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UNITED STATES 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, 2004.
( ) 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 Registrant as specified in its charter)
Delaware 98-0203281
- --------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
40/F RBS Tower, Times Square
No. 1 Matheson Street, Causeway Bay
Hong Kong
(Address of principal executive offices)
(011) (852) 2917-0000
(Registrant's telephone number)
Check whether the registrant (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
stock, as of the latest practicable date: June 30, 2004, 10,000,000 shares.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations 1
for the three-month and six-month periods
ended June 30, 2003 and 2004 (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2003 2
and June 30, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows 3
for the six-month periods ended
June 30, 2003 and 2004 (Unaudited)
Notes to Financial Statements 4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 12
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 12
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 13
ITEM 2 - CHANGE IN SECURITIES AND USE OF PROCEEDS 13
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE 13
OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION 13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 13
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except share and per share data)
Three months ended June 30 Six months ended June 30
2003 2004 2004 2003 2004 2004
--------- --------- --------- --------- --------- ---------
HK$ HK$ US$ HK$ HK$ US$
Operating Revenues
Fitness service 63,205 92,040 11,800 126,098 153,252 19,648
Beauty treatments 39,065 52,502 6,731 81,937 104,752 13,430
Others 193 59 8 193 148 18
--------- --------- --------- --------- --------- ---------
Total operating revenues 102,463 144,601 18,539 208,228 258,152 33,096
--------- --------- --------- --------- --------- ---------
Operating Expenses
Salaries and commissions (37,547) (41,366) (5,303) (75,844) (82,144) (10,531)
Rent and related expenses (40,215) (39,409) (5,052) (75,158) (79,748) (10,224)
Depreciation (15,799) (17,008) (2,181) (31,809) (32,294) (4,140)
Other selling and administrative expenses (26,590) (33,287) (4,268) (50,789) (58,839) (7,543)
--------- --------- --------- --------- --------- ---------
Total operating expenses (120,151) (131,070) (16,804) (233,600) (253,025) (32,438)
--------- --------- --------- --------- --------- ---------
(Loss) Income from operations (17,688) 13,531 1,735 (25,372) 5,127 658
--------- --------- --------- --------- --------- ---------
Non-operating income (expenses)
Other income, net 150 1,273 163 228 1,361 174
Interest expenses (1,559) (2,028) (260) (3,129) (3,187) (409)
--------- --------- --------- --------- --------- ---------
Total non-operating expenses (1,409) (755) (97) (2,901) (1,826) (235)
--------- --------- --------- --------- --------- ---------
(Loss) Income before income taxes
and minority interests (19,097) 12,776 1,638 (28,273) 3,301 423
Provision for income taxes 210 (2,689) (345) (252) (2,689) (345)
--------- --------- --------- --------- --------- ---------
(Loss) Income before minority interests (18,887) 10,087 1,293 (28,525) 612 78
Minority interests 257 (362) (46) 233 (162) (21)
--------- --------- --------- --------- --------- ---------
Net (loss) income (18,630) 9,725 1,247 (28,292) 450 57
Other comprehensive loss
- - Foreign currency translation adjustments (1) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Comprehensive (loss) income (18,631) 9,725 1,247 (28,292) 450 57
========= ========= ========= ========= ========= =========
(Loss) Income per common share (1.86) 0.97 0.12 (2.83) 0.05 0.01
========= ========= ========= ========= ========= =========
Number of shares of common stock outstanding
(in thousands) 10,000 10,000 10,000 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$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on June 30, 2004 or at any other certain rate.
