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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, 2000
[ ] 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 small business issuer in its charter)
DELAWARE 98-0203281
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14/F Lee Theatre Plaza
99 Percival St., Causeway Bay
Hong Kong Not applicable
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 852 2572-8888
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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 [ ] NO [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
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: $38,887,000
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of December 31, 2000 was $374,000 based upon the average of
the last available bid and asked price of the Common Stock of $0.187 as of
December, 2000.
The number of shares outstanding of the issuer's classes of Common
Stock as of December 31, 2000: 10,000,000
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. DESCRIPTION OF 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 fourteen facilities: ten
in Hong Kong and four 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, Shatin, Mei Foo and
Kowloon City. Another four wholly owned subsidiaries of the Company, Physical
Health Centre (Tsuen Wan) Limited, Physical Health Center (TST) Limited,
Physical Health Centre (Tuen Mun) Limited and Physical Health Centre (E House)
Limited (formerly known as Global Resources Limited) respectively operates the
Tsuen Wan Centre (opened in July, 1998), the Sheraton Hotel center (opened in
July, 1999), the Tuen Mun Centre (opened in July, 2000), and the Elizabeth House
Centre (opened in April, 2001). All of these companies are Hong Kong
corporations. Renaissance Beauty Centre is operated by Supreme Resources
Limited, which was previously a majority (70%) owned subsidiary of the Company
and became a wholly-owned subsidiary in 2000. Supreme Resources Limited is also
a Hong Kong corporation.
1
The Company's facilities in China are operated by two joint ventures:
Shanghai Physical Ladies' Club Co., Ltd. ("Shanghai Joint Venture"), which
operates two centers in the city of Shanghai, and 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 100% (increased
from 92.5% in 2000) interest in the Shanghai Joint Venture and a 90% interest in
the Dalian Joint Venture. The minority interest in the Dalian joint ventures is
held by the joint venture's Chinese partner. China regulations of the fitness
and spa facilities encourage joint ventures with a foreign company and provide
less restrictive regulations of such form of business entities. See "Government
Regulation - China".
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 a membership 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 members and visitors, and include
skin care and facial treatments, massage, relaxation programs and
weight-management programs. The Company also sells at the facilities a variety
of exercise clothing and European beauty products. Based on the number of the
Company's facilities members, 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 70,000 members.
The Company's strategy is to provide a one-stop fitness and beauty
center for its customers. With the exception of the Mei Foo and Elizabeth House
locations in Hong Kong, all other facilities in Hong Kong and China are
exclusively for women. 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 combining fitness and beauty services in a single
facility that offers 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 comprising of
approximately 15,000 square feet 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 Hongqiao outlet was relocated
to Xu Hui with enhanced facilities in early March, 2001. A third China operation
in Dalian commenced in April 1996 and is conducted through Dalian Joint Venture.
See "Business of the Company - Organization". The Company's facilities in China
are operated under the name "Physical Ladies' Club", 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, in general, comprised mainly of government operated facilities that offer
either fitness or beauty services, in small facilities that lack modern
equipment. The Company is aware of no Western quality facilities of comparable
size to that of the Company's facilities currently operating in China. 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. In 1996, the Company (through its
subsidiaries) entered into two additional joint ventures in Zhongshan (Zhongshan
Joint Venture) and Shenzhen (Shenzhen Joint Venture), China, however, such joint
ventures have not commenced any operations yet. The Company explores the
possibilities of opening the centers in Zhongshan and Shenzhen in the future,
however, there can be no assurances given that such joint ventures will start
operations or that such centers will be opened as currently contemplated by the
management. See "Business of the Company - Business Strategy".
2
The Company's strategy for maintaining its strong presence in Hong Kong
is to continue to provide existing and new members 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. In 2000, the Company opened two new fitness centers. One is in Tuen
Mun, a densely populated district in the New Territories, Hong Kong. Another is
in Macau which is strategically located at the mouth of Pearl River on the
border of China. The Company also opened a new center in Elizabeth House,
Causeway Bay, Hong Kong in early April, 2001 which is offering fitness services
to both male and female customers. See "Business of the Company - Properties".
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.
The Company maintains its executive and administrative office Hong Kong
at:
14/F., Lee Theatre Plaza
99 Percival St., Causeway Bay, HONG KONG
The telephone number of the Company in Hong Kong is (852) 2572-8888.
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. (formerly
known as Physical Health Centre (Zhong Shan) Limited), Zhongshan Physical
Ladies' Club, Ltd., Ever Growth Ltd., Proline Holdings Ltd., Shanghai Physical
Ladies' Club Company Ltd., Shanghai Physical Ladies' Club 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 Company 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, and Physical
Health Centre (E House) Limited (formerly known as Global Resources Limited).
See also "Business - Organization".
3
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 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 20,000 square feet and
include a workout area including a broad range of fitness equipment, changing
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 with lounge, health drink bar and sells a range of exercise
clothing, European beauty products and cosmetics.
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
intends to build on its continuous operating presence (over 10 years) in Hong
Kong, the relationships in China established by the Company's executives and
senior staff and the Company's policy of offering what it believes are the
state-of-the-art exercise and spa facilities and beauty treatments at affordable
prices in their respective markets. In addition, the Company is closely
monitoring potential opportunities in the Philippines, Taiwan, Malaysia and
Indonesia.
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
(formerly known as Center
Global Resources in
Limited) Hong Kong
Jade Regal Holdings March 15, 1996 BVI - 100% Investment
Limited ("Jade Regal") holding
4
Organization (Continued)
- ------------
EQUITY INTEREST
DATE OF ACQUISITION PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY / FORMATION INCORPORATION COMPANY ACTIVITIES
Direct Indirect
------ --------
Physical Health Centre March 15, 1996 HK - 100% Investment
(Dalian) Limited holding
("Dailan Physical")
Physical Health Centre March 21, 1997 HK - 100% Investment
(Macau) Limited holding
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
("Physical TST") Center in
Hong Kong
Physical Health Centre September 8, 1997 HK - 100% Operating a
(Tsuen Wan) Limited Fitness
("Physical Tsuen Wan") 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 5
Hong Kong Limited Fitness
("Hong Kong Limited") Centers in
Hong Kong
Proline Holdings Limited September 28, 1994 BVI - 100% Investment
("Proline") holding
Regent Town Holdings September 20, 1993 BVI - 100% Investment
Limited ("Regent") holding
Shanghai Physical Ladies' September 28, 1994 HK - 100% Investment
Club Company 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
treatment
center in
Hong Kong
Su Sec Pou Physical Health August 18, 1997 Macau - 100% Operating a
Centre (Macau), Limited Fitness
Center in
Macau
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 Health
Center -E House Limited Centre | Centre | Venture -Sheraton Mei Foo Centre
(Central (Dalian) | (Shenzhen) (Macau),
Branch Limited | Limited Limited
Operation) |
HK HK BVI HK | HK HK HK HK Macau
- ----------- ---------- ---------- --------- | ----------- ----------- --------- ---------- ---------
| | | |
|100%* |90% | |90%
Shanghai | | |
Physical | | |
Ladies' | | |
Club | | |
Company | | |
Limited | | |
HK | Causeway Bay |
---------- | Tsimshatsui |
| Shatin |
|100% | Mei Foo |
| | Kowloon City |
Shanghai Dalian Shenzhen
Joint Joint Joint
Venture Venture HK Venture
----------
*50% held by one nominee shareholder. Since the Companies Ordinance of Hong Kong
requires a minimum of 2 shareholders for each limited company, Mr. Luk holds the
remaining shares on behalf of Physical Beauty & Fitness Holdings Ltd.
