Ngai Keung Luk (Serleo), pursuant to which the Company
issued 8,000,000 pre-split (6,000,000 post-split) shares of its Common Stock to
Ngai Keung Luk (Serleo) in exchange for all of the outstanding shares of
Physical Limited (the "Closing"). At the Closing, the then current management of
the Company resigned and was replaced by the current management of the Company.
-7-
RESULTS OF OPERATIONS
The Company's revenues are derived from its two main lines of business
of fitness and spa services in the following principal ways: admission fees and
monthly subscription fees from the fitness customers, and the sale of beauty
treatments and skin care products to the beauty patrons.
In respect to fitness services, customers are invited to purchase a
standard fitness card at a fee currently set at HK$600 (US$77) for one person.
Each customer will also be charged a monthly due of HK$299 (US$38) for the
usage of the fitness centers. In order to fully utilize the facilities, the
Company grants a special offer of admission fees at HK$200 (US$26) to off-peak
customers.
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$280 (US$36) 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.
RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30 June 30
2001 2002 2001 2002
----------- ----------- ----------- -----------
Operating Revenues 100.00% 100.00% 100.00% 100.00%
Total operating expenses 91.78% 107.63% 94.33% 104.27%
Operating income (loss) 8.22% (7.63%) 5.67% (4.27%)
Income (Loss) before income taxes and
minority interests 7.24% (8.68%) 4.59% (5.14%)
Provision for income and deferred taxes 2.30% 0.09% 1.85% 0.37%
Minority interests 0.80% (0.02%) 0.52% 0.04%
Net income (loss) 4.14% (10.00%) 2.22% (5.01%)
=========== =========== =========== ==========
THREE MONTHS ENDED JUNE 30, 2002 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
JUNE 30, 2001 (UNAUDITED).
- ----------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues decreased 2% to
HK$103,424,000 (US$13,260,000) in the second quarter of 2002 as compared to
HK$105,725,000 (US$13,554,000) of last year.
Operating revenues derived by the Company's fitness services, net of
sales rebates of HK$2,842,000 (US$364,000), decreased 1% to HK$68,337,000
(US$8,761,000) compared to HK$69,050,000 (US$8,852,000) of the same period
last year. Fitness revenues as a percentage of total revenues were 66% in the
second quarter of 2002 as compared to 65% of last year.
Operating revenues from the Company's beauty treatment business totaled
HK$35,087,000 (US$4,499,000) compared to HK$36,675,000 (US$4,702,000) in the
second quarter of 2001, representing a decrease of 4%. Beauty treatment
revenues as a percentage of total revenues fell slightly from 35% to 34%
in the second quarter of 2002 as compared to 2001.
-8-
Operating revenues derived from the Company's Hong Kong locations
remain an important contributor to the Company's business, generating
HK$93,905,000 (US$12,039,000), or 91% of total operating revenues in the second
quarter of 2002 as compared to HK$97,287,000 (US$12,473,000) or 92% of total
operating revenues in 2001.
Operating revenues derived from the Company's China locations generated
HK$9,519,000 (US$1,220,000), or 9% of total operating revenues in the second
quarter of 2002 as compared to HK$8,438,000 (US$1,082,000) or 8% of last year.
OPERATING EXPENSES. The Company's operating expenses for the second
quarter of 2002 totaled HK$111,312,000 (US$14,271,000) compared to HK$97,031,000
(US$12,440,000) in 2001, representing an increase of 15%. Total operating
expenses, after taking into account all corporate expenses, were 108% of total
operating revenue as compared to 92% of last year. This reflects the additional
costs incurred by the Company in following its business expansion plan.
Operating expenses associated with the Company's Hong Kong locations
were HK$99,174,000 (US$12,715,000) in the second quarter of 2002, representing
an increase of 13% as compared to HK$87,463,000 (US$11,213,000) in 2001. The
increase was mainly due to additional expenses incurred by the Wing On, Central
center (opened in April, 2002) and the new unisex fitness centers in Tsuen Wan
(opened in April, 2002) and Kornhill (opened in June, 2002), all of which have
not yet commenced operation in the corresponding period of last year. Hong Kong
operating expenses represented 89% of total operating expenses in the second
quarter of 2002 as compared to 90% in 2001.
