Consolidated Financial Statements
Kapital Engine Investments, Inc.
Years Ended December 31, 2004 and 2003
Report of Independent Registered Certified Public Accounting Firm
Consolidated Financial Statements
Years Ended December 31, 2004 and 2003
Report of Independent Registered Certified Public Accounting Firm
Contents
Report of Independent Registered Certified Public Accounting Firm
Financial Statements:
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Certified Public Accounting Firm
Board of Directors
Kapital Engine Investments, Inc.
Raleigh, North Carolina
We have audited the accompanying balance sheet of Kapital Engine Investments,
Inc. as of December 31, 2004 and the related statements of operations, changes
in stockholders' equity, and cash flows for the two years then ended. These
financial statements are the responsibility of the management of Kapital Engine
Investments, Inc. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required at
this time, to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kapital Engine Investments,
Inc. as of December 31, 2004 and the results of its operations and its cash
flows for the two years then ended in conformity with United States generally
accepted accounting principles.
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
November 1, 2005
Kapital Engine Investments, Inc.
Consolidated Balance Sheets
December 31, 2004
Assets
Current assets:
Cash $ 1,200
Accounts receivable, net of allowances of $2,097,000 82,600
Related party receivables 361,300
Advances to shareholders 129,800
Prepaid expenses 38,000
-----------
Total current assets 612,900
Property & equipment, net of accumulated depreciation of $3,020,300 2,574,100
Identified intangible assets, net of accumulated amortization of $48,400 25,200
Other long-term assets 60,600
-----------
Total assets $ 3,272,800
-----------
Liabilities and Stockholders' Equity
Current liabilities:
Cash overdraft $ 238,800
Accounts payable 315,300
Accrued payroll and payroll taxes 90,300
Notes payable, current 1,191,600
Capital leases, current 446,200
Deferred revenue, current 2,685,200
Other accrued liabilities 271,000
-----------
Total current liabilities 5,238,400
Long-term liabilities:
Deferred revenue, less current portion 1,097,400
Notes payable, less current portion 237,000
Capital leases, less current portion 401,700
Stockholders' deficit:
Common stock; $1.00 par value; 1,000 shares authorized; 1,000 shares issued and
outstanding at December 31, 2004 1,000
Additional paid-in capital 424,500
Accumulated deficit (4,127,200)
-----------
Total stockholders' deficit (3,701,700)
-----------
Total liabilities and stockholders' equity $ 3,272,800
-----------
The accompanying notes are an integral part of the financial statements.
Kapital Engine Investments, Inc.
Consolidated Statements of Operations
Years Ended December 31,
----------------------------
2004 2003
------------ ------------
Revenues:
Membership revenue $ 9,661,200 $ 7,006,700
Membership refunds (128,700) (156,800)
Other returns (156,800) (91,100)
------------ ------------
Total revenue 9,375,700 6,758,800
------------ ------------
General and administrative expenses 7,998,600 7,344,100
Other expense (income):
Loss on sale of fixed assets 9,900 51,000
Other income (126,000) (150,900)
Interest expense 141,700 124,400
------------ ------------
Total other expenses (income) 25,600 24,500
Net income (loss) $ 1,351,500 $ (609,800)
------------ ------------
Basic and dilutive income (loss) per share of common stock $ 1,351.50 $ (609.80)
------------ ------------
Weighted average common stock outstanding 1,000 1,000
------------ ------------
Weighted average diluted common stock outstanding 1,000 1,000
------------ ------------
The accompanying notes are an integral part of the financial statements.