**30% held by one nominee shareholder. Since the Companies Ordinance of Hong
Kong requires a minimum of 2 shareholders for each limited company, Mr. Luk
holds the remaining shares on behalf of Physical Beauty & Fitness Holdings Ltd.
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
JOINT VENTURE LOCATION VENTURE COMPANY VENTURE THOUSAND) PROFIT SHARING ARRANGEMENT
- ----------------- ------------ ---------- ---------- -------- ---------------- ------------------------------------
Shanghai Huangpu Co-operative 100% 10 Originally None. Joint venturer receives
Physical and Xu Hui years US$1,000 in rent for locations and will
Ladies' Club (formerly cash and receive equipment when the Joint
Co., Ltd. known as increased to venture is dissolved.
("Shanghai Hongqiao), US$2,000 in
Joint Venture") Shanghai cash in 1995
Dalian Physical Dalian Equity 90% 12 Originally Pro-rata to equity interests
Ladies' Club years Rmb10,000 in
Co., Ltd. cash and
("Dalian Joint changed to
Venture") Rmb1,000 in
cash and
Rmb9,000
in form of
fixed assets
and renovation
materials in
1996
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 JOINT VENTURE. The Shanghai Joint Venture is a Sino-foreign
cooperative joint venture established on September 7, 1993 in Shanghai, China.
The Chinese joint venture partner is a state-owned enterprise in the PRC,
Shanghai Ti Yu Guan (SHTYG). Shanghai Physical Ladies' Club Company Limited, a
Hong Kong corporation ("Shanghai Physical") authorized Physical Health Centre
Hong Kong Limited, a Hong Kong corporation, to enter into a joint venture
contract with SHTYG. The joint venture period is 10 years from the date of issue
of the business license on September 7, 1993. SHTYG is paid rent of RMB950,000
for the first 3 years of the joint venture. Rent for the fourth to tenth years
will be 110% of the preceding year, except where the inflation rate in the PRC
exceeds 16% in which case, the rental increase would be indexed to the inflation
rate.
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 Joint Venture 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.
8
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 in the recent years.
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 in recent
years, 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 recent
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.
A number of five-star hotels in China have luxury spas and fitness
centers, well-equipped with the latest brands of Western-styled exercise
machines (as compared to the Company's facilities). However, the Management
believes that the exorbitant fees (in the Company's opinion) prevent any
significant competitive impact on the industry. Private dining clubs have become
increasingly popular throughout China in the recent years, and usually include
small fitness and beauty centers. However, the Company believes that as the
focus of these clubs is usually dining, drinking, karaoke and entertainment,
they have contributed insignificantly to the industry. (See "Competition")
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.
9
In recent years, several Hong Kong and Japanese companies have entered
the market with small, limited service salons. Several internationally
recognized skin care lines, such as Dior, Channel and Elizabeth Arden have
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."
In 1986, the founder and principal shareholder of the Company, Ngai
Keung Luk (Serleo), set up the first fitness center under the name of "Physical
Health Club" 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
under the name of "Physical Ladies' Club" 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 six 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.
10
HONG KONG
The first facility was opened in the Mei Foo Sun Chuen area of Hong
Kong, which has a population of approximately 680,000. The Company's first
center offered fitness training and spa treatment facilities at a price thought
to be affordable by its target middle-class customers. The Mei Foo Center
operates under a membership basis and is open to both male and female customers.
The Mei Foo Center proved profitable and within a year, it had enrolled more
than 700 members and 1,000 clients for spa treatments. In 1990 the Mei Foo
Center was expanded by acquiring by the Company's subsidiary an additional 700
square feet, immediately above the existing facility. In December 1999 and
October 2000, the spa and fitness facilities were respectively expanded by
approximately 4,000 square feet, resulting in a total of 12,000 square feet.
The second fitness and spa center under the name "Physical Ladies' Club"
was opened in July 1988 on Nathan Road, Tsimshatsui, Kowloon, which is one of
the busiest commercial and entertainment areas in the Kowloon area of Hong Kong.
The Tsimshatsui Center, consisting at that time of 12,000 sq. ft. (subsequently
expanded to 25,000 sq. ft) is, to the best of the Management's knowledge, to be
the first fitness and spa center to provide high quality, Western-styled
professional services for fitness training and spa treatment for middle income
women customers in Hong Kong. Tsimshatsui Center within a year of its opening,
had approximately 2,000 fitness members and 2,000 patrons for spa treatments.
In March 1990, the business of Physical Health Club and Physical Ladies'
Club was transferred to, and consolidated under, Hong Kong Limited (see above).
To broaden its geographical diversification, Hong Kong Limited opened
its third fitness and spa center in Causeway Bay Plaza, Causeway Bay in August,
1990. Located in one of the most popular entertainment areas on Hong Kong
Island, the Causeway Bay Center initially occupied a floor space of
approximately 18,000 square feet. In the first year of operation, the Causeway
Bay Center had approximately 5,000 members and 2,000 patrons for spa services.
The Causeway Bay Center experienced an ongoing strong demand for its fitness and
spa services, and the Company relocated the Causeway Bay Center to a new 30,000
sq. ft center in June 1997.
In order to cater to the market demand in the New Territories area of
Hong Kong, Hong Kong Limited opened its fourth fitness and spa center in New
Town Tower, Shatin, in September 1992. The Shatin Center is located in a
commercial complex in the heart of the densely populated residential and popular
entertainment areas in the New Territories. It occupies a floor space of
approximately 15,000 square feet. In October 1998, the Shatin Center is
relocated to a brand new shopping mall nearby, Grand Central Plaza, at the
expiration of the original tenancy.
In March 1993, Hong Kong Limited opened another fitness and spa center
of approximately 3,000 square feet in Kowloon City to provide facilities to
members residing in the south-eastern area of Kowloon.
