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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003 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 NO. 33-10639-NY
MAN SANG HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 87-0539570
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
21st Floor, Railway Plaza, 39 Chatham Road South
Tsimshatsui, Kowloon, Hong Kong
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDE AREA CODE: (852) 2317 5300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
_____________________________
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past ninety (90) days. Yes X No
________ ________
Indicate by check if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $3,725,910 as of June 20, 2003, based upon the
closing price on the NASD Electronic Bulletin Board reported for such date.
Shares of Common Stock held by each executive officer and director and by each
person who beneficially owns more than 5% of the outstanding Common Stock have
been excluded in that such persons may under certain circumstances be deemed to
be affiliates. This determination of executive officer of affiliate status is
not necessarily a conclusive determination for other purposes.
4,405,960 shares of Common Stock Issued and Outstanding as of June 20, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
No annual reports to security holders, proxy or information statements,
or prospectuses filed pursuant to Rule 424(b) or (c) are incorporated by
reference in this report.
PART I
ITEM 1. BUSINESS
GENERAL AND ORGANIZATION CHART
Man Sang Holdings, Inc. (the "Company", or "we" or "us"), through its
subsidiaries, is principally engaged in the purchasing, processing, assembling,
merchandising, and wholesale distribution of pearls, pearl jewelry products and
jewelry products. In addition, the Company owns and operates a commercial real
estate complex in Shenzhen, People's Republic of China (the "PRC"). The
structure of the Company as of the date of this annual report on Form 10-K is as
follows:
(FLOW CHART)
1
HISTORY OF THE COMPANY
The Company was incorporated in the State of Nevada in November 1986 under the
name of SBH Ventures, Inc. The Company was originally incorporated as a "blind
pool" company for the purpose of acquiring an operating business. In March 1987,
the Company completed a public offering of 20,000,000 shares of common stock
raising net proceeds of approximately $171,000.* Subsequently, in November 1991,
the Company, in connection with a merger with an operating company, changed its
name to UNIX Source America, Inc. and effected a 1-for-20 reverse stock split of
its common stock. The operations of the merged companies proved unsuccessful and
the Company ceased such business operations in 1992. In January 1996, the
Company again effected a reverse split of its common stock on approximately a
1-for-14 basis and, following such reverse split, issued 11,000,000 shares of
common stock, par value $0.001 per share ("Common Stock") and 100,000 shares of
Series A Preferred Stock, par value $0.001 per share ("Series A Preferred
Stock") in exchange (the "Exchange") for all of the outstanding securities of
Man Sang International (B.V.I.) Limited, a British Virgin Islands company ("Man
Sang BVI"). Pursuant to the terms of the Exchange, the Company changed its name
to Man Sang Holdings, Inc. and assumed the operations of Man Sang BVI. The
management of Man Sang BVI then assumed control of the Company.
The foundation of the group of companies comprising the Company and its
subsidiaries (the "Group") was laid in early 1980's when Cheng Chung Hing, Ricky
formed Man Sang Trading Hong, a freshwater pearl trading company and Cheng Tai
Po formed Peking Pearls Company, a Japanese cultured pearl trading company. As
the business of the Group developed, Man Sang Jewellery Company Limited ("MSJ")
and Peking Pearls Company Limited were formed in Hong Kong in 1988 and 1991
respectively to continue the trading operations of the Group. Subsequently, the
Group expanded its operations to include pearl processing with the establishment
of Man Hing Industry Development (Shenzhen) Co., Ltd. ("Man Hing") in 1992 to
process and assemble freshwater pearls and Chinese cultured pearls, and Damei
Pearls Jewellery Goods (Shenzhen) Co., Ltd. ("Damei") in 1995 to assume and
expand the Chinese cultured pearl processing operations of Man Hing. In view of
the continuous expansion of Chinese cultured pearls business, in December 1996,
the Group set up a subsidiary, Tangzhu Jewellery Goods (Shenzhen) Co., Ltd.
("Tangzhu") in the PRC to specialize in purchasing and processing Chinese
cultured pearls of larger sizes with diameter from 6mm and above and, to a
lesser extent, in processing other cultured pearls. As a result, Damei started
to concentrate on the purchasing and processing of cultured pearls of smaller
size with diameter below 6mm. The business of purchasing and processing of
Chinese
- --------
*Unless otherwise indicated as Hong Kong dollars or HK$, all financial
information contained herein is presented in US dollars. The translations of
Hong Kong dollar amounts into US dollars are for reference purpose only and have
been made at the exchange rate of HK$7.80 for US$1, the approximate free rate of
exchange at March 31, 2003. The Hong Kong dollar has been "pegged" to the US
dollar since October 1983. The so-called "peg" is the Linked Exchange Rate
System under which certificates of indebtedness issued by the Hong Kong Exchange
Fund, which the three banks that issue the Hong Kong currency are required to
hold as backing for the issue of Hong Kong dollar notes, are issued and redeemed
against US dollars at a fixed exchange rate of HK$7.8 to US$1. In practice,
therefore, any increase in note circulation is matched by a US dollar payment to
the Exchange Fund, and any decrease in note circulation is matched by US dollar
payment from the Exchange Fund. In the foreign exchange market, the exchange
rate of Hong Kong dollar continues to be determined by forces of supply and
demand. Against the fixed exchange rate for the issue and redemption of
certificates of indebtedness, the market exchange rate generally stays close to
the rate of HK$7.80 to US$1.
2
freshwater pearls was also transferred from Man Hing to Tangzhu whilst Man Hing
started to concentrate on the pearl jewelry assembling business.
During the period from April to July 1996, the Company, in reliance on
Regulation S promulgated under the U.S. Securities Act of 1933, as amended, sold
and issued 6,760 shares of Series B Convertible Preferred Stock, par value
$0.001 per share ("Series B Preferred Stock"), for an aggregate purchasing price
of $6.76 million. All 6,760 shares of Series B Preferred Stock were converted
into 5,223,838 shares of Common Stock, of which 5,219,448 shares were issued in
fiscal 1997 before a 1-for-4 reverse stock split which the Company effected in
October 1996, and the balance of 4,390 shares of Common Stock issuable upon
conversion of Series B Preferred Stock were issued as 1,098 shares of Common
Stock (post reverse stock split) during fiscal 1998.
On July 30, 1997, Man Sang International Limited ("MSIL") was incorporated as an
exempted company under the Companies Act 1981 of Bermuda. On September 8, 1997,
Man Sang BVI acquired MSIL and underwent a corporate reorganization. Thereafter,
MSIL held directly or indirectly the interests of various operating subsidiaries
in Hong Kong and the PRC.
On September 26, 1997, MSIL successfully listed on The Stock Exchange of Hong
Kong Limited ("The Hong Kong Stock Exchange") and completed an initial public
offering ("IPO") of 127,500,000 shares ("Shares") of HK$0.1 each at HK$1.08 per
share with warrants (each an "IPO Warrant") in the proportion of 1 IPO Warrant
for every 5 Shares raising net proceeds of approximately HK$123.6 million. Every
IPO Warrant entitled the holder thereof to subscribe for one Share at an
exercise price of HK$1.3 from the date of issue up to and including March 31,
1999. After MSIL's IPO, Man Sang BVI held 73.02% or 345 million Shares. As of
March 31, 1999, the Company had issued 50 Shares upon exercise of the IPO
Warrants related to such Shares and on such date, the subscription rights
attaching to the remaining IPO Warrants expired.
On August 12, 1998, at the 1998 Annual General Meeting of MSIL, MSIL's
shareholders approved a final dividend for the year ended March 31, 1998 of
HK$0.03 per Share, settled by way of allotment of fully paid shares in the
capital of MSIL ("Scrip Shares") with a cash option ("Scrip Dividend Scheme").
Man Sang BVI elected to receive part of its final dividend in cash and part of
it in 10,000,000 Scrip Shares. As some of MSIL's shareholders elected to receive
cash dividend and some elected Scrip Shares, a total of 11,963,456 Scrip Shares
were allotted on October 8, 1998. After the allotment, Man Sang BVI legally and
beneficially owns approximately 73.28% or 355 million Shares.
On August 2, 1999, at the 1999 Annual General Meeting of MSIL, MSIL's
shareholders approved (i) a final dividend for the year ended March 31, 1999 in
the amount of HK$0.01 per share; and (ii) a "Bonus Issue of Warrants" (i.e. a
distribution of warrants (each a "Bonus Warrant")) to MSIL's shareholders on the
basis of 1 Bonus Warrant for every 5 Shares of MSIL held on August 2, 1999.
Pursuant to such shareholder approval, MSIL paid a cash dividend of
HK$4,844,635.06 to its shareholders on September 7, 1999. Each Bonus Warrant
entitles the holder thereof to subscribe in cash at an initial subscription
price of HK$0.40 per Share (subject to adjustment), and is exercisable at any
time from September 14, 1999 to September 13, 2001, both dates inclusive. 45,603
Shares were issued in fiscal 2000 upon exercise of the Bonus Warrants; all other
Bonus Warrants expired without exercise.
3
On August 6, 1999, MSIL appointed Kingsway SW Securities Limited as placing
agent on a fully underwritten basis in respect of the placing of 40,000,000 new
Shares of MSIL at a price of HK$0.33 per Share. After the placement, MSIL had
524,463,506 shares issued and outstanding. The legal and beneficial ownership of
Man Sang BVI reduced from 73.28% to 67.69% of the issued and outstanding shares
of MSIL.
On August 2, 2000, at the 2000 Annual General Meeting of MSIL, MSIL's
shareholders approved a bonus issue of Shares to MSIL's shareholders on the
basis of 1 bonus Share for every 5 Shares of MSIL held on August 2, 2000 (the
"Bonus Issue"). Based on the 526,559,109 MSIL Shares issued and outstanding as
at August 2, 2000, 105,311,821 bonus Shares, credited as fully paid by way of
capitalization from the share premium account of MSIL, were allotted on August
3, 2000. The bonus Shares rank pari passu in all respects with the existing
issued Shares of MSIL. After the Bonus Issue, and the placement of Shaares in
1999 and exercise of Bonus Warrants referred to above, Man Sang BVI legally and
beneficially owned approximately 67.42% of the issued and outstanding Shares of
MSIL.
On November 26, 2001, MSIL issued 120,000,000 Shares through a private
placement, which constituted approximately 18.99% of the issued share capital of
MSIL immediately before, and approximately 15.96% of the issued share capital of
MSIL immediately after, said placement. Said placement in 2001 (i) increased the
number of issued and outstanding Shares of MSIL from 631,870,930 to 751,870,930,
and therefore (ii) decreased Man Sang BVI's legal and beneficial ownership in
MSIL from 67.42% to 56.66%.
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.
On April 30, 2003, the Company repurchased in aggregate 410,000 shares of Common
Stock previously issued to 2 business consultants on June 7, 2002, at a price of
$1.5 per share. These shares were cancelled on May 12, 2003.
In order to facilitate the growth in existing operations and expansion into
processing operations, and to diversify its revenues, in 1991, the Group
commenced construction of a 24 building industrial facility in Shenzhen, the PRC
("Man Sang Industrial City") for use in pearl processing and corporate
administration (5 buildings) and for lease to third party industrial users (19
buildings). See "Item 1 - Business - Real Estate Leasing Operations" and "Item 2
- - Properties".
PEARL OPERATIONS
Pearl Industry
The use of pearls in jewelry dates back over 1,500 years in China. Large scale
commercial pearl production began in Japan in the late 19th century. The
farming, production and trading of pearls to meet demand for pearl jewelry is a
mature industry. Today's pearl industry and its growth are affected by consumer
preferences, worldwide economic conditions and availability of supply.
4
In today's pearl market, pearls are divided into two categories, i.e. freshwater
pearls and saltwater cultured pearls. Saltwater cultured pearls are, in turn,
divided into Japanese cultured pearls, Chinese cultured pearls, Tahitian pearls
and South Sea pearls.
The PRC is a major supplier of freshwater pearls. In addition to the traditional
smaller freshwater pearls ranging in size from 5mm to 7mm, there was a supply of
high quality freshwater pearls ranging in size from 8mm to 10mm, or even
sometimes up to 15mm since 1999. These larger freshwater pearls contribute a
higher gross profit margin than the traditional smaller freshwater pearls. In
fiscal 2002, and continuing into fiscal 2003, there was an overall increase in
the supply of freshwater pearls.
The PRC has emerged as a major supplier of cultured pearls, ranging in size from
5mm to 8mm. Since 1996, Japan has been losing its long held dominance in the
cultured pearl industry because Japanese cultured pearls have been in poor
harvests. Meanwhile, Chinese cultured pearls have been improving in quality and
competitively priced. As a result, the Company has been shifting its cultured
pearls product mix from Japanese to Chinese cultured pearls.
Tahitian pearls are sourced from French Polynesia and the Cook Islands, while
South Sea pearls are sourced mainly from Australia, Papua New Guinea, Indonesia
and the Philippines. These pearls are generally more expensive and are
considered superior in quality when compared to either Japanese or Chinese
cultured pearls, and cannot be easily substituted by the latter.
Products
We presently offer seven product lines including freshwater pearls, Chinese
cultured pearls, Japanese cultured pearls, South Sea pearls and Tahitian pearls,
pearl jewelry and other jewelry products. Freshwater pearls are available in a
variety of shapes and sizes. The most commonly available sizes range from 2mm to
8mm, and the price are generally less expensive than cultured pearls with
wholesale prices typically ranging from $2 to $300 per 16 inch strand depending
on size, grade and shape. However, since 1998, larger size freshwater pearls are
available in the market ranging from 8mm to 10mm, or even sometimes up to 15mm,
and the price for the larger size freshwater pearls can reach up to $1,000 per
16 inch strand depending on size, grade and shape. Saltwater cultured pearls
generally are round in shape and range in size from 5mm to 18mm. South Sea and
Tahitian pearls are considered to be the highest quality saltwater cultured
pearls and typically the largest and most expensive followed by Japanese
cultured pearls and Chinese cultured pearls. Wholesale prices of cultured pearls
typically range from $13 to $70,000 per 16-inch strand.
The following table illustrates by pearl category the typical range of size and
wholesale price of cultured pearls we sell, with price variations within each
category reflecting size and qualitative differences:
SIZE PRICE/16 INCH STRAND
mm US$
Freshwater pearls 2-13 2-1,000
Chinese cultured pearl 5-7.5 13 - 300
Japanese cultured pearls 7-10 100-2,000
Tahitian pearls 8-16 200-15,000
South Sea pearl 8-18 300-70,000
5
We also offer fully assembled pearl jewelry, including necklaces, earrings,
rings, pendants, broaches, bracelets, watches, cufflinks, and similar
miscellaneous pearl products. For the three years ended March 31, 2003,
freshwater and cultured pearls sales as a percentage of our sales of pearls and
assembled pearl products were as follows:
Loose and Assembled
Year Strands Pearls Pearl Jewelry
---- --------------------------- -----------------------------
Freshwater Cultured Freshwater Cultured
% % % %
2003 60 87 40 13
2002 66 92 34 8
2001 53 92 47 8
Purchasing
We purchase (i) Chinese cultured pearls from pearl farms and other suppliers in
the coastal areas of the southern part of the PRC, including Guangdong and
Guangxi Provinces, (ii) South Sea pearls from pearl farms and suppliers in Hong
Kong, Australia, the Philippines, and Japan; (iii) Tahitian pearls from pearl
farms and suppliers in French Polynesia; and (iv) freshwater pearls from pearl
farms and other suppliers in the eastern part of the PRC, including Jiangsu and
Zhejiang Provinces.
Our purchase of pearls is conducted by its full-time, well-trained and
experienced purchasing staff from our offices in Hong Kong and Shenzhen in the
PRC, and a special purchasing office in Zhangjiang in the PRC, the site of the
largest Chinese cultured pearl farm. The purchasing staff maintains regular
contacts with pearl farms and other suppliers in the PRC, Japan, Hong Kong,
Philippines and Tahiti, enabling us to buy directly from farmers whenever
possible, to secure the best prices available for pearls and to gain access to a
larger quantity of pearls. Our management and purchasing staff meet regularly to
assess existing and anticipated pearl demand. The purchasing staff in turn
inspects and purchases pearls in the quantities and of the quality and nature
necessary to meet existing and estimated demand.
We have no long term purchase contracts, and instead negotiate the purchase of
pearls on an as needed basis to correspond with expected demand. While we
constantly seek to capitalize on its volume purchasing and relationship with
farmers and suppliers to secure the best pricing and quality when purchasing
pearls and other jewelry raw materials, we generally purchase raw materials from
suppliers at approximately prevailing market prices. We believe that there are
numerous alternate supply sources and that the termination of our relationship
with any of its existing sources would not materially adversely affect us. To
date, we have not experienced any difficulty in purchasing raw materials.
6
In fiscal 2003, our five largest suppliers the Company accounted for
approximately 30.4% (2002: 34.1%) of our total purchases, with the largest
supplier accounting for approximately 13.2% (2002: 9.5%) of our total purchases.
In fiscal 2003, approximately 28.2% of our purchases were made in Renminbi, with
the remaining amount settled in Japanese Yen, French Polynesian francs, Hong
Kong dollars or US dollars. It is our policy not to enter into derivative
contracts such as forward contracts and options, unless we consider it necessary
to hedge against foreign exchange fluctuations. No such derivative contract was
entered into during fiscal 2003. See "Item 7A - Quantitative and Qualitative
Disclosures about Market Risk".
Processing and Assembly
Pearl processing and assembly are conducted at our facilities in Shenzhen, PRC.
Freshwater pearl processing and assembly operations presently occupy
approximately 33,260 square feet and employ 232 workers while cultured pearl
processing and assembly operations occupy approximately 23,788 square feet and
employ 188 workers. The average compensation per factory worker is HK$619 per
month while average supervisory compensation is HK$1,739 per month.
We, with the assistance of specialists from Japan, have trained our work force
to implement advanced Japanese bleaching technology. Each worker performs a
specific function and is supervised by an officer and technical assistants who
are university graduates with chemical technology training and also specialized
training by industry specialists from Japan. Prior to participation in pearl
processing operations, each worker is required to participate in an extensive
on-the-job training program utilizing poor quality pearls for demonstration and
training purposes.
Pearl processing occurs in batches or production cycles. Raw pearls and other
materials transported to the Company's processing facilities in Shenzhen PRC are
first sorted, chemically bleached and, if necessary, drilled. This process,
excluding drilling, takes approximately 21 days for freshwater pearls and
approximately 70 days for saltwater cultured pearls. Drilling takes
approximately 10 days. Next, the pearls are cleaned, dried, waxed, graded,
sorted, strung, and if necessary, packaged. The entire production cycle takes
approximately 30 days for freshwater pearls and approximately 100 days for
saltwater cultured pearls.
Where appropriate, processed pearls are then incorporated into finished jewelry
products. Assembly and finishing may include the addition of clasps, decorative
jewelry pieces, or other specialty work requested by the customers to produce
finished jewelry pieces.
We presently have facilities and pearl processing personnel to produce
approximately 29,000 kg (2002: 25,000 kg) of freshwater pearls and 10,000 kg
(2002: 10,600 kg) of cultured pearls annually. Fiscal 2003 production totaled
approximately 10,360 kg of freshwater pearls and 8,972 kg of cultured pearls,
compared to the production of 13,367 kg of freshwater pearls and 6,761 kg of
cultured pearls in fiscal 2002. We presently also have adequate assembly and
finishing personnel and facilities to produce approximately 1.3 million pieces
of finished jewelry annually.
7
Upon completion of processing, pearls are shipped to our offices in Hong Kong
where they are stored for inspection by potential buyers.
