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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ____________________ to ____________________
Commission file number 026573
------
PHYSICAL SPA & FITNESS INC.
- --------------------------------------------------------------------------------
(Exact name of issuer in its charter)
DELAWARE 98-0203281
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
40/F., RBS Tower, Times Square,
No. 1 Matheson Street, Causeway Bay
Hong Kong Not applicable
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 852 2917-0000
-------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
State issuer's revenues for its most recent fiscal year: $64,336,000
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of April 12, 2005 was $800,000 based
upon the average of the last available bid and asked price of the Common Stock
of $0.40 as of April 12, 2005.
Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]
The number of shares outstanding of the registrant's classes of common
stock as of April 12, 2005: Common Stock, $.001 Par Value, 10,000,000 shares
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SHAREHOLDERS AND PROSPECTIVE
SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY
FORWARD-LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE
OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED HEREIN. THESE FORWARD-LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES
OF MANAGEMENT FOR FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO
THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS
RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS,
FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS,
AND THE TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS,
ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH
ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL
EXPERIENCE AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING,
CAPITAL EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE
COMPANY'S RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES
INHERENT IN THE FORWARD LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF
ANY SUCH STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR
ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
ITEM 1. BUSINESS
BACKGROUND OF THE COMPANY
Physical Spa & Fitness Inc. (the "Company"), through its subsidiaries,
operates fitness and spa centers in Hong Kong and the People's Republic of China
("China" or the "PRC"). The Company currently operates eighteen facilities:
thirteen in Hong Kong and five in China (including one in Macau) under the name
"PHYSICAL", with the exception of Renaissance Beauty Centre (see "Company
Organization"). All of the Company's operations, including the operating of the
fitness and spa centers, property holding, investment holding and other
corporate activities are conducted through the Company's wholly-owned or
majority-owned subsidiaries or joint ventures (see "Business of the Company
Organization"). The fitness and spa centers in Hong Kong are operated by the
Company's subsidiaries. Physical Health Centre Hong Kong Limited, a Hong Kong
corporation and a majority (91.4%) owned subsidiary of the Company, operates the
following centers in Hong Kong: Causeway Bay, Tsimshatsui, Mei Foo (two
centers) and Kowloon City. Another seven wholly owned subsidiaries of the
Company, Physical Health Centre (Tsuen Wan) Limited, Physical Health Center
(TST) Limited, Physical Health Centre (Tuen Mun) Limited, Physical Health Centre
(E House) Limited, Physical Beauty Centre (Central) Limited, Physical Health
Centre (Kornhill) Limited, and Physical Health Centre (Shatin) Limited
respectively operates the Tsuen Wan Center (opened in July, 1998), the Sheraton
Hotel Center (opened in July, 1999), the Tuen Mun Center (opened in July, 2000),
the Elizabeth House Center (opened in April, 2001), the Wing On Centre (opened
in April, 2002), the Kornhill Center (opened in June, 2002), and the Citylink,
Shatin Center (opened in November, 2003). All of these companies are Hong Kong
corporations. Renaissance Beauty Centre is operated by Supreme Resources
Limited, a Hong Kong corporation, which is a wholly-owned subsidiary of the
Company.
1
The Company's facilities in China are operated by a wholly owned
foreign enterprise, Shanghai Physical Fitness & Beauty Centre Co., Ltd.
("Shanghai PRC", formerly known as a joint venture or "Shanghai Joint Venture"),
which operates three centers in the city of Shanghai, and a joint venture,
Dalian Physical Ladies' Club Co., Ltd. ("Dalian Joint Venture"), which operates
fitness and spa facility in the city of Dalian. The Company, through its
subsidiaries, holds a 100% (formerly 99%) interest in the Shanghai PRC and a 90%
interest in the Dalian Joint Venture. The minority interests in the latter are
held by the joint venture's Chinese partner. Sine 2004, China regulations of the
fitness and spa facilities have been amended to allow the wholly owned foreign
enterprises running this type of business on their own. See "Government
Regulation - China".
In September, 2003, the Company was engaged by a third party to manage
a fitness and spa center in Hangzhou, China. The center, which is under
franchise of the Company, commenced operation in April, 2004 and generated
management fee income for the Company. See Notes to Financial Statements (Note
15 "Other Supplemental Information").
The Company's facility in Macau is operated by a wholly-owned
subsidiary of the Company, Su Sec Pou Physical Health Centre (Macau) Limited,
which is a Macau corporation.
The Company provides its customers, at each location, with access to a
wide range of U.S.-styled fitness and spa services. The Company offers to its
customers the fitness cards for the use of its fitness facilities, which include
extensive aerobics programs, personalized training, cardiovascular conditioning
and strength training. The facilities are equipped with the latest Western
exercise equipment, including Life Fitness, Cybex, Flex and Precor. Spa and
beauty treatment services are provided to both customers and visitors, and
include skin care and facial treatments, massage, spa relaxation programs and
weight-management programs. The Company also sells at the facilities health food
and European beauty products. Based on the number of the Company's customers,
management believes that the Company is among the top providers of fitness,
exercise, and spa/beauty treatment services in Hong Kong and China, with
approximately 110,000 customers.
The Company's strategy is to provide a one-stop fitness and beauty
center for its customers. Management believes that the Company's strong market
presence in Hong Kong and its successful entrance into China's market is a
result of its strategy of offering state-of-the-art exercise equipment, high
quality beauty treatments and professional staff.
The Company believes that it is one of the first companies to provide
Western fitness and spa services in China. In 1994, the predecessor companies of
Physical Beauty & Fitness Holdings Limited, a British Virgin Islands corporation
("Physical Limited"), the holding company of the Company's subsidiaries, began a
process of expansion into targeted market segments in China. In 1994, the
Company through Shanghai Joint Venture opened the Company's first China
operation in Huangpu, Shanghai, with a fitness center to provide fitness and spa
treatment facilities. Another center of similar size was opened in Hongqiao,
Shanghai in September 1995, through Shanghai Joint Venture. The Huangpu and
Hongqiao centers were respectively relocated to Lu Wan (October, 2002) and Xu
Hui (March, 2001) with enhanced facilities. A third China operation in Dalian
commenced in April 1996 and is conducted through Dalian Joint Venture. In
February, 2005, the Shanghai PRC opened its third center in Huangpu, Shanghai.
See "Business of the Company - Organization". The Company's facilities in China
are operated under the trade name "Physical", and the Company registered a
servicemark under that name in Chinese language, which precludes others from the
use of the same name. See "Business of the Company - Trademarks and Trade
Names".
In the opinion of the Company's management, current competition in
China is becoming keen as the fitness and spa industry has attained its growth
stage with increased new entrants from both domestic and global market. The
Company expects that rising consumer incomes, increasing health awareness and
growing access to foreign goods and trends, should continue to create increased
demand for fitness and spa services in China. The Company explores the
possibilities of opening these centers in the future, however, there can be no
assurances given that such centers will start operations or be opened as
currently contemplated by the management. See "Business of the Company -
Business Strategy".
The Company's strategy for maintaining its strong presence in Hong Kong
is to continue to provide existing and new customers with high quality services
at an affordable price and by periodically upgrading the facilities as new
developments and technology emerge in the industry. The Company's objective is
to add new services and treatments to keep the Company current with market
trends and to promote and enhance the Company's reputation of providing value-
driven services to its customers. The Company places heavy emphasis on staff
training which is supported by an in-house training department and on-going
classes.
2
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions. Prior to acquisition of Physical Limited,
the Company had no revenue producing operations, but planned to enter into joint
ventures and/or acquisitions originally in the area of real estate to expand its
operations. In October, 1996, the Company closed a transaction with Ngai Keung
Luk (Serleo), a 100% shareholder of Physical Limited, whereby the Company
entered into a Share Exchange Agreement with Ngai Keung Luk (Serleo), pursuant
to which the Company issued 8,000,000 shares of its Common Stock to Ngai Keung
Luk (Serleo) in exchange for all of the outstanding shares of Physical Limited
(the "Closing"). Subsequently, the Company changed its name to "Physical Spa &
Fitness Inc." in November, 1996, to reflect the new business operations of the
Company. At the Closing the then current management of the Company resigned and
was replaced by the current management of the Company. See "Management."
The Company effected a 1.333333-for-1 reverse split of its common stock
in October 1997 and a 1-for-1.333333 forward split of its common stock in June
1998. All references in this Report to shares of Common Stock of the Company
have been adjusted for the effects of the reverse stock split and forward stock
split.
Since December 20, 2001, the Company has maintained its executive and
administrative office in Hong Kong at:
40/F., RBS Tower, Times Square,
No. 1 Matheson Street, Causeway Bay, HONG KONG
The telephone number of the Company in Hong Kong is (852) 2917-0000.
Unless the context requires otherwise, as used herein, any reference to
the Company includes the Company's subsidiaries - Physical Beauty & Fitness
Holdings Limited, Physical Health Centre Hong Kong Ltd., Regent Town Holdings
Ltd., Supreme Resources Ltd., Physical Health Centre (Tuen Mun) Ltd., Zhongshan
Physical Ladies' Club Co., Ltd., Ever Growth Ltd., Proline Holdings Ltd.,
Physical Health Centre (Shanghai) Limited, Shanghai Physical Fitness & Beauty
Centre Co., Ltd., Jade Regal Holdings Ltd., Physical Health Centre( Dalian)
Ltd., Dalian Physical Ladies' Club Co., Ltd., Star Perfection Holdings Ltd.,
Physical Health Centre (Shenzhen) Ltd., Shenzhen Physical Ladies' Club Co.,
Ltd., Physical Health Centre (Tsuen Wan) Limited, Physical Health Centre (Macau)
Limited, Su Sec Pou Physical Health Centre (Macau) Limited, Physical Health
Centre (TST) Limited, Physical Health Centre (E House) Limited, Physical Beauty
Centre (Central) Limited, Physical Health Centre (Shatin) Limited, Physical
Health Centre (Kornhill) Limited, and Physical Health Centre (Central) Limited.
See also "Business - Organization".
THE COMPANY'S BUSINESS
General
- -------
The Company's fitness and spa centers are located in or near urban
areas in highly populated areas of Hong Kong and major metropolitan cities in
China and most of them are operated under long-term leases. With the exception
of Mei Foo fitness center, a portion of which is owned by the Company (see
"Business - Properties"), the Company does not own the real property on which
the centers are located, but owns the leasehold improvements and equipment with
respect to each center. Generally, the Company's centers average 30,000 square
feet and include a workout area for aerobic classes, a broad range of fitness
equipment, changing room, shower room, sauna and steam facilities and a separate
area devoted exclusively to professional spa and beauty treatment programs. Each
center typically includes a laser TV room, health drink bar and sells a range of
European beauty products and health food.
3
Organization
- ------------
The Company's operations are conducted through its subsidiaries in Hong
Kong and Sino-foreign joint ventures in China. A number of the Company's
subsidiaries have been incorporated in the British Virgin Islands, primarily for
tax reasons. Such structure provides greater flexibility for the Company in
obtaining tax benefits, especially in case of corporate accounts. Set forth
below is the description of the Company's subsidiaries and their respective
roles in the organizational structure of the Company.
EQUITY INTEREST
DATE OF ACQUISITION / PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY FORMATION INCORPORATION COMPANY ACTIVITIES
--------------- --------- ------------- ------- ----------
Direct Indirect
------ --------
Physical Beauty and March 8, 1996 BVI 100% - Investment
Fitness Holdings holding
Limited ("Physical
Limited")
Ever Growth Limited September 29, 1994 HK - 100% Property
("Ever Growth") holding
Physical Health Centre December 1, 1998 HK - 100% Operate a
(E House) Limited fitness
center
in
Hong Kong
Jade Regal Holdings March 15, 1996 BVI - 100% Investment
Limited ("Jade Regal") holding
Physical Beauty Centre September 14, 2001 HK - 100% Operating
(Central) Limited** a beauty
center in
Hong Kong
Physical Health Centre March 15, 1996 HK - 100% Investment
(Dalian) Limited holding
("Dailan Physical")
Physical Health Centre December 31, 2001 HK - 100% Operating a
(Kornhill) Limited** fitness and
beauty center
in Hong Kong
Physical Health Centre March 21, 1997 HK - 100% Investment
(Macau) Limited holding
Physical Health Centre May 30, 2001 HK - 100% Operating a
(Shatin) Limited** fitness and
beauty center
in Hong Kong
Physical Health Centre April 15, 1996 HK - 100% Investment
(Shenzhen) Limied holding
("Shenzhen Physical")
Physical Health Centre November 18, 1998 HK - 100% Operating a
(TST) Limited fitness and
("Physical TST") beauty center
in Hong Kong
Physical Health Centre September 8, 1997 HK - 100% Operating a
(Tsuen Wan) Limited fitness and
("Physical Tsuen Wan") beauty center
in Hong Kong
Physical Health Centre September 29, 1994 HK - 100% Operating a
(Tuen Mun) Limited fitness
center in
Hong Kong
Physical Health Centre March 2, 1990 HK - 91.4% Operating 2
Hong Kong Limited fitness and
("Hong Kong Limited") beauty centers,
1 fitness center
and 2 beauty
centers in
Hong Kong
4
EQUITY INTEREST
DATE OF ACQUISITION / PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY FORMATION INCORPORATION COMPANY ACTIVITIES
--------------- --------- ------------- ------- ----------
Direct Indirect
------ --------
Proline Holdings Limited September 28, 1994 BVI - 100% Investment
("Proline") holding
Regent Town Holdings September 20, 1993 BVI - 100% Investment
Limited ("Regent") holding
Physical Health Centre September 28, 1994 HK - 100% Investment
(Shanghai) Limited holding
("Shanghai Physical")
Star Perfection Holdings April 15, 1996 BVI - 100% Investment
Limited ("Star holding
Perfection")
Supreme Resources Limited September 29, 1994 HK - 100% Operating a
("Supreme") beauty
center in
Hong Kong
Su Sec Pou Physical Health August 18, 1997 Macau - 100% Operating a
Centre (Macau), Limited fitness
center in
Macau
Physical Health Centre August 9, 2002 HK - 100% Inactive
(Central) Limited**
See also Notes to the Financial Statements
5
See also "Company" - Properties". The Company's organizational chart is set
forth below.
ORGANIZATION CHART OF PHYSICAL SPA & FITNESS INC.
--------------------------------------------------
Physical Spa & Fitness Inc.