As a result of a growing demand for upscale facilities and amenities for
spa services in the upper middle market, the Company opened through a
subsidiary, Supreme Resources Limited (see "Company - Organization"), its first
upscale market spa treatment center; "Renaissance Beauty Centre". The
Renaissance center is situated in an upper income residential area in Central,
Hong Kong and provides spa treatment services.
From Mid-1998 to end of 2000, the Company opened three additional
centers in Hong Kong through its wholly owned subsidiaries, Physical Health
Centre (Tsuen Wan) Limited, Physical Health Centre (TST) Limited, and Physical
Health Centre (Tuen Mun) Limited respectively.
The Company opened its tenth center in Elizabeth House, Causeway Bay in
April 2001 which provides fitness service to both male and female customers.
These collectively make up a total of ten centers in Hong Kong.
See also "Description of Property".
11
CHINA
Commencing in the mid-1980's, China commenced market-oriented reforms
that were designed to open up and improve the economy and the Chinese standard
of living. As economic reforms became successful in China and a large,
middle-class market developed, China was targeted as an expansion market where
the success in Hong Kong could be duplicated.
Shanghai, with a booming economy, an influx of foreign investment, and a
population of 14 million, was the logical choice for the Company to start its
first China location. In January of 1994, the Huang Pu branch was opened in one
of Shanghai's busiest shopping districts, through a joint venture company formed
between a Chinese enterprise and a newly formed subsidiary of the Company. The
center has an area of 15,000 sq. ft. (which was expanded to 23,000 sq. ft. in
1998), and within the first year there were over 2,000 fitness members and spa
clients. Based upon the positive response to the first facility in Shanghai, the
decision was made to open a second Shanghai branch.
September, 1995 marked the opening of the second center in Shanghai-Hong
Qiao branch in Shanghai, situated in the fashionable Hong Qiao Special Economic
Development Zone. This center contains approximately 12,000 sq. ft. and is
easily accessible to a large residential area and busy commercial district. In
March, 2001, the Hong Qiao Center was relocated to Metro City, Xu Hui District
which is one of the busiest shopping districts in Shanghai with enhanced
facilities of approximately 24,000 sq. ft.
In April, 1996, the Company opened its third fitness/spa center in China
in the city of Dalian. Dalian, China, located on the northern peninsula near
Korea, is the third largest seaport in China and has a population of
approximately 5,600,000. Dalian is the fashion capital of China, hosting the
world renowned International Fashion Festival annually, and is also a major
tourist destination. Dalian has seen an influx of foreign investment in the past
several years, and the purchasing power of these citizens ranks high in the
nation. The Company's market research showed a strong existing interest in
fitness and spa services, with few choices available to potential customers.
Within the first six months of opening, Dalian center had over one thousand
fitness members and nearly one thousand spa clients.
In October, 2000, the Company opened its first fitness center in Macau.
Macau has been a Portuguese colony (until December 20, 1999) strategically
located at the mouth of the Pearl River on the border of China. Macau is easily
accessible by Hong Kong residents via a 45- minute jet foil ride and is a
popular vacation destination for both Hong Kong and Chinese residents. Macau has
a population of approximately 500,000 of which 50% is female (Hong Kong Trade
Development Council). The Company plans to target primarily Macau's local
residents.
See also "Description of Properties".
BUSINESS STRATEGY
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 (since 1986), 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.
12
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
membership 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). The
Company also expects to establish additional fitness and spa centers in other
major metropolitan centers in China over the next several years. 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.
- - BECOMING THE MARKET LEADER IN CHINA
In China, the fitness and spa industry is in its formative stage. In
addition there is an image associated with Western luxury consumer goods. The
Company is not aware of any Western-style facilities of comparable size or
competitors in the fitness and spa industry whose market position is more
established than the Company's. Management plans to take advantage of those
circumstances and in doing so, become the first entrant into China market.
The planned expansion into China includes opening facilities in most
major cities and economically developing urban areas throughout the country,
subject to then current market and other conditions. According to the State
Statistic Bureau of China, the population of China is 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). Facilities can be linked by a
reciprocal membership system, allowing members to use another facility when
traveling to other parts of the country. 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.
13
- - MAINTAINING A STRONG PRESENCE IN HONG KONG
The Company has well-established customer base and pre-dominant market
share in Hong Kong and opened two new locations in July, 2000 (Tuen Mun center)
and April, 2001 (Elizabeth House, Causeway Bay) respectively 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. Based on the reports of the Hong Kong Census and
Statistics Department, the number of women within the age group of 25 to 45 rose
from 850,000 to 1,200,000 between 1986 and mid-1996, representing an increase of
41%. 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 members 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 France and Italy 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.
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 include aerobic dance, step,
arms and thighs workout, funk and jazz and are taught by experienced
instructors. The dance classes are reviewed on a monthly basis and new dance
classes are introduced approximately every three months in order to appeal to
the interests of members. Since 1995, the Company has recruited fully qualified
and experienced aerobic instructors from Australia.
The Company believes, based on member 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
membership growth as well as comfortable usage by present members.
14
SPA SERVICES
Spa services are open to both members and non-members. However, members
of the centers have priority for such service facilities. Over 80 types of spa
treatments are offered including facial treatments, various skin care
treatments, 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 members 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 coupons. These coupons are valid within a specified
period of time.
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. In order to remain informed of the
latest international developments in spa treatments, applications, technology
and equipment, the Company arranges both local and overseas training.
RETAIL
The Company sells a range of products at each center such as leotards,
shorts, T-shirts, training shoes, socks and training suits, including Nike and
several U.S. and Australian brand products. The Company also sells European skin
care products manufactured in France and Spain by Guinot, Sothys and Anubis,
respectively. The fitness and beauty related products are available in the
centers to facilitate the needs of their members.
MEMBERSHIP
The Company currently offers prospective members a membership 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 female population in the 18 to 34 years old range.
15
Under the plans, new members are charged a membership fee upon admission
and a monthly fee each month to maintain their membership privileges. The
initial membership fees are non-refundable and range from approximately HK$800
(US$103) to HK$1,500 (US$192), depending on the diversity of facilities and
services available at the club of enrollment, the local competitive environment,
as well as the effects of seasonal price strategies. Monthly dues for
memberships generally range from HK$168 (US$22) to HK$299 (US$38) during the
typical membership period. Prepayment of the monthly fee is encouraged by
offering a discount for members who prepay for six or twelve months. Members are
also provided on a monthly basis 10 aerobic coupons on free-of-charge basis at
Hong Kong locations. Any member 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 members, the Company
operates a network system where members 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 members and customers. Generally,
they are open from 7:00 a.m. to 10:30 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 each of the
Centers regularly invite comments from members 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 members 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 Ladies' Club", 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 2000.
