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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
OF INCORPORATION OR ORGANIZATION) 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)
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 FEBRUARY 7, 2005, 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
December 31, 2004 and March 31, 2004 F-1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three and Nine Months
Ended December 31, 2004 and 2003 F-3
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended December 31, 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 8
ITEM 4. Controls and Procedures 9
PART II - OTHER INFORMATION
ITEM 6. Exhibits 10
SIGNATURES 11
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share data)
DECEMBER 31, 2004 MARCH 31, 2004
----------------------- --------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents 25,917 202,151 104,907
Marketable securities 1,140 8,890 7,776
Accounts receivable, net of allowance for doubtful 6,931 54,060 62,993
accounts of HK$23,108 as of December 31, 2004 and
HK$14,728 as of March 31, 2004
Inventories:
Raw materials 3,722 29,029 14,676
Work in progress 746 5,821 19,659
Finished goods 10,017 78,131 80,962
-------- --------- --------------
14,485 112,981 115,297
Prepaid expenses 565 4,410 3,169
Deposits and other receivables, net of allowance for 323 2,519 7,840
doubtful accounts of HK$3,617 as of December 31, 2004
and HK$2,769 as of March 31, 2004
Other current assets 452 3,518 8,937
Income tax receivable 70 549 461
-------- --------- --------------
Total current assets 49,883 389,078 311,380
Deferred tax assets 0 0 174
Property, plant and equipment 20,949 163,402 157,528
Accumulated depreciation and impairment loss (5,999) (46,792) (41,737)
-------- --------- --------------
14,950 116,610 115,791
Real estate investment 7,870 61,386 99,608
Accumulated depreciation (1,465) (11,429) (10,935)
-------- --------- --------------
6,405 49,957 88,673
Long-term investments 0 0 856
-------- --------- --------------
Total assets 71,238 555,645 516,874
======== ========= ==============
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
DECEMBER 31, 2004 MARCH 31, 2004
----------------------- --------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debts:
Secured bank loans - - 5,575
Accounts payable 1,361 10,617 13,234
Accrued payroll and employee benefits 1,454 11,343 8,523
Other accrued liabilities 1,353 10,555 9,979
Deposit on sale of real estate investment - - 7,160
Income taxes payable 1,390 10,841 4,264
-------- --------- --------------
Total current liabilities 5,558 43,356 48,735
Long-term debts:
Secured bank loans - - 6,016
Deferred tax liabilities 61 475 821
Minority interests 32,300 251,938 224,437
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$0.001 4 34 34
- authorized: 25,000,000 shares;
issued and outstanding: 4,405,960 shares as of
December 31, 2004 and March 31, 2004
Additional paid-in capital 7,839 61,141 61,051
Retained earnings 25,025 195,191 172,836
Accumulated other comprehensive income 451 3,509 2,943
-------- --------- --------------
Total stockholders' equity 33,319 259,876 236,865
-------- --------- --------------
Total liabilities and stockholders' equity 71,238 555,645 516,874
======== ========= ==============
See accompanying notes to condensed consolidated financial statements
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31
(Amounts expressed in thousands except share data)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------------ ------------------------------------
2004 2003 2004 2003
------------------------ ---------- ---------------------- ------------
US$ HK$ HK$ US$ HK$ HK$
Net sales 13,984 109,074 106,540 40,530 316,135 274,936
Cost of goods sold (10,343) (80,674) (82,713) (29,278) (228,365) (205,992)
----------- ----------- ---------- --------- ---------- ------------
Gross profit 3,641 28,400 23,827 11,252 87,770 68,944
Rental income, gross 107 831 1,690 476 3,710 4,565
----------- ----------- ---------- --------- ---------- ------------
3,748 29,231 25,517 11,728 91,480 73,509
Selling, general and administrative expenses
- Pearls (2,647) (20,649) (17,288) (8,070) (62,948) (51,720)
- Real estate investment (447) (3,489) (1,986) (1,131) (8,828) (8,834)
----------- ----------- ---------- --------- ---------- ------------
Operating income 654 5,093 6,243 2,527 19,704 12,955
Non-operating items
- Interest expense (3) (22) (63) (13) (100) (337)
- Interest income 37 286 46 58 455 205
- Gain on sales of a real estate investment 0 0 0 4,391 34,248 0
- Other income 39 307 1,682 146 1,142 2,740
- Other than temporary decline in fair value of
marketable securities 0 0 (2,474) 0 0 (2,474)
----------- ----------- ---------- --------- ---------- ------------
Income before income taxes and minority interests 727 5,664 5,434 7,109 55,449 13,089
Income taxes (235) (1,833) (3,773) (791) (6,173) (7,106)
----------- ----------- ---------- --------- ---------- ------------