Marketing
We market our products from our facilities in Hong Kong. Our sales staff, which
is divided into groups organized by geographic regions, presently markets
freshwater pearls, Chinese cultured pearls, Japanese cultured pearls, Tahitian
pearls, South Sea pearls, and jewelry products.
Our marketing and sales staff maintains on-going communications with a broad
range of jewelry distributors, manufacturers and retailers worldwide to assure
that customers' pearl requirements are fully satisfied. Our marketing and sales
staff regularly visits all major pearl markets and jewelry trade shows to
display products, establish contacts with potential customers and evaluate
market trends. Apart from attending trade shows and servicing customers, our
marketing and sales force principally operates from our headquarters in Hong
Kong, where buyers personally visit and inspect our products and place orders.
As part of our marketing efforts, we have established two Internet web pages
(www.mspearl.com and www.4376zone.com) to market our products. In addition, we
have increased our efforts to market pearls and jewelry products to customers in
Europe and North America.
Customers
Our customers consist principally of wholesale distributors and mass
merchandisers in Europe, the United States, Hong Kong and other Asian countries.
For fiscal 2003, no customer accounted for more than 10% of our sales, and our
five largest customers accounted for approximately 19.0% (2002: 20.2%), with the
largest customer accounting for approximately 9.2% (2002: 9.3%) of our sales. As
of March 31, 2003, we had approximately 900 customers. We have no long-term
contract with any customer. Most of our customers have been in business with us
for a number of years. We do not believe that the loss of any one customer will
have a material adverse effect on our financial condition or results of
operations.
Our policy is to denominate predominantly all our sales in either US dollars or
Hong Kong dollars. Since Hong Kong dollar remained "pegged" to the U.S. dollar
throughout fiscal 2003, our sales proceeds have thus far had minimal exposure to
foreign exchange fluctuations. See "Item 7A - Quantitative and Qualitative
Disclosures about Market Risk".
The following table sets forth by region and by product our net sales for the
years ended March 31, 2003, 2002 and 2001:
2003 2002 2001
HK$'000 % HK$'000 % HK$'000 %
Cultured Pearls
North America 76,140 23.6 60,000 21.2 53,647 17.2
Europe 29,654 9.2 41,999 14.9 31,570 10.2
Hong Kong 33,634 10.4 49,858 17.6 42,421 13.6
Japan 33,098 10.2 21,721 7.7 19,741 6.3
8
Other Asian countries 45,151 14.0 33,058 11.7 50,529 16.3
Others 5,378 1.7 7,419 2.6 8,883 2.9
------- ----- ------- ----- ------- -----
Sub-total 223,055 69.1 214,055 75.7 206,791 66.5
------- ----- ------- ----- ------- -----
Freshwater Pearls
North America 5,909 1.8 6,719 2.4 16,700 5.4
Europe 9,408 2.9 8,182 2.9 14,306 4.6
Hong Kong 7,251 2.3 2,420 0.9 4,771 1.5
Japan 4,848 1.5 6,243 2.2 2,832 0.9
Other Asian countries 6,140 1.9 8,317 2.9 6,374 2.0
Others 1,437 0.4 1,234 0.4 899 0.3
------- ----- ------- ----- ------- -----
Sub-total 34,993 10.8 33,115 11.7 45,882 14.7
------- ----- ------- ----- ------- -----
Assembled Pearl
Jewelry 65,034 20.1 35,545 12.6 58,436 18.8
------- ----- ------- ----- ------- -----
Total 323,082 100.0 282,715 100.0 311,109 100.0
======= ===== ======= ===== ======= =====
A majority of sales (by dollar amount) in Hong Kong is for re-export to North
America, Europe and other Asian countries.
Seasonality
Our sales are seasonal in nature. The bulk of our sales occur during the months
of March, June and September (during major international jewelry trade shows
held in Hong Kong in these three months). Accordingly, the results of any
interim period are not necessarily indicative of the results that might be
expected during a full year.
The following table sets forth our unaudited net sales for the fiscal quarters
indicated:
Fiscal Year Ended March 31,
2003 2002 2001
------- ------- -------
HK$'000 % HK$'000 % HK$'000 %
First Quarter 76,776 23.8 73,294 25.9 81,984 26.2
Second Quarter 81,445 25.2 72,645 25.7 95,581 30.7
Third Quarter 66,839 20.7 57,127 20.2 66,102 21.3
Fourth Quarter 98,022 30.3 79,649 28.2 67,442 21.8
------- ----- ------- ----- ------- -----
Total 323,082 100.0 282,715 100.0 311,109 100.0
======= ===== ======= ===== ======= =====
Competition
With the exception of several large Japanese cultured pearl and South Sea pearl
suppliers, the pearl business is highly fragmented with limited brand name
recognition or consumer loyalty. Selection is generally a function of design
appeal, perceived value and quality in relationship to price.
9
Internationally, we face intense competition. Our principal historical
competitors in the Japanese cultured, Tahitian and South Sea pearl markets are
Japanese companies. Firms such as Tasaki, Mikimoto, Tokyo and K. Otsuki are the
largest traders and distributors of such pearls. Nevertheless, their
competitiveness has been impaired by the current weakness in Japan's economy,
and the poor harvest of Japanese cultured pearls.
Locally, we compete with approximately 60 companies in Hong Kong that engage
actively in the freshwater pearl and Chinese cultured pearl business. Most of
such local companies are small operators and some are engaged only in pearl
trading. In addition to genuine pearls, we must compete with synthetically
produced pearls.
We believe that we are competitive in the industry because of our advanced pearl
processing and bleaching techniques, and processing facilities in the PRC which
allow us to process pearls at cost that is lower than many of our competitors
and because we are a leading purchaser and distributor of Chinese cultured
pearls. In addition, we provide one-stop shop convenience to customers and have
historically maintained a close relationship with our customers. Therefore,
although competition is intense, we believe that we are well positioned in the
pearl industry. However, in a highly competitive industry where many competitors
have substantially greater technical, financial and marketing resources than us,
new competitors may enter into the market and customer preferences may change
unpredictably, and there can be no assurance that we will remain competitive.
Other Events
In April 2000, Cyber Bizport Limited ("Cyber Bizport"), a wholly owned
subsidiary of MSIL, acquired all issued share capital of Intimex Business
Solutions Limited ("IBS"), in part by issuing to the founders of IBS shares that
constituted 21% of the enlarged issued share capital of Cyber Bizport
immediately after the close of the transaction. IBS assisted with the
establishment and maintenance of our web page www.4376zone.com. On March 31,
2003, the Company caused Cyber Bizport to transfer all issued share capital of
IBS back to its founders, in exchange for such founders' transfer of the 21%
issued share capital of Cyber Bizport that they held. The founders of IBS are
third parties independent from the Company and any of its directors, officers or
major shareholders.
REAL ESTATE LEASING OPERATIONS
Facilities
In connection with our expansion into pearl processing and assembling
operations, we acquired land use rights with respect to, and constructed, an
industrial complex ("Man Sang Industrial City") located in Gong Ming Zhen,
Shenzhen Special Economic Zone, PRC in September 1991. The land use rights with
a total site area of approximately 472,291 square feet we acquired with respect
to Man Sang Industrial City have a duration of 50 years starting from September
1, 1991. We acquired the land use rights relating to Man Sang Industrial City
and constructed such facility for approximately $3.4 million.
As of March 31, 2003, Man Sang Industrial City consisted of 24 buildings
encompassing a total gross floor area of approximately 559,356 square feet. 19
of the buildings in Man Sang Industrial City are factory buildings and 5 are
living quarters. In addition to factories,
10
dormitories and shops, Man Sang Industrial City has green zones, playgrounds and
other amenities typically offered in industrial/living complexes in the PRC.
Leasing and Management
Throughout fiscal 2003, we utilized 5 buildings in Man Sang Industrial City for
pearl processing and assembly, administration and to house employees. The
remaining facilities were leased to third party industrial users, primarily
foreign investors and non-polluting light industry.
We employed a staff of 31 persons to provide required management, leasing,
maintenance and security for Man Sang Industrial City.
As of March 31, 2003, the 19 buildings in Man Sang Industrial City, excluding
the 5 buildings utilized for our pearl operations, were used for leasing to
third party industrial users. Such facilities are typically offered under leases
ranging in duration from 1 year to 3 years. The gross rental income from Man
Sang Industrial City for fiscal 2003 was approximately HK$4.51 million compared
to approximately HK$4.48 million for fiscal 2002. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
Ended March 31, 2003 Compared to Year Ended March 31, 2002 - Rental Income".
In addition to Man Sang Industrial City, we own rental properties in Hong Kong
("Hong Kong Rental Properties") which were leased to independent third parties.
The Hong Kong Rental Properties consist of the properties as follows:-
a. 2,643 square feet on 17th Floor and a car parking space No.16 on 2nd
Floor, Silvercrest, No.24 Macdonnell Road, Midlevels, Hong Kong. A
tenancy agreement was made at a monthly rental of HK$37,000 for a term
of two years starting from October 20, 2002. The rental income totaled
approximately HK$203,500 for fiscal 2003. See "Item 2 - Properties -
Hong Kong".
b. 3,586 square feet at Unit 14 and half of Unit 15 of the 6th floor,
Block A, Focal Industrial Centre, 21 Man Lok Street, Kowloon, Hong
Kong. A tenancy agreement was made on December 29, 2000 for a term of 3
years starting from February 1, 2001. The rental income totaled
approximately HK$255,200 for fiscal 2003 and approximately HK$264,000
for fiscal 2002. See "Item 2 - Properties - Hong Kong";
c. 1,585 square feet at Unit 16 of the 6th floor, Block A, Focal
Industrial Centre, 21 Man Lok Street, Kowloon, Hong Kong. A tenancy
agreement was entered into during fiscal 2002 at a monthly rental of
HK$12,680 for a term of 3 years starting from May 12, 2001. The rental
income totaled approximately HK$152,160 for fiscal 2003 and
approximately HK$154,307 for fiscal 2002. See "Item 2 - Properties -
Hong Kong";
d. Parking space No. L-30 on the Ground Floor of Block A, Focal Industrial
Centre, 21 Man Lok Street, Kowloon, Hong Kong. A tenancy agreement was
made at a monthly rental of HK$3,600 for a term of 2 years starting
from September 1, 2002. The rental income totaled approximately
HK$49,200 for fiscal 2003 and approximately HK$57,600 for fiscal 2002.
See "Item 2 - Properties - Hong Kong";
11
e. Parking space No. 3 on Floor L3 of Valverde, 11 May Road, Hong Kong. A
tenancy agreement on this property and property (f) below was made
during the year. See "Item 2 - Properties - Hong Kong".
f. 1,063 square feet at Flat A on 33rd Floor, Valverde, 11 May Road, Hong
Kong. A tenancy agreement on this property and property (e) above was
made at a total monthly rental of HK$38,000 for a term of 2 years
starting from March 15, 2002, which has been reduced to HK$30,000 per
month for the period commencing on April 15, 2003 and ending on March
14, 2004. Rental income on this property and property (e) above totaled
approximately HK$456,000 for fiscal 2003, and approximately HK$434,714
for fiscal 2002. See "Item 2 - Properties - Hong Kong".
g. 10,880 square feet at 19th Floor, Railway Plaza, 39 Chatham Road South,
Tsimshatsui, Kowloon, Hong Kong. A tenancy agreement was made at a
monthly rental of HK$152,320 for a term of 1 year from March 15, 2002.
The rental income totaled approximately HK$1,827,840 for fiscal 2003,
compared to approximately HK$2,137,031 for fiscal 2002. See "Item 2 -
Properties - Hong Kong". After the tenant's departure, we have moved
our operations located at 27th Floor, Railway Plaza, 39 Chatham Road
South, Tsimshatsui, Kowloon, Hong Kong, to this location.
Competition
Competition among facilities such as Man Sang Industrial City is intense in the
Shenzhen Special Economic Zone. Because of economic incentives available for
businesses operating in the Shenzhen Special Economic Zone, numerous facilities
have been constructed to house such businesses. While a number of competing
facilities may offer greater amenities and may be operated by companies having
greater resources, and additional facilities may be constructed, we believe Man
Sang Industrial City is competitive with other similar facilities in the
Shenzhen Special Economic Zone based on both the quality of facilities and lease
rates.
Employees
As of May 31, 2003, we had 969 employees. No employee is governed by collective
bargaining agreements and we consider our relations with our employees to be
satisfactory. A breakdown of employees by function is as follows:
Hong Kong PRC Total
Senior management 7 -- 7
Marketing and sales 19 24 43
Purchasing 6 -- 6
Finance and accounting 12 12 24
Processing and logistics 32 776 808
Human resources and administration 15 33 48
Real estate leasing -- 31 31
Information technology 2 -- 2
-- --- ---
TOTAL 93 876 969
== === ===
12
SEGMENT INFORMATION
Reportable segment income or loss, and segment assets are as follows:
Reportable Segment Income or Loss, and Segment Assets
2003 2002
------- -------
HK$'000 HK$'000
Revenues from external customers
Pearls 323,082 282,715
Real estate investment 7,455 7,526
------- -------
330,537 290,241
======= =======
Interest expenses
Pearls 859 1,873
Real estate investment 503 2,460
Corporate assets 267 553
------- -------
1,629 4,886
======= =======
Depreciation and amortization
Pearls 6,051 6,031
Real estate investment 2,013 1,827
Corporate assets 1,232 1,394
------- -------
9,296 9,252
======= =======
Operating income
Pearls 24,843 30,538
Real estate investment 175 1,397
------- -------
25,018 31,935
======= =======
Capital expenditure for segment assets
Pearls 8,963 2,162
Real estate investment 2,053 --
Corporate assets 167 45
------- -------
11,183 2,207
======= =======
Segment assets
Pearls 334,251 334,579
Real estate investment 96,447 81,986
Corporate assets 53,046 72,504
------- -------
483,744 489,069
======= =======
13
ITEM 2. PROPERTIES
HONG KONG
The head office of the Group at 21st Floor, Railway Plaza, 39 Chatham Road
South, Tsimshatsui, Kowloon, Hong Kong has a gross floor area of approximately
10,880 square feet. We entered into a tenancy agreement for 1 year commencing
July 1, 2002. We reached agreement with the landlord to extend our term to June
30, 2004, with an option to further extend our term to June 30, 2006.
From April 1, 2000 through June 30, 2003, we leased the 27th Floor of Railway
Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong, with a gross
floor area of approximately 10,880 square feet, for the trading of pearl jewelry
and the retailing of jewelry and accessories through its e-commerce website,
www.4376zone.com. We have vacated the premises and moved our operations at this
location to 19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong, which we own.
We own the property at Room 407, Wing Tuck Commercial Centre, 177 - 183 Wing Lok
Street, Sheung Wan, Hong Kong. The gross floor area of the premises is
approximately 957 square feet. In fiscal 2003, we used the property to house our
subsidiary, Intimex Business Solutions Company Limited.
We own Units 14, 15 and 16 on 6th Floor and a car-parking space at No. L30 on
the Ground Floor of Block A, Focal Industrial Centre, 21, Man Lok Street,
Kowloon, Hong Kong. The floor areas of the units are 2,412 square feet, 2,349
square feet and 1,585 square feet respectively. We use half of Unit 15 as
warehouse, and lease the rest of the units to independent third parties. See
"Item 1 - Business - Real Estate Leasing Operations - Leasing and Management"
above.
We own two residential flats with a gross floor area of approximately 1,784
square feet on Flat C and Flat D on 15th Floor, Windsor Mansion, 29-31 Chatham
Road South, Tsimshatsui, Kowloon, Hong Kong, which we use as quarters for PRC
employees on business trips to Hong Kong.
We own a residential flat with a gross floor area of approximately 1,063 square
feet on 33rd Floor, and a parking space at No.3 on L3 Floor of Valverde, 11 May
Road, Hong Kong, which we lease to an independent third party. See "Item 1 -
Business - Real Estate Leasing Operations - Leasing and Management" above.
We own a residential flat with a gross floor area of approximately 2,838 square
feet on 20th Floor, The Mayfair, 1 May Road, Hong Kong, which we use as our
Chairman's residence since February 6, 2002.
We own an investment property with a gross floor area of approximately 10,880
square feet at 19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong, which we had leased to an independent third party until
April 21, 2003. See "Item 1 - Business - Real Estate Leasing Operations -
Leasing and Management" above. In May 2003, we moved certain operations
previously located on the 27th Floor of the same building into these premises.
14
PEOPLE'S REPUBLIC OF CHINA
As noted above, we own the land use rights to the site of Man Sang Industrial
City for a term of 50 years from September 1, 1991 to September 1, 2041. On
March 31, 2003, Man Sang Industrial City consisted of 24 buildings encompassing
a total gross floor area of approximately 559,356 square feet. Throughout fiscal
2003, we used most of the units in 5 buildings for pearl processing,
administration and staff accommodation, and leased the remaining 19 buildings,
amounting to approximately 490,564 square feet of floor space and representing
approximately 87.7% of the total gross floor space of Man Sang Industrial City,
to independent third parties and industrial users not connected with us.
ITEM 3. LEGAL PROCEEDINGS
On November 1, 2001, MSJ 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. As of May
31, 2003, we have recovered HK$612,316 (approximately US$78,502), and have been
promised another HK$268,195 (approximately US$38,384) by December 30, 2003. We
estimate that non-recoverable amount and its associated costs, if any, will be
immaterial.
MSJ has also made a claim against a Hong Kong vendor for the return of a deposit
in the amount of HK$537,765. The vendor has failed to file an Acknowledgement of
Service and default judgment was entered against the vendor on March 17, 2003
for the amount of HK$537,765, together with interest and certain costs incurred.
We are pursuing enforcement of the default judgment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders through the solicitation
of proxies or otherwise, during the fourth quarter of our fiscal year ended
March 31, 2003.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Common Stock has been quoted on the National Association of Securities
Dealers, Inc. Electronic Bulletin Board since 1987 and is traded under the
symbol "MSHI". However, the market for these securities has historically been
extremely limited and sporadic, particularly during the period prior to the
Exchange.
The high and low bid prices for our Common Stock for each quarter, and on the
last day of each quarter, during our last two fiscal years were as follows:
Period Over the quarter On the last day of quarter
- ------ ----------------- ---------------------------
High Low High Low
---- ---- ---- ----
$ $ $ $
2003
June 30, 2002 1.20 0.60 1.05 0.75
September 30, 2002 1.32 0.85 0.90 0.85
December 31, 2002 1.38 0.65 1.10 1.05
March 31, 2003 1.40 1.05 1.10 1.10
2002
June 30, 2001 1.39 0.75 0.82 0.75
September 30, 2001 1.14 0.71 0.95 0.95
December 31, 2001 2.00 0.75 1.80 1.70
March 31, 2002 2.10 1.10 1.16 1.16
The above bid information is provided by Bloomberg LP, and reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
HOLDERS
The number of record holders of our Common Stock as of May 31, 2003, was
approximately 200. This number does not include an indeterminate number of
stockholders whose shares are held by brokers in street name.
DIVIDENDS
We have not paid any dividends with respect to our Common Stock during the two
preceding fiscal years, and do not intend to pay dividends in the foreseeable
future.
16
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected consolidated financial data for the Company
and its subsidiaries covering the fiscal years ended March 31, 2003, 2002, 2001,
2000 and 1999 and the selected balance sheet data at March 31 of each such year.
This summary should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements provided in Item 7, 7A and 8 respectively, of this Report on Form
10-K.