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 membership to prospective members. The Company
believes that these presentations are enhanced by its well-equipped, attractive
centers and its "value pricing" membership programs. The Company conducts a
variety of marketing efforts. The Company's executives and sales personnel
attend trade shows and exhibitions throughout Hong Kong and China. At these
trade shows, the Company usually operates a separate promotional exhibit. The
Company's executives and marketing personnel also attend and sponsor seminars
given to individual end-user organizations or industry groups.
16
Since 1993, the Company has begun marketing, on a retail basis products
to its members including apparel manufactured by leading U.S. and Australian
fitness apparel brands. These products are intended to add value to the
memberships and increase the Company's revenues. The Company's marketing focus
also includes corporate membership sales which are designed to improve
productivity. The Company has introduced programs such as corporate on-site
aerobics classes to expand the market for its services. In addition to its
advertising, personal sales presentations and targeted marketing efforts, the
Company is increasingly utilizing in-club marketing programs. Open days are
organized to introduce the centers to prospective customers and referral
incentive programs involve current members in the process of new member
enrollments that effectively help foster member 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. Local corporate accounts
are normally not allowed any special credit. International corporate accounts,
which are much larger than the local accounts, can be allowed one to two months'
credit, with a possibility of extending such period, depending on the account's
size and record.
COMPETITION
HONG KONG
The competition of the Company consists of the following.
Upscale Market
- --------------
The Hong Kong upscale market consists of exclusive private clubs which
usually provide both fitness services and spa treatments at very high prices.
These private clubs are typically oriented towards women and offer a great deal
of variety to their customers. Annual membership fees average approximately
HK$19,000 (US$2,400) and beauty treatments are charged separately upon usage.
These facilities use expensive, name-brand equipment, luxurious decoration,
large areas of space averaging 30,000 sq ft, and offer a wide range of services
to attract customers. The two primary clubs in this category are Philip-Wain and
Body by Deborah International Health Spa. There are certain upscale market
establishments which provide fitness services only, most are for both male and
female, and are concentrated in one area of Hong Kong. The joining fees range
from HK$2,000 (US$256) to HK$7,000 (US$897) with monthly membership fees ranging
from HK$350 (US$45) to HK$800 (US$103). These establishments range in size from
10,000 sq ft to 30,000 sq ft. Examples are Ray Wilson's California Gym and New
York Fitness. Another fitness only company, Tom Turk, was the earliest entrant
into the Hong Kong Market, with the first outlet opening in the early 1980's.
The Tom Turk facilities have fees that target between the upper and middle
market customer, and their two locations are each approximately 30,000 sq. ft.
Tom Turk attracts primarily a male clientele and emphasizes their extensive line
of free weights, workout equipment and swimming pools. The Company's fitness/spa
facilities compete directly primarily with the middle markets (see below), with
the exception of Renaissance Beauty Center, which targets upscale market.
17
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 nine 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. Another
establishment which provides only fitness services is The Lift Club. The Lift
Club has three outlets in prime locations, with approximately 10,000 sq ft each.
The joining fee is HK$1,600 (US$205) and the monthly fee is HK$550 (US$71). The
operators of spa/beauty services only which are in direct competition with the
Company include Expression, with one location, Angel Face Beauty Creations
(International) Ltd., with nine locations, and Marie France Bodyline, with six
outlets. The management believes that, these facilities do not offer as high a
level of fitness equipment and instruction as the Company does and that the
Company offers a more comprehensive level of spa treatments than these
facilities. The Company targets primarily the middle market.
Low-End Market
- --------------
In this category, most establishments only provide either fitness
services or simple beauty treatments. These establishments are usually much
smaller in size and have a limited range of services. Representatives of the
low-end market include The Fitness Gym, Paradise Health Club, Tess Beauty, and
Health City. Joining fee to these facilities vary from HK$600 (US$77) to
HK$2,000 (US$256), and monthly fees average approximately HK$430 (US$55). In
addition, there are numerous smaller facilities operating inside the shopping
arcades, and/or associated with hair salons and department stores. Management
believes that the Company does not directly compete with this market.
In the low-end fitness market, the government operates a small number of
gymnasium facilities. These are public facilities, open to both men and women
for nominal fees.
18
CHINA
SPA SERVICES. Certain spa services are provided by beauty salons, which
are very popular in China and have been in existence for several years. However,
most are small scale and offer only basic services in the Company's opinion and
as compared to the Company's facilities. Most salons are not modern and do not
possess certain international standards of skill and hygiene as most facilities
in Hong Kong. In the Management's view, these salons only have access to locally
manufactured skin care products, which tend to be low-tech and chemically-based,
since it is too costly for a small salon to use imported products. The Company,
as an exclusive agent for several professional European skin care lines,
maintains the leading edge in skin care. The closest competitors in the spa
industry would be several beauty salons with Hong Kong and Japanese investors,
including Carita in Shanghai, and Marco, in Dalian. Services in these facilities
are somewhat more up to date, though most do not exceed the Company's facilities
in size, nor in number of services available, in management's opinion. Most of
these salons use common department store skin care products, which prevents them
from differentiating themselves in the market. The Company believes that no
other salons offer a professional line of skin care products for purchase,
except for common, famous-name brands which are also available in department
stores.
FITNESS CENTER. There are several fitness centers in China, especially
following the opening of the Company's China facilities in Shanghai and Dalian.
The Company believes that its early entry into the market has helped it to
achieve the leading name in fitness. The Company believes that it was the first
to offer professional, up to date fitness services, up to date group exercise
(aerobics) classes, and a full range of modern exercise equipment. Though the
Company currently has only three facilities operating in China, the management
believes that its name has become already known as the Company has set the
standards for the fitness and spa industry for China. The closest competitors
are as follows:
Upscale Market
- --------------
There are many upscale recreation clubs in the major cities of China,
including Hong Kong City, Shanghai, and the Friendship Club in Dalian. These
facilities usually offer dining, bars, karaoke, massage, sauna, exercise, beauty
treatments, and occasionally bowling, tennis or golf. However, the trend for
such clubs has proven to be most successful when utilized as men's clubs. These
clubs are used primarily for entertaining business clients or for high-income
business men. Therefore, very little emphasis is placed on the level of service
and amenities within the fitness areas. Typically, most are staffed only with
receptionists as there is no demand for fitness professionals. Very few women
use such facilities. These clubs charge very high joining fees, usually upwards
of several thousand US dollars.
The majority of four and five star hotels have health clubs for outside
membership as well as for hotel guests. Usually these clubs have expensive,
brand name equipment, and often offer aerobics classes. Most also have luxury
shower and spa facilities. However, the price structure is usually comparable to
an upscale U.S. health club, and therefore is not affordable to the vast
majority of Chinese people. Such clubs cater to the expatriate business
community, and some are exclusive to such community. Their location, being
situated on the hotel premises, often limits size, and they tend to reach full
capacity with a low number of members. Since most hotels do not depend on the
health club as a major source of revenue, typically very little marketing or
membership incentives are used.
