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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 SEPTEMBER 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 SEPTEMBER 30, 2002 AND NOVEMBER 14, 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
September 30, 2002 and March 31, 2002 F-1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three and six months ended
September 30, 2002 and 2001 F-3
Condensed Consolidated Statements of Cash Flows for
the six months ended September 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 6
Market Risk
PART II - OTHER INFORMATION
SIGNATURES
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share data)
SEPTEMBER 30, 2002 MARCH 31, 2002
---------------------------------- -----------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents 9,760 76,131 82,152
Restricted cash - - 16,169
Marketable securities 1,323 10,316 13,584
Accounts receivable, net of allowance for doubtful 9,057 70,641 60,814
accounts of HK$11,073 as of September 30, 2002 and
HK$10,054 as of March 31, 2002
Inventories :
Raw materials 261 2,036 1,773
Work in progress 4,618 36,017 35,679
Finished goods 13,838 107,940 81,059
----------- ----------- ------------
18,717 145,993 118,511
Prepaid expenses 339 2,642 2,702
Deposits and other receivables 2,088 16,287 11,317
Other current assets 1,676 13,078 15,983
----------- ----------- ------------
Total current assets 42,960 335,088 321,232
Property, plant and equipment 12,129 94,604 112,468
Accumulated depreciation (4,285) (33,419) (32,135)
----------- ----------- ------------
7,844 61,185 80,333
Real estate investment 13,888 108,327 89,669
Accumulated depreciation (1,382) (10,780) (7,683)
----------- ----------- ------------
12,506 97,547 81,986
Interest in an associate 36 280 -
Long-term investments, net of impairment loss of
HK$3,000 as of September 30, 2002 and HK$3,000 as
of March 31, 2002 447 3,486 3,330
Deferred tax assets 139 1,081 2,188
----------- ----------- ------------
Total assets 63,932 498,667 489,069
=========== =========== ============
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
SEPTEMBER 30, 2002 MARCH 31, 2002
--------------------------------- ------------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 2,000 15,600 29,445
Current portion of long-term debts :
Secured bank loans 715 5,575 5,575
Accounts payable 934 7,286 3,726
Accrued payroll and employee benefits 616 4,802 4,658
Other accrued liabilities 1,170 9,128 8,674
Income taxes payable 570 4,449 373
----------- ----------- -------------
Total current liabilities 6,005 46,840 52,451
Long-term debts :
Secured bank loans 2,465 19,222 22,010
Minority interests 22,751 177,459 170,208
Stockholders' equity:
Series A preferred stock, par value US$0.001 - 1 1
- authorized, issued and outstanding: 100,000 shares;
(entitled in liquidation to US$2,500 (HK$19,500))
Series B convertible preferred stock, par value US$0.001 - - -
- authorized: 100,000 shares; no shares outstanding
Common stock, par value US$0.001 5 37 34
- authorized: 25,000,000 shares;
issued and outstanding: 4,815,960 shares as of
September 30, 2002 and 4,405,960 shares as of
March 31, 2002
Additional paid-in capital 7,773 60,630 58,458
Retained earnings 25,356 197,777 187,570
Accumulated other comprehensive loss (423) (3,299) (1,663)
----------- ----------- -------------
Total stockholders' equity 32,711 255,146 244,400
----------- ----------- -------------
Total liabilities and stockholders' equity 63,932 498,667 489,069
=========== =========== =============
See accompanying notes to condensed consolidated financial statements
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands except share data)
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
2002 2001 2002 2001
----------------------- ---------- ------------------------- ----------
US$ HK$ HK$ US$ HK$ HK$
Net sales 10,442 81,445 72,645 20,285 158,221 145,939
Cost of goods sold (6,848) (53,414) (49,575) (13,573) (105,871) (101,625)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 3,594 28,031 23,070 6,712 52,350 44,314
Rental income, gross 239 1,868 1,935 474 3,700 3,811
---------- ---------- ---------- ---------- ---------- ----------
3,833 29,899 25,005 7,186 56,050 48,125
Selling, general and administrative expenses
- Pearls (1,964) (15,325) (16,519) (3,795) (29,603) (33,267)
- Real estate investment (190) (1,478) (1,432) (404) (3,147) (2,856)
---------- ---------- ---------- ---------- ---------- ----------
