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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 September 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: September 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 nine-month periods
ended September 30, 2003 and 2004 (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2003 2
and September 30, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows 3
for the nine-month periods ended
September 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 September 30 Nine months ended September 30
2003 2004 2004 2003 2004 2004
--------- --------- --------- --------- --------- ---------
HK$ HK$ US$ HK$ HK$ US$
Operating Revenues
Fitness service 67,670 75,018 9,618 193,768 228,270 29,265
Beauty treatments 47,309 50,208 6,437 129,246 154,960 19,867
Others 103 33 4 296 181 23
--------- --------- --------- --------- --------- ---------
Total operating revenues 115,082 125,259 16,059 323,310 383,411 49,155
--------- --------- --------- --------- --------- ---------
Operating Expenses
Salaries and commissions (39,674) (40,570) (5,201) (115,518) (122,714) (15,733)
Rent and related expenses (39,869) (42,579) (5,459) (115,027) (122,327) (15,683)
Depreciation (15,142) (15,460) (1,982) (46,951) (47,754) (6,122)
Other selling and administrative expenses (28,381) (27,944) (3,583) (79,170) (86,783) (11,126)
--------- --------- --------- --------- --------- ---------
Total operating expenses (123,066) (126,553) (16,225) (356,666) (379,578) (48,664)
--------- --------- --------- --------- --------- ---------
(Loss) Income from operations (7,984) (1,294) (166) (33,356) 3,833 491
--------- --------- --------- --------- --------- ---------
Non-operating income (expenses)
Other income, net 168 203 26 396 1,564 201
Interest expenses (2,137) (1,415) (181) (5,266) (4,602) (590)
--------- --------- --------- --------- --------- ---------
Total non-operating expenses (1,969) (1,212) (155) (4,870) (3,038) (389)
--------- --------- --------- --------- --------- ---------
(Loss) Income before income taxes
and minority interests (9,953) (2,506) (321) (38,226) 795 102
Benefit (Provision) for income taxes 201 441 57 (51) (2,248) (288)
--------- --------- --------- --------- --------- ---------
Loss before minority interests (9,752) (2,065) (264) (38,277) (1,453) (186)
Minority interests 131 425 54 364 263 34
--------- --------- --------- --------- --------- ---------
Net loss (9,621) (1,640) (210) (37,913) (1,190) (152)
Other comprehensive loss
- - Foreign currency translation adjustments -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Comprehensive loss (9,621) (1,640) (210) (37,913) (1,190) (152)
========= ========= ========= ========= ========= =========
Loss per common share (0.96) (0.16) (0.02) (3.79) (0.12) (0.02)
========= ========= ========= ========= ========= =========
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$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on September 30, 2004 or at any other certain rate.
-1-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------
AS OF DECEMBER 31, 2003 AND SEPTEMBER 30, 2004
(In thousands, except share and per share data)
As of
-------------------------------------------------------
Note December 31, 2003 September 30, 2004
(Unaudited)
HK$ HK$ US$
ASSETS
Current assets
Cash and cash equivalents 1,806 1,593 204
Trade receivables 8,938 4,919 631
Other receivables 6,728 6,728 863
Rental and utility deposits 31,862 31,924 4,093
Prepayments to vendors and suppliers and other current assets 8,336 5,174 663
Inventories, finished products for beauty treatment and sale 3,992 6,473 830
Income taxes recoverable 2,563 3,170 406
Due from a related company 6 -- 1,023 131
----------------- ----------------- -----------------
Total current assets 64,225 61,004 7,821
----------------- ----------------- -----------------
Marketable securities, collateralized 3,290 4,280 549
Bank deposits, collateralized 13,103 10,512 1,348
Due from a stockholder 9,481 9,481 1,215
Prepayments for construction-in-progress - 4,132 529
Property, plant and equipment,
net of accumulated depreciation of HK$300,820 224,787 203,063 26,034
----------------- ----------------- -----------------
Total assets 314,886 292,472 37,496
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank loans 14,473 11,168 1,431
Long-term bank loans - current portion 5 10,274 6,366 816
Trade and other payables 92,345 63,423 8,131
Obligations under finance leases - current portion 5,516 1,518 195
Deferred income - current portion 113,241 127,081 16,292
Deferred liabilities - current portion 8,587 6,564 842
Income taxes payable 175 2,148 275
Taxes other than income 6,083 6,309 809
----------------- ----------------- -----------------
Total current liabilities 250,694 224,577 28,791
----------------- ----------------- -----------------
Deferred income - non-current portion 6,599 14,058 1,802
Deferred liabilities - non-current portion 9,114 9,180 1,177
Long-term bank loans - non-current portion 1,498 - -
Obligations under finance leases - non-current portion 716 - -
Deferred taxation 2,746 2,746 352
Minority interests 7,230 6,812 873
Commitments and contingencies 7
Stockholders' equity:
Common stock, par value US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 162 162 21
Retained earnings 36,049 34,859 4,470
----------------- ----------------- -----------------
Total stockholders' equity 36,289 35,099 4,501
----------------- ----------------- -----------------
Total liabilities and stockholders' equity 314,886 292,472 37,496
================= ================= =================
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on September 30, 2004 or at any other certain rate.
