Back to GetFilings.com
MAN SANG HOLDINGS, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 NUMBER: 33-10639-NY
MAN SANG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0539570
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) (IRS EMPLOYER NO.)
21/F RAILWAY PLAZA, 39 CHATHAM ROAD SOUTH, TSIMSHATSUI, KOWLOON, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(852) 2317 5300
(ISSUER'S TELEPHONE NUMBER)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO[ ]
INDICATE BY CHECKMARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT) YES [ ] NO [X].
AS OF JUNE 30, 2003 AND AUGUST 14, 2003, 4,405,960 SHARES OF COMMON
STOCK OF THE REGISTRANT WERE OUTSTANDING.
MAN SANG HOLDINGS, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as at
June 30, 2003 and March 31, 2003 F-1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three months ended
June 30, 2003 and 2002 F-3
Condensed Consolidated Statements of Cash Flows for
the three months ended June 30, 2003 and 2002 F-4
Notes to Condensed Consolidated Financial Statements F-5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 1
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 3
ITEM 4. Controls and Procedures 4
PART II - OTHER INFORMATION
ITEM 2 Changes in Securities 5
ITEM 5 Other Information 5
ITEM 6 Exhibits and Reports on Form 8-K 5
SIGNATURES 6
EXHIBIT INDEX 7
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share data)
JUNE 30, 2003 MARCH 31, 2003
------------------- --------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
- ------
Current assets:
Cash and cash equivalents 14,404 112,350 83,766
Marketable securities 1,261 9,835 9,978
Accounts receivable, net of allowance for doubtful 6,413 50,026 69,840
accounts of HK$9,216 as of June 30, 2003 and
HK$9,216 as of March 31, 2003
Inventories :
Raw materials 1,576 12,296 12,917
Work in progress 2,134 16,649 29,399
Finished goods 13,470 105,063 91,894
------ ------- -------
17,180 134,008 134,210
Prepaid expenses 799 6,231 6,340
Deposits and other receivables 683 5,326 5,109
Other current assets 1,058 8,258 8,732
Income taxes receivable 59 458 458
------ ------- -------
Total current assets 41,857 326,492 318,433
Property, plant and equipment 18,038 140,694 101,807
Accumulated depreciation (4,795) (37,398) (35,529)
------ ------- -------
13,243 103,296 66,278
Real estate investment 8,874 69,214 108,327
Accumulated depreciation (1,331) (10,380) (11,880)
------ ------- -------
7,543 58,834 96,447
Long-term investments, net of impairment loss of
HK$3,000 as of June 30, 2003 and HK$3,000 as
of March 31, 2003 332 2,586 2,586
------ ------- -------
Total assets 62,975 491,208 483,744
====== ======= =======
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -CONTINUED
(Amounts expressed in thousands except share data)
JUNE 30, 2003 MARCH 31, 2003
---------------- --------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term borrowings 2,417 18,848 -
Current portion of long-term debts :
Secured bank loans 715 5,575 5,575
Accounts payable 852 6,649 5,554
Accrued payroll and employee benefits 873 6,813 7,188
Other accrued liabilities 1,144 8,922 9,577
Income taxes payable 314 2,446 2,224
------ ------- -------
Total current liabilities 6,315 49,253 30,118
Long-term debts :
Secured bank loans 1,307 10,198 16,435
Deferred tax liabilities 152 1,186 -
Minority interests 23,003 179,427 179,844
Stockholders' equity:
Series A preferred stock, par value US$0.001 - 1 1
- authorized, issued and outstanding: 100,000 shares;
(entitled in liquidation to US$2,500 (HK$19,500))
Series B convertible preferred stock, par value US$0.001 - - -
- authorized: 100,000 shares; no shares outstanding
Common stock, par value US$0.001 4 34 37
- authorized: 25,000,000 shares;
issued and outstanding: 4,405,960 shares as of
June 30, 2003 and 4,815,960 shares as of
March 31, 2003
Additional paid-in capital 7,788 60,737 60,633
Retained earnings 24,333 189,801 196,491
Accumulated other comprehensive income 73 571 185
------ ------- -------
Total stockholders' equity 32,198 251,144 257,347
------ ------- -------
Total liabilities and stockholders' equity 62,975 491,208 483,744
====== ======= =======
See accompanying notes to condensed consolidated financial statements
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED) FOR THE THREE MONTHS ENDED JUNE 30
(Amounts expressed in thousands except share data)
Three Months Ended June 30,
2003 2002
------------------------- -----------
US$ HK$ HK$
Net sales 8,575 66,888 76,776
Cost of sales (6,391) (49,846) (52,457)
---------- ---------- ----------
Gross profit 2,184 17,042 24,319
Rental income, gross 178 1,388 1,832
---------- ---------- ----------
2,362 18,430 26,151
Selling, general and administrative expenses :
- Pearls (2,154) (16,807) (14,278)