-1-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------
AS OF DECEMBER 31, 2003 AND JUNE 30, 2004
(In thousands, except share and per share data)
As of
-------------------------------------------------------
Note December 31, 2003 June 30, 2004
(Audited) (Unaudited)
HK$ HK$ US$
ASSETS
Current assets
Cash and cash equivalents 1,806 1,243 159
Trade receivables 8,938 13,481 1,728
Other receivables 6,728 6,728 863
Rental and utility deposits 31,862 31,516 4,041
Prepayments to vendors and suppliers and other current assets 8,336 5,331 683
Inventories, finished products for beauty treatment and sale 3,992 5,594 717
Income taxes recoverable 2,563 2,303 295
Due from a related company 6 -- 830 106
----------------- ----------------- -----------------
Total current assets 64,225 67,026 8,592
----------------- ----------------- -----------------
Marketable securities, collateralized 3,290 4,280 549
Bank deposits, collateralized 13,103 10,507 1,347
Due from a stockholder 9,481 9,453 1,212
Prepayments for construction-in-progress - 1,775 228
Property, plant and equipment,
net of accumulated depreciation of HK$286,344 224,787 213,234 27,338
----------------- ----------------- -----------------
Total assets 314,886 306,275 39,266
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank loans 14,473 11,837 1,517
Long-term bank loans - current portion 5 10,274 6,846 878
Trade and other payables 92,345 67,908 8,706
Obligations under finance leases - current portion 5,516 2,320 297
Deferred income - current portion 113,241 136,569 17,509
Deferred liabilities - current portion 8,587 7,180 921
Income taxes payable 175 1,721 221
Taxes other than income 6,083 6,559 841
----------------- ----------------- -----------------
Total current liabilities 250,694 240,940 30,890
----------------- ----------------- -----------------
Deferred income - non-current portion 6,599 9,913 1,271
Deferred liabilities - non-current portion 9,114 7,910 1,014
Long-term bank loans - non-current portion 5 1,498 790 101
Obligations under finance leases - non-current portion 716 - -
Deferred taxation 2,746 2,746 352
Minority interests 7,230 7,237 928
Commitments and contingencies 7
Stockholders' equity:
Common stock, par value US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 162 162 21
Retained earnings 36,049 36,499 4,679
----------------- ----------------- -----------------
Total stockholders' equity 36,289 36,739 4,710
----------------- ----------------- -----------------
Total liabilities and stockholders' equity 314,886 306,275 39,266
================= ================= =================
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on June 30, 2004 or at any other certain rate.
-2-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE SIX MONTHS FROM JANUARY 1, 2003 TO JUNE 30, 2003
AND JANUARY 1, 2004 TO JUNE 30, 2004
(in thousands)
Six Months Ended June 30
------------------------------
2003 2004 2004
-------- -------- --------
HK$ HK$ US$
Cash flows from operating activities:
Net (loss) income (28,292) 450 57
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Minority interests (233) 162 21
Depreciation 31,809 32,294 4,140
(Gain) Loss on disposal of property, plant and equipment (56) 13 2
Changes in working capital:
Trade receivables (8,122) (4,543) (582)
Rental and utility deposits 1 -- --
Deposits, prepayments and other current assets (2,112) 3,196 409
Inventories -- (1,602) (205)
Due from a related company (2,372) (830) (106)
Trade and other payables 9,083 (24,437) (3,133)
Deferred income 18,752 26,642 3,415
Deferred liabilities 4,235 (2,611) (335)
Income taxes payable/recoverable (5,179) 1,806 232
Taxes other than income 202 476 61
-------- -------- --------
Net cash provided by operating activities 17,716 31,016 3,976
-------- -------- --------
Cash flows from investing activities:
Prepayments for construction-in-progress (380) (1,775) (228)
Acquisition of property, plant and equipment (11,589) (20,757) (2,661)
Acquisition of marketable securities (1,750) (990) (127)
Proceeds from disposal of held-to-maturity securities 3,114 -- --
Sales proceeds from disposal of property, plant and equipment 33 3 --
-------- -------- --------
Net cash used in investing activities (10,572) (23,519) (3,016)
-------- -------- --------
Cash flows from financing activities:
(Increase) Decrease in bank deposits (2,124) 2,596 333
Due from a stockholder 3,785 28 4
Settlement of short-term bank loans (3,440) (2,636) (338)
Proceeds from long-term bank loans 7,338 -- --
Repayment of long-term bank loans (8,773) (4,136) (530)
Assumption of finance lease obligations 1,800 -- --
Capital element of finance lease rental payments (4,846) (3,912) (502)
-------- -------- --------
Net cash used in financing activities (6,260) (8,060) (1,033)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 884 (563) (73)
Cash and cash equivalents at beginning of period 1,336 1,806 232
-------- -------- --------
Cash and cash equivalents at end of period 2,220 1,243 159
======== ======== ========
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, 2004 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, 2003.
The accompanying unaudited condensed 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 adjustments) considered necessary for a fair presentation
have been included. Operating results for the six-month period ended
June 30, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004.
