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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
Form 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File No. 33-10639-NY
MAN SANG HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 87-0539570
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
21st Floor, Railway Plaza, 39 Chatham Road South
Tsimshatsui, Kowloon, Hong Kong
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, Include area code: (852) 2317 5300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
-----------------------------
(Title of class)
_________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past ninety (90) days. Yes X No
---- ----
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $14,357,382 as of June 27, 2005, based upon the
closing price on the NASD Electronic Bulletin Board reported for such date.
Shares of Common Stock held by each executive officer and director and by each
person who beneficially owns more than 5% of the outstanding Common Stock have
been excluded in that such persons may under certain circumstances be deemed to
be affiliates. This determination of executive officer of affiliate status is
not necessarily a conclusive determination for other purposes.
4,555,960 shares of Common Stock Issued and Outstanding as of June 27, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement are incorporated by reference into
Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
General and Organization Chart
Man Sang Holdings, Inc. (the "Company," or "we" or "us"), through its
subsidiaries, is principally engaged in the purchasing, processing, assembling,
merchandising, and wholesale distribution of pearls, pearl jewelry products and
jewelry products. In addition, the Company owns and operates a commercial real
estate complex in Shenzhen, People's Republic of China (the "PRC"). The
structure of the Company as of the date of this annual report on Form 10-K is as
follows:
ORGANIZATIONAL CHART OF MAN SANG GROUP
- --------------------------------------
______________
MAN SANG
HOLDINGS, INC.
(Nevada)
______________
|
| (Investment holding)
100%
______________________
Man Sang International
(B.V.I.) Limited
(B.V.I.)
______________________
|
| (Investment holding)
|
______________________________________
| |
49.40% 100%
| |
_____________ _________________
M.S. Electronic
MAN SANG Emporium Limited
INTERNATIONAL (B.V.I.)
LIMITED _________________
(Bermuda)
_____________ (E-commerce)
|
| (Investment holding)
|
________________________________________________________________________________________________________________
| | |
| | |
| | |
100% 100% 100%
| | |
__________________ ________________ ___________________
Market Leader Man Sang Man Sang
Technology Limited Enterprise Ltd. Innovations Limited
(B.V.I.) (B.V.I.) (Hong Kong)
__________________ ________________ ___________________
| |
| (Investment | (Investment (Licensing &
| holding) | holding) investment
| ___________________________________________________________ holding)
| | | |
100% 100% 100% 100%
| | | |
| | | |
_____________ __________________ ________________ ___________________
Cyber Bizport Man Sang Jewellery M.S. Collections Man Sang Development
Limited Company Limited Limited Company Limited
(Hong Kong) (Hong Kong) (Hong Kong) (Hong Kong)
_____________ __________________ ________________ ___________________
| | | |
| (Investment | (Trading & | (Investment | (Property &
| holding) | investment | holding) | investment
| | holding) | | holding)
| | | |
| ____________________________ | __________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
| | | | | | | |
____________ __________ _________ ___________ _______________ ____________ ___________ ______________
4376zone.com Asean Gold Arcadia Man Hing Peking Pearls Excel Access Hong Kong Swift Millions
Limited Limited Jewellery Industry Company Limited Limited Man Sang Limited
(Hong Kong) (B.V.I.) Limited Development (Hong Kong) (Hong Kong) Investments (Hong Kong)
(Hong (Shenzhen) Limited
Kong) Co. Ltd. (Hong Kong)
(P.R.C.)
____________ __________ _________ ___________ _______________ ____________ ___________ ______________
|
|
(Procurement) (Investment (Trading & (Real estate |Investment (Property (Property (Property
holding & assembling leasing & | holding) holding) holding) holding)
trading) of jewellery pearl |
products) products 100%
assembling) |
|
_______________
Damei Pearls
Jewellery
Goods
(Shenzhen)
Co. Ltd.
(P.R.C.)
