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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 March 31, 2003.
( ) 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 : March 31, 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 months ended March
31, 2003 and 2002 (Unaudited)
Consolidated Balance Sheets at March 31, 2003 2
(Unaudited) and December 31, 2002
Consolidated Statements of Cash Flows 3
for the three months ended March 31,
2003 and 2002 (Unaudited)
Notes to Financial Statements (Unaudited) 4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - CONTROLS AND PROCEDURES 10
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 11
ITEM 2 - CHANGE IN SECURITIES 11
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 11
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE 11
OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION 11
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 2002 TO MARCH 31, 2002
AND JANUARY 1, 2003 TO MARCH 31, 2003
(In thousands, except share and per share data)
Three Months Ended
March 31,
2002 2003
----------- ------------------------
HK$ HK$ US$
(Unaudited) (Unaudited) (Unaudited)
Operating Revenues
Fitness service 67,468 62,893 8,063
Beauty treatments 28,419 42,872 5,496
----------- ----------- -----------
Total operating revenues 95,887 105,765 13,559
----------- ----------- -----------
Operating Expenses
Salaries and commissions 30,213 38,297 4,910
Rent and related expenses 29,466 34,943 4,480
Depreciation 15,606 16,010 2,053
Other selling and administrative expenses 23,184 24,199 3,102
----------- ----------- -----------
Total operating expenses 98,469 113,449 14,545
----------- ----------- -----------
Loss from operations (2,582) (7,684) (986)
----------- ----------- -----------
Non-operating (income) expenses
Other income, net (113) (78) (10)
Interest expenses 783 1,570 201
----------- ----------- -----------
Total non-operating expenses 670 1,492 191
----------- ----------- -----------
Loss before income taxes and
minority interests and the cumulative (3,252) (9,176) (1,177)
effect of a change in accounting principle
Provision for income taxes 274 462 59
----------- ----------- -----------
Loss before cumulative effect of a change (3,526) (9,638) (1,236)
in an accounting principle and
minority interests
Minority interests 61 24 3
----------- ----------- -----------
Loss before cumulative effect of
a change in an accounting principle (3,587) (9,662) (1,239)
Cumulative effect on prior years (to December
31, 2001) of deferral of sales rebates, net
of income taxes and minority interests 3,857 - -
----------- ----------- -----------
Net income (loss) 270 (9,662) (1,239)
Other comprehensive (loss) income
- - Foreign currency translation adjustments (11) 1 -
----------- ----------- -----------
Comprehensive income (loss) 259 (9,661) (1,239)
=========== =========== ===========
Loss per share before cumulative effect
of a change in accounting principle (0.36) (0.97) (0.12)
Cumulative effect on prior years (to December
31, 2001) of deferral of sales rebates 0.39 - -
----------- ----------- -----------
Earnings (Loss) per share of common stock 0.03 (0.97) (0.12)
=========== =========== ===========
Number of shares of common stock outstanding
(in thousands) 10,000 10,000 10,000
=========== =========== ===========
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on March 31, 2003 or at any other certain rate.