Income before minority interests 492 3,831 1,661 6,318 49,276 5,983
Minority interests (322) (2,509) (2,379) (3,451) (26,921) (5,647)
----------- ----------- ---------- --------- ---------- ------------
Net income (loss) 170 1,322 (718) 2,867 22,355 336
Other comprehensive income, net of taxes and
minority interests
- Foreign currency translation adjustments (2) (13) 40 2 16 6
- Unrealized holding gain on marketable securities 63 493 527 71 550 1,678
- Reclassification adjustment for other than
temporary decline in fair value of marketable
securities included in net income (loss) for
the period - - 1,222 - - 1,222
----------- ----------- ---------- --------- ---------- ------------
Other comprehensive income, net of taxes and
minority interests 61 480 1,789 73 566 2,906
----------- ----------- ---------- --------- ---------- ------------
Comprehensive income 231 1,802 1,071 2,940 22,921 3,242
=========== =========== ========== ========= ========== ============
Basic earnings (loss) per common share 0.04 0.29 (0.16) 0.64 4.96 0.07
=========== =========== ========== ========= ========== ============
Diluted earnings (loss) per common share 0.03 0.26 (0.16) 0.56 4.40 0.07
=========== =========== ========== ========= ========== ============
Weighted average number of shares
of common stock
- for basic earnings (loss) per share 4,405,960 4,405,960 4,405,960 4,405,960 4,405,960 4,467,087
=========== =========== ========== ========= ========== ============
- for diluted earnings (loss) per share 4,988,798 4,988,798 4,405,960 4,970,678 4,970,678 4,742,564
=========== =========== ========== ========= ========== ============
See accompanying notes to condensed consolidated financial statements
F-3
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31
(Amounts expressed in thousands)
NINE MONTHS ENDED DECEMBER 31,
------------------------------------
2004 2003
----------------------- -------
US$ HK$ HK$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 2,867 22,355 336
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful debts 1,183 9,228 2,194
Inventory write down 2,974 23,200 7,925
Impairment loss on property, plant and
equipment 336 2,617 389
Impairment loss on real estate investment 0 0 1,762
Impairment loss on long term investment 110 856 0
Compensation expense 12 90 312
Depreciation and amortization 818 6,377 7,144
(Gain) loss on disposal of property, plant
and equipment (17) (136) 685
(Gain) loss on disposal of real estate
investment (4,391) (34,248) 1,992
Other than temporary decline in fair value of
marketable securities 0 0 2,474
Realized gain on sales of marketable
securities 0 0 (480)
Minority interests 3,451 26,921 5,647
Changes in operating assets and liabilities:
Accounts receivable 67 527 13,094
Inventories (2,676) (20,874) 11,013
Prepaid expenses (159) (1,241) 1,278
Deposits and other receivables 573 4,474 (2,373)
Other current assets 694 5,419 3,661
Income taxes receivable (11) (88) 0
Deferred tax assets 22 174 (318)
Accounts payable (336) (2,620) 6,254
Accrued payroll and employee benefits 361 2,820 2,260
Other accrued liabilities 74 574 (2,060)
Deferred tax liabilities (44) (346) 367
Income taxes payable 843 6,577 6,351
------- -------- --------
Net cash provided by operating activities 6,751 52,656 69,907
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,102) (8,597) (16,692)
Purchase of real estate investment 0 0 (38,222)
Purchase of marketable securities 0 0 (27)
Proceeds from disposal of marketable
securities 0 0 4,495
Proceeds from disposal of property, plant
and equipment 41 320 1,062
Proceeds from disposal of real estate
investment 8,263 64,450 5,196
------- -------- --------
Net cash provided by investing activities 7,202 56,173 (44,188)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 0 0 18,848
Proceeds from partial disposal of a
subsidiary 0 0 8,940
Repayment of short-term borrowings 0 0 (18,845)
Repayment of long-term debts (1,486) (11,591) (9,025)
Repurchase of common stock 0 0 (4,797)
------- -------- --------
Net cash used in financing activities (1,486) (11,591) (4,879)
------- -------- --------
Net increase in cash and cash equivalents 12,467 97,238 20,840
Cash and cash equivalents at beginning of period 13,450 104,907 83,766
Exchange adjustments 0 6 (16)
------- -------- --------
Cash and cash equivalents at end of period 25,917 202,151 104,590
======= ======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 14 108 352
------- -------- --------
Net income taxes paid 21 163 786
------- -------- --------
See accompanying notes to condensed consolidated financial statements
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 as of December 31, 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 disclosure guidance previously
discussed under EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The consensus provided
for certain disclosure requirements that were effective for fiscal years ending
after December 15, 2003. We will adopt the disclosure requirements during the
fiscal year ending March 31, 2005.