- Real estate investment (459) (3,578) (1,669)
---------- ---------- ----------
Operating (loss) income (251) (1,955) 10,204
Non-operating items :
- Interest expenses (17) (133) (584)
- Interest income 12 94 228
- Other income 85 661 765
---------- ---------- ----------
(Loss) income before income taxes
and minority interests (171) (1,333) 10,613
Income tax expenses (163) (1,275) (3,266)
---------- ---------- ----------
(Loss) income before minority interests (334) (2,608) 7,347
Minority interests 91 713 (3,381)
---------- ---------- ----------
Net (loss) income (243) (1,895) 3,966
Other comprehensive income (loss) net of taxes and
minority interests :
- Foreign currency translation adjustments (1) (5) 31
- Unrealized holding gain (loss) on marketable
securities 50 391 (425)
---------- ---------- ----------
Other comprehensive income (loss) net of taxes and
minority interests 49 386 (394)
---------- ---------- ----------
Comprehensive (loss) income (194) (1,509) 3,572
========== ========== ==========
Basic and diluted (loss) earnings per common share (0.05) (0.41) 0.88
========== ========== ==========
Weighted average number of shares
of common stock outstanding :
- basic and diluted 4,595,191 4,595,191 4,514,092
========== ========== ==========
See accompanying notes to condensed consolidated financial statements
F-3
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(Amounts expressed in thousands)
THREE MONTHS ENDED JUNE 30,
--------------------------------
2003 2002
--------------------- ---------
US$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income (243) (1,895) 3,966
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Compensation expense 13 103 -
Depreciation and amortization 309 2,412 2,358
Loss on disposal of property, plant and equipment 332 2,591 333
Realized gain on sales of marketable securities (6) (44) -
Minority interests (91) (713) 3,381
Changes in operating assets and liabilities:
Accounts receivable 2,540 19,806 6,845
Inventories 26 199 (9,936)
Prepaid expenses 14 109 375
Deposits and other receivables (28) (217) 358
Other current assets 61 474 (302)
Deferred tax assets - - 1,205
Accounts payable 140 1,095 8,090
Accrued payroll and employee benefits (48) (375) (426)
Other accrued liabilities (84) (655) (499)
Deferred tax liabilities 152 1,186 -
Income taxes payable 29 222 1,770
-------- -------- --------
Net cash provided by operating activities 3,116 24,298 17,518
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (572) (4,463) (1,022)
Decrease in restricted cash - - 5,194
Proceeds from disposal of property, plant and equipment 7 58 -
Proceeds from sales of marketable securities 112 877 -
Purchase of long-term investments - - (156)
-------- -------- --------
Net cash (used in) provided by investing activities (453) (3,528) 4,016
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 2,417 18,848 942
Repayment of short-term borrowings - - (4,905)
Repayment of long-term debts (800) (6,237) (1,394)
Repurchase of common stock (615) (4,797) -
-------- -------- --------
Net cash provided by (used in) financing activities 1,002 7,814 (5,357)
-------- -------- --------
Net increase in cash and cash equivalents 3,665 28,584 16,177
Cash and cash equivalents at beginning of period 10,739 83,766 82,152
Exchange adjustments - - 1
-------- -------- --------
Cash and cash equivalents at end of period 14,404 112,350 98,330
-------- -------- --------
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and finance charges 17 135 573
-------- -------- --------
Net income taxes paid 93 729 291
-------- -------- --------
See accompanying notes to condensed consolidated financial statements
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 2003 balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the financial statements and
notes included in the annual report of Man Sang Holdings, Inc. (the "Company")
on Form 10-K for the fiscal year ended March 31, 2003. In the opinion of
management, the interim financial statements reflect all adjustments of a normal
recurring nature necessary for a fair presentation of the results for the
interim periods presented. Operating results and cash flows for interim periods
are not necessarily indicative of results of the entire year.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated from their
functional currency to the reporting currency at period end exchange rates,
while revenues and expenses are translated at average exchange rates during the
period. Adjustments arising from such translation are reported as a separate
component of stockholders' equity. Gains or losses from foreign currency
transactions are included in the Statement of Operations. Aggregate net foreign
currency gains or losses were immaterial for all periods.
