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MAN SANG HOLDINGS, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
COMMISSION FILE NUMBER: 33-10639-NY
MAN SANG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0539570
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) (IRS EMPLOYER NO.)
21/F RAILWAY PLAZA, 39 CHATHAM ROAD SOUTH, TSIMSHATSUI, KOWLOON, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(852) 2317 5300
(ISSUER'S TELEPHONE NUMBER)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED
BY SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR
SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X
NO __
AS OF JUNE 30, 2002 AND AUGUST 2, 2002, 4,815,960 SHARES OF COMMON
STOCK OF THE REGISTRANT WERE OUTSTANDING.
MAN SANG HOLDINGS, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as at
June 30, 2002 and March 31, 2002 F-1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three months ended
June 30, 2002 and 2001 F-3
Condensed Consolidated Statements of Cash Flows for
the three months ended June 30, 2002 and 2001 F-4
Notes to Condensed Consolidated Financial Statements F-5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 1
ITEM 3. Quantitative and Qualitative Disclosures about 4
Market Risk
PART II - OTHER INFORMATION
SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share data)
JUNE 30, 2002 MARCH 31, 2002
----------------------- --------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents 12,607 98,330 82,152
Restricted cash 1,407 10,975 16,169
Marketable securities 1,645 12,833 13,584
Accounts receivable, net of allowance for doubtful
accounts of HK$10,054 as of June 30, 2002 and
HK$10,054 as of March 31, 2002 6,907 53,876 60,814
Inventories:
Raw materials 241 1,881 1,773
Work in progress 5,401 42,126 35,679
Finished goods 10,827 84,448 81,059
-------- -------- --------
16,469 128,455 118,511
Prepaid expenses 298 2,327 2,702
Deposits and other receivables 1,405 10,962 11,317
Other current assets 2,355 18,370 15,983
-------- -------- --------
Total current assets 43,093 336,128 321,232
Property, plant and equipment 14,501 113,105 112,468
Accumulated depreciation (4,345) (33,891) (32,135)
-------- -------- --------
10,156 79,214 80,333
Real estate investment 11,496 89,669 89,669
Accumulated depreciation (1,043) (8,139) (7,683)
-------- -------- --------
10,453 81,530 81,986
Long-term investments, net of impairment loss of
HK$3,000 as of June 30, 2002 and HK$3,000 as
of March 31, 2002 447 3,486 3,330
Goodwill 151 1,179 1,179
Accumulated amortization and impairment (151) (1,179) (1,179)
-------- -------- --------
-- -- --
Deferred tax assets 126 983 2,188
-------- -------- --------
Total assets 64,275 501,341 489,069
======== ======== ========
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
JUNE 30, 2002 MARCH 31, 2002
--------------------- --------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 3,250 25,350 29,445
Current portion of long-term debts:
Secured bank loans 715 5,575 5,575
Accounts payable 1,515 11,816 3,726
Accrued payroll and employee benefits 542 4,232 4,658
Other accrued liabilities 1,048 8,175 8,674
Income taxes payable 275 2,143 373
------- -------- --------
Total current liabilities 7,345 57,291 52,451
Long-term debts:
Secured bank loans 2,643 20,616 22,010
Minority interests 22,216 173,287 170,208
Stockholders' equity:
Series A preferred stock, par value US$0.001
- authorized, issued and outstanding: 100,000 shares;
(entitled in liquidation to US$2,500 (HK$19,500)) -- 1 1
Series B convertible preferred stock, par value US$0.001
- authorized: 100,000 shares; no shares outstanding
Common stock, par value US$0.001 -- -- --
- authorized: 25,000,000 shares;
issued and outstanding: 4,815,960 shares as of
June 30, 2002 and 4,405,960 shares as of
March 31, 2002 5 37 34
Additional paid-in capital 7,773 60,630 58,458
Retained earnings 24,556 191,536 187,570
Accumulated other comprehensive loss (263) (2,057) (1,663)
------- -------- --------
Total stockholders' equity 32,071 250,147 244,400
------- -------- --------
Total liabilities and stockholders' equity 64,275 501,341 489,069
======= ======== ========
See accompanying notes to condensed consolidated financial statements
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(Amounts expressed in thousands except share data)
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2002 2001
---------------------------- ------------
US$ HK$ HK$
Net sales 9,843 76,776 73,294
Cost of sales (6,725) (52,457) (52,050)
---------- ---------- ----------
Gross profit 3,118 24,319 21,244
Rental income, gross 235 1,832 1,876
---------- ---------- ----------
3,353 26,151 23,120