In March 2004, the EITF reached a consensus on recognition and measurement
guidance previously discussed under EITF Issue No. 03-1. The consensus clarifies
the meaning of "other-than-temporary impairment" and its application to
investments classified as either "available-for-sale" or "held-to-maturity"
under FASB Statement No.115, "Accounting for Certain Investments in Debt and
Equity Securities," and investments accounted for under the cost method or the
equity method. The recognition and measurement guidance for which consensus was
reached is to be applied to other-than-temporary impairment evaluations in
reporting periods beginning after June 15, 2004. In September 2004, the EITF
delayed the effective date to apply the measurement and recognition provisions
relating to debt and equity
F-6
securities until the FASB issues additional guidance. We believe that this
consensus on the recognition and measurement guidance will not have a material
impact on our financial position, results of operations, or cash flows.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of
ARB No. 43, Chapter 4." This statement amends Accounting Research Bulletin No.
43, Chapter 4 to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and spoilage should be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal" and that
fixed production overhead costs should be allocated to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005,
however, earlier application is permitted for inventory costs incurred during
fiscal years beginning after November 23, 2004. The provisions of SFAS No. 151
should be applied prospectively. There was no significant impact on the
Company's financial position and results of operations as a result of the
adoption of SFAS No. 151.
In December 2004, the FASB issued SFAS No.123R (revised 2004), "Share-Based
Payment." SFAS No. 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS No. 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123(R) replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Public entities (other than those
filing as small business issuers) will be required to apply SFAS No. 123(R) as
of the first interim or annual reporting period that begins after June 15, 2005.
There is no significant impact on the Company due to the adoption of this
standard because the Company has already adopted SFAS No. 123.
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.
F-7
For the Nine
For the Quarter Months Ended
Ended December December 31,
31, 2003 2003
HK$'000 HK$'000
--------------- -------------
Net (loss) income (718) 336
Allocation of undistributed earnings to
participating securities (Series A preferred
stock) - (7)
--------------- -------------
Undistributed (loss) earnings to common stock,
adjusted (718) 329
=============== =============
No. of shares No. of shares
Weighted average-shares outstanding 4,405,960 4,467,087
Effect of dilutive securities stock options
granted by the Company - 275,477
--------------- -------------
Adjusted weighted average-shares outstanding 4,405,960 4,742,564
=============== =============
HK$ HK$
Net (loss) earnings per share
Basic (0.16) 0.07
=============== =============
Diluted (0.16) 0.07
=============== =============
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 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$1.1 per share, the latest closing price of the Company's
common stock as of the date of grant. Half of the options vested on March 26,
2004 and the remaining half vests on March 26, 2005.