The consolidated financial statements of the Company are maintained, and its
consolidated financial statements are expressed, in Hong Kong dollars. The
translations of Hong Kong dollars into United States dollars are for convenience
only and have been made at the rate of HK$7.8 to US$1, the approximate free rate
of exchange at June 30, 2003. Such translations should not be construed as
representations that Hong Kong dollar amounts could be converted into United
States dollars at that rate or any other rate.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In 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 adopted this statement on April
1, 2003. There was no significant impact on the Company's financial position or
results of operations.
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
F-5
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item. 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 Opinion 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
transaction be accounted for in the same manner as sale-leaseback transactions;
(iv) Makes certain technical corrections that 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. There was no significant
impact on the Company's financial position and results of operations as a result
of the adoption of SFAS No.145.
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 derivative
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. 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 classification and measurement of 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 as assets in some
circumstances. The statement also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities whose shares are
mandatorily redeemable. This statement does not apply to features embedded in a
financial instrument that is not a derivative in its entirety. 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.
4. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128. Per share data is calculated
using the weighted average number of shares of common stock outstanding during
the period.
Man Sang International Limited ("MSIL"), a subsidiary of the Company whose
shares are listed on The Stock Exchange of Hong Kong Limited, adopted a share
option scheme (the "Old Share Option Scheme") on September 8, 1997. The Old
Share Option Scheme is administered by Board of Directors of MSIL. On August 2,
2002, at the 2002 Annual General Meeting of MSIL, MSIL's shareholders approved a
share option scheme (the "New Share Option Scheme") to replace the Old Share
Option Scheme. No option has been granted under the New Share Option Scheme and
all the options granted under the Old Share Option Scheme lapsed in October
2002.
F-6
For the Three Months Ended June 30, 2002
----------------------------------------
Earnings No. of shares EPS
HK$'000 HK$
Basic EPS
Net income available to common stockholders 3,966 4,514,092 0.88
Diluted EPS
Net income available to common
stockholders, including conversion 3,966 4,514,092 0.88
On June 7, 2002, the Company issued an aggregate of 410,000 shares of common
stock, to two business consultants pursuant to their respective business
consulting agreements. For the three months ended June 30, 2002, the effect on
consolidated EPS of options issued by MSIL and options issued by the Company was
not included in the computation of diluted EPS because doing so would have been
antidilutive. On April 30, 2003, the Company repurchased the consultant's shares
for US$1.5 per share and cancelled those shares on May 12, 2003.
On March 26, 2003, pursuant to the Company's 1996 Stock Option Plan, the
Compensation Committee granted to Cheng Chung Hing, Ricky, the Company's
President, Chairman, Chief Executive Officer and then Chief Financial Officer,
and Cheng Tai Po, the Company's Vice Chairman, non-qualified options to purchase
150,000 and 100,000 shares of the Company's common stock respectively at an
exercise price of US$1.1 per share, the latest closing price of the Company's
common stock as of the date of grant. Half of the options vest on March 26, 2004
and the remaining half vest on March 26, 2005.