Operating expenses associated with the Company's China locations were
HK$12,138,000 (US$1,556,000) in the second quarter of 2002, representing an
increase of 27% as compared to HK$9,568,000 (US$1,227,000) in 2001 primarily due
to the opening of an additional unisex fitness center in Xu Hui, Shanghai in
January, 2002. Operating expenses in China represented 11% of total operating
expenses in the second quarter of 2002 as compared to 10% of the same period
last year.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
second quarter of 2002 totaled HK$1,090,000 (US$140,000) compared to
HK$1,040,000 (US$133,000) in 2001. This represents an increase of 5%.
PROVISION FOR INCOME TAXES. Provision for income taxes for the second
quarter of 2002 totaled HK$91,000 (US$12,000) compared to HK$2,436,000
(US$312,000) in the second quarter of 2001. The decrease of 96% was mainly due
to losses incurred in the period under review.
NET LOSS. The Company has generated a net loss of HK$10,340,000
(US$1,326,000) for the second quarter of 2002, compared to a net income of
HK$4,377,000 (US$561,000) for 2001, representing a decrease of 336%. The loss
was mainly due to the pre-opening overhead associated with the new centers being
recorded but neither income has yet been generated nor recognized.
SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED) COMPARED TO SIX MONTHS ENDED
JUNE 30, 2001 (UNAUDITED).
- ----------------------------------------------------------------------------
OPERATING REVENUES. Operating revenues for the first six months of 2002
totaled HK$201,197,000 (US$25,795,000) compared to HK$188,804,000
(US$24,206,000) of last year, representing an increase of 7%.
Operating revenues derived by the Company's fitness services, net of
sales rebates of HK$8,611,000 (US$1,104,000), increased 10% to HK$137,691,000
(US$17,653,000) compared to HK$125,154,000 (US$16,045,000) in 2001. Fitness
revenues as a percentage of total revenues were 68% in the first six months of
2002 as compared to 66% in the same period last year.
Operating revenues from the Company's beauty treatment business
stabilized at HK$63,506,000 (US$8,142,000) in the first six months of 2002
compared to HK$63,650,000 (US$8,160,000) of last year. Beauty treatment revenues
as a percentage of total revenues were 32% in the first six months of 2002 as
compared to 34% in the first six months of 2001.
-9-
Operating revenues derived from the Company's Hong Kong locations
remain an important contributor to the Company's business, generating
HK$182,739,000 (US$23,428,000), or 91% of total operating revenues in the six
months ended June 30, 2002 as compared to HK$173,207,000 (US$22,206,000) or 92%
of total operating revenues in the six months ended June 30, 2001.
Operating revenues derived from the Company's China locations generated
HK$18,458,000 (US$2,366,000), or 9% of total operating revenues in the six
months ended June 30, 2002 as compared to HK$15,597,000 (US$2,000,000) or 8% of
total operating revenues in the six months ended June 30, 2001.
OPERATING EXPENSES. The Company's operating expenses for the first six
months of 2002 totaled HK$209,781,000 (US$26,895,000) compared to HK$178,103,000
(US$22,834,000) in the first six months of 2001, representing an increase of
18%. Total operating expenses, after taking into account all corporate expenses,
were 104% of total operating revenue as compared to 94% of last year. This
reflects the additional costs incurred by the new centers during the period
under review.
Operating expenses associated with the Company's Hong Kong locations,
after an adjustment of the sales rebate, were HK$186,169,000 (US$23,868,000) in
the six months ended June 30, 2002, representing an increase of 17% as compared
to HK$159,091,000 (US$20,397,000) in 2001. Hong Kong operating expenses
represented 89% of total operating expenses in the six months ended June 30,
2002 and 2001.
Operating expenses associated with the Company's China locations were
HK$23,612,000 (US$3,027,000) in the six months ended June 30, 2002, representing
an increase of 24% as compared to HK$19,012,000 (US$2,437,000) in 2001.
Operating expenses in China represented 11% of total operating expenses in the
six months ended June 30, 2002 and 2001.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first six months of 2002 totaled HK$1,760,000 (US$226,000) compared to
HK$2,042,000 (US$262,000) in the first six months of 2001. This represents a
decrease of 14% mainly due to lower interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
six months of 2002 totaled HK$737,000 (US$95,000) compared to HK$3,487,000
(US$447,000) in the first six months of 2001, representing a decrease of 79% as
a result of losses incurred in the period under review.
