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MAN SANG HOLDINGS, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 REGISTER IS AN ACCELERATED FILER ( AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT ) YES [ ] NO [X].
AS OF SEPTEMBER 30, 2003 AND NOVEMBER 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
September 30, 2003 and March 31, 2003 F-1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three months and six months ended
September 30, 2003 and 2002 F-3
Condensed Consolidated Statements of Cash Flows for
the six months ended September 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 5
ITEM 4. Controls and Procedures 6
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 7
ITEM 6 Exhibits and Reports on Form 8-K 7
SIGNATURE 8
EXHIBIT INDEX 9
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share data)
SEPTEMBER 30, 2003 MARCH 31, 2003
---------------------- --------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents 7,190 56,082 83,766
Marketable securities 1,326 10,343 9,978
Accounts receivable, net of allowance for doubtful
accounts of HK$8,739 as of September 30, 2003 and
HK$9,216 as of March 31, 2003 8,783 68,506 69,840
Inventories :
Raw materials 1,767 13,785 12,917
Work in progress 2,411 18,803 29,399
Finished goods 12,553 97,913 91,894
-------- -------- --------
16,731 130,501 134,210
Prepaid expenses 515 4,017 6,340
Deposits and other receivables 727 5,672 5,109
Other current assets 843 6,572 8,732
Income tax receivable 59 458 458
-------- -------- --------
Total current assets 36,174 282,151 318,433
Deferred tax assets 37 287 --
Property, plant and equipment 18,392 143,456 101,807
Accumulated depreciation and impairment loss (5,066) (39,510) (35,529)
-------- -------- --------
13,326 103,946 66,278
Real estate investment 13,761 107,332 108,327
Accumulated depreciation and impairment loss (1,601) (12,486) (11,880)
-------- -------- --------
12,160 94,846 96,447
Long-term investments 332 2,586 2,586
-------- -------- --------
Total assets 62,029 483,816 483,744
======== ======== ========
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
SEPTEMBER 30, 2003 MARCH 31, 2003
----------------------- --------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debts :
Secured bank loans 715 5,575 5,575
Accounts payable 902 7,037 5,554
Accrued payroll and employee benefits 1,092 8,519 7,188
Other accrued liabilities 1,275 9,946 9,577
Income taxes payable 604 4,708 2,224
-------- -------- --------
Total current liabilities 4,588 35,785 30,118
Long-term debts :
Secured bank loans 1,129 8,804 16,435
Deferred tax liabilities 43 334 -
Minority interests 23,585 183,965 179,844
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$0.001 5 34 37
- authorized: 25,000,000 shares;
issued and outstanding: 4,405,960 shares as of
September 30, 2003 and 4,815,960 shares as of
March 31, 2003
Additional paid-in capital 7,800 60,841 60,633
Retained earnings 24,712 192,750 196,491
Accumulated other comprehensive income 167 1,302 185
-------- -------- --------
Total stockholders' equity 32,684 254,928 257,347
-------- -------- --------
Total liabilities and stockholders' equity 62,029 483,816 483,744
======== ======== ========
See accompanying notes to condensed consolidated financial statements
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands except share data)
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------------- --------- --------------------- ---------
US$ HK$ HK$ US$ HK$ HK$
Net sales 13,014 101,508 81,445 21,589 168,396 158,221
Cost of goods sold (9,414) (73,433) (53,414) (15,805) (123,279) (105,871)
--------- --------- --------- --------- --------- ---------
Gross profit 3,600 28,075 28,031 5,784 45,117 52,350
Rental income, gross 191 1,487 1,868 369 2,875 3,700
--------- --------- --------- --------- --------- ---------
3,791 29,562 29,899 6,153 47,992 56,050
Selling, general and administrative expenses
- Pearls (2,260) (17,625) (15,325) (4,415) (34,432) (29,603)
- Real estate investment (419) (3,270) (1,478) (878) (6,848) (3,147)
--------- --------- --------- --------- --------- ---------
Operating income 1,112 8,667 13,096 860 6,712 23,300
Share of result of an associate - - (80) - - (80)
Non-operating items
- Interest expense (18) (141) (452) (35) (274) (1,036)
- Interest income 8 65 195 20 159 423
- Other income 51 397 865 136 1,058 1,630
--------- --------- --------- --------- --------- ---------
Income before income taxes and minority interests 1,153 8,988 13,624 981 7,655 24,237
Income taxes (264) (2,058) (2,261) (427) (3,333) (5,527)
--------- --------- --------- --------- --------- ---------
Income before minority interests 889 6,930 11,363 554 4,322 18,710
Minority interests (510) (3,981) (5,122) (419) (3,268) (8,503)