US
|
|100%
|
Physical Beauty & Fitness
Holdings Limited
BVI
|
|
- ---|-----------|----------|----------|----------|----------|-----------|--------------|---------------|---------|----------|-------
|100%* |100%* |100% |100% |91.40% |100%* |100% |100%* |100%* |100%* |100%*
- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ----------------- ---------- --------- -----------
Supreme Physical Regent Jade Physical Physical Star Physical Physical Ever Physical
Resources Health Town Regal Health Health Perfection Health Health Growth Health
Limited Centre Holdings Holdings Centre Centre Holdings Centre Centre Limited Centre
(E House) Limited Limited Hong Kong (Tsuen Wan) Limited (Tuen Mun) (TST) (Macau)
Limited Limited Limited Limited Limited Limited
HK HK BVI BVI HK HK BVI HK HK HK HK
- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ----------------- ---------- --------- -----------
| | | | | | | | | | |
|100% |100% |100% |100%* |100% |100% |100%* 100%---|---95% |100% |100% |100%
Renaissance Causeway Proline Physical | Tsuen Wan Physical Tuen Mun| Zhongshan Tsim- Property Su Sec Pou
Beauty Bay Holdings Health | Health Centre Health | Joint shatsui in Physical
Center -E House Limited Centre | Centre | Venture -Sheraton Mei Foo Health
(Dalian) | (Shenzhen) Centre
Limited | Limited (Macau),
| Limited
HK HK BVI HK | HK HK HK HK Macau
- ----------- ---------- ---------- --------- | ----------- ----------- --------- ---------- ---------
| | | |
|100%* |90% | |90%
Physical | | |
Health | | |
Centre | | |
(Shanghai) | | |
Limited | | |
HK | Causeway Bay |
---------- | Tsimshatsui |
| | Kowloon City |
|100% | Mei Foo (Fitness) |
| | Mei Foo (Beauty) |
Shanghai Dalian Shenzhen
PRC Joint Joint
Venture HK Venture
----------
*50% held by one nominee shareholder. Since the Companies Ordinance of Hong Kong
required a minimum of 2 shareholders for each limited company prior to February
13, 2004, Mr. Luk holds the remaining shares on behalf of Physical Beauty &
Fitness Holdings Ltd.
** Physical Beauty Centre (Central) Limited, Physical Health Centre (Kornhill)
Limited, Physical Health Centre (Shatin) Limited, and Physical Health Centre
(Central) Limited are not shown in the above chart.
6
OWNERSHIP STRUCTURES IN CHINA
The organizational structure of the Company's operations in China is set
forth below.
INTEREST TERM REGISTERED
TYPE OF OWNED BY OF THE CAPITAL
NAME OF THE JOINT THE JOINT (AMOUNT IN
COMPANY LOCATION VENTURE COMPANY VENTURE THOUSAND) PROFIT SHARING
- ----------------- ------------ ---------- ---------- -------- ---------------- ------------------------------------
Shanghai Lu Wan, N/A 100% N/A US$2,000 N/A
Physical Xu Hui,
Fitness and
& Beauty Huangpu,
Centre Shanghai
Co., Ltd.
("Shanghai
PRC")
Dalian Physical Dalian Equity 90% 12 Rmb1,000 in Pro-rata to equity interests
Ladies' Club years cash and
Co., Ltd. Rmb9,000
("Dalian Joint in form of
Venture") fixed assets
and renovation
materials
Shenzhen Shenzhen Co-operative 90% 10 HK$4,600 in Pro-rata to equity interests
Physical years form of cash
Ladies' Club and fixed
Co., Ltd. assets
("Shenzhen
Joint
Venture")
Zhongshan Zhongshan Co-operative 95% 10 US$500 in form Pro-rata to equity interests
Physical years of cash and
Ladies' Club fixed assets
Co., Ltd.
("Zhongshan
Joint Venture")
See also Notes to the Financial Statements
SHANGHAI PRC. The Shanghai PRC was formerly a Sino-foreign
cooperative joint venture established on September 7, 1993 in Shanghai, China.
On May 28, 2004, the Company was approved to register as a wholly owned foreign
enterprise which is owned by Physical Shanghai.
DALIAN JOINT VENTURE. On April 11, 1995, Physical Health Centre
(Dalian) Limited, a Hong Kong corporation ("Dalian Physical") formed a
Sino-foreign equity joint venture with a Chinese enterprise to operate a
fitness/ spa center in Dalian, China. The joint venture period is 12 years from
the issue of the business license on April 11, 1995. The equity interest of
Dalian Physical is 90% and the Chinese joint venture partner's equity interest
is 10%. The joint venture commenced effective operations in April 1996.
7
ZHONGSHAN JOINT VENTURE. In June 1996, Physical Health Center (Zhong
Shan) Ltd. ("Zhongshan Physical", now known as Physical Health Centre (Tuen Mun)
Limited), entered into a joint venture contract, as supplemented in August,
1996, with a Chinese enterprise in Zhongshan, China to establish a Sino-foreign
cooperative joint venture for the provision of fitness and spa services. Prior
to the date of this report, however, the Company has verbally agreed with the
Chinese enterprise to terminate the joint venture contract.
SHENZHEN JOINT VENTURE. In 1996, Shenzhen Physical Ladies' Club Co.,
Ltd., entered into a joint venture contract with a Chinese enterprise in
Shenzhen, China to establish a Sino-foreign cooperative joint venture for the
provision of fitness and spa services. Prior to the date of this report,
however, the Company has verbally agreed with the Chinese partner to terminate
the joint venture contract.
Since Shanghai PRC and Dalian Joint Venture operate in China, they are
subject to special considerations and significant risks not typically associated
with investments in equity securities of the United States or Western European
countries.
OVERVIEW OF THE COMPANY'S MARKETS
HONG KONG
- ---------
FITNESS
- -------
The concept of preventive health care and physical fitness, which
became popular in Hong Kong in the early 1980's, was introduced from the United
States and Europe. With the growing affluence of the local population and
improvement in their standard of living, people began to immerse in physical
exercise to maintain a fit and healthy body. The fitness trend grew in Hong Kong
and gained popularity within the high income group initially.
To cater to this new industry, a number of fitness centers were
established in Hong Kong which provided a variety of exercise equipment as well
as aerobic dance classes. Private clubs (dining clubs, marina clubs,
entertainment clubs) targeted towards the upper income group also began to
provide similar services to their members or expanded their existing facilities.
The majority of these fitness centers targeted the high income group,
were very exclusive, and entrance fees or membership fees were generally high.
Under this marketing strategy, these fitness centers were restricted to a
comparatively small number of potential customers. Additionally, some of these
fitness centers were affected by the migration boom of Hong Kong in the mid
1980's. At that time, a large number of professionals migrated from Hong Kong to
other countries to pursue educational and economic opportunities. This migration
boom affected the customer base of these fitness centers and thus decreased the
viability of their business. As a result, fitness centers targeting the high
income group in Hong Kong were vulnerable and underwent a period of
consolidation. Later on, as the market developed, a market niche emerged for
fitness centers catering to the middle income group.
SPA
- ---
The spa industry in Hong Kong, which includes the skin care or beauty
industry, is rather fragmented with a large number of small operations. It is
common that certain spa and beauty treatments are provided by a wide range of
establishments including beauty salons, hair salons, and even cosmetic counters
situated in department stores. The standard of services for beauty treatments
varies widely. Normally, the customer base of these operations is confined to a
relatively limited number of frequent customers. Exclusive private clubs that
cater to a small percentage of wealthy Hong Kong women and the inconsistent
quality and skill level of small operations have increased the demand for middle
market skin care treatments since late `80S.
See also "Competition".
8
CHINA
- -----
FITNESS
- -------
In China, the concept of physical fitness has a long history, but it
was not widely practiced, except by the 50+ generation. Even China's famous Tai'
Chi is seldom practiced by young people. Organized sports for recreation are
more popular, though sports centers are in the Management's opinion generally
ill equipped and out of date. It appears that intensive training in a particular
sport is only available to a minority of people. Physical fitness centers are
usually in the form of gymnasiums run by state-owned sports authorities.
A handful of small clubs with standard facilities have opened since
early '90S, but offer, in the Management's opinion, a limited selection of
locally made, out-of-date equipment (as compared to the equipment used in the
Company's centers). Such facilities are frequented by more men than women, as
they tend to be equipped with barbells and weights.
The Company believes that aerobics is gaining popularity with the
influx of follow-along television programs. The Management observed that the
overall improved lifestyle; availability of fast food and convenience foods,
increased spending power, and increasingly sedentary lifestyles of Chinese
people, has led to a widespread concern for weight control. The Management
believes that aerobics especially appeals to women in China, as large
percentages of women seem to be concerned with losing weight.
In recent years, several fitness centers have entered into the market.
They are well-equipped with the latest brands of Western-styled exercise
machines and help enhance the popularity of the fitness industry.
SPA
- ---
The Company noted that Western-styled spa and beauty treatments has
become increasingly common and popular in China. Home-treatments, using
cosmetics purchased in department stores, have also become very common. However,
in the Management's opinion standards of skill and hygiene tend to be poor, as
is the quality of products used, as compared to those provided by the Company's
centers.
In mid-90'S, several Hong Kong and Japanese companies set up spa/beauty
centers of varieties of facilities. More and more internationally recognized
skin care lines have also become available in department stores. Those
department stores often hold in-house promotions to demonstrate their products
and educate potential customers. It appears that the desire to own anything
imported, including skin care products, is considered prestigious and is
therefore highly desired by Chinese women. The Management noticed that the
demand for "foreign" spa treatments and beauty salons, and imported products is
high. The local and international media is introducing fitness and skin care
news to a growing receptive audience. The Company believes that the demand for
affordable, value-driven beauty and skin care has increased.
HISTORY
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions. Prior to acquisition of Physical Beauty &
Fitness Holdings Limited, a British Virgin Islands corporation ("Physical
Limited"), the Company had no revenue producing operations, but planned to enter
into joint ventures and/or acquisitions originally in the area of real estate,
to expand its operations. In October, 1996, the Company closed a transaction
with Ngai Keung Luk (Serleo), a 100% shareholder of Physical Limited, whereby
the Company entered into a Share Exchange Agreement with Ngai Keung Luk
(Serleo). Physical Limited was incorporated on March 8, 1996 under the laws of
British Virgin Islands and has interests in various companies operating fitness
and beauty centers and other related businesses in Hong Kong and China (see
"Company-Organization"). Pursuant to the Share Exchange Agreement, the Company
issued 8,000,000 shares of its Common Stock to Ngai Keung Luk (Serleo) in
exchange for all of the outstanding shares of Physical Limited (the "Closing").
Subsequently, the Company changed its name to "Physical Spa & Fitness Inc." in
November, 1996, to reflect the new business operations of the Company. At the
Closing the then current management of the Company resigned and was replaced by
the current management of the Company. See "Management."
9
In 1986, the founder and principal shareholder of the Company, Ngai
Keung Luk (Serleo), set up the first fitness center under the trade name of
"Physical" with the objective of providing physical fitness and spa treatment
services at prices which could be afforded by a rapidly growing middle class
population in Hong Kong. Two years later in 1988, another center was founded in
Hong Kong. The businesses of these centers were operated in a form of a sole
proprietorship and were subsequently transferred to Physical Health Centre Hong
Kong Limited, a Hong Kong corporation established on March 2, 1990 ("Hong Kong
Limited"). During the period from 1990 to 1996, Hong Kong Limited and Physical
Limited expanded their scope of operations by acquiring and establishing several
subsidiaries and by forming Sino-foreign joint ventures in China to operate four
additional fitness/spa centers in Hong Kong, three in China and other related
businesses (see "Company - Organization"). The subsidiary companies were all
formerly owned by Mr. Luk and other principal shareholders, or solely by Mr.
Luk. The respective equity interests were transferred by Mr. Luk and other
principal shareholders to Hong Kong Limited or Physical Limited throughout 1993
to 1996 at the original cost of the respective investments. In October, 1996,
91.4% of the equity interests of Hong Kong Limited was transferred by the
principal and other shareholders (including Mr. Luk) to Physical Limited at the
par value of the shares transferred. In addition, all the equity interests of
Hong Kong Limited in various subsidiaries and Sino-foreign joint-ventures were
also transferred to Physical Limited at the recorded cost of these investments.
BUSINESS STRATEGY
The Company's strategy is to grow through expansion of its fitness and
spa facilities in Hong Kong and China, as well as to explore the opportunities
for its fitness and spa services in other countries of Far East. The Company
believes that it has a strong reputation in the Hong Kong and China markets in
which it presently operates. This belief is based on several factors, including
continuous operating presence of the Company in Hong Kong for the past years,
and the relationships in China established by the Company's executives,
management and staff over the last several years. The Company intends to
continue its policy of providing what it believes are first-quality,
comprehensive fitness and spa services in their respective markets at affordable
prices.
The Company seeks to expand its fitness and spa business from the
ground up as opposed to acquiring health and fitness clubs that are poorly
managed and/or financially distressed. The Company believes that the end result
of repositioning an existing center, which typically includes rebuilding a
customer base, renovations, additional equipment leasing, and re-training
existing staff, is less desirable than developing a new center.
The Company intends to build on its momentum, relationships and
standard of quality in several ways. First, the Company intends to expand its
presence in Hong Kong and China through the establishment of new fitness and spa
centers in Hong Kong (see "Business-Organization-Hong Kong") and China, and
through the addition of qualified personnel, including fitness instructors and
spa personnel in the existing facilities. Second, in conjunction with its
expansion, the Company intends to increase the variety of fitness and spa
services provided and products sold on a retail basis at each location.
The Company believes that its experience in and knowledge of the
fitness and spa industry in Hong Kong and China, as well as management's
continuous presence in Hong Kong (since 1986) and China (since 1994), positions
the Company to take advantage of perceived opportunities in this market.
Further, demographic developments in Hong Kong and China, continue to create
increasing demand for certain fitness and spa services. In this regard, the
Company opened planned centers in Tsuen Wan, Hong Kong (July, 1998), Sheraton
Hotel, Tsimatshui, Hong Kong (July, 1999), Tuen Mun, Hong Kong (July, 2000),
Macau (October, 2000), and Elizabeth House, Causeway Bay, Hong Kong (April,
2001). In early April, 2002, the Company opened a new beauty center in Central,
Hong Kong and expanded its Tsuen Wan fitness center to locate male customers.
The Company also established a new fitness/spa center in Kornhill, Hong Kong in
June, 2002.
10
- - BECOMING THE MARKET LEADER IN CHINA
In China, the Company is the first entrant into the market and has
secured a more established position than its competitors in the opinion of the
Management.
The planned expansion into China includes opening facilities in most
major cities and economically developing urban areas throughout the country by
way of direct investment or franchise, subject to then current market and other
conditions. According to the State Statistic Bureau of China, the population of
China exceeds 1.2 billion and there are currently thirty cities with populations
in excess of 1 million. The population of China is becoming increasingly
urbanized, and the tastes of the urban population is becoming increasingly
sophisticated. (Source: Hong Kong Trade Development Council).
Forty percent of the population of China lives in coastal areas, where
retail sales account for 60% of the country's total retail sales. Population
factors and strong spending power have led the Company to target coastal areas
for the spas to be developed (i.e. Dalian). Marketing programs carried out
nationwide, in the management's opinion, will enable the Company to benefit from
economies of scale, similar to what the Company experiences in Hong Kong.
The Company plans to open new centers in other major metropolitan
cities in China over the next several years. However, there is no assurance that
such centers will be opened as currently planned since they are subject to
changing political and economic conditions, as well as the Company's evaluation
of the applicable market conditions.
- - MAINTAINING A STRONG PRESENCE IN HONG KONG
The Company has well-established customer base and pre-dominant market
share in Hong Kong. The Board of Directors estimates that over 80 percent of the
Company's patrons are between the age of 20 to 40. Management believes that the
strong position held in the Hong Kong market can be maintained by continuously
upgrading facilities and services. The Company monitors this situation
continuously, and upgrades the fitness and spa areas on a regular basis. The
number of customers in each location is also carefully monitored in order to
ensure adequate levels of service to individual customers, particularly during
peak work-out periods. Branch Managers monitor the situation through direct
observation, customer feedback and surveys.