F-8
For the Nine
For the Quarter Months Ended
Ended December December 31,
31, 2004 2004
HK$'000 HK$'000
--------------- -------------
Net income 1,322 22,355
Allocation of undistributed earnings to
participating securities (Series A preferred
stock) (29) (496)
--------------- -------------
Undistributed earnings to common stock, adjusted 1,293 21,859
=============== =============
No. of shares No. of shares
Weighted average-shares outstanding 4,405,960 4,405,960
Effect of dilutive securities stock options
granted by the Company 582,838 564,718
--------------- -------------
Adjusted weighted average-shares outstanding 4,988,798 4,970,678
=============== =============
HK$ HK$
Net earnings per share
Basic 0.29 4.96
=============== =============
Diluted 0.26 4.40
=============== =============
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:
For the Quarter Ended For the Nine Months
December 31 Ended December 31
2004 2003 2004 2003
HK$'000 HK$'000 HK$'000 HK$'000
---------- --------- --------- ----------
Net Sales:
Hong Kong * 10,118 12,542 35,543 36,705
Export:
North America 40,674 35,366 111,622 85,727
Europe (excluding Germany) 3,418 11,710 36,100 31,750
Germany 33,148 16,955 56,645 46,686
Japan 15,110 17,162 39,553 27,476
Other Asian countries 3,423 9,464 25,257 35,198
Others 3,183 3,341 11,415 11,394
---------- --------- --------- ----------
109,074 106,540 316,135 274,936
========== ========= ========= ==========
* A majority of sales (by dollar amount) in Hong Kong are for re-export to
North America and Europe.
F-9
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:
December 31, 2004 March 31, 2004
HK$'000 HK$'000
------------------ ------------------
Hong Kong 460,643 427,092
PRC 95,002 89,782
------------------ ------------------
555,645 516,874
================== ==================
6. DISCLOSURE OF MAJOR CUSTOMERS
During the three months ended December 31, 2004, two customers accounted for
23.3% of total sales. During the nine months ended December 31, 2004, one
customer accounted for 11.6% of total sales. During the three and nine months
ended December 31, 2003, there was no customer who accounted for 10.0% or more
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-10
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 nine months ended,
December 31 December 31
2004 2003 2004 2003
HK$'000 HK$'000 HK$'000 HK$'000
-------- ------- ------- ---------
Revenues from external
customers:
Pearls 109,074 106,540 316,135 274,936
Real estate investment 831 1,690 3,710 4,565
-------- ------- ------- ---------
109,905 108,230 319,845 279,501
======== ======= ======= =========
Operating income (loss):
Pearls 7,751 6,539 24,822 17,224
Real estate investment (2,658) (296) (5,118) (4,269)
-------- ------- ------- ---------
5,093 6,243 19,704 12,955
======== ======= ======= =========
Interest expense:
Pearls 9 20 33 102
Real estate investment 3 14 18 118
Corporate assets 10 29 49 117
-------- ------- ------- ---------
22 63 100 337
======== ======= ======= =========
Depreciation and amortization:
Pearls 1,473 1,679 4,365 5,148
Real estate investment 314 442 1,324 1,307
Corporate assets 230 231 689 689
-------- ------- ------- ---------
2,017 2,352 6,378 7,144
======== ======= ======= =========
Capital expenditure for segment assets:
Pearls 2,011 632 8,597 4,185
Real estate investment - 8,577 - 50,729
-------- ------- ------- ---------
2,011 9,209 8,597 54,914
======== ======= ======= =========
As of As of
December March
31, 2004 31, 2004
HK$'000 HK$'000
-------- ---------
Segment assets:
Pearls 457,248 372,671
Real estate investment 49,957 95,833
Corporate assets 48,440 48,370
-------- ---------
555,645 516,874
======== =========
F-11
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. DISPOSAL OF REAL ESTATE
On March 12, 2004, the Company entered into a Sale and Purchase Agreement to
sell real estate 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 was completed on September 15, 2004. No Hong Kong
Profits Tax is owed as the gain is capital in nature.