--------- --------- --------- --------- --------- ---------
Net income 379 2,949 6,241 135 1,054 10,207
Other comprehensive income (loss), net of taxes and
minority interests
- Foreign currency translation adjustments (4) (29) 185 (4) (34) 216
- Unrealized holding gain (loss) on marketable securities 97 760 (1,426) 148 1,151 (1,851)
--------- --------- --------- --------- --------- ---------
Other comprehensive income (loss), net of taxes and 93 731 (1,241) 144 1,117 (1,635)
--------- --------- --------- --------- --------- ---------
minority interests
Comprehensive income 472 3,680 5,000 279 2,171 8,572
========= ========= ========= ========= ========= =========
Basic earnings per common share 0.09 0.67 1.30 0.03 0.23 2.19
========= ========= ========= ========= ========= =========
Diluted earnings per common share 0.08 0.63 1.30 0.03 0.22 2.19
========= ========= ========= ========= ========= =========
Weighted average number of shares
of common stock
- for basic earnings per share 4,405,960 4,405,960 4,815,960 4,500,058 4,500,058 4,665,851
========= ========= ========= ========= ========= =========
- for diluted earnings per share 4,717,098 4,717,098 4,815,960 4,787,439 4,787,439 4,665,851
========= ========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements
F-3
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands)
SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------
2003 2002
--------------------- --------
US$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net income 136 1,054 10,207
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Write-down of inventories 455 3,549 5,639
Provision for doubtful debts 9 73 1,019
Impairment loss on property, plant and equipment 50 389 0
Impairment loss on real estate investment 226 1,762 0
Compensation expense 27 208 0
Depreciation and amortization 614 4,792 4,902
Share of result of an associate 0 0 80
Loss on disposal of property, plant and equipment 338 2,637 310
Realized gain on sales of marketable securities (17) (137) -
Minority interests 418 3,268 8,503
Changes in operating assets and liabilities:
Accounts receivable 220 1,714 (10,927)
Inventories 19 151 (33,113)
Prepaid expenses 298 2,323 60
Deposits and other receivables (138) (1,076) (3,157)
Other current assets 277 2,159 2,908
Deferred tax assets (37) (287) 1,107
Accounts payable 190 1,483 3,500
Accrued payroll and employee benefits 171 1,331 144
Other accrued liabilities 47 369 453
Deferred tax liabilities 43 334 --
Income taxes payable 318 2,484 4,076
-------- -------- --------
Net cash provided by (used in) operating activities 3,664 28,580 (4,289)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (5,859) (45,705) (1,457)
Decrease in restricted cash - - 16,169
Loan to an associate - - (300)
Proceeds from disposal of marketable securities 231 1,803 -
Proceeds from disposal of property, plant and equipment 8 64 196
Purchase of a long-term investment - - (156)
-------- -------- --------
Net cash (used in) provided by investing activities (5,620) (43,838) 14,452
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 2,416 18,848 942
Repayment of short-term borrowings (2,416) (18,845) (14,339)
Repayment of long-term debts (978) (7,631) (2,788)
Repurchase of common stock (615) (4,797) --
-------- -------- --------
Net cash used in financing activities (1,593) (12,425) (16,185)
-------- -------- --------
Net decrease in cash and cash equivalents (3,549) (27,683) (6,022)
Cash and cash equivalents at beginning of period 10,739 83,766 82,152
Exchange adjustments - (1) 1
-------- -------- --------
Cash and cash equivalents at end of period 7,190 56,082 76,131
======== ======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 36 280 1,046
-------- -------- --------
Net income taxes paid 95 743 344
-------- -------- --------
See accompanying notes to condensed consolidated financial statements
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 dollar amounts into United States dollars are for
convenience only and have been made at the rate of HK$7.8 to US$1, the
approximate free rate of exchange at September 30, 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 has adopted this statement on
April 1, 2003. There was no significant impact on the Company financial position
and 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 extinguishment of debt be aggregate and, if
material, classified as an extraordinary
F-5
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 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 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. 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 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. There was no significant impact on the Company's
financial position and results of operations as a result of the adoption of SFAS
No.149.