-2-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE NINE MONTHS FROM JANUARY 1, 2003 TO SEPTEMBER 30, 2003
AND JANUARY 1, 2004 TO SEPTEMBER 30, 2004
(in thousands)
Nine Months Ended September 30
------------------------------
2003 2004 2004
-------- -------- --------
HK$ HK$ US$
Cash flows from operating activities:
Net loss (37,913) (1,190) (152)
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Minority interests (364) (263) (34)
Depreciation 46,951 47,754 6,122
Loss on disposal of property, plant and equipment 206 50 7
Changes in working capital:
Trade receivables (1,468) 4,019 515
Rental and utility deposits (584) (62) (8)
Prepayments to vendors and suppliers and other current assets (4,287) 3,007 385
Inventories -- (2,481) (318)
Due from a related company (3,171) (1,023) (131)
Trade and other payables 232 (28,922) (3,708)
Deferred income 35,063 21,299 2,730
Deferred liabilities 7,312 (1,957) (251)
Income taxes payable/recoverable (5,751) 1,366 175
Taxes other than income (109) 226 29
-------- -------- --------
Net cash provided by operating activities 36,117 41,823 5,361
-------- -------- --------
Cash flows from investing activities:
Prepayments for construction-in-progress (10,849) (4,132) (530)
Acquisition of property, plant and equipment (14,647) (26,310) (3,372)
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 157 230 29
-------- -------- --------
Net cash used in investing activities (23,975) (31,202) (4,000)
-------- -------- --------
Cash flows from financing activities:
(Increase) Decrease in bank deposits, collateralized (2,191) 2,591 332
Due from a stockholder 3,501 -- --
Settlement of short-term bank loans (2,434) (3,305) (424)
Proceeds from long-term bank loans 7,338 -- --
Repayment of long-term bank loans (12,959) (5,406) (693)
Assumption of finance lease obligations 1,800 -- --
Capital element of finance lease rental payments (7,418) (4,714) (604)
-------- -------- --------
Net cash used in financing activities (12,363) (10,834) (1,389)
-------- -------- --------
Net decrease in cash and cash equivalents (221) (213) (28)
Cash and cash equivalents at beginning of period 1,336 1,806 232
-------- -------- --------
Cash and cash equivalents at end of period 1,115 1,593 204
======== ======== ========
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 September 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 nine-month period
ended September 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$163,573
as of December 31, 2003 and September 30, 2004. Besides, the Group has incurred
net loss for the nine-month periods ended September 30, 2003 and 2004 of
HK$37,913 HK$1,190 respectively. The Group has also experienced net loss of
HK$9,621 and HK$1,640 for the three-month periods ended September 30, 2003 and
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
At its November 2003 meeting, the EITF of the FASB reached a consensus
in EITF Issue No. 03-01 regarding disclosures to be made when held-to-maturity
or available-for-sale investments are impaired at the balance sheet date but for
which an "other-than-temporary" loss has not been recognized. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004, while the disclosure requirements are effective for annual
periods ending after June 15, 2004. On October 1, 2004, the EITF delayed the
effective date to apply the measurement and recognition provisions relating to
debt and equity securities until the FASB issues additional guidance. The
Company will adopt the disclosure provisions of EITF 03-1 for the fiscal year
ended December 31, 2005. The adoption did not have a material impact on the
consolidated financial statements, results of operations or liquidity of the
Company.
