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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12 b - 2 of the Exchange Act) Yes( ) No(X)
Commission file number 0-26573
PHYSICAL SPA & FITNESS INC.
---------------------------
(Exact name of Registrant as specified in its charter)
Delaware 98-0203281
-------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
40/F RBS Tower, Times Square
No. 1 Matheson Street, Causeway Bay
Hong Kong
(Address of principal executive offices)
(011) (852) 2917-0000
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: March 31, 2005, 10,000,000 shares.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations 1
for the three-month periods
ended March 31, 2004 and 2005 (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2004 2
and March 31, 2005 (Unaudited)
Condensed Consolidated Statements of Cash Flows 3
for the three-month periods ended
March 31, 2004 and 2005 (Unaudited)
Notes to Financial Statements 4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 11
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES 11
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 12
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS 12
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE 12
OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION 12
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 12
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(In thousands, except share and per share data)
Three months ended March 31
2004 2005 2005
--------- --------- ---------
HK$ HK$ US$
Operating Revenues
Fitness service 61,212 69,451 8,904
Beauty treatments 52,250 48,989 6,281
Others 89 1,454 186
--------- --------- ---------
Total operating revenues 113,551 119,894 15,371
--------- --------- ---------
Operating Expenses
Salaries and commissions (40,778) (40,024) (5,131)
Rent and related expenses (40,339) (41,841) (5,364)
Depreciation (15,286) (15,406) (1,975)
Other selling and administrative expenses (25,552) (26,931) (3,453)
--------- --------- ---------
Total operating expenses (121,955) (124,202) (15,923)
--------- --------- ---------
Loss from operations (8,404) (4,308) (552)
--------- --------- ---------
Non-operating (Expenses) Income
Other income, net 88 68 9
Interest expenses (1,159) (1,207) (155)
--------- --------- ---------
Total non-operating (expenses) income (1,071) (1,139) (146)
--------- --------- ---------
Loss before income taxes and minority interests (9,475) (5,447) (698)
Provision for income taxes -- (188) (24)
--------- --------- ---------
Loss before minority interests (9,475) (5,635) (722)
Minority interests 200 145 18
--------- --------- ---------
Net loss (9,275) (5,490) (704)
========= ========= =========
Loss per share of common stock (0.93) (0.55) (0.07)
========= ========= =========
Number of shares of common stock outstanding
(in thousands) 10,000 10,000 10,000
========= ========= =========
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on March 31, 2005 or at any other certain rate.
-1-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------
AS OF DECEMBER 31, 2004 AND MARCH 31, 2005
(In thousands, except share and per share data)
As of
-------------------------------------------------------
Note December 31, 2004 March 31, 2005
HK$ HK$ US$
ASSETS
Current assets
Cash and bank balances 1,625 3,072 394
Trade receivables 4,006 5,894 756
Other receivables 7,334 7,334 940
Rental and utility deposits 31,821 31,431 4,030
Prepayments to vendors and suppliers and other current assets 2,482 2,938 377
Inventories, finished products for beauty treatment and sale 5,873 6,430 824
Income taxes recoverable 2,041 1,591 204
----------------- ----------------- -----------------
Total current assets 55,182 58,690 7,525
----------------- ----------------- -----------------
Marketable securities, collateralized 4,280 4,280 549
Bank deposits, collateralized 11,523 13,489 1,729
Due from a stockholder 9,480 9,480 1,215
Prepayments for construction-in-progress 11,835 2,111 271
Property, plant and equipment,
net of accumulated depreciation of
HK$328,604 as of March 31, 2005 (2004: HK$313,845) 187,892 188,467 24,162
----------------- ----------------- -----------------
Total assets 280,192 276,517 35,451
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank loans 14,473 12,057 1,546
Long-term bank loans - current portion 5 638 167 21
Trade and other payables 60,685 59,505 7,629
Obligations under finance leases - current portion 716 75 10
Deferred income - current portion 117,526 122,322 15,682
Deferred liabilities - current portion 5,745 5,137 659
Income taxes payable 214 457 59
Taxes other than income 6,570 6,479 831
----------------- ----------------- -----------------
Total current liabilities 206,567 206,199 26,437
----------------- ----------------- -----------------
Deferred income - non-current portion 18,748 22,273 2,856
Deferred liabilities - non-current portion 7,983 6,786 870
Deferred taxation 2,202 2,202 282
Minority interests 7,010 6,865 880
Commitments and contingencies 6
Stockholders' equity:
Common stock, par value US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 161 161 20
Retained earnings 37,443 31,953 4,096
----------------- ----------------- -----------------
Total stockholders' equity 37,682 32,192 4,126
----------------- ----------------- -----------------
Total liabilities and stockholders' equity 280,192 276,517 35,451
================= ================= =================
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars ("US$") for the convenience of the
reader has been made at the exchange rate of US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar
amounts could have been, or could be, converted into United States Dollars, at that rate on March 31, 2005 or at any
other certain rate.