Kapital Engine Investments, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2004 and 2003
Common Stock Additional
--------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 1,000 $ 1,000 $ 424,500 $ (3,634,500) $ (3,209,000)
Distributions (844,400 (844,400)
Net loss (609,800) (609,800)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 1,000 1,000 424,500 (5,088,700) (4,663,200)
Distributions (390,000) (390,000)
Net income 1,351,500 1,351,500
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 1,000 $ 1,000 $ 424,500 $ (4,127,200) $ (3,701,700)
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
Kapital Engine Investments, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
----------------------------
2004 2003
------------ ------------
Operating activities
Net income (loss) $ 1,351,500 $ (609,800
------------ ------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Provisions for allowance for doubtful accounts 1,356,300 300,600
Depreciation and amortization 589,500 514,200
Loss on sale of assets 9,900 51,000
Increase (decrease) in:
Accounts receivables (1,337,900) (341,600)
Prepaid expenses 114,400 (152,400)
Other assets 6,000 5,600
Accounts payable 52,800 (25,500)
Deferred revenue (1,103,200) 1,493,200
Other accrued liabilities 40,800 33,200
------------ ------------
Total adjustments (271,400) 1,878,300
------------ ------------
Net cash provided by operating activities 1,080,100 1,268,500
------------ ------------
Investing activities
Purchase of property and equipment (278,300) (191,600)
Proceeds from sale of assets 57,000 500
------------ ------------
Net cash used in investing activities (221,300) (191,100)
------------ ------------
Financing activities
Increase in bank overdraft 238,800
Increase in advances to shareholders (129,800)
Related party receivables (338,400) 1,400
Proceeds from notes payable and capital leases 506,500 1,375,900
Payment on notes payable and capital leases (759,700) (1,942,900)
Payment on minority interest 0 (103,300)
Distributions to shareholders (390,000) (844,400)
------------ ------------
Net cash used by financing activities (872,600) (1,513,300)
------------ ------------
Net decrease in cash and cash equivalents (13,800) (435,900)
Cash and cash equivalents, beginning of year 15,000 450,900
------------ ------------
Cash and cash equivalents, end of period $ 1,200 $ 15,000
------------ ------------
Supplemental disclosure of cash flow information and non-cash financing
activities:
Cash paid during the year for interest $ 141,700 $ 124,400
------------ ------------
Assets acquired with capital leases $ 56,500 $ 1,016,600
------------ ------------
The accompanying notes are an integral part of the financial statements.
KAPITAL ENGINE INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2004 and 2003
1. Nature of Business
Kapital Engine Investments, Inc. and the Subsidiaries (collectively, the
Company) are primarily engaged in design, management and operation of fitness
centers, principally in the Raleigh, North Carolina area. The Company was
incorporated in the state of Nevada in 2002. As of December 31, 2004, the
Company owned and operated nine fitness clubs.
The fitness clubs offer weight training, cardiovascular equipment,
aerobics classes, yoga, tanning, babysitting and basketball courts. Operations
focus on prospecting for new members, membership sales, and renewals.
Memberships may be prepaid or paid monthly. The majority of the memberships sold
are for two year periods.
2. Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. In recording transactions and balances resulting from
business operations, the Company uses estimates based on the best information
available. The Company revises the recorded estimates when better information is
available, facts change, or the Company can determine actual amounts. Those
revisions can affect operating results.
Principles of Consolidation - The consolidated financial statements
include the accounts of Kapital Engine Investments, Inc. and its wholly owned
subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition -- The Company receives a one-time enrollment fee and
offers discounts on pre-payment of multi-year contracts at the time a member
joins and monthly membership dues for usage from its members. The enrollment
fees are nonrefundable after 30 days. The Company records income on the basis of
cash received and adjusts the cash income for net changes in accounts receivable
and calculates a deferral of cash income to subsequent periods based on a sample
of membership contracts entered into during the year. In addition, monthly
membership dues paid in advance of a center's opening are deferred until the
center opens. The Company offers members month-to-month memberships and
recognizes as revenue the monthly membership dues in the month to which they
pertain.
The Company also receives rental revenue from several third party vendors
who operate refreshment areas within each fitness center. Rental revenue from
this activity is recognized monthly.
Fair Value of Financial Instruments - Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information
available to management. The respective carrying value of certain
on-balance-sheet financial instruments approximated their fair values. These
financial instruments include cash, accounts receivable, accounts payable, and
accrued expenses. Fair values were assumed to approximate carrying values for
these financial instruments since they are short-term in nature and their
carrying amounts approximate fair values or they are receivable or payable on
demand. The fair value of the Company's notes payable is estimated based upon
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities and
approximates the carrying amounts of the notes.
