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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 JUNE 30, 2004
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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
21/F RAILWAY PLAZA, 39 CHATHAM ROAD SOUTH, TSIMSHATSUI, KOWLOON, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(852) 2317 5300
(ISSUER'S TELEPHONE NUMBER)
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 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED N RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AS OF AUGUST 13, 2004, 4,405,960 SHARES OF THE REGISTRANT'S COMMON STOCK
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, 2004 and March 31, 2004 F-1
Condensed Consolidated Statements of Operations and Comprehensive
Income for the three months ended June 30, 2004 and 2003 F-3
Condensed Consolidated Statements of Cash Flows for
the three months ended June 30, 2004 and 2003 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 6
ITEM 4. Controls and Procedures 7
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 9
ITEM 5 Other Information 9
ITEM 6 Exhibits and Reports on Form 8-K 9
SIGNATURES 10
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, 2004 MARCH 31, 2004
------------------- --------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents 15,414 120,228 104,907
Marketable securities 943 7,356 7,776
Accounts receivable, net of allowance for doubtful
accounts of HK$16,328 as of June 30, 2004 and
HK$14,728 as of March 31, 2004 9,129 71,206 62,993
Inventories :
Raw materials 2,185 17,040 14,676
Work in progress 829 6,463 19,659
Finished goods 10,622 82,848 80,962
------ ------- -------
13,636 106,351 115,297
Prepaid expenses 250 1,948 3,169
Deposits and other receivables, net of allowance for
doubtful accounts of HK$2,769 as of June 30, 2004
and March 31, 2004 1,147 8,945 7,840
Other current assets 318 2,478 8,937
Income taxes receivable 59 461 461
------ ------- -------
Total current assets 40,896 318,973 311,380
Deferred tax assets - - 174
Property, plant and equipment 20,441 159,441 157,528
Accumulated depreciation (5,449) (42,506) (41,737)
------ ------- -------
14,992 116,935 115,791
Real estate investment 12,770 99,608 99,608
Accumulated depreciation (1,474) (11,495) (10,935)
------ ------- -------
11,296 88,113 88,673
Long-term investments 110 856 856
------ ------- -------
Total assets 67,294 524,877 516,874
====== ======= =======
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
JUNE 30, 2004 MARCH 31, 2004
------------------- --------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt:
Secured bank loans 715 5,575 5,575
Accounts payable 1,522 11,872 13,234
Accrued payroll and employee benefits 946 7,382 8,523
Other accrued liabilities 1,348 10,504 9,979
Deposit on sale of real estate investment 918 7,160 7,160
Income taxes payable 903 7,043 4,264
------ ------- -------
Total current liabilities 6,352 49,536 48,735
Long-term debt:
Secured bank loans 593 4,622 6,016
Deferred tax liabilities 159 1,236 821
Minority interests 29,360 229,006 224,437
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$0.001 4 34 34
- authorized: 25,000,000 shares;
issued and outstanding: 4,405,960 shares as of
June 30, 2004 and March 31, 2004
Additional paid-in capital 7,831 61,083 61,051
Retained earnings 22,640 176,589 172,836
Accumulated other comprehensive income 355 2,770 2,943
------ ------- -------
Total stockholders' equity 30,830 240,477 236,865
------ ------- -------
Total liabilities and stockholders' equity 67,294 524,877 516,874
====== ======= =======
See accompanying notes to condensed consolidated financial statements
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(Amounts expressed in thousands except share data)
Three Months Ended June 30,
2004 2003
---------------------- ---------
US$ HK$ HK$
Net sales 12,702 99,078 66,888
Cost of sales (9,179) (71,593) (49,846)
--------- --------- ---------
Gross profit 3,523 27,485 17,042
Rental income, gross 202 1,578 1,388
--------- --------- ---------
3,725 29,063 18,430
Selling, general and administrative expenses:
- Pearls (2,213) (17,262) (16,807)
- Real estate investment (193) (1,503) (3,578)
--------- --------- ---------
Operating income (loss) 1,319 10,298 (1,955)
Non-operating items:
- Interest expense (5) (38) (133)
- Interest income 8 59 94
- Other income 83 647 661
--------- --------- ---------
Income (loss) before income taxes
and minority interests 1,405 10,966 (1,333)
Income tax expense (316) (2,467) (1,275)
--------- --------- ---------
Income (loss) before minority interests 1,089 8,499 (2,608)
Minority interests (608) (4,746) 713
--------- --------- ---------
Net income (loss) 481 3,753 (1,895)
Other comprehensive (loss) income, net of taxes and
minority interests:
- Foreign currency translation adjustments 4 35 (5)
- Unrealized holding (loss) gain on marketable