For spa personnel, intensive training is conducted in the in-house
training center and thorough on-the-job instruction. Selected employees are sent
to international workshops to study the latest techniques and to learn about new
products on the market. The Company seeks to satisfy its spa clients' needs with
the latest technology, expertise and a high level of service.
- - EXPLORING POTENTIAL MARKETS
The Company considers its market to be the greater Asia region. The
Company is also closely monitoring the market opportunities in other South East
Asian countries such as Taiwan, the Philippines, Thailand, Malaysia and
Indonesia.
11
FITNESS
The centers emphasize the benefits of health, physical fitness and
exercise by providing a wide range of exercise equipment from the United States
and Europe including free-weights, strength systems and cardiovascular machines
from manufacturers such as Life Fitness, Cybex , Flex, and Precor. The Company
places a particular emphasis on the quality of its fitness managers and
instructors by providing continuous training both in Hong Kong and overseas.
The centers also conduct daily dance classes which run for
approximately 45 minutes and are on a first-come, first-served basis. The
Company believes that the number of dance classes conducted by the Centers per
day is among the highest in Hong Kong. The variety of dance classes is
regularly updated in order to appeal to the interests of customers. Since
1995, the Company has recruited fully qualified and experienced aerobic
instructors from Australia.
The Company believes, based on customer survey responses, utilization
rates and the existence of underutilized space in its centers, that it has
sufficient excess capacity at its existing fitness centers to accommodate new
customers as well as comfortable usage by present customers.
SPA SERVICES
Spa services are open to both customers and walk-in guests. However,
customers of the centers have priority for such service facilities. Over 80
types of spa treatments are offered including facial treatments, various skin
care treatments, spa relaxation programs, massage, and weight-management
programs.
All of the centers have designated rooms for spa treatments in order to
ensure privacy. In view of the popularity of the spa treatments, the centers
have a booking system whereby sessions for such treatment are reserved in
advance. The centers offer special discounts to patrons for beauty treatments
during off-peak hours in order to maintain an even level of customers during the
day. In promoting the fitness training services provided by the centers, patrons
for spa treatments, who are not fitness customers of the centers, are eligible
to use all facilities of the centers including fitness training, on the day of
their visits for a spa treatment. The Company believes that this additional
service offers an advantage over its competitors who engage only in beauty
treatments.
The Company has a broad scale of fees for its spa services and believes
that these fees are both affordable and competitive in terms of the quality and
variety of services provided at the centers. The centers typically charge the
normal fee on spa treatment per session. However, discounts are given to those
patrons who purchase prepaid treatments. These treatments are valid within a
specified period of time.
12
The Company employs professional spa personnel who hold recognized
qualifications and adequate experience. Each center retains a specific manager
for spa treatments that supervises the spa personnel and other staff members of
the center. Each spa employee serves only one patron during the entire session
of spa treatment. The Company places great emphasis on providing continuous
training programs for its spa personnel so as to keep them informed of the
latest international developments in spa treatments, applications, technology
and equipment.
RETAIL
The Company sells a range of fitness related products such as
sun-tanning lotion and health food (since 2003) at selected fitness centers,
and European skin care products at all of its beauty centers. These products
are intended to add value to the services and increase the Company's revenues.
SERVICES
The Company currently offers prospective customers a fitness plan. Fees
for services at each facility depend on the location and demand for such
services at that facility. Marketing of the Company's services is targeted
towards the middle income population in the 18 to 45 years old range.
Under the plans, new customers are charged a registration fee upon
admission and a monthly fee each month to maintain their privileges. The initial
registration fees are non-refundable and range from approximately HK$200
(US$26) to HK$2,000 (US$256), depending on the diversity of facilities and
services available at the enrolling center, the local competitive environment,
as well as the effects of seasonal price strategies. The Hong Kong centers from
times to times are launching promotion at a special fee of HK$600 (US$77). 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. Customers are also provided on a monthly basis 10 aerobic coupons on
complementary basis at Hong Kong locations. Any customer who attends additional
classes has to purchase coupons at HK$15 (US$2) each. China locations include
aerobics classes with monthly dues.
In order to allow greater flexibility to its customers, the Company
operates a network system where customers may use the facilities in any fitness
centers of the Company in Hong Kong at no extra cost. The centers have long
opening hours and are open all year round (except for Chinese New Year), in
order to provide continuous service to its customers. Generally, they are open
from 7:00 a.m. to 11:00 p.m. As with any consumer driven market, it is essential
that the services provided by the Company are constantly reviewed, updated and
improved. To achieve this, managers from the Customer Services Department as
well as each of the centers regularly invite comments from customers in relation
to the services provided. Additionally, the Company constantly seeks to
introduce new products and techniques on fitness training and spa treatments in
order to improve its services and thus enhance its competitive position.
SALES AND MARKETING
The Company devotes substantial resources to the marketing and
promotion of its fitness and spa centers and their services because the Company
believes strong marketing support is critical to attracting new customers both
at existing and new fitness centers. Since July, 1988, the Company and its
predecessor began to market substantially all of its fitness centers under the
service name "Physical", thereby eliminating the prior practice of using
different names for individual locations. See "Business - Trademarks and Trade
Names".
A key component of the Company's marketing strategy is to cluster
numerous fitness centers in major media markets in order to increase the
efficiency and cost effectiveness of its marketing and advertising programs.
Advertising consists of (i) television and (ii) newspapers, magazines, leaflets,
light box, and other promotional activities, which were accounted for
approximately 10%, and 90%, respectively, of the Company's total advertising
expenses in 2004.
Since 1998, the Company has appointed sales agents to conduct certain
promotional, marketing and sales services in public areas of the region. These
agents have successfully helped enhance public awareness of the Company's
fitness service and recruited thousands of new customers to use the Company's
facilities.
13
The Company's sales and marketing programs emphasize the benefits of
health, physical fitness and exercise by appealing to the public's desire to
look and feel better. The success of the Company's marketing efforts are
dependent upon the ability of its sales personnel to make effective personal
presentations of the benefits of fitness training and beauty treatments to
prospective customers. The Company believes that these presentations are
enhanced by its well-equipped, attractive centers and its "value pricing"
programs. The Company also conducts a variety of marketing efforts. The
Company's executives and sales personnel attend trade shows and exhibitions, and
sponsor seminars and TV programs throughout Hong Kong and China. The Company has
introduced on-site aerobics shows, gymnasium instruction, and beauty
consultation in the course of these activities.
The Company's marketing focus also includes corporate customers and
clients from the reputable banks in Hong Kong. In addition to its advertising,
personal sales presentations and targeted marketing efforts, the Company is
increasingly utilizing in-door marketing programs. Open days are organized to
introduce the centers to prospective customers and referral incentive programs
involve current customers in the process of new customer enrollments that
effectively help foster customer loyalty.
ACCOUNT COLLECTION
All collections of past-due accounts are handled internally by the
Company. Customers who have outstanding unpaid balances are not provided further
services until such balances are paid in full. Corporate accounts are handled
pursuant to the applicable terms of credit agreements.
COMPETITION
The Company targets primarily the middle market. There are very few
establishments in this class which provide both fitness services and spa/ beauty
treatments in a single facility. The closest competitor in the same category is
Modern Beauty Salon with sixteen locations of average size of approximately
20,000 sq. ft. A monthly subscription of HK$150 (US$19) is required to become
a member of the above center for a continuous period of one year.
The operators of "fitness services only" which are in direct competition with
the Company's fitness centers include California Fitness, and Fitness First.
The operators of "spa/beauty services only" which are in direct competition with
the Company's beauty centers include Sau San Tong Healthy Trim Institute, Angel
Face Beauty Creations, Marie France Bodyline, Sasa Beauty, Royal Bodyperfect,
and Caesar Beauty Centre.
The management believes that the Company offers a more comprehensive
level of both fitness and spa treatments than its competitors.
14
Trademarks and Trade Names
In July 1988, the Company and its predecessor began to market
substantially all its fitness centers under the servicemark "Physical" thereby
eliminating the prior practice of using a different trade names for each center.
The Company registered a servicemark under its trade name "Physical" in Hong
Kong and its Chinese equivalent name in China. In the opinion of the Company's
trademark counsel in Hong Kong, the registration enables the mark to distinguish
the Company's services from similar services of others. The servicemark gives
the Company a priority over the use of the servicemark by others and the right
to reject others from the use of the same name. In China, the Company has
registered the name in Chinese language pursuant to the Chinese Trademark Law
which provides the Company with protection of its name on a nation-wide basis
and precludes others in China from using the same name as the Company's.
Seasonality
Historically, the Company has experienced greater sales in the third
quarter of each year. In recent years, the Company has lessened this seasonal
effect by the use of sales incentives and awards for its sales personnel, as
well as other marketing initiatives.
Research and Development
The Company's business is service-oriented, therefore it does not have
a formal Research & Development department, however, its marketing and training
departments are closely following the evolution of international fitness and
beauty trends.
Employees
The Company has approximately 1,520 employees. Approximately 760
employees are involved in fitness operations, including sales personnel,
instructors, and supervisory personnel. Approximately 600 employees are involved
in beauty and spa operations. Approximately 160 are administrative support
personnel, including accounting, marketing, training and other services.
The Company is not a party to any collective bargaining agreement with
its employees. The Company has not experienced a high turnover of non-management
personnel and also has not had difficulty in obtaining adequate replacement
personnel.
15
Government Regulation
The Company's operations and business practices of the Company are
subject to regulation at the local level. General rules and regulations,
including those of the local consumer protection agencies, apply to the
Company's advertising, sales and other trade practices.
Statutes and regulations affecting the fitness, spa and beauty
industries have been enacted or proposed in all of the areas in which the
Company conducts business. Typically, these statutes and regulations prescribe
certain forms and regulate the terms and provisions of sales and purchase
contracts, allowing the customer the right to cancel the contract within, in
most cases, 14 business days after signing. In addition, the Company is subject
to several other types of regulations governing the collection of debts. These
laws and regulations are subject to varying interpretations by local consumer
protection agencies and the courts. The Company maintains internal review
procedures in order to comply with these requirements and it believes that its
activities are in substantial compliance with all applicable statutes, rules and
decisions.
Certain regulations allow customers of fitness centers to cancel any
un-used services. In each instance, the canceling customer is entitled to a
refund of prepaid amounts only. Furthermore, where permitted by law, a
cancellation fee is due to the Company upon cancellation and the Company may
offset such amount against any refund owed. The Company's customer agreements
provide that all fees paid shall under no circumstances be refundable.
The Consumer Council protects the rights of consumers. The
customers have a right to dispute the price or quality of the service, if they
find it unsatisfactory. The Council also assists consumers in cases of false
claims made by the companies with respect to a specific service offered by them.
The Company is cautious in advertising its services, and it never promotes or
guarantees unrealistic results concerning skin care or fitness services,
therefore the Company rarely faces complaints in this respect from its
consumers.
The Company's facilities are also subject to building, and
safety laws. The laws require a normal building inspection at the time of
renovation of the facilities and/or fire safety inspection. Since the Company's
facilities typically are a part of a large office building for which a license
is granted, if the Company does not comply with all the regulations, the
landlord would not be granted a license.
16
ITEM 2. PROPERTIES
Aggregate rental expense was approximately HK$103.6 million (US$13
million), HK$119.7 million (US$15 million) and HK$125.7 million (US$16 million)
for the year ended December 31, 2002, 2003 and 2004, respectively.
Mei Foo is the only location indirectly partially owned by the Company.
The Company (through its subsidiary, Ever Growth Limited), directly owns 700 sq.
ft. of the property where the Mei Foo fitness center is located. There are 7,300
sq. ft. located in the same building and 2,000 sq. ft. in the neighborhood for
fitness facility.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or
any of its properties is subject, nor to the knowledge of the Company, are any
such legal proceedings threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
through the solicitation of proxies, or otherwise, during the Company's fiscal
year ended December 31, 2004.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDE MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock has been listed on the Bulletin Board of the
NASD's over-the-counter market under the symbol PFIT, since December 1996, but
has been traded only sporadically. As of March 31, 2005, the 52-week trading
range was between $0.30 to $0.51 per share. The last reported sale was in
October, 2004 at $0.30 per share. The reported sporadic sales in the fiscal year
2004, are set forth below.
Date Open High Low Close
Oct-04 0.30 0.51 0.30 0.30
May-04 0.30 0.51 0.30 0.30
- ---------------------
As of December 31, 2004, there were approximately 618 record holders of
the Company's Common Stock.
DIVIDEND POLICY
- ---------------
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the future. The Company
currently intends to retain future earnings, if any, to fund the development and
growth of its business.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES.
NONE.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
NONE.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements, related
Notes to Consolidated Financial Statements and Report of Independent Public
Accountants, and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere herein. The following table summarizes
certain selected financial data of the Company for the fiscal years ended
December 31, 2000 through December 31, 2004. The data has been derived from
Consolidated Financial Statements (audited) included in Item 8 of this Report.
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
HK$ HK$ HK$ HK$ HK$ US$
--------- --------- --------- --------- --------- ---------
Consolidated Statements of Operations Data
OPERATING REVENUES 303,312 392,097 413,744 439,511 501,816 64,336
--------- --------- --------- --------- --------- ---------
OPERATING EXPENSES
Salaries and commissions (88,999) (113,239) (139,740) (156,181) (162,450) (20,827)
Rent and related expenses (74,685) (95,413) (132,929) (155,844) (163,201) (20,923)
Depreciation (41,335) (51,494) (63,412) (62,618) (63,327) (8,119)
Other selling and administrative expenses (80,634) (108,298) (95,844) (103,629) (107,177) (13,741)
--------- --------- --------- --------- --------- ---------
Total operating expenses (285,653) (368,444) (431,925) (478,272) (496,155) (63,610)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 17,659 23,653 (18,181) (38,761) 5,661 726
--------- --------- --------- --------- --------- ---------
NON-OPERATING INCOME (EXPENSES)
Other income, net 853 778 418 553 2,344 301
Interest expenses (3,379) (3,638) (5,645) (7,329) (6,108) (783)
Goodwill write-off (1,113) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total non-operating expenses (3,639) (2,860) (5,227) (6,776) (3,764) (482)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTERESTS AND THE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE 14,020 20,793 (23,408) (45,537) 1,897 244
(Provision) Benefit for income taxes (3,312) (6,785) (834) 359 (568) (73)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND THE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 10,708 14,008 (24,242) (45,178) 1,329 171
Minority interests (1,010) (761) 147 210 65 8
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) BOFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE 9,698 13,247 (24,095) (44,968) 1,394 179
Cumulative effect on prior year of deferral
of sales rebates, net of income taxes
and minority interests -- -- 3,857 -- -- --
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) 9,698 13,247 (20,238) (44,968) 1,394 179
========= ========= ========= ========= ========= =========
Net income per share 0.97 1.32 (2.02) (4.50) 0.14 0.02
========= ========= ========= ========= ========= =========
Number of shares of stock outstanding
(in thousands) 10,000 10,000 10,000 10,000 10,000 10,000
========= ========= ========= ========= ========= =========
Balance Sheet Data
Current assets 31,135 51,841 55,597 64,225 55,182 7,075
Total assets 212,931 263,126 324,890 314,886 280,192 35,922
Current liabilities 88,677 122,856 209,239 250,694 206,567 26,482
Long-term obligations other than finance
leases 15,789 15,243 22,252 11,772 638 82
Working capital (57,542) (71,015) (153,642) (186,469) (151,385) (19,407)
Obligations under finance leases-non current 8,191 9,342 5,032 716 -- --
Deferred taxation 6,312 7,434 4,593 2,746 2,202 282
Minority interests 6,544 7,305 7,285 7,230 7,010 899
Shareholders' equity 88,260 101,506 81,256 36,289 37,682 4,832
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with "Selected
Income Data" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this report.