For the Three Months Ended June 30, 2003
----------------------------------------
Loss No. of shares Loss per share
HK$'000 HK$
Basic loss per share
Net loss available to common stockholders (1,895) 4,595,191 (0.41)
Diluted loss per share
Net loss available to common stockholders,
including conversion (1,895) 4,595,191 (0.41)
For the three months ended June 30, 2003, the effect on consolidated loss per
share of options issued by the Company was not included in the computation of
diluted loss per share because it would have resulted in an anti-dilutive
effect.
F-7
5. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are coordinated through its Hong Kong
subsidiaries. The following is an analysis by destination:
Three Months ended
June 30
2003 2002
HK$'000 HK$'000
Net Sales:
Hong Kong * 10,221 15,160
Export:
North America 22,331 22,422
Europe 19,881 10,393
Japan 8,667 6,584
Thailand 723 7,831
Other Asian countries 3,561 12,084
Others 1,505 2,302
------ ------
66,888 76,776
====== ======
* A majority of sales (by dollar amount) in Hong Kong are for re-export to North
America and Europe.
The Company operates primarily in one geographic area, Hong Kong and other
regions of The People's Republic of China (the "PRC"). The locations of the
Company's identifiable assets are as follows:
June 30, 2003 March 31, 2003
HK$'000 HK$'000
Hong Kong 392,452 399,628
PRC 98,756 84,116
------- -------
491,208 483,744
======= =======
6. DISCLOSURE OF MAJOR CUSTOMERS
During the three months ended June 30, 2003, one customer accounted for 11.1% of
total sales. No customers accounted for 10% or more of total sales during the
three months ended June 30, 2002. A substantial percentage of the Company's
sales was made to a small number of customers and was typically on an open
account basis.
F-8
7. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
Reportable Segment Profit or Loss, and Segment Assets
For the three months ended,
June 30
2003 2002
HK$'000 HK$'000
Revenues from external customers:
Pearls 66,888 76,776
Real estate investment 1,388 1,832
------- -------
68,276 78,608
======= =======
Operating (loss) income:
Pearls 235 10,041
Real estate investment (2,190) 163
------- -------
(1,955) 10,204
======= =======
Interest expenses:
Pearls - 350
Real estate investment 86 155
Corporate assets 47 79
------- -------
133 584
======= =======
Depreciation and amortization:
Pearls 1,767 1,556
Real estate investment 416 457
Corporate assets 229 345
------- -------
2,412 2,358
======= =======
Capital expenditure for segment assets:
Pearls 3,316 1,017
Real estate investment 1,147 -
Corporate assets - 5
------- -------
4,463 1,022
======= =======
As of June As of March 31,
30, 2003 2003
HK$'000 HK$'000
Segment assets:
Pearls 380,000 334,251
Real estate investment 58,834 96,447
Corporate assets 52,374 53,046
------- -------
491,208 483,744
======= =======
F-9
8. COMMON STOCK
On June 7, 2002, the Company issued an aggregate of 410,000 shares of common
stock, par value US$0.001 per share, to two business consultants pursuant to
their respective business consulting agreements, both dated June 1, 2002.
Compensation expenses of approximately HK$2.2 million, the fair value of the
stock issued, is being recognized over the consultants' service period. During
the three months ended June 30, 2003, approximately HK$272,000 was charged to
the income statement. On April 30, 2003, the Company repurchased the stock
issued to these consultants at a price of US$1.5 per share. These shares were
cancelled on May 12, 2003.
On May 27, 2003, the Company launched a small shareholders buyout to purchase
shares of the Company's common stock from shareholders who, on May 27, 2003,
owned 99 or fewer shares of the Company. Subsequent to the closing of the buyout
program, the Company's transfer agent reported to the Company in July 2003 that
none of the shareholders accepted the offer.
On August 6, 2003, Man Sang International Ltd ("MSIL"), a subsidiary of the
Company whose shares are listed on The Stock Exchange of Hong Kong Limited,
approved an ordinary share dividend of one share of ordinary share for every ten
ordinary shares owned by each of its record shareholders.
9. PURCHASE OF PROPERTY
In June 2003, the Company entered into a provisional sales and purchase
agreement to purchase office space at 8th Floor, Harcourt House, 39 Gloucester
Road, Wanchai, Hong Kong, for HK$36.5 million. As of June 30, 2003, the Company
had paid a deposit of HK$1 million and expects to pay the balance of HK$35.5
million by August 15, 2003.