The balance sheet at December 31, 2003 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$186,469 and HK$173,914
as of December 31, 2003 and June 30, 2004. 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
attaining profitable operations in the future, exercising tight cost
and cash flow controls measures, and obtaining additional banking
facilities. In addition, 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 November 2003, the EITF reached a consensus on EITF Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments". EITF Issue No. 03-01 establishes additional
disclosure requirements for each category of SFAS No. 115 and 124
investments in a loss position for annual periods ending after December
15, 2003. In March 2004, the EITF also reached a consensus on the
additional accounting guidance for other-than-temporary impairments and
its application to debt and equity investments in reporting periods
beginning after June 15, 2004 and the additional disclosures for equity
securities that are not subject to the scope of SFAS No.115 and not
accounted for under the equity method under APB Opinion 18 and related
interpretation ("cost method investments") for annual financial
statements for fiscal years ending after June 15, 2004. Comparative
information for the periods prior to initial application of this issue
is not required. The Company will test for other-than-temporary
impairment under the guidance in the third quarter of fiscal year 2004.
-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 mainly 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 is
presented in the tables below:
CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------------- ---------------------------------
2003 2004 2004 2003 2004 2004
--------- --------- --------- --------- --------- ---------
HK$ HK$ US$ HK$ HK$ US$
Operating revenues
- Physical fitness 63,205 92,040 11,800 126,098 153,252 19,648
- Beauty treatments 39,065 52,502 6,731 81,937 104,752 13,430
- Others 193 59 8 193 148 18
--------- --------- --------- --------- --------- ---------
102,463 144,601 18,539 208,228 258,152 33,096
========= ========= ========= ========= ========= =========
Net (loss) income
- Physical fitness (13,253) 11,473 1,471 (22,524) (1,059) (136)
- Beauty treatments (5,570) (1,617) (207) (5,961) 1,685 216
- Others 193 (131) (17) 193 (176) (23)
--------- --------- --------- --------- --------- ---------
(18,630) 9,725 1,247 (28,292) 450 57
Income taxes included in
segment (loss) income above (210) 2,689 345 252 2,689 345
Minority interests included
in segment (loss) income above (257) 362 46 (233) 162 21
--------- --------- --------- --------- --------- ---------
Consolidated (loss) income before income
taxes and minority interests (19,097) 12,776 1,638 (28,273) 3,301 423
========= ========= ========= ========= ========= =========
-5-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------
(Amounts in thousands, except share and per share data)
5. LONG-TERM BANK LOANS
The Group had not obtained additional long-term bank loans during the
six-month period ended June 30, 2004.
During the six months ended June 30 2004, the Group repaid HK$4,136 of
its outstanding bank loans. The outstanding loan balances as of June 30, 2004
were analyzed as follows:
PRINCIPAL INTEREST RATE MATURITY
--------- ------------- --------
HK$ US$
4,700 603 5.84% Within one year
1,786 229 HK$ prime + 1.5% Serially from 2004 to 2005
1,150 147 HK$ prime + 1.5% Serially from 2004 to 2007
------- -------
7,636 979
======= =======
Aggregate maturities of the long-term bank loans are as follows:
PRINCIPAL PAYABLES DURING THE FOLLOWING PERIODS
--------- -------------------------------------
HK$ US$
6,846 878 2004
------- -------
360 46 2005
360 46 2006
70 9 2007
------- -------
790 101
------- -------
7,636 979
======= =======
6. DUE FROM A RELATED COMPANY
The amount due from Williluck International Limited is trade in nature,
unsecured, interest-free and has no fixed repayment terms. The connected
directors are Mr. Luk Ngai Keung and Ms. Ho Yuk Wah.
7. COMMITMENTS AND CONTINGENCIES
The Company imported beauty products from suppliers in Hong Kong into the PRC
for beauty treatment and sales to its customers. Under the prevailing PRC rules
and regulations governing imports into the PRC, the Company is required to make
import declarations and to pay various taxes including, inter alia, customs
duty, consumption tax and value-added tax, on such imports. The Company faced
further penalty, additional to the original amount of taxes payable, ranging
from 50% to 500% of the original amount of taxes payable, had the Company been
found in breach of any of such rules and regulations.
As of December 31, 2003 and June 30, 2004, the Company is potentially liable to
make good in aggregate an amount of HK$12,388, of which an amount of HK$6,728
has been provided for in both balance sheet dates as Taxes Other Than Income and
as Other Receivables in the liabilities and assets respectively. No further
provision has been made for the difference and any potential amount of penalty
which might be imposed. In this respect, the directors are of the opinion that
the probability that such potential liabilities will be crystallized would be
remote.