Operating income 1,679 13,096 7,054 2,987 23,300 12,002
Share of result of an associate (10) (80) - (10) (80) -
Non-operating items
- Interest expenses (59) (452) (1,610) (133) (1,036) (3,403)
- Interest income 25 195 740 54 423 1,947
- Other income 111 865 121 209 1,630 1,222
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and minority interests 1,746 13,624 6,305 3,107 24,237 11,768
Income taxes (289) (2,261) (1,437) (708) (5,527) (3,663)
---------- ---------- ---------- ---------- ---------- ----------
Income before minority interests 1,457 11,363 4,868 2,399 18,710 8,105
Minority interests (657) (5,122) (1,915) (1,090) (8,503) (3,055)
---------- ---------- ---------- ---------- ---------- ----------
Net income 800 6,241 2,953 1,309 10,207 5,050
Other comprehensive loss, net of taxes and
minority interests
- Foreign currency translation adjustments 24 185 488 28 216 391
- Unrealized holding loss on marketable securities (183) (1,426) (2,672) (237) (1,851) (2,389)
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive loss, net of taxes and (159) (1,241) (2,184) (209) (1,635) (1,998)
---------- ---------- ---------- ---------- ---------- ----------
minority interests
Comprehensive income 641 5,000 769 1,100 8,572 3,052
========== ========== ========== ========== ========== ==========
Basic earnings per common share 0.17 1.30 0.67 0.28 2.19 1.15
========== ========== ========== ========== ========== ==========
Diluted earnings per common share 0.17 1.30 0.67 0.28 2.19 1.15
========== ========== ========== ========== ========== ==========
Weighted average number of shares
of common stock
- for basic earnings per share 4,815,960 4,815,960 4,405,960 4,665,851 4,665,851 4,405,960
========== ========== ========== ========== ========== ==========
- for diluted earnings per share 4,815,960 4,815,960 4,405,960 4,665,851 4,665,851 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 SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands)
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
2002 2001
------------------------------------- --------------
US$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net income 1,309 10,207 5,050
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Write-down of inventories 723 5,639 -
Provision for doubtful debts 130 1,019 3,486
Depreciation and amortization 629 4,902 4,754
Provision for impairment of goodwill - - 591
Share of result of an associate 10 80 -
Loss on disposal of property, plant and equipment 40 310 9
Minority interests 1,090 8,503 3,055
Changes in operating assets and liabilities:
Accounts receivable (1,401) (10,927) (10,655)
Inventories (4,245) (33,113) 9,150
Prepaid expenses 8 60 363
Deposits and other receivables (405) (3,157) 850
Other current assets 373 2,908 (421)
Deferred tax assets 142 1,107 -
Accounts payable 449 3,500 3,844
Amount due to an affiliate - - (184)
Accrued payroll and employee benefits 18 144 280
Other accrued liabilities 58 453 (2,028)
Income taxes payable 522 4,076 3,506
----------- ----------- -----------
Net cash (used in) provided by operating activities (550) (4,289) 21,650
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of marketable securities - - (2,524)
Purchase of property, plant and equipment (187) (1,457) (671)
Decrease in restricted cash 2,073 16,169 26,748
Loan to an associate (38) (300) -
Proceeds from disposal of property, plant and equipment 25 196 5
Purchase of a long-term investment (20) (156) -
----------- ----------- -----------
Net cash provided by investing activities 1,853 14,452 23,558
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 120 942 2,106
Repayment of short-term borrowings (1,838) (14,339) (23,556)
Repayment of long-term debts (357) (2,788) (15,343)
----------- ----------- -----------
Net cash used in financing activities (2,075) (16,185) (36,793)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (772) (6,022) 8,415
Cash and cash equivalents at beginning of period 10,532 82,152 65,294
Exchange adjustments - 1 348
----------- ----------- -----------
Cash and cash equivalents at end of period 9,760 76,131 74,057
=========== =========== ===========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 134 1,046 3,421
----------- ----------- -----------
Net income taxes paid 44 344 158
----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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. Operating results and cash flows for interim periods
are not necessarily indicative of results of the entire year.