-2-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 2004 TO MARCH 31, 2004
AND JANUARY 1, 2005 TO MARCH 31, 2005
(in thousands)
Three Months Ended March 31
---------------------------------
2004 2005 2005
------- ------- -------
HK$ HK$ US$
Cash flows from operating activities:
Net loss (9,275) (5,490) (704)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Minority interests (200) (145) (18)
Depreciation 15,286 15,406 1,975
Changes in working capital:
Trade receivables (793) (1,888) (243)
Deposits, prepayments and other current assets 859 (66) (8)
Inventories 1 (557) (71)
Due from a related company (3,950) -- --
Trade and other payables (17,380) (1,180) (151)
Deferred income 29,362 8,321 1,067
Deferred liabilities (2,209) (1,805) (231)
Income taxes payable/recoverable (725) 693 89
Taxes other than income 46 (91) (12)
------- ------- -------
Net cash provided by operating activities 11,022 13,198 1,693
------- ------- -------
Cash flows from investing activities:
Prepayments for construction-in-progress (9,503) (149) (19)
Acquisition of property, plant and equipment (1,822) (6,108) (783)
Acquisition of marketable securities (990) -- --
------- ------- -------
Net cash used in investing activities (12,315) (6,257) (802)
------- ------- -------
Cash flows from financing activities:
Decrease (Increase) in bank deposits 2,399 (1,966) (252)
Due from a stockholder 282 -- --
Proceeds from (Settlement of) short-term bank loans 3,996 (2,416) (310)
Repayment of long-term bank loans (2,680) (471) (60)
Capital element of finance lease rental payments (2,419) (641) (83)
------- ------- -------
Net cash provided by (used in) financing activities 1,578 (5,494) (705)
------- ------- -------
Net increase in cash and cash equivalents 285 1,447 186
Cash and cash equivalents at beginning of period 1,806 1,625 208
Cumulative translation adjustments -- -- --
------- ------- -------
Cash and cash equivalents at end of period 2,091 3,072 394
======= ======= =======
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars ("US$") for
the convenience of the reader has been made at the exchange rate of US$1.00 = HK$7.8. No
representation is made that the Hong Kong Dollar amounts could have been, or could be,
converted into United States Dollars, at that rate on March 31, 2005 or at any other certain
rate.
-3-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------
(Amounts in thousands, except share and per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Physical Spa & Fitness Inc. ("the Company") and the
subsidiaries that it controls. The Company, through its subsidiaries,
operates fitness and spa/beauty centers in Hong Kong and China. Unless
otherwise specified in the text, references to the Company include the
Company and its subsidiaries. These financial statements should be read
in conjunction with the consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December
31, 2004.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March
31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
2. PREPARATION OF FINANCIAL STATEMENTS
The Group has a negative working capital of HK$151,385 and HK$147,509
as of December 31, 2004 and March 31, 2005. Besides, the Group has
incurred loss of HK$5,490 in the three-month period ended March 31,
2005. These conditions raise substantial doubt about the Group's
ability to continue as a going concern.
Continuation of the Group as a going concern is dependent upon
attaining profitable operations in the future, exercising tight cost
and cash flow controls measures, and obtaining additional banking
facilities. In addition, the Principal Stockholder has undertaken to
make available adequate funds to the Group as and when required to
maintain the Group as a going concern. As a result, the financial
statements have been prepared in conformity with the principles
applicable to a going concern.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There are no new accounting pronouncements for which adoption is
expected to have a material effect on the Company's financial
statements.