securities (27) (208) 391
--------- --------- ---------
Other comprehensive (loss) income, net of taxes and
minority interests (23) (173) 386
--------- --------- ---------
Comprehensive income (loss) 458 3,580 (1,509)
========= ========= =========
Basic earnings (loss) per common share 0.11 0.83 (0.41)
========= ========= =========
Diluted earnings (loss) per common share 0.10 0.76 (0.41)
========= ========= =========
Weighted average number of shares
of common stock outstanding:
- basic 4,405,960 4,405,960 4,595,191
========= ========= =========
- diluted 4,849,342 4,849,342 4,595,191
========= ========= =========
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,
----------------------------
2004 2003
----------------- -------
US$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) 481 3,753 (1,895)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts 205 1,600 -
Compensation expense 4 32 103
Depreciation and amortization 292 2,277 2,412
(Gain) loss on disposal of property, plant and equipment (3) (20) 2,591
Realized gain on sales of marketable securities - - (44)
Minority interests 608 4,746 (713)
Changes in operating assets and liabilities:
Accounts receivable (1,252) (9,773) 19,806
Inventories 1,148 8,956 199
Prepaid expenses 157 1,221 109
Deposits and other receivables (141) (1,103) (217)
Other current assets 828 6,459 474
Deferred tax assets 22 174 -
Accounts payable (175) (1,364) 1,095
Accrued payroll and employee benefits (146) (1,141) (375)
Other accrued liabilities 67 522 (655)
Deferred tax liabilities 53 415 1,186
Income taxes payable 356 2,778 222
------ ------- -------
Net cash provided by operating activities 2,504 19,532 24,298
------ ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (388) (3,026) (4,463)
Proceeds from disposal of property, plant and equipment 26 204 58
Proceeds from sales of marketable securities - - 877
------ ------- -------
Net cash used in investing activities (362) (2,822) (3,528)
------ ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term borrowings - - 18,848
Repayment of long-term debt (179) (1,394) (6,237)
Repurchase of common stock - - (4,797)
------ ------- -------
Net cash (used in) provided by financing activities (179) (1,394) 7,814
------ ------- -------
Net increase in cash and cash equivalents 1,963 15,316 28,584
Cash and cash equivalents at beginning of period 13,450 104,907 83,766
Exchange adjustments 1 5 -
------ ------- -------
Cash and cash equivalents at end of period 15,414 120,228 112,350
------ ------- -------
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and finance charges 5 36 135
------ ------- -------
Net income taxes paid 24 188 729
------ ------- -------
See accompanying notes to condensed consolidated financial statements
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 2004 balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. 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, 2004. 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 PRESENTATIONS 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 presented in this
report.
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 June 30, 2004. 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.
F-5
3. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issue Task Force ("EITF") reached its consensus on
Issue No. 03-6 "Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share". EITF No. 03-6 addresses how to determine
whether a security should be considered a "participating security" for purposes
of computing EPS and how to allocate earnings to a participating security when
using the two-class method for computing basic EPS. EITF No. 03-6 is effective
for reporting periods beginning after March 31, 2004 and should be applied by
restating previously reported EPS.
The issued and outstanding shares of Series A preferred stock of the Company,
which are entitled to participate in any dividends paid ratably with the holders
of common stock, are participating securities under EITF No. 03-6. According to
EITF No. 03-6 and SFAS No. 128, the undistributed earnings should be allocated
between the common stock and the participating securities based on the
contractual participation rights of the participating securities to share in
current earnings as if all earnings were distributed ratably, but separate
income statement presentation of the per share amounts attributable to the
participating securities, other than common stock, is not required. However, the
amount of earnings allocable to participating securities should be disclosed, as
a reconciling item, in the basic EPS calculation as disclosed in note 4 to the
condensed consolidated financial statements. No losses were allocated to the
Series A preferred stock because its contractual terms provide no obligation of
its holders to share in the Company's losses.