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristic 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. 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, whose
decisions are final and binding on all parties. On August 2, 2002, at the 2002
Annual General Meeting of MSIL, MSIL's shareholders approved a share option
scheme (the "New Share Option Scheme") to replace the Old Share Option Scheme.
No option has been granted under the New Share Option Scheme and all the options
granted under the Old Share Option
F-6
Scheme lapsed in October 2002.
For the Quarter Ended September 30, 2002
----------------------------------------
Earnings EPS
HK$'000 No. of shares HK$
Basic EPS
Net income available to common stockholders 6,241 4,815,960 1.30
Diluted EPS
Net income available to common stockholders, including
conversion 6,241 4,815,960 1.30
For the Six Months Ended September 30, 2002
-------------------------------------------
Earnings EPS
HK$'000 No. of shares HK$
Basic EPS
Net income available to common stockholders 10,207 4,665,851 2.19
Diluted EPS
Net income available to common stockholders, including
conversion 10,207 4,665,851 2.19
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 September 30, 2002, the effect
on consolidated EPS of options issued by MSIL and options issued by the Company
was not included in the computation of diluted EPS because 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$1.1 per share, the latest closing price of the Company's
common stock as of the date of grant. Half of the options vest on March 26, 2004
and the remaining half vest on March 26, 2005.
For the Quarter Ended September 30, 2003
----------------------------------------
Earnings EPS
HK$'000 No. of shares HK$
Basic EPS
Net income available to common stockholders 2,949 4,405,960 0.67
Effect of dilutive stock options granted by the
Company
Diluted EPS - 311,138
------ ---------
Net income available to common stockholders,
including conversion 2,949 4,717,098 0.63
------ --------- ----
F-7
For the Six Months Ended September 30, 2003
-------------------------------------------
Earnings EPS
HK$'000 No. of shares HK$
Basic EPS
Net income available to common stockholders 1,054 4,500,058 0.23
Effect of dilutive stock options granted by the
Company
Diluted EPS - 287,381
------ ---------
Net income available to common stockholders,
including conversion 1,054 4,787,439 0.22
------ --------- ----
5. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are coordinated through its Hong Kong
subsidiaries and an analysis by destination:
For the quarter ended For the Six Months ended
------------------------- -------------------------
September 30 September 30
------------------------- -------------------------
2003 2002 2003 2002
HK$'000 HK$'000 HK$'000 HK$'000
Net Sales:
Hong Kong * 13,942 12,189 24,163 27,347
Export:
North America 28,030 25,135 50,361 47,557
Germany 17,279 6,443 29,731 8,753
Europe (excluding Germany) 12,611 9,714 20,040 17,797
Japan 8,513 10,790 17,180 17,375
Other Asian countries 14,585 13,098 18,868 33,014
Others 6,548 4,076 8,053 6,378
-------- -------- -------- --------
101,508 81,445 168,396 158,221
======== ======== ======== ========
* A majority of sales (by dollar amount) in Hong Kong are for re-export
to North America and Europe.
The Company operates in 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:
September 30, 2003 March 31, 2003
------------------ --------------
HK$'000 HK$'000
Hong Kong 403,194 399,628
PRC 80,622 84,116
-------- --------
483,816 483,744
======== ========
F-8
6. DISCLOSURE OF MAJOR CUSTOMERS
During the three and six months ended September 30, 2003 and September 30, 2002,
there was no customer who accounted for 10% or more of total sales. A
substantial percentage of the Company's sales were made to a small number of
customers and was typically on an open account basis.