Overview
- --------
The Company, through its predecessor companies and its subsidiaries,
has been an established commercial operator of fitness and spa centers in Hong
Kong and China since 1986 (see "Company - History"). The Company currently
operates eighteen facilities: thirteen in Hong Kong and five in China
(including one in Macau). Based on the number of the customers of the Company's
facilities, management believes that the Company is one of the top providers of
fitness facilities and spa and beauty treatment services in Hong Kong and China,
with approximately 110,000 customers. The Company offers to its customers, at
each location, access to a wide range of U.S.-styled fitness and spa services.
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.
Years Ended December 31,
--------------------------
2002 2003 2004
---- ---- ----
Operating Revenues 100.00% 100.00% 100.00%
Total operating expenses 104.39% 108.82% 98.87%
Operating income (loss) (4.39%) (8.82%) 1.13%
Income (Loss) before income taxes and
minority interests (5.66%) (10.36%) 0.38%
Provision for income and deferred taxes 0.20% (0.08%) 0.11%
Minority interests (0.04%) (0.05%) 0.01%
Net income (loss) (4.89%) (10.23%) 0.28%
======== ======== ========
20
FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
2003
- ----
OPERATING REVENUES. The Company's operating revenues increased 14% to
HK$501,816,000 (US$64,336,000) in the fiscal year ended December 31, 2004 as
compared to HK$439,511,000 (US$56,348,000) of last year.
Operating revenues derived by the Company's fitness services increased
16% to HK$298,596,000 (US$38,282,000) compared to HK$258,015,000 (US$33,079,000)
of last year. Fitness revenues as a percentage of total revenues were 60% in
2004 as compared to 59% in 2003.
Operating revenues for the Company's beauty treatments in 2004 totaled
HK$203,000,000 (US$26,026,000) compared to HK$181,093,000 (US$23,217,000) in
2003, representing an increase of 12%. Beauty revenues as a percentage of total
revenues were 40% in 2004 as compared to 41% in 2003.
Operating revenues derived from the Company's Hong Kong locations
remain at 88% of the Company's business, generating HK$442,755,000
(US$56,764,000) in the fiscal year ended December 31, 2004 as compared to
HK$385,966,000 (US$49,483,000) in the fiscal year ended December 31, 2003. This
represented an increase of 15%.
Operating revenues derived from the Company's China locations generated
HK$59,061,000 (US$7,572,000) in the fiscal year ended December 31, 2004,
representing an increase of 10%, as compared to HK$53,545,000 (US$6,865,000).
The China operation represented 12% of total operating revenues in the fiscal
years ended December 31, 2003 and 2004.
OPERATING EXPENSES. The Company's operating expenses for the fiscal
year ended December 31, 2004 totaled HK$496,155,000 (US$63,610,000) compared to
HK$478,272,000 (US$61,317,000) in the fiscal year ended December 31, 2003,
representing an increase of 4%. Total operating expenses, after taking into
account all corporate expenses, were 99% of total operating revenue as compared
to 109% of last year. The ratio remained high reflecting steep running costs in
a competitive environment.
Operating expenses associated with the Company's Hong Kong locations
were HK$425,718,000 (US$54,580,000) in the fiscal year ended December 31, 2004,
representing an increase of 2% as compared to HK$416,732,000 (US$53,427,000) in
2003. The increase was mainly due to the additional expenses incurred by the
Citylink, Shatin Center which commenced its fitness operation in November, 2003.
Hong Kong operating expenses represented 86% of total operating expenses in
2004, as compared to 87% of last year.
Operating expenses associated with the Company's China locations were
HK$70,437,000 (US$9,030,000) in the fiscal year ended December 31, 2004,
representing an increase of 14% as compared to HK$61,540,000 (US$7,890,000) in
2003 primarily due to additional expenses incurred by the enhanced facilities in
Shanghai. Operating expenses in China represented 14% of total operating
expenses in the fiscal year ended December 31, 2004, as compared to 13% of 2003.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
fiscal year ended December 31, 2004 totaled HK$3,764,000 (US$482,000) compared
to HK$6,776,000 (US$870,000) in the fiscal year ended December 31, 2003,
representing a decrease of 44% mainly due to lower interest expenses and the
recognition of management service income.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 2004 totaled HK$568,000 (US$73,000) compared to
HK$(359,000) (US$(47,000)) in 2003, representing an increase of 258% mainly due
to profits generated in the year.
NET PROFIT (LOSS). The Company has recorded a net profit of
HK$1,394,000 (US$179,000) for the fiscal year ended December 31, 2004, compared
to a net loss of HK$44,968,000 (US$5,765,000) for the fiscal year ended December
31, 2003, representing an increase of 103%. 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.
21
FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
2002
- ----
OPERATING REVENUES. The Company's operating revenues increased 6% to
HK$439,511,000 (US$56,348,000) in the fiscal year ended December 31, 2003 as
compared to HK$413,744,000 (US$53,044,000) of last year.
Operating revenues derived by the Company's fitness services decreased
7% to HK$258,015,000 (US$33,079,000) compared to HK$278,212,000 (US$35,668,000)
of last year. Fitness revenues as a percentage of total revenues were 59% in
2003 as compared to 67% in 2002.
Operating revenues for the Company's beauty treatments in 2003 totaled
HK$181,093,000 (US$23,217,000) compared to HK$135,532,000 (US$17,376,000) in
2002, representing an increase of 34%. Beauty revenues as a percentage of total
revenues increased from 33% to 41% in 2003 as compared to 2002.
Operating revenues derived from the Company's Hong Kong locations
remain an important contributor to the Company's business, generating
HK$385,966,000 (US$49,483,000), or 88% of total operating revenues in the fiscal
year ended December 31, 2003 as compared to HK$374,102,000 (US$47,962,000) or
90% of total operating revenues in the fiscal year ended December 31, 2002.
Operating revenues derived from the Company's China locations generated
HK$53,545,000 (US$6,865,000), or 12% of total operating revenues in the fiscal
year ended December 31, 2003 as compared to HK$39,642,000 (US$5,082,000) or 10%
of total operating revenues in the fiscal year ended December 31, 2002.
OPERATING EXPENSES. The Company's operating expenses for the fiscal
year ended December 31, 2003 totaled HK$478,272,000 (US$61,317,000) compared to
HK$431,925,000 (US$55,375,000) in the fiscal year ended December 31, 2002,
representing an increase of 11%. Total operating expenses, after taking into
account all corporate expenses, were 109% of total operating revenue as compared
to 104% 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$416,732,000 (US$53,427,000) in the fiscal year ended December 31, 2003,
representing an increase of HK$40,865,000 (US$5,239,000) or 11% as compared to
HK$375,867,000 (US$48,188,000) 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 full
operation in 2002. Moreover, additional expenses were also incurred by the
Citylink, Shatin Center which commenced its fitness operation in November, 2003.
Hong Kong operating expenses represented 87% of total operating expenses in
2003, same as last year.
Operating expenses associated with the Company's China locations were
HK$61,540,000 (US$7,890,000) in the fiscal year ended December 31, 2003,
representing an increase of 10% as compared to HK$56,058,000 (US$7,187,000) in
2002 primarily due to additional expenses incurred by the enhanced facilities in
Shanghai. Operating expenses in China represented 13% of total operating
expenses in the fiscal years ended December 31, 2003 and 2002.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
fiscal year ended December 31, 2003 totaled HK$6,776,000 (US$870,000) compared
to HK$5,227,000 (US$670,000) in the fiscal year ended December 31, 2002,
representing an increase of 30% mainly due to higher interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 2003 totaled HK$(359,000) (US$(47,000)) compared to
HK$834,000 (US$107,000) in 2002, representing a decrease of 143%. The decrease
is mainly due to losses incurred in the year.
NET LOSS. The Company suffered a net loss of HK$44,968,000
(US$5,765,000) for the fiscal year ended December 31, 2003, compared to a net
loss of HK$20,238,000 (US$2,595,000) for the fiscal year ended December 31,
2002, representing an increase of 122%. The loss substantially reflects the
adverse impact of an outbreak of the Severe Acute Respiratory Syndrome (SARS)
during the year.
In Mid-March, 2003, SARS occurred in areas such as Vietnam, Toronto,
Southern China, Hong Kong, and Singapore. Consumers avoided from contacting the
SARS virus by staying at home that led to weak demand in the Company's fitness
and beauty service. The revenues and results of the Company, like most
retailers, were badly hit by the disease. In view of the uncertainty in the
economic situation, the Company has postponed the renovation work of the
Citylink, Shatin center thus incurring additional opportunity costs.
22
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
2001
- ----
OPERATING REVENUES. The Company's operating revenues increased 6% to
HK$413,744,000 (US$53,044,000) in the fiscal year ended December 31, 2002 as
compared to HK$392,097,000 (US$50,269,000) of last year.
Operating revenues derived by the Company's fitness services, net of
sales rebates of HK$4,743,000 (US$608,000), increased 2% to HK$278,212,000
(US$35,668,000) compared to HK$272,756,000 (US$34,969,000) of last year. Fitness
revenues as a percentage of total revenues were 67% in 2002 as compared to 70%
in 2001.
Operating revenues for the Company's beauty treatments in 2002 totaled
HK$135,532,000 (US$17,376,000) compared to HK$119,341,000 (US$15,300,000) in
2001, representing an increase of 14%. Beauty revenues as a percentage of total
revenues increased from 30% to 33% in 2002 as compared to 2001.
Operating revenues derived from the Company's Hong Kong locations
remain an important contributor to the Company's business, generating
HK$374,102,000 (US$47,962,000), or 90% of total operating revenues in the fiscal
year ended December 31, 2002 as compared to HK$360,388,000 (US$46,204,000) or
92% of total operating revenues in the fiscal year ended December 31, 2001.
Operating revenues derived from the Company's China locations generated
HK$39,642,000 (US$5,082,000), or 10% of total operating revenues in the fiscal
year ended December 31, 2002 as compared to HK$31,709,000 (US$4,065,000) or 8%
of total operating revenues in the fiscal year ended December 31, 2001.
OPERATING EXPENSES. The Company's operating expenses for the fiscal
year ended December 31, 2002 totaled HK$431,925,000 (US$55,375,000) compared to
HK$368,444,000 (US$47,236,000) in the fiscal year ended December 31, 2001,
representing an increase of 17%. Total operating expenses, after taking into
account all corporate expenses, were 104% of total operating revenue as compared
to 94% of last year. This reflects the additional costs incurred by the Company
in following its business expansion plan.
Operating expenses associated with the Company's Hong Kong locations
were HK$375,867,000 (US$48,188,000) in the fiscal year ended December 31, 2002,
representing an increase of HK$51,763,000 (US$6,637,000) or 16% as compared to
HK$324,104,000 (US$41,551,000) in 2001. 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 2001. Hong Kong operating expenses represented 87% of total
operating expenses in 2002 as compared to 88% in 2001.
Operating expenses associated with the Company's China locations were
HK$56,058,000 (US$7,187,000) in the fiscal year ended December 31, 2002,
representing an increase of 26% as compared to HK$44,340,000 (US$5,685,000) in
2001 primarily due to additional expenses incurred by the enhanced facilities in
Shanghai. Operating expenses in China represented 13% of total operating
expenses in the fiscal year ended December 31, 2002 as compared to 12% in 2001.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
fiscal year ended December 31, 2002 totaled HK$5,227,000 (US$670,000) compared
to HK$2,860,000 (US$367,000) in the fiscal year ended December 31, 2001,
representing an increase of 83% mainly due to higher interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 2002 totaled HK$834,000 (US$107,000) compared to
HK$6,785,000 (US$870,000) in 2001, representing a decrease of 88%. The decrease
is mainly due to losses incurred in the year.
NET LOSS. The Company generated a net loss of HK$20,238,000
(US$2,595,000) for the fiscal year ended December 31, 2002, compared to a net
income of HK$13,247,000 (US$1,698,000) for the fiscal year ended December 31,
2001, representing a decrease of 253%. The loss was mainly due to the narrowing
margin of the existing centers and the absorption of the pre-opening overhead
associated with four new centers.
23
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. See Notes to Financial Statements
(Note 6 "Short-Term Bank Loans"; and Note 7 "Long-Term Bank Loans").
Cash and cash equivalent balances for the fiscal years ended December
31, 2004 and December 31, 2003 were HK$1,625,000 (US$208,000) and HK$1,806,000
(US$231,000) respectively.
Net cash provided by operating activities were HK$54,777,000
(US$7,023,000), HK$58,288,000 (US$7,472,000), and HK$105,334,000 (US$13,503,000)
for fiscal years 2004, 2003, and 2002 respectively. The Company's operating
activities are historically financed by cash flows from operations. Net cash
used in investing activities were HK$39,888,000 (US$5,114,000), HK$42,731,000
(US$5,478,000), and HK$120,362,000 (US$15,430,000) for fiscal years 2004, 2003,
and 2002 respectively, primarily as a result of expenditures for property, plant
and equipment. Net cash (used in) provided by financing activities, which mainly
include bank loan repayments, net of proceeds from new bank loans, were
HK$(15,069,000) (US$(1,932,000)), HK$(15,088,000) (US$(1,934,000)), and
HK$11,589,000 (US$1,486,000) for fiscal years 2004, 2003, and 2002 respectively.
During the fiscal year ended December 31, 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 7% per annum. The
total balance outstanding as of December 31, 2004 on such loans was HK$638,000
(US$82,000). 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.
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 its customers. This practice creates
working capital that the Company generally utilizes for working capital
purposes. However, the unused portion of the pre-paid monthly fees and spa
treatment dues is characterized as deferred income, and further categorized as
current portion under current liability and non-current portion under
non-current liability, for accounting purposes.
24
The Company's trade receivable balance at December 31, 2004, was
HK$4,006,000 (US$514,000) which is mainly due by banks for the installment
program. The program allows the holders of credit cards issued by certain banks
to purchase the Company's fitness and beauty services with the said cards and
then enjoy the 12-month interest-free payment by installment arrangements with
the banks. The Company offers credit terms varying from 7 days to 14 days to the
banks for settlement of the full purchase amounts. The Company has never
experienced any significant problems with collection of accounts receivable from
its customers. No provision for doubtful receivables is therefore made for the
year under review.
Capital expenditures for fiscal years 2004, 2003 and 2002 were
HK$27,066,000 (US$3,470,000), HK$46,159,000 (US$5,918,000) and HK$126,364,000
(US$16,199,000), respectively.