-1-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED BALANCE SHEET
-----------------------------------
AS OF DECEMBER 31, 2002
AND
UNAUDITED CONSOLIDATED BALANCE SHEET
------------------------------------
AS OF MARCH 31, 2003
(In thousands, except share and per share data)
As of
-------------------------------------------------------
December 31, 2002 March 31, 2003
HK$ HK$ US$
ASSETS
Current assets
Cash and cash equivalents 1,336 1,686 216
Trade receivables 5,672 5,430 696
Other receivables 6,326 6,326 811
Rental and utility deposits 30,924 30,672 3,933
Prepayments to vendors and suppliers and other current assets 5,112 7,497 961
Inventories 3,113 3,112 399
Income taxes recoverable - 2,114 271
Held-to-maturity securities, collateralized 3,114 3,114 399
----------------- ----------------- -----------------
Total current assets 55,597 59,951 7,686
----------------- ----------------- -----------------
Marketable securities, collateralized 1,540 2,040 262
Bank deposits, collateralized 13,340 13,355 1,712
Due from a stockholder 10,955 10,147 1,301
Prepayments for construction-in-progress 1,690 3,341 428
Property, plant and equipment, net 241,768 229,285 29,396
----------------- ----------------- -----------------
Total assets 324,890 318,119 40,785
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Due to a related company 3,515 1,804 231
Short-term bank loans 12,634 10,731 1,376
Long-term bank loans - current portion 18,255 21,017 2,694
Accounts payable and accrued expenses 73,246 75,927 9,734
Obligations under finance leases - current portion 9,358 9,177 1,177
Deferred income - current portion 76,828 82,389 10,563
Deferred liabilities - current portion 5,616 5,295 679
Income taxes payable 3,764 1,530 196
Taxes other than income 6,023 5,938 761
----------------- ----------------- -----------------
Total current liabilities 209,239 213,808 27,411
----------------- ----------------- -----------------
Deferred income - non-current portion 6,315 6,581 844
Deferred liabilities - non-current portion 7,173 6,784 870
Long-term bank loans - non-current portion 3,997 4,428 568
Obligations under finance leases - non-current portion 5,032 2,865 367
Deferred taxation 4,593 4,593 589
Minority interests 7,285 7,465 957
Stockholders' equity:
Common stock, par value US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 161 162 21
Retained earnings 81,017 71,355 9,148
----------------- ----------------- -----------------
Total stockholders' equity 81,256 71,595 9,179
----------------- ----------------- -----------------
Total liabilities and stockholders' equity 324,890 318,119 40,785
================= ================= =================
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on March 31, 2003 or at any other certain rate.
-2-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 2002 TO MARCH 31, 2002
AND JANUARY 1, 2003 TO MARCH 31, 2003
(In thousands)
Three Months Ended March 31
----------------------------------------------
2002 2003 2003
HK$ HK$ US$
Cash flows from operating activities:
Net income (loss) 270 (9,662) (1,239)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Minority interests 187 24 3
Depreciation 15,606 16,010 2,053
Loss on disposal of property, plant and equipment 229 59 7
Changes in working capital:
Trade receivables (92) 398 51
Rental and utility deposits (2,426) 252 32
Prepayments to vendors and suppliers and other current assets (956) (2,385) (305)
Inventories - 1 -
Due from related companies (2,542) (1,711) (219)
Accounts payable and accrued expenses 5,607 2,681 344
Deferred income (2,941) 5,827 747
Deferred liabilities 2,606 (710) (92)
Income taxes payable/recoverable (453) (4,348) (557)
Taxes other than income 50 (85) (11)
-------------- -------------- --------------
Net cash provided by operating activities 15,145 6,351 814
-------------- -------------- --------------
Cash flows from investing activities:
Prepayments for construction-in-progress (15,212) (1,651) (212)
Acquisition of property, plant and equipment (13,707) (3,615) (464)
Acquisition of marketable securities (1,540) (500) (64)
Sales proceeds from disposal of property, plant and equipment 396 29 4
-------------- -------------- --------------
Net cash used in investing activities (30,063) (5,737) (736)
-------------- -------------- --------------
Cash flows from financing activities:
Increase in bank deposits (453) (15) (2)
Due from a stockholder (1,838) 808 104
Proceeds from (Settlement of) short-term bank loans 6,245 (1,903) (244)
Proceeds from long-term bank loans 13,330 7,338 941
Repayment of long-term bank loans (4,023) (4,145) (531)
Assumption of finance lease obligations 650 - -
Capital element of finance lease rental payments (2,033) (2,348) (301)
-------------- -------------- --------------
Net cash provided by (used in) financing activities 11,878 (265) (33)
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents (3,040) 349 45
Cash and cash equivalents at beginning of period 4,787 1,336 171
Cumulative translation adjustments (11) 1 -
-------------- -------------- --------------
Cash and cash equivalents at end of period 1,736 1,686 216
============== ============== ==============
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 March 31, 2003 or at any other certain rate.
