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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 DECEMBER 31, 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 DECEMBER 31, 2002 AND FEBRUARY 14, 2003, 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
December 31, 2002 and March 31, 2002 F-1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three and nine months
ended December 31, 2002 and 2001 F-3
Condensed Consolidated Statements of Cash Flows for
the nine months ended December 31, 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
ITEM 4. Controls and Procedures 7
PART II - OTHER INFORMATION 8
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)
DECEMBER 31, 2002 MARCH 31, 2002
---------------------------- --------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents 13,523 105,481 82,152
Restricted cash - - 16,169
Marketable securities 1,336 10,423 13,584
Accounts receivable, net of allowance for doubtful 7,559 58,963 60,814
accounts of HK$9,793 as of December 31, 2002 and
HK$10,054 as of March 31, 2002
Inventories :
Raw materials 256 1,995 1,773
Work in progress 4,172 32,544 35,679
Finished goods 13,458 104,975 81,059
------ ------- -------
17,886 139,514 118,511
Prepaid expenses 607 4,733 2,702
Deposits and other receivables 2,043 15,932 11,317
Other current assets 1,297 10,113 15,983
Income taxes receivable 58 449 -
------ ------- -------
Total current assets 44,309 345,608 321,232
Property, plant and equipment 12,656 98,717 112,468
Accumulated depreciation (4,357) (33,988) (32,135)
------ ------- -------
8,299 64,729 80,333
Real estate investment 13,888 108,327 89,669
Accumulated depreciation (1,441) (11,237) (7,683)
------ ------- -------
12,447 97,090 81,986
Long-term investments, net of impairment loss of
HK$3,000 as of December 31, 2002 and HK$3,000 as
of March 31, 2002 332 2,586 3,330
Deferred tax assets 109 851 2,188
------ ------- -------
Total assets 65,496 510,864 489,069
====== ======= =======
F - 1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
DECEMBER 31, 2002 MARCH 31, 2002
--------------------------- --------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 1,932 15,073 29,445
Current portion of long-term debts :
Secured bank loans 715 5,575 5,575
Accounts payable 2,484 19,379 3,726
Accrued payroll and employee benefits 794 6,192 4,658
Other accrued liabilities 1,361 10,614 8,674
Income taxes payable 647 5,044 373
-------- -------- --------
Total current liabilities 7,933 61,877 52,451
Long-term debts :
Secured bank loans 2,286 17,829 22,010
Minority interests 22,591 176,208 170,208
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$0.001 5 37 34
- authorized: 25,000,000 shares;
issued and outstanding: 4,815,960 shares as of
December 31, 2002 and 4,405,960 shares as of
March 31, 2002
Additional paid-in capital 7,773 60,629 58,458
Retained earnings 25,290 197,266 187,570
Accumulated other comprehensive loss (382) (2,983) (1,663)
-------- -------- --------
Total stockholders' equity 32,686 254,950 244,400
-------- -------- --------
Total liabilities and stockholders' equity 65,496 510,864 489,069
======== ======== ========
See accompanying notes to condensed consolidated financial statements
F - 2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31
(Amounts expressed in thousands except share data)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------------ ------------------------------------
2002 2001 2002 2001
----------------------- ----------- ----------------------- ----------
US$ HK$ HK$ US$ HK$ HK$
Net sales 8,569 66,839 57,127 28,854 225,060 203,066
Cost of goods sold (6,620) (51,631) (38,188) (20,193) (157,502) (139,813)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 1,949 15,208 18,939 8,661 67,558 63,253
Rental income, gross 248 1,928 1,889 722 5,628 5,700
---------- ---------- ---------- ---------- ---------- ----------
2,197 17,136 20,828 9,383 73,186 68,953
Selling, general and
administrative expenses
- Pearls (1,982) (15,457) (14,598) (5,777) (45,060) (47,864)
- Real estate investment (212) (1,658) (1,502) (616) (4,805) (4,358)
---------- ---------- ---------- ---------- ---------- ----------
Operating income 3 21 4,728 2,990 23,321 16,731
Share of result of an associate 2 20 -- (8) (60) --
Non-operating items
- Interest expenses (50) (394) (922) (183) (1,430) (4,325)
- Interest income 21 162 404 75 585 2,351
- Other income 132 1,028 370 341 2,658 1,592
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
minority interests 108 837 4,580 3,215 25,074 16,349