And as mentioned in note 3 to the financial statements, the Company has
a negative working capital of HK$151,385,000 (US$19,407,000) and HK$186,469,000
(US$23,906,000) as of December 31, 2004 and 2003 respectively. This condition
raises doubt about the Company's ability to continue as a going concern. In
order to maintain it as a going concern, the management is seeking to procure
additional funding from various sources. In addition, the Principal Stockholder
has also 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since some operations of the Company are operated in the People's
Republic of China ("PRC"), they are subject to special considerations and
significant risks not typically associated with investments in equity securities
of United States and Western European companies. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. These are described further in the following:
POLITICAL ENVIRONMENT
The value of the Company's interests in the Shanghai subsidiary and
Dalian joint venture ("JV") may be adversely affected by significant political,
Economic and social uncertainties in the PRC. A change in policies by the
Chinese government could adversely affect the Company's interests in these
companies by, among other factors: changes in laws, regulations or the
interpretation thereof; confiscatory taxation; restrictions on foreign currency
conversion, imports or sources of suppliers; or the expropriation or
nationalization of private enterprises.
ECONOMIC ENVIRONMENT
The economy of the PRC differs significantly from the economies of the
United States and Western Europe in such respects as structure, level of
development, gross national product, growth rate, capital reinvestment, resource
allocation, self-sufficiency, rate of inflation and balance of payments
position, among others. Only recently has the Chinese government encouraged
substantial private economic activities.
The Chinese economy has experienced significant growth in the past ten
years, but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly restrained economic expansion recently. Similar
actions by the central government of the PRC in the future could have a
significant adverse effect on economic conditions in the PRC and the economic
prospects for the Group.
25
FOREIGN CURRENCY EXCHANGE
The Chinese central government imposes control over its foreign
currency reserves through control over imports and through direct regulation of
the conversion of its national currency into foreign currencies. As a result,
the Renminbi is not freely convertible into foreign currencies.
The Shanghai subsidiary and Dalian JV conduct substantially all of
their Business in the PRC, and their financial performance and condition are
measured in Terms of Renminbi. The revenues and profits of these companies are
predominantly denominated in Renminbi, and will have to be converted to pay
dividends to the Company in United States Dollars or Hong Kong Dollars. Should
the Renminbi devalue against these currencies, such devaluation would have a
material adverse effect on the Company's profits and the foreign currency
equivalent of such profits repatriated by the Shanghai subsidiary and Dalian JV
to the Company. The Company currently is not able to hedge its exchange rate
exposure in the PRC because neither the banks in the PRC nor any other financial
institution authorized to engage in foreign exchange transactions offer forward
exchange contracts.
LEGAL ENVIRONMENT
Since 1979, many laws and regulations dealing with economic matters in
general and foreign investment in particular have been enacted in the PRC.
However, the PRC still does not have a comprehensive system of laws and
enforcement of existing laws may be uncertain and sporadic.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company required to be included in
Item 7 are set forth in the Financial Statements Index.
Independent Auditors' Report of Moores Rowland F-1
Consolidated Statements of Operations for the years ended
December 31, 2002, 2003 and 2004 F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2003 and 2004 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2003 and 2004 F-5
Notes to Financial Statements F-6
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AUDITED FINANCIAL STATEMENTS
PHYSICAL SPA & FITNESS INC.
DECEMBER 31, 2004
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PHYSICAL SPA & FITNESS INC.
We have audited the accompanying consolidated balance sheets of Physical Spa &
Fitness Inc. (a Delaware Corporation) and subsidiaries as of December 31, 2004
and 2003 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Physical Spa &
Fitness Inc. and subsidiaries as of December 31, 2004 and 2003 and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 2004 in conformity with United States generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 (b) to the
financial statements, the Company has a negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3 (b). The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 3 (r) to the financial statements, the Company changed its
method of accounting for sales rebates in the year 2002.
/s/ Moores Rowland Mazars
MOORES ROWLAND MAZARS
CHARTERED ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS
Hong Kong
Date: April 14, 2005
F-2
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
2004 2004 2003 2002
NOTE US$ HK$ HK$ HK$
OPERATING REVENUES 64,336 501,816 439,511 413,744
-------------- -------------- ------------- -------------
OPERATING EXPENSES
Salaries and commissions (20,827) (162,450) (156,181) (139,740)
Rent and related expenses (20,923) (163,201) (155,844) (132,929)
Depreciation (8,119) (63,327) (62,618) (63,412)
Other selling and administrative expenses (13,741) (107,177) (103,629) (95,844)
-------------- -------------- ------------- -------------
Total operating expenses (63,610) (496,155) (478,272) (431,925)
-------------- -------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 726 5,661 (38,761) (18,181)
-------------- -------------- ------------- -------------
NON-OPERATING INCOME (EXPENSES)
Other income, net 301 2,344 553 418
Interest expenses (783) (6,108) (7,329) (5,645)
-------------- -------------- ------------- -------------
Total non-operating expenses (482) (3,764) (6,776) (5,227)
-------------- -------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTERESTS AND THE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 244 1,897 (45,537) (23,408)
(Provision) Benefit for income taxes 8 (73) (568) 359 (834)
-------------- -------------- ------------- -------------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND
THE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 171 1,329 (45,178) (24,242)
Minority interests 8 65 210 147
-------------- -------------- ------------- -------------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 179 1,394 (44,968) (24,095)
Cumulative effect on prior year of deferral of
sales rebates, net of income taxes and
minority interests 3(r) - - - 3,857
-------------- -------------- ------------- -------------
NET INCOME (LOSS) 179 1,394 (44,968) (20,238)
Other comprehensive (loss) income
- - Foreign currency translation adjustments - (1) 1 (12)
-------------- -------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) 179 1,393 (44,967) (20,250)
============== ============== ============= =============
The financial statements should be read in conjunction with the accompanying notes.
F-3
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
2004 2004 2003 2002
NOTE US$ HK$ HK$ HK$
Earnings (Loss) per share of common stock before
cumulative effect of a change in accounting
principle 0.02 0.14 (4.50) (2.41)
Per share cumulative effect on prior year of
deferral of sales rebates - - - 0.39
-------------- -------------- ------------- -------------
Earnings (Loss) per share of common stock
- - Basic 0.02 0.14 (4.50) (2.02)
============== ============== ============= =============
Number of shares of common stock outstanding 10,000 10,000 10,000 10,000
============== ============== ============= =============
PROFORMA AMOUNTS ASSUMING THE CHANGE IN
ACCOUNTING FOR REBATES IS APPLIED
RETROACTIVELY
Net income (loss) 179 1,394 (44,968) (24,095)
============== ============== ============= =============
Earnings (Loss) per share of common stock
- - Basic 3(o) 0.02 0.14 (4.50) (2.41)
============== ============== ============= =============
The financial statements should be read in conjunction with the accompanying notes.
F-4
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
NOTE AS OF DECEMBER 31
------------------------------------------
2004 2004 2003
ASSETS US$ HK$ HK$
CURRENT ASSETS
Cash and bank balances 208 1,625 1,806
Trade receivables 514 4,006 8,938
Other receivables 8 940 7,334 6,728
Rental and utility deposits 4,080 31,821 31,862
Prepayments to vendors and suppliers and other current assets 318 2,482 8,336
Inventories 3(c) 753 5,873 3,992
Income taxes recoverable 262 2,041 2,563
------------ ---------- ----------
TOTAL CURRENT ASSETS 7,075 55,182 64,225
------------ ---------- ----------
Marketable securities, collateralized 4 549 4,280 3,290
Bank deposits, collateralized 1,477 11,523 13,103
Due from a stockholder 12(d) 1,215 9,480 9,481
Prepayments for construction-in-progress 13 1,517 11,835 -
Property, plant and equipment, net 5 24,089 187,892 224,787
------------ ---------- ----------
TOTAL ASSETS 35,922 280,192 314,886
============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank loans 6 1,855 14,473 14,473
Long-term bank loans - current portion 7 82 638 10,274
Trade payables 583 4,549 5,031
Other payables 9 7,197 56,136 87,314
Obligations under capital leases - current portion 10 92 716 5,516
Deferred income - current portion 15,067 117,526 113,241
Deferred liabilities - current portion 737 5,745 8,587
Income taxes payable 27 214 175
Taxes other than income 842 6,570 6,083
------------ ---------- ----------
TOTAL CURRENT LIABILITIES 26,482 206,567 250,694
------------ ---------- ----------
Deferred income - non-current portion 2,404 18,748 6,599
Deferred liabilities - non-current portion 1,023 7,983 9,114
Long-term bank loans - non-current portion 7 - - 1,498
Obligations under capital leases - non-current portion 10 - - 716
Deferred taxation 8 282 2,202 2,746
Minority interests 899 7,010 7,230
STOCKHOLDERS' EQUITY
Common stock, par value of US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 10 78 78
Cumulative translation adjustments 21 161 162
Retained earnings 4,801 37,443 36,049
------------ ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 4,832 37,682 36,289
------------ ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 35,922 280,192 314,886
============ ========== ==========
APPROVED AND AUTHORIZED FOR ISSUE BY THE BOARD OF DIRECTORS ON
DIRECTOR DIRECTOR
The financial statements should be read in conjunction with the accompanying notes.
F-5
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
YEAR ENDED DECEMBER 31
----------------------------------------------------
2004 2004 2003 2002
US$ HK$ HK$ HK$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 179 1,394 (44,968) (20,238)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interests (8) (65) (210) (20)
Depreciation 8,119 63,327 62,618 63,412
Loss on disposal of property, plant and equipment 80 631 148 1,493
Changes in working capital:
Trade receivables 632 4,932 (3,266) 1,570
Deposits, prepayments and other current assets 736 5,740 (4,007) (4,923)
Inventories (241) (1,881) (879) (740)
Due to a related company - - (3,515) 3,510
Trade and other payables (4,059) (31,660) 19,099 52,602
Deferred income 2,107 16,434 36,697 5,452
Deferred liabilities (509) (3,973) 4,912 3,206
Income taxes payable/recoverable 72 561 (6,152) 2,801
Taxes other than income (15) (119) (342) 50
Deferred taxation (70) (544) (1,847) (2,841)
----------- ----------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,023 54,777 58,288 105,334
----------- ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Prepayments for construction-in-progress (1,517) (11,835) 1,690 10,280
Acquisition of property, plant and equipment (3,470) (27,066) (46,159) (126,364)
Acquisition of marketable securities (127) (990) (1,750) (4,654)
Proceeds from disposal of marketable securities - - 3,114 -
Sales proceeds from disposal of property, plant and
equipment - 3 374 376
----------- ----------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (5,114) (39,888) (42,731) (120,362)
----------- ----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (Increase) in bank deposits, collateralized 202 1,580 237 (6,405)
Due from a stockholder - 1 1,474 740
Settlement of short-term bank loans (603) (4,700) - -
Proceeds from short-term bank loans 603 4,700 1,839 10,865
Proceeds from long-term bank loans - - 2,500 28,670
Repayment of long-term bank loans (1,427) (11,134) (12,980) (21,661)
Assumption of capital lease obligations - - 1,800 7,982
Capital element of capital lease rental payments (707) (5,516) (9,958) (8,602)
----------- ----------- ------------ -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,932) (15,069) (15,088) 11,589
----------- ----------- ------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (1) 1 (12)
----------- ----------- ------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (23) (181) 470 (3,451)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 231 1,806 1,336 4,787
----------- ----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR, REPRESENTED BY
CASH AND BANK BALANCES 208 1,625 1,806 1,336
=========== =========== ============ ===========
The financial statements should be read in conjunction with the accompanying notes.
F-6
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
CUMULATIVE
RETAINED TRANSLATION
COMMON STOCK EARNINGS ADJUSTMENTS TOTAL
------------------------- ------------- --------------- ---------------------------
NUMBER HK$ HK$ HK$ HK$ US$
Balance as of
January 1, 2002 10,000,000 78 101,255 173 101,506 13,014
Net loss - - (20,238) - (20,238) (2,594)
Translation adjustment - - - (12) (12) (2)
------------- ---------- ------------- --------------- ------------ ------------
Balance as of
December 31, 2002 10,000,000 78 81,017 161 81,256 10,418
Net loss - - (44,968) - (44,968) (5,765)
Translation adjustment - - - 1 1 -
------------- ---------- ------------- --------------- ------------ ------------
Balance as of
December 31, 2003 10,000,000 78 36,049 162 36,289 4,653
Net profit - - 1,394 - 1,394 179
Translation adjustment - - - (1) (1) -
------------- ---------- ------------- --------------- ------------ ------------
BALANCE AS OF
DECEMBER 31, 2004 10,000,000 78 37,443 161 37,682 4,832
============= ========== ============= =============== ============ ============
The financial statements should be read in conjunction with the accompanying notes.
F-7
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Physical Spa & Fitness Inc. ("the Company") was incorporated on
September 21, 1988 under the laws of the United States of America. The
Company was incorporated with authorized share capital of 100 million
common stocks with par value of US$0.001 each. 80% of the Company's
issued and outstanding common stocks were held by a stockholder (the
"Principal Stockholder"). The Company is a U.S. public company listed
on the National Association of Securities Dealers Automated Quotations
Over-the-Counter Bulletin Board.
Physical Beauty & Fitness Holdings Limited ("Physical Holdings") was
incorporated on March 8, 1996 under the laws of the British Virgin
Islands ("BVI") with a capital of one common stock being held by the
Company. Physical Holdings has interests in various companies
("Operating Subsidiaries") operating fitness and beauty centres
("Fitness Centres") and other related businesses in Hong Kong and the
People's Republic of China ("PRC"). The Company also operates Fitness
Centres in the PRC through some of its Operating Subsidiaries which are
Sino-foreign joint ventures ("JV") established in the PRC. In the
opinion of the directors, the Company is able to govern and control the
financial and operating policies and the board of directors of the JV.
Therefore, the JV have been accounted for as subsidiaries. Detailed
information in connection with these JV is as follows:
a) Shanghai Physical Fitness and Beauty Centre Co., Ltd. (the
"Shanghai JV"), a Sino-foreign co-operative JV, was
established on September 7, 1993 in Shanghai, the PRC. The
original total investment and registered capital of the
Shanghai JV was US$1 million each and was increased to US$2
million each in 1995. The capital contributions were made in
cash. The original JV period was 10 years starting from the
date of issuance of the business license on September 7, 1993.
On April 1, 2002, the JV period was extended from 10 years to
15 years as approved by the PRC government.
On December 12, 2003, Physical Shanghai signed an agreement
with the Shanghai JV partner to acquire 1% of the registered
capital held by them at a consideration of US$20. The transfer
was approved by the PRC government on January 15, 2004 and
since then, the Shanghai JV has changed its status into a
foreign-invested enterprise wholly owned by Physical Shanghai.
b) Dalian Physical Ladies' Club Co., Ltd. ("the Dalian JV") is a
Sino-foreign equity JV established on April 11, 1995 in
Dalian, the PRC. The total registered capital of the Dalian JV
was Renminbi ("RMB") 10 million. The JV period is 12 years
from the date of issue of the business license on April 11,
1995. Physical Dalian held a 90% equity interest in the Dalian
JV and the profits or losses of the Dalian JV are to be shared
by the venturers in proportion to their equity interests in
the JV.