Cash and Cash Equivalents - The Company considers all unrestricted cash
accounts and highly liquid debt instruments purchased with original maturities
of three months or less to be cash and cash equivalents.
Accounts Receivable - Accounts receivable principally consists of amounts
due from the Company's membership base. The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of the
Company's members to make required payments. The Company considers facts such
as: historical collection experience, the age of the receivable balance, and
general economic conditions that may affect our member's ability to pay.
The roll forward of these allowances at December 31, 2004 are as follows:
Allowance for doubtful accounts:
Balance, beginning of period $ 740,600
Provisions 1,356,400
Write-offs against allowance
Balance, end of period $2,097,000
Prepaid Expenses and Other Receivables - Prepaid expenses and other
receivables consisted primarily of prepaid legal fees, rent and security
deposits.
Property and Equipment - Property, equipment and leasehold improvements
are recorded at cost. Improvements are capitalized, while repair and maintenance
costs are charged to operations when incurred.
Depreciation is computed primarily using the straight-line method over
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the lease term or the estimated
useful life of the improvement. Construction in progress is not depreciated
until placed in service and then is depreciated over the useful life of the
asset.
Impairment of Long-lived Assets - The carrying value of long-lived assets
is reviewed annually and whenever events or changes in circumstances indicate
that such carrying values may not be recoverable. The Company considers a
history of consistent and significant operating losses to be its primary
indicator of potential impairment. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash flows,
which is generally at an individual location. The determination of whether
impairment has occurred is based on an estimate of undiscounted future cash
flows directly related to that center, compared to the carrying value of these
assets. If an impairment has occurred, the amount of impairment recognized is
determined by estimating the fair value of these assets and recording a loss if
the carrying value is greater than the fair value. For the years ended December
31, 2004 and 2003 there was no impairment charge recorded.
Advertising costs - are charged to operations when incurred. The costs of
direct-response advertising are capitalized and amortized over the period during
which future benefits are expected to be received. Advertising expense for the
year ended December 31, 2004 and 2003 were $166,300 and $374,600, respectively.
There was no direct-response advertising for the periods presented.
Operating Leases - Rent expense for operating leases was approximately
$1,742,200 and $1,324,700 for the years ended December 31, 2004 and 2003,
respectively. Certain lease agreements call for escalating lease payments over
the term of the lease, resulting in a deferred rent liability due to the expense
being recognized on the straight-line basis over the life of the lease.
Income Taxes - The Company, with the consent of the stockholders, has
elected under Sections 1361 through 1379 of the Internal Revenue Code to be
treated substantially as a partnership instead of as a corporation for income
tax purposes. As a result, the stockholders will report the entire corporate
taxable income and investment credit on their individual tax returns. Therefore,
no provision for income taxes has been made to these financial statements.
Earnings per Common Share - Basic earnings per common share (EPS) is
computed by dividing net income applicable to common shareholders by the
weighted average number of shares of common stock for each year. Diluted EPS is
computed similarly to basic EPS, except that the numerator is adjusted to add
back any redeemable preferred stock accretion and the denominator is increased
for the conversion of any dilutive common stock
New Accounting Pronouncements - In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections. SFAS No. 154 changes the requirements
for the accounting for and reporting of a change in accounting principle. In
addition, it carries forward without change the guidance contained in APB
Opinion No. 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. SFAS No. 154 requires
retrospective application to prior periods' financial statements of changes in
accounting principle in most circumstances. The provisions of SFAS No. 154 are
effective in fiscal years beginning after December 15, 2005. The Company plans
to prospectively adopt SFAS No. 154 at the beginning of the 2006 fiscal year.
In June 2005, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 05-06, Determining the Amortization Period for Leasehold Improvements
Purchased after Lease Inception or Acquired in a Business Combination ("EITF
05-06"). EITF 05-06 concludes that the amortization period for leasehold
improvements acquired in a business combination and leasehold improvements that
are in service significantly after and not contemplated at the beginning of the
lease term should be amortized over the shorter of the useful life of the assets
or a term that includes required lease periods and renewals that are deemed to
be reasonably assured at the date of inception. As of September 30, 2005 this
pronouncement had no impact on the financial statements.