Selling, general and administrative expenses:
- Pearls (1,831) (14,278) (16,748)
- Real estate investment (214) (1,669) (1,424)
---------- ---------- ----------
Operating income 1,308 10,204 4,948
Non-operating items:
- Interest expenses (74) (584) (1,793)
- Interest income 29 228 1,207
- Other income 98 765 1,101
---------- ---------- ----------
Income before income taxes and minority interests 1,361 10,613 5,463
Income taxes (419) (3,266) (2,226)
---------- ---------- ----------
Income before minority interests 942 7,347 3,237
Minority interests (433) (3,381) (1,140)
---------- ---------- ----------
Net income 509 3,966 2,097
Other comprehensive (loss) income, net of taxes and
minority interests:
- Foreign currency translation adjustments 4 31 (97)
- Unrealized holding (loss) gain on marketable
securities (54) (425) 283
---------- ---------- ----------
Other comprehensive (loss) income, net of taxes and
minority interests (50) (394) 186
---------- ---------- ----------
Comprehensive income 459 3,572 2,283
========== ========== ==========
Basic earnings per common share 0.11 0.88 0.48
========== ========== ==========
Diluted earnings per common share 0.11 0.88 0.48
========== ========== ==========
Weighted average number of shares
of common stock outstanding:
- basic 4,514,092 4,514,092 4,405,960
========== ========== ==========
- diluted 4,514,092 4,514,092 4,405,960
========== ========== ==========
See accompanying notes to condensed consolidated financial statements
F-3
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(Amounts expressed in thousands)
THREE MONTHS ENDED JUNE 30,
----------------------------------
2002 2001
--------------------- --------
US$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net income 509 3,966 2,097
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for doubtful debts -- -- 2,000
Depreciation and amortization 302 2,358 2,370
Loss on disposal of property, plant and equipment 43 333 8
Minority interests 433 3,381 1,140
Changes in operating assets and liabilities:
Accounts receivable 879 6,845 (9,549)
Inventories (1,275) (9,936) (11,062)
Prepaid expenses 48 375 200
Deposits and other receivables 46 358 (1,283)
Other current assets (39) (302) 811
Deferred tax assets 155 1,205 --
Accounts payable 1,038 8,090 6,824
Amount due to an affiliate -- -- 53
Accrued payroll and employee benefits (55) (426) 76
Other accrued liabilities (64) (499) (3,260)
Income taxes payable 227 1,770 2,128
------- ------- -------
Net cash provided by (used in) operating activities 2,247 17,518 (7,447)
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- -- (1,666)
Purchase of property, plant and equipment (131) (1,022) (336)
Decrease in restricted cash 666 5,194 1,388
Proceeds from disposal of property, plant and equipment -- -- 5
Purchase of long-term investments (20) (156) --
------- ------- -------
Net cash provided by investing activities 515 4,016 (609)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 121 942 --
Repayment of short-term borrowings (629) (4,905) (1,716)
Repayment of long-term debts (179) (1,394) (1,628)
------- ------- -------
Net cash used in financing activities (687) (5,357) (3,344)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 2,075 16,177 (11,400)
Cash and cash equivalents at beginning of period 10,532 82,152 65,294
Exchange adjustments -- 1 (108)
------- ------- -------
Cash and cash equivalents at end of period 12,607 98,330 53,786
======= ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 73 573 1,827
------- ------- -------
Net income taxes paid 37 291 97
------- ------- -------
See accompanying notes to condensed consolidated financial statements
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 2002 balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the financial statements and
notes included in the annual report of Man Sang Holdings, Inc. (the "Company")
on Form 10-K for the fiscal year ended March 31, 2002. In the opinion of
management, the interim financial statements reflect all adjustments of a normal
recurring nature necessary for a fair presentation of the results for the
interim periods presented.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated from their
functional currency to the reporting currency, at period end exchange rates,
while revenues and expenses are translated at average exchange rates during the
period. Adjustments arising from such translation are reported as a separate
component of stockholders' equity. Gains or losses from foreign currency
transactions are included in the Statement of Operations. Aggregate net foreign
currency gains or losses were immaterial for all periods.