In November 2003, the EITF reached a consensus on EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". EITF Issue No. 03-01 establishes additional disclosure
requirements for each category of SFAS No. 115 and 124 investments in a loss
position for annual periods ending after December 15, 2003. In March 2004, the
EITF also reached a consensus on the additional accounting guidance for
other-than-temporary impairments and its application to debt and equity
investments in reporting periods beginning after June 15, 2004 and the
additional disclosures for equity securities that are not subject to the scope
of SFAS No.115 and not accounted for under the equity method under APB Opinion
18 and related interpretation ("cost method investments") for annual financial
statements for fiscal years ending after June 15, 2004. Comparative information
for the periods prior to initial application of this issue is not required.
In connection with adopting this issue, during the first quarter of fiscal 2005,
the Company has completed the test for other-than-temporary impairment under the
guidance of this issue, which
F-6
indicated no other-than-temporary impairment of existing investments.
4. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128 by application of the
two-class method. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock and participating
securities according to dividends declared (or accumulated) and participation
rights in undistributed earnings. 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 the 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.
For the Three Months
Ended June 30
2003
HK$'000
Net loss (1,895)
Allocation of undistributed losses to participating securities -
(Series A preferred stock)
--------------------
Undistributed losses to common stock, adjusted (1,895)
====================
No. of shares
Weighted average-shares outstanding 4,595,191
Effect of dilutive securities stock options granted by the Company -
--------------------
Adjusted weighted average-shares outstanding 4,595,191
====================
HK$
Net losses per share
Basic (0.41)
====================
Diluted (0.41)
====================
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. On April 30, 2003, the Company repurchased the stock
issued to these consultants at a price of US $1.5 per
F-7
share. These shares were cancelled 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$1.1 per share, the latest closing price of the Company's
common stock as of the date of grant. Half of the options vest on March 26, 2004
and the remaining half vests on March 26, 2005.
For the three months ended June 30, 2003, the effect on consolidated EPS of
options issued by MSIL and options issued by the Company was not included in the
computation of diluted EPS because doing so would have been anti-dilutive.
For the Three Months
Ended June 30
2003
HK$'000
Net income 3,753
Allocation of undistributed earnings to participating securities (83)
(Series A preferred stock)
--------------------
Undistributed earnings to common stock, adjusted 3,670
====================
No. of shares
Weighted average-shares outstanding 4,405,960
Effect of dilutive securities stock options granted by the Company 443,382
--------------------
Adjusted weighted average-shares outstanding 4,849,342
====================
HK$
Net earnings per share
Basic 0.83
====================
Diluted 0.76
====================
F-8
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
2004 2003
HK$'000 HK$'000
Net Sales:
Hong Kong * 15,132 10,221
Export:
North America 30,354 22,331
Europe (excluding Germany) 10,053 7,429
Germany 11,014 12,451
Japan 18,682 8,667
Other Asian countries 10,192 4,284
Others 3,651 1,505
------- -------
99,078 66,888
======= =======
* 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, 2004 March 31, 2004
HK$'000 HK$'000
Hong Kong 451,579 427,092
PRC 73,298 89,782
------------- --------------
524,877 516,874
============= ==============
6. DISCLOSURE OF MAJOR CUSTOMERS
During the three months ended June 30, 2004, one customer accounted for 12.0% of
total sales. During the three months ended June 30, 2003, one customer accounted
for 11.1% of total sales. Generally, a substantial percentage of the Company's
sales has been made to a small number of customers and is 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 three months ended, June 30
2004 2003
HK$'000 HK$'000
Revenues from external customers:
Pearls 99,078 66,888
Real estate investment 1,578 1,388
------- --------
100,656 68,276
======= ========
Operating income (loss):
Pearls 10,223 235
Real estate investment 75 (2,190)
------- --------
10,298 (1,955)
======= ========
Interest expense:
Pearls 13 -
Real estate investment 7 86
Corporate assets 18 47
------- --------
38 133
======= ========
Depreciation and amortization:
Pearls 1,513 1,767
Real estate investment 535 416
Corporate assets 229 229
------- --------
2,277 2,412
======= ========
Capital expenditure for segment assets:
Pearls 3,026 3,316
Real estate investment - 1,147
Corporate assets - -
------- --------
3,026 4,463
======= ========
As of June 30, 2004 As of March 31, 2004
HK$'000 HK$'000
Segment assets:
Pearls 389,256 372,671
Real estate investment 88,134 95,833
Corporate assets 47,487 48,370
------------------- --------------------
524,877 516,874
=================== ====================
F-10
8. COMMON STOCK
On August 4, 2004, MSIL approved an ordinary share dividend of one share of
ordinary share for every ten ordinary shares owned by each of its record
shareholders.