F-9
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 quarter ended For the six months ended,
September 30 September 30
2003 2002 2003 2002
HK$'000 HK$'000 HK$'000 HK$'000
Revenues from external customers:
Pearls 101,508 81,445 168,396 158,221
Real estate investment 1,487 1,868 2,875 3,700
-------- -------- --------- --------
102,995 83,313 171,271 161,921
======== ======== ========= ========
Operating income:
Pearls 10,450 12,706 10,685 22,747
Real estate investment (1,783) 390 (3,973) 553
-------- -------- --------- --------
8,667 13,096 6,712 23,300
======== ======== ========= ========
Interest expense:
Pearls 82 252 82 602
Real estate investment 18 128 104 283
Corporate assets 41 72 88 151
-------- -------- --------- --------
141 452 274 1,036
======== ======== ========= ========
Depreciation and amortization:
Pearls 1,702 1,743 3,469 3,299
Real estate investment 449 456 865 913
Corporate assets 229 345 458 690
-------- -------- --------- --------
2,380 2,544 4,792 4,902
======== ======== ========= ========
Capital expenditure for segment assets:
Pearls 237 418 3,553 1,435
Real estate investment 41,005 - 42,152 -
Corporate assets - 17 - 22
-------- -------- --------- --------
41,242 435 45,705 1,457
======== ======== ========= ========
As of
September As of March
30, 2003 31, 2003
HK$'000 HK$'000
Segment assets:
Pearls 334,213 334,251
Real estate investment 94,846 96,447
Corporate assets 54,757 53,046
--------- --------
483,816 483,744
========= ========
F-10
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 and six months ended September 30, 2003, approximately HK$272,000 and
HK$544,000 respectively were 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 A PROPERTY
The Company purchased an office space at 8th Floor, Harcourt House, No.39
Gloucester Road, Wanchai, Hong Kong for a consideration of approximately HK$38.2
million including purchase cost and its associated expenses. The transaction was
completed on August 15, 2003.
10. SUBSEQUENT EVENTS
SALE OF PROPERTY
The Company entered into sale and purchase agreements on August 12, 2003 to sell
commercial real property consisting of Units 14, 15 & 16 of the 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 approximately HK$6.2
million. The transaction was completed on October 31, 2003.
In connection with the disposal, the Company recorded an impairment loss of
approximately HK$2.1 million, which represents the excess of the carrying value
of the properties over the consideration. The impairment loss is recorded as a
component of "Selling, General and Administrative Expenses" in the income
statement for the three and the six months ended September 30, 2003.
DISPOSAL OF MSIL SHARES
The Company, through its wholly owned subsidiary, Man Sang International
(B.V.I.) Limited ("MSBVI"), held 468.6 million issued shares of MSIL,
representing 56.66% of all the issued shares of MSIL.
On October 6, 2003, Mr. Cheng Chung Hing, Ricky and Mr. Cheng Tai Po purchased
from MSBVI
F-11
36 million and 24 million of MSIL shares respectively. The purchase price per
share was based upon the average closing price of the MSIL shares over a period
of 5 trading days up to and including October 6, 2003, the closing date of the
transaction.