(Amounts expressed in thousands except share data)
FOR THE FISCAL YEAR 2003 2002 2001 2000 1999
HK$ HK$ HK$ HK$ HK$
Net sales 323,082 282,715 311,109 279,289 230,915
Gross profit 89,922 96,439 16,433 91,136 77,500
Rental income - gross 7,455 7,526 5,526 4,620 4,304
SG & A expenses
- for net sales 65,079 65,901 77,076 64,836 61,101
- for rental 7,280 6,129 6,022 3,908 4,167
Operating income (loss) 25,018 31,935 (61,139) 27,012 16,536
Interest expenses 1,629 4,886 6,990 5,429 4,500
Interest income 690 2,785 5,799 5,014 4,018
Non-operating income 4,425 1,870 6,705 6,576 645
Other than temporary decline in
fair value of marketable
securities (5,921) -- -- -- --
Income (loss) before
income taxes (N1) 22,583 31,704 (55,625) 33,173 16,699
Income taxes expenses (benefits) 3,719 1,206 (3,320) 4,811 2,333
Minority interests 9,943 14,189 (18,112) 8,531 5,551
Net income (loss) (N1) 8,921 16,309 (34,193) 19,831 8,815
Net income (loss)
- per share 1.88 3.70 (7.76) 4.59 2.05
Depreciation and amortization 9,296 9,252 9,162 6,698 5,622
Gross profit margin (%) 27.83 34.11 5.28 32.63 33.56
17
AT MARCH 31 2003 2002 2001 2000 1999
HK$ HK$ HK$ HK$ HK$
Working capital 288,315 268,781 219,929 304,234 265,145
Property, plant and
equipment, net 66,278 80,333 84,821 97,412 100,734
Real estate investments, net 96,447 81,986 84,369 33,027 29,842
Total assets 483,744 489,069 512,381 548,681 459,953
% Return on total assets 1.84 3.33 (6.67) 3.61 1.92
Long-term debts 16,435 22,010 29,306 20,890 25,511
Total liabilities (excluding
minority interests) 46,553 74,461 141,809 128,568 84,313
Minority interests 179,844 170,208 112,234 127,566 92,766
Stockholders' equity 257,347 244,400 258,338 292,547 282,874
Net book value per share 54.3 55.5 58.6 67.8 65.7
% Return on stockholders' equity 3.47 6.67 (13.24) 6.78 3.12
Gearing ratio (N2) 0.78 0.93 0.90 0.78 0.53
Weighted average shares
outstanding 4,740,700 4,405,960 4,405,960 4,316,069 4,305,960
N1: Income before income taxes and net income is from continuing
operations.
N2: "Gearing ratio" represents the ratio of the Company's total debts and
minority interests to shareholders' equity.
N3: No dividend was paid in the fiscal years presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-K 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 product 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,
18
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 pearls jewelry products, and in real estate investment, the
Company's ability to achieve its objectives and expectations are derived at
least in part form 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 goods 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, liquidity and capital resources, derivative
instruments, seasonality and inflation should be read in conjunction with the
financial statements and the notes thereto include elsewhere herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of results of operations and financial
condition are based upon our consolidated financial statements. These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles require management to make
certain estimates and assumptions that affect amounts reported and disclosed in
the financial statements and related notes. The most significant estimates and
assumptions include valuation of inventories, provisions for income taxes and
uncollectible accounts, the recoverability of non-consolidated investments and
long-lived assets. Actual results could differ from these estimates.
Periodically, the Company reviews all significant estimates and assumptions
affecting the financial statements and records the effect of any necessary
adjustments.
The following critical accounting policies rely upon assumptions and estimates
and were used in the preparation of the Company's consolidated financial
statements:
Sales returns: Sales are recognized at the time we ship products to customers
and collectibility for such sales is reasonably assured. Sales are reported net
of returns. We maintain a reserve for potential product returns and record, as a
reduction to sales, our provision for estimated product returns, which is based
on historical experience.
Allowance for doubtful accounts: We maintain an allowance for doubtful accounts
based on estimates of the credit-worthiness of our customers. If the financial
condition of our customers was to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
19
Inventories write-downs: We write down the amount by which the cost of
inventories (determined by the weighted average method) exceeds their estimated
market values based on assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Long-lived assets: We periodically evaluate the carrying value of long-lived
assets to be held and used, including goodwill and other intangible assets,
whenever events and circumstances indicate that the carrying value of the asset
may no longer be recoverable. An impairment loss, measured based on the fair
value of the asset, is recognized if expected future undiscounted cash flows are
less than the carrying amount of the assets.
Non-consolidated investments: An adverse change in market conditions or poor
operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments, thereby possibly
requiring an impairment charge.
Marketable securities: We hold for long term investment purposes certain
publicly traded securities, which are classified as available for sale.
Management periodically reviews these investments for other than temporary
decline in value. In our review in fiscal 2003, taking into account the length
of time and the extent to which the market value of certain securities have been
below cost, and other qualitative factors, management determined that a decline
in value of such securities was other than temporary, which we recognized in our
income statement. Management will continue to periodically review the market
value of our investments in securities, and if it determines in the future,
based at least in part on the length of time and the extent to which the market
value is less than cost as well as the financial conditions and prospects of the
respective issuers, that an other than temporary decline in value occurs, we may
be required to make further write-downs for such decline in value.
Income taxes: Provisions for deferred income taxes are made using the asset and
liability method, under which deferred income taxes are recognized for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities, and are classified as
current or non-current based upon the classification of the related asset or
liability in the financial statements. A valuation allowance is provided to
reduce the amount of deferred tax assets if it is considered more likely than
not that some portion, or all, of the deferred tax asset will not be realized.
OVERVIEW
Fiscal 2003
Net sales in fiscal 2003 increased by HK$40.4 million to HK$323.1 million,
representing a 14.3% increase when compared to net sales of HK$282.7 million in
fiscal 2002. We attribute such increase in net sales to, among other factors,
(i) our lowering of prices of Chinese cultured pearls on several occasions, in
part to increase sales, in part to move certain inventory as determined by
management, and in part to stay competitive with our customers in an intensely
competitive market, (ii) improvements in general business and consumer
confidence resulting in improvements in demand and market sentiment (until the
20
commencement of military conflict between the United States of America and
Republic of Iraq (the "Iraq War"), and then the outbreak of the severe acute
respiratory syndrome ("SARS") in the PRC, Hong Kong and other countries), (iii)
especially with respect to the fourth quarter, contribution by a jewelry
business (comprising of assets, inventory and clients) that we acquired in
December 2002, and (iv) our increased marketing efforts, flexible pricing
strategies, and value added services to satisfy our customers' needs.
Net income for fiscal 2003 was HK$8.9 million, compared to net income of HK$16.3
million for fiscal 2002. We attribute such decrease to, among other factors, (i)
a lower gross profit margin when we reduced prices on Chinese cultured pearls on
several occasions, (ii) a lower profit margin on sales made by the jewelry
business we acquired in December 2002, and (iii) a decline in fair value of
marketable securities we hold.
Looking Forward to 2004
The negative impact of the Iraq War and SARS on consumer spending, as well as
the ban of Hong Kong jewelry manufacturers and merchants from the Basel trade
show, one of the largest annual jewelry trade shows in the world, in Switzerland
in March 2003, are well publicized in the press. However, with the Iraqi War
concluded, and SARS on the wane, there appears to be a general improvement of
consumer spending sentiment. Hong Kong jewelry manufacturers and merchants have
had encouraging results at the "JCK" tradeshow in Las Vegas in June 2003. We are
closely monitoring the market. While it may be necessary on occasions to deploy
various flexible marketing/pricing strategies to re-engage our customers after
these major world events, which may in turn exert some pressure on profit
margin, we continue to efficiently respond to, if not anticipate, our customers'
tastes and demands. We believe offering the right product/services mix to our
customers will deliver the best results of operations. In addition, while the
newly acquired jewelry business may have a profit margin that is slightly lower
than our existing pearl and pearl jewelry businesses, we expect it to contribute
positively to our overall profits. Therefore, by strengthening our core pearl
business and expanding further into the jewelry business, and simultaneously
controlling overall expenditures and enhancing effectiveness of its operations,
we remain optimistic for fiscal 2004.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years indicated certain items from
the Consolidated Statements of Income expressed as a percentage of net sales:
Year Ended March 31,
-----------------------------
2003 2002 2001
----- ----- -----
% % %
Net sales 100.0 100.0 100.0
Cost of sales 72.2 65.9 94.7
----- ----- -----
Gross profit 27.8 34.1 5.3
Rental income, gross 2.3 2.7 1.8
----- ----- -----
30.1 36.8 7.1
21
Selling, general and administrative expenses (22.4) (25.5) (26.7)
----- ----- -----
Operating income (loss) 7.7 11.3 (19.6)
Interest expenses (0.5) (1.7) (2.3)
Interest income 0.2 1.0 1.9
Non-operating income 1.4 0.6 2.1
Other than temporary decline in fair value
of marketable securities (1.8) -- --
----- ----- -----
Income (loss) before income taxes and
Minority interests 7.0 11.2 (17.9)
Income taxes (expenses) benefits (1.1) (0.4) 1.1
----- ----- -----
Net income (loss) before minority interests 5.9 10.8 (16.8)
Minority interests (3.1) (5.0) 5.8
----- ----- -----
Net income (loss) 2.8 5.8 (11.0)
===== ===== =====
YEAR ENDED MARCH 31, 2003 COMPARED TO YEAR ENDED MARCH 31, 2002
Net Sales and Gross Profit
Net sales in fiscal 2003 increased by HK$40.4 million to HK$323.1 million,
representing a 14.3% increase when compared to net sales of HK$282.7 million in
fiscal 2002. We attribute such increase in net sales to, among other factors,
(i) our lowering of prices of Chinese cultured pearls on several occasions, in
part to increase sales, in part to move certain inventory as determined by
management, and in part to stay competitive with our customers in an intensely
competitive market, (ii) improvements in general business and consumer
confidence resulting in improvements in demand and market sentiment (until the
commencement of military conflict between the United States of America and
Republic of Iraq (the "Iraq War"), and then the outbreak of the severe acute
respiratory syndrome ("SARS") in the PRC, Hong Kong and other countries), (iii)
especially with respect to the fourth quarter, contribution by a jewelry
business (comprising of assets, inventory and clients) that we acquired in
December 2002, and (iv) our increased marketing efforts, flexible pricing
strategies, and value added services to satisfy our customers' needs.
Gross profit for fiscal 2003, on the other hand, reduced by HK$6.4 million from
HK$96.4 million for fiscal 2002 to HK$90.0 million. We attribute this decrease
in gross profit margin to (i) the occasional price reductions on Chinese
cultured pearls as described above, and (ii) the lower margin of the jewelry
business we acquired in December 2002.
Rental Income
Gross rental income decreased by HK$71K**, or 0.9%, from HK$7.53 million for
fiscal 2002 to $7.46 million for fiscal 2003. The decrease in gross rental
income was mainly attributable to the reduction in rental income in respect to
19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Hong Kong, by
HK$309,191 when compared to fiscal 2002. However, such decrease is partially
offset by the rental income in respect of the investment property at 17th Floor
and Car Parking Space No.16, 24 Macdonnell Road, Midlevels, Hong Kong, which
- -----
**As used in this 10-K, 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".
22
amounted to HK$203,500, when no rent was collected in respect of such property
in fiscal 2002.
Selling, General and Administrative Expenses ("SG & A expenses")
SG & A expenses for fiscal 2003 were HK$72.4 million, consisting of HK$65.1
million attributable to pearl operations and HK$7.3 million attributable to real
estate operations. This is an increase of approximately HK$0.4 million, or 0.5%,
from HK$72.0 million, consisting of HK$65.9 million attributable to pearl
operations and HK$6.1 million attributable to real estate operations, during
fiscal 2002.
As a percentage of net sales, SG & A expenses for pearl operations decreased
from 23.3% in fiscal 2002 to 20.1% in fiscal 2003.
Interest Income
Interest income for fiscal 2003 decreased by HK$2.1 million to HK$0.7 million
from HK$2.8 million in fiscal 2002. The decrease in interest income was
principally due to lower interest rates in fiscal 2003 as compared to interest
rates in fiscal 2002, and a withdrawal of bank deposits to repay our bank debts.
See "Item 3. Quantitative and Qualitative Disclosures About Market Risk".
Interest Expenses
Interest expenses for fiscal 2003 decreased by HK$3.3 million to HK$1.6 million
from HK$4.9 million in fiscal 2002 as a result of the drop in interest rate and
the use of bank deposits to repay part of its bank borrowings.
Income Taxes Expenses (Benefits)
Our income taxes expenses are HK$3.7 million for fiscal 2003, an increase of
HK$2.5 million when compared to an income taxes expense of HK$1.2 million for
fiscal 2002, which increase is mainly attributable to the full utilization in
fiscal 2003 of tax losses carried forward from prior years.
Net Income (Loss)
Net income for fiscal 2003 decreased by HK$7.4 million to HK$8.9 million, when
compared to a net income of HK$16.3 million for fiscal 2002. Such decrease is
mainly due to a decrease in gross profit margin, and a decline of fair value of
HK$5.9 million on marketable securities purchased in fiscal 2001, which we
continue to intend to hold as long-term investment.
Income taxes and minority interests for fiscal 2003 was HK$28.5 million, and the
amount for fiscal 2002 was HK$31.7 million.
YEAR ENDED MARCH 31, 2002 COMPARED TO YEAR ENDED MARCH 31, 2001
Net Sales and Gross Profit
23
Net sales in fiscal 2002 decreased by HK$28.4 million to HK$282.7 million,
representing a 9.1% drop when compared to net sales of HK$311.1 million in
fiscal 2001. The decrease in sales was mainly attributable to a decrease in
demand, which was in turn mainly attributable to a general slow down of the
economies of, and weakened business and consumer confidence in, many of our
major markets, especially immediately after September 11, 2001. Net sales in the
fourth quarter of fiscal 2002, however, was HK$79.6 million, compared to HK$68.0
million for the same period in fiscal 2001; such strong rebound was attributable
in part to our increased marketing efforts, and in part to improvement in the
market sentiments.
Gross profit for fiscal 2002, on the other hand, improved by HK$80.0 million
from HK$16.4million for fiscal 2001 to HK$96.4 million. Gross profit in fiscal
2001 was adversely affected by a write-down of our inventories in the amount of
HK$65.0 million.
Rental Income
Gross rental income increased by HK$2.0 million, or 35.3%, to HK$7.5 million for
fiscal 2002 compared to HK$5.5 million for fiscal 2001. The increase in gross
rental income was mainly attributable to the rental income from 19th Floor of
Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong, acquired
in February 2001.
SG & A expenses
SG & A expenses for fiscal 2002 were HK$72.0 million, consisting of HK$65.9
million attributable to pearl operations and HK$6.1 million attributable to real
estate operations. This is a decrease of approximately HK$11.1 million, or
14.0%, from HK$83.1 million, consisting of HK$77.1 million attributable to pearl
operations and HK$6.0 million attributable to real estate operations, during
fiscal 2001. Included in the SG&A expenses for fiscal 2002 were impairment loss
on goodwill of HK$591K and impairment loss on non-consolidated investment of
HK$3.0 million.
The decrease in SG & A expenses was partly due to a decrease in compensation
expenses as no stock options were granted by the Company or MSIL for fiscal 2002
(compared to fiscal 2001 when MSIL granted options to purchase 33,000,000 shares
at HK$0.297 per share), and partly due to a decrease in compensation, marketing
and other operating expenses under the Company's cost savings program. In
addition, the Company's investments in new marketing and distribution channels
were fully expensed in fiscal 2001.
As a percentage of net sales, SG & A expenses for pearl operations increased
from 24.8% in fiscal 2001 to 23.3% in fiscal 2002.
Interest Income
Interest income for fiscal 2002 decreased by HK$3.0 million to HK$2.8 million
from HK$5.8 million in fiscal 2001. The decrease in interest income was
principally due to lower interest rates for fiscal 2002 as compared to interest
rates for fiscal 2001 and the withdrawal of bank deposits to pay down the
Company's bank debts. See "Item 3. Quantitative and Qualitative Disclosures
About Market Risk".
24
Interest Expenses
Interest expenses for fiscal 2002 decreased by HK$2.1 million to HK$4.9 million
from HK$7.0 million in fiscal 2001 as a result of drops in interest rates and
the use by the Company of bank deposits to pay down its bank debts.
Income Taxes (Expenses) Benefits
The Company's income taxes expenses of fiscal 2002 were HK$1.2 million. This is
in contrast to income taxes benefits of HK$3.3 million for fiscal 2001. The
income taxes benefits in fiscal 2001 were mainly attributable to a deferred tax
asset of HK$3.6 million which arose from the inventories write-down in fiscal
2001.
Net Income (Loss)
Net income for fiscal 2002 was HK$16.3 million, compared to net loss of HK$34.2
million for fiscal 2001. The net loss of fiscal 2001 was mainly attributable to
the inventories write-down of HK$65.0 million. Net income before inventories
write-down, income taxes and minority interests for fiscal 2002 was HK$31.7
million, as compared to HK$9.4 million for fiscal 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
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 has adopted this statement on
April 1, 2003. There was no significant impact on the Company's financial
position and results of operations.
25
On April 30, 2002, the FASB 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 statements 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 Extraordinary, 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 these provisions that
become effective during the year ended March 31, 2003, 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 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 be recognized when the liability is
incurred. Under Emerging Issue Task Force ("EITF") Issue 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an exit
plan. A fundamental conclusion reached by the FASB in this statement is that an
entity's commitment to a plan, by itself, does not create a present obligation
to others that meets the definition of a liability. Therefore, this statement
eliminates the definition and requirements for recognition of exit costs in EITF
Issue 94-3. This statement also established that fair value is the objective for
initial measurement of the liability and the liability should be measured
initially at fair value only when the liability is incurred. The provisions of
this statement are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. There was no
26
significant impact on the Company's financial position and results of operations
as a result of the adoption of SFAS No. 146.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivatives
instruments embedded in other contracts and for hedging activities under SFAS
No. 133. This Statement is generally effective for contracts entered into or
modified after June 30, 2003. The Company will be required to adopt this
statement during the year ended March 31, 2004. Management is assessing, but has
not yet determined, the impact that SFAS No. 149 will have, if any, on its
financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The statement
establishes standards for how an issuer classifies and measures certain
financial instruments. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
statement requires that certain financial instruments that, under previous
guidance, could be accounted for as equity be classified as liabilities, or
assets in some circumstances. This statement does not apply to features embedded
in a financial instrument that is not a derivative in its entirety. The
statement also requires disclosures about alternative ways of settling the
instruments and the capital structure of entities whose shares are mandatorily
redeemable. The Company will be required to adopt this statement during the year
ended March 31, 2004. Management is assessing, but has not yet determined, the
impact that SFAS No. 150 will have, if any, on its financial position and
results of operations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN No. 45 are effective for interim
and annual periods ending after December 15, 2002. The initial recognition and
initial measurement requirements of FIN No. 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. The Company has adopted
FIN No. 45 during the year ended March 31, 2003. There was no significant impact
on the Company's financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund accounts receivable and
inventories and, to a lesser extent, expand its business operations. At March
31, 2003, the Company had working capital of HK$288.3 million, which included a
cash balance of HK$83.8 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 10.6 to 1 in fiscal 2003 as
compared with that of 6.2 to 1 in fiscal 2002. Net cash provided by operating
activities was HK$29.6 million and HK$22.9 million for fiscal 2003 and fiscal
27
2002, respectively. The increase in cash and cash equivalents by HK$1.6 million
was mainly generated by operating activities.
Inventories increased by HK$15.7 million from HK$118.5 million at March 31, 2002
to HK$134.2 million at March 31, 2003. The inventory turns in terms of months
decreased from 7.4 months in fiscal 2002 to 6.5 months in this fiscal year.