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 September 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 April 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 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.
In April 2002, the FASB also issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", to update, clarify, and simplify certain existing accounting
pronouncements. Specifically, SFAS No. 145: (i) Rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", an amendment of APB Opinion 30,
and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", which amended SFAS No. 4, as these two standards required that
all gains and losses from the extinguishment of debt be aggregate and, if
material, classified as an extraordinary item. Consequently, such gains and
losses will now be classified as extraordinary only if they meet the criteria
for extraordinary treatment set forth in APB Opinion 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extra-ordinary, Unusual and Infrequently Occurring Events and Transactions;
(ii) Rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers",
an amendment of Chapter 5 of Accounting Research Bulletins No. 43 and an
interpretation of APB Opinions 17 and 30, because the discrete event to which
the Statement relates is no longer relevant; (iii) Amends SFAS No. 13,
"Accounting for leases", to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as such transactions; (iv) Makes certain technical corrections,
which the FASB deemed to be non-substantive, to a number of existing accounting
pronouncements. The provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 and No. 64 are effective for fiscal years beginning after May 15, 2002.
The provisions related to the amendment of SFAS No. 13 are effective for
transactions occurring after May 15, 2002. All other provisions of SFAS No. 145
are effective for financial statements issued on or after May 15, 2002. For
those provisions that become effective during the six-month period ended
September 30, 2002, there was no significant impact on the Company's financial
position and results of operations; for the remaining provisions under SFAS No.
145, management is
F-6
assessing, but has not yet determined, the impact such provisions will have, if
any, on its financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Such costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS No. 146 replaces the previous
accounting guidance provided by the Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002 and the Company does not anticipate that the statement
will have a material impact on the Company's financial statements and results of
operations.
F-7
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.
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 the Old Share Option Scheme shall continue to be valid and
exercisable in accordance therewith.
For the Quarter Ended September 30, 2001
----------------------------------------
Earnings No. of shares EPS
US$ US$
Basic EPS
Net income available to common stockholders 378,583 4,405,960 0.09
Diluted EPS
Net income available to common stockholders,
including conversion 378,583 4,405,960 0.09
For the Six Months Ended September 30, 2001
-------------------------------------------
Earnings No. of shares EPS
US$ US$
Basic EPS
Net income available to common stockholders 647,487 4,405,960 0.15
Diluted EPS
Net income available to common stockholders,
including conversion 647,487 4,405,960 0.15
F-8
For each of the three-month and six-month periods ended September 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 Quarter Ended September 30, 2002
----------------------------------------
Earnings No. of shares EPS
US$ US$
Basic EPS
Net income available to common stockholders 800,095 4,815,960 0.17
Diluted EPS
Net income available to common stockholders,
including conversion 800,095 4,815,960 0.17
For the Six Months Ended September 30, 2002
-------------------------------------------
Earnings No. of shares EPS
US$ US$
Basic EPS
Net income available to common stockholders 1,308,609 4,665,851 0.28
Diluted EPS
Net income available to common stockholders,
including conversion 1,308,609 4,665,851 0.28
On June 7, 2002, the Company issued in aggregate 410,000 shares of Common Stock,
par value $0.001 per share, to 2 business consultants pursuant to 2 separate
business consulting agreements dated June 1, 2002.