-3-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 2002 TO MARCH 31, 2002
AND JANUARY 1, 2003 TO MARCH 31, 2003
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Physical Spa & Fitness Inc. ("the Company") and the
subsidiaries (collectively referred to as the "Group")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, 2002.
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 three-month period ended March 31,
2003 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2003.
The balance sheet at December 31, 2002 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$153,642 and HK$153,857
as of December 31, 2002 and March 31, 2003. Besides, the Group has net
loss before cumulative effect of a change in accounting principle of
HK$9,662 and HK$3,587 for the three-month periods ended March 31, 2003
and 2002. These conditions raise substantial 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, attaining profitable operations
and exercising tight cost and cash flow controls measures 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145: "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This statement made revisions to the accounting
for gains and losses from the extinguishment of debt, rescinded
Statement No. 44, and required certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale- leaseback transactions. The Group has
adopted this statement since January 1, 2003. The management considers
that the adoption of this standard do not have a material effect on the
Group's consolidated financial position, results of operations and cash
flows.
In January 2003, the FASB published interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46") to clarify the
conditions under which assets, liabilities and activities of another
entity should be consolidated into the financial statements of a
company. FIN 46 requires the consolidation of a variable interest
entity (including a special purpose entity such as that utilized in an
accounts receivable securitization transaction) by a company that bears
the majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the variable
interest entity's residual returns or both. The Group has adopted the
provisions of FIN 46 from January 1, 2003. The management considers
that adoption of FIN 46 do not have a material impact on the Group's
financial position or results of operations.
-4-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(In thousands, except share and per share data)
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities. The SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Subject to certain exception, this
Statement is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30,
2003 and all provisions of this Statement should be applied
prospectively. The Group had no derivative instruments outstanding.
The management does not expect the adoption of SFAS No. 149 will have
a material impact on the Group's consolidated financial statements.
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
2002 2003 2003
HK$ HK$ US$
Operating revenues
- Physical fitness 67,468 62,893 8,063
- Beauty treatments 28,419 42,872 5,496
----------- ----------- ---------
95,887 105,765 13,559
============ =========== =========
Operating profit (loss)
- Physical fitness 4,273 (9,271) (1,189)
- Beauty treatments (4,003) (391) (50)
------------ ----------- ---------
270 (9,662) (1,239)
Cumulative effect of a change
in accounting principle
included in segment profit
(loss) above (3,857) - -
Income taxes included in
segment profit (loss) above 274 462 59
Minority interests included
in segment profit (loss) above 61 24 3
----------- ----------- ---------
Consolidated loss before income
taxes and minority interests and
the cumulative effect of a change
in accounting principle (3,252) (9,176) (1,177)
============ =========== =========
Depreciation
- Physical fitness 12,249 11,933 1,530
- Beauty treatments 3,357 4,077 523
------------ ----------- ---------
15,606 16,010 2,053
============ =========== =========
Total assets
- Physical fitness 149,879 238,589 30,589
- Beauty treatments 127,675 79,530 10,196
------------ ----------- ---------
277,554 318,119 40,785
============ =========== =========
Property, plant and equipment additions
- Physical fitness 11,632 1,633 210
- Beauty treatments 2,075 1,982 254
------------ ----------- ---------
13,707 3,615 464
============ =========== =========
-5-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(In thousands, except share and per share data)
4. REPORT ON SEGMENT INFORMATION (CONTINUED)
CONSOLIDATED OPERATIONS BY GEOGRAPHIC AREA
THREE MONTHS ENDED MARCH 31
----------------------------
2002 2003 2003
HK$ HK$ US$
Operating revenues
- Hong Kong 86,948 92,688 11,883
- PRC 8,939 13,077 1,676
----------- ----------- --------
95,887 105,765 13,559
=========== =========== ========
Operating (loss)
- Hong Kong (456) (5,968) (766)
- PRC (2,461) (2,138) (274)
-------- -------- -------
Segment loss (2,917) (8,106) (1,040)
Interest income not included
in segment loss above 113 14 2
Interest expenses not included
in segment loss above (783) (1,570) (201)
Income taxes included in
segment loss above 274 462 59
Minority interests included
in segment loss above 61 24 3
----------- ----------- --------
Consolidated loss before
income taxes and minority
interests and the cumulative
effect of a change in
accounting principle (3,252) (9,176) (1,177)
=========== =========== ========
AS AT MARCH 31
----------------------------
2002 2003 2003
HK$ HK$ US$
Segment assets
- Hong Kong 216,947 239,191 30,666
- PRC 60,607 78,928 10,119
----------- ----------- -------
277,554 318,119 40,785
=========== =========== ======
5. LONG-TERM BANK LOANS
The Group has obtained additional banking facilities of HK$7,338 during
the three-month period ended March 31, 2003 from creditworthy
commercial banks in Hong Kong to finance its operations. These
facilities are collateralized by the Group's marketable securities,
fixed deposits and personal guarantee from its stockholder.