The consolidated financial statements of the Company are maintained, and its
consolidated financial statements are expressed, in Hong Kong dollars. Unless
otherwise indicated as Hong Kong dollars or HK$, all financial information
contained herein is presented in United States dollars. The translations of Hong
Kong dollar amounts into United States dollars are for convenience only and have
been made at the rate of HK$7.8 to US$1, the approximate free rate of exchange
at June 30, 2002. Such translations should not be construed as representations
that Hong Kong dollar amounts could be converted into United States dollars at
that rate or any other rate.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
that, among other things, all business combinations entered into subsequent to
June 30, 2001, be accounted for using the purchase method of accounting. SFAS
No. 142 provides that goodwill and other intangible assets with indefinite lives
not be amortized, but will be tested for impairment on an annual basis. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 141 during the year ended March 31, 2002 and it did not impact
the Company's financial statements. The Company has adopted SFAS No. 142 on
April 1,
F-5
2002. There was no significant impact on the Company's financial position and
results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company will be required to adopt this
standard on January 1, 2003. Management is assessing, but has not yet
determined, the impact that SFAS No. 143 will have on its financial position and
results of operations.
The FASB also recently issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" that is applicable to financial statements issued
for fiscal years beginning after December 15, 2001. The FASB's new rules on
assets impairment supersede SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and portions of
APB Opinion 30 "Reporting the Results of Operations". The statement provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. The statement also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement dates as
presently required. The Company has adopted SFAS No. 144 on April 1, 2002. There
was no significant impact on the Company's financial position and results of
operations.
4. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128. Per share data is calculated
using the weighted average number of shares of common stock outstanding during
the period.
For the Three Months Ended June 30, 2001
-------------------------------------------------
Earnings No. of shares EPS
US$ US$
Basic EPS
Net income available to common stockholders
268,904 4,405,960 0.06
Diluted EPS
Net income available to common stockholders, including
conversion 268,904 4,405,960 0.06
Man Sang International Limited ("MSIL"), a subsidiary of the Company whose
shares are listed on The Stock Exchange of Hong Kong Limited, adopted a share
option scheme (the "Old Share Option Scheme") on September 8, 1997. The Old
Share Option Scheme is administered by Board of Directors of MSIL, whose
decisions are final and binding on all parties. On August 2, 2002, at the 2002
Annual General Meeting of MSIL, MSIL's shareholders approved a share option
scheme (the "New Share Option Scheme") to replace the Old Share Option Scheme.
No option has been granted under the New Share Option Scheme and all the options
granted under
F-6
the Old Share Option Scheme shall continue to be valid and exercisable in
accordance therewith.
For the three months ended June 30, 2001, the effect on consolidated EPS of both
options and warrants issued by MSIL and options issued by the Company was not
included in the computation of diluted EPS because it would have resulted in
anti-dilutive effect.