After the transaction, the Company, through MSBVI, holds 408.6 million MSIL
shares, representing 49.40% of all the issued shares of MSIL and still is the
principal shareholder of MSIL.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements that are, by their nature, subject to risks and uncertainties. These
forward-looking statements include, without limitation, statements relating to:
(a) future supplies, demands, and purchase and sale prices of pearl and pearl
jewelry in the international pearl and jewelry markets, and real estate in Hong
Kong and the PRC; (b) sales and profitability of the Company's products and its
future product mix; (c) the amount and nature of, and potential for, future
developments and competitions; (d) expansion, consolidation and other trends in
the pearl and jewelry industry; (e) the Company's business strategy; (f) the
Company's estimated financial information regarding its business; (g) tax
exemptions and tax rates; and (h) exchange rates. These forward-looking
statements are based on assumptions and analyses made by the Company in light of
its experience and perception of historical trends, current conditions and
expected future developments, as well as other factors the Company believes to
be appropriate in particular circumstances. However, whether actual results and
developments will meet the Company's expectations and predictions depends on a
number of known and unknown risks, uncertainties and other factors, any or all
of which could cause actual results, performance or achievements to differ
materially from the Company's expectations, whether expressed or implied by such
forward-looking statements (which may relate to, among other things, the
Company's sales, costs and expenses, income, inventory performance, and
receivables). The Company's ability to achieve its objectives and expectations
are derived at least in part from assumptions regarding economic conditions,
consumer tastes, and developments in its competitive environment. The following
assumptions, among others, could materially affect the likelihood that the
Company will achieve its objectives and expectations communicated through these
forward-looking statements: (i) that low or negative growth in the economies or
the financial markets of our customers, particularly in the United States and in
Europe, will not occur and reduce discretionary spending on good that might be
perceived as "luxuries"; (ii) that the Hong Kong dollar will remain pegged to
the US dollar at US$1 to HK$7.8; (iii) that customer's choice of pearls
vis-a-vis other precious stones and metals will not change adversely; (iv) that
the Company will continue to obtain a stable supply of pearls in the quantities,
of the quality and on terms required by the Company; (v) that there will not be
a substantial adverse change in the exchange relationship between the Chinese
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
Six-Month Period Ended September 30, 2003 compared to Six-Month Period Ended
September 30, 2002.
Sales and Gross Profit
Net sales for the six months ended September 30, 2003 increased by HK$10.2
million, or 6.4%, to HK$168.4 million, compared to net sales of HK$158.2 million
during the same period in 2002. The overall increase in sales was mainly
attributable to the recovery of business in the second quarter and the impact of
Iraq war and Severe Acute Respiratory Syndrome ("SARS") on consumer spending in
the first quarter. Overseas buyers reacted positively to the International
Jewelry Show held this September, suggesting a return of customers' confidence.
In addition, the increase is also due to the additional contribution of sales
revenue generated from our acquired jewelry business in December 2002.
Gross profit for the six months ended September 30, 2003 decreased by HK$7.2
million, or 13.8%, to HK$45.1 million from HK$52.3 million for the same period
in 2002. As a percentage of net sales, gross profit margin decreased 6.3% to
26.8% for the six months ended September 30, 2003 from 33.1% for the same period
in 2002. The decrease in gross profit margin was mainly attributable to our
flexible pricing strategy on our fresh water pearls to boost sales and to our
acquired jewelry business, which has a slightly lower gross profit margin than
our existing pearl and pearl jewelry business.
Rental Income
Gross rental income for the six months ended September 30, 2003 was
approximately HK$2.9 million, representing a decrease of approximately HK$0.8
million, or 22.3%, as compared to HK$3.7 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, while being
offset by the rental income contribution from the newly acquired property at 8th
Floor, Harcourt House, 39 Gloucester Road, Wanchai, Hong Kong.
Selling, General and Administrative Expenses ("SG & A expenses")
SG&A expenses were HK$41.3 million, consisting of HK$34.5 million attributable
to pearl operations and HK$6.8 million attributable to real estate operations.
SG&A expenses for the six months ended September 30, 2003, an increase of
approximately HK$8.6 million, or 26.0%, from HK$32.7 million, in the same period
in 2002, consisting of HK29.6 million attributable to pearl operations and
HK$3.1 million attributable to real estate operations, for the same period in
2002. The increase in SG&A expenses was mainly due to (i) increased headcount
and salaries expenses related to our acquired jewelry business, and (ii) loss
arising on the demolition of one of the buildings for reconstruction in our
Industrial City in Shenzhen.
As a percentage of net sales, SG&A expenses from pearl operations increased 1.7%
to 20.4 % for the six months ended September 30, 2003 from 18.7% for the same
period in 2002.
Interest Expense
Interest expense decreased by HK$762K, or 73.6%, to HK$274K for the six months
ended
2
September 30, 2003 from HK$1,036K for the same period in 2003 as a result of the
reduction of the Company's bank borrowings and the lower interest rate during
the period.