During the three-month period ended March 31, 2003, the Group repaid
HK$4,145 of its outstanding bank loans. The outstanding loan balances
as of March 31, 2003 were analysed as follows:
Principal Interest rate Repayable during the following periods
HK$
4,700 5.57% Within one year
2,471 3.66% Serially from 2003 to 2004
3,778 HK$ prime + 0.25% Serially from 2003 to 2004
1,888 HK$ prime + 3% Serially from 2003 to 2004
4,569 HK$ prime + 1.5% Serially from 2003 to 2005
6,439 6.65% Serially from 2003 to 2005
1,600 HK$ prime + 1.5% Serially from 2003 to 2007
----------------
25,445
================
Aggregate maturities of the long-term bank loans are as follows:
Principal Payables during the following periods
HK$
21,017 April 2003 to March 2004
3,381 April 2004 to March 2005
527 April 2005 to March 2006
360 April 2006 to March 2007
160 April 2007 to March 2008
-----------------
25,445
=================
-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 seventeen facilities:
thirteen 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
100,000 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 services, the customers may purchase single
treatment, 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.
RESULTS OF OPERATIONS
Three Months Ended
March 31
2002 2003
----------- -----------
Operating Revenues 100.00% 100.00%
Total operating expenses 102.69% 107.27%
Operating loss (2.69%) (7.27%)
Loss before income taxes and
minority interests and cumulative effect (3.39%) (8.68%)
of a change in an accounting principle
Provision for income taxes 0.29% 0.44%
Minority interests 0.06% 0.02%
Net income (loss) 0.28% (9.14%)
============ ===========
THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
MARCH 31, 2002 (UNAUDITED).
- ----------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues increased 10% to
HK$105,765,000 (US$13,559,000) in the first three months of 2003 as compared to
HK$95,887,000 (US$12,293,000) of the same period last year.
Operating revenues derived by the Company's fitness services decreased
7% to HK$62,893,000 (US$8,063,000) compared to HK$67,468,000 (US$8,650,000) in
the first three months of 2002. Fitness revenues as a percentage of total
revenues were 59% in the first three months of 2003 as compared to 70% in the
first three months of 2002.
Operating revenues from the Company's beauty treatment business totaled
HK$42,872,000 (US$5,496,000) compared to HK$28,419,000 (US$3,643,000) in the
first three months of 2002, representing an increase of 51%. Beauty treatment
revenues as a percentage of total revenues were 41% in the first three months of
2003 as compared to 30% in the first three months of 2002.
-8-
Operating revenues derived from the Company's Hong Kong locations
remain an important contributor to the Company's business, generating
HK$92,688,000 (US$11,882,000), or 88% of total operating revenues in the three
months ended March 31, 2003 as compared to HK$86,948,000 (US$11,147,000) or 91%
of total operating revenues in the three months ended March 31, 2002.
Operating revenues derived from the Company's China locations generated
HK$13,077,000 (US$1,677,000), or 12% of total operating revenues in the three
months ended March 31, 2003 as compared to HK$8,939,000 (US$1,146,000) or 9% of
total operating revenues in the three months ended March 31, 2002.