Inventories increased mainly to cater to improved market sentiments and our
anticipated attendance at the trade shows in March.
Long-term debts (including current portion of long-term debts) decreased from
HK$27.6 at March 31, 2002 to HK$22.0 million. The decrease was attributable to
repayment of installment loans. The gearing ratio was 0.78 at March 31, 2003, as
compared with 0.93 at March 31, 2002. The decrease was mainly attributable to
the repayment of short-term bank borrowing in PRC.
The Company had available working capital facilities of HK$70.6 million in total
with various banks at March 31, 2003. 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 offered by banks in Hong Kong and in the PRC, and are subject to
periodic review. At March 31, 2003, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In fiscal 2003, the Company made approximately 28.2% of its purchases in RMB,
with the remaining amounts mainly settled in Hong Kong dollars, US Dollars and
Japanese Yen (together, 43.8% of total purchase). The RMB is not a fully
convertible currency and the PRC government determines its exchange rate against
other currencies. There are conflicting speculations in the foreign exchange
market for either a devaluation of RMB as an attempt of the PRC government to
make PRC exports more competitive, or a revaluation of RMB following the PRC's
entry to the World Trade Organization. As PRC has not declared any intention to
either devalue or revalue its currency, we believe that the imminent risk of a
substantial fluctuation of the RMB exchange rate remains low. At March 31, 2003,
the Company had fully repaid its short-term RMB bank borrowings, and the
weighted average interest rate was 5.4% per annum.
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 appreciation or devaluation, and sales are
made in US dollars, the Company's management determined that the Company's
currency risk in the foreseeable
28
future should not be material, and that no derivative contracts such as forward
contracts or options to hedge against foreign exchange fluctuations were
necessary during fiscal 2003.
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 dollar interest rates is expected to have a corresponding
bearing on Hong Kong dollar interest rates. Since interest rates in the United
States have been falling since June 30, 2000, three-month HIBOR has decreased by
5.125% from 6.5% as at June 30, 2000 to 1.375% as at March 31, 2003, largely in
line with changes in US dollar rates. During fiscal 2003, the Company did not
expect risks of a material rise in Hong Kong interest rates, and did not enter
into derivate contracts or other arrangements to hedge against such risks. At
March 31, 2003, the Company had Hong Kong dollar bank borrowings of about
HK$22.0 million, and the weighted average interest rate was 2.6% per annum.
ITEM 8. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1
Consolidated Statements of Income and Comprehensive Income for the years
ended March 31, 2003, 2002 and 2001 F-2
Consolidated Balance Sheets as of March 31, 2003 and 2002 F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years
ended March 31, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of July 7, 2003, the name and age, position
held with the Company and term of office, of each director of the Company and
the period or periods during which he or she has served in his or her respective
position(s).
NAME AGE POSITION(S) HELD TERM OF OFFICE
- ---- --- ---------------- --------------
Cheng Chung Hing, Ricky 42 President and Chairman of the Board 1/96 - present
Chief Executive Officer 1/98 - present
Chief Financial Officer 2/99 - 8/99
and 8/00 - present
Cheng Tai Po 51 Vice Chairman of the Board 1/96 - present
Yan Sau Man, Amy 40 Vice President and Director 1/96 - present
Lai Chau Ming, Matthew 50 Director 11/96 -present
Yuen Ka Lok, Ernest 40 Director 11/96 -present
TERM OF OFFICE
Each of our directors serves until his or her successor is duly elected at the
next annual meeting of shareholders or until his or her earlier resignation or
removal.
INFORMATION REGARDING EXECUTIVE OFFICERS
The following table sets forth the names, ages and offices of our present
executive officers. The periods during which such persons have served in such
capacities and information with respect to non-employee directors are indicated
in the description of business experience of such persons below.
NAME AGE POSITION HELD
- ---- --- -------------
Cheng Chung Hing, Ricky 42 President, Chairman,
Chief Executive Officer, Chief
Financial Officer
Cheng Tai Po 51 Vice Chairman
Yan Sau Man, Amy 40 Vice President
Ho Suk Han, Sophia 34 Secretary
30
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
CHENG Chung Hing, Ricky, co-founder of the Company with its subsidiaries (the
"Group"), has served as Chairman of the Board of Directors and President of the
Company since January 8, 1996, and of Man Sang International (B.V.I.) Limited
("Man Sang BVI") since December 1995. He was appointed Chief Executive Officer
of the Company on January 2, 1998. He was appointed a member of the Compensation
Committee of the Board of Directors on September 8, 1997 and Chief Financial
Officer on February 27, 1999 but resigned from the two offices on September 18,
1998 and August 6, 1999 respectively. He was again appointed Chief Financial
Officer on August 6, 2000. Mr. Cheng was appointed Chairman and a Director of
Man Sang International Limited ("MSIL"), an indirect subsidiary listed on The
Stock Exchange of Hong Kong Limited, on August 8, 1997 and August 4, 1997,
respectively. Prior to the reorganization of the Group in late 1995, which
culminated in the Company's issuance of Common Stock and Series A Preferred
Stock in exchange for all the outstanding securities of Man Sang BVI in January
1996 (the "Group Reorganization"), he had served as chairman and president of
various companies within the Group. Mr. Cheng has 20 years' experience in the
pearl business and is responsible for overall planning, strategic formulation
and business development of the Company.
CHENG Tai Po, co-founder of the Group, has served as Vice Chairman of the
Company since January 8, 1996 and of Man Sang BVI since December 1995. He was
appointed Deputy Chairman and a Director of MSIL on August 8 and August 4, 1997,
respectively. Prior to the Group Reorganization, he had served as vice-chairman
of various companies within the Group. Mr. Cheng has 20 years' experience in the
pearl business and is responsible for purchasing and processing of pearls as
well as overall planning, strategic formulation and business development of the
Company.
YAN Sau Man, Amy, has served as Vice President and a Director of the Company
since January 8, 1996 and of Man Sang BVI since December 1995. She was appointed
as a Director of MSIL on August 12, 1997. Ms. Yan joined the Group in 1984 and
has been responsible for overall marketing and sales activities of the Company.
LAI Chau Ming, Matthew, has served as a Director of the Company since November
1996. He was appointed a member of the Compensation Committee and a member of
the Audit Committee of the Board of Directors on September 8, 1997 and September
18, 1998 respectively. Mr. Lai is currently employed as Sales Associate Director
of DBS Vickers (Hong Kong) Limited ("DBS Vickers"). Prior to his joining DBS
Vickers in July 1996, Mr. Lai served from 1972 to 1996 as a Senior Manager of
Sun Hung Kai Investment Company Limited, one of the biggest investment companies
in Hong Kong. Mr. Lai has 30 years' experience in investment. He is experienced
in the areas of financial management and planning.
YUEN Ka Lok, Ernest, has served as a Director of the Company since November
1996. He was appointed Chairman of the Compensation Committee and a member of
the Audit Committee of the Board of Directors on September 8, 1997 and September
18, 1998 respectively. Mr. Yuen was also appointed a Director of MSIL on August
12, 1997. Mr. Yuen is a solicitor and is currently a Partner in the law firm of
Messrs. Yuen & Partners. Mr. Yuen joined Messrs. Ivan Tang & Co. ("ITC") as a
Consultant in August 1994 and became a Partner in January 1996. He retired from
ITC as Partner and started his own practice in the
31
name of Yuen & Partners in August, 1997. Prior to his joining ITC, from March
1992 to August 1994, Mr. Yuen was employed as Assistant Solicitor at Messrs. Van
Langenbery & Lau ("VLL") and Messrs. AB Nasir, respectively. Prior to his
joining VLL, Mr. Yuen was an Articled Clerk at Messrs. Robin Bridge & John Liu.
From 1985 to 1987, Mr. Yuen was an audit trainee at Price Waterhouse (now known
as PriceWaterhouseCoopers), an international accounting firm. Mr. Yuen is
experienced in civil and criminal litigations as well as general commercial
practice.
HO Suk Han, Sophia, has served as Secretary of the Company since January 1998.
Miss Ho has over 10 years' experience in company secretarial work in an
international accounting firm and several listed companies in Hong Kong. She is
an associate of The Hong Kong Institute of Company Secretaries and The Institute
of Chartered Secretaries and Administrators in Hong Kong Limited.
FAMILY RELATIONSHIPS
Cheng Chung Hing, Ricky and Cheng Tai Po are brothers. Other than the foregoing,
there are no family relationships among the above-named directors and executive
officers of the Company.
COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT
Based solely on a review of copies of the forms provided to the Company, or
written representations that no other filing of forms was required, we believe
that for fiscal 2003, all reports required under Section 16(a) of the Securities
Exchange Act were timely filed.
ITEM 11. EXECUTIVE COMPENSATION
OVERVIEW AND THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
While for convenience of reference this Proxy Statement and the annual report on
Form 10-K has used "the Company" when referring to the overall business of the
Group, Man Sang Holdings, Inc. itself only has one employee. The employee
directors of the Company have entered into Services Agreement with MSIL (see
"Employment Agreements"). Other executive officers in the management team are
employed by a subsidiary of MSIL.
In the 2002 Annual General Meeting of MSIL held in August 2002, the shareholders
of MSIL passed a resolution to authorize its Board of Directors to fix
remuneration of all directors (which for MSIL would include all its executives)
for the year. The MSIL Board determined that the compensation packages of its
directors were generally competitive. Hence, the compensation packages remained
unchanged for fiscal 2003.
As at July 7, 2003, the Company via its subsidiary, Man Sang BVI, holds
426,000,000 shares, or 56.66% of the issued capital, of MSIL. Since the overall
compensation of the executive officers of the Company is determined by the Board
of Directors of MSIL, the Company's Compensation Committee takes up a monitoring
function. The Committee reviews the decisions of the MSIL Board in relation to
this issue. Should the Committee disagree with the decisions of the MSIL Board,
the Committee may advise the Company's Board of
32
Directors to vote in any general meeting of MSIL against authorizing the MSIL
Board to fix compensation for MSIL's directors and executives.
For fiscal 2003, all executive officers received their salaries from MSIL and
each of Cheng Chung Hing, Ricky and Cheng Tai Po received a bonus from the
Company.
With respect to the Chairman and the Vice Chairman, the Compensation Committee
members acknowledged that they have brought to the Company not only their
expertise and personal relationships in the pearl industry, but also their
vision, foresight and efforts to steer the Company towards more diversified
business. The Committee members also took into account the need to retain such
highly qualified officers by providing competitive compensation packages, and
granted a bonus to each of Cheng Chung Hing, Ricky, Chairman of the Board and
Cheng Tai Po, Vice Chairman, on December 20, 2002 and stock options to each of
Cheng Chung Hing, Ricky and Cheng Tai Po on March 26, 2003.
EXECUTIVE COMPENSATION
During fiscal 2003, other than its Chief Executive Officer, the Company had two
executive officers in the management team, and two additional employees, whose
annual compensation exceeded (or would have exceeded if annualized) HK$780,000
(approximately $100,000). The following table sets forth information concerning
cash and non-cash compensation paid to such persons during fiscal 2003, 2002
and 2001.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ----------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(5) OPTIONS GRANTED
- --------------------------- ---- --------- ----------- --------------- ----------------
(HK$) (HK$) (HK$) (#)
Cheng Chung Hing, Ricky 2003 3,000,000 1,000,000(2) 1,076,400(6) 150,000(8)
Chairman of the Board, 2002 3,000,000 1,000,000(2) 685,152(6) --
President, CEO & CFO 2001 3,000,000 1,000,000(2) 519,002(6) 12,000,000(9)
Cheng Tai Po 2003 3,000,000 1,000,000(2) 45,659(7) 100,000(8)
Vice Chairman 2002 3,000,000 1,000,000(2) 1,083,685(7) --
2001 3,000,000 1,000,000(2) 1,185,603(7) 12,000,000(9)
Yan Sau Man, Amy 2003 1,200,000 150,000(3) -- --
Vice President and Director 2002 1,200,000 -- -- --
2001 1,116,667 83,333(3) -- 6,000,000(9)
So Nai Leung, Jimmy (1) 2003 393,333 120,000(4) -- --
General Manager of a
subsidiary of MSIL
Au Moon Ying, Henry (1) 2003 464,774 -- -- --
Group Financial Controller
(1) So Nai Leung, Jimmy and Au Moon Ying, Henry, both commenced employment
with the Company in fiscal 2003.
(2) Each of Cheng Chung Hing, Ricky and Cheng Tai Po received a bonus of
HK$1,000,000 from the Company for each of fiscal 2003, 2002 and 2001.
(3) Yan Sau Man, Amy received a bonus of HK$150,000 and HK$83,333 from MSIL
for fiscal 2003 and 2001 respectively.
33
(4) So Nai Leung, Jimmy's bonus may, in accordance with his employment
agreement, be adjusted at the end of calendar year 2003, depending on his
performance. If he exceeds his performance target, he may receive an
additional bonus; if he fails to achieve his performance target, he may be
required to return some or all bonus already paid to him.
(5) Although the officers receive certain perquisites such as company provided
life insurance, travel insurance, medical insurance and mandatory
provident fund, the value of such perquisites did not exceed the lesser of
HK$390,000 (approximately $50,000) or 10% of the officer's salary and
bonus.
(6) In addition to the amounts referred to in note (2) above, Cheng Chung
Hing, Ricky is provided the right to use a leasehold property of the
Company at no cost as his personal residence. The estimated fair rental
value of such leasehold property was HK$1,076,400, HK$685,152 and
HK$519,002 for fiscal 2003, 2002 and 2001 respectively. The estimated fair
rental value is based on the "rateable value" assessed by the Rating and
Valuation Department of The Government of Hong Kong Special Administrative
Region. According to the Hong Kong Rating Ordinance (Cap. 116), rateable
value is an estimate of the annual rental of the relevant premises at a
designated valuation reference date. When assessing a rateable value, all
factors which would affect rental value, such as age and size of the
premises, quality of finishes, location, transport facilities, amenities
and open market rents, are considered.
(7) In addition to the amounts referred to in note (2) above, Cheng Tai Po was
provided the right to use a leasehold property of the Company at no cost
as his personal residence till January 13, 2002. The estimated fair rental
value of such leasehold property was HK$1,055,738 and HK$1,185,603 for
fiscal 2002 and 2001 respectively. The estimated fair rental value is
based on the "rateable value" assessed by the Rating and Valuation
Department of The Government of Hong Kong Special Administrative Region.
According to the Hong Kong Rating Ordinance (Cap. 116), rateable value is
an estimate of the annual rental of the relevant premises at a designated
valuation reference date. When assessing a rateable value, all factors
which would affect rental value, such as age and size of the premises,
quality of finishes, location, transport facilities, amenities and open
market rents, are considered. From January 14, 2002 to June 24, 2002,
Cheng Tai Po stayed in a hotel when he was in Hong Kong at the Company's
expenses. The hotel charges for fiscal 2003 and 2002 were HK$45,659 and
HK$27,947 respectively.
(8) Cheng Chung Hing, Ricky and Cheng Tai Po each received options from the
Company in fiscal 2003.
(9) Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy each received
options from MSIL in fiscal 2001, all of which expired in fiscal 2003
without exercise.
34
OPTION GRANTS IN FISCAL 2003
The Company
The Compensation Committee and the Board of Directors recognized the need for
continuously providing competitive compensation and strong incentives to Cheng
Chung Hing, Ricky and Cheng Tai Po who have made significant contributions to
the diversification of business of the Company. In this respect, on March 26,
2003, pursuant to the Company's 1996 Stock Option Plan, the Committee granted to
Cheng Chung Hing, Ricky and Cheng Tai Po at no consideration non-qualified
options to purchase 150,000 and 100,000 shares of the Company's common stock
respectively, at an exercise price of $1.1 per share (representing 100% of the
latest closing price of the Company's common stock before the date of grant).
Half of the options vest on March 26, 2004 and half of which vest on March 26,
2005. These options are not intended to be eligible for special tax treatment as
an Incentive Stock Option under Section 422 of the Internal Revenue Code of
1986, as amended.
INDIVIDUAL GRANTS
----------------------
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATE OF STOCK
SECURITIES GRANTED PRICE APPRECIATION
UNDERLYING TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------
NAME AND PRINCIPAL POSITION GRANTED IN 2003 PRICE DATE 5% 10%
- ------------------------------ ---------- --------- -------- ---------- ------- --------
(#) (%) ($/SHARE) ($) ($)
Cheng Chung Hing, Ricky 150,000 60 1.1 3/26/2013 103,768 262,968
Chairman of the Board,
President, CEO & CFO
Cheng Tai Po 100,000 40 1.1 3/26/2013 69,178 175,312
Vice Chairman
- -----------
(1) These amounts represent the hypothetical option gains that would exist for
the options based on assumed rates of annual compound stock price appreciation
of 5% and 10% from the date the options were granted over the full option terms
as required by the Securities and Exchange Commission Rules. These hypothetical
gains are not forecasts of future appreciation in the Company's stock prices.
MSIL
In fiscal 2003, MSIL did not grant any option to any of its directors or
executive officers.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 2003 AND FISCAL YEAR-END OPTION/SAR
VALUES
No executive officer exercised his/her options to purchase Common Stock of the
Company or shares of MSIL in fiscal 2003.
35
The following table indicates the number of shares subject to exercisable
(vested) and unexercisable (unvested) stock options as of March 31, 2003, and
the value of exercisable and unexercisable "in-the-money" options, which
represents the positive spread between the exercise price of existing stock
options and the price of the Common Stock at March 31, 2003.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT MARCH 31, 2003 MARCH 31, 2003 (1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
The Company
Cheng Chung Hing, Ricky 100,000 150,000 $0 $0
Cheng Tai Po 100,000 100,000 $0 $0
Yan Sau Man, Amy 100,000 0 $0 $0
MSIL
None
- ------------
(1) Calculated based on the March 31, 2003 closing stock price of $1.10 per
share.
PERFORMANCE GRAPH
The following graph summarizes cumulative total shareholder return (assuming
reinvestment of dividends) on the Common Stock of the Company and IWI Holding
Limited ("IWI"), a peer issuer selected by the Company. The Company's Common
Stock was first registered under Section 12(g) of the Securities Exchange Act of
1934, as amended, on June 17, 1996. As there was no trading of the Company's
Common Stock on June 17 and June 18, 1996, the trading price of the Common Stock
of the Company was not available. Therefore, the measurement period hereto
commenced on June 19, 1996 and ended on March 31, 2003, the Company's 2003
fiscal year end date. The graph assumes that $100 was invested on June 19, 1996.
The comparisons in this graph are required by the Securities and Exchange
Commission and are not intended to forecast or be indicative of future stock
price performance or the financial performance of the Company. Shareholders are
encouraged to review the Financial Statements of the Company contained in the
accompanying annual report on Form 10-K for the fiscal year ended March 31,
2003.
36
[LINE GRAPH]
6/19/96 3/31/97 3/31/98 3/31/99 3/31/00 3/31/01 3/31/02 3/31/03
------- ------- ------- ------- ------- ------- ------- -------
The Company's Common Stock $100 $15.57 $8.93 $12.50 $16.07 $ 6.47 $ 8.28 $ 7.85
IWI's Common Stock $100 $46.67 $8.32 $ 3.73 $21.33 $ 3.73 $16.00 $ 8.53
As there is no broad equity market index for the OTC Bulletin Board where the
Company's Common Stock is traded and there is no published industry or
line-of-business index for the pearl or jewelry business in which the Company is
engaged, the Company has selected IWI as a peer issuer for comparison. IWI is
engaged primarily in the design, assembly, merchandising and wholesale
distribution of jewelry.