Physical Dalian contributed its share of the registered
capital in the form of property, plant and equipment and
renovation materials and the PRC venturer contributed in cash.
Both venturers had fulfilled their respective capital
contributions as of December 31, 1996. The JV commenced
operation in 1996.
F-8
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
2. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America.
The financial statements are presented in Hong Kong dollars which is
the Company's functional currency because the Company's operations are
primarily located in Hong Kong. For illustrative purposes, the exchange
rate adopted for the presentations of financial information as of and
for the year ended December 31, 2004 has been made at HK$7.8 to
US$1.00. No representation is made that the HK$ amount could have been,
or could be, converted into United States Dollars at that rate on
December 31, 2004 or at any other rate.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
information of the Company, its majority-owned and controlled
subsidiaries and joint ventures. All material intercompany
balances and transactions have been eliminated on
consolidation.
b) PREPARATION OF FINANCIAL STATEMENTS
The Company had negative working capital of HK$151,385 and
HK$186,469 as of December 31, 2004 and 2003 respectively,
which raise substantial doubt about the Company's ability to
continue as a going concern.
Continuation of the Company as a going concern is dependent
upon attaining profitable operations in the future, exercising
tight cost and cash flow controls measures, and obtaining
additional banking facilities. In view of the improvement in
operating results in 2004 and the Principal Stockholder's
undertaking to make available adequate funds to the Company as
and when required to maintain the Company as a going concern,
the financial statements have been prepared in conformity with
the principles applicable to a going concern.
c) INVENTORIES
Inventories, mainly comprise beauty products for treatment and
sale, are stated at the lower of cost and net realizable
value. Cost, which comprises all costs of purchase and, where
applicable, other costs that have been incurred in bringing
the inventories to their present location and condition, is
calculated using the first-in, first-out method. Net
realizable value represents the estimated selling price in the
ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
F-9
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
c) INVENTORIES (CONTINUED)
Inventories are consisted of the following:
AS OF DECEMBER 31
---------------------------------------
2004 2004 2003
US$ HK$ HK$
Beauty products for treatment 523 4,077 2,469
Beauty products for sale 225 1,756 1,403
Health food for sale 5 40 120
---------- ---------- ----------
753 5,873 3,992
========== ========== ==========
d) MARKETABLE DEBT AND EQUITY SECURITIES
Debt securities and equity securities designated as
available-for-sale, whose fair values are readily
determinable, are carried at fair value with unrealized gains
or losses included as a component of accumulated other
comprehensive income, net of applicable taxes. Debt and equity
securities classified as trading securities are carried at
fair value with unrealized gains or losses included in income.
Debt securities that are expected to be held-to-maturity are
carried at amortized cost. Individual securities classified as
either available-for-sale or held-to-maturity are reduced to
net realizable value by a charge to income for other than
temporary declines in fair value. Realized gains and losses
are determined on the average cost method and are reflected in
income.
e) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at cost less
accumulated depreciation.
The cost of an asset comprises its purchase price and any
directly attributable costs of bringing the asset to its
present working condition and location for its intended use.
Expenditure incurred after the assets have been put into
operation, such as repairs and maintenance, is normally
recognized as an expense in the period in which it is
incurred. In situations where it can be clearly demonstrated
that the expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the
assets, the expenditure is capitalized.
When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the accounts and any gain or
loss resulting from their disposal is included in the
statement of operations.
F-10
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION (CONTINUED)
Depreciation is provided to write off the cost of property,
plant and equipment over their estimated useful lives from the
date on which they become fully operational and after taking
into account their estimated residual values, using the
straight-line method at the following rates per annum:
Leasehold land held under long-term lease Over the lease term
Buildings 20 to 50 years
Leasehold improvements Over the lease term
Machinery and equipment 5 to 10 years
Furniture and fixtures 5 years
Computers 4 to 5 years
Motor vehicles 4 to 5 years
The Company recognizes an impairment loss on property, plant
and equipment when evidence, such as the sum of expected
future cash flows (undiscounted and without interest charges),
indicates that future operations will not produce sufficient
revenue to cover the related future costs, including
depreciation, and when the carrying amount of asset cannot be
realized through sale. Measurement of the impairment loss is
based on the fair value of the assets.
f) TRADE RECEIVABLES
Trade receivables are recorded at original invoice amount,
less an estimated allowance for uncollectible accounts. Trade
credit is generally granted on a short-term basis, thus trade
receivables do not bear interest. Trade receivables are
periodically evaluated for collectibility based on past credit
history with customers and their current financial condition.
Changes in the estimated collectibility of trade receivables
are recorded in the results of operations for the period in
which the estimate is revised. Trade receivables that are
deemed uncollectible are offset against the allowance for
uncollectible accounts. The Company generally does not require
collateral for trade receivables.
g) REVENUE RECOGNITION
Revenue represents service income in connection with the
provision of physical fitness and beauty treatment services
and other related income, net of the related sales tax, if
any. The non-refundable admission fee is recognized as revenue
on a pro-rata basis over the estimated duration whereas the
monthly dues, service income and other related income are
recognized as revenue when services are rendered.
h) DEFERRED INCOME
Deferred income represents unamortized non-refundable
admission fees and service fees billed but for which the
related services, or portion of the services, have not yet
been rendered by the balance sheet date.
F-11
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
i) CAPITAL LEASES
Leases that substantially transfer to the Company all the
rewards and risks of ownership of assets, other than legal
title, are accounted for as capital leases.
Property, plant and equipment held under capital leases are
initially recorded at the present value of the minimum lease
payments at the inception of the leases, with equivalent
liabilities categorized as appropriate under current or
non-current liabilities.
Depreciation is provided on the cost of the assets on a
straight-line basis over their estimated useful lives as set
out in Note 3(e) above. Finance charges implicit in the
purchase payments are charged to the statement of operations
over the periods of the contracts so as to produce an
approximately constant periodic rate of charge on the
remaining balances of the obligations for each accounting
period.
j) OPERATING LEASES
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are
accounted for as operating leases. Rentals payable under
operating leases are recorded in the statement of operations
on a straight-line basis over the lease term.
k) DEFERRED LIABILITIES
Deferred liabilities represent the benefit arose from the
rent-free period of the operating leases. The deferred
liabilities are amortized within the lease term, and the
amortization is recorded in the statement of operations.
l) INCOME TAXES
Provision for income and other related taxes have been
provided in accordance with the tax rates and laws in effect
in the various countries of operations.
The Company provides for deferred income taxes using the
liability method, by which deferred income taxes are
recognized for all significant temporary differences between
the tax and financial statements bases of assets and
liabilities. The tax consequences of those differences are
classified as current or non-current based upon the
classification of the related assets or liabilities in the
financial statements.
m) FOREIGN CURRENCY TRANSLATION
The Company and its subsidiaries maintain their accounting
books and records in Hong Kong Dollars ("HK$"), except for the
PRC JV and Physical Macau subsidiary which maintain their
accounting books and records in Renminbi and Macau Pataca
respectively. Foreign currency transactions during the year
are translated to HK$ at the approximate rates of exchange on
the dates of transactions. Monetary assets and liabilities
denominated in foreign currencies at year end are translated
at the approximate rates of exchange ruling at the balance
sheet date. Non-monetary assets and liabilities are translated
at the rates of exchange prevailing at the time the asset or
liability was acquired. Exchange gains or losses are recorded
in the statements of operations.
F-12
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
m) FOREIGN CURRENCY TRANSLATION (CONTINUED)
On consolidation, the financial statements of the PRC JV and
Physical Macau are translated into HK$ using the closing rate
method, whereby the balance sheet items are translated into
HK$ using the exchange rates at the respective balance sheet
dates. The share capital and retained earnings are translated
at exchange rates prevailing at the time of the transactions
while income and expenses items are translated at the average
exchange rate for the year.
All exchange differences arising on consolidation are recorded
within equity.
n) RELATED PARTIES
Parties are considered to be related if one party controls or
can significantly influence the management or operating
policies of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own
separate interests, those parties are related parties. Another
party also is a related party if it can significantly
influence the management or operating policies of the
transacting parties or if it has an ownership interest in one
of the transacting parties and can significantly influence the
other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate
interests. Related parties include an enterprise and its
principal owners, management or members of their immediate
families.
o) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share exclude dilution and are
computed by dividing earnings (loss) available to common
shareholders by the weighted average number of common shares
outstanding for the periods.
Diluted earnings (loss) per share are computed by dividing
earnings available to common shareholders by the weighted
average number of common shares outstanding adjusted to
reflect potentially dilutive securities. There were no
potentially dilutive securities outstanding during any of the
years and, accordingly, basic and diluted earnings (loss) per
share are the same.
p) USES OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires the Company's management to make estimates and
assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual amounts
could differ from those estimates.
q) ADVERTISING AND MARKETING COSTS
All advertising and marketing costs are expensed off in the
period in which those costs are incurred or the first time the
advertising takes place.
F-13
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
r) ACCOUNTING CHANGE
Since January 1, 2002, the consolidated financial statements
have been prepared in conformity with EITF 01-9. Upon adoption
by the Company since January 1, 2002, sales rebates incurred
in 2002 and subsequent thereto were accounted for as a
reduction in the corresponding revenues instead of being
included in other selling and administrative expenses. In
addition, sales rebates incurred have been deferred in
synchronization with the deferral of revenues in accordance
with the Company's accounting policy. As a result, revenues,
expenses and deferred income have been reduced by HK$7,781,
HK$10,182 and HK$2,401 respectively for the year ended
December 31, 2002.
The total proforma cumulative effect of this accounting change
on prior years resulted in an after-tax and minority interests
credit to income of HK$3,857 for the year ended December 31,
2002.
s) RECENTLY ISSUED ACCOUNTING STANDARDS
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. On October 1, 2004,
FASB announced that the effective date of this requirement has
been delayed until additional guidance is issued. As a result,
there has been no impact of this EITF on the Company for the
year.
In November 2004, the FASB issued SFAS No. 151 "Inventory
Costs, an amendment of ARB No. 43, Chapter 4". This statement
amends ARB No. 43, Chapter 4 to clarify that abnormal amounts
of idle facility expense, freight, handling costs, and
spoilage should be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal"
and that fixed production overheads should be allocated to
inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005;
however, earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 23,
2004. The provisions of SFAS No. 151 should be applied
prospectively. Management considers that SFAS No. 151 does not
have significant impact on its financial statements when it is
adopted.
F-14
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
s) RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". This statement provides investors and
other users of financial statements with more complete and
neutral financial information by requiring that the
compensation cost relating to share-based payment transactions
be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability
instruments issued. SFAS No. 123(R) covers a wide range of
share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS
123(R) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Public entities (other than
those filing as small business issuers) will be required to
apply this statement as of the first interim or annual
reporting period that begins after June 15, 2005. Management
considers that SFAS No. 123(R) does not have significant
impact on its financial statements when it is adopted.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 29
Accounting for Non-monetary Transactions". The amendments made
by SFAS No. 153 are based on the principle that exchanges on
non-monetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the
narrow exception for non-monetary exchanges of similar
productive assets and replace it with a broader exception for
exchanges of non-monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity expected to change
significantly as a result of the exchange. SFAS No. 153 is
effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is
permitted for non-monetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions
of SFAS No. 153 should be applied prospectively. Management
considers that SFAS No. 153 does not have significant impact
on its financial statements when it is adopted.
4. MARKETABLE SECURITIES, COLLATERALIZED
The balance represents available-for-sale unlisted capital guaranteed
funds made up of debt and equity securities. As of the balance sheet
dates, as the cost approximated to the estimated fair value, no gain or
loss was recognized. The contractual maturity dates of the funds are
ranging from March 2006 to December 2007. These securities have been
pledged to banks to secure general banking facilities granted to the
Company.
F-15
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
5. PROPERTY, PLANT AND EQUIPMENT, NET
AS OF DECEMBER 31
----------------------------------------------------
2004 2004 2003
US$ HK$ HK$
Land and buildings 402 3,136 3,136
Leasehold improvements 26,007 202,857 196,871
Machinery and equipment 27,949 218,003 217,209
Furniture and fixtures 8,383 65,387 62,210
Computers 1,048 8,170 7,355
Motor vehicles 537 4,184 4,211
Less: Accumulated depreciation (40,237) (313,845) (266,205)
--------------- ---------------- ---------------
Net book value 24,089 187,892 224,787
=============== ================ ===============
As of December 31, 2004, the cost and accumulated depreciation of
property, plant and equipment held under capital leases amounted to
approximately HK$1,814 (2003: HK$36,634) and HK$681 (2003: HK$21,394)
respectively.
6. SHORT-TERM BANK LOANS
The short-term bank loans are collateralized and repayable within one
year. Please refer to Note 7 for details of collateral for such
facilities.
Supplemental information with respect to the short-term bank loans was
as follows:
YEAR ENDED DECEMBER 31
-----------------------------------------------------
2004 2004 2003
Maximum amount outstanding during the year US$1,943 HK$15,152 HK$15,902
Average amount outstanding during the year US$1,629 HK$12,709 HK$12,592
Weighted average interest rate at the end of the
year 8% 8% 6%
Weighted average interest rate during the year 8% 8% 7%
F-16
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
7. LONG-TERM BANK LOANS
The Company obtained various lines of credit under banking facilities
which aggregated HK$28,173 as of December 31, 2004 (2003: HK$42,976)
from creditworthy commercial banks in Hong Kong and PRC to finance its
operations. These loans were collateralized by certain of the assets of
the Company its related companies and the Principal Stockholder and his
spouse. As of December 31, 2004, the loans consisted of the following:
PRINCIPAL INTEREST RATE MATURITY
US$ HK$
82 638 HK$ prime + 1.5% Serially from 2004 to 2005
====== ======
The collateral of the short-term and long-term bank loans include:
(i) leasehold property in Hong Kong owned by Ever Growth with a
net book value of HK$1,999;
(ii) fixed deposits owned by Physical Hong Kong, Physical E House
and Physical TST;
(iii) leasehold property in Hong Kong owned by Silver Policy
Development Limited ("Silver Policy"), a company owned by the
Principal Stockholder and his spouse;
(iv) personal guarantees from the Principal Stockholder and his
spouse;
(v) marketable securities as stated in Note 4;
(vi) a fixed charge over Physical Macau's machinery and equipment
and a floating charge over its other assets; and
(vii) corporate guarantees provided by Silver Policy and Mighty
System Limited which are owned by the Principal Stockholder.
8. INCOME TAXES
The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which it is
domiciled and operates. In the opinion of management, any undistributed
earnings of Physical Holdings and the Operating Subsidiaries will be
reinvested indefinitely.