During the six months ended June 30 2004, the Company's subsidiary leases a
property under operating lease in Shanghai. The lease runs for a period of 5
years, with an option to renew for a further 5 years upon the expiry of the
original term ("1st optional term") and upon the expiry of the 1st optional
term, a second option to renew for a further term of 5 years. Lease payments are
fixed for the initial period at US$73 per month but will be adjusted to reflect
the market rental for the renewal periods.
-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). In addition,
the Company is appointed by an outside investor to manage a fitness and spa
center in Hang Zhou, China. Management believes that the Company is one of the
top providers of fitness facilities and spa and beauty treatment services in
Hong Kong and China, with approximately 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$15,000 (US$1,923).
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
2003 2004 2003 2004
----------- ----------- ----------- -----------
Operating Revenues 100.00% 100.00% 100.00% 100.00%
Total operating expenses 117.26% 90.64% 112.18% 98.01%
Operating (loss) income (17.26%) 9.36% (12.18%) 1.99%
(Loss) Income before income taxes and
minority interests (18.64%) 8.84% (13.58%) 1.28%
Provision for income taxes (0.21%) 1.86% 0.12% 1.04%
Minority interests (0.25%) 0.25% (0.11%) 0.06%
Net (loss) income (18.18%) 6.73% (13.59%) 0.17%
=========== =========== =========== ==========
THREE MONTHS ENDED JUNE 30, 2004 (UNAUDITED) COMPARED TO THREE MONTHS ENDED JUNE
30, 2003 (UNAUDITED).
- --------------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues increased 41% to
HK$144,601,000 (US$18,539,000) in the second quarter of 2004 as compared to
HK$102,463,000 (US$13,136,000) of the same period last year.
Operating revenues derived by the Company's fitness services increased
46% to HK$92,040,000 (US$11,800,000) compared to HK$63,205,000 (US$8,103,000) of
last year. Fitness revenues as a percentage of total revenues were 64% in the
second quarter of 2004 as compared to 62% in the second quarter of 2003.
Operating revenues from the Company's beauty treatment business totaled
HK$52,502,000 (US$6,731,000) compared to HK$39,065,000 (US$5,008,000) of last
year, representing an increase of 34%. Beauty treatment revenues as a percentage
of total revenues were 36% in the second quarter of 2004 as compared to 38% of
2003.
-8-
OPERATING EXPENSES. The Company's operating expenses for the second
quarter of 2004 totaled HK$131,070,000 (US$16,804,000) compared to
HK$120,151,000 (US$15,404,000) in 2003, representing an increase of 9%. The
increase was mainly due to additional expenses incurred by the Citylink, Shatin
center which has not yet commenced operation in the corresponding period of last
year. Total operating expenses, after taking into account all corporate
expenses, were 91% of total operating revenue in the quarter ended June 30, 2004
as compared to 117% of 2003.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
second quarter of 2004 totaled HK$755,000 (US$97,000) compared to HK$1,409,000
(US$181,000) in 2003. This represents a decrease of 46% mainly due to an offset
effect of other income resulting from the management service provided to the
Hang Zhou center.
PROVISION FOR INCOME TAXES. Provision for income taxes for the second
quarter of 2004 totaled HK$2,689,000 (US$345,000) compared to a negative
provision of HK$210,000 (US$27,000) in the second quarter of 2003, representing
an increase of HK$2,899,000 (US$372,000) or 1380%.
NET INCOME. The Company has recorded a net income of HK$9,725,000
(US$1,247,000) for the second quarter of 2004, compared to a net loss of
HK$18,630,000 (US$2,388,000) for 2003, representing an increase of HK$28,355,000
(US$3,635,000) or 152%. The improvement in the bottom line reflects the gradual
pick-up of the business from the adverse economic situation. The Company also
benefits from a comparison with a relatively low base of last year which saw a
disastrous SARS outbreak in the second quarter.
-9-
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) COMPARED TO SIX MONTHS ENDED JUNE 30,
2003 (UNAUDITED).
- ----------------------------------------------------------------------------
OPERATING REVENUES. Operating revenues for the first six months of 2004
totaled HK$258,152,000 (US$33,096,000) compared to HK$208,228,000
(US$26,696,000) of last year, representing an increase of 24%.
Operating revenues derived by the Company's fitness services increased
22% to HK$153,252,000 (US$19,648,000) compared to HK$126,098,000 (US$16,166,000)
in 2003. Fitness revenues as a percentage of total revenues were 59% in the
first six months of 2004 as compared to 61% in the same period last year.