For the Three Months Ended June 30, 2002
-------------------------------------------------
Earnings No. of shares EPS
US$ US$
Basic EPS
Net income available to common stockholders
508,514 4,514,092 0.11
Diluted EPS
Net income available to common stockholders, including
conversion 508,514 4,514,092 0.11
On June 7, 2002, the Company issued in aggregate 410,000 shares of Common Stock,
par value $0.001 per share, to 2 business consultants pursuant to 2 separate
business consulting agreements dated June 1, 2002. For the three months ended
June 30, 2002, the effect on consolidated EPS of options issued by MSIL and
options issued by the Company was not included in the computation of diluted EPS
because it would have resulted in anti-dilutive effect.
5. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are co-ordinated through its Hong Kong
subsidiaries and an analysis by destination is as follows:
Three Months ended
June 30
2002 2001
US$'000 US$'000
Net Sales:
Hong Kong * 1,944 2,248
Export:
North America 2,875 2,371
Europe 1,332 2,222
Thailand 1,003 244
Other Asian countries 2,394 1,762
Others 295 550
----- -----
9,843 9,397
===== =====
* A majority of sales (by dollar amount) in Hong Kong are for re-export to
North America and Europe.
F-7
The Company operates in only one geographic area. The locations of the Company's
identifiable assets are as follows:
June 30, 2002 March 31, 2002
US$'000 US$'000
Hong Kong 49,275 47,636
Other regions of The People's Republic of China (the "PRC")
15,000 15,065
------ ------
64,275 62,701
====== ======
6. DISCLOSURE OF MAJOR CUSTOMERS
A substantial percentage of the Company's sales was made to a small number of
customers and was typically on an open account basis. During the three months
ended June 30, 2002, there was no customer who accounted for 10% or more of
total sales.
F-8
7. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
Reportable Segment Profit or Loss, and Segment Assets
For the three months ended,
June 30
2002 2001
US$'000 US$'000
Revenues from external customers:
Pearls 9,843 9,397
Real estate investment 235 240
------ ------
10,078 9,637
====== ======
Operating income:
Pearls 1,287 577
Real estate investment 21 57
------ ------
1,308 634
====== ======
Interest expenses:
Pearls 44 77
Real estate investment 20 128
Corporate assets 10 25
------ ------
74 230
====== ======
Depreciation and amortization:
Pearls 199 201
Real estate investment 59 59
Corporate assets 44 44
------ ------
302 304
====== ======
Capital expenditure for segment assets:
Pearls 130 41
Real estate investment -- --
Corporate assets 1 2
------ ------
131 43
====== ======
As of As of
June 30, March 31,
2002 2002
US$'000 US$'000
Segment assets:
Pearls 43,951 42,894
Real estate investment 10,453 10,511
Corporate assets 9,871 9,296
------ ------
64,275 62,701
====== ======
F-9
8. COMMON STOCK
Effective June 1, 2002, the Company entered into two agreements with two
business consultants. Under the terms of such agreements, the consultants will
provide service for two years in consideration of either US$370,000 in cash or
410,000 shares of the Common Stock of the Company.
On June 7, 2002, the Company issued in aggregate 410,000 shares of Common Stock,
US$0.001 par value per share, to the consultants pursuant to the business
consulting agreements. The amount of the relevant compensation expenses of
approximately US$279,000, being the fair value of the shares issued, is to
be recognized over the consultants' service period. During the three months
ended June 30, 2002, approximately US$12,000 was charged to the income
statement.