Interest Income
Interest income decreased by HK$264K, or 62.4%, to HK$159K for the six months
ended September 30, 2003 from HK$423K in the same period in 2002. The decrease
was due principally to lower bank deposit balance and lower interest rates
during the six months ended September 30, 2003 when compared to same period last
year.
Income Tax Expense
Income taxes expenses for the six months ended September 30, 2003 were HK$3.3
million, a decrease of HK$2.2 million as compared to HK5.5 million for the same
period in 2002. The lower income tax expense was due to lower taxable income
generated during the six months ended September 30, 2003 when compared to same
period last year.
Net Income
Net income for the six months ended September 30, 2003 was HK$1.1 million,
compared to net income of HK$10.2 million for the same period in 2002. The
decrease was mainly attributable to lower gross profit and rental income and
higher SG&A expenses in this period in 2003 as compared to the same period in
2002.
RESULTS OF OPERATIONS
Three-Month Period Ended September 30, 2003 compared to Three-Month Period Ended
September 30, 2002.
Sales and Gross Profit
Net sales for the three months ended September 30, 2003 increased by HK$20.1
million, or 24.6%, to HK$101.5 million, compared to net sales of HK$81.4 million
during the same period in 2002. The overall increase in sales was mainly
attributable to the recovery of business in the second quarter and the impact of
Iraq war and Severe Acute Respiratory Syndrome ("SARS") on consumer spending in
the first quarter. Overseas buyers react positively in the International Jewelry
Show in this September, suggesting a return of customers' confidence. In
addition, the increase is also due to the additional contribution of sales
revenue generated from the newly acquired jewelry business in December 2002.
Gross profit for the three months ended September 30, 2003 increased by HK$44K,
or 0.2%, to HK$28.1 million from HK$28.0 million for the same period in 2002. As
a percentage of net sales, gross profit margin decreased 6.7% to 27.7% for the
three months ended September 30, 2003 from 34.4% for the same period in 2002.
The decrease in gross profit margin was mainly attributable to our flexible
pricing strategy on our fresh water pearls to boost sales and to our acquired
jewelry business, which has a slightly lower gross profit margin than our
existing pearl and pearl jewelry business.
3
Rental Income
Gross rental income for the three months ended September 30, 2003 was
approximately HK$1.5 million representing a decrease of approximately HK0.4
million, or 20.4%, as compared to HK$1.9 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, while being
offset by the rental income contribution from the newly acquired property at 8th
Floor, Harcourt House, 39 Gloucester Road, Wanchai, Hong Kong.
Selling, General and Administrative Expenses ("SG & A expenses")
SG&A expenses were HK$20.9 million, consisting of HK17.6 million attributable to
pearl operations and HK$3.3 million attributable to real estate operations. SG&A
expenses for the three months ended September 30, 2003, an increase of
approximately HK$4.1 million, or 24.4%, from HK$16.8 million, in the same period
in 2002, consisting of HK$15.3 million attributable to pearl operations and
HK$1.5 million attributable to real estate operations, for the same period in
2002. The increase in SG&A expenses was mainly due to the increased headcount
and salaries expenses related to our acquired jewelry business.
As a percentage of net sales, SG&A expenses from pearl operations decreased 1.4%
to 17.4% for the three months ended September 30, 2003 from 18.8% for the same
period in 2002.
Interest Expense
Interest expense decreased by HK311K, or 68.8%, to HK$141K for the three months
ended September 30, 2003 from HK$452K for the same period in 2002 as a result of
lower bank borrowings within the Company for the period and lower interest rate.
Interest Income
Interest income decreased by HK$130K, or 66.7%, to HK$65K for the three months
ended September 30, 2003 from HK$195K in the same period in 2002. The decrease
was due principally to lower bank deposit balance and lower interest rates
during the three months ended September 30, 2003 when compared to same period
last year.
Income Tax Expense
Income taxes expenses for the three months ended September 30, 2003 were HK$2.1
million, as compared to HK$2.3 million for the same period in 2002. The lower
income tax expenses was due to lower taxable income during the three months
ended September 30, 2003 than same period last year.