-4-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------
(Amounts in thousands, except share and per share data)
4. REPORT ON SEGMENT INFORMATION
The Group's operations are mainly classified into two reportable
business segments: provision of physical fitness and beauty treatment
services. Each separately managed segment offers different products
requiring different marketing and distribution strategies.
Information concerning consolidated operations by business segment is
presented in the tables below:
CONSOLIDATED OPERATIONS BY BUSINESS SEGMENT
THREE MONTHS ENDED MARCH 31
---------------------------------
2004 2005 2005
-------- -------- --------
HK$ HK$ US$
Operating revenues
- Physical fitness 61,212 69,451 8,904
- Beauty treatments 52,250 48,989 6,281
- Others 89 1,454 186
-------- -------- --------
113,551 119,894 15,371
======== ======== ========
Operating (loss) profit
- Physical fitness (12,532) (5,117) (656)
- Beauty treatments 3,302 (1,817) (233)
- Others (45) 1,444 185
-------- -------- --------
(9,275) (5,490) (704)
Provision for income taxes included in
segment (loss) profit above -- 188 24
Minority interests included
in segment profit (loss) above (200) (145) (18)
-------- -------- --------
Consolidated loss before income
taxes and minority interests (9,475) (5,447) (698)
======== ======== ========
-5-
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------
(Amounts in thousands, except share and per share data)
5. LONG-TERM BANK LOANS
The Group had not obtained additional long-term bank loans during the
three-month period ended March 31, 2005.
During the period under review, the Group repaid HK$471 of its
outstanding bank loans. The outstanding loan balances as of March 31,
2005 were analyzed as follows:
PRINCIPAL INTEREST RATE MATURITY
US$ HK$
21 167 HK$ prime + 1.5% Serially from 2004 to 2005
====== ======
6. CONTINGENT LIABILITIES
The Company imported beauty products from suppliers in Hong Kong into
the PRC for beauty treatment and sales to its customers. Under the
prevailing PRC rules and regulations governing imports into the PRC,
the Company is required to make import declarations and to pay various
taxes including, inter alia, customs duty, consumption tax and
value-added tax, on such imports. The Company faced further penalty,
additional to the original amount of taxes payable, ranging from 50% to
500% of the original amount of taxes payable, had the Company been
found in breach of any of such rules and regulations.
As of December 31, 2004 and March 31, 2005, the Company is potentially
liable to make good in aggregate an amount of HK$12,994, of which an
amount of HK$7,334 has been provided for in both balance sheet dates as
Taxes Other Than Income and as Other Receivables in the liabilities and
assets respectively. No further provision has been made for the
difference and any potential amount of penalty which might be imposed.
In this respect, the directors are of the opinion that the probability
that such potential liabilities will be crystallized would be remote.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
THREE MONTHS ENDED MARCH 31
---------------------------------
2004 2005 2005
-------- -------- --------
HK$ HK$ US$
Cash paid (received) for:
Interest expenses 1,159 1,207 155
Income taxes -- (505) (65)
-6-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
Overview of Company's Business:
The Company, through its predecessor companies and its subsidiaries,
has been an established commercial operator of fitness and spa centers in Hong
Kong and China since 1986. The Company currently operates eighteen facilities:
thirteen in Hong Kong and five in China (including one in Macau). In addition,
the Company is appointed by an outside investor to manage a fitness and spa
center in Hang Zhou, China. Management believes that the Company is one of the
top providers of fitness facilities and spa and beauty treatment services in
Hong Kong and China, with approximately 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.
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions with no material assets or liabilities. Prior
to acquisition of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ("Physical Limited"), the Company had no revenue producing
operations, but planned to enter into joint ventures and/or acquisitions
originally in the area of real estate, to expand its operations. In October,
1996, the Company closed a transaction with Ngai Keung Luk (Serleo), a 100%
shareholder of Physical Limited, whereby the Company entered into a Share
Exchange Agreement with Ngai Keung Luk (Serleo), pursuant to which the Company
issued 8,000,000 pre-split (6,000,000 post-split) shares of its Common Stock to
Ngai Keung Luk (Serleo) in exchange for all of the outstanding shares of
Physical Limited (the "Closing"). At the Closing, the then current management of
the Company resigned and was replaced by the current management of the Company.