9. SUBSEQUENT EVENT
On March 12, 2004, the Company entered into a Sale and Purchase Agreement to
sell an investment property located at 8th Floor, Harcourt House, No.39
Gloucester Road, Wanchai, Hong Kong to an independent third party for a
consideration of HK$71.6 million. The transaction is expected to be completed on
September 15, 2004.
F-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, which are, by their nature, subject to risks and uncertainties. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements, other than statements of historical fact,
including statements regarding industry prospects and future results of
operations or financial position, made in this Form 10-Q are forward looking.
Words such as "anticipates," "believes," "expects," "future" and "intends" and
similar expressions may identify forward-looking statements. These
forward-looking statements include, without limitation, statements relating to:
the Company's future performance, the Company's expansion efforts, the state of
economic conditions and the Company's markets, the completion of the sale of
investment property; the resolution of certain legal proceedings; currency and
exchange rate fluctuations; and the Company's ability to meet its liquidity
requirements. These forward-looking statements are based on assumptions and
analyses made by the Company in light of its experience and perception of
historical trends, current conditions and expected future developments, as well
as other factors the Company believes to be appropriate in particular
circumstances. However, whether actual results and developments will meet the
Company's expectations and predictions depends on a number of known and unknown
risks and uncertainties and other factors, any or all of which could cause
actual results, performance or achievements to differ materially from the
Company's expectations, whether expressed or implied by such forward-looking
statements (which may relate to, among other things, the Company's sales, costs
and expenses, income, inventory performance, and receivables). Primarily engaged
in the processing and trading of pearls and pearl jewelry products, and in real
estate investment, the Company's ability to achieve its objectives and
expectations are derived at least in part from assumptions regarding economic
conditions, consumer tastes, and developments in its competitive environment.
The following assumptions, among others, could materially affect the likelihood
that the Company will achieve its objectives and expectations communicated
through these forward-looking statements: (i) that low or negative growth in the
economies or the financial markets of its 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
1
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 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, 2004. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this report. 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,
2004, which contains a further description of risks and uncertainties related to
forward-looking statements made by the Company, as well as other aspects of its
business. The Company will not publicly release any revisions to these
forward-looking statements after the date hereof. Readers are urged, however, to
review the factors set forth in reports that the Company files from time to time
with the Securities and Exchange Commission.
OVERVIEW
In the first quarter of fiscal 2005, the Company continued to benefit from
global economic improvements. The Company recorded an increase of 48.1% in
turnover as compared to the same period in fiscal 2004. The increase in turnover
is mainly attributable to the recovery in the Company's sales performance, which
was adversely affected by the negative economic effects of SARS (Severe Acute
Respiratory Syndrome) and the Iraq war on the Company's business in the same
period last year.
The global demand for South Sea pearls (including white and gold South Sea
pearls and Tahitian black pearls) continues to grow. Due to steady consumer
spending and the Company's aggressive marketing efforts, turnover in South Sea
pearls increased in this quarter and constituted 53.4% of the Company's total
turnover, out of which Tahitian black pearls contributed the majority of the
increase. In order to maintain its competitive advantage, the Company continues
to focus on maintaining its relationships with its purchasing network, so that
it can maintain the quality of its goods and keep its prices competitive.
2
The Company continues its efforts to increase sales, particularly with respect
to sales of its jewelry products. It has its own design team for jewelry
products and by offering its customers a unique and wide range of choices,
believes it can capture more customers and greater market share. The Company
continually promotes and markets its jewelry products through attendance at
international trade shows and exhibitions, marketing campaigns and
advertisements. The Company believes that by continuing these efforts it can
pursue further expansion in its sales of jewelry products. In addition, the
Company closely monitors its PRC pearl and jewelry production facilities to
ensure that they are running efficiently and effectively.