Income taxes (69) (533) (86) (777) (6,060) (3,749)
---------- ---------- ---------- ---------- ---------- ----------
Income before minority interests 39 304 4,494 2,438 19,014 12,600
Minority interests (105) (815) (2,596) (1,195) (9,318) (5,651)
---------- ---------- ---------- ---------- ---------- ----------
Net (loss) income (66) (511) 1,898 1,243 9,696 6,949
Other comprehensive loss, net of taxes and
minority interests
- Foreign currency translation
adjustments 33 255 354 61 471 745
- Unrealized holding gain (loss) on
marketable securities 8 60 1,255 (230) (1,791) (1,134)
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive gain (loss), net
of taxes and minority interests 41 315 1,609 (169) (1,320) (389)
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive (loss) income (25) (196) 3,507 1,074 8,376 6,560
========== ========== ========== ========== ========== ==========
Basic (loss) earnings per common share (0.01) (0.11) 0.43 0.26 2.06 1.58
========== ========== ========== ========== ========== ==========
Diluted (loss) earnings per common share (0.01) (0.11) 0.43 0.26 2.06 1.58
========== ========== ========== ========== ========== ==========
Weighted average number of shares
of common stock
- for basic earnings per share 4,815,960 4,815,960 4,405,960 4,716,069 4,716,069 4,405,960
========== ========== ========== ========== ========== ==========
- for diluted earnings per share 4,815,960 4,815,960 4,405,960 4,716,069 4,716,069 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 NINE MONTHS ENDED DECEMBER 31
(Amounts expressed in thousands)
NINE MONTHS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001
--------------------------- ---------
US$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net income 1,243 9,696 6,949
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful debts 130 1,019 5,054
Write-down of inventories 723 5,639 --
Depreciation and amortization 945 7,370 7,008
Provision for impairment of goodwill -- -- 591
Share of result of an associate 8 60 --
Loss on disposal of property, plant and equipment 110 858 9
Loss on disposal of subsidiaries 12 98 --
Minority interests 1,195 9,318 5,651
Changes in operating assets and liabilities:
Accounts receivable 47 360 (935)
Inventories (3,694) (28,814) 1,660
Prepaid expenses (260) (2,031) (15)
Deposits and other receivables (58) (449) (12,485)
Other current assets 404 3,155 310
Income tax receivable (58) (449) --
Deferred tax assets 171 1,337 --
Accounts payable 2,007 15,653 3,715
Amount due to an affiliate -- -- (184)
Accrued payroll and employee benefits 197 1,534 1,267
Other accrued liabilities 259 2,022 (3,864)
Income taxes payable 599 4,671 3,558
-------- -------- --------
Net cash provided by operating activities 3,980 31,047 18,289
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- -- (3,578)
Purchase of property, plant and equipment (953) (7,438) (1,402)
Decrease in restricted cash 2,073 16,169 48,955
Loan to an associate (38) (300)
Proceeds from disposal of a long term investment 115 900 --
Proceeds from disposal of property, plant and equipment 25 196 5
Proceeds from disposal of interests in subsidiaries 62 489 --
Purchase of a long-term investment (20) (156) --
-------- -------- --------
Net cash provided by investing activities 1,264 9,860 43,980
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 121 942 2,035
Repayment of short-term borrowings (1,838) (14,339) (46,300)
Repayment of long-term debts (536) (4,181) (16,755)
Net proceeds from issuance of shares by a subsidiary -- -- 14,030
-------- -------- --------
Net cash used in financing activities (2,253) (17,578) (46,990)
-------- -------- --------
Net increase in cash and cash equivalents 2,991 23,329 15,279
Cash and cash equivalents at beginning of period 10,532 82,152 65,294
Exchange adjustments -- -- 250
-------- -------- --------
Cash and cash equivalents at end of period 13,523 105,481 80,823
======== ======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 185 1,441 4,397
-------- -------- --------
Net income taxes paid 64 501 191
-------- -------- --------
See accompanying notes to condensed consolidated financial statements
F - 4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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. 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 December 31, 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, 2002. There was no significant impact on the Company's financial
position and results of operations.