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 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:
our future performance, our expansion efforts, demand for our products, the
state of economic conditions and our markets, currency and exchange rate
fluctuations, and our ability to meet our liquidity requirements. These
forward-looking statements are based on assumptions and analyses made by us in
light of our experience and perception of historical trends, current conditions
and expected future developments, as well as other factors we believe to be
appropriate in particular circumstances. However, whether actual results and
developments will meet our expectations and predictions depend 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 our 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, our ability to achieve
our objectives and expectations are derived at least in part from assumptions
regarding economic conditions, consumer tastes, and developments in our
competitive environment. The following assumptions, among others, could
materially affect the likelihood that we will achieve our objectives and
expectations communicated through these forward-looking statements: (i) that low
or negative growth in the economies or the financial markets of our customers,
particularly in the United States and in Europe, will not occur and reduce
discretionary spending on goods that might be perceived as "luxuries"; (ii) that
the Hong Kong dollar will remain pegged to the US dollar at US$1 to HK$7.8;
(iii) that customer's choice of pearls vis-a-vis other precious stones and
metals will not change adversely; (iv) that we will continue to obtain a stable
supply of pearls in the quantities, of the quality and on terms we require; (v)
that there will not be a substantial adverse change in the exchange relationship
between the renminbi ("RMB") and the Hong
1
Kong or US dollar; (vi) that there will not be a substantial increase in
the tax burdens of our subsidiaries operating in the PRC; (vii) that there will
not be a substantial change in climate and environmental conditions at the
source regions of pearls that could have a material adverse effect on the supply
and pricing of pearls; and (viii) that there will not be a substantial adverse
change in the real estate market conditions in the PRC and in Hong Kong. The
following discussion of our 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 our 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, as
well as, other aspects of our business. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. We 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 we file from time to time with the Securities
and Exchange Commission.
OVERVIEW
Sales performance for the Company and its subsidiaries (the "Group") increased
2.4% in the third quarter of fiscal 2005 compared to the same quarter last
fiscal year. For the nine months ended December 31, 2004, the Group recorded net
sales of approximately HK$316.1 million, representing an increase of 15.0% as
compared to the same period in fiscal 2004. Overall sales performance has been
benefited from the improvement in global economic conditions. The improvement in
performance for the nine months is mainly due to the increase in sales in the
first quarter of this fiscal year compared to the same quarter last year, which
was adversely affected by the negative economic effects of Severe Acute
Respiratory Syndrome ("SARS") and the Iraq war.
Our key performer on the pearl side of the business continues to be South Sea
pearls, including white and gold South Sea pearls and Tahitian Black pearls,
which represented 42.5% of the Group's total turnover for the nine months ended
December 31, 2004. In addition to South Sea pearls, sales of assembled pearl
jewelry and jewelry products in North America and Europe are growing at a
healthy pace due to the increased popularity of pearl jewelry products.
FUTURE TRENDS
We will continue to emphasize expansion of our assembled jewelry products
business, while maintaining steady growth in our core pearl business. We
continue to look for opportunities to venture into new market segments, to
enlarge our customer base and to solidify our market
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position. By attending international tradeshows and exhibitions and adopting
aggressive marketing and flexible pricing strategies, we believe that we can
further expand our market share and customer base. We closely monitor changes in
market demand, environment and conditions so that we can react to such changes.
By diversifying our product range, we expect to further increase our sales. To
support increasing sales and to improve product quality, we intend to expand our
production facilities. Furthermore, we maintain effective cost control measures
to increase our competitiveness.
Based on the improvement in global economic conditions, we believe that our
sales performance will continue to increase in the fourth quarter of fiscal
2005.
RESULTS OF OPERATIONS
For the Nine-Month Period Ended December 31, 2004 compared to Nine-Month Period
Ended December 31, 2003.
Sales and Gross Profit
Net sales for the nine months ended December 31, 2004 increased by HK$41.2
million, or 15.0% to HK$316.1 million, compared to net sales of HK$274.9 million
for the nine months ended December 31, 2003. The overall increase in sales was
mainly attributable to the increase in sales in the first quarter of fiscal 2005
as a result of the improvement in global economic conditions and consumer
confidence as compared with the negative impact of the war in Iraq and SARS on
consumer spending during the same period last year. The increase in sales was
mainly from increases in sales of South Sea pearls and finished products.
Gross profit for the nine months ended December 31, 2004 increased by HK$18.9
million, or 27.3%, to HK$87.8 million from HK$68.9 million for the nine months
ended December 31, 2003. As a percentage of net sales, gross profit margin
increased 2.7% to 27.8% for the nine months ended December 31, 2004 from 25.1%
for the nine months ended December 31, 2003. The increase in gross profit margin
was mainly attributable to the increase in pearl sales, which have a higher
gross profit margin than jewelry products.