FUTURE TRENDS
The Company received encouraging feedback from the trade shows it attended in
Hong Kong and overseas, which may indicate that the market downturn is nearing
its end. The Company plans to closely monitor the market environment and respond
quickly to changes in customers' tastes and preferences. The Company believes
that offering the right product and services mix will be the key factor to its
success. Further, by enhancing the efficiency and effectiveness of its
operations through cost control measures as well as through aggressive marketing
and pricing strategies, the Company expects it can further expand its marketing
and distribution network. The Company anticipates that it will continue to
perform well in the coming quarters ahead.
RESULTS OF OPERATIONS
Sales and Gross Profit
Net sales for the three months ended June 30, 2004 increased by HK$32.2 million,
or 48.1% to HK$99.1 million, compared to net sales of HK$66.9 million during the
same period in 2003. The overall increase in sales in this quarter was mainly
attributable to the improvement in the global economy and consumer confidence as
compared with the negative impact of the war in Iraq and Severe Acute
Respiratory Syndrome ("SARS") on consumer spending for the same period last
year. The increase in sales in this quarter is mainly from increases in sales of
South Sea pearls and finished products.
Gross profit for the three months ended June 30, 2004 increased by HK$10.5
million, or 61.3%, to HK$27.5 million from HK$17.0 million during the same
period in 2003. As a percentage of net sales, gross profit margin increased 2.2%
to 27.7% for the three months ended 30 June 2004 from 25.5% during the same
period in 2003. The increase in gross profit margin was mainly
3
attributable to the increase in pearl sales, which have a higher gross profit
margin than jewelry products.
Rental Income
Gross rental income for the three months ended June 30, 2004 was approximately
HK$1.6 million representing an increase of approximately HK$190K, or 13.7%, as
compared to HK$1.4 million during the same period in 2003. The increase in gross
rental income was mainly attributable to the rental contribution from one of the
Company's investment properties at 8th Floor, Harcourt House, No.39 Gloucester
Road, Wanchai, Hong Kong, but offset by a decrease in gross rental income due to
the Company taking back 19th Floor, Railway Plaza, No.39 Chatham Road South,
Tsimshatsui, Kowloon, HK for its own use in the first quarter of fiscal 2004.
Selling, General and Administrative Expenses ("SG & A expenses")
SG&A expenses were HK$18.8 million, consisting of HK$17.3 million attributable
to pearl operations and HK$1.5 million attributable to real estate operations.
SG&A expenses for the three months ended June 30, 2004, decreased approximately
HK$1.6 million, or 7.9%, from HK$20.4 million during the same period in 2003,
consisting of HK$16.8 million attributable to pearl operations and HK$3.6
million attributable to real estate. The higher SG&A expenses attributable to
the pearl operation are mainly due to higher exhibition expenses and a provision
for doubtful accounts, offset by lower rental expenses. The decrease in SG&A
expenses attributable to the real estate side was mainly due to the loss arising
from the demolition of one of the Company's buildings for reconstruction in its
Industrial City in Shenzhen, which was written off in the first quarter of
fiscal 2003.
As a percentage of net sales, SG&A expenses attributable to pearl operations
decreased 7.7% to 17.4% for the three months ended June 30, 2004 from 25.1%
during the same period in 2003.
Interest Expense
Interest expense decreased by HK$95K, or 71.4%, to HK$38K for the three months
ended June 30, 2004 from HK$133K during the same period in 2003 as a result of
the Company's reduction in bank debt during the year.
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Interest Income
Interest income decreased by HK$35K, or 37.2%, to HK$59K for the three months
ended June 30, 2004 from HK$94K during the same period in 2003. The decrease was
due principally to lower interest rates and lower account balances during the
three months ended June 30, 2004.
Income Tax Expense
Income tax expense for the three months ended June 30, 2004 was HK$2.5 million,
compared to the HK$1.3 million during the same period in 2003. The increase was
due to increased taxable income generated during the three months ended June 30,
2004.
Net Income (Loss)
Net income for the three months ended June 30, 2004 was HK$3.8 million, compared
to a net loss of HK$1.9 million during the same period in 2003. The increase was
mainly attributable to the increase in sales, gross profit and rental income
during the first quarter of 2004.