Net Income
Net income for the three months ended September 30, 2003 was HK$2.9 million,
compared to net income of HK$6.2 million for the same period in 2002. The
decrease was mainly attributable to the lower gross profit, rental income and
higher SG&A expenses in this period in 2003 as compared to the same period in
2002.
4
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are funded by collection of accounts
receivable and sales of inventories. At September 30, 2003, the Company had
working capital of HK$246.4 million, which included a cash balance of HK$56.1
million. The current ratio was 7.9 to 1 as of September 30, 2003. Net cash
provided by operating activities was approximately HK$28.6 million for the six
months ended September 30, 2003. Net cash used in investing activities for the
six months ended September 30, 2003 was HK$43.8 million and net cash used in
financing activities was HK12.4 million.
Inventories were HK$130.5 million at September 30, 2003. The inventory turnover
period was 6.7 months as at September 30, 2003.
Accounts receivable was HK$68.5 million at September 30, 2003. The accounts
receivable turnover period was 75 days as at September 30, 2003.
Long-term debts (including current portion of long-term debts) were HK$14.4
million at September 30, 2003. The gearing ratio was 0.06 at September 30, 2003,
calculated by reference to the debt of HK$14.4 million and the stockholders'
equity of HK$254.9 million.
The Company had available working capital facilities of HK$95.6 million in total
with various banks at September 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 September 30, 2003, the Company had not utilized
any 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 September 30, 2003, the Company had no derivative contracts, such as
forward contracts and options to hedge against foreign exchange fluctuations.
During the six months ended September 30, 2003, the Company made 35.3% of its
purchases in Hong Kong Dollar and 25.7% in US dollars.
At September 30, 2003, the Company had no short-term RMB bank borrowings. The
RMB is not a fully convertible currency and the PRC government determines its
exchange rate against other currencies. To the best of our knowledge, the PRC
has not declared any intention to either devalue or revalue its currency;
however, there can be no assurance that a decision to allow the currency to
fluctuate in the future will not be taken. The Company mostly 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 that unless the Hong Kong government was to
change its monetary policy, its exposure to currency risk in the foreseeable
future is not material.
5
At September 30, 2003, the Company had Hong Kong dollar bank borrowings of
HK14.4 million, the weighted average interest rate of which was 2.16 % 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 5.69% from 6.5% as at September 30, 2000 to
0.81% as at September 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 September 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 September 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 resources 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 breakdown
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 the design will succeed in
achieving its stated goals under all potential future conditions.
6
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held its Annual Meeting of Stockholders on August 6, 2003.
At the Meeting, the following nominees for election as directors, to hold office
until the Company's 2004 Annual Meeting of Stockholders, received the votes of
3,887,619 shares of Common Stock and 100,000 shares of Series A Preferred Stock,
constituting a majority of the voting power present at the Meeting:
Cheng Chung Hing, Ricky
Cheng Tai Po
Yan Sau Man, Amy
Lai Chau Ming, Matthew
Yuen Ka Lok, Ernest
1,000 shares of Common Stock abstained from voting.
Therefore, said nominees were elected as directors for the term described above.
The stockholders also ratified the Board of Directors' appointment of Deloitte
Touche Tohmatsu as independent accountants. Holders of 3,886,619 shares of
Common Stock and 100,000 shares of Preferred Stock voted for the ratification,
holders of 2,000 shares voted against ratification and holders of no share
abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. SEE EXHIBIT INDEX
(b) Reports on Form 8-K.
Current Report on Form 8-K filed on October 10, 2003.
7
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: November 14, 2003
By: /s/ CHENG CHUNG HING, RICKY
----------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President and
Chief Executive Officer
8
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.
Exhibits 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)
10.1 Service Agreement, dated August 31, 2003, between Man Sang
International Limited and Cheng Chung Hing.
10.2 Service Agreement, dated August 31, 2003, between Man Sang
International Limited and Cheng Tai Po.
10.3 Service Agreement, dated August 31, 2003, between Man Sang
International Limited and Yan Sau Man, Amy.
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 statements on
Form 8-A dated June 17, 1996.