F - 5
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
from adoption of this statement.
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 nine-month period ended December 31, 2002, there was
no significant impact on the Company's financial position and results of
operations; for the remaining provision under SFAS No. 145, management is
assessing, but has not yet determined, the impact such provisions will have, if
any, on its financial position and results of operations.
F - 6
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 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.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amends SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. (Under the fair value based
method, compensation cost for stock options is measured when options are
issued.) In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require more prominent and more frequent disclosures in financial
statements of the effects of stock-based compensation.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. Management is assessing
but has not yet determined the impact that SFAS No. 148 will have, if any, on
its 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.
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.
F - 7
For the Quarter Ended December 31, 2001
---------------------------------------------
Earnings EPS
HK$ No. of shares HK$
Basic EPS
Net income available to common stockholders 1,898,217 4,405,960 0.43
Diluted EPS
Net income available to common stockholders,
including conversion 1,898,217 4,405,960 0.43
For the Nine Months Ended December 31, 2001
----------------------------------------------
Earnings EPS
HK$ No. of shares HK$
Basic EPS
Net income available to common stockholders 6,948,612 4,405,960 1.58
Diluted EPS
Net income available to common stockholders,
including conversion 6,948,612 4,405,960 1.58
For each of the three-month and nine-month periods ended December 31, 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 an anti-dilutive effect.
For the Quarter Ended December 31, 2002
-----------------------------------------------
Loss
Loss per share
HK$ No. of shares HK$
Basic loss per share
Net loss available to common stockholders (511,147) 4,815,960 (0.11)
Diluted loss per share
Net loss available to common stockholders, including
conversion (511,147) 4,815,960 (0.11)
For the Nine Months Ended December 31, 2002
----------------------------------------------
Earnings EPS
HK$ No. of shares HK$
Basic EPS
Net income available to common stockholders 9,696,007 4,716,069 2.06
Diluted EPS
Net income available to common stockholders,
including conversion 9,696,007 4,716,069 2.06
F - 8
For each of the three-month and nine-month periods ended December 31, 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 an 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:
For the quarter ended For the nine months ended
December 31 December 31
2002 2001 2002 2001
HK$'000 HK$'000 HK$'000 HK$'000
Net Sales:
Hong Kong * 10,413 15,137 37,760 47,704
Export:
North America 17,759 11,866 65,316 50,896
Europe 19,440 11,013 45,990 42,997
Other Asian countries 16,975 18,008 67,364 54,061
Others 2,252 1,103 8,630 7,408
------ ------ ------- -------
66,839 57,127 225,060 203,066
====== ====== ======= =======
* 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:
December 31, 2002 March 31, 2002
HK$'000 HK$'000
Hong Kong 417,830 371,558
Other regions of The People's Republic of China ( the
"PRC") 93,034 117,511
------ -------
510,864 489,069
======= =======
6. DISCLOSURE OF MAJOR CUSTOMERS
During the three months ended December 31, 2002, there was one customer who
accounted for 12.1% of total sales; during the nine months ended December 31,
2002, no customer accounted for 10% or more of total sales. On the other hand,
there is one customer who accounted for 11.0% and 10.4% of total sales for the
three and nine months ended December 31, 2001 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.