In Mid-March, 2003, an outbreak of the Severe Acute Respiratory
Syndrome (SARS) occurred in areas such as Vietnam, Toronto, Southern China, Hong
Kong, and Singapore, all of which were badly hit by the disease. Since the
consumers avoided from contacting the SARS virus by staying at home, sales and
profits of most retailers have been unsurprisingly be adversely affected by
weaker demand. The Company estimates that its revenues in the second quarter of
the year will decrease by approximately 20% compared to the first quarter. As of
the date of this report, however, there are already signs of recovery in Hong
Kong where the number of cases has steadily declined, suggesting that the
outbreak has peaked. The Company believes that sales will pick up rapidly as
consumers are more willing to spend and more health conscious to look for
fitness training and exercise.
OPERATING EXPENSES. The Company's operating expenses for the first
three months of 2003 totaled HK$113,449,000 (US$14,545,000) compared to
HK$98,469,000 (US$12,624,000) in the first three months of 2002, representing an
increase of 15%. Total operating expenses, after taking into account all
corporate expenses, were 107% of total operating revenue as compared to 103% 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$98,169,000 (US$12,586,000) in the three months ended March 31, 2003,
representing an increase of 13% as compared to HK$86,995,000 (US$11,153,000) in
2002. The increase was mainly due to additional expenses incurred by the Wing
On, Central Center (opened in April, 2002), the new unisex fitness center in
Tsuen Wan (opened in April, 2002) and Kornhill Center (opened in June, 2002),
all of which have not yet commenced operation in the three months ended March
31, 2002. Hong Kong operating expenses represented 87% of total operating
expenses in the three months ended March 31, 2003 as compared to 88% of 2002.
Operating expenses associated with the Company's China locations were
HK$15,280,000 (US$1,959,000) in the three months ended March 31, 2003,
representing an increase of 33% as compared to HK$11,474,000 (US$1,471,000) in
2002 due to additional expenses incurred by the enhanced facilities in Shanghai.
Operating expenses in China represented 13% of total operating expenses in the
three months ended March 31, 2003 as compared to 12% of 2002.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first three months of 2003 totaled HK$1,492,000 (US$191,000) compared to
HK$670,000 (US$86,000) in the first three months of 2002. This represents an
increase of 123% mainly due to higher interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
three months of 2003 totaled HK$462,000 (US$59,000) compared to HK$274,000
(US$35,000) in the first three months of 2002, representing a decrease of 28%.
The decrease is mainly due to losses incurred in the period.
NET INCOME (LOSS). The Company has generated a net loss of HK$9,662,000
(US$1,239,000) for the first three months of 2003, compared to a net income of
HK$270,000 (US$35,000) for the first three months of 2002, representing a
decrease of 3679%. The net income for 2002 has been arrived at after adding back
a cumulative effect of a change in an accounting principle amounting
HK$3,857,000 (US$494,000). In the absence of the cumulative adjustment, the
Company has suffered a loss of HK$3,587,000 (US$460,000) for the first three
months of 2002, compared with which the net income for 2003 decreased by 169%.
This was mainly due to the narrowing margin of the existing centers and the
absorption of the pre-opening overhead associated with four new centers.
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
March 31, 2003 and December 31, 2002 were HK$1,686,000 (US$216,000) and
HK$1,336,000 (US$171,000), while total indebtedness at March 31, 2003 was
HK$48,218,000 (US$6,182,000) and HK$49,276,000 (US$6,317,000) at December 31,
2002.
-9-
Net cash provided by operating activities were HK$105,334,000
(US$13,503,000) and 6,351,000 (US$814,000) for Fiscal Year 2002, and the
three-month period ended March 31, 2003, respectively. The Company's operating
activities are historically financed by cash flows from operations. Net cash
used in investing activities were HK$120,362,000 (US$15,430,000) and
HK$5,737,000 (US$736,000) for Fiscal Year 2002 and the three-month period ended
March 31, 2003, primarily as a result of expenditures for property, plant and
equipment. Net cash provided by (used in) financing activities, which mainly
include proceeds from bank loans, net interest and repayment, were HK$11,589,000
(US$1,486,000)and HK$(265,000) (US$(33,000)) in Fiscal Year 2002 and the
three-month period ended March 31, 2003, respectively.