F-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements that are, by their nature, subject to risks and uncertainties. These
forward-looking statements include, without limitation, statements relating to:
(a) future supplies, demands, and purchase and sale prices of pearl and pearl
jewelry in the international pearl and jewelry markets, and real estate in Hong
Kong and the PRC; (b) sales and profitability of the Company's products and its
future product mix; (c) the amount and nature of, and potential for, future
developments and competitions; (d) expansion, consolidation and other trends in
the pearl and jewelry industry; (e) the Company's business strategy; (f) the
Company's estimated financial information regarding its business; (g) tax
exemptions and tax rates; and (h) exchange rates. These forward-looking
statements are based on assumptions and analyses made by the Company in light of
its experience and perception of historical trends, current conditions and
expected future developments, as well as other factors the Company believes to
be appropriate in particular circumstances. However, whether actual results and
developments will meet the Company's expectations and predictions depends on a
number of known and unknown risks and uncertainties and other factors, any or
all of which could cause actual results, performance or achievements to differ
materially from the Company's expectations, whether expressed or implied by such
forward-looking statements (which may relate to, among other things, the
Company's sales, costs and expenses, income, inventory performance, and
receivables). Primarily engaged in the processing and trading of pearls and
pearl jewelry products, and in real estate investment, the Company's ability to
achieve its objectives and expectations are derived at least in part from
assumptions regarding economic conditions, consumer tastes, and developments in
its competitive environment. The following assumptions, among others, could
materially affect the likelihood that the Company will achieve its objectives
and expectations communicated through these forward-looking statements: (i) that
low or negative growth in the economies or the financial markets of our
customers, particularly in the United States and in Europe, will not occur and
reduce discretionary spending on good that might be perceived as "luxuries";
(ii) that the Hong Kong dollar will remain pegged to the US dollar at US$1 to
HK$7.8; (iii) that customer's choice of pearls vis-a-vis other precious stones
and metals will not change adversely; (iv) that the Company will continue to
obtain a stable supply of pearls in the quantities, of the quality and on terms
required by the Company; (v) that there will not be a substantial adverse change
in the exchange relationship between RMB and the Hong Kong or US dollar; (vi)
that there will not be substantial increase in tax burden of subsidiaries of the
Company operating in the PRC; (vii) that there will not be substantial change in
climate and environmental conditions at the source regions of pearls that could
have material effect on the supply and pricing of pearls; and (viii) that there
will not be substantial adverse change in the real estate market conditions in
the PRC and in Hong Kong. The following discussion of results of operation, and
liquidity and capital resources should be read in conjunction with the financial
statements and the notes thereto included elsewhere in this Form 10-Q and with
the Company's annual report on Form 10-K for the year ended March 31, 2002.
1
RESULTS OF OPERATIONS
Sales and Gross Profit
Net sales for the three months ended June 30, 2002 increased by $0.4 million to
$9.8 million, representing a 4.7% increase when compared to net sales of $9.4
million during the same period in 2001. The overall increase in sales was mainly
attributable to increased marketing efforts to customers and improvement in
market sentiment in the first quarter. The major areas of growth was Asia
(including the PRC and Thailand) and North America. There was, however, a drop
in sales to Europe mainly because European buyers have remained cautious.
Gross profit for the three months ended June 30, 2002 improved by $0.4 million,
or 14.5%, from $2.7 million for the same period in 2001 to $3.1 million. As a
percentage of net sales, gross profit improved from 29.0% for the three months
ended 30 June 2001 to 31.7% for the same period in 2002. The overall improvement
in gross profit margin was mainly attributable to improvement in gross profit
margin of Freshwater pearls as the Company has increased Freshwater pearls of
higher grades in its product mix.
Rental Income
Gross rental income for the three months ended June 30, 2002 was approximately
$235K*, representing a decrease of approximately $5K, or 2.1%, as compared to
the same period in 2001. The decrease in gross rental income was mainly
attributable to the decrease in rental rate in respect of the property at 19th
Floor of Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong.
Selling, General and Administrative Expenses ("SG & A expenses")
SG&A expenses were $2.0 million, consisting of $1.8 million attributable to
pearl operations and $0.2 million attributable to real estate operations, for
the three months ended June 30, 2002, a decrease of approximately $0.3 million,
or 12.2%, from $2.3 million, consisting of $2.1 million attributable to pearl
operations and $0.2 million attributable to real estate operations, for the same
period in 2001. The decrease in SG&A expenses was mainly due to a decrease in
marketing and other operating expenses under the Company's cost savings program.
As a percentage of net sales, SG&A expenses from pearl operations decreased from
22.9% for the three months ended June 30, 2001 to 18.6% for the same period in
2002.