-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 SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
--------------------------------- ---------------------------------
2003 2004 2004 2003 2004 2004
--------- --------- --------- --------- --------- ---------
HK$ HK$ US$ HK$ HK$ US$
Operating revenues
- Physical fitness 67,670 75,018 9,618 193,768 228,270 29,265
- Beauty treatments 47,309 50,208 6,437 129,246 154,960 19,867
- Others 193 33 4 296 181 23
--------- --------- --------- --------- --------- ---------
115,082 125,259 16,059 323,310 383,411 49,155
========= ========= ========= ========= ========= =========
Net loss
- Physical fitness (11,383) (55) (7) (33,907) (1,114) (142)
- Beauty treatments 1,659 (1,551) (199) (4,302) 134 17
- Others 103 (34) (4) 296 (210) (27)
--------- --------- --------- --------- --------- ---------
(9,621) (1,640) (210) (37,913) (1,190) (152)
(Benefit) Provision for income taxes
included in segment (loss) income above (201) (441) (57) 51 2,248 288
Minority interests included
in segment (loss) income above (131) (425) (54) (364) (263) (34)
--------- --------- --------- --------- --------- ---------
(Loss) Income before income
taxes and minority interests (9,953) (2,506) (321) (38,226) 795 102
========= ========= ========= ========= ========= =========
-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 did not obtain additional long-term bank loans during the
nine-month period ended September 30, 2004.
During the nine months ended September 30 2004, the Group repaid
HK$5,406 of its outstanding bank loans. The outstanding loan balances as of
September 30, 2004 were analyzed as follows:
PRINCIPAL INTEREST RATE MATURITY
--------- ------------- --------
HK$ US$
4,700 603 6.138% Within one year
1,666 213 HK$ prime + 1.5% Within one year
------- -------
6,366 816
======= =======
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 September 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 nine months ended September 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 Nine Months Ended
September 30 September 30
2003 2004 2003 2004
----------- ----------- ----------- -----------
Operating Revenues 100.00% 100.00% 100.00% 100.00%
Total operating expenses (106.94%) (101.03%) (110.32%) (99.00%)
Operating (loss) income (6.94%) (1.03%) (10.32%) 1.00%
(Loss) Income before income taxes and
minority interests (8.65%) (2.00%) (11.82%) 0.21%
Benefit (Provision) for income taxes 0.18% 0.35% (0.02%) (0.59%)
Minority interests 0.11% 0.34% 0.11% 0.07%
Net loss (8.36%) (1.31%) (11.73%) (0.31%)
=========== =========== =========== ==========
THREE MONTHS ENDED SEPTMEBER 30, 2004 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003 (UNAUDITED).
- --------------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues increased 9% to
HK$125,259,000 (US$16,059,000) in the third quarter of 2004 as compared to
HK$115,082,000 (US$14,754,000) of the same period last year.
Operating revenues derived by the Company's fitness services increased
11% to HK$75,018,000 (US$9,618,000) compared to HK$67,670,000 (US$8,676,000) of
last year. Fitness revenues as a percentage of total revenues were 60% in the
third quarter of 2004 as compared to 59% in the third quarter of 2003.
Operating revenues from the Company's beauty treatment business totaled
HK$50,208,000 (US$6,437,000) compared to HK$47,309,000 (US$6,065,000) of last
year, representing an increase of 6%. Beauty treatment revenues as a percentage
of total revenues were 40% in the third quarter of 2004 as compared to 41% of
2003.
-8-
OPERATING EXPENSES. The Company's operating expenses for the third
quarter of 2004 totaled HK$126,553,000 (US$16,225,000) compared to
HK$123,066,000 (US$15,778,000) in 2003, representing an increase of 3%. 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 101% of total operating revenue in the quarter ended September
30, 2004 as compared to 107% of 2003.