Income tax (expense) benefit comprised of the following:
YEAR ENDED DECEMBER 31
---------------------------------------------------
2004 2004 2003 2002
US$ HK$ HK$ HK$
Current taxes (143) (1,112) (1,488) (4,434)
Deferred taxes 70 544 1,847 2,841
Tax effect related to deferral of sales rebates - - - 759
---------- ---------- ----------- ----------
Income tax (expense) benefit (73) (568) 359 (834)
========== ========== =========== ==========
F-17
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
8. INCOME TAXES (CONTINUED)
Reconciliation to the expected statutory tax rate in Hong Kong of 17.5%
(2003: 17.5% AND 2002: 16%) is as follows:
YEAR ENDED DECEMBER 31
-----------------------------------
2004 2003 2002
% % %
Statutory rate 17.5 17.5 16.0
Difference in tax rates in the countries that the Company operates (48.6) (1.5) 2.6
Valuation allowance in respect of net operating losses (74.0) (13.0) (17.9)
Valuation allowance in respect of temporary differences 132.0 (4.0) (7.2)
Effect of change in tax rate - 0.3 -
Others 3.0 1.5 (2.8)
--------- --------- ---------
Effective rate 29.9 0.8 (9.3)
========= ========= =========
Recognized deferred tax assets (liabilities) comprised of the
following:
AS OF DECEMBER 31
------------------------------------------------
2004 2004 2003
US$ HK$ HK$
Taxable temporary differences in respect of property, plant
and equipment (664) (5,182) (2,746)
Deductible temporary differences in respect of property,
plant and equipment 1,089 8,491 5,985
Operating losses carry forward 2,121 16,545 16,909
Valuation allowance (Note) (2,828) (22,056) (22,894)
------------- ------------- ------------
Net deferred tax liabilities (282) (2,202) (2,746)
============= ============= ============
Note: Valuation allowance was made for deferred tax assets recognized
in certain Hong Kong subsidiaries as it is more likely than not
that the assets will not be realized. The net change in
valuation allowance for the year ended December 31, 2004 was a
decrease of HK$838 (US$107).
The Hong Kong subsidiaries are subject to Hong Kong profits tax at a
rate of 17.5% (2003: 17.5% AND 2002: 16%). As of December 31, 2004 and
2003, the Company has operating losses carry forward in respect of Hong
Kong subsidiaries of HK$10,995 and HK$34,032 respectively. The
operating losses have no expiry date under the current tax legislation.
Since those PRC JV have sustained losses for PRC income tax purposes,
the Company has not recorded any PRC income tax expense. PRC income tax
in the future will be calculated at the applicable rate relevant to the
PRC JV which is currently 33%. As of December 31, 2004 and 2003, the
Company has operating losses carry forward in respect of PRC JV of
HK$27,582 and HK$24,350 respectively. The operating losses of the PRC
JV will expire five years after the losses were incurred.
F-18
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
8. INCOME TAXES (CONTINUED)
As the fitness centre operated in Macau has incurred a loss for
taxation purposes for the period, the Company has not recorded any
Macau income tax expense. Macau profits tax is currently charged at
sliding rates with a maximum rate of 15% on assessable profits. As of
December 31, 2004 and 2003, the Company has operating losses carry
forward in respect of the fitness centre operated in Macau of HK$16,105
and HK$18,648 respectively. The operating losses of the Macau centre
will expire three years after the losses were incurred.
The Company imported beauty products from suppliers in Hong Kong into
the PRC for beauty treatment and sale 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.
Since the Company commenced its business operation in the PRC, the
Company has not made any import declaration nor paid any of the taxes
due for such imports. The directors have represented that the suppliers
have undertaken to the Company that they would reimburse the Company
for such payments had such payments been found necessary.
As of the balance sheet date, the Company is potentially liable to make
good in aggregate an amount of HK$12,994 (2003: HK$12,388), of which an
amount of HK$7,334 (2003: HK$6,728) has been provided for as "Taxes
other than income" and as "Other receivables" in the liabilities and
assets respectively. No further provision has been made for the
difference which amounted to HK$5,660 (2003: HK$5,660) and any
potential amount of penalty which might be imposed. In this respect,
the directors are of the opinion that the probability that such
potential liabilities will be crystallized would be remote.
As also stated in Note 12(e) to the financial statements, the Principal
Stockholder has undertaken to indemnify the Company against any
contingent liabilities including tax liabilities and claims that may
result from the operating activities of the Company in Hong Kong, the
PRC and elsewhere occurring prior to the balance sheet date. Had any
payments been found necessary, the payments made by the Principal
Stockholder will be recorded as expenses in the Company's financial
statements with a corresponding credit to contributed (paid-in) capital
in accordance with the stipulations as mentioned in the Staff
Accounting Bulletin Topic 5-T.
F-19
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
9. OTHER PAYABLES
AS OF DECEMBER 31
------------------------------------------------
2004 2004 2003
US$ HK$ HK$
Accrued rental and related expenses 3,073 23,973 35,552
Accrued salaries, commissions and related expenses 2,058 16,051 25,487
Accrued capital expenditures 399 3,113 10,983
Other accrued expenses and creditors 1,667 12,999 15,292
------------- ------------- ------------
7,197 56,136 87,314
============= ============= ============
10. OBLIGATIONS UNDER CAPITAL LEASES
Physical TST and Physical Tsuen Wan lease fitness equipment under
several capital leases. The scheduled future minimum lease payments
were as follows:
AS OF DECEMBER 31
-------------------------------------------------
2004 2004 2003
US$ HK$ HK$
Payable during the following periods:
Within one year 122 951 7,076
Over one year but not exceeding two years - - 951
Over two years but not exceeding three years - - -
Over three years but not exceeding four years - - -
Over four years but not exceeding five years - - -
Thereafter - - -
-------------- -------------- -------------
Total minimum lease payments 122 951 8,027
Less: Amount representing interest (30) (235) (1,795)
-------------- -------------- -------------
Present value of net minimum lease payments 92 716 6,232
============== ============== =============
11. COMMITMENTS
CAPITAL EXPENDITURE COMMITMENTS
AS OF DECEMBER 31
------------------------------------------------
2004 2004 2003
US$ HK$ HK$
Contracted but not provided for net of deposit paid 1,228 9,579 12,136
============= ============= ============
F-20
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
11. COMMITMENTS (CONTINUED)
COMMITMENTS UNDER OPERATING LEASES
The Company had outstanding commitments not provided for under
non-cancelable operating leases in respect of land and buildings, the
portion of these commitments payable in the following periods is as
follows:
AS OF DECEMBER 31
------------------------------------------------
2004 2004 2003
US$ HK$ HK$
Payable during the following periods:
Within one year 15,134 118,043 126,225
Over one year but not exceeding two years 10,392 81,055 83,503
Over two years but not exceeding three years 6,641 51,796 43,598
Over three years but not exceeding four years 4,708 36,724 25,155
Over fours years but not exceeding five years 3,322 25,914 20,690
Thereafter 17,080 133,222 69,629
------------- ------------- ------------
Total operating lease commitments 57,277 446,754 368,800
============= ============= ============
12. RELATED PARTY TRANSACTIONS
The Company had the following transactions with related parties:
YEAR ENDED DECEMBER 31
--------------------------------------------------
2004 2004 2003 2002
NOTE US$ HK$ HK$ HK$
Rental and related expenses of a
director's quarter (a) 207 1,614 1,234 1,452
Purchase of beauty and fitness equipment (b) - - 1,031 3,442
Purchase of health food (b) 51 400 657 -
(a) The rental of a director's quarter is payable to a related
company, Mighty System Limited.
(b) The purchases of beauty and fitness equipment and health food
were made from a related company, Williluck International
Limited.
(c) The Principal Stockholder of the Company has beneficial
interests in all the aforementioned related companies or the
stockholder of the related companies are related to the
Principal Stockholder.
F-21
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
(d) The balance due from the Principal Stockholder to the Company
as of December 31, 2004 was HK$9,480 (2003: HK$9,481). Under
an agreement with the Company, the Principal Stockholder has
pledged 1,500,000 shares of the Company's stock as collateral,
which had a market value of HK$5,967 as of December 31, 2004.
(e) The Principal Stockholder has undertaken to indemnify the
Company against any contingent liabilities including tax
liabilities and claims that may result from the operating
activities of the Company in Hong Kong, the PRC and elsewhere
occurring prior to the balance sheet date. He has also
undertaken to indemnify the Company against any loss that may
arise from non-recovery of advances made to two unrelated
parties amounted to HK$890 (2003: HK$2,104), which have been
included in "Prepayment to vendors and suppliers and other
current assets".
13. PREPAYMENTS FOR CONSTRUCTION-IN-PROGRESS
The balance as of December 31, 2004 mainly represented prepayments for
decoration works and purchase of machinery for a new fitness and beauty
centre which commenced operations in January 2005.
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31
-----------------------------------------
2004 2004 2003
US$ HK$ HK$
Cash paid for:
Interest expenses 783 6,108 7,329
Income taxes 71 551 7,640
F-22
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
15. OTHER SUPPLEMENTAL INFORMATION
The following items are included in the consolidated statements of
operations:
YEAR ENDED DECEMBER 31
-----------------------------------------
2004 2004 2003
NOTE US$ HK$ HK$
Interest expenses on:
Capital leases 200 1,558 1,875
Overdrafts and bank loans 164 1,280 2,062
Others 419 3,270 3,392
Interest income (a) 10 80 135
Sales taxes (b) 186 1,450 1,354
Advertising and marketing expenses (c) 2,834 22,105 29,155
Rental expenses under operating leases 16,117 125,716 119,721
Management fee income (d) 229 1,790 -
Auditors' remuneration 69 539 529
Directors' emoluments 305 2,379 2,643
(a) Interest income is included in "Other income, net" in the
consolidated statements of operations.
(b) Sales taxes are deducted from "Operating revenues" in the
consolidated statements of operations.
(c) Advertising and marketing expenses are included in "Other
selling and administrative expenses" in the consolidated
statements of operations.
(d) Management fee income is included under "Other income, net" in
the consolidated statements of operations. The fee is earned
from a fitness centre operated by a third party in Hangzhou,
the PRC, under franchise of the Company, which is calculated
at 10% or 25% of the profit of the centre.
16. RETIREMENT PLAN
The Company did not operate any retirement plan before December 2000.
Following the implementation of the Mandatory Provident Fund ("MPF") in
Hong Kong with effect from December 2000, the Company operates two
Mandatory Provident Fund ("MPF") plans for its Hong Kong employees. The
assets of the MPF plans are held separately from those of the Company
in two provident funds managed by independent trustees. In April 2004,
one of the MPF plans was terminated and the contribution was
transferred to the other remaining MPF plan. The pension expenses
charged to the consolidated statements of operations amounted to
HK$6,414, HK$8,059, and HK$5,707 for the years ended December 31, 2004,
2003 and 2002 respectively.
F-23
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
17. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") which was adopted by
the Company's stockholders and its Board of Directors on April 23,
1997. Under the Plan, the Company may issue incentive stock options,
non-qualified options, restricted stock grants, and stock appreciation
rights to selected directors, officers, advisors and employees of the
Company. A total of 500,000 shares of Common Stock of the Company are
reserved for issuance under the Plan. Stock options may be granted as
non-qualified or incentive options. Incentive stock options may not be
granted at a price less than the fair market value of the stock as of
the date of grant while non-qualified stock options may not be granted
at a price less than 85% of the fair market value of the stock as of
the date of grant. The plan will be administered by an option committee
which is to be composed of two or more disinterested directors of the
Board of Directors (the "Committee"). The option can be exercised
during a period of time fixed by the Committee subject to the condition
that no option may be exercised ten years after the date of grant or
three years after death or disability, whichever is later. As of the
date of this report, no stock options have been granted by the Company
under the Plan.
18. OPERATING RISKS
a) CONCENTRATION OF SUPPLIERS
The Company purchases beauty products from a number of
suppliers. Details of individual suppliers also accounted for
more than 10% of the Company's purchases are as follows:
YEAR ENDED DECEMBER 31
-----------------------------------------
2004 2003 2002
% % %
William Pharmaceutical Agency 11 - -
Kaydex Trading Ltd. 27 39 40
Kingstar International Trading Limited 13 16 24
b) CONCENTRATION OF CREDIT RISK
None of the sales to the customers accounted for more than 10%
of the Company's turnover for the three years ended December
31, 2004, 2003 and 2002.
F-24
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
19. REPORT ON SEGMENT INFORMATION
The Company's operations are classified into two reportable business
segments: provision of physical fitness and beauty treatment services.
Each separately managed segment offers different products requiring
different marketing and distribution strategies.
Information concerning consolidated operations by business segment and
geographic area is presented in the tables below and on the following
pages:
CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
2004 2004 2003 2002
US$ HK$ HK$ HK$
Operating revenues
- Physical fitness 38,282 298,596 258,015 278,212
- Beauty treatments 26,026 203,000 181,093 135,532
- Others 28 220 403 -
------------- ------------- ----------- ------------
64,336 501,816 439,511 413,744
============= ============= =========== ============
Operating (loss) profit
- Physical fitness (1,394) (10,876) (43,026) (9,468)
- Beauty treatments 1,596 12,450 (1,691) (10,770)
- Others (23) (180) (251) -
------------- ------------- ----------- ------------
179 1,394 (44,968) (20,238)
============= ============= =========== ============
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
2004 2004 2003 2002
US$ HK$ HK$ HK$
Depreciation
- Physical fitness 6,032 47,047 47,360 50,422
- Beauty treatments 2,087 16,280 15,258 12,990
------------- ------------- ----------- ------------
8,119 63,327 62,618 63,412
============= ============= =========== ============
Total assets
- Physical fitness 26,582 207,342 239,313 259,912
- Beauty treatments 9,340 72,850 75,573 64,978
------------- ------------- ----------- ------------
35,922 280,192 314,886 324,890
============= ============= =========== ============
Property, plant and equipment additions
- Physical fitness 891 6,953 38,979 88,241
- Beauty treatments 2,539 19,808 7,439 38,123
-------------
------------- ----------- ------------
3,430 26,761 46,418 126,364
============= ============= =========== ============
F-25
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
19. REPORT ON SEGMENT INFORMATION (CONTINUED)
CONSOLIDATED OPERATIONS BY GEOGRAPHIC AREA
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
2004 2004 2003 2002
US$ HK$ HK$ HK$
Operating revenues
- Hong Kong 56,764 442,755 385,966 374,102
- PRC 7,572 59,061 53,545 39,642
------------- -------------- ------------- ------------
64,336 501,816 439,511 413,744
============= ============== ============= ============
Operating (loss) profit
- Hong Kong 2,161 16,855 (30,140) 1,458
- PRC (1,209) (9,433) (7,634) (16,177)
Interest income 10 80 135 126
Interest expenses (783) (6,108) (7,329) (5,645)
------------- -------------- ------------- ------------
Net (loss) income 179 1,394 (44,968) (20,238)
============= ============== ============= ============
Segment assets
- Hong Kong 24,406 190,370 230,387 247,305
- PRC 11,516 89,822 84,499 77,585
------------- -------------- ------------- ------------
35,922 280,192 314,886 324,890
============= ============== ============= ============
20. UNAUDITED QUARTERLY CONSOLIDATED FINANICAL DATA
2004
QUARTER
---------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
HK$ HK$ HK$ HK$
Operating revenues 113,551 144,601 125,259 118,405
Operating expenses (121,955) (131,070) (126,553) (116,577)
--------------- --------------- --------------- ---------------
(Loss) Income from operations (8,404) 13,531 (1,294) 1,828
Non-operating expenses (1,071) (755) (1,212) (726)
--------------- --------------- --------------- ---------------
(Loss) Income before income taxes
and minority interests (9,475) 12,776 (2,506) 1,102
(Provision) Benefit for income
taxes - (2,689) 441 1,680
Minority interests 200 (362) 425 (198)
--------------- --------------- --------------- ---------------
Net (loss) income (9,275) 9,725 (1,640) 2,584
=============== =============== =============== ===============
(Loss) Earnings per share of common stock
- Basic (0.93) 0.97 (0.16) 0.26
=============== =============== =============== ===============
A management fee expense incurred to Mighty System Limited of HK$4,000
in the second quarter of 2004 was reversed in the fourth quarter.