During the three-month period ended March 31, 2003, 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 3.66% to 8%per annum. The total
balance outstanding as of March 31, 2003 on such loans was HK$25,445,000
(US$3,262,000). The last repayment on the loans is due in 2007. The Company had
total banking facilities available from financial institutions amounting to
approximately HK$52,568,000 (US$6,739,000). 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 (E House) Limited), and personal guarantees from Mr. Luk,
respectively.
During the three-month period ended March 31, 2003, the Company
purchased marketable securities of HK$500,000 (US$64,000). The Company have no
other material purchases of investments during the period under review.
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 March 31, 2003, was
HK$5,430,000 (US$696,000). The Company has never experienced any significant
problems with collection of accounts receivable from its customers.
Capital expenditure for Fiscal Year 2002, and the three-month period
ended March 31, 2003, were HK$126,364,000 (US$16,199,000) and HK$3,615,000
(US$464,000) respectively.
And as mentioned in note 2 to the financial statements, the Company has
a negative working capital of HK$153,642,000 (US$19,698,000) and HK$153,857,000
(US$19,725,000) as of December 31, 2002 and March 31, 2003. Besides, it has net
loss before cumulative effect of a change in accounting principle of
HK$9,662,000 (US$1,239,000) and HK$3,587,000 (US$460,000) respectively for the
three-month periods ended March 31, 2003 and 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern. In
order to maintain it as a going concern, the management is now seeking to
procure additional funding from various sources. If necessary, the management
would delay the capital expansion plan which would have least impact on the
Company's ongoing operation until the cash flow position of the Company is
improved. In addition, the Principal Stockholder has undertaken to make
available adequate funds to the Company as and when required to maintain the
Company as a going concern. In this connection, the Company has worked out a
funding schedule with the Principal Stockholder whereby he agrees to inject
funds of not less than HK$500,000 (US$64,000) each time and realize his net
worth assets to support the Company as and when required. Accordingly, the
Company believes that cash flow generated from its operations, the tight cost
and cash flow control measures and its existing and additional credit facilities
to be sought should be sufficient to satisfy its working capital and capital
expenditure requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES
Besides the accounting policies as described in note 3 to the financial
statements for the year ended December 31, 2002, the management considers that
the Group has not adopted any other critical accounting policies.
ITEM 3 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with participation of the Company's
management, including the Chief Executive Officer and Principal Financial
Officer, of the effectiveness of the disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based on
the evaluation, the Chief Executive Officer and Principal Financial Officer have
concluded that disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
-10-
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
(a) Exhibits Exhibit No. Description
-------- ----------- -----------
Exhibit 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2003.
-11-
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHYSICAL SPA & FITNESS INC.
(Registrant)
Date: May 20, 2003 /s/Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Date: May 20, 2003 /s/ Robert Chui
------------------------------------
Robert Chui,
Chief Financial Officer
CERTIFICATION
I, Ngai Keung Luk, Chairman and Chief Executive Officer and I, Robert Chui,
Chief Financial Officer, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Physical Spa & Fitness
Inc. (the "registrant");
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and we have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and we have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
5/20/03 /s/ Ngai Keung Luk
- --------------- -------------------------------------
Date Chairman and Chief Executive Officer
5/20/03 /s/ Robert Chui
- --------------- -------------------------------------
Date Chief Financial Officer
Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SS. 1350 ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of Physical Spa & Fitness Inc. (the
"Company") on Form 10-Q for the quarter ended March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Ngai Keung Luk, Chairman and Chief Executive Officer of the Company, certify
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Ngai Keung Luk
- -------------------------
Ngai Keung Luk
Chairman and
Chief Executive Officer
May 20, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SS. 1350 ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Report of Physical Spa & Fitness Inc. (the
"Company") on Form 10-Q for the quarter ended March 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert Chui, Chief Financial Officer of the Company, certify
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Robert Chui
- -------------------------
Robert Chui
Chief Financial Officer
May 20, 2003