EMPLOYMENT AGREEMENTS
Man Sang Holdings, Inc. itself has only one employee. However, MSIL entered into
Service Agreements with each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan
Sau Man, Amy on September 8, 1997 and September 1, 2000. The major terms of
these agreements are as follows:-
- - the service agreement of each of Cheng Chung Hing, Ricky, Cheng Tai Po and
Yan Sau Man, Amy is for an initial term of 3 years commencing on September
1, 1997 and renewed for another term of 3 years commencing on September 1,
2000. Each service agreement may be terminated by either party by giving
the other written notice of not less than 3 months;
- - the annual basic salary payable to each of Cheng Chung Hing, Ricky, Cheng
Tai Po and Yan Sau Man, Amy shall be HK$3 million, HK$3 million and HK$1.2
million respectively, subject to annual review by the Board of MSIL every
year; and
- - each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy is also
entitled to a discretionary bonus in respect of each financial year. The
amount of such discretionary bonuses shall be determined by the MSIL Board
each year, provided that the aggregate of all discretionary bonuses
payable by MSIL to its executive directors in any financial year shall not
exceed 10% of the net profits (after tax and after extraordinary items) of
MSIL for such year as shown in its audited accounts.
37
COMPENSATION OF DIRECTORS
No employee of the Company receives any compensation for his or her service as a
Director. The Company paid each of Yuen Ka Lok, Ernest and Lai Chau Ming,
Matthew HK$100,000 for their services as non-employee directors of the Company
in fiscal 2003. MSIL paid HK$100,000 and HK$200,000 to Yuen Ka Lok, Ernest and
Alexander Reid Hamilton (who is not a director of the Company but is a director
of MSIL) respectively for their services as a director of MSIL. Except as
disclosed in the next paragraph, no additional compensation of any nature was
paid to any non-employee director of the Company.
An amount of HK$3,900 is paid to each non-employee director and to Alexander
Reid Hamilton for their participation in each Audit Committee meeting. In fiscal
2003, the Audit Committee members were compensated as follows:-
Amount Received
------------------------
Audit Committee Members The Company MSIL
----------------------- ----------- ----
(HK$) (HK$)
Lai Chau Ming, Matthew 7,800 N/A
Yuen Ka Lok, Ernest 15,600 15,600
Alexander Reid Hamilton 15,600 15,600
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are not executives of the Company or
any of its subsidiaries, save as disclosed. "Certain Relationships and Related
Transactions."
Except as described herein, no executive officer of the Company, (i) served as a
member of the compensation committee (or other board committee performing
similar functions or, in the absence of any such committee, the board of
directors) of another entity outside the Group, one of whose executive officers
served on the Company's Compensation Committee, (ii) served as a director of
another entity outside the Group, one of whose executive officers served on the
Company's Compensation Committee, or (iii) served as a member of the
compensation committee (or other board committee performing similar functions
or, in the absence of any such committee, the board of directors) of another
entity outside the Group, one of whose executive officers served as a director
of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
COMMON STOCK
The information furnished in the following table indicates beneficial ownership
of shares of the Company's Common Stock, as of July 7, 2003, by (i) each
shareholder of the Company who is known by the Company to be beneficial owner of
more than 5% of the Company's Common Stock, (ii) each director, nominee for
director and Named Officer (defined in "Information Regarding Executive
Officers" in Proposal 1 below) of the Company, individually, and (iii) all
officers and directors of the Company as a group.
38
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ------------------- ----------------------- ----------------
Cafoong Limited (2) (4) 2,750,000 57%
Cheng Chung Hing, Ricky (2) (3) (4) 2,850,000 59%
Cheng Tai Po (2) (3) (4) 2,850,000 59%
Yan Sau Man, Amy (3) (4) 100,000 2%
Lai Chau Ming, Matthew (4) - 0 - *
Yuen Ka Lok, Ernest (4) - 0 - *
Ho Suk Han, Sophia (4) - 0 - *
All executive officers and directors as a group (6 persons) 3,050,000 63%
* Less than 1%
(1) This disclosure is made pursuant to certain rules and regulations
promulgated by the Securities and Exchange Commission and the number of
shares shown as beneficially owned by any person may not be deemed to be
beneficially owned for other purposes. Unless otherwise indicated in these
footnotes, each named individual has sole voting and investment power with
respect to such shares of Common Stock, subject to community property
laws, where applicable.
(2) Cafoong Limited owns directly 1,357,875 shares of Common Stock of the
Company. Cafoong Limited also owns indirectly 1,392,125 shares of Common
Stock of the Company by virtue of holding all issued and outstanding
shares of certain British Virgin Islands companies which own such shares
of Common Stock of the Company. Because Cheng Chung Hing, Ricky and Cheng
Tai Po own 60% and 40%, respectively, of all issued and outstanding stock,
and are directors, of Cafoong Limited, they may be deemed to be the
beneficial owners of the shares of Common Stock of the Company which are
owned, directly or indirectly, by Cafoong Limited.
(3) Each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy has the
right, within 60 days, to exercise non-qualified options granted under the
1996 Stock Option Plan to purchase 100,000 shares of Common Stock of the
Company.
(4) Address is 21st Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong.
PREFERRED STOCK
The following table is furnished as of July 7, 2003, to indicate beneficial
ownership of the Company's Series A Preferred Shares by each shareholder of the
Company who is known by the Company to be a beneficial owner of more than 5% of
the Company's Series A Preferred Shares.
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
- ------------------- ------------------------ ----------------
Cafoong Limited (1) (2) 100,000 100%
- -----------
(1) Cheng Chung Hing, Ricky and Cheng Tai Po own 60% and 40%, respectively, of
all issued and outstanding stock, and are directors, of Cafoong Limited
and, accordingly,
39
are deemed to be the beneficial owners of the shares of Series A Preferred
Stock of the Company owned by Cafoong Limited.
(2) Address is 21st Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong.
CHANGES IN CONTROL
To the knowledge of management, there are no present arrangements or
pledges of securities of the Company that may result in a change in control of
the Company.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth (i) the number of securities to be issued upon
exercise of outstanding options, (ii) the weighted average of exercise price of
such outstanding options, and (iii) the number of securities remaining available
for future issuance, under (a) equity compensation plans that have been approved
by security holders and (b) equity compensation plans that have not been
approved by security holders of the Company.
(a) (b) (c)
Number of securities
remaining available for
future issuance under
Number of securities equity compensation
to be issued upon Weighted average plans (excluding
exercise of outstanding exercise price of securities reflected in
Plan Category options outstanding options column (a)) (3)
- ------------- ----------------------- ------------------- -----------------------
Equity compensation plans 700,000 $1.177 1,200,000(1)
approved by security holders
Equity compensation plans -- -- 225,561,279 (2)
not approved by security holders
Total 700,000 226,761,279
(1) Shares indicated are those issuable under the Company's 1996 Stock Option
Plan.
(2) Shares indicated are those issuable under MSIL's share option scheme
adopted on August 2, 2002 (the "Share Option Scheme"). MSIL's share option
scheme adopted on September 7, 1997 was terminated on the same date of
adoption of the Share Option Scheme. The shareholders of MSIL, but not the
shareholders of the Company, have approved both share option schemes. The
Share Option Scheme is administered by the
40
MSIL Board of Directors, whose decisions are final and binding on all
parties. The Compensation Committee of the Company takes up a monitoring
function.
Under the Share Option Scheme, the MSIL Board of Directors may grant
options to an employee, officer, agent or consultant of MSIL or any of its
subsidiaries, including any executive or non-executive director of MSIL or
any of its subsidiaries, who satisfy certain criteria set out in the Share
Option Scheme. The per share exercise price must be at least the highest
of (i) the closing price of MSIL shares as stated in The Hong Kong Stock
Exchange's daily quotations sheets on the date of grant (which must be a
"Business Day," defined as a day on which The Hong Kong Stock Exchange is
open for business of dealing in securities); (ii) the average closing
price of MSIL shares as stated in The Hong Kong Stock Exchange's daily
quotations sheets for the five Business Days immediately preceding the
date of grant, and (iii) the nominal value of an MSIL share.
The limit on the total number of MSIL shares that may be issued upon
exercise of all outstanding options granted and yet to be exercised under
the Share Option Scheme, together with all outstanding options granted and
yet to be exercised under any other share option scheme(s) of MSIL and/or
any of its subsidiaries, must not exceed 30% of the number of MSIL's
issued shares from time to time. No option may be granted if such grant
will result in said 30%-limit being exceeded. Options lapsed or cancelled
in accordance with the terms of the Share Option Scheme or any other share
option scheme(s) of MSIL and/or any of its subsidiaries are not counted
for the purpose of calculating said 30%-limit.
The Share Option Scheme has other terms and conditions designed to comply
with certain rules of The Hong Kong Stock Exchange. For the full text of
the Share Option Scheme, see Exhibit 99.1.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
During the past three years,
- - before the enactment of Sarbanes-Oxley Act of 2002, the Company had loaned
funds to Cheng Chung Hing, Ricky and Cheng Tai Po, the Chairman and Vice
Chairman of the Company. The maximum amount advanced to Cheng Chung Hing,
Ricky and Cheng Tai Po during the past three years reached HK$520,898 and
HK$416,885, respectively, in fiscal 2001. During fiscal 2003, the Company
did not make personal loans or advances to any executive officers. All
such prior advances were made on an interest free basis and without
definitive repayment terms.
- - the Company has not received advances from any director, executive officer
or shareholder of the Company who is known by the Company to be beneficial
owner of more than 5% of the Company's Common Stock.
41
Yuen Ka Lok, Ernest, a director of both the Company and MSIL, the Chairman of
the Compensation Committee and a member of the Audit Committee of the Board of
Directors of the Company, is a partner of Messrs. Yuen & Partners, one of the
legal advisors to the Company. Messrs. Yuen & Partners receives its standard
professional fees in the provision of legal services to the Company.
Lai Chau Ming, Matthew, a director of the Company, a member of the Compensation
Committee and the Audit Committee of the Board of Directors of the Company, is
Sales Associate Director at DBS Vickers. MSIL holds certain securities that are
quoted on The Stock Exchange of Hong Kong Limited and maintains a securities
account with DBS Vickers. Mr. Lai is in charge of such account. MSIL pays
standard brokerage fees to DBS Vickers when transaction occurs. Mr. Lai has
advised the Company that he receives basic monthly salary and a year end
performance bonus from DBS Vickers, that he receives no commission from MSIL's
securities transactions, and that his performance on MSIL account is
insignificant towards the calculation of his year end performance bonus.
Alexander Reid Hamilton, Chairman of the Audit Committee of the Board of
Directors of the Company, is a director of MSIL.
In fiscal 2003, the Company established Accurate Gain Developments Limited, a
subsidiary incorporated the British Virgin Islands ("Accurate Gain"), to carry
out certain feasibility studies on various business proposals. Accurate Gain
concluded that said business proposals were not feasible, and Mr. Cheng Chung
Hing, Ricky, and Mr. Cheng Tai Po then purchased from the Company all issued
share capital of Accurate Gain at the amount at which the Company initially
capitalized Accurate Gain, thereby reimbursing the Company for its expenses on
the Accurate Gain study.
ITEM 14. 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, 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.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) ITEMS FILES AS PART OF REPORT:
1. FINANCIAL STATEMENTS
The financial statements of the Company as set forth in the Index to
Consolidated Financial Statements under Part II, Item 8 of this Form 10-K are
hereby incorporated by reference.
2. EXHIBITS
The exhibits listed under Item 15(c) are filed as part of this Form 10-K.
(B) REPORT ON FORM 8-K
No report on Form 8-K were filed during the last quarter of the period covered
by this report. However, (i) a current report on Form 8-K was filed by the
Registrant with the Securities and Exchange Commission on April 29, 2003, to
report the Registrant's repurchase of 410,000 shares of Common Stock previously
issued to two consultants, and (ii) a current report on Form 8-K was filed by
the Registrant with the Securities and Exchange Commission on May 29, 2003, to
report the Registrant's program to repurchase shares of its Common Stock in odd
lots.
(C) EXHIBITS
Exhibit No. Description
3.1 Restated Articles of Incorporation of Man Sang Holdings, Inc.,
including the Certificate of Designation, Preferences and Rights
of a Series of 100,000 Shares of Preferred Stock, $.001 Par
Value, Designated "Series A Preferred Stock", filed on January
12, 1996 (1)
3.2 Certificate of Designation, Preferences and Rights of a Series
of 100,000 Shares of Preferred Stock, $.001 Par Value,
Designated "Series B Preferred Stock", dated April 1, 1996 (2)
3.3 Amended Bylaws of Man Sang Holdings, Inc., effective as of
January 10, 1996 (1)
10.1 Acquisition Agreement, Dated December __, 1995, between Unix
Source America, Inc. and the Shareholders of Man Sang
International (B.V.I.) Limited (1)
10.2 Tenancy Agreement, dated June 24, 1996, between Same Fast
Limited and Man Sang Jewellery Company Limited (3)
43
Exhibit No. Description
10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3)
10.4 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Cheng Chung Hing (5)
10.5 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Cheng Tai Po (5)
10.6 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Hung Kwok Wing (5)
10.7 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Sio Kam Seng (5)
10.8 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Ng Hak Yee (5)
10.9 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Yan Sau Man Amy (5)
10.10 Contract dated November 8, 1997, between Nan'ao Shaohe Pearl
Seawater Culture Co., Ltd. of Guangdong Province, People's
Republic of China, Man Sang Jewellery Co., Ltd. of Hong Kong and
Chung Yuen Company o/b Golden Wheel Jewellery Mfr. Ltd. of Hong
Kong to establish a cooperative joint venture in Nan'ao County,
Guangdong Province, People's Republic of China (6)
10.11 Agreement dated January 2, 1998, between Overlord Investment
Company Limited and Excel Access Limited, a subsidiary of the
Company, pursuant to which Excel Access Limited will purchase
certain real property located at Flat A, 33rd Floor, of
Valverde, 11 May Road, Hong Kong for HK$15,050,000 (6)
10.12 Agreement for Sale and Purchase dated February 24, 1998, between
City Empire Limited and Wealth-In Investment Limited, a
subsidiary of the Company, pursuant to which Wealth-In
Investment Limited purchased certain real property located at
Flat B on the 20th Floor of The Mayfair, One May Road, Hong
Kong, at a purchase price of HK$39,732,200 (7)
10.13 Service Agreement, dated February 10, 2000, between Man Sang
International Limited and Wong Ka Ming (8)
10.14 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Cheng Chung Hing (8)
10.15 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Cheng Tai Po (8)
44
Exhibit No. Description
10.16 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Yan Sau Man, Amy (8)
13.1 Annual report to security holders (4)
21.1 Subsidiaries of the Company
24.1 Power of Attorney (included on page 46)
99.1 Share Option Scheme of Man Sang International Limited, a
subsidiary of the Company (6)
99.2 Certification of Cheng Chung Hing, Ricky pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- --------------
(1) Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8- K dated January 8, 1996
(2) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A dated June 17, 1996
(3) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10- QSB for the quarterly period ended December
31, 1996
(4) Incorporated by reference to the Form 10- KSB/A for the fiscal year
ended March 31, 1997
(5) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1997
(6) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1997
(7) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998
(8) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000
45
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: June 27, 2003
By: /s/ CHENG Chung Hing, Ricky
-------------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cheng Chung Hing, Ricky, his attorney-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Name Title Date
- ---- ----- ----
/s/ CHENG Chung Hing, Ricky Chairman of the Board, President, June 27, 2003
- ------------------------------ Chief Executive Officer and
CHENG Chung Hing, Ricky Chief Financial Officer
/s/ CHENG Tai Po Vice Chairman of the Board June 27, 2003
- ------------------------------
CHENG Tai Po
/s/ YAN Sau Man, Amy Vice President and Director June 27, 2003
- ------------------------------
YAN Sau Man, Amy
46
I, CHENG Chung Hing, Ricky, certify that:
1. I have reviewed this annual report on Form 10-K of Man Sang Holding, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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.
47
Date: June 27, 2003
/s/ CHENG Chung Hing, Ricky
----------------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
SUPPLEMENTAL REPORTS TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report or proxy material has been forwarded to securities holders of
the Registrant covering the Registrant's fiscal 2003; however, if any annual
report or proxy material is furnished to security holders in connection with the
annual meeting of stockholders to be held in 2003, a copy of any such annual
report or proxy materials shall be forwarded to the Commission when it is
forwarded to security holders.
INDEX TO EXHIBITS
The following documents are filed (or in the case of Exhibit 99.2, furnished)
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
3.1 Restated Articles of Incorporation of Man Sang Holdings, Inc.,
including the Certificate of Designation, Preferences and Rights
of a Series of 100,000 Shares of Preferred Stock, $.001 Par
Value, Designated "Series A Preferred Stock", filed on January
12, 1996 (1)
3.2 Certificate of Designation, Preferences and Rights of a Series
of 100,000 Shares of Preferred Stock, $.001 Par Value,
Designated "Series B Preferred Stock", dated April 1, 1996 (2)
3.3 Amended Bylaws of Man Sang Holdings, Inc., effective as of
January 10, 1996 (1)
10.1 Acquisition Agreement, Dated December __, 1995, between Unix
Source America, Inc. and the Shareholders of Man Sang
International (B.V.I.) Limited (1)
10.2 Tenancy Agreement, dated June 24, 1996, between Same Fast
Limited and Man Sang Jewellery Company Limited (3)
48
Exhibit No. Description
10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3)
10.4 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Cheng Chung Hing (5)
10.5 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Cheng Tai Po (5)
10.6 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Hung Kwok Wing (5)
10.7 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Sio Kam Seng (5)
10.8 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Ng Hak Yee (5)
10.9 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Yan Sau Man Amy (5)
10.10 Contract dated November 8, 1997, between Nan'ao Shaohe Pearl
Seawater Culture Co., Ltd. of Guangdong Province, People's
Republic of China, Man Sang Jewellery Co., Ltd. of Hong Kong and
Chung Yuen Company o/b Golden Wheel Jewellery Mfr. Ltd. of Hong
Kong to establish a cooperative joint venture in Nan'ao County,
Guangdong Province, People's Republic of China (6)
10.11 Agreement dated January 2, 1998, between Overlord Investment
Company Limited and Excel Access Limited, a subsidiary of the
Company, pursuant to which Excel Access Limited will purchase
certain real property located at Flat A, 33rd Floor, of
Valverde, 11 May Road, Hong Kong for HK$15,050,000 (6)
10.12 Agreement for Sale and Purchase dated February 24, 1998, between
City Empire Limited and Wealth-In Investment Limited, a
subsidiary of the Company, pursuant to which Wealth-In
Investment Limited purchased certain real property located at
Flat B on the 20th Floor of The Mayfair, One May Road, Hong
Kong, at a purchase price of HK$39,732,200 (7)
10.13 Service Agreement, dated February 10, 2000, between Man Sang
International Limited and Wong Ka Ming (8)
10.14 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Cheng Chung Hing (8)
10.15 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Cheng Tai Po (8)
49
Exhibit No. Description
10.16 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Yan Sau Man, Amy (8)
13.1 Annual report to security holders (4)
21.1 Subsidiaries of the Company
24.1 Power of Attorney (included on page 46)
99.1 Share Option Scheme of Man Sang International Limited, a
subsidiary of the Company (6)
99.2 Certification of Cheng Chung Hing, Ricky pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ---------------
(1) Incorporated by reference to the exhibits filed with the Company's Current
Report on Form 8- K dated January 8, 1996
(2) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A dated June 17, 1996
(3) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10- QSB for the quarterly period ended December
31, 1996
(4) Incorporated by reference to the Form 10- KSB/A for the fiscal year ended
March 31, 1997
(5) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1997
(6) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1997
(7) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998
(8) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2000
50
MAN SANG HOLDINGS, INC.