Interest Expenses
Interest expenses decreased by $156K, or 67.8%, to $74K from $230K for the
comparable period in the prior year as a result of reductions in interest rate
and the use of bank deposits by the Company to repay part of the bank
borrowings. The Company borrows most of the cash it
- --------
* As used in this 10-Q, the letter "K" appearing immediately after a dollar
amount denotes rounding to the nearest $1,000; as an example, $250,499 may be
rounded to "$250K".
2
needs in the PRC through short-term loans from the PRC banks in order to
minimize exposure to any Renminbi ("RMB") fluctuations. See "Item 3.
Quantitative and Qualitative Disclosures About Market Risk".
Interest Income
Interest income decreased by $126K, or 81.3%, to $29K from the comparable period
of $155K in the prior year. The decrease in interest income was due principally
to lower interest rates for the three months ended June 30, 2002 as compared to
interest rates for the same period in 2001 and the use of bank deposits to
reduce bank borrowings. See "Item 3. Quantitative and Qualitative Disclosures
About Market Risk".
Income Taxes
Income taxes and provision therefor for the three months ended June 30, 2002
increased by $134K to $419K as compared to $285K for the same period in 2001.
The increase was in line with the increase in income before income taxes and
minority interests.
Net Income
Net income for the three months ended June 30, 2002 showed an improvement of
$240K over the net income of $269K for the same period in 2001 to a net income
of $509K. The improvement was mainly attributable to improvement in sales and
gross profit margin and decrease in SG&A expenses.
Excluding income taxes and minority interests, the operating income for the
three months ended June 30, 2002 was $1.4 million, and the operating income for
the comparable period in the last fiscal year was $0.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund accounts receivable and
inventories. At June 30, 2002, the Company had working capital of $35.7 million,
which included a cash balance of $14.0 million (including restricted cash),
compared to working capital of $34.5 million, which included a cash balance of
$12.6 million (including restricted cash) at March 31, 2002. The current ratio
was 5.9 to 1 as of June 30, 2002 as compared with that of 6.2 to 1 as of March
31, 2002. Net cash provided by operating activities was approximately $2.3
million for the three months ended June 30, 2002, while net cash used in
operating activities was $1.0 million for the same period in 2001. The increase
in cash and cash equivalents by $2.1 million from March 31, 2002 to June 30,
2002 was the net effect of net cash provided by operating activities of $2.3
million, net cash provided by investing activities of $0.5 million and net cash
used in financing activities of $0.7 million.
Inventories increased by $1.3 million from $15.2 million at March 31, 2002 to
$16.5 million at June 30, 2002. The inventory turnover period decreased from 7.4
months as at March 31, 2002 to 7.1 months as at June 30, 2002.
3
Accounts receivable decreased by $0.9 million to $6.9 million at June 30, 2002,
as compared to $7.8 million at March 31, 2002. The debtors turnover period
decreased from 80 days as at March 31, 2002 to 68 days as at June 30, 2002. The
decrease in accounts receivable was mainly attributable to continuing efforts by
the Company to control its credit.
Long-term debts (including current portion of long-term debts) were $3.4 million
at June 30, 2002, a decrease of $0.1 million compared to that of $3.5 million at
March 31, 2002. The decrease was attributable to repayment of installment loans
during the three months ended June 30, 2002. The gearing ratio was 0.90 at June
30, 2002, compared to 0.93 at March 31, 2002.
The Company had available working capital facilities of $7.3 million in total
with various banks at June 30, 2002. Such banking facilities include letter of
credit arrangements, import loans, overdraft and other facilities commonly used
in the jewelry business. All such banking facilities bear interest at floating
rates generally based on inter bank rates in Hong Kong and in the PRC, and are
subject to periodic review. At June 30, 2002, the Company did not utilize such
credit facilities.