Other recent accounting pronouncements issued by the FASB (including its EITF),
the AICPA, and the SEC did not or are not believed by management to have a
material impact on the Company's present or future financial statements.
3. Property and Equipment
Property and equipment at December 31, 2004 consists of the following:
Useful Lives 2004
------------------ --------------------
Leasehold improvements 10 years $ 2,361,100
Construction in progress 42,500
---------------------
2,403,600
Equipment:
Fitness 7 - 10 years 2,804,600
Computer and telephone 5 years 94,100
Decor and signage 10 years 110,900
Furniture and fixtures 10 years 181,200
---------------------
---------------------
Property and equipment, gross 5,594,400
Less accumulated depreciation 3,020,300
---------------------
Property and equipment, net $ 2,574,100
=====================
4. Intangible Assets and Debt Issuance Costs
Intangible assets consist of a covenant-not-to-compete. This asset is
stated at cost and is being amortized by the straight-line method over its
estimated lives.
Debt issuance costs are classified within other assets and are being
amortized as additional interest expense over the life of the underlying debt,
one to three years, using the straight-line method. Amortization of debt issue
costs was $4,900 and $3,000 for December 31, 2004 and 2003, respectively.
Estimated amortization of intangibles for the next year is as follows:
Year Amortization Expense
---- --------------------
2005 $ 4,893
2006 $ 4,893
2007 $ 4,893
2008 $ 4,893
2009 $ 4,893
5. Notes Payable
Notes payable at December 31, 2004 consists of the following:
Note payable to bank, due in monthly installments of $9,018 through
November 2005, including interest at 5.25%, with a final payment of $255,500
plus unpaid interest $ 331,300
Note payable to bank, due in monthly installments of $4,082 through
November 2005, including interest at 5.25%, with a final payment of $189,100
plus unpaid interest 150,100
Note payable to bank, due in monthly installments of $8,658 through
November 2005, including interest at 5.25%, with a final payment of $247,500
plus unpaid interest 318,300
Note payable to bank, due in monthly installments of $6,389 through March
2007, including interest at 5.25%, with a final payment of $39,400 plus unpaid
interest 178,900
Note payable to bank, monthly interest only payments through December
2005, including interest at 7.00%, collateralized by certain equipment, with a
final payment of $100,000 plus unpaid interest 100,000
Note payable to bank, due in monthly installments of $7,702 through June
2006, including interest at 4.559%, with a final payment of $40,800 plus unpaid
interest 100,000
Note payable to bank, due in monthly installments of $19,254 through May
2006, including interest at 4.429%, with a final payment of $86,200 plus unpaid
interest 250,000
-----------
Total notes payable 1,428,600
-----------
Less current maturities 1,191,600
-----------
Total notes payable, less current portion $ 237,000
===========
The Company was in compliance in all material respects with all
restrictive and financial covenants under its various credit facilities as of
December 31, 2004.
Aggregate annual future maturities of notes payable at December 31, 2004
are as follows:
2005 $ 1,191,600
2006 199,500
2007 37,500
------------
$ 1,428,600
============
6. Capital Leases
The Company is a party to capital equipment leases with third parties which
provide for monthly rental payments of approximately $60,200 as of December 31,
2004. All of the fitness equipment, which is included in property and equipment
has been recorded under capital leases.
Equipment $ 2,804,600
------------
2,804,600
Less accumulated depreciation 1,286,600
------------
$ 1,518,000
============
Future minimum lease payments and the present value of net minimum lease
payments on capital leases at December 31, 2004 are as follows:
2005 $ 524,500
2006 311,700
2007 43,000
2008
2009
Thereafter
------------
879,200
Less amounts representing interest 31,300
------------
Present value of net minimum lease payments 847,900
Current portion 446,200
------------
$ 401,700
============
7. Related Party Transactions
The advances to shareholders account is made up of advances to the majority
shareholders. These advances are non-interest bearing, unsecured and due on
demand.