Rental Income
Gross rental income for the nine month period ended December 31, 2004 was HK$3.7
million compared to HK$4.6 million for the nine months ended December 31, 2003,
representing a decrease of HK$0.9 million, or 18.7%. The decrease in gross
rental income was mainly
3
attributable to the disposal of a real estate investment in September 2004.
Selling, General and Administrative Expense ("SG & A expense")
SG&A expense for the nine months ended December 31, 2004 was HK$71.8 million,
consisting of HK$63.0 million attributable to pearl operations and HK$8.8
million attributable to real estate operations. SG&A expense for the nine months
ended December 31, 2004, increased approximately HK$11.2 million, or 18.5%, from
HK$60.6 million for the nine months ended December 31, 2003, which consisted of
HK$51.8 million attributable to pearl operations and HK$8.8 million attributable
to real estate. The higher SG&A expenses attributable to pearl operations is
mainly due to higher exhibition expenses, higher commission expense and
provision for doubtful accounts as a result of higher sales performance and the
impairment of property, plant and equipment.
As a percentage of net sales, SG&A expense attributable to pearl operations was
19.9% for the nine months ended December 31, 2004, 1.1% higher than SG&A expense
for the nine months ended December 31, 2003 of 18.8%.
Interest Expense
As a result of our reduction in outstanding bank loans during fiscal 2005,
interest expense decreased by HK$237K*, or 70.3%, to HK$100K for the nine months
ended December 31, 2004 from HK$337K for the nine months ended December 31,
2003.
Interest Income
Interest income increased by HK$250K, or 122.0%, to HK$455K for the nine months
ended December 31, 2004 from HK$205K for the nine months ended December 31,
2003. The increase was principally due to higher interest rates and higher cash
balances during the nine months ended December 31, 2004.
Gain on Disposal of Real Estate
During the nine months ended December 31, 2004, we sold real estate to an
independent third party for HK$71.6 million, resulting in a disposal gain of HK
$34.2 million. The sales transaction was completed on September 15, 2004.
- ----------------------
* As used in this report, the letter "K" appearing immediately after a Hong Kong
dollar amount denotes rounding to the nearest HK$1,000; as an example,
HK$250,499 may be rounded to "HK$250K."
4
Income Tax Expense
Income tax expense for the nine months ended December 31, 2004 was HK$6.2
million, compared to the HK$7.1 million during the nine months ended December
31, 2003. The decrease was due to the income tax provision made in the third
quarter of fiscal 2004 relating to the gain arising from the disposal of MSIL
shares by its wholly owned subsidiary, Man Sang International (B.V.I.) Limited
("MSBVI").
Net Income
Net income for the nine months ended December 31, 2004 was HK$22.4 million,
compared to net income of HK$0.3 million for the nine months ended December 31,
2003. The increase was mainly attributable to the increase in sales, gross
profit and the gain arising on the disposal of real estate during the first nine
months of fiscal 2005.
RESULTS OF OPERATIONS
For the Three-Month Period Ended December 31, 2004 compared to Three-Month
Period Ended December 31, 2003.
Sales and Gross Profit
Net sales for the three months ended December 31, 2004 increased by HK$2.6
million, or 2.4% to HK$109.1 million, compared to net sales of HK$106.5 million
during the three months ended December 31, 2003. The overall increase in sales
was mainly attributable to the improvement in the global economy and consumer
confidence.
Gross profit for the three months ended December 31, 2004 increased by HK$4.6
million, or 19.2%, to HK$28.4 million from HK$23.8 million in the three months
ended December 31, 2003. As a percentage of net sales, gross profit margin
increased 3.6% to 26.0% for the three months ended December 31, 2004 from 22.4%
for the three months ended December 31, 2003. The increase in gross profit
margin was mainly 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 December 31, 2004 was
approximately HK$0.8 million representing a decrease of approximately HK$0.9
million, or 50.8%, as
5
compared to HK$1.7 million for the three months ended December 31, 2003. The
decrease in gross rental income was mainly attributable to the disposal of a
real estate investment in September 2004.