Consolidated Financial Statements
Years ended March 31, 2003, 2002 and 2001
and Independent Auditors' Report
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC.
Independent Auditors' Report........................................... F-1
Consolidated Statements of Income and Comprehensive Income
for the years ended March 31, 2003, 2002 and 2001.................... F-2
Consolidated Balance Sheets as of March 31, 2003 and 2002.............. F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2003, 2002 and 2001............................ F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2003, 2002 and 2001........................................ F-6
Notes to Consolidated Financial Statements............................. F-8
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
Man Sang Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Man Sang
Holdings, Inc. and its subsidiaries as of March 31, 2003 and 2002, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the
period ended March 31, 2003, all expressed in Hong Kong dollars. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Man Sang
Holdings, Inc. and its subsidiaries as of March 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.
Our audits also comprehended the translation of Hong Kong dollar amounts
into U.S. dollar amounts and, in our opinion, such translation has been
made in conformity with the basis stated in Note 2. Such U.S. dollar
amounts are presented solely for the convenience of readers in the United
States of America.
Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
June 27, 2003
F-1
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands except share data)
Year ended March 31,
----------------------------------------------------------
2003 2003 2002 2001
---------- ---------- ---------- ----------
US$ HK$ HK$ HK$
Net sales .................................................... 41,421 323,082 282,715 311,109
Cost of sales ................................................ (29,892) (233,160) (186,276) (294,676)
---------- ---------- ---------- ----------
Gross profit ................................................. 11,529 89,922 96,439 16,433
Rental income, gross ......................................... 956 7,455 7,526 5,526
---------- ---------- ---------- ----------
12,485 97,377 103,965 21,959
Selling, general and administrative expenses:
Pearls ..................................................... (8,344) (65,079) (65,901) (77,076)
Real estate investment ..................................... (933) (7,280) (6,129) (6,022)
---------- ---------- ---------- ----------
Operating income (loss) ...................................... 3,208 25,018 31,935 (61,139)
Interest expenses ............................................ (209) (1,629) (4,886) (6,990)
Interest income .............................................. 88 690 2,785 5,799
Share of result of associate ................................. (8) (60) -- --
Other income ................................................. 575 4,485 1,870 6,705
Other than temporary decline in fair value of
marketable securities ...................................... (759) (5,921) -- --
---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interests ......................................... 2,895 22,583 31,704 (55,625)
Income tax (expenses) benefits ............................... (477) (3,719) (1,206) 3,320
Minority interests ........................................... (1,275) (9,943) (14,189) 18,112
---------- ---------- ---------- ----------
Net income (loss) ............................................ 1,143 8,921 16,309 (34,193)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments ................... 69 536 719 488
Unrealized holding loss on marketable
securities arising during the year ....................... (262) (2,043) (1,363) (2,929)
Reclassification adjustment for other than
temporary decline in fair value of marketable
securities included in net income for the year ........... 430 3,355 -- --
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of
taxes ...................................................... 237 1,848 (644) (2,441)
---------- ---------- ---------- ----------
Comprehensive income (loss) .................................. 1,380 10,769 15,665 (36,634)
========== ========== ========== ==========
Basic and diluted earnings (loss) per
common share ............................................... $ 0.24 $ 1.88 $ 3.70 $ (7.76)
========== ========== ========== ==========
Weighted average number of shares of common stock outstanding:
- basic and diluted ........................................ 4,740,700 4,740,700 4,405,960 4,405,960
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-2
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
March 31,
-------------------------------
2003 2003 2002
------- ------- -------
US$ HK$ HK$
Current assets:
Cash and cash equivalents ........................ 10,739 83,766 82,152
Restricted cash .................................. -- -- 16,169
Marketable securities ............................ 1,279 9,978 13,584
Accounts receivable, net of allowance
for doubtful accounts of HK$9,216 and HK$10,054
in 2003 and 2002, respectively ................. 8,954 69,840 60,814
Inventories ...................................... 17,206 134,210 118,511
Prepaid expenses ................................. 813 6,340 2,702
Deposits and other receivables ................... 655 5,109 11,317
Other current assets ............................. 1,119 8,732 15,983
Income taxes receivable .......................... 59 458 --
------- ------- -------
Total current assets ........................... 40,824 318,433 321,232
Property, plant and equipment, net ............... 8,497 66,278 80,333
Real estate investment, net ...................... 12,365 96,447 81,986
Long-term investments, net of impairment loss of
HK$3,000 in 2003 and 2002, respectively ........ 332 2,586 3,330
Deferred tax assets .............................. -- -- 2,188
------- ------- -------
Total assets ................................... 62,018 483,744 489,069
======= ======= =======
F-3
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
(Dollars in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
----------------------------------
2003 2003 2002
-------- -------- --------
US$ HK$ HK$
Current liabilities:
Short-term borrowings ................................... -- -- 29,445
Current portion of long-term debts ...................... 715 5,575 5,575
Accounts payable ........................................ 712 5,554 3,726
Accrued payroll and employee benefits ................... 922 7,188 4,658
Other accrued liabilities ............................... 1,228 9,577 8,674
Income taxes payable .................................... 285 2,224 373
-------- -------- --------
Total current liabilities ............................. 3,862 30,118 52,451
-------- -------- --------
Long-term debts ........................................... 2,107 16,435 22,010
-------- -------- --------
Minority interests ........................................ 23,057 179,844 170,208
-------- -------- --------
Commitments and contingencies (note 12)
Stockholders' equity:
Series A preferred stock US$0.001 par value
- authorized, issued and outstanding 100,000
shares in 2003 and 2002 (entitled in liquidation
to US$2,500 (HK$19,500)) .......................... -- 1 1
Series B preferred stock US$0.001 par value
- authorized 100,000 shares; no shares outstanding .... -- -- --
Common stock of par value US$0.001
- authorized 25,000,000 shares; issued and outstanding,
4,815,960 shares and 4,405,960 shares in 2003
and 2002, respectively ............................ 5 37 34
Additional paid-in capital .............................. 7,773 60,633 58,458
Retained earnings ....................................... 25,190 196,491 187,570
Accumulated other comprehensive income (loss) .......... 24 185 (1,663)
-------- -------- --------
Total stockholders' equity ............................ 32,992 257,347 244,400
-------- -------- --------
Total liabilities and stockholders' equity ............ 62,018 483,744 489,069
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands except share data)
Series A Series B
preferred stock preferred stock Common stock
--------------- --------------- ------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
HK$ HK$ HK$
Balance at March 31, 2000 ..... 100,000 1 -- -- 4,405,960 34
Issuance of common shares
by subsidiary ............... -- -- -- -- -- --
Stock compensation expense .... -- -- -- -- -- --
Translation adjustment ........ -- -- -- -- -- --
Unrealized holding loss on
marketable securities ....... -- -- -- -- -- --
Net loss ...................... -- -- -- -- -- --
--------- ------ --- --- --------- -----
Balance at March 31, 2001 ..... 100,000 1 -- -- 4,405,960 34
Issuance of common shares
by subsidiary ............... -- -- -- -- -- --
Translation adjustment ........ -- -- -- -- -- --
Unrealized holding loss on
marketable securities ....... -- -- -- -- -- --
Net income .................... -- -- -- -- -- --
--------- ------ --- --- --------- -----
Balance at March 31, 2002 ..... 100,000 1 -- -- 4,405,960 34
Issuance of common shares ..... -- -- -- -- 410,000 3
Stock compensation expense .... -- -- -- -- -- --
Translation adjustment ........ -- -- -- -- -- --
Unrealized holding loss on
marketable securities ....... -- -- -- -- -- --
Other than temporary
decline in fair value
of marketable securities .... -- -- -- -- -- --
Net income .................... -- -- -- -- -- --
--------- ------ --- --- --------- -----
Balance at March 31, 2003 ..... 100,000 1 -- -- 4,815,960 37
========= ====== === === ========= =====
-- -- US$5
====== === =====
Accumulated Total
Additional other stock-
paid-in Retained comprehensive holders'
capital earnings income (loss) equity
------- -------- ------------- ------
HK$ HK$ HK$ HK$
Balance at March 31, 2000 ..... 85,636 205,454 1,422 292,547
Issuance of common shares
by subsidiary ............... (696) -- -- (696)
Stock compensation expense .... 3,121 -- -- 3,121
Translation adjustment ........ -- -- 488 488
Unrealized holding loss on
marketable securities ....... -- -- (2,929) (2,929)
Net loss ...................... -- (34,193) -- (34,193)
--------- --------- -------- ---------
Balance at March 31, 2001 ..... 88,061 171,261 (1,019) 258,338
Issuance of common shares
by subsidiary ............... (29,603) -- -- (29,603)
Translation adjustment ........ -- -- 719 719
Unrealized holding loss on
marketable securities ....... -- -- (1,363) (1,363)
Net income .................... -- 16,309 -- 16,309
--------- --------- -------- ---------
Balance at March 31, 2002 ..... 58,458 187,570 (1,663) 244,400
Issuance of common shares ..... 2,171 -- -- 2,174
Stock compensation expense .... 4 -- -- 4
Translation adjustment ........ -- -- 536 536
Unrealized holding loss on
marketable securities ....... -- -- (2,043) (2,043)
Other than temporary
decline in fair value
of marketable securities .... -- -- 3,355 3,355
Net income .................... -- 8,921 -- 8,921
--------- --------- -------- ---------
Balance at March 31, 2003 ..... 60,633 196,491 185 257,347
========= ========= ======== =========
US$7,773 US$25,190 US$24 US$32,992
========= ========= ======== =========
See accompanying notes to consolidated financial statements.
F-5
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended March 31,
----------------------------------------------
2003 2003 2002 2001
------- ------- ------- -------
US$ HK$ HK$ HK$
Cash flow from operating activities
Net income (loss) ............................................................ 1,143 8,921 16,309 (34,193)
Adjustments to reconcile net income to net cash provided by operating
activities:
Bad debt provision ......................................................... 56 440 5,054 214
Provision for impairment loss of goodwill .................................. -- -- 591 --
Provision for impairment loss of long-term investments ..................... -- -- 3,000 --
Other than temporary decline in fair value of marketable securities ........ 759 5,921 -- --
Depreciation and amortization .............................................. 1,192 9,296 9,252 9,162
Loss (gain) on sale of property, plant and equipment ....................... 77 603 (55) 733
Minority interests ......................................................... 1,275 9,943 14,189 (18,112)
Realized gain on sale of marketable securities ............................. -- -- -- (2,027)
Stock compensation expenses ................................................ 1 4 -- 4,620
Share of result of associate ............................................... 8 60 -- --
Loss on disposal of subsidiaries ........................................... 56 438 -- --
Changes in operating assets and liabilities, net of effects from sale
of subsidiaries:
Accounts receivable ...................................................... (1,354) (10,559) (3,315) (7,136)
Inventories .............................................................. (2,013) (15,700) (7,471) 77,021
Prepaid expenses ......................................................... (512) (3,998) (813) 1,987
Deposits and other receivables ........................................... 1,075 8,382 (6,707) 955
Other current assets ..................................................... 916 7,152 (7,347) (768)
Income taxes receivable .................................................. (59) (458) 1,725 (1,741)
Deferred tax assets ...................................................... 281 2,188 1,455 (3,643)
Accounts payable ......................................................... 287 2,238 261 (4,931)
Amount due to affiliate .................................................. -- -- (184) (420)
Accrued payroll and employee benefits .................................... 340 2,655 18 614
Other accrued liabilities ................................................ 23 176 (2,632) (1,039)
Income taxes payable ..................................................... 237 1,851 (390) (3,432)
------- ------- ------- -------
Net cash provided by operating activities .................................... 3,788 29,553 22,940 17,864
------- ------- ------- -------
Cash flow from investing activities
Decrease (increase) in restricted cash ....................................... 2,073 16,169 48,710 (2,422)
Proceeds from disposal of long-term investments............................... 115 900 -- --
Proceeds from sale of property, plant and equipment .......................... 58 452 73 67
Proceeds from disposal of subsidiaries ....................................... 44 341 -- --
Purchase of property, plant and equipment .................................... (787) (6,137) (2,207) (10,845)
Acquisition of a business .................................................... (667) (5,200) -- --
Acquisition of an associate .................................................. (38) (300) -- --
Purchase of long-term investments ............................................ (20) (156) -- --
Purchase of marketable securities ............................................ -- -- (3,578) (23,486)
Expenditure on real estate investment ........................................ -- -- -- (37,439)
Acquisition of subsidiaries .................................................. -- -- -- 89
Proceeds from sale of marketable securities .................................. -- -- -- 9,430
------- ------- ------- -------
Net cash provided by (used in) investing activities .......................... 778 6,069 42,998 (64,606)
------- ------- ------- -------
F-6
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Dollars in thousands)
Year ended March 31,
----------------------------------------------
2003 2003 2002 2001
------- ------- ------- -------
US$ HK$ HK$ HK$
Cash flow from financing activities
Increase in short-term borrowings ............................... 121 942 16,170 87,352
Increase in long-term debts ..................................... -- -- -- 25,000
Investment from minority shareholder ............................ -- -- -- 525
Repayment of short-term borrowings .............................. (3,766) (29,377) (61,378) (85,469)
Repayment of long-term debts .................................... (715) (5,575) (18,148) (4,778)
Net proceeds from issuance of common shares by a subsidiary ..... -- -- 14,030 --
------- ------- ------- -------
Net cash (used in) provided by financing activities.............. (4,360) (34,010) (49,326) 22,630
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents ............ 206 1,612 16,612 (24,112)
Cash and cash equivalents at beginning of year .................. 10,532 82,152 65,294 88,900
Exchange adjustments ............................................ 1 2 246 506
------- ------- ------- -------
Cash and cash equivalents at end of year ........................ 10,739 83,766 82,152 65,294
======= ======= ======= =======
Supplementary disclosures of cash flow information:
Cash paid (refunded) during the year for:
Interest and finance charges .................................. 214 1,670 4,821 7,101
Income taxes paid (refunded) .................................. 343 2,676 (1,584) 5,475
======= ======= ======= =======
Non-cash investing and financing activities:
Issuance of common shares to consultants as consideration for
their services ................................................ 279 2,174 -- --
======= ======= ======= =======
Disposal of subsidiaries:
Assets disposed of, including interest in an associate of
HK$240 ...................................................... (971) (7,571) -- --
Liabilities disposed of ....................................... 237 1,850 -- --
Minority interests ............................................ 221 1,720 -- --
------- ------- ------- -------
Net assets disposed of ........................................ (513) (4,001) -- --
Cash consideration received ................................... 296 2,307 -- --
Inventories received .......................................... 161 1,256 -- --
------- ------- ------- -------
Loss on disposal of subsidiaries .............................. (56) (438) -- --
======= ======= ======= =======
Net cash proceeds from disposal of subsidiaries:
Cash consideration received ................................... 296 2,307 -- --
Cash and cash equivalent disposed of .......................... (252) (1,966) -- --
------- ------- ------- -------
44 341 -- --
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-7
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
ACTIVITIES AND ORGANIZATION
Man Sang Holdings, Inc. (the "Company") was incorporated in the State
of Nevada, the United States of America on November 14, 1986.
The principal activities of the Company comprise the processing and
sale of South Sea, fresh water and cultured pearls and pearl jewelry
products. The selling and administrative activities are performed in
the Hong Kong Special Administrative Region of the People's Republic
of China ("Hong Kong") and the processing activities are conducted by
subsidiaries operating in Guangdong Province, the People's Republic
of China ("the PRC"). The Company also derives rental income from
real estate located at its pearl processing facility in the PRC and
from offices in Hong Kong. The Company's activities are principally
conducted by its majority held publicly traded subsidiary, Man Sang
International Limited ("MSIL").
The Company has also made a number of investments in companies that
supply the Company or distribute its products. The Company has an
investment of Renminbi 5.1 million (HK$4.7 million) for a 19.5% stake
in a pearl farm located in Nan'ao County in Guangdong Province in the
PRC through a cooperative joint venture which has a duration of 11
years. In case of termination or liquidation of the joint venture,
the Company is entitled to receive 19.5% of the net assets of the
joint venture.
In April 2000, MSIL acquired all the issued share capital of Intimex
Business Solutions Company Limited ("IBS") for a consideration of
HK$2,100 which was satisfied by an issue of 42,000,000 new shares of
HK$0.05 each in Cyber Bizport Limited, a wholly owned subsidiary of
MSIL, representing 21% of the enlarged issued share capital of Cyber
Bizport Limited. As a result, MSIL held a 79% equity interest in
Cyber Bizport Limited which in turn held the entire equity interest
in IBS. The principal business of IBS is the provision of computer
consultancy services.
The acquisition was accounted for as a purchase and the results of
IBS and its subsidiary have been included in the accompanying
consolidated financial statements since the date of acquisition. The
excess of the purchase consideration over the fair value of the net
assets acquired was HK$1,179 and has been recorded as goodwill which
is being amortized on a straight-line basis over three years. In view
of the unsatisfactory financial performance of IBS, the remaining
unamortized amount of HK$591 has been fully provided for impairment
loss in 2002 accordingly.
On March 31, 2003, the Company acquired the remaining 21% equity
interest of Cyber Bizport Limited by disposing of its entire 79%
indirect equity interest in IBS. The Company has accounted for this
transaction under the purchase method of accounting. Accordingly, the
fair value of the Company's equity interest in IBS, totaling HK$341
was treated as the purchase price for accounting purpose. There is no
significant goodwill as a result of this acquisition.
In July 2002, a wholly-owned subsidiary of the Company acquired a 30%
equity interest of China South City Holdings Limited for HK$300,
which was accounted for using the equity method in the accompanying
financial statements. There is no significant goodwill as a result of
this acquisition. In December 2002, the Company disposed of its
entire equity interest in that subsidiary to Cheng Chung Hing and
Cheng Tai Po, the Company's directors, for a consideration of HK$300.
F-8
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
ACTIVITIES AND ORGANIZATION - continued
On October 17, 2002, the Company disposed of its entire 18% equity
interest in Gold Treasure International Jewellery Company Limited
("GTI") at a consideration of HK$900. The principal business of GTI
is the production of accessories in gold, silver and/or other gems.
On December 1, 2002, a wholly owned subsidiary of MSIL acquired a
business by acquiring property, plant and equipment, inventories and
customer information from a jewellery company for a total
consideration of HK$7,200. At March 31, 2003, the Company has paid
HK$5,200. Under the terms of the agreement, HK$1,000 has to be paid
in June 2003 and the remaining HK$1,000 in December 2003. The
acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated to the
assets acquired based on the estimated fair values at the date of
acquisition. No liabilities were assumed in the acquisition. The
operating results of this acquisition are included in the
consolidated financial statements since the date of acquisition.
The following table presents the allocation of the purchase price to
the assets acquired:
HK$
Property, plant and equipment 5,046
Inventories 2,154
-----
Total acquisition cost 7,200
=====
The fair value of the customer information acquired is considered to
be insignificant by the Company's management.
MAN SANG INTERNATIONAL LIMITED ("MSIL")
MSIL, an indirectly owned subsidiary of the Company and a company
incorporated in Bermuda, has its shares listed on The Stock Exchange
of Hong Kong Limited.
On August 2, 1999, at the 1999 annual general meeting of MSIL, MSIL's
shareholders approved, among other matters, a "bonus issue of
warrants" to MSIL's shareholders on the basis of one bonus warrant
for every five shares of MSIL held on August 2, 1999. Each bonus
warrant entitles the holder to subscribe in cash at an initial
subscription price of HK$0.40 per share (subject to adjustment), and
is exercisable at any time from September 14, 1999 to September 13,
2001, both dates inclusive. All the rights attached to the warrants
expired on September 13, 2001.