8. Commitments and Contingencies
Lease Commitments - The Company leases certain property under operating
leases. The minimum annual payments under all noncancelable operating leases at
December 31, 2004 are as follows:
Lease Commitment Lease Income Net Lease Commitment
2005 $ 1,444,900 $ 162,000 $ 1,282,900
2006 1,157,000 36,000 1,121,000
2007 789,100 36,000 753,100
2008 688,700 688,700
2009 721,200 721,200
Thereafter 1,231,700 1,231,700
---------------- ---------------- ----------------
$ 6,032,600 $ 234,000 $ 5,798,600
================ ================ ================
Litigation - The Company is engaged in legal proceedings incidental to the
normal course of business. Although the ultimate outcome of these matters cannot
be determined, management believes that the final disposition of these
proceedings will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
9. Income Taxes
The individual companies in this consolidation file separate income tax returns
with the federal government and the State of North Carolina. The companies have
elected to be taxes as S-Corporations or LLC's and therefore have no actual tax
expense. The pro forma federal income tax provision below has been calculated as
if the consolidated entity was a C-Corporation.
Pro forma income tax expense consists of the following:
2004 2003
Taxes currently payable (receivable):
Federal $ 72,200 $ 231,300
State 9,700 31,000
Change in deferred income tax expense 433,800 (483,400)
------------ ------------
$ 515,800 $ (221,100)
Net income (loss) as reported $ 1,351,500 $ (609,800)
Net income after pro forma tax expense $ 835,700 $ (388,700)
Pro forma earnings per share $ 800 $ (389)
The company has no carryovers available for future periods.
Income taxes are based on estimates of the annual effective tax rate and
evaluations of possible future events and transactions and may be subject to
subsequent refinement or revision.
Consolidated Financial Statements
Kapital Engine Investments, Inc.
As of September 30, 2005 and for the
Nine Months Ended September 30, 2005 and 2004
(unaudited)
Kapital Engine Investments, Inc.
Consolidated Financial Statements
As of September 30, 2005 and for the
Nine Months Ended September 30, 2005 and 2004
(unaudited)
Contents
Consolidated Financial Statements:
Consolidated Balance Sheet (unaudited) 1
Consolidated Statements of Operations (unaudited) 2
Consolidated Statement of Changes in Stockholders' Equity (unaudited) 3
Consolidated Statements of Cash Flows (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Kapital Engine Investments, Inc.
Consolidated Balance Sheet
September 30, 2005
(unaudited)
Assets
Current assets:
Cash $ 20,400
Accounts receivable, net of allowances of $3,314,500 580,300
Related party receivables 206,700
Advances to shareholders 129,800
-----------
Total current assets 937,200
Property & equipment, net of accumulated depreciation of $3,478,800 2,124,800
Identified intangible assets, net of accumulated amortization of $53,200 20,400
Other long-term assets 60,600
-----------
Total assets $ 3,143,000
-----------
Liabilities and Stockholders' Deficit
Current liabilities:
Cash overdraft $ 80,100
Accounts payable 152,500
Accrued payroll and payroll taxes 102,900
Notes payable, current 940,200
Capital leases, current 433,300
Deferred revenue, current 2,106,400
Other accrued liabilities 323,100
-----------
Total current liabilities 4,138,500
Long-term liabilities:
Deferred revenue, less current portion 742,400
Notes payable, less current portion 48,600
Capital leases, less current portion 112,300
Stockholders' deficit:
Common stock; $1.00 par value; 1,000 shares authorized; 1,000
shares issued and outstanding 1,000
Additional paid-in capital 424,500
Accumulated deficit (2,324,300)
-----------
Total stockholders' deficit (1,898,800)
-----------
Total liabilities and stockholders' deficit $ 3,143,000
-----------
The accompanying notes are an integral part of the consolidated financial
statements.
1
Kapital Engine Investments, Inc.