Operating revenues from the Company's beauty treatment business
increased 28% to HK$104,752,000 (US$13,430,000) in the first six months of 2004
compared to HK$81,937,000 (US$10,505,000) of last year. Beauty treatment
revenues as a percentage of total revenues were 41% in the first six months of
2004 as compared to 39% in the first six months of 2003.
OPERATING EXPENSES. The Company's operating expenses for the first six
months of 2004 totaled HK$253,025,000 (US$32,438,000) compared to HK$233,600,000
(US$29,949,000) in the first six months of 2003, representing an increase of 8%.
This reflects the additional costs incurred by the new center during the period
under review. Total operating expenses, after taking into account all corporate
expenses, were 98% of total operating revenue as compared to 112% of last year.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first six months of 2004 totaled HK$1,826,000 (US$235,000) compared to
HK$2,901,000 (US$372,000) in the first six months of 2003. This represents a
decrease of 37% mainly due to the recognition of management service income.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
six months of 2004 totaled HK$2,689,000 (US$345,000) compared to HK$252,000
(US$32,000) in the first six months of 2003, representing an increase of 967%.
NET INCOME. The Company had generated a net income of HK$450,000
(US$57,000) for the first six months of 2004, compared to a net loss of
HK$28,292,000 (US$3,627,000) for the first six months of 2003, representing an
increase of 102%. Management believes that the business of the Company will
further improve in the next quarter as there is increasing concerns of the
general public about obesity and their desire for a slim body especially in the
summer.
-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 as of June 30, 2004 and December 31,
2003 were HK$1,243,000 (US$159,000) and HK$1,806,000 (US$232,000).
Net cash provided by operating activities were HK$17,716,000
(US$2,271,000) and HK$31,016,000 (US$3,976,000) for the six-month periods ended
June 30, 2003 and 2004, respectively. The Company's operating activities are
historically financed by cash flows from operations. Net cash used in investing
activities were HK$10,572,000 (US$1,355,000) and HK$23,519,000 (US$3,016,000)
for the six-month periods ended June 30, 2003 and 2004 respectively, primarily
as a result of expenditures for property, plant and equipment. Net cash used in
financing activities, which mainly include proceeds from bank loans, net
interest and repayment, were HK$6,260,000 (US$803,000) and HK$8,060,000
(US$1,033,000) in the six-month periods ended June 30, 2003 and 2004,
respectively.
During the six-month period ended June 30, 2004, 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 5.84% to 6.5% per annum. The
total balance outstanding as of June 30, 2004 on such loans was HK$7,636,000
(US$979,000). The last repayment on the loans is due in 2007. 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, Physical
Health Centre (E House) Limited, and Physical Health center (TST) Limited) and
personal guarantees from Mr. Luk, respectively.
During the six-month period ended June 30, 2004, the Company has no
material purchases of investments.
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, 2004, was
HK$13,481,000 (US$1,728,000). These trade receivables are mainly amounts due
from major credible banks and the history of credit loss from these banks are
none.
Capital expenditure for Fiscal Year 2003, and the six-month period
ended June 30, 2004, were HK$46,159,000 (US$5,918,000) and HK$20,757,000
(US$2,661,000) respectively.
And as mentioned in note 2 to the financial statements, the Company has
negative working capital. 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 Principal Stockholder agrees
to inject funds 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.
-11-
CRITICAL ACCOUNTING POLICIES
Besides the accounting policies as described in note 3 to the financial
statements for the year ended December 31, 2003, the management considers that
the Group has not adopted any other critical accounting policies.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The operations of the Company are located in Hong Kong and the PRC and most of
the operating revenues are earned in these two areas. Therefore the Company is
not exposed to risks relating to fluctuating currencies or exchange rates.
Besides, the Company has not purchased options or entered into swaps or forward
or futures contracts. The primary market risk exposure is that of interest rate
risk on borrowings that the Company may have under some future credit facility.
ITEM 4 - 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.
-12-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
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
NONE
-13-
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 16, 2004 /s/ Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Date: August 16, 2004 /s/ Robert Chui
------------------------------------
Robert Chui,
Chief Financial Officer
-14-
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.
8/20/04 /s/ Ngai Keung Luk
- --------------- -------------------------------------
Date Chairman and Chief Executive Officer
8/20/04 /s/ Robert Chui
- --------------- -------------------------------------
Date Chief Financial Officer