19
Middle Market
- -------------
There are several middle market fitness centers in some of the larger
cities in China. Many newly built housing complexes (upscale apartment buildings
and "western" style housing villages) have recreation centers. They typically
include swimming pools, tennis courts and gyms. In the management's opinion,
such facilities are luxurious by Chinese standards, but gyms are commonly
unstaffed or only have a receptionist. More and more such centers are providing
exercise classes as well, but lack of qualified instructors, in the management's
opinion, inhibits growth in this area. Such clubs have recently been opened in
Dalian, however, in the management's opinion, none of them matches the Company
in size, nor in the range of exercise equipment available, and classes offered
and the Company does not see them as the same level competitors. Shanghai has
several recently opened middle market clubs, such as DD's Personal Club and
YMCA. DD's Personal Club caters primarily to the expatriate market and is
therefore limited in growth. YMCA is not situated in a prime location and has
not used, in the management's opinion aggressive marketing, and in the
management's view to date has not made significant impact on the fitness
industry in Shanghai.
Low-End Market
- --------------
Group exercise is an extremely popular activity in China, but mainly
done by elderly people. As more interest is created in the younger market, a
wider variety of classes are now being offered in government facilities such as
gymnasiums, parks and town squares. Such facilities usually are held on a
basketball court in a gym, or a recreation hall with large open space. Typically
there are no shower, locker, or spa facilities available. The management
believes that the popularity of these facilities is due to the nominal fees
charged.
Trademarks and Trade Names
In July 1988, the Company and its predecessor began to market
substantially all its fitness centers under the servicemark "Physical Ladies'
Club" thereby eliminating the prior practice of using a different trade names
for each Center. The Company registered a servicemark under its trade name
"Physical Ladies' Club" 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, although it gives the Company no right to the exclusive use of the
words. 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 was only able to register the name in Chinese
language pursuant to the Chinese Trademark Law. In the opinion of the Company's
trademark counsel, the name "Physical Ladies' Club" is considered a direct
reference to the contents and features of the services in the servicemark and as
such it cannot be registered as a trademark under the Chinese Trademark Law. The
registration of the Chinese name, however, 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 and
members, as well as other marketing initiatives.
Insurance
The Company maintains liability insurance providing coverage to the
Company with respect to accidental bodily injury and accidental loss of or
damage to property of any customer or employee of the Company, which would occur
in connection with the business of the Company and on the premises of the
Company. The Company does not maintain product liability insurance with respect
to the beauty products used in its spa treatments.
20
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 900 employees, including approximately 30
commission based sales executives. Approximately 480 employees are involved in
fitness operations, including sales personnel, instructors, and supervisory
personnel. Approximately 300 employees are involved in beauty and spa
operations. Approximately 90 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, except with respect to sales personnel, which the Company believes
have become somewhat more difficult to replace due, in part, to increased
competition for skilled retail sales personnel.
Government Regulation
Hong Kong
The Hong Kong 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 membership contracts,
allowing the member the right to cancel the contract within, in most cases, 14
business days after signing, requiring an escrow for funds received from
pre-opening sales or the posting of a bond or proof of financial responsibility,
and, in some cases, establishing maximum prices and terms for membership
contracts and limitations on the term of contracts. In addition, the Company is
subject to several other types of regulations governing the sale and collection
of memberships, as well as laws 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.
21
Under typical regulations, members of fitness centers have the right to
cancel their un-used memberships for a period of 30 to 60 days after the date
the contract was entered into (depending on the applicable law) and are entitled
to refunds of any payment made. The specific procedures for cancellation in
these circumstances vary according to differing local laws. In each instance,
the canceling member 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 membership contracts provide that a member's one-time
membership fee is non-refundable in case of cancellation.
The Consumer Council of Hong Kong protects the rights of consumers,
including memberships, such as those offered by the Company. The members 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, health and
safety laws. The laws require a normal building inspection at the time of
renovation of the club 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. The Board of Health carries out an
inspection of shower and restroom facilities to make sure that they comply with
the standards imposed by the Board. In order to have massage services, the law
requires a special massage license. The Board of Health and Police Department
also hold random inspections of the facilities providing massage services, since
there are strict laws requiring that massage therapists be of the same sex as
the customers. As the Company is exclusively open to women in all centers, but
one, there have been no concerns with this regulation.
China
In China, the Company's operations and business practices are subject
to regulation from the central government, which is often carried out at local
levels. There is a Consumer Council in China which is now expanded to most urban
areas and whose role is to protect consumers and enforce consumer rights in
cases of dispute regarding quality of the product or service or misleading
claims. The Consumer Council holds considerable power in China and can impose
large fines upon a company it finds in violation of consumer laws. The Consumer
Council would often publish a statement against a fined company in a local
newspaper.
China requires a fire safety inspection and license before completion
of renovation of the facility. The safety department performs unannounced
inspections every year to ensure proper compliance with the regulations, such as
maintenance of clear fire exits, extinguishers, smoke detectors and other safety
equipment.
The Board of Health has strict regulations regarding spa facilities and
fitness/beauty equipment that is used by many people per day. The Board requires
an initial license before opening of the facilities and requires installation of
certain anti-bacterial and hygiene equipment. For example, the beauty treatment
area is required to have ultra-violet ("UV") disinfection lamps installed within
every 5 feet of public space. The law also requires UV disinfection every night
for the air, beds and chairs in the area. The Board also requires "hot cabinet"
disinfection units for small beauty tools and equipment. In the Company's
experience, random inspections of those areas of the spa are often done by the
Board of Health.
22
The Board of Health also requires an inspection and license for each
imported cosmetic or skin care product. The license must be obtained from the
Central Government in Beijing and a substantial fee is charged for the testing
of each imported product.
In China, the Board of Health is responsible for monitoring the
operation of the Company's spas, however, their strict regulations fall in line
with the standards of the Company and therefore, to date, there has been no fine
or restriction of the operation of any fitness or spa facility.
There is a Council for Fair Pricing in China, and every business that
sells products or provides services must register their fees with this
department. The Council has a right to dispute fees if it deems them
unreasonable, however to date, the Council's directives are just a formality
which is limited to collecting a registration fee from each business and rarely
questions the pricing.
The Police Department has strict regulations in China regarding massage
services and requires (although in the management's experience, it seldom checks
for compliance) the Company to ensure that the massage therapist is of the same
sex as the customer. A special license is required for massage services, which
is in the management's opinion, difficult to obtain. The massage therapist must
be certified and licensed by a government affiliation, and must have an annual
health examination. Since all the Company's centers in China are exclusively for
women and include only female staff, the Company has not been impacted by those
regulations.
China has also regulations which are so restricting, that, in fact,
amount to not allowing independently owned fitness and beauty spas by foreign
companies. Instead, the regulations encourage joint ventures with a foreign
company. Fitness and beauty spas fall under the category of "Entertainment and
Recreation", which to date have always been business entities in a form of joint
ventures.