For each of the three-month and six-month periods ended September 30, 2002, the
effect on consolidated EPS of options issued by MSIL and options issued by the
Company was not included in the computation of diluted EPS because it would have
resulted in anti-dilutive effect.
F-9
5. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are co-ordinated through its Hong Kong
subsidiaries and an analysis by destination is as follows:
For the quarter ended For the six months ended
September 30 September 30
2002 2001 2002 2001
US$'000 US$'000 US$'000 US$'000
Net Sales:
Hong Kong * 1,562 1,927 3,506 4,175
Export:
North America 3,222 2,633 6,097 5,004
Europe 2,072 1,879 3,404 4,101
Other Asian countries 3,063 2,616 6,460 4,622
Others 523 258 818 808
---------- ----------- ----------- -----------
10,442 9,313 20,285 18,710
========== =========== =========== ===========
* A majority of sales (by dollar amount) in Hong Kong are for re-export to
North America and Europe.
The Company operates in only one geographic area. The locations of the Company's
identifiable assets are as follows:
September 30, 2002 March 31, 2002
US$'000 US$'000
Hong Kong 50,403 47,636
Other regions of The People's Republic of China ( the
"PRC") 13,529 15,065
-------------------- ----------------
63,932 62,701
==================== ================
6. DISCLOSURE OF MAJOR CUSTOMERS
During the three or six months ended September 30, 2002, there was no customer
who accounted for 10% or more of total sales. During the three and six months
ended September 30, 2001, one customer accounted for 10.8% and 10.1% of total
sales, respectively. A substantial percentage of the Company's sales was made to
a small number of customers and was typically on an open account basis.
F-10
7. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
Reportable Segment Profit or Loss, and Segment Assets
For the three months ended, For the six months ended,
September 30 September 30
2002 2001 2002 2001
US$'000 US$'000 US$'000 US$'000
Revenues from external customers:
Pearls 10,442 9,313 20,285 18,710
Real estate investment 239 249 474 489
-------------- ----------- --------------- --------------
10,681 9,562 20,759 19,199
============== =========== =============== ==============
Operating income:
Pearls 1,630 839 2,917 1,416
Real estate investment 49 66 70 123
-------------- ----------- --------------- --------------
1,679 905 2,987 1,539
============== =========== =============== ==============
Interest expenses:
Pearls 34 80 78 157
Real estate investment 16 107 36 235
Corporate assets 9 19 19 44
-------------- ----------- --------------- --------------
59 206 133 436
============== =========== =============== ==============
Depreciation and amortization:
Pearls 224 202 423 403
Real estate investment 58 58 117 117
Corporate assets 45 45 89 89
-------------- ----------- --------------- --------------
327 305 629 609
============== =========== =============== ==============
Capital expenditure for segment assets:
Pearls 54 39 184 80
Real estate investment - - - -
Corporate assets 2 4 3 6
-------------- ----------- --------------- --------------
56 43 187 86
============== =========== =============== ==============
As of September As of March
30, 2002 31, 2002
US$'000 US$'000
Segment assets:
Pearls 44,045 42,468
Real estate investment 12,506 10,511
Corporate assets 7,381 9,722
--------------- --------------
63,932 62,701
=============== ==============
F-11
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 six months ended
September 30, 2002, approximately US$46K was charged to the income statement.
F-12
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
Six-Month Period Ended September 30, 2002 Compared to Six-Month Period Ended
September 30, 2001
Sales and Gross Profit
Net sales for the six months ended September 30, 2002 increased by $1.6 million
to $20.3 million, representing an 8.4% increase when compared to net sales of
$18.7 million during the same period in 2001. The overall increase in sales was
mainly attributable to increased marketing efforts to customers and further
improvement in market sentiment in the second quarter. The major areas of growth
were Asia (including the PRC and Thailand) and North America, which growth was
to a certain extent offset by a drop in sales in Europe mainly because European
buyers had remained cautious during the first quarter.