F-26
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
20. UNAUDITED QUARTERLY CONSOLIDATED FINANICAL DATA (CONTINUED)
2003
Quarter
---------------------------------------------------------------------------
First Second Third Fourth
HK$ HK$ HK$ HK$
Operating revenues 105,765 102,463 115,082 116,201
Operating expenses (113,449) (120,151) (123,066) (121,606)
--------------- --------------- --------------- ---------------
Loss from operations (7,684) (17,688) (7,984) (5,405)
Non-operating expenses (1,492) (1,409) (1,969) (1,906)
--------------- --------------- --------------- ---------------
Income before income taxes and
minority interests (9,176) (19,097) (9,953) (7,311)
(Provision) Benefit for income
taxes (462) 210 201 410
Minority interests (24) 257 131 (154)
--------------- --------------- --------------- ---------------
Net loss (9,662) (18,630) (9,621) (7,055)
=============== =============== =============== ===============
Loss per share of common stock
- Basic (0.97) (1.86) (0.96) (0.71)
=============== =============== =============== ===============
F-27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) as of the end of the period
covered by this report (the "Evaluation Date"), have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were adequate
and effective to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by others within those
entities.
(b) Management's Report on Internal Control over Financial Reporting.
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). The Company's management
assessed the effectiveness of its internal control over financial reporting as
of December 31, 2004. The Company's management has concluded that, as of
December 31, 2004, its internal control over financial reporting is effective
based on these criteria.
(c) Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure controls and
procedures subsequent to the Evaluation Date, nor were there any significant
deficiencies or material weaknesses in such disclosure controls and procedures
requiring corrective actions. As a result, no corrective actions were taken.
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, does not expect that the Company's disclosure controls and
procedures or its internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
ITEM 9B. OTHER INFORMATION
NONE
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The officers and directors of the Company, their ages and present
positions held with the Company are as follows:
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
Ngai Keung Luk (Serleo) 48 Chairman of the Board of Directors,
Chief Executive Officer
Yuk Wah Ho 49 President and Director
Robert Chui 48 Chief Financial Officer and Director
Darrie Lam 41 Executive Vice President, Secretary
and Director
Yat Ming Lam 47 Director
Allan Wah Chung Li 47 Director
The following is a brief summary of the background of each director,
executive officer and key employees of the Company:
NGAI KEUNG LUK (SERLEO), CHIEF EXECUTIVE OFFICER, CHAIRMAN. Mr. Luk has
been the Chairman of the Board of Directors and Chief Executive Officer of the
Company since October, 1996. He is the founder of its predecessor companies and
has over eighteen years' experience in the physical health service business. Mr.
Luk was previously employed as a trader on the floor of the Hong Kong gold
exchange. Mr. Luk is a controlling shareholder of the Company and owns
beneficially approximately 80% of the Company's Common Stock (see "Principal
Shareholders").
YUK WAH HO, PRESIDENT, DIRECTOR. Ms. Ho has over twenty years'
experience in beauty and skin care and has attended various international beauty
workshops held in Europe. Ms. Ho holds many certificates in beauty therapy, skin
care, and cosmetic applications from France, England, Taiwan and Hong Kong,
including Rene Guinot, Germain de Cappucini, and Sothy's. Ms. Ho is responsible
for the business development and staff training of the Company's beauty
treatment business. Ms. Ho is the wife of Mr. Luk.
ROBERT CHUI, CHIEF FINANCIAL OFFICER, DIRECTOR. Mr. Chui has been Chief
Financial Officer of the Company since October, 1996. Mr. Chui graduated from
Concordia University, Canada. He is a practicing Certified Public Accountant in
Hong Kong and a fellow member of the Chartered Association of Certified
Accountants (UK). Mr. Chui has twelve years of experience with the international
accounting firm, Ernst and Young. Mr. Chui is responsible for corporate planning
and financial control.
DARRIE LAM, EXECUTIVE VICE PRESIDENT, SECRETARY, DIRECTOR. Ms. Lam has
been a Vice-President and Secretary of the Company since October, 1996. Ms. Lam
is a fellow member of the Hong Kong Institute of Certified Public Accountants
and a fellow member of the Chartered Association of Certified Accountants (UK).
She joined the Company in 1994 and before that she worked with a major Hong Kong
Listed company, Wharf Group, as a Financial Analyst. Ms. Lam is responsible for
the Company's secretarial affairs, finance and administration functions. Ms. Lam
received MBA degree from the University of Manchester, U.K.
YAT MING LAM, DIRECTOR. Mr. Lam has been a Director of the Company
since August, 1997. In the past year, Mr. Lam has run his own business in China.
Previously, Mr. Lam was employed as a Sales Manager with Fitness Concept Leisure
Supplies Ltd., one of the leading fitness equipment and product suppliers.
28
ALLAN WAH CHUNG LI, DIRECTOR. Mr. Li has been a director of the Company
since June, 1998. Mr. Li is a solicitor qualified to practice law in Canada,
England and Hong Kong. Mr. Li has practiced law in Vancouver, Toronto and Hong
Kong for ten years and had also worked for the Listing Division of the Stock
Exchange of Hong Kong. Since 1994, Mr. Li has been with Lai Sun Development
Company Limited, a company listed on the Stock Exchange of Hong Kong, where
he is currently serving as a vice-president, and is involved in hotels and
corporate transactions. Mr. Li received B.Comm. and L.L.B degrees from the
University of British Columbia, Canada.
WAI KEE LAM, GENERAL MANAGER. Mr. Lam holds a Diploma in Business
Management awarded by the Hong Kong Management Association. Prior to joining the
Company in October, 1997, Mr. Lam was the Director and General Manager of
Fitness Concept Leisure Supplies Ltd., one of the leading fitness equipment and
product suppliers. Mr. Lam is responsible for the Company's fitness operation in
both Hong Kong and China branches.
LING LAM, GENERAL MANAGER - BEAUTY. Ms. Lam is a member of The
Association of Worldwide Beauty Professional holding an ITEC Aesthetician
Diploma, Fingertip Accupuncture Certiciate - Hong Kong, Theory & Practice of
Aesthetic Diploma - Cananda, Diploma of Cosmetology - USA, and CIBTAC Aesthetic
Treatments Diploma. Prior to joining the Company in June, 1996, Ms. Lam was the
General Manager of Golden Maple Leaf Foundation Management Ltd. Ms. Lam is
responsible for the Company's beauty operation in both Hong Kong and China
branches.
SIU LING CHENG, MARKETING MANAGER. Ms. Cheng holds a Bachelor Degree in
Marketing at the University of Southern Queensland, Australia. Ms. Cheng joined
the Company since 1992 as a marketing executive, and was promoted to marketing
manager the following year. Ms. Cheng is responsible for the Company's
promotional and marketing activities and public relations. Ms. Cheng also
coordinates and assists the marketing teams in China branches.
GILLIAN LOUISE HOLLOWAY, SENIOR FITNESS MANAGER. Ms. Holloway is a
member of the Association for Fitness Professionals. Ms. Holloway obtained the
qualifications of Certified Aerobics Instructor and Certified Personal Trainer
issued by the American Council on Exercise. Ms. Holloway joined the Company in
1991 and is responsible for the Company's fitness training services and customer
relationship. Ms. Holloway received a Graduate Certificate in Recreation and
Sports Management issued by the Victoria University, Australia.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee, composed of the
two outside directors and Robert Chui, Chief Financial Officer. The principal
functions of the Audit Committee will include making recommendations to the
Board regarding the selection of independent public accountants to audit
annually the books and records of the Company, reviewing the proposed scope of
each audit and reviewing the recommendations of the independent public
accountants as a result of their audit of the Company. The Audit Committee will
also periodically review the activities of the Company's accounting staff and
the adequacy of the Company's internal controls.
CODE OF BUSINESS CONDUCT AND ETHICS
The Company has not adopted yet the code of business conduct and ethics
to guide all directors, officers and employees, but intends to adopt one on its
next meeting of the Board of Directors.
29
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company during the fiscal years 2004,
2003 and 2002 by those persons who served as Chief Executive Officer and any
Named Executive Officer who received compensation in excess of $100,000 during
such years.
SUMMARY COMPENSATION TABLE (US$)
Name and Principal Position Year Salary(1) Annual Awards(2)
- --------------------------- ---- --------- -----------------------------------
Bonus (3) Other compensation (4)
-------- ----------------------
Ngai Keung Luk, CEO, Chairman 2004 - - 207,000
2003 - - 261,800
2002 - - 186,000
Yuk Wah Ho, President, COO 2004 98,000 - -
2003 77,000 - -
2002 - - -
(1) No officers received or will receive any bonus or other annual
compensation other than salaries during fiscal year 2004, other than
stated above. Management believes that the value of other non-cash
benefits and compensation distributed to executive officers of the
Company individually or as a group during fiscal year 2004 did not
exceed the lesser of US$50,000 or ten percent of such officers'
individual cash compensation or, with respect to the group, US$50,000
times the number of persons in the group or ten percent of the group's
aggregate cash compensation.
(2) No officers received or will receive any long term incentive plan
(LTIP) payouts or other payouts during fiscal year 2004.
(3) Bonus awarded based on performance.
(4) Other compensation for Mr. Luk included an allowance of HK$960,000
(US$123,000) for the fiscal years 2004 and 2003, being fair market
rent of the living accommodation provided to Mr. Luk. See also
"Certain Transactions".
COMPENSATION OF DIRECTORS
The Company reimburses each Director for reasonable expenses (such as
travel and out-of-pocket expenses) in attending meetings of the Board of
Directors. Directors are not separately compensated for their services as
Directors.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
There are no employment agreements with the Company's key employees at
this time.
30
Limitation of Liability of Directors
- ------------------------------------
The laws of the State of Delaware and the Company's By-laws provide for
indemnification of the Company's directors for liabilities and expenses that
they may incur in such capacities. In general, directors and officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, and
with respect to any criminal action or proceeding, actions that the indemnitee
had no reasonable cause to believe were unlawful.
The Company has been advised that in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2004, the stock
ownership of all persons known to own beneficially five percent or more of the
Company's Common Stock and all directors and officers of the Company,
individually and as a group. Each person has sole voting and investment power
over the shares indicated, except as noted. Unless otherwise indicated, the
address for each stockholder is 40/F., RBS Tower, Times Square, No. 1
Matheson Street, Causeway Bay, Hong Kong.
NAME AND AMOUNT AND
ADDRESS OF NATURE PERCENTAGE
BENEFICIAL OF BENEFICIAL BENEFICAILLY
OWNER OWNERSHIP (1) OWNED(2)
- ---------- ------------- ------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
NGAI KEUNG LUK (SERLEO)(3) 8,000,000 80.00%
YUK WAH HO, PRESIDENT (4) 8,000,000 80.00%
ROBERT CHUI, CFO 0 0.00%
DARRIE LAM, VICE PRESIDENT 0 0.00%
YAT MING LAM, DIRECTOR 0 0.00%
ALLAN WAH CHUNG LI, DIRECTOR 0 0.00%
ALL OFFICERS AND DIRECTORS 8,000,000 80.00%
AS A GROUP (6 PERSONS)(3)
- ----------
* Less than 1%
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed below, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the percentage
of the person holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any other
person.
(2) Based upon 10,000,000 shares of Common Stock outstanding.
(3) Mr. Luk pledged 1,500,000 shares of Common Stock for the loans received
from the Company under that certain Pledge Agreement dated September
30, 1997.
(4) Ms. Ho is the wife of Ngai Keung Luk (Serleo). Accordingly the number
of common stock owned by Mr. Luk and Ms. Ho overlap.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company made certain advances to Mr. Luk, the Company's Chief
Executive Officer and the Chairman of its Board of Directors, during the years.
The balance due to the Company and its subsidiaries at December 31, 2004 was
HK$9,480,000 (US$1,215,000). Under an agreement with the Company, Mr. Luk has
pledged 1,500,000 shares of the Company stock as collateral. See Note 12 to
Financial Statements.
Mr. Luk receives a monthly allowance of HK$80,000 (US$10,300) for the
fiscal year 2004 for his living accommodations. Such allowance represents the
fair market rent of the property owned by a company which is controlled by
Mr. Luk. See also "Management - Compensation".
The Company had the transactions with related companies as provided in
the Financial Statements, Note 12.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Set forth below are fees paid to the Company's independent accountants for the
past two years for the professional services performed for the Company.
Audit Fees: The Company paid Moores Rowland Mazars $69,000 in the year 2004 and
$67,000 in the year 2003, in connection with the annual audit and to review
the quarterly filings made on form 10-Q.
Audit Related Fees: NONE
Tax Fees: NONE
All Other Fees: NONE
32
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
The following exhibits of the Company are included herein.
2.1 Share Exchange Agreement between Foreclosed Realty Exchange, Inc. and
Ngai Keung Luk, together with amendments*
3.1 Articles of Incorporation of Physical Spa & Fitness Inc., a Delaware
Corporation*
3.2 Certificate of Amendment of Articles of Incorporation changing the
number of directors*
3.3 Certificate of Amendment of Articles of Incorporation changing the
Company's name*
3.4 Certificate of Amendment of Articles of Incorporation changing the
authorized capital*
3.5 By-Laws of Physical Spa & Fitness Inc.*
3.6 Amended By-Laws of Physical Spa & Fitness Inc.
10.7 Repayment Agreement between the Company and Ngai Keung Luk*
10.8 Pledge Agreement between the Company and Ngai Keung Luk*
10.9 1997 Stock Option Plan and form of Stock Option Agreement*
16. Letter on changes in certifying accountant**.
21. Subsidiaries of the Registrant
23. Consent of Moores Rowland Mazars, Independent Auditors.
- ----------
* Filed with the Commission as exhibit to the Registration Statement or
amendments to the Registration Statement. ** Filed with the Commission as
exhibit 16 to Form 8-K.
(b) Reports on Form 8-K
-------------------
NONE
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on April 14, 2005.
PHYSICAL SPA & FITNESS INC.
By: /s/ Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Ngai Keung Luk Chairman and Chief Executive Officer Date: 4/14/05
- ------------------------ (principal executive officer)
Ngai Keung Luk
/s/ Yuk Wah Ho President and Director Date: 4/14/05
- ------------------------
Yuk Wah Ho
/s/ Robert Chui Chief Financial Officer and Director Date: 4/14/05
- ------------------------ (Principal accounting and financial officer)
Robert Chui
/s/ Darrie Lam Executive Vice President, Secretary Date: 4/14/05
- ------------------------ and Director
Darrie Lam
/s/ Yat Ming Lam Director Date: 4/14/05
- ------------------------
Yat Ming Lam
/s/ Allan Wah Chung Li Director Date: 4/14/05
- ------------------------
Allan Wah Chung Li
34