The Company believes that funds to be generated from internal operations and the
existing banking facilities will enable the Company to meet anticipated future
cash flow requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three months ended June 30, 2002, the Company made approximately
38.0% of its purchases in RMB, with the remaining amounts mainly settled in Hong
Kong dollars, US dollars and Japanese Yen (15.1% of total purchase). The RMB is
not a fully convertible currency and the PRC government determines its exchange
rate against other currencies. There are conflicting speculations in the market
for either a devaluation of the RMB as an attempt of the PRC government to make
the PRC exports more competitive, or a revaluation of the RMB following the
PRC's entry to the World Trade Organization. As the PRC has not declared any
intention to either devalue or revalue its currency, the management believes
that the imminent risk of a substantial fluctuation of the RMB exchange rate
remains low. However, to further minimize any exposure to any RMB fluctuations,
the Company borrows most of the cash it needs in the PRC through short-term
loans from banks in the PRC. At June 30, 2002, the Company had short-term RMB
bank borrowings of about $3.2 million, the weighted average interest rate was
5.4% per annum. The Company is closely monitoring the movements of Japanese Yen
against US dollars and may take measures to hedge its currency exposure if
deemed necessary. See also "Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Company's policy is to denominate all its sales in either US dollars or Hong
Kong dollars. Since the Hong Kong dollar remained pegged to the US dollar
throughout the period, the Company's sales proceeds have thus far had minimal
exposure to foreign exchange fluctuations.
Therefore, since most of the Company's purchases are made in currencies that the
Company believes have low risk of revaluation or appreciation and sales are made
in US dollars, the
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currency risk in the foreseeable future should not be material, and the
Company's management determined that no derivative contracts such as forward
contracts and options to hedge against foreign exchange fluctuations were
necessary during the three months ended June 30, 2002.
In addition, the Company's interest expense is sensitive to fluctuations in the
general level of Hong Kong interest rates determined on the basis of Hong Kong
Inter-bank Offer Rate ("HIBOR"). As the Hong Kong dollar is pegged to the US
dollar, which in turn correlates Hong Kong interest rates to US interest rates,
any movement in US interest rates is expected to have a bearing on Hong Kong
interest rates. Since the US economy has slowed down and US interest rates has
been falling since June 30, 2000, three-month HIBOR has decreased by 4.7% from
6.5% as at June 30, 2000 to 1.8% as at June 30, 2002. At June 30, 2002, the
Company had Hong Kong dollar bank borrowings of about $3.4 million, the weighted
average interest rate of which was 3.1% per annum. Therefore, the Company does
not foresee material risks of an increase in Hong Kong interest rates in the
foreseeable future. See "Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations".
As a result, the Company believes that the risk associated with fluctuations in
interest rate is not material, and no derivative contracts are necessary.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 1, 2001, Man Sang Jewellery Company Limited ("MSJ"), a subsidiary of
the Company, filed an action in the High Court of Hong Kong against a customer,
World Wide Imports, Inc. to claim approximately $119,182 (for which the Company
has made full provision) plus interests and costs. Up to August 2, 2002, MSJ has
recovered $44,120 and the Company estimates that non-recoverable costs in
addition to the amount claimed, if any, will be immaterial.
ITEM 2. CHANGES IN SECURITIES
On June 7, 2002, the Company issued in aggregate 410,000 shares of Common Stock,
par value $0.001 per share, to 2 business consultants pursuant to 2 separate
business consulting agreements dated June 1, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(A) Exhibits
99.1 Share Option Scheme of Man Sang International Limited, adopted
on August 2, 2002.
99.2 Certification of Chief Executive Officer and Chief Financial
Officer
(B) Reports on Form 8-K
None
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, Man Sang Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
Date: August 14, 2002
By: /s/ CHENG Chung Hing, Ricky
-----------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
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INDEX TO EXHIBITS
The following documents are filed herewith or have been included as exhibits to
previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
Exhibit No. Description
99.1 Share Option Scheme of Man Sang International Limited, adopted on
August 2, 2002.
99.2 Certification of Chief Executive Officer and Chief Financial Officer.
8