Gross profit for the six months ended September 30, 2002 increased by $1.0
million, or 18.1%, from $5.7 million for the same period in 2001 to $6.7
million. As a percentage of net sales, gross profit improved from 30.4% for the
six months ended 30 September 2001 to 33.1% for the same period in 2002. The
overall improvement in gross profit margin was mainly attributable to an
improvement in gross profit margin of Freshwater pearls and the Company's
increase of higher grade Freshwater pearls in its product mix.
Rental Income
Gross rental income for the six months ended September 30, 2002 was
approximately $474K*, representing a decrease of approximately $14K, or 2.9%, 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 $4.2 million, consisting of $3.8 million attributable to
pearl operations and $0.4 million attributable to real estate operations, for
the six months ended September 30, 2002, a total decrease of approximately $0.4
million, or 9.3%, from $4.6 million, consisting of $4.2 million attributable to
pearl operations and $0.4 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 other operating expenses under the Company's cost savings program.
As a percentage of net sales, SG&A expenses from pearl operations decreased from
22.8% for the six months ended September 30, 2001 to 18.7% for the same period
in 2002.
- -----------------------
* 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
Interest Expenses
Interest expenses for the six months ended September 30, 2002, decreased by
$303K, or 69.6%, to $133K from $436K for the comparable period last year as a
result of the use of bank deposits by the Company to repay part of the bank
borrowings. The Company borrows most of the cash it 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 $195K, or 78.3%, to $54K from the comparable period
of $249K in last year. The decrease in interest income was due principally to
the use of bank deposits to reduce bank borrowings and lower interest rates for
the six months ended September 30, 2002 as compared to interest rates for the
same period in 2001. See "Item 3. Quantitative and Qualitative Disclosures About
Market Risk".
Income Taxes
Income taxes and provision for the six months ended September 30, 2002 increased
by $238K to $708K as compared to $470K 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 six months ended September 30, 2002 showed an improvement of
$662K over the net income of $647K for the same period in 2001 to a net income
of $1,309K. 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 six
months ended September 30, 2002 was $3.1 million, and the operating income for
the comparable period in the last fiscal year was $1.5 million.
Three-Month Period Ended September 30, 2002 Compared to Three-Month Period Ended
September 30, 2001
Sales and Gross Profit
Net sales for the three-month period ended September 30, 2002 increased by $1.1
million to $10.4 million, representing a 12.0% increase when compared to net
sales of $9.3 million during the same period in 2001. The overall increase in
sales was mainly attributable to increased marketing efforts to customers and
further improvement in market sentiment in the second quarter. The major areas
of growth were Asia (including PRC) and North America.
Gross profit for the three-month period ended September 30, 2002 increased by
$636K, or 21.5%, to $3.6 million, compared to $3.0 million for the same period
in 2001. As a percentage of net sales, gross profit increased slightly from
31.8% for the three-month period ended September 30, 2001 to 34.4% for the same
period in 2002. The increase in gross profit resulted
3
mainly from an improvement in gross profit margin of Freshwater pearls and the
Company's increase of higher grade Freshwater pearls in its product mix.
Rental Income
Gross rental income for the three-month period ended September 30, 2002 was
approximately $239K, representing a decrease of approximately $10K, or 3.4%, 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 were $2.2 million, consisting of $2.0 million attributable to
pearl operations and $0.2 million attributable to real estate operations, for
the three-month period ended September 30, 2002, a total decrease of
approximately $0.1 million, or 6.4%, 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 from pearl operations decreased from 22.7%
for the three months ended September 30, 2001 to 18.8% for the same period in
2002.
Interest Expense
Interest expense decreased by $147K, or 71.9%, to $59K from $206K for the
comparable period in last year as a result of the use of bank deposits by the
Company to repay part of bank borrowings. The Company borrows most of the cash
it 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 $69K, or 73.4%, to $25K from the comparable period
of $94K in last year. The decrease in interest income was due principally to the
use of bank deposit to reduce bank borrowings and lower interest rates for the
three months ended September 30, 2002 as compared to interest rates for the same
period in 2001 See "Item 3. Quantitative and Qualitative Disclosures About
Market Risk".