-7-
RESULTS OF OPERATIONS
The Company's revenues are derived from its two main lines of business
of fitness and spa services in the following principal ways: admission fees and
monthly subscription fees from the fitness customers, and the sale of beauty
treatments and skin care products to the beauty patrons.
In respect to fitness services, customers are invited to purchase a
standard fitness card at a fee currently set at HK$600(US$77) for one person.
Each customer will also be charged a monthly due of HK$299 (US$38) for the usage
of the fitness centers. In order to fully utilize the facilities, the Company
grants a special offer of admission fees at HK$200 (US$26) to off-peak
customers.
In respect to beauty services, the customers may purchase single
treatment, or in packages of ten or more treatments, with quantity discounts
available. There is a wide range of beauty treatments available at prices
ranging from HK$400 (US$51) to HK$15,000 (US$1,923).
The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.
RESULTS OF OPERATIONS
Three Months Ended
March 31
2004 2005
----------- -----------
Operating Revenues 100.00% 100.00%
Total operating expenses 107.40% 103.59%
Operating loss (7.40%) (3.59%)
Loss before income taxes and
minority interests (8.34%) (4.54%)
Provision for income taxes -- (0.16%)
Minority interests 0.17% 0.12%
Net loss (8.17%) (4.58%)
=========== ===========
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
MARCH 31, 2004 (UNAUDITED).
- --------------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues increased 6% to
HK$119,894,000 (US$15,371,000) in the first quarter of 2005 as compared to
HK$113,551,000 (US$14,558,000) of the same period last year.
Operating revenues derived by the Company's fitness services increased
13% to HK$69,451,000 (US$8,904,000) compared to HK$61,212,000 (US$7,848,000) of
last year. Fitness revenues as a percentage of total revenues were 59% in the
first quarter of 2005 as compared to 54% in the first quarter of 2004.
Operating revenues from the Company's beauty treatment business totaled
HK$48,989,000 (US$6,281,000) compared to HK$52,250,000 (US$6,699,000) of last
year, representing a decrease of 6%. Beauty treatment revenues as a percentage
of total revenues decreased from 46% to 41% in the first quarter of 2005 as
compared to 2004.
-8-
Operating revenues from others increased 1634% to HK$1,454,000
(US$186,000) in the first quarter of 2005 compared to HK$89,000 (US$11,000)
of the same quarter last year. The significant increase was mainly due to
the recognition of management service income from Hang Zhou, China which
has not yet commenced operation in the corresponding period of last year.
OPERATING EXPENSES. The Company's operating expenses for the first
quarter of 2005 totaled HK$124,202,000 (US$15,923,000) compared to
HK$121,955,000 (US$15,635,000) in 2004, representing an increase of 2%. This
reflects the additional costs incurred by the Company in following its business
expansion plan. Total operating expenses, after taking into account all
corporate expenses, were 105% of total operating revenue in the period ended
March 31, 2005 as compared to 107% in the corresponding period of last year.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the
first quarter of 2005 totaled HK$1,139,000 (US$146,000) compared to HK$1,071,000
(US$137,000) in 2004. This represents an increase of 6% due to higher interest
expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
quarter of 2005 totaled HK$188,000 (US$24,000) compared to a nil provision
in 2004.
NET LOSS. The Company has suffered a net loss of HK$5,490,000
(US$704,000) for the first quarter of 2005, compared to a net loss of
HK$9,275,000 (US$1,189,000) for 2004, representing a decrease of 41%. Management
believes that the bottom line will gradually improve to ultimately achieving a
net profit by the end of the year.
-9-
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash
generated from operations, short-term bank credit, long-term bank loans,
advances from customers relating to prepaid fitness and spa income, and leasing
arrangements with financial institutions.
Cash and cash equivalent balances as of March 31, 2005 and December 31,
2004 were HK$3,072,000 (US$394,000) and HK$1,625,000 (US$208,000).