10. SUBSEQUENT EVENT
In July 2003, the Company entered into provisional sales and purchase agreements
to sell Units 14, 15 and 16 of 6th Floor, Block A, and car parking space
numbered L-30, at Focal Industrial Centre, 21 Man Lok Street, Kowloon, Hong Kong
for a total consideration of HK$6.2 million. The Company expects to complete
this transaction by October 31, 2003.
F-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements that are, by their nature, subject to risks and uncertainties. These
forward-looking statements include, without limitation, statements relating to:
(a) future supplies, demands, and purchase and sale prices of pearl and pearl
jewelry in the international pearl and jewelry markets, and real estate in Hong
Kong and the PRC; (b) sales and profitability of the Company's products and its
future product mix; (c) the amount and nature of, and potential for, future
developments and competitions; (d) expansion, consolidation and other trends in
the pearl and jewelry industry; (e) the Company's business strategy; (f) the
Company's estimated financial information regarding its business; (g) tax
exemptions and tax rates; (h) potential sales and purchases of real property;
(i) potential stock dividends and (i) the stability of interest rates and
foreign currency 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, uncertainties and other factors, any or all of which could cause
actual results to differ materially from the Company's expectations, whether
expressed or implied by such forward-looking statements (which may relate to,
among other things, the Company's sales, costs and expenses, income, inventory
performance, and receivables). The Company's ability to achieve its objectives
and expectations are derived in part from assumptions regarding economic
conditions, consumer tastes, and developments in its competitive environment.
The following assumptions, among others, could materially affect the likelihood
that the Company will achieve its objectives and expectations communicated
through these forward-looking statements: (i) that low or negative growth in the
economies or the financial markets of our customers, particularly in the United
States and in Europe, will not occur and reduce discretionary spending on good
that might be perceived as "luxuries"; (ii) that the Hong Kong dollar will
remain pegged to the US dollar at US$1 to HK$7.8; (iii) that customer's choice
of pearls vis-a-vis other precious stones and metals will not change adversely;
(iv) that the Company will continue to obtain a stable supply of pearls in the
quantities, of the quality and on terms required by the Company; (v) that there
will not be a substantial adverse change in the exchange relationship between
Renminbi ("RMB") and the Hong Kong or US dollar; (vi) that there will not be
substantial increase in tax burden of subsidiaries of the Company operating in
the PRC; (vii) that there will not be substantial change in climate and
environmental conditions at the source regions of pearls that could have
material effect on the supply and pricing of pearls; and (viii) that there will
not be substantial adverse change in the real estate market conditions in the
PRC and in Hong Kong. The following discussion of results of operation, and
liquidity and capital resources should be read in conjunction with the financial
statements and the notes thereto included elsewhere in this Form 10-Q and with
the Company's annual report on Form 10-K for the year ended March 31, 2003.
1
RESULTS OF OPERATIONS
Sales and Gross Profit
Net sales for the three months ended June 30, 2003 decreased by HK$9.9 million,
or 12.9%, to HK$66.9 million, compared to net sales of HK$76.8 million during
the same period in 2002. The overall decrease in sales in this quarter was
mainly attributable to the impact of the war in Iraq and Severe Acute
Respiratory Syndrome ("SARS") on consumer spending, which adversely affects
trade shows and travels by overseas buyers to Hong Kong. This shortfall was
partly offset by the contribution of sales revenue generated from the jewelry
business acquired in December 2002.
Gross profit for the three months ended June 30, 2003 decreased by HK$7.3
million, or 30.0%, to HK$17.0 million from HK$24.3 million for the same period
in 2002. As a percentage of net sales, gross profit margin decreased 6.2% to
25.5% for the three months ended June 30, 2003 from 31.7% for the same period in
2002. The decrease in gross profit margin was mainly attributable to the newly
acquired jewelry business, which has a slightly lower gross profit margin than
our existing pearl and pearl jewelry business and to our flexible pricing
strategy on our fresh water pearls.