23
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters which include the Company's executive and
administrative offices are located at a 30,000 square feet facility in Hong Kong
pursuant to a lease expiring February 28, 2003. The Company relocated its
headquarters and its Causeway Bay location to this location in Mid-1997 in order
to accommodate additional customers, and more extensive lines of fitness and spa
treatment equipment.
Aggregate rental expense was approximately HK$36.0 million (US$4.6
million), HK$47.2 million (US$6.1 million) and HK$56.5 million (US$7.2 million)
for the year ended December 31, 1998, 1999 and 2000, 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 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 and an additional 2,000 sq. ft. for the spa facility located in the
same district.
Set forth below is the information regarding the Company's centers in
Hong Kong and China.
FITNESS/SPA CENTERS - HONG KONG AND CHINA
-----------------------------------------
HONG KONG Size Own / Lease Term Expiration Renewal Option Monthly Rent(1)(2)
---- ----------- --------------- -------------- ------------------
Shop A on 11/F, 30,000 sq. ft. Lease 2/28/2003 None HK$1,122,236
12/F-15/F.,
Lee Theatre Plaza
99 Percival Street
Causeway Bay,
Hong Kong
701B, 7/F 1,500 sq. ft. Lease 9/10/2003 None HK$28,119
One Hysan Avenue
Causeway Bay
Hong Kong
10/F-12/F., Storeroom on 25,000 sq. ft. Lease 1/31/2003 (3) None HK$564,905
5/F, Room 701A,
Prestige Tower
23-25 Nathan Road
Tsimshatsui, Hong Kong
Shop Nos. 125, 126 and 10,200 sq. ft. Lease 5/19/2001 (4) 2 Years HK$423,667
131-133, Level 1,
Grand Central Plaza
Shatin, Hong Kong
18/F - 21/F 50,000 sq. ft. Lease 3/31/2001 5 Years HK$1,048,287
City Landmark
No. 68 Chung On Street
Tsuen Wan, Hong Kong
24
HONG KONG (Continued) Size Own / Lease Term Expiration Renewal Option Monthly Rent(1)(2)
---- ----------- --------------- -------------- ------------------
P/F., Stage 8 8,000 sq. ft. Own/lease 4/30/2001 6 Years HK$101,108
122B Broadway Street
Mei Foo Sun Chuen,
Hong Kong
Fourth Podium Floor 2,000 sq. ft. Lease 4/17/2003 None HK$35,214
Stage 8, 114 & 118
Broadway Street
Mei Foo Sun Chuen,
Hong Kong
Shop 66, P/F, Stage 3 2,000 sq. ft. Lease 9/1/2002 None HK$85,673
26-50 Broadway
Mei Foo Sun Chuen
Hong Kong
14/F., Coda Plaza 5,000 sq. ft. Lease 6/30/2003 None HK$131,762
51 Garden Road
Central, Hong Kong
G/F., 5 Junction Road 3,000 sq. ft. Lease 6/30/2001 None HK$51,000
Kowloon City,Hong Kong
Shops 108, G08, S17 & B08, 43,464 sq. ft. Lease 3/5/2005 2 Years HK$1,895,033
The Elegance at Sheraton,
Tsimshatsui, Hong Kong
Whole Wet Market on Ground 20,000 sq. ft. Lease 5/31/2003 5 Years HK$511,813
Floor, Tuen Mun Town Plaza
Phase I, Tuen Mun, N.T.
3/F of Podium 33,864 sq. ft. Lease 11/30/2003 3 Years HK$944,660
Elizabeth House
250-254 Gloucester Road
Hong Kong
- ---------------------
(1) Monthly rent is paid in HK Dollars
(2) Monthly rent also includes the management fee for property management.
Excludes utilities and rates.
(3) Lease for Room 701A expires on July 31, 2002.
CHINA Size Own / Lease Term Expiration Renewal Option Monthly Rent(1)
- ----- ---- ----------- --------------- -------------- ---------------
5/F-7/F., Huangpu Gymnasium 23,000 sq. ft. Lease 9/30/2003 None HK$131,000 (2)
No. 311 Shandong Road
(Mid) Shanghai
4/F., China Wanda Bldg 15,000 sq. ft. Lease 2/28/2008 None HK$106,000 (3)
No. 18 Hongda Road
Zhongshan District, Dalian
2/F, 3/F, 4/F, Block B No. 12,000 sq. ft. Lease 12/14/2004 None HK$196,000 (4)
808 Hong Qiao Road
Shanghai
5/F-6/F., Metro City 24,020 sq. ft. Lease 8/31/2010 None HK$236,000
No. 1111 Zhao Jia Bang Road
Shanghai
2/F, Macau Landmark 40,000 sq. ft. Lease 8/14/2009 None HK$535,000
555 Avenida da Amizade
ZAPE, Macau
- --------------
(1) Monthly rent is paid in Rmb except for the Macau Center which rent in
paid in HK$.
(2) Lease agreement was revised in August 1999 to fix the annual rental for
the remaining tenancy period.
(3) Rental was reduced from March 1, 1999 and agreed to increase by 5% from
March 1, 2002.
(4) Combined monthly rent includes management fee. The monthly rent will
increase by the inflation rate (1999 - 2.24%) beginning May 1, 1999 for
2/F space and June 30, 1999 for 3/F and 4/F space. The premises was
surrendered earlier in March 2001.
25
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 fourth quarter of
the Company's fiscal year ended December 31, 2000.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 1999, the 52-week trading
range was between $6.00 to $0.15 per share. The last reported sale was on
December 22, 2000 at $0.187 per share. The reported sporadic sales in the fiscal
year 2000, are set forth below*.
Date Open High Low Close
Oct-00 0.187 0.187 0.187 0.187
Aug-00 0.25 0.406 0.25 0.406
- ---------------------
* Historical quotes provided by Commodity Systems, Inc.
As of December 31, 2000, there were approximately 624 record holders of
the Company's Common Stock. The Company effected a 1.333333-for-1 reverse split
of its Common Stock in October 1997 and a 1-for-1.333333 forward stock split in
June 1998.
DIVIDEND POLICY
- ---------------
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the future. Physical Health
Centre Hong Kong Limited, the subsidiary of the company acquired by the Company
in October, 1996, paid dividends out in 1995. The Company currently intends to
retain future earnings, if any, to fund the development and growth of its
business.
27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data are qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements, related
Notes to Consolidated Financial Statements and Report of Independent Public
Accountants, and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere herein. The following table summarizes
certain selected financial data of the Company for the fiscal years ended
December 31, 1996 through December 31, 2000. The data has been derived from
Consolidated Financial Statements (audited) included in Item 8 of this Report.