Income Taxes
Income taxes and provision therefor for three-month period ended September 30,
2002 increased by $104K to $289K as compared to $185K for the same period in
2001. The increase was in line with the increase in income before income taxes
and minority interests.
4
Net Income
Net income for the three-month period ended September 30, 2002 showed an
improvement of $422K over the net income of 378K for the same period in 2001 to
a net income of $800K. 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-month period ended September 30, 2002 was $1.7 million, and the operating
income for the comparable period in the last fiscal year was $809K.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund accounts receivable and
inventories. At September 30, 2002, the Company had working capital of $37.0
million, which included a cash balance of $9.8 million, 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 7.2 to 1 as
of September 30, 2002 as compared with that of 6.2 to 1 as of March 31, 2002.
Net cash used in operating activities was approximately $0.6 million for the six
months ended September 30, 2002, while net cash provided by operating activities
was $2.8 million for the same period in 2001. The decrease in cash and cash
equivalents by $0.8 million from March 31, 2002 to September 30, 2002 was the
net effect of net cash used in operating activities of $0.6 million, net cash
provided by investing activities of $1.9 million and net cash used in financing
activities of $2.1 million.
Inventories increased by $3.5 million from $15.2 million at March 31, 2002 to
$18.7 million at September 30, 2002. The inventory turnover period decreased
from 7.4 months as at March 31, 2002 to 7.0 months as at September 30, 2002.
Accounts receivable increased by $1.3 million to $9.1 million at September 30,
2002, as compared to $7.8 million at March 31, 2002. The debtors turnover period
increased from 80 days as at March 31, 2002 to 82 days as at September 30, 2002.
The increase in accounts receivable was mainly attributable to higher sales made
near the end of September as a result of the Jewellery trade show. The
management is closely monitoring both the amount (both with respect to each
customer and in aggregate) and the aging of the company's accounts receivable.
Long-term debts (including current portion of long-term debts) were $3.2 million
at September 30, 2002, a decrease of $0.3 million compared to that of $3.5
million at March 31, 2002. The decrease was attributable to repayment of
installment loans during the six months ended September 30, 2002. The gearing
ratio was 0.85 at September 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 September 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 September 30, 2002, the Company did not
utilize such credit facilities.
5
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 six months ended September 30, 2002, the Company made approximately
23.2% of its purchases in RMB, with the remaining amounts mainly settled in
Japanese Yen, US dollars and Hong Kong dollars (at 26.2%, 17.6% and 8.6% of
total purchase respectively). 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 September 30, 2002, the Company had short-term RMB bank borrowings of about
$2.0 million, the weighted average interest rate of which 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 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 six months ended September 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 4.6% from
6.5% as at June 30, 2000 to 1.9% as at September 30, 2002. At September 30,
2002, the Company had Hong Kong dollar bank borrowings of about $3.2 million,
the weighted average interest rate of which was 3.1% per annum. Therefore, the
Company does not consider risks of a substantial increase in Hong Kong interest
rates in the foreseeable future to be material, and believes that the risk
associated with fluctuations in interest rate is not material and no derivative
contracts are necessary. See "Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations".
6
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, as amended). Based on such evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the design and operation of
these disclosure controls and procedures were effective. No significant changes
were made in our internal controls or in other factors that would significantly
affect these controls subsequent to the date of such evaluation.
7
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 November 14, 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
None
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 Certification of Chief Executive Officer and Chief Financial Officer
(B) Reports on Form 8-K
None
8
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: November 14, 2002
By: /s/ CHENG Chung Hing, Ricky
----------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
I, CHENG Chung Hing, Ricky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Man Sang
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
9
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ CHENG Chung Hing, Ricky
----------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
10
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 Certification of Chief Executive Officer and Chief Financial
Officer
11