Rental Income
Gross rental income for the three months ended June 30, 2003 was approximately
HK$1.4 million representing a decrease of approximately HK$0.4 million, or
24.2%, as compared to HK$1.8 million in the same period in 2002. The decrease in
gross rental income was mainly attributable to the Company taking back certain
of its property for its own use on April 21, 2003.
Selling, General and Administrative Expenses ("SG & A expenses")
SG&A expenses were HK$20.4 million, consisting of HK$16.8 million attributable
to pearl operations and HK$3.6 million attributable to real estate operations.
SG&A expenses for the three months ended June 30, 2003 increased approximately
HK$4.4 million, or 27.8%, from HK$16.0 million in the same period in 2002,
consisting of HK$14.3 million attributable to pearl operations and HK$1.7
million attributable to real estate operations, for the same period in 2002. The
increase in SG&A expenses was mainly due to the loss arising on the demolition
of one of the buildings for reconstruction in our Industrial City in Shenzhen,
and the increased headcount and salary expenses related to the acquisition of
the jewelry business in December 2002.
As a percentage of net sales, SG&A expenses from pearl operations increased 6.5%
to 25.1% for the three months ended June 30, 2003 from 18.6% for the same period
in 2002.
Interest Expenses
Interest expenses decreased by HK$451K, or 77.2%, to HK$133K for the three
months ended June 30, 2003 from HK$584K for the same period in 2002 as a result
of the use of bank deposits to repay part of the Company's bank borrowings.
Interest Income
Interest income decreased by HK$134K, or 58.8%, to HK$94K for the three months
ended June 30, 2003 from HK$228K in the same period in 2002. The decrease was
due principally to a withdrawal of bank deposits to repay part of the Company's
bank borrowings during the three months ended June 30, 2003.
2
Income Tax Expenses
Income tax expenses for the three months ended June 30, 2003 were HK$1.3
million, as compared to HK$3.3 million for the same period in 2002. The decrease
was due to lower tax expenses as a result of lower taxable income generated
during the three months ended June 30, 2003.
Net (Loss) Income
Net loss for the three months ended June 30, 2003 was HK$1.9 million, compared
to net income of HK$4.0 million for the same period in 2002. The decrease was
mainly attributable to the decrease in sales, gross profit and rental income in
this period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are funded by collection of accounts
receivable and sales of inventories. At June 30, 2003, the Company had working
capital of HK$277.2 million, which included a cash balance of HK$112.4 million.
The current ratio was 6.6 to 1 as of June 30, 2003. Net cash provided by
operating activities was approximately HK$24.3 million for the three months
ended June 30, 2003. Net cash used in investing activities for the three months
ended June 30, 2003 was HK$3.5 million and net cash provided by financing
activities was HK$7.8 million.
Inventories were HK$134.0 million at June 30, 2003. The inventory turnover
period was 7.9 months as at June 30, 2003.
Accounts receivable was HK$50.0 million at June 30, 2003. Debtors' turnover
period was 68 days as at June 30, 2003.
Long-term debts (including current portion of long-term debts) were HK$15.8
million at June 30, 2003. The gearing ratio was 0.85 at June 30, 2003.
The Company had available working capital facilities of HK$70.6 million in total
with various banks at June 30, 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 June 30, 2003, the Company had utilized HK$18.8 million of
these credit facilities.
The Company believes that its existing cash, cash equivalents, banking
facilities and funds to be generated from internal operations will be sufficient
to meet its anticipated future liquidity requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2003, the Company had no derivative contracts, such as forward
contracts and options to hedge against foreign exchange fluctuations.
During the three months ended June 30, 2003, the Company made 5.0% of its
purchases in RMB and an aggregate of 61.6% in Hong Kong dollars and US dollars.