NET INCOME. The Company reported a net loss of HK$10,070,000
(US$1,291,000) for the first six months of 2002, compared to a net income of
HK$4,194,000 (US$537,000) for the first six months of 2001, representing a
decrease of 340%. The decrease reflects the additional overhead associated with
the opening of new centers not yet recovered by their additional contribution.
The situation has, however, improved in the third quarter of the year.
-10-
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash
generated from operations, short-term bank credit, long-term bank loans,
advances from customers relating to prepaid fitness and spa income, and leasing
arrangements with financial institutions.
Cash and cash equivalent balances for the respective periods ended June
30, 2002 and December 31, 2001 were HK$1,691,000 (US$217,000) and HK$4,787,000
(US$614,000), while total indebtedness at June 30, 2002 was HK$56,098,000
(US$7,192,000) and HK$32,022,000 (US$4,105,000) at December 31, 2001.
Net cash provided by operating activities were HK$92,074,000
(US$11,804,000) and HK$58,066,000 (US$7,444,000) for Fiscal Year 2001, and the
six-month period ended June 30, 2002, respectively. The Company's operating
activities are historically financed by cash flows from operations. Net cash
used in investing activities were HK$70,881,000 (US$9,087,000) and HK$81,668,000
(US$10,470,000) for Fiscal Year 2001 and the six-month period ended June 30,
2002, primarily as a result of expenditures for property, plant and equipment.
Net cash (used in) provided by financing activities, which mainly include
proceeds from bank loans, net interest and repayment, were HK$(18,164,000)
(US$(2,328,000))and HK$20,517,000 (US$2,630,000) in Fiscal Year 2001 and the
six-month period ended June 30, 2002, respectively.
During the six-month period ended June 30, 2002, the Company has not
entered into any transactions using derivative financial instruments or
derivative commodity instruments nor held any marketable equity securities of
publicly traded companies. Accordingly, the Company believes its exposure to
market interest rate risk and price risk is not material. The Company's
long-term loans bear interest rates varying from 5.375% to 7.625% per annum. The
total balance outstanding as of June 30, 2002 on such loans was HK$26,266,000
(US$3,367,000). 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$32,158,000 (US$4,123,000). These facilities were secured by
certain leasehold property in Hong Kong owned by the Company's subsidiary (Ever
Growth Limited) and a related company, a fixed charge over a subsidiary's
machinery and equipment and a floating charge over its other assets (Physical
Health Centre (Macau) Limited), fixed deposits and securities owned by the
Company's subsidiaries (Physical Health Centre Hong Kong Limited and Physical
Health Centre (TST) Limited), and personal guarantees from Mr. Luk,
respectively.
Consistent with the general practice of the fitness and spa industry,
the Company receives prepaid monthly fees from fitness customers, which are
non-refundable, and spa treatment dues from beauty customers. This practice
creates working capital that the Company generally utilizes for working capital
purposes. However, the unused portion of the pre-paid monthly dues and spa
treatment dues is characterized as deferred income, a liability, for accounting
purposes.
The Company's trade receivable balance at June 30, 2002, was
HK$11,482,000 (US$1,472,000). The Company has never experienced any significant
problems with collection of accounts receivable from its customers.
Capital expenditure for Fiscal Year 2001, and the six-month period
ended June 30, 2002, were HK$65,931,000 (US$8,453,000) and HK$87,385,000
(US$11,202,000) respectively. The Company also had capital expenditure
commitments of approximately HK$30,000,000 (US$3,846,000) as of June 30, 2002
compared with HK$31,554,000 (US$4,045,000) as of December 31, 2001, all of which
were contracted but not provided for in the financial statements. Subsequent to
the balance sheet date of June 30, 2002, the Company has not committed
significant capital expenditure. 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.
-11-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 99.1
-12-
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHYSICAL SPA & FITNESS INC.
(Registrant)
Date: August 14, 2002 /s/ Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Date: August 14, 2002 /s/ Robert Chui
------------------------------------
Robert Chui,
Chief Financial Officer
-13-