The Company is contractually obligated to make the following material payments
as of June 30, 2004:
Less than 1
Total year 1-3 years 3-5 More than
Contractual Obligations HK$'000 HK$'000 HK$'000 years 5 years
Long Term Debt Obligations 10,197 5,575 4,622 - -
Capital Commitment Obligations 5,217 5,217 - - -
Operating lease obligations 3,477 1,754 1,723 - -
------- ----------- --------- ----- ---------
Total contractual obligations 18,891 12,546 6,345 - -
======= =========== ========= ===== =========
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are funded by sales of inventory. At June
30, 2004, the
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Company had working capital of HK$269.4 million, which included a cash balance
of HK$120.2 million. The current ratio was 6.4 to 1 as of June 30, 2004. Net
cash provided by operating activities was approximately HK$19.5 million for the
three months ended June 30, 2004. Net cash used in investing activities for the
three months ended June 30, 2004 was HK$2.8 million and net cash used in
financing activities was HK$1.4 million.
Inventories were HK$106.4 million at June 30, 2004. The inventory turnover
period was 4.5 months at June 30, 2004.
Accounts receivable were HK$71.2 million at June 30, 2004. Debtors' turnover
period was 65.6 days at June 30, 2004.
Long-term debt (including the current portion of long-term debt) was HK$10.2
million at June 30, 2004. The gearing ratio was 0.04 at June 30, 2004,
calculated based on debt of HK$10.2 million and stockholder equity of HK$240.5
million.
The Company had available working capital facilities of HK$72.0 million with
various banks at June 30, 2004. 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, 2004, the Company had a zero balance on each 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, 2004, 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, 2004, the Company made approximately
37.8% of its purchases in US dollars and 42.8% in Hong Kong dollars and RMB
combined.
The Company denominates its sales in either US Dollars or Hong Kong Dollars.
Since the
6
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. On the other hand, the RMB is not a fully convertible
currency and the PRC government determines its exchange rate against other
currencies. The Company does not believe that the PRC intends to devalue or
revalue the RMB; however, there is no assurance that the PRC will not decide to
allow the currency to fluctuate in the future. We believe that the imminent risk
of a substantial fluctuation of the RMB exchange rate remains low. At March 31,
2004, the Company has no short-term RMB bank borrowings.
Because 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 future should not be material, and that no derivative contracts,
such as forward contracts and options to hedge against foreign exchange
fluctuations, were necessary during this quarter.
At June 30, 2004, the Company had Hong Kong dollar bank borrowings of HK$10.2
million, the weighted average interest rate of which was 1.5% 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 6.03% from 6.5% at June 30, 2000 to 0.47% at June 30, 2004.
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. Due to the recovery
of the economy in the US and the PRC, there is an expectation in the market that
interest rates will increase in the coming calendar year; however, the Company
does not anticipate any material financial effect related to its upcoming
long-term and short-term financing requirements.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures designed to
provide reasonable assurance as to the reliability of its published financial
statements and other disclosures included in its reports under the Securities
and Exchange Act of 1934. In accordance with Rule 14a-15(b) of the Securities
and Exchange Act of 1934, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
7
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of June 30, 2004. Based on such evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2004 to ensure
that material information relating to the Company was made known to them by
others within the Company, particularly during the period in which this
Quarterly Report on Form 10-Q was being prepared. No significant change was made
in the Company's internal control over financial reporting during the fiscal
quarter ended June 30, 2004 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 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 any design will succeed in
achieving its stated goals under all potential future conditions.
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PART II OTHER INFORMATION
ITEM I LEGAL PROCEEDINGS
On December 2, 3003, Arcadia Jewellery Limited ("Arcadia"), a subsidiary of the
Company, filed a lawsuit in Hong Kong against its former general manager and
certain other parties for breach of certain agreements. On December 22, 2003,
this former general manager filed a lawsuit in Hong Kong against Arcadia.
Arcadia intends to pursue its claim and defend against the former general
manager's claims vigorously. Although it is not possible to predict with
certainty at the moment the outcome of these unresolved legal actions or the
range of possible loss or recovery, the Company does not believe that the
resolution of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 5 OTHER INFORMATION
On August 4, 2004, MSIL approved the issuance to its shareholders of one
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) None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
Date: August 13, 2004
By: /s/ CHENG Chung Hing, Ricky
---------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer
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