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1996 1997 1998 1999 2000 2000
HK$ HK$ HK$ HK$ HK$ US$
Consolidated Statements of Operations Data
OPERATING REVENUES 111,230 148,954 210,209 253,172 303,312 38,887
------- ------- ------- ------- ------- ------
OPERATING EXPENSES
Salaries and commissions (23,797) (34,459) (56,415) (70,729) (88,999) (11,411)
Rent and related expenses (21,185) (36,222) (46,527) (63,931) (74,685) (9,575)
Depreciation (11,393) (18,274) (25,781) (33,187) (41,335) (5,299)
Other selling and administrative expenses (23,178) (34,849) (60,572) (57,520) (80,634) (10,338)
-------- -------- -------- -------- -------- -------
Total operating expenses (79,553) (123,804) (189,295) (225,367) (285,653) (36,623)
-------- --------- --------- --------- --------- -------
INCOME FROM OPERATIONS 31,677 25,150 20,914 27,805 17,659 2,264
------- ------- -------- -------- -------- -------
NON-OPERATING INCOME (EXPENSES)
Other income, net 885 2,186 645 452 853 109
Interest expenses (842) (4,151) (3,933) (4,245) (3,379) (433)
Goodwill write-off - - - - (1,113) (143)
----- ----- -------- --------- --------- --------
Total non-operating income (expenses) 43 (1,965) (3,288) (3,793) (3,639) (467)
----- ------- --------- ---------- ---------- --------
INCOME BEFORE INCOME TAXES AND MINORITY
INTERESTS 31,720 23,185 17,626 24,012 14,020 1,797
(Provision) Credit for income taxes (8,398) (6,969) 108 (4,933) (3,312) (424)
------- ------- ------- --------- --------- --------
INCOME BEFORE MINORITY INTERESTS 23,322 16,216 17,734 19,079 10,708 1,373
Minority interests (2,211) (1,460) (1,198) (577) (1,010) (129)
------- ------- -------- ---------- ---------- --------
NET INCOME 21,111 14,756 16,536 18,502 9,698 1,244
====== ======= ======= ========= ========== ========
Net income per share 2.11 1.48 1.65 1.85 0.97 0.12
====== ======= ======= ========= ========== ========
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 47,880 46,964 39,467 41,206 33,243 4,262
Total assets 117,693 168,170 169,641 186,131 212,931 27,299
Current liabilities 64,079 92,439 81,976 67,809 88,677 11,369
Long-term obligations other than finance leases 19,316 15,479 13,592 16,319 14,947 1,916
Working capital (16,199) (45,475) (42,509) (26,603) (55,434) (7,107)
Obligations under finance leases-non current 1,698 8,252 4,215 12,114 8,191 1,050
Deferred taxation 1,451 4,574 4,712 5,661 6,312 809
Minority interests 2,483 3,945 5,144 5,721 6,544 839
Shareholders' equity 28,666 43,481 60,002 78,507 88,260 11,316
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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
fourteen facilities: ten in Hong Kong and four in China (including one in
Macau). Based on the number of the members 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 70,000 members. 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 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. See "Management."
29
RESULTS OF OPERATIONS
The Company's revenues are derived from its two main lines of business
of fitness and spa services in three principal ways: sale of memberships to
fitness facilities, monthly membership fees and the sale of beauty treatments.
The sale of beauty products and exercise clothing also contributes an
insignificant amount to the total revenues. In respect to fitness services,
customers are invited to join as a member at a fee currently set at
HK$2,000(US$256) for one person. (A current promotion allows a special fee of
HK$500 (US$64) at a particular booth). A monthly subscription fee of HK$299
(US$38) is charged to each customer for the usage of the fitness center.
In respect to beauty treatments, the customers may purchase single
treatments, or in packages of ten or more treatments, with quantity discounts
available. There is a wide range of beauty treatments available at prices
ranging from HK$400 (US$51) to HK$13,000 (US$1,670).
The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.
Years Ended December 31,
--------------------------
1998 1999 2000
---- ---- ----
Operating Revenues 100.00% 100.00% 100.00%
Total operating expenses 90.05% 89.02% 94.18%
Operating income 9.95% 10.98% 5.82%
Income before income taxes and minority
Interests 8.38% 9.48% 4.62%
Provision for income and deferred taxes (0.05%) 1.95% 1.09%
Minority interests 0.57% 0.23% 0.33%
Net income 7.87% 7.31% 3.20%
======== ======== ========
30
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1999
- ----
OPERATING REVENUES. The Company's operating revenues showed the
continuous growth in the fiscal year ended December 31, 2000 as compared to the
fiscal year ended December 31, 1999. Operating revenues for the fiscal year
ended 2000 totaled HK$303,312,000 (US$38,887,000) compared to HK$253,172,000
(US$32,458,000) in the fiscal year ended December 31, 1999, representing an
increase of 20%. Operating revenues derived by the Company's fitness services
increased 22% to HK$203,758,000 (US$26,123,000) compared to HK$166,917,000
(US$21,400,000) in the fiscal year ended December 31, 1999. Fitness revenues as
a percentage of total revenues were 67% in the fiscal year ended December 31,
2000 as compared to 66% in the fiscal year ended December 31, 1999.
Operating revenues for the Company's beauty treatments totaled
HK$99,553,000 (US$12,764,000) compared to HK$86,225,000 (US$11,054,000) in the
fiscal year ended December 31, 1999, representing an increase of 15%. Beauty
revenues as a percentage of total revenues were 33% in the fiscal year ended
December 31, 2000 as compared to 34% in the fiscal year ended December 31, 1999.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$284,007,000
(US$36,412,000), or 94% of total operating revenues in the fiscal year ended
December 31, 2000 as compared to HK$238,096,000 (US$30,525,000) or 94% of total
operating revenues in the fiscal year ended December 31, 1999.
Operating revenues derived from the Company's China locations generated
HK$19,305,000 (US$2,475,000), or 6% of total operating revenues in the fiscal
year ended December 31, 2000 as compared to HK$15,076,000 (US$1,933,000) or 6%
of total operating revenues in the fiscal year ended December 31, 1999.
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 2000 totaled HK$285,653,000 (US$36,623,000) compared to
HK$225,367,000 (US$28,893,000) in the fiscal year ended December 31, 1999,
representing an increase of 27%. The increase in the operating expenses was
primarily due to higher salaries and commissions as a result of increased
revenues and additional rent and related expenses incurred by the new Sheraton
Hotel center, Tuen Mun center and Macau center which opened in July 1999, July
2000 and October 2000 respectively. Total operating expenses, after taking into
account all corporate expenses, were 94% of total operating revenue as compared
to 89% of last year.