Consolidated Statements of Operations
(unaudited)
Nine Months Ended
September 30,
--------------------------------
2005 2004
-------------- --------------
Revenues:
Membership revenue $ 6,751,700 $ 7,699,900
Membership refunds (33,800) (100,100)
Other returns (99,300) (126,800)
-------------- --------------
Total revenue 6,618,600 7,473,000
-------------- --------------
General and administrative expenses 4,873,100 5,837,000
Other expense (income):
Other income (277,400) (78,800)
Interest expense 87,900 120,200
-------------- --------------
Total other expenses (income) (189,500) 41,400
Net income $ 1,935,000 $ 1,594,600
-------------- --------------
Basic and dilutive income per share of common stock $ 1,935.00 $ 1,594.60
-------------- --------------
Weighted average common stock outstanding 1,000 1,000
-------------- --------------
Weighted average diluted common stock outstanding 1,000 1,000
-------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements
2
Kapital Engine Investments, Inc.
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2005
(unaudited)
Additional
Paid-In (Accumulated
Shares Amount Capital Deficit) Total
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 2004 1,000 $ 1,000 $ 424,500 $ (4,127,200) $ (3,701,700)
-------------- -------------- -------------- -------------- --------------
Distributions (132,100) (132,100)
Net income 1,935,000 1,935,000
-------------- -------------- -------------- -------------- --------------
Balance, September 30, 2005 1,000 $ 1,000 $ 424,500 $ (2,324,300) $ (1,898,800)
-------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements
3
Kapital Engine Investments, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
--------------------------------
2005 2004
-------------- --------------
Operating activities
Net income $ 1,935,000 $ 1,594,600
-------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Provisions for allowance for doubtful accounts 1,217,500 983,100
Depreciation and amortization 463,300 463,900
Increase (decrease) in:
Accounts receivables (1,715,200) (953,900)
Prepaid expenses 38,000 101,800
Other assets 154,600 (96,400)
Accounts payable (162,800) (188,100)
Deferred revenue (933,800) (986,700)
Other accrued liabilities 64,700 50,300
-------------- --------------
Total adjustments (873,700) (626,000)
-------------- --------------
Net cash provided by operating activities 1,061,300 968,600
-------------- --------------
Investing activities
Purchase of property and equipment (9,200) (223,700)
-------------- --------------
Net cash used in investing activities (9,200) (223,700)
-------------- --------------
Financing activities
Increase (Decrease) in bank overdraft (158,700) 54,900
Increase in advances to shareholders (129,800)
Proceeds from notes payable 15,400 56,500
Payment on notes payable and capital leases (757,500) (568,900)
Distributions to shareholders (132,100) 171,300
-------------- --------------
Net cash used by financing activities (1,032,900) (758,600)
-------------- --------------
Net increase (decrease) in cash 19,200 (13,700)
Cash, beginning of year 1,200 15,000
-------------- --------------
Cash, end of period $ 20,400 $ 1,300
-------------- --------------
Supplemental disclosure of cash flow information and non-cash financing activities:
Cash paid during the year for interest $ 87,900 $ 463,900
-------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements.
4
Kapital Engine Investments, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2005 and for the
Nine Months Ended September 30, 2005 and 2004
(unaudited)
1. Background Information
Kapital Engine Investments, Inc. and the Subsidiaries (collectively, the
Company) are primarily engaged in design, management and operation of fitness
centers, principally in the Raleigh, North Carolina area. The Company was
incorporated in the state of Nevada in 2002. As of December 31, 2004, the
Company owned and operated nine fitness clubs.
The fitness clubs offer weight training, cardiovascular equipment,
aerobics classes, yoga, tanning, babysitting and basketball courts. Operations
focus on prospecting for new members, membership sales, and renewals.
Memberships may be prepaid or paid monthly. The majority of the memberships sold
are for two year periods.
2. Basis of Presentation
In the opinion of management, all adjustments consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the nine months ended September 30, 2005 and 2004, (b) the
financial positions at September 30, 2005, and (c) cash flows for the nine month
periods ended September 30, 2005 and 2004, have been made.
The unaudited consolidated financial statements and notes are presented as
permitted by Regulation SB. Accordingly, certain information and note
disclosures normally included in condensed financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted. The accompanying consolidated financial statements
and notes should be read in conjunction with the audited consolidated financial
statements and notes of the Company for the fiscal year ended December 31, 2004.
The results of operations for the nine months ended September 30, 2005 are not
necessarily indicative of those to be expected for the entire year.
5