F-9
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
MAN SANG INTERNATIONAL LIMITED ("MSIL") - continued
During the year ended March 31, 2001, MSIL issued 105,312,000 shares
of HK$0.10 each as a result of the bonus issue of shares in MSIL on
the basis of one bonus share for every five shares held on August 2,
2000. At March 31, 2001, the Company held approximately 67.42% of the
issued share capital of MSIL.
In November 2001, MSIL issued 120,000,000 shares for a cash
consideration of HK$14,400 representing approximately 15.96% of
MSIL's issued and outstanding shares after the issue to unrelated
parties. As a consequence, the Company's holding in MSIL was reduced
to 56.66%. The difference between the issue price and the Company's
carrying value per share after completion of the issuance amounted to
HK$29,603 and has been deducted from additional paid-in capital in
accordance with policy adopted by the Company. At March 31, 2002 and
2003, the Company held approximately 56.66% of the issued share
capital of MSIL.
BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ from those used
in the statutory accounts of its subsidiaries. The principal
adjustments made by the Company to conform the statutory accounts of
the subsidiaries to U.S. GAAP relate to the amortization of
properties held for real estate investment, which is not amortized
for local statutory reporting, the restatement of properties included
in real estate investment and property, plant and equipment at cost,
which is stated at open market value estimated by external
professional valuers for local statutory reporting, the recognition
of compensation cost over the vesting period for the stock options
granted by the Company and MSIL, which is not required for local
statutory reporting, the recognition of a deferred tax asset, which
is not recognized for local statutory reporting unless its
recoverability is assured beyond reasonable doubt and the recognition
of net unrealized holding gain or loss on marketable securities in
the consolidated statements of income for local statutory reporting.
F-10
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements
include the assets, liabilities, revenues and expenses of Man Sang
Holdings, Inc. and all its subsidiaries. All material intra-group
transactions and balances have been eliminated.
Goodwill - The excess of the purchase price over the fair value of
net assets acquired is recorded on the consolidated balance sheet as
goodwill.
Prior to April 1, 2002, goodwill is amortized on a straight-line
basis over its estimated useful life of three years. Amortization
expense was HK$393 and HK$195 in 2001 and 2002, respectively. The
management determined that there had been an impairment on goodwill
and had recognized an impairment loss of HK$591 during the year ended
March 31, 2002.
Starting from April 1, 2002, the Company has adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" which requires that upon
adoption, amortization of goodwill and other intangible assets with
indefinite lives will cease and instead, the carrying value of these
intangible assets will be evaluated for impairment on an annual
basis. Identifiable intangible assets with definitive lives will
continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". There was no effect on
the consolidated financial statements of the Company upon the
adoption of SFAS No. 142. Reported net income (loss) and earnings
(loss) per share assuming non-amortization of goodwill for 2001 and
2002 under SFAS No. 142 would not be significantly different from the
actual amounts.
Cash and cash equivalents - Cash and cash equivalents include cash on
hand, demand deposits, interest bearing savings accounts, and time
certificates of deposit with maturity of three months or less when
purchased.
Inventories - Inventories are stated at the lower of cost determined
by the weighted average method, or market value. Finished goods
inventories consist of raw materials, direct labor and overheads
associated with the processing of pearls.
F-11
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Marketable securities - The Company classifies its marketable
securities as available-for-sale and carries them at market value
with a corresponding recognition of net unrealized holding gain or
loss (net of tax) as a separate component of stockholders' equity
until realized. Unrealised losses are charged against net earnings
when a decline in fair value is determined to be other than
temporary. Gains and losses on sales of securities are computed on a
specific identification basis. Marketable securities comprise:
March 31,
2003 2002
----- ------
HK$ HK$
Publicly traded corporate equity securities listed in Hong Kong:
Gross unrealized losses net of minority interests, included
in accumulated other comprehensive income ........................... 2,980 4,292
===== ======
Fair value of marketable securities ................................... 9,978 13,584
===== ======
During the year ended March 31, 2003, the Company recognized losses
of HK$5,921 on its marketable securities due to decline in fair value
that were determined by management to be other than temporary.
Long-lived assets - The Company periodically evaluates the carrying
value of long-lived assets to be held and used, including goodwill
and other intangible assets through March 31, 2002, whenever events
and circumstances indicate that the carrying value of the asset may
no longer be recoverable. An impairment loss, measured based on the
fair value of the asset, is recognized if expected future
undiscounted cash flows are less than the carrying amount of the
assets.
Starting from April 1, 2002, the Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which requires 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
statements also requires expected future operating losses from
discontinued operations to be recorded in the periods in which the
losses are incurred, rather than as of the measurement date as
previously required. There was no effect on the consolidated
financial statements of the Company upon the adoption of SFAS No.
144.
F-12
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Property, plant and equipment - Property, plant and equipment is
stated at cost. Depreciation is provided using the straight-line
method based on the estimated useful lives of the assets as follows:
Leasehold land and buildings 50 years, or less if the lease period is shorter
Plant and machinery 4 to 5 years
Furniture and equipment 4 years
Motor vehicles 4 years
Assets under construction are not depreciated until construction is
complete and the assets are ready for their intended use. No interest
was capitalized in the three years ended March 31, 2001, 2002 and
2003.
Real estate investment - Leasehold land and buildings held for
investment are stated at cost. Cost includes the cost of the purchase
of the land and construction costs, including finance costs incurred
during the construction period. Depreciation of land and buildings is
computed using the straight-line method over the term of the
underlying lease of the land on which the buildings are located up to
a maximum of 50 years.
Long-term investments - The Company's long-term investments are
accounted for under the cost method. In management's opinion, there
has been an impairment on the Company's 19.5% stake in a pearl farm
in view of its unsatisfactory operating performance. Accordingly, an
impairment loss of HK$3,000 has been recognized by reference to the
estimated future discounted cash flows generated by the pearl farm
and included in the selling, general and administrative expenses for
the year ended March 31, 2002.
Revenue recognition - The Company recognizes revenue at the time
products are shipped to customers and collectibility for such sales
is reasonably assured. Property rental is recognized on a
straight-line basis over the term of the lease, and is stated at the
gross amount.
Income taxes - Deferred income taxes are provided using the asset and
liability method. Under this method, deferred income taxes are
recognized for all significant temporary differences and classified
as current or non-current based upon the classification of the
related asset or liability in the financial statements. A valuation
allowance is provided to reduce the amount of deferred tax assets if
it is considered more likely than not that some portion of, or all,
the deferred tax asset will not be realized.
Net earnings per share ("EPS") - Basic EPS excludes dilution and is
computed by dividing net income attributable to common shareholders
by the weighted average of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (warrants to
purchase common stock and common stock options) were exercised or
converted into common shares. EPS for all periods presented have been
computed in accordance with SFAS No. 128 "Earnings Per Share" issued
by the Financial Accounting Standards Board ("FASB").
F-13
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The diluted EPS is same as the basic EPS for each of the three years
ended March 31, 2003.
In 2001 and 2002, the effect on consolidated EPS of both warrants and
options issued by MSIL and options issued by the Company were not
included in the computation of diluted earnings per share because it
would have resulted in an antidilutive effect.
In 2003, the effect on consolidated EPS of both options issued by
MSIL and options issued by the Company were not included in the
computation of diluted earnings per share because it would have
resulted in either antidilutive or no dilution effect.
Foreign currency translation - Assets and liabilities of foreign
subsidiaries are translated from their functional currency to Hong
Kong Dollars at year end exchange rates, while revenues and expenses
are translated at average exchange rates during the year. Adjustments
arising from translating foreign currency financial statements are
reported as a separate component of stockholders' equity. Gains or
losses from foreign currency transactions are included in income.
Stock-based compensation - The Company has elected to account for its
stock option plan using the fair value method in accordance with SFAS
No.123 "Accounting for Stock-Based Compensation". Under the fair
value method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the vesting period.
Staff retirement plan costs - The Company's costs related to the
defined contribution retirement plans are charged to the consolidated
statement of income as incurred.
Translation into United States Dollars - The 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 U.S. dollars are for the convenience of readers
in the United States of America only and have been made at the rate
of HK$7.8 to US$1, the approximate free rate of exchange at March 31,
2003. Such translations should not be construed as representations
that the Hong Kong dollar amounts could be converted into U.S.
dollars at that rate or any other rate.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Comprehensive income - The Company reports comprehensive income in
accordance with SFAS No. 130, "Reporting Comprehensive Income".
Accumulated other comprehensive income represents translation
adjustments and unrealized holding losses on marketable securities
and is included in the stockholders' equity section of the balance
sheet.
F-14
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Reclassification - Certain prior year amounts in the accompanying
consolidated financial statements have been reclassified to conform
to the current year's presentation. These reclassifications had no
effect on the net income or financial position for any year
presented.
Recent changes in accounting standards - 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 has
adopted this standard on April 1, 2003. There was no significant
impact on the Company's financial position and results of operations.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements 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 No. 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 aggregated 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 No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
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 No. 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; and (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 year ended March 31, 2003, 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 assessing, but has not yet determined, the impact such
provisions will have, if any, on its financial position and results
of operations.
F-15
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 be recognized when the liability is incurred. Under
Emerging Issue Task Force ("EITF") Issue 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an
exit plan. A fundamental conclusion reached by the FASB in this
statement is that an entity's commitment to a plan, by itself, does
not create a present obligation to others that meets the definition
of a liability. Therefore, this statement eliminates the definition
and requirements for recognition of exit costs in EITF Issue 94-3.
This statement also established that fair value is the objective for
initial measurement of the liability and the liability should be
measured initially at fair value only when the liability is incurred.
The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. There was no significant impact on the
Company's financial position and results of operations as a result of
the adoption of SFAS No. 146.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." The
statement amends and clarifies accounting for derivative instruments,
including certain derivatives instruments embedded in other contracts
and for hedging activities under SFAS No. 133. This Statement is
generally effective for contracts entered into or modified after June
30, 2003. The Company will be required to adopt this statement during
the year ended March 31, 2004. Management is assessing, but has not
yet determined, the impact that SFAS No. 149 will have, if any, on
its financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." The statement establishes standards for how an issuer
classifies and measures certain financial instruments. This statement
is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The statement
requires that certain financial instruments that, under previous
guidance, could be accounted for as equity be classified as
liabilities, or assets in some circumstances. This statement does not
apply to features embedded in a financial instrument that is not a
derivative in its entirety. The statement also requires disclosures
about alternative ways of settling the instruments and the capital
structure of entities whose shares are mandatorily redeemable. The
Company will be required to adopt this standard during the year ended
March 31, 2004. Management is assessing, but has not yet determined,
the impact that SFAS No. 150 will have, if any, on its financial
position and results of operations.
In November 2002, the FASB issued Interpretation ("FIN") No.45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
interpretation requires certain disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN No.45 are effective for
interim and annual periods ending after December 15, 2002. The
initial recognition and initial measurement requirements of FIN No.
45 are effective prospectively for guarantees issued or modified
after December 31, 2002. The Company has adopted FIN No. 45 during
the year ended March 31, 2003. There was no significant impact on the
Company's financial position and results of operations.
F-16
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
3. OTHER INCOME
Other income consists of the following:
Year ended March 31,
2003 2002 2001
----- ----- -----
HK$ HK$ HK$
Gain on sale of marketable securities ............. -- -- 2,027
Foreign currency exchange gain, net ............... 452 378 1,722
Others ............................................ 4,032 1,492 2,956
----- ----- -----
4,484 1,870 6,705
===== ===== =====
4. INCOME TAXES
Income is subject to taxation in the various countries in which the
Company and its subsidiaries operate.
The components of income (loss) before income taxes and minority
interests are as follows:
Year ended March 31,
2003 2002 2001
------- ------- -------
HK$ HK$ HK$
Hong Kong........................... 17,564 2,927 (35,682)
Other regions in the PRC............ 11,246 32,159 (16,581)
Corporate expenses, net............. (6,227) (3,382) (3,362)
------- ------- -------
22,583 31,704 (55,625)
======= ======= =======
Certain activities conducted by the Company's subsidiaries may result
in current income recognition, for U.S. tax purposes, by the Company
even though no actual distribution is received by the Company from
the subsidiaries. However, such income, when distributed, would
generally be considered previously taxed income to the Company and
thus would not be subject to U.S. federal income tax again.
F-17
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
4. INCOME TAXES - continued
Hong Kong companies are subject to Hong Kong taxation on their
activities conducted in Hong Kong. Under the current Hong Kong laws,
dividends and capital gains arising from the realization of
investments are not subject to income taxes and no withholding tax is
imposed on payments of dividends by the Hong Kong incorporated
subsidiaries to the Company.
The Company has three subsidiaries which are incorporated in
Guangdong Province, China and operate in the special economic zone of
Shenzhen. These companies are subject to PRC income taxes at the
applicable tax rate (currently 15%) on taxable income based on income
tax laws applicable to foreign enterprises. Pursuant to the same
income tax laws, the subsidiaries are fully exempt from PRC income
tax on their manufacturing operations for two years starting from the
first profit-making year, followed by a 50% exemption for the next
three years. The exemptions applicable to all the three subsidiaries
expired on December 31, 2002, 2000 and 1999, respectively. These
exemptions do not apply to rental income.
The provision for income tax expenses (benefits) consists of the
following:
Year ended March 31,
2003 2002 2001
------- ------- -------
HK$ HK$ HK$
Current tax:
Subsidiaries operating in:
Hong Kong........................................ (88) 7 (198)
Other regions.................................... 1,619 (256) 521
------- ------- -------
1,531 (249) 323
Deferred tax:
Subsidiary operating in Hong Kong.................. 2,188 1,455 (3,643)
------- ------- -------
Total 3,719 1,206 (3,320)
======= ======= =======
Had the tax holidays and concessions detailed above not been
available, the tax charge would have been increased by HK$385 in 2002
and HK$928 in 2001. Both basic and diluted earnings per share in 2002
would have been reduced by HK$0.09 and both basic and diluted loss
per share in 2001 would have been increased by HK$0.21.
F-18
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
4. INCOME TAXES - continued
A reconciliation between the provision for income tax expenses (benefits)
computed by applying the United States statutory tax rate to income (loss)
before income taxes and minority interests and the actual provision for
income tax expenses (benefits) is as follows:
Year ended March 31,
2003 2002 2001
------- ------- -------
HK$ HK$ HK$
Applicable U.S. federal tax rate ............. 34% 34% 34%
------- ------- -------
Provision of income taxes at the applicable
U.S. federal tax rate on income for the year 7,678 10,779 (18,913)
(Non-taxable income) non-deductible expenses . 3,881 (4,099) 9,360
Changes in valuation allowance ............... (1,491) 2,134 5,490
International rate difference ................ (6,197) (7,305) 1,478
Others ....................................... (152) (303) (735)
------- ------- -------
Income tax expenses (benefits) ............... 3,719 1,206 (3,320)
======= ======= =======
Details of deferred tax assets are as follows:
March 31,
2003 2002
------ ------
HK$ HK$
Deferred tax assets:
Operating loss carryforwards 6,133 9,812
Valuation allowance ........ (6,133) (7,624)
------ ------
-- 2,188
====== ======
At March 31, 2003, subsidiaries of the Company had tax loss carryforwards
for Hong Kong tax purposes, subject to the agreement of the Hong Kong
Inland Revenue Department, amounting to approximately HK$38,333, which
have no expiration date. The loss carryforwards can only be utilized by
the subsidiaries generating the losses.
Due to the uncertainty of the realization of certain operating loss
carryforwards, the Company has established a valuation allowance against
these loss carryforwards in the amount of HK$6,133.
U.S. deferred tax liabilities have not been provided on approximately
HK$257,452 in undistributed earnings of foreign subsidiaries because the
Company intends to reinvest those earnings permanently. If such earnings
were paid as dividends to the Company in a single distribution, the
estimated U.S. income tax, net of foreign tax credits, if allowable, would
be approximately HK$87,534.
F-19
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
5. INVENTORIES
Inventories by major categories are summarized as follows:
March 31,
2003 2002
------- -------
HK$ HK$
Raw materials .. 12,917 1,773
Work in progress 29,399 35,679
Finished goods . 91,894 81,059
------- -------
134,210 118,511
======= =======
6. STAFF RETIREMENT PLANS
The Company participates in a Mandatory Provident Fund Scheme ("MPF
Scheme") for all qualifying employees in Hong Kong with effect from
December 1, 2000. The assets of the MPF Scheme are held separately form
those of the Company in funds under the control of an independent trustee.
The Company contributes 5% of relevant payroll costs (monthly contribution
is limited to 5% of HK$20 for each eligible employee) to the MPF Scheme,
which contribution is matched by employees.
The employees of the Company's subsidiaries in the PRC are members of a
state-managed retirement benefits scheme operated by the local PRC
government. The subsidiaries are required to contribute 8% of the average
basic salary to the retirement benefit scheme to fund the benefits. The
only obligation of the Company with respect to the retirement benefit
scheme is to make the specified contributions.
The total contributions made for the year ended March 31, 2003, 2002 and
2001 amounted to HK$737, HK$622, and HK$248, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31,
2003 2002
------- -------
HK$ HK$
Leasehold land and buildings . 72,408 92,293
Construction in progress ..... 3,516 --
Plant and machinery .......... 11,911 6,938
Furniture and equipment ...... 9,394 8,928
Motor vehicles ............... 4,578 4,309
Less: accumulated depreciation (35,529) (32,135)
------- -------
Net book value ............... 66,278 80,333
======= =======
F-20
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
8. REAL ESTATE INVESTMENT
March 31,
2003 2002
------- -------
HK$ HK$
At cost:
Leasehold land and buildings - Hong Kong .............. 78,513 62,038
- Other regions of the PRC 27,631 27,631
Less: accumulated depreciation ........................ (9,697) (7,683)
------- -------
96,447 81,986
======= =======
The real estate investment in other regions of the PRC represents the
Company's interest in an industrial complex known as Man Sang Industrial
City located in Gong Ming Zhen, Shenzhen. Part of the industrial complex
is used by the Company and is included in property, plant and equipment.
The remaining leasehold land and buildings are classified as real estate
investment and are leased to unaffiliated third parties under cancelable
operating lease agreements. The real estate investment in Hong Kong
principally represents office premises leased to unaffiliated third
parties under non-cancelable operating lease agreements.
Rental income relating to such operating leases is included in gross
rental income in the consolidated statements of income and amounted to
HK$7,455 in 2003, HK$7,526 in 2002 and HK$5,526 in 2001.
9. SHORT-TERM BORROWINGS
March 31,
2003 2002
------ ------
HK$ HK$
Bank loans ...................... -- 29,445
====== ======
Weighted average interest rate on
borrowings at end of year ..... -- 5.60%
====== ======
At end of year:
Bank credit facilities .......... 70,563 86,445
Utilized ........................ -- 29,445
------ ------
Bank credit facilities available 70,563 57,000
====== ======
Interest rates are generally based on the banks' prime lending rates and
the credit lines are normally subject to periodic review. There are no
significant covenants or other financial restrictions relating to the
Company's short-term borrowings.
At March 31, 2003, leasehold land and buildings with a net book value of
HK$46,074 and real estate investments with a net book value of HK$69,256
were pledged as collateral for the above facilities and long-term debts
described in note 11. Other than the restricted cash of HK$16,169 pledged
at March 31, 2002, there is no restriction on the use of the assets
pledged for such facilities and bank loans.