7. SEGMENT INFORMATION
F - 9
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 nine months ended,
December 31 December 31
2002 2001 2002 2001
HK$'000 HK$'000 HK$'000 HK$'000
Revenues from external customers:
Pearls 66,839 57,127 225,060 203,066
Real estate investment 1,928 1,889 5,628 5,700
------ ------ ------- -------
68,767 59,016 230,688 208,766
====== ====== ======= =======
Operating income:
Pearls 2,899 8,228 29,542 22,826
Real estate investment 269 386 822 1,341
Corporate expenses (3,147) (3,886) (7,043) (7,436)
------ ------ ------- -------
21 4,728 23,321 16,731
====== ====== ======= =======
Interest expenses:
Pearls 208 387 811 1,615
Real estate investment 123 414 405 2,243
Corporate expenses 63 121 214 467
------ ------ ------- -------
394 922 1,430 4,325
====== ====== ======= =======
Depreciation and amortization:
Pearls 1,735 1,399 5,034 4,545
Real estate investment 457 457 1,370 1,370
Corporate assets 276 398 966 1,093
------ ------ ------- -------
2,468 2,254 7,370 7,008
====== ====== ======= =======
Capital expenditure for segment assets:
Pearls 5,839 731 7,274 1,357
Real estate investment -- -- -- --
Corporate assets 142 -- 164 45
------ ------ ------- -------
5,981 731 7,438 1,402
====== ====== ======= =======
As of As of
December 31, March 31,
2002 2002
HK$'000 HK$'000
Segment assets:
Pearls 356,884 331,249
Real estate investment 97,090 81,986
Corporate assets 56,890 75,834
------- -------
510,864 489,069
======= =======
F - 10
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 HK$2.9 million 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 HK$2.2 million, being the fair value of the shares issued, is to
be recognized over the consultants' service period. During the nine months ended
December 31, 2002, approximately HK$634K was charged to the income statement.
9. ACQUISITION
On December 1, 2002, Arcadia Jewellery Limited ("AJL"), a wholly owned
subsidiary of MSIL, acquired fixed assets, inventories and customers information
from a jewellery company (which is not related to any officer, director or
shareholder of the Company) for a total consideration of HK$7.2 million. At
December 31, 2002, the Company has paid HK$5.2 million. The Company expects to
pay another HK$1 million on June 1, 2003, and another HK$1 million on December
1, 2003. No liabilities were assumed in the acquisition.
F - 11
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
Nine-Month Period Ended December 31, 2002 Compared to Nine-Month Period Ended
December 31, 2001
Net sales for the nine months period ended December 31, 2002 increased by
HK$22.0 million to HK$225.1 million, representing a 10.8% increase when compared
to net sales of HK$203.1 million during the same period in 2001. The increase in
sales was mainly attributable to an improvement in general business and consumer
confidence resulting in further improvement in demand and market sentiment in
the second and third quarters this year. The major contribution for the increase
was mainly due to the growth in Asia (including PRC and Thailand), North America
as well as Europe.
Gross profit for the nine-month period ended December 31, 2002, increased by
HK$4.3 million, or 6.8% from HK$63.3 million for the same period in 2001 to
HK$67.6 million. As a percentage of net sales, gross profit slightly reduced
from 31.1% for the nine-month period ended 31 December 2001 to 30.0% for the
same period in 2002. The decrease in gross profit margin in this period is due
to the strategy in lowering the Chinese Cultured pearls price to boost sales
when compared to the same period last year. Other pearls, including Freshwater
pearls and South Sea pearls, are all showing improvement in gross profit margin
as compared with last year.
Rental Income
Gross rental income for the nine-month period ended December 31, 2002 was
approximately HK$5.63 million, representing a decrease of approximately HK$72K,
or 1.3%, as compared to the same period in 2001. The decrease in gross rental
income was mainly attributable to the decrease in rental rates in respect of the
property at 19th Floor of Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong, but partly offset by rental payments received in respect of
the investment property at 17th Floor and Car Parking Space No. 16, 24
Macdonnell Road, Midlevels, Hong Kong in the third quarter of 2002.
Selling, General and Administrative Expenses ("SG & A expenses")
SG&A expenses were HK$49.9 million, consisting of HK$45.1 million attributable
to pearl operations and HK$4.8 million attributable to real estate operations,
for the nine-month period ended December 31, 2002, a decrease of approximately
HK$2.3 million, or 4.4%, from HK$52.2 million, consisting of a decrease of
HK$2.8 million attributable to pearl operations but offset by an increase of
HK$0.5 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 including salaries under the Company's cost savings program
and bad debt provision although such decrease was partially offset by an
increase in marketing expenses related to exhibitions and trade shows to boost
sales. The higher SG & A expenses related to the Company's real estate business
are mainly due to higher depreciation and building management fee during the
nine-month period ended December 31, 2002.