Net cash provided by operating activities were HK$11,022,000
(US$1,413,000) and HK$13,198,000 (US$1,693,000) for the three-month periods
ended March 31, 2004 and 2005, respectively. The Company's operating activities
are historically financed by cash flows from operations. Net cash used in
investing activities were HK$12,315,000 (US$1,579,000) and HK$6,257,000
(US$802,000) for the three-month periods ended March 31, 2004 and 2005
respectively, primarily as a result of expenditures for property, plant and
equipment. Net cash provided by (used in) financing activities, which mainly
include proceeds from bank loans, net interest and repayment, were HK$1,578,000
(US$202,000) and HK$(5,494,000) (US$(705,000)) in the three-month periods ended
March 31, 2004 and 2005, respectively.
During the three-month period ended March 31, 2005, 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 loan bears interest rate of 7% per annum. The total balance
outstanding as of March 31, 2005 on such loan was HK$167,000 (US$21,000). The
last repayment on the loan is due in 2005.
During the three-month period ended March 31, 2005, the Company has no
material purchases of investments.
Consistent with the general practice of the fitness and spa industry,
the Company receives prepaid monthly fees from fitness customers, which are
non-refundable, and spa treatment dues from beauty customers. This practice
creates working capital that the Company generally utilizes for working capital
purposes. However, the unused portion of the pre-paid monthly dues and spa
treatment dues is characterized as deferred income, a liability, for accounting
purposes.
The Company's trade receivable balance at March 31, 2005, was
HK$5,894,000 (US$756,000). These trade receivables are mainly amounts due from
major credible banks and the history of credit loss from these banks are none.
Capital expenditure for Fiscal Year 2004, and the three-month period
ended March 31, 2005, were HK$27,066,000 (US$3,470,000) and HK$6,108,000
(US$783,000) respectively.
And as mentioned in note 2 to the financial statements, the Company has
negative working capital and net loss. The Principal Stockholder has undertaken
to make available adequate funds to the Company as and when required to maintain
the Company as a going concern. In this connection, the Principal Stockholder
agrees to inject funds and realize his net worth assets to support the Company
as and when required. Accordingly, the Company believes that cash flow generated
from its operations, the tight cost and cash flow control measures and its
existing and additional credit facilities to be sought should be sufficient to
satisfy its working capital and capital expenditure requirements for at least
the next 12 months. The Company also considers the carrying amount of the assets
could be recovered from operations in the light of the fact that the Company was
able to generate a cash flow from operations of HK$13,198,000 (US$1,693,000) and
a net cash inflow of HK$1,447,000 (US$186,000). Moreover, a large part of the
loss for the first quarter of 2005 was attributable to the new center in
Shanghai, China, which has just commenced operation in February, 2005. Having
excluded the loss of the new center, the Company's results would have improved
from a loss of HK$9,275,000 (US$1,189,000) in the first quarter of 2004 to
HK$2,452,000 (US$314,000) of 2005.
-10-
CRITICAL ACCOUNTING POLICIES
Besides the accounting policies as described in note 3 to the financial
statements for the year ended December 31, 2004, the management considers that
the Group has not adopted any other critical accounting policies.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The operations of the Company are located in Hong Kong and the PRC and
most of the operating revenues are earned in these two areas. Therefore the
Company is not exposed to risks relating to fluctuating currencies or exchange
rates. Besides, the Company has not purchased options or entered into swaps or
forward or futures contracts. The primary market risk exposure is that of
interest rate risk on borrowings that the Company may have under some future
credit facility.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with participation of the
Company's management, including the Chief Executive Officer and Principal
Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based on the evaluation, the Chief Executive Officer and Principal
Financial Officer have concluded that disclosure controls and procedures are, to
the best of their knowledge, effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of their evaluation, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
-11-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
NONE
-12-
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHYSICAL SPA & FITNESS INC.
(Registrant)
Date: May 20, 2005 /s/ Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Date: May 20, 2005 /s/ Robert Chui
------------------------------------
Robert Chui,
Chief Financial Officer
-13-
CERTIFICATION
I, Ngai Keung Luk, Chairman and Chief Executive Officer and I, Robert Chui,
Chief Financial Officer, certify that:
1. We have reviewed this quarterly report on Form 10-Q of Physical Spa & Fitness
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and we are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and we have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to affect ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
May 20, 2005 /s/ Ngai Keung Luk
- --------------- -------------------------------------
Date Chairman and Chief Executive Officer
May 20, 2005 /s/ Robert Chui
- --------------- -------------------------------------
Date Chief Financial Officer