TOTAL NON-OPERATING EXPENSES. Non-operating expenses for the third
quarter of 2004 totaled HK$1,212,000 (US$155,000) compared to HK$1,969,000
(US$252,000) in 2003. This represents a decrease of 38% mainly due to lower
interest expenses.
BENEFIT FOR INCOME TAXES. Benefit for income taxes for the third
quarter of 2004 totaled HK$441,000 (US$57,000) compared to HK$201,000
(US$26,000) in the third quarter of 2003, representing an increase of HK$240,000
(US$31,000) or 119%. Both periods involved an adjustment of overprovision for
income taxes as a result of losses incurred.
NET LOSS. The Company reported a net loss of HK$1,640,000 (US$210,000)
for the third quarter of 2004, compared to a net loss of HK$9,621,000
(US$1,233,000) for 2003, representing a decrease of HK$7,981,000 (US$1,023,000)
or 83%. 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-
NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED) COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003 (UNAUDITED).
- ----------------------------------------------------------------------------
OPERATING REVENUES. Operating revenues for the first nine months of
2004 totaled HK$383,411,000 (US$49,155,000) compared to HK$323,310,000
(US$41,450,000) of last year, representing an increase of 19%.
Operating revenues derived by the Company's fitness services increased
18% to HK$228,270,000 (US$29,265,000) compared to HK$193,768,000 (US$24,842,000)
in 2003. Fitness revenues as a percentage of total revenues were 60% in the
first nine months of 2004, same as last year.
Operating revenues from the Company's beauty treatment business
increased 20% to HK$154,960,000 (US$19,867,000) in the first nine months of 2004
compared to HK$129,246,000 (US$16,570,000) of last year. Beauty treatment
revenues as a percentage of total revenues were 40% in the first nine months of
2004 and 2003.
OPERATING EXPENSES. The Company's operating expenses for the first nine
months of 2004 totaled HK$379,578,000 (US$48,664,000) compared to HK$356,666,000
(US$45,726,000) in the first nine months of 2003, representing an increase of
6%. 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 99% of total operating revenue as compared to 103% of
last year.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first nine months of 2004 totaled HK$3,038,000 (US$389,000) compared to
HK$4,870,000 (US$624,000) in the first nine months of 2003. This represents a
decrease of 38% mainly due to lower interest expenses and the recognition of
management service income.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
nine months of 2004 totaled HK$2,248,000 (US$288,000) compared to HK$51,000
(US$7,000) in the first nine months of 2003, representing an increase of 4308%.
NET LOSS. The Company had a net loss of HK$1,190,000 (US$152,000) for
the first nine months of 2004, compared to a net loss of HK$37,913,000
(US$4,861,000) for the first nine months of 2003, representing a decrease of
97%. Management believes that the Company is able to benefit from improved
economic outlook and consumer confidence in the last 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 as of September 30, 2004 and December
31, 2003 were HK$1,593,000 (US$204,000) and HK$1,806,000 (US$232,000).
Net cash provided by operating activities were HK$36,117,000
(US$4,630,000) and HK$41,823,000 (US$5,361,000) for the nine-month periods ended
September 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$23,975,000 (US$3,074,000) and HK$31,202,000
(US$4,000,000) for the nine-month periods ended September 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$12,363,000 (US$1,585,000)
and HK$10,834,000 (US$1,389,000) in the nine-month periods ended September 30,
2003 and 2004, respectively.
During the nine-month period ended September 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 6.138% to 6.75% per annum. The
total balance outstanding as of September 30, 2004 on such loans was
HK$6,366,000 (US$816,000). The last repayment on the loans is due in 2005. 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 nine-month period ended September 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 September 30, 2004, was
HK$4,919,000 (US$631,000). 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 nine-month period
ended September 30, 2004, were HK$46,159,000 (US$5,918,000) and HK$26,310,000
(US$3,372,000) 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: November 19, 2004 /s/ Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Date: November 19, 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.
11/19/04 /s/ Ngai Keung Luk
- --------------- -------------------------------------
Date Chairman and Chief Executive Officer
11/19/04 /s/ Robert Chui
- --------------- -------------------------------------
Date Chief Financial Officer