2
As a percentage of net sales, SG&A expenses from pearl operations decreased
slightly from 23.6% for the nine-month period ended December 31, 2001 to 20.0%
for the same period in 2002.
Interest Expenses
Interest expenses for the nine months ended December 31, 2002 decreased by
HK$2.9 million, or 66.9%, to HK$1.4 million from HK$4.3 million for the
comparable period last year as a result of lower interest rate and the use of
bank deposits by the Company to repay part of bank borrowings. The Company
borrows most of the cash it needs in PRC through short-term loans from 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 HK$1.8 million, or 75.1%, to HK$585K from HK$2.4
million in the comparable period 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 nine-month period ended December 31, 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 tax charges for nine-month period ended December 31, 2002 increased by
HK$2.4 million to HK$6.1 million as compared to HK$3.7 million for the same
period in 2001. The increase was in line with the increase in income before
income taxes and minority interests. The effective tax rate for the nine-month
period slightly increased to 24.2% in December 31, 2002 from 22.9% for the
comparable period last year.
Net Income
Net income for the nine months ended December 31, 2002 showed an improvement of
HK$2.7 million over the net income of HK$7.0 million for the same period in 2001
to a net income of HK$9.7 million. The improvement was mainly attributable to an
overall increase in sales and gross profit and a decrease in SG&A expenses.
The income before income taxes and minority interests for the nine months ended
December 31, 2002 was HK$25.1 million, and the amount for the comparable period
in last year was HK$16.3 million.
Three-Month Period Ended December 31, 2002 Compared to Three-Month Period Ended
December 31, 2001
Sales and Gross Profit
Net sales for the three-month period ended December 31, 2002 increased by HK$9.7
million to HK$66.8 million, representing a 17.0% increase when compared to net
sales of HK$57.1 million for the same period in 2001. The overall increase in
sales was mainly attributable to
3
further improvement in market sentiment in the third quarter. The major areas of
growth were Asia (including PRC), North America as well as Europe.
Gross profit for the three-month period ended December 31, 2002 reduced by
HK$3.7 million or 19.7%, to HK$15.2 million, compared to HK$18.9 million for the
same period in 2001. As a percentage of net sales, gross profit reduced from
33.2% for the three-month period ended December 31, 2001 to 22.8% for the same
period in 2002. The decrease in gross profit margin is due to the strategy in
lowering the Chinese Cultured pearls price to boost sales when compared to the
same period last year. Other pearls, including Freshwater pearls and South Sea
pearls, are all showing positive improvements in gross profit margin.
Rental Income
Gross rental income for the three-month period ended December 31, 2002 was
approximately HK$1.9 million, representing an increase of approximately HK$39K,
or 2%, as compared to the same period in 2001. The net increase in gross rental
income was mainly attributable to the rental payments received in respect of the
investment property at 17th Floor and Car Parking Space No. 16, 24 Macdonnell
Road, Midlevels, Hong Kong in this quarter but offset by 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 HK$17.1 million, consisting of HK$15.5 million attributable
to pearl operations and HK$1.7 million attributable to real estate operations,
for the three-month period ended December 31, 2002, an increase of approximately
HK$1.0 million, or 6.3%, from HK$16.1 million, consisting of HK$14.6 million
attributable to pearl operations and HK$1.5 million attributable to real estate
operations, for the same period in 2001. The increase in SG&A expenses was
mainly due to an increase in marketing expenses related to exhibitions and trade
shows to boost sales and other operating expenses as a result of higher sales.
As a percentage of net sales, SG&A from pearl operations decreased from 25.6%
for the three months ended December 31, 2001 to 23.1% for the same period in
2002.
Interest Expense
Interest expense decreased by HK$528K, or 57.3%, to HK$394K from HK$922K for the
comparable period in last year as a result of the Company having used its bank
deposits to repay part of its 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 fluctuations. See "Item 3. Quantitative and
Qualitative Disclosures About Market Risk".
Interest Income
Interest income decreased by HK$242K, or 60%, to HK$162K from the comparable
period of HK$404K in last year. The decrease in interest income was due
principally to the use of bank
4
deposits to reduce bank borrowings and lower interest rates when compared to
same period last year. See "Item 3. Quantitative and Qualitative Disclosures
About Market Risk".