Selling, General and Administrative Expense ("SG&A expense")
SG&A expense was HK$24.1 million for the three months ended December 31, 2004,
consisting of HK$20.6 million attributable to pearl operations and HK$3.5
million attributable to real estate operations. SG&A expense for the three
months ended December 31, 2004, increased approximately HK$4.8 million, or
25.2%, from HK$19.3 million for the three months ended December 31, 2003, which
consisted of HK$17.3 million attributable to pearl operations and HK$2.0 million
attributable to real estate. The increase in SG&A expense attributable to pearl
operations is mainly due to higher commission expenses and an impairment loss on
property, plant and equipment. The increase in SG&A expense attributable to the
real estate side was mainly due to the increased repair and maintenance expense
for refurbishing some of the buildings located in Man Sang Industrial City in
Shenzhen.
As a percentage of net sales, SG&A expense attributable to pearl operations
increased 2.7% to 18.9% for the three months ended December 31, 2004 from 16.2%
for the three months ended December 31, 2003.
Interest Expense
As a result of our reduction in outstanding bank loans during fiscal 2005,
interest expense decreased by HK$41K, or 65.1%, to HK$22K for the three months
ended December 31, 2004 from HK$63K for the three months ended December 31,
2003.
Interest Income
Interest income increased by HK$240K, or 521.7%, to HK$286K for the three months
ended December 31, 2004 from HK$46K for the three months ended December 31,
2003. The increase was principally due to higher interest rates and higher cash
balances during the three months ended December 31, 2004.
Income Tax Expense
Income tax expense for the three months ended December 31, 2004 was HK$1.8
million, compared to HK$3.8 million for the three months ended December 31,
2003. The decrease was
6
due to the income tax provision made in the third quarter of fiscal 2004
relating to the gain arising from the disposal of MSIL shares by MSBVI.
Net Income (Loss)
Net income for the three months ended December 31, 2004 was HK$1.3 million,
compared to net loss of HK$0.7 million during the three months ended December
31, 2003. The increase was mainly attributable to a lower tax provision in the
third quarter of fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are funded by the collection of accounts receivable
and sales of inventory. As of December 31, 2004, we had working capital of
HK$345.7 million, which included a cash balance of HK$202.2 million. The current
ratio was 9 to 1 as of December 31, 2004. Net cash provided by operating
activities was approximately HK$52.7 million for the nine months ended December
31, 2004. Net cash provided by investing activities for the nine months ended
December 31, 2004 was HK$56.2 million and net cash used in financing activities
was HK$11.6 million.
Inventories were HK$113.0 million as of December 31, 2004. The inventory
turnover period was 4.5 months as of December 31, 2004.
Accounts receivable were HK$54.1 million as of December 31, 2004. Debtors'
turnover period was 46.8 days as of December 31, 2004.
All of our long-term debt (including the current portion of long-term debt) was
fully repaid before December 31, 2004 and the gearing ratio was zero as of
December 31, 2004.
We had available working capital facilities of HK$47.0 million with various
banks at December 31, 2004. Such 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 are subject to periodic review. As
of December 31, 2004, we had a zero balance on each of these credit facilities.
We believe that our existing cash, cash equivalents, banking facilities and
funds to be generated from internal operations will be sufficient to meet its
anticipated future liquidity requirements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2004, we had no derivative contracts, such as forward
contracts and options to hedge against foreign exchange fluctuations.
During the nine months ended December 31, 2004, we made approximately 53.2% of
our purchases in US dollars and 46.6% in Hong Kong dollars and RMB combined.
We denominate our sales in either US Dollars or Hong Kong Dollars. Since the
Hong Kong Dollar remained "pegged" to the US Dollar at a consistent rate, we
feel that the exposure of our 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. We do 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. As of December 31, 2004, we have no short-term
RMB bank loans.
Because most of our purchases are made in currencies that we believe have low
risk of appreciation or devaluation and sales are made in US dollars, we have
determined that our 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.
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ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in our 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 our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the our
disclosure controls and procedures as of December 31, 2004. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of December 31,
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 our internal control over financial reporting during the fiscal quarter
ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Our Chief Executive Officer and Chief Financial Officer do not expect that our
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 6. EXHIBITS
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.
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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: February 7, 2005
By: /s/ CHENG Chung Hing, Ricky
----------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer
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