Operating expenses associated with the Company's Hong Kong locations
were HK$258,105,000 (US$33,091,000) in the fiscal year ended December 31, 2000,
representing an increase of HK$51,283,000 (US$6,576,000) or 25% as compared to
HK$206,822,000 (US$26,515,000) in 1999. Hong Kong operating expenses represented
90% of total operating expenses in the fiscal year ended December 31, 2000 as
compared to 92% in 1999. The increase in operating expenses was primarily
incurred by the new branch in Tuen Mun, Hong Kong which has not yet been opened
in 1999. The operating expenses for the Tuen Mun center amounted to
HK$13,651,000 (US$1,750,000) in 2000. In addition, the Sheraton Hotel center
incurred operating expenses of HK$59,738,000 (US$7,659,000), representing an
increase of HK$28,901,000 (US$3,705,000) over last year which reflected the
6-month operation since July 1999.
31
Operating expenses associated with the Company's China locations were
HK$27,548,000 (US$3,532,000) in the fiscal year ended December 31, 2000,
representing an increase of 49% as compared to HK$18,545,000 (US$2,378,000) in
1999. Operating expenses in China represented 10% of total operating expenses in
the fiscal year ended December 31, 2000 as compared to 8% in 1999. The increase
in operating expenses was primarily incurred by the new branch in Macau which
has not yet been opened in 1999. The operating expenses for the new branch
totaled HK$6,543,000 (US$839,000) in 2000.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses for
the fiscal year ended December 31, 2000 totaled HK$3,639,000 (US$467,000)
compared to HK$3,793,000 (US$486,000) in the fiscal year ended December 31,
1999, representing a decrease of 4% due to lower interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 2000 totaled HK$3,312,000 (US$424,000). The effective
tax rate of the year was 23.6% as compared with 20.5% of last year, representing
an increase of 15%. The increase is mainly due to a profits tax rate of 16%
being charged on the Company's Hong Kong locations whereas the income of these
profits contributors was partially offset by the losses incurred by the
Company's China locations.
NET INCOME. The Company's net income for the fiscal year ended December
31, 2000 totaled HK$9,698,000 (US$1,244,000) compared to HK$18,502,000
(US$2,372,000) for the fiscal year ended December 31, 1999, representing a
decrease of 48%. The decrease in the net income was mainly due to a substantial
portion of expansion overhead being recognized in the fiscal year ended December
31, 2000, however, the revenues derived in association with such expansion were
not fully recognized in the same time period in accordance with the Company's
accounting policy.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1998
- ----
OPERATING REVENUES. The Company's operating revenues showed the
continuous growth in the fiscal year ended December 31, 1999 as compared to the
fiscal year ended December 31, 1998. Operating revenues for the fiscal year
ended 1999 totaled HK$253,172,000 (US$32,458,000) compared to HK$210,209,000
(US$26,950,000) in the fiscal year ended December 31, 1998, representing an
increase of 20%. Operating revenues derived by the Company's fitness services
increased 19% to HK$166,917,000 (US$21,400,000)compared to HK$139,829,000
(US$17,927,000) in the fiscal year ended December 31, 1998. Fitness revenues as
a percentage of total revenues were 66% in the fiscal year ended December 31,
1999 as compared to 67% in the fiscal year ended December 31, 1998.
Operating revenues for the Company's beauty treatments totaled
HK$86,225,000 (US$11,054,000)compared to HK$70,317,000 (US$9,015,000) in the
fiscal year ended December 31, 1998, representing an increase of 23%. Beauty
revenues as a percentage of total revenues were 34% in the fiscal year ended
December 31, 1999 as compared to 33% in the fiscal year ended December 31, 1998.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$238,096,000
(US$30,525,000), or 94% of total operating revenues in the fiscal year ended
December 31, 1999 as compared to HK$192,692,000 (US$24,704,000) or 92% of total
operating revenues in the fiscal year ended December 31, 1998.
Operating revenues derived from the Company's China locations generated
HK$15,076,000 (US$1,933,000), or 6% of total operating revenues in the fiscal
year ended December 31, 1999 as compared to HK$17,517,000 (US$2,246,000) or 8%
of total operating revenues in the fiscal year ended December 31, 1998.
32
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 1999 totaled HK$225,367,000 (US$28,893,000)compared to
HK$189,295,000 (US$24,269,000)in the fiscal year ended December 31, 1998,
representing an increase of 19%. The increase in the operating expenses was
primarily due to higher salaries and commissions as a result of increased
revenues and additional rent and related expenses incurred by the new Tsuen Wan
branch and Sheraton branch which opened in July 1998 and July 1999 respectively.
Total operating expenses, after taking into account all corporate expenses, were
89% of total operating revenue as compared to 90% of last year.
Operating expenses associated with the Company's Hong Kong locations
were HK$206,822,000 (US$26,516,000) in the fiscal year ended December 31, 1999,
representing an increase of HK$39,716,000 (US$5,092,000) or 24% as compared to
HK$167,106,000 (US$21,424,000) in 1998. Hong Kong operating expenses represented
92% of total operating expenses in the fiscal year ended December 31, 1999 as
compared to 88% in 1998. The increase in operating expenses was primarily
incurred by a new branch in Sheraton Hotel, Hong Kong which has not yet been
opened in 1998. The operating expenses for the Sheraton Hotel center amounted to
HK$30,837,000 (US$3,953,000) in 1999. In addition, the Tsuen Wan center incurred
operating expenses of HK$45,059,000 (US$5,777,000), representing an increase of
HK$18,738,000 (US$2,402,000) over last year which reflected the 6-month
operation since July 1998.
Operating expenses associated with the Company's China locations were
HK$18,545,000 (US$2,378,000) in the fiscal year ended December 31, 1999,
representing a decrease of 16% as compared to HK$22,189,000 (US$2,845,000) in
1998. Operating expenses in China represented 8% of total operating expenses in
the fiscal year ended December 31, 1999 as compared to 12% in 1998. The decrease
in operating expenses was primarily due to less selling and administrative
expenses incurred in the year.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses for
the fiscal year ended December 31, 1999 totaled HK$3,793,000 (US$486,000)
compared to HK$3,288,000 (US$422,000) in the fiscal year ended December 31,
1998, representing an increase of 15% due to higher interest expenses.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 1999 totaled HK$4,933,000 (US$632,000). The effective
tax rate of the year was 20.5%. For the fiscal year ended December 31, 1998, the
Company provided income taxes of HK$4,382,000 (US$562,000) against which the
Company settled prior years taxes and recorded the amount over provided in prior
years in the amount of HK$4,490,000 (US$576,000). This resulted in a negative
provision of HK$108,000 (US$14,000) in the fiscal year ended December 31, 1998.
NET INCOME. The Company's net income for the fiscal year ended December
31, 1999 totaled HK$18,502,000 (US$2,372,000)compared to HK$16,536,000
(US$2,120,000) for the fiscal year ended