3
At June 30, 2003, the Company had short-term RMB bank borrowings of HK$18.8
million and the weighted average interest rate was 5.3% per annum. The RMB is
not a fully convertible currency and the PRC government determines its exchange
rate against other currencies. As the PRC has not declared any intention to
either devalue or revalue its currency, the Company believes that any imminent
risk of a substantial fluctuation of the RMB exchange rate remains low. The
Company denominates its sales in either US dollars or Hong Kong dollars. Because
the Hong Kong dollar remained pegged to the US dollar at a consistent rate, the
Company feels that the exposure of its sales proceeds to foreign exchange
fluctuations is minimal. Therefore, the Company believes its currency risk in
the foreseeable future is not material.
At June 30, 2003, the Company had Hong Kong dollar bank borrowings of HK$15.8
million, the weighted average interest rate of which was 2.4% per annum. 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"). Because the Hong Kong dollar is pegged to the US dollar, which
correlates Hong Kong interest rates to US interest rates, any change in US
interest rates will likely affect Hong Kong interest rates. Since the US economy
has slowed down and US interest rates have remained low, the three-month HIBOR
has decreased by 5.37% from 6.5% as at June 30, 2000 to 1.13% as at June 30,
2003. Therefore, the Company does not foresee material risks of an increase in
Hong Kong interest rates in the foreseeable future and did not enter into
derivative contracts or other arrangements to hedge against such risk.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2003, an evaluation was performed under the supervision and the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on such evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
No significant change was made in the Company's internal control over financial
reporting during the fiscal quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
The Company's Chief Executive Officer and Chief Financial Officer do not expect
that the Company's disclosure controls or internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based partly on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
4
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On June 7, 2002, the Company issued an aggregate of 410,000 shares of common
stock, par value US$0.001 per share, to two business consultants pursuant to
their respective business consulting agreements, both dated June 1, 2002. On
April 30, 2003, the Company repurchased the stock issued to these consultants at
a price of US$1.5 per share. These shares were cancelled on May 12, 2003.
ITEM 5. OTHER INFORMATION
PURCHASE OF PROPERTY
In June 2003, the Company entered into a provisional sales and purchase
agreement to purchase office space at 8th Floor, Harcourt House, 39 Gloucester
Road, Wanchai, Hong Kong, for HK$36.5 million. As of June 30, 2003, the Company
had paid a deposit of HK$1 million and expects to pay the balance by August 15,
2003.
SALE OF PROPERTIES
In July 2003, the Company entered into provisional sales and purchase agreements
to sell Units 14, 15 and 16 of 6th Floor, Block A, and car parking space
numbered L-30, at Focal Industrial Centre, 21 Man Lok Street, Kowloon, Hong Kong
for a total consideration of HK$6.2 million. The Company expects to complete
this transaction by October 31, 2003.
BONUS SHARES
On August 6, 2003, Man Sang International Ltd. ("MSIL"), a subsidiary of the
Company whose shares are listed on The Stock Exchange of Hong Kong Limited,
approved the issuance to MSIL's shareholders of one bonus ordinary share for
every ten ordinary shares of MSIL held.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.1 Restated Articles of Incorporation including the Certificate of
Designation, of the Series A Preferred Stock. (1)
3.2 Certificate of Designation of the Series B Preferred Stock. (2)
3.3 Amended Bylaws. (1)
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
(1) Incorporated by reference to the Company's current report on Form 8-K
dated January 8, 1996.
(2) Incorporated by reference to the Company's registration statement on
Form 8-A dated June 17, 1996.
(B) Reports on Form 8-K
(1) Current Report on Form 8-K filed on April 29, 2003.
(2) Current Report on Form 8-K filed on May 29, 2003.
5
SIGNATURE
Pursuant to 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.
Dated: August 14, 2003 By: /s/ CHENG CHUNG HING, RICKY
------------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President and
Chief Executive Officer
6
INDEX TO EXHIBITS
The following documents are filed herewith or have been included as exhibits to
previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
Exhibit No. Description
3.1 Restated Articles of Incorporation including the Certificate
of Designation, of the Series A Preferred Stock. (1)
3.2 Certificate of Designation of the Series B Preferred Stock.(2)
3.3 Amended Bylaws.(1)
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
(1) Incorporated by reference to the Company's current report on Form 8-K
dated January 8, 1996.
(2) Incorporated by reference to the Company's registration statement on
Form 8-A dated June 17, 1996.
7