F-21
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31,
2003 2002
----- -----
HK$ HK$
Accrued expenses . 4,652 2,517
Commission payable -- 552
Deposits received 1,006 1,893
Sundry payables .. 2,688 2,473
Others ........... 1,231 1,239
----- -----
9,577 8,674
===== =====
11. LONG-TERM DEBTS
March 31,
2003 2002
------ ------
HK$ HK$
Long-term debts consist of:
Bank loan bearing interest at Hong Kong Inter-Bank Offered Rate
("HIBOR") (1.375% at March 31, 2003) plus 1.25%, repayable
by monthly instalments of HK$156 through 2009 ............... 11,094 12,969
Bank loan bearing interest at HIBOR plus 1.1%, repayable by
quarterly instalments of HK$625 through 2007 ................ 7,916 10,416
Bank loan bearing interest at HIBOR plus 1.5%, repayable by
quarterly instalments of HK$300 through 2006 ................ 3,000 4,200
------ ------
Total ......................................................... 22,010 27,585
Current portion of long-term debt ............................. 5,575 5,575
------ ------
Long-term debts, less current portion ......................... 16,435 22,010
====== ======
Maturities of long-term debts as of March 31, 2003 are as follows:
HK$
Year ending March 31,
2004 ................ 5,575
2005 ................ 5,575
2006 ................ 4,975
2007 ................ 2,291
2008 ................ 1,875
After 2008 .......... 1,719
------
22,010
======
There are no significant covenants or other financial restrictions
relating to the Company's long-term debts.
Details of assets pledged by the Company as collateral for the above bank
loans are described in note 9.
F-22
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
12. COMMITMENTS AND CONTINGENCIES
The Company leases premises under various operating leases which do not
contain any escalation clauses and all of the leases contain a renewal
option. Rental expense under operating leases was HK$3,974 in 2003,
HK$4,678 in 2002 and HK$4,916 in 2001.
As at March 31, 2003, the Company and its subsidiaries were obligated
under non-cancelable operating leases requiring minimum rentals of
HK$1,025 payable within one year.
13. CAPITAL STOCK
The Company's capital stock consists of common stock and Series A
preferred stock and Series B convertible preferred stock.
The voting rights of the holders of common stock are subject to the rights
of the outstanding Series A preferred shares which, as a class, is
entitled to one-third voting control of the Company. Accordingly, the
holders of common stock and Series A preferred shares hold, in the
aggregate, more than fifty percent of the total voting rights and they can
elect all of the directors of the Company.
Holders of the 100,000 issued and outstanding shares of Series A preferred
stock (the "Series A preferred shares") are entitled, as a class, to
one-third voting control of the Company in all matters voted on by
stockholders and a liquidation preference of US$25 per share. Except for
the foregoing, the holders of the Series A preferred shares have no
preferences or rights in excess of those generally available to the
holders of common stock. The holders of Series A preferred shares are
entitled to participate in any dividends paid ratably with the holders of
common stock.
The directors have authorized a series of preferred stock designated as
Series B convertible preferred stock (the "Series B preferred shares"). A
total of 100,000 Series B preferred shares were authorized. Except to the
extent declared by the directors from time to time, if ever, no dividends
are payable with respect to the Series B preferred shares. Additionally,
the Series B preferred shares have no voting rights except that the
approval of holders of a majority of such shares is required to (1)
authorize, create or issue any shares of any class or series ranking
senior to the Series B preferred shares as to liquidation preference, (2)
amend, alter or repeal, by any means, the Company's certificate of
incorporation if the powers, preferences, or special rights of the Series
B preferred shares would be adversely affected, or (3) become subject to
any restriction on the Series B preferred shares, other than restrictions
arising solely under Nevada law or existing under the certificate of
incorporation as in effect on December 31, 1995.
F-23
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
13. CAPITAL STOCK - continued
The Series B preferred shares are convertible into common stock commencing
on or after 45 days following the sale of such shares. Each of the Series
B preferred shares is convertible into the number of shares of common
stock determined by dividing US$1 by an amount equal to the lesser of (1)
the market price of the common stock on the closing date of the sale of
such shares or (2) 70% of the average closing bid price of the common
stock for the five trading days preceding the conversion. The right of the
holders of Series B preferred shares to convert such shares into common
stock expired on December 31, 1997. The Series B preferred shares have a
liquidation preference of US$1,000 per share and are subject, at the
election of the Company, to redemption or conversion at such price after
December 31, 1997. At March 31, 2003, no shares of Series B preferred
stock were outstanding.
On June 7, 2002, the Company issued in aggregate 410,000 shares of common
stock of par value US$0.001 per share to two business consultants pursuant
to two separate business consulting agreements dated June 1, 2002. The
amount of the relevant compensation expenses of approximately HK$2,174,
being the fair value of the shares issued, is being recognized over the
service period of the contracts. During the year ended March 31, 2003,
approximately HK$906 was charged to the income statement.
14. STOCK OPTION PLANS
COMPANY OPTIONS
In October of 1996, the Company approved the establishment of the Man Sang
Holdings, Inc. 1996 Stock Option Plan (the "Plan"), under which stock
options awards ("Holding Company Options") may be made to employees,
directors and consultants of the Company. The Plan will remain effective
until October 2006 unless terminated earlier by the Board of Directors.
The maximum number of shares of common stock which may be issued or
delivered and as to which awards may be granted under the Plan was
1,000,000 shares, which was subsequently revised to 2,000,000 shares, as
adjusted by the antidilution provisions contained in the Plan. The
exercise price for a stock option must be at least equal to 100% (110%
with respect to incentive stock options granted to persons holding ten
percent or more of the outstanding common stock) of the fair market value
of the common stock on the date of grant of such stock option for
incentive stock options, which are available only to employees of the
Company, and 85% of the fair market value of the common stock on the date
of grant of such stock option for other stock options.
The duration of each option will be determined by the Compensation
Committee, but no option will be exercisable more than ten years from the
date of grant (or, with respect to incentive stock options granted to
persons holding ten percent or more of the outstanding common stock not
more than five years from the date of grant). Unless otherwise determined
by the Compensation Committee and provided in the applicable option
agreement, options will be exercisable within three months of any
termination of employment, including termination due to disability, death
or normal retirement (but no later than the expiration date of the
option).
F-24
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
Option activity of the Holding Company Options is as follows:
Number Exercise price
of Holding with the weighted average
Company Options exercise price in parenthesis
--------------- -----------------------------
Outstanding at April 1, 2000 600,000 US$1.22 and US$1.5
(US$1.2667)
Cancelled (100,000) US$1.5
--------
Outstanding at March 31, 2001 500,000 US$1.22
Cancelled (50,000) US$1.22
--------
Outstanding at March 31, 2002 450,000 US$1.22
Granted 250,000 US$1.1
--------
US$1.22 and US$1.1
Outstanding at March 31, 2003 700,000 (US$1.1771)
========
Total number of options exercisable were 700,000 and 450,000 as of March
31, 2003 and 2002, respectively, at the weighted average exercise prices
of US$1.1771 and US$1.22.
Additional information on options outstanding at March 31, 2003 is as
follows:
Options outstanding
and exercisable as
of March 31, 2003
-----------------
Weighted
Number average
outstanding remaining
and contractual
Exercise price exercisable life (years)
- -------------- ----------- ------------
US$
1.10 250,000 10
1.22 450,000 4.55
------- -------
700,000 6.50
======= =======
At March 31, 2003 and 2002, 1,200,000 and 1,450,000 options, respectively,
were available for future grant under the Plan.
F-25
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
MSIL OPTIONS
On August 2, 2002, MSIL adopted a new share option scheme (the "2002
Scheme") and terminated the one adopted on September 8, 1997 (the "1997
Scheme"). Upon termination of the 1997 Scheme, no further options will be
granted thereunder but in all other respects, the provisions of the 1997
Scheme shall remain in force and all outstanding options granted prior to
such termination shall continue to be valid and exercisable in accordance
therewith. During the year ended March 31, 2003, all options granted under
the 1997 Scheme (the "MSIL Options") lapsed and no options were granted
under the 2002 Scheme during the year.
In accordance with the 2002 Scheme, MSIL may grant options to any person
being an employee, officer, agent, or consultant of group headed by MSIL
("MSIL Group") including executive or non-executive directors of MSIL
Group to subscribe for shares in MSIL at a price determined by the board
of directors of MSIL being at least the highest of (a) the closing price
of the shares on The Stock Exchange of Hong Kong Limited (the "Stock
Exchange") on the date of grant of the option, which must be a trading
day; (b) the average closing price of the shares on the Stock Exchange for
the five trading days immediately preceding the date of grant of the
option; and (c) the nominal value of the shares. The purpose of the 2002
Scheme is to provide incentives to the people who were granted options to
contribute to MSIL Group and to enable MSIL Group to recruit high-caliber
employees and attract resources that are valuable to MSIL Group.
The total number of shares which may be issued upon exercise of all
options to be granted, together with all options to be granted under any
other share option scheme(s) of MSIL and/or any of its subsidiaries, must
not represent more than 10% of the nominal amount of all the issued shares
of MSIL as at August 2, 2002.
The 2002 Scheme shall be valid and effective for a period of 10 years
commencing August 2, 2002.
Options may be exercised at any time during the option period, which is to
be notified by the board of directors of MSIL to each grantee, commencing
on the date of grant or such later date as the board of directors of MSIL
may decide and expiring on such date as the board of directors of MSIL may
determine, provided that such period is not to exceed ten years from the
date of grant.
F-26
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
Option activity of the MSIL options under 1997 Scheme is as follows:
Number Exercise price
of MSIL with the weighted average
Options exercise price in parenthesis
------- -----------------------------
Outstanding at April 1, 2000 46,250,000 HK$0.6208 and HK$0.4460 and HK$0.2560
(HK$0.5108)
Granted 33,000,000 HK$0.2970
Lapsed (36,450,000) HK$0.6208 and HK$0.4460
Exercised (2,050,000) HK$0.2560
Adjusted 8,151,450 (Note)
Cancelled (1,200,000) HK$0.2475
----------
Outstanding at March 31, 2001 47,701,450 HK$0.2133 and HK$0.2475 (HK$0.2408)
Lapsed (4,440,131) HK$0.2133 and HK$0.2475 (HK$0.2408)
----------
Outstanding at March 31, 2002 43,261,319 HK$0.2133 and HK$0.2475 (HK$0.2408)
Lapsed (43,261,319) HK$0.2133 and HK$0.2475 (HK$0.2408)
----------
Outstanding at March 31, 2003 -
==========
Note: MSIL issued bonus shares to its shareholders on August 3, 2000; the number
and the exercise prices of the MSIL options in issue were adjusted
accordingly pursuant to the 1997 Scheme.
No options were exercisable as of March 31, 2003 under the 2002 Scheme.
Total number of options exercisable were 43,261,319 as of March 31, 2002,
under the 1997 Scheme at the weighted average price of HK$0.2408.
At March 31, 2003, 75,187,093 options were available for future grant
under the 2002 Scheme.
At March 31, 2002, 29,670,774 options were available for future grant
under the 1997 Scheme.
F-27
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
COMPENSATION EXPENSES
The Company has elected to account for the Holding Company Options and the
MSIL Options using the fair value method. The fair values of each Holding
Company Option granted on March 26, 2003 and September 16, 1997 and of
each MSIL Option granted on April 28, 2000, November 16, 1999, December 3,
1997 and October 16, 1997 were calculated to be US$0.28, US$0.63, HK$0.14,
HK$0.07, HK$0.19 and HK$0.13, respectively, using the Black-Scholes option
pricing model, with the following assumptions:
Holding Company MSIL Options
Options granted on granted on
------------------------- --------------------------------------------
October 16, 1997
March 26, September 16, April 28 November 16, and,
2003 1997 2000 1999 December 3, 1997
---- ---- ---- ---- ----------------
Risk-free interest rate per annum 1.25% 5.90% 6% 5.50% 5.25%
Expected life 2 years 2 years 2 years 2 years 2 years
Expected volatility 45% 63% 62% 3% 33%
Expected dividend yield Nil Nil 5% 5% 5%
The total compensation expense of the Holding Company Options and the MSIL
Options recognized in the consolidated statements of income for the years
ended March 31, 2003 and 2001, net of minority interests' share of HK$Nil
and HK$1,499, was HK$4 and HK$3,121, respectively.
15. RELATED PARTY TRANSACTIONS
During the periods presented, certain leasehold properties were provided
free of charge to Cheng Chung Hing and Cheng Tai Po, directors of the
Company, for their residential use.
In December 2002, the Company disposed of its entire equity interest of a
wholly owned subsidiary which held a 30% equity interest of China South
City Holdings Limited, for a consideration of HK$300 to Cheng Chung Hing
and Cheng Tai Po, directors of the Company. The carrying value of the net
assets disposed of amounted to approximately HK$240.
In addition, the Company advanced HK$Nil in 2003, HK$770 in 2002 and
HK$938 in 2001 to certain directors on an interest-free basis without
specific repayment terms. All amounts were repaid during each year.
The Company paid professional fees of HK$301 in 2003, HK$36 in 2002 and
HK$135 in 2001 to Messrs. Yuen & Partners for the provision of legal and
professional services to the Company. Yuen Ka Lok, Ernest, a director of
both the Company and MSIL, the Chairman of the Compensation Committee and
a member of the Audit Committee of the Board of Directors of the Company,
is a partner of Messrs. Yuen & Partners.
The Company paid standard brokerage fees to DBS Vickers (Hong Kong)
Limited ("DBS Vickers") for holding certain securities on behalf of the
Company and maintains a securities account with DBS Vickers. Lai Chau
Ming, Matthew, a director of the Company, a member of the Compensation
Committee and the Audit Committee of the Board of Directors of the
Company, is Sales Associate Director of DBS Vickers. The amounts of
brokerage fees paid to DBS Vickers during the periods presented were
considered insignificant by the management.
The Company also had purchases of HK$5,415 in 2001 from GTI, in which the
Company holds an equity interest of 18% before disposal by the Company on
October 17, 2002.
F-28
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
16. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
A substantial percentage of the Company's sales is made to a small number
of customers and is typically on an open account basis. In no period did
sales to any one customer account for 10% or more of total sales.
Details of the amounts receivable from the five customers with the largest
receivable balances at March 31, 2003 and 2002 are as follows:
Percentage of
accounts receivable
March 31,
2003 2002
------ ------
Five largest receivable balances 39.95% 36.17%
The Company is not aware of any financial difficulties being experienced
by its major customers. Bad debt provisions were HK$440 in 2003, HK$5,054
in 2002 and HK$364 in 2001. The deductions from the allowance for doubtful
accounts which represented write-offs of bad debts were HK$1,278 in 2003
and HK$214 in 2002.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, marketable securities, accounts receivable
and accounts payable are reasonable estimates of their fair values because
of the short maturity of these amounts. The carrying amounts of short-term
borrowings and long-term debts approximate their fair values as their
interest rates approximate those which would have been available at March
31, 2003 for debts of the same remaining maturities.
18. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and interim
reporting standards for enterprise business segments and related
disclosures about its products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
The Company's chief operating decision maker evaluates segment performance
and allocates resources based on several factors, of which the primary
financial measures are revenues from external customers and operating
income (loss).
F-29
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
18. SEGMENT INFORMATION - continued
Contributions of the major activities, profitability information and asset
information are summarized below:
Year ended March 31,
2003 2002 2001
-------- -------- --------
HK$ HK$ HK$
Revenues from external customers:
Pearls .............................. 323,082 282,715 311,109
Real estate investment .............. 7,455 7,526 5,526
-------- -------- --------
330,537 290,241 316,635
======== ======== ========
Operating income (loss):
Pearls .............................. 24,843 30,538 (60,643)
Real estate investment .............. 175 1,397 (496)
-------- -------- --------
25,018 31,935 (61,139)
======== ======== ========
Interest expenses:
Pearls .............................. 859 1,873 2,898
Real estate investment .............. 503 2,460 2,368
Corporate assets .................... 267 553 1,724
-------- -------- --------
1,629 4,886 6,990
======== ======== ========
Depreciation and amortization:
Pearls .............................. 6,051 6,031 6,597
Real estate investment .............. 2,013 1,827 1,033
Corporate assets .................... 1,232 1,394 1,532
-------- -------- --------
9,296 9,252 9,162
======== ======== ========
Capital expenditure for segment assets:
Pearls .............................. 8,963 2,162 6,416
Real estate investment .............. 2,053 -- 37,439
Corporate assets .................... 167 45 4,429
-------- -------- --------
11,183 2,207 48,284
======== ======== ========
Segment assets:
Pearls .............................. 334,251 334,579 355,592
Real estate investment .............. 96,447 81,986 84,369
Corporate assets .................... 53,046 72,504 72,420
-------- -------- --------
483,744 489,069 512,381
======== ======== ========
Long-lived assets:
Pearls .............................. 28,353 25,573 32,556
Real estate investment .............. 96,447 81,986 84,369
Corporate assets .................... 40,511 58,090 59,381
-------- -------- --------
165,311 165,649 176,306
======== ======== ========
F-30
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
18. SEGMENT INFORMATION - continued
The operating income of the pearl segment for the year ended March 31,
2002 has been arrived at after an impairment charge of HK$3,000 recognized
in respect of the Company's 19.5% stake in a pearl farm (see Note 2).
Corporate assets consist principally of marketable securities and
leasehold land and buildings held as quarters used by certain directors
and employees of the Company.
All of the Company's sales of pearls are coordinated through the Hong Kong
subsidiaries and an analysis by destination is as follows: Year ended
March 31,
Year ended March 31,
2003 2002 2001
------- ------- -------
HK$ HK$ HK$
Net sales:
Hong Kong ....................... 51,515 61,626 68,753
Export:
North America ................... 92,830 73,655 78,300
Europe .......................... 69,269 58,374 63,080
Japan ........................... 39,923 30,655 25,426
Asian countries, other than Japan 58,932 47,322 64,522
Others .......................... 10,613 11,083 11,028
------- ------- -------
323,082 282,715 311,109
======= ======= =======
The Company operates in only one geographic area. The location of the
Company's identifiable assets is as follows:
March 31,
2003 2002 2001
------- ------- -------
HK$ HK$ HK$
Hong Kong .............. 399,628 371,558 383,268
Other regions of the PRC 84,116 117,511 129,113
------- ------- -------
483,744 489,069 512,381
======= ======= =======
F-31
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
19. SUBSEQUENT EVENT
On April 30, 2003, the Company repurchased 410,000 shares of the Company's
common stock for US$1.50 per share, and the repurchased shares were
cancelled on May 12, 2003.
On May 27, 2003, the Company launched a small shareholder buyout program
to purchase shares of the Company's common stock from shareholders who, on
May 27, 2003, owned 99 or fewer shares of the Company. These shareholders
can sell their shares directly to the Company without having to pay a
brokerage commission or incurring any other transaction charges. The
purchase price for the shares will be the average of the closing prices
reported on the Over-the-Counter Bulletin Board from May 27, 2003 through
and including June 26, 2003. The management does not expect that the
amount to be paid for the purchase of these shares will be significant.
20. QUARTERLY DATA (UNAUDITED)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
HK$ HK$ HK$ HK$
2003
Net sales 76,776 81,445 66,839 98,022
Gross profit 24,319 28,031 15,208 22,364
Operating income 10,204 13,096 21 1,697
Net income (loss) 3,966 6,241 (511) (775)
Basic earnings (loss) per common share 0.88 1.30 (0.11) (0.16)
Diluted earnings (loss) per common share 0.88 1.30 (0.11) (0.16)
2002
Net sales 73,294 72,645 57,127 79,649
Gross profit 21,244 23,070 18,939 33,186
Operating income 4,948 7,054 4,728 15,205
Net income 2,097 2,953 1,898 9,361
Basic earnings per common share 0.48 0.67 0.43 2.12
Diluted earnings per common share 0.48 0.67 0.43 2.09
F-32