Income Taxes
Income tax charges for three-month period ended December 31, 2002 increased by
HK$447K to HK$533K as compared to HK$86K for the same period in 2001. The
effective tax rate for the 3 months period ended December 31, 2002 increased to
63.7% from 1.9% for the same period in 2001. The increase was mainly due to the
increase in valuation allowances in respect of tax losses incurred by the
Company and certain subsidiaries of the Company.
Net Income
For the three-month period ended December 31, 2002 the Company showed a net loss
of HK$511K but a net income of HK$1.9 million for the same period in 2001. The
drop was mainly attributable to the income tax charges, a decrease in gross
profit margin and a slight increase in SG&A expenses during the period.
The income before income taxes and minority interest for the three-month period
ended December 31, 2002 was HK$837K, and the amount for the comparable period in
last year was HK$4.6 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are funded by collection of accounts
receivable and sales of inventories. At December 31, 2002, the Company had
working capital of HK$283.7 million, which included a cash balance of HK$105.5
million, compared to working capital of HK$268.8 million, which included a cash
balance of HK$98.3 million (including restricted cash) at March 31, 2002. The
current ratio was 5.6 to 1 as of December 31, 2002 as compared with that of 6.2
to 1 as of March 31, 2002. Net cash provided by operating activities was
approximately HK$31.0 million for the nine months ended December 31, 2002, while
net cash provided by operating activities was HK$18.3 million for the same
period in 2001. The increase in cash and cash equivalents by HK$23.3 million
from March 31, 2002 to December 31, 2002 was the net effect of net cash provided
by operating activities of HK$31.0 million and net cash provided by investing
activities of HK$9.9 million but offset by net cash used in financing activities
of HK$17.6 million.
Inventories increased by HK$21.0 million from HK$118.5 million at March 31, 2002
to HK$139.5 million at December 31, 2002. The inventory turnover period slightly
decreased from 7.4 months as at March 31, 2002 to 7.3 months as at December 31,
2002.
Accounts receivable decreased by HK$1.8 million to HK$59.0 million at December
31, 2002, as compared to HK$60.8 million at March 31, 2002. The debtors turnover
period decreased from 80 days as at March 31, 2002 to 70 days as at December 31,
2002. The decrease in accounts receivable was mainly attributable to continuing
efforts by the company to control its credit. The management continues to
monitor closely both the amount (both with respect to each customer and in
aggregate) and the aging of the Company's accounts receivable.
5
Long-term debts (including current portion of long-term debts) were HK$23.4
million at December 31, 2002, a decrease of HK$4.2 million compared to that of
HK$27.6 million at March 31, 2002. The decrease was attributable to repayment of
installment loans during the nine months ended December 31, 2002. The gearing
ratio was 0.84 at December 31, 2002, compared to 0.93 at March 31, 2002.
The Company had available working capital facilities of HK$57.0 million in total
with various banks at December 31, 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 December 31, 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 nine months ended December 31, 2002, the Company made approximately
26.9% of its purchases in RMB, with the remaining amounts mainly settled in
Japanese Yen, US dollars and Hong Kong dollars (at 19.9%, 15.5%, and 13.7% 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 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 December 31, 2002, the Company had short-term RMB bank borrowings of about
HK$15.1 million, the weighted average interest rate was 5.4% per annum. The
Company is closely monitoring the movements of the Japanese Yen against the US
dollar 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
6
hedge against foreign exchange fluctuations were necessary during the nine
months ended December 31, 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 5.0% from
6.5% as at June 30, 2000 to 1.5% as at December 31, 2002. At December 31, 2002,
the Company had Hong Kong dollar bank borrowings of about HK$23.4 million, the
weighted average interest rate of which was 2.8% 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".
As a result, the Company believes that the risk associated with fluctuations in
interest rate is not material, and no derivative contracts are necessary.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period 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 US$119,182 (for which the
Company has made full provision) plus interests and costs. Up to November 14,
2002, MSJ has recovered HK$344,126 (approximately US$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: February 14, 2003
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 Holding, 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 statement 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 conditions, 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: February 14, 2003
/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.