_______________
(Purchasing &
processing
of pearls)
1
History of the Company
The Company was incorporated in the State of Nevada in November 1986 under the
name of SBH Ventures, Inc. The Company was originally incorporated as a "blind
pool" company for the purpose of acquiring an operating business. In March 1987,
the Company completed a public offering of 20,000,000 shares of common stock
raising net proceeds of approximately $171,000.* Subsequently, in November 1991,
the Company, in connection with a merger with an operating company, changed its
name to UNIX Source America, Inc. and effected a 1-for-20 reverse stock split of
its common stock. The operations of the merged companies proved unsuccessful and
the Company ceased such business operations in 1992. In January 1996, the
Company again effected a reverse split of its common stock on approximately a
1-for-14 basis and, following such reverse split, issued 11,000,000 shares of
common stock, par value $0.001 per share ("Common Stock") and 100,000 shares of
Series A Preferred Stock, par value $0.001 per share ("Series A Preferred
Stock") in exchange (the "Exchange") for all of the outstanding securities of
Man Sang International (B.V.I.) Limited, a British Virgin Islands company ("Man
Sang BVI"). Pursuant to the terms of the Exchange, the Company changed its name
to Man Sang Holdings, Inc. and assumed the operations of Man Sang BVI. The
management of Man Sang BVI then assumed control of the Company.
The foundation of the group of companies comprising the Company and its
subsidiaries (the "Group") was laid in the early 1980's when Cheng Chung Hing,
Ricky formed Man Sang Trading Hong, a freshwater pearl trading company, and
Cheng Tai Po formed Peking Pearls Company, a Japanese cultured pearl trading
company. As the business of the Group developed, Man Sang Jewellery Company
Limited ("MSJ") and Peking Pearls Company Limited were formed in Hong Kong in
1988 and 1991, respectively, to continue the trading operations of the Group.
Subsequently, the Group expanded its operations to include pearl processing with
the establishment of Man Hing Industry Development (Shenzhen) Co., Ltd. ("Man
Hing") in 1992 to process and assemble freshwater pearls and Chinese cultured
pearls, and Damei Pearls Jewellery Goods (Shenzhen) Co., Ltd. ("Damei") in 1995
to assume and expand the Chinese cultured pearl processing operations of Man
Hing. In view of the continuous expansion of Chinese cultured pearls business,
in December 1996 the Group set up a subsidiary, Tangzhu Jewellery Goods
(Shenzhen) Co., Ltd. ("Tangzhu") in the PRC to specialize in purchasing and
processing Chinese cultured pearls of larger sizes with diameter from 6mm and
above and, to a lesser extent, in processing other cultured pearls. As a result,
Damei started to concentrate on the purchasing and processing of cultured pearls
of smaller size with diameter below 6mm. The business of purchasing and
processing of Chinese freshwater pearls was also transferred from Man Hing to
Tangzhu whilst Man Hing started to concentrate on the pearl jewelry assembling
business.
______________________________________
*Unless otherwise indicated as Hong Kong dollars or HK$, all financial
information contained herein is presented in US dollars. The translations of
Hong Kong dollar amounts into US dollars are for reference purpose only and have
been made at the exchange rate of HK$7.80 for US$1, the approximate free rate of
exchange at March 31, 2005. The Hong Kong dollar has been "pegged" to the US
dollar since October 1983. The so-called "peg" is the Linked Exchange Rate
System under which certificates of indebtedness issued by the Hong Kong Exchange
Fund, which the three banks that issue the Hong Kong currency are required to
hold as backing for the issue of Hong Kong dollar notes, are issued and redeemed
against US dollars at a fixed exchange rate of HK$7.8 to US$1. In practice,
therefore, any increase in note circulation is matched by a US dollar payment to
the Exchange Fund, and any decrease in note circulation is matched by US dollar
payment from the Exchange Fund. In the foreign exchange market, the exchange
rate of Hong Kong dollar continues to be determined by forces of supply and
demand. Against the fixed exchange rate for the issue and redemption of
certificates of indebtedness, the market exchange rate generally stays close to
the rate of HK$7.80 to US$1.
2
During the period from April to July 1996, the Company, in reliance on
Regulation S promulgated under the U.S. Securities Act of 1933, as amended, sold
and issued 6,760 shares of Series B Convertible Preferred Stock, par value
$0.001 per share ("Series B Preferred Stock"), for an aggregate purchasing price
of $6.76 million. All 6,760 shares of Series B Preferred Stock were converted
into 5,223,838 shares of Common Stock, of which 5,219,448 shares were issued in
fiscal 1997 before a 1-for-4 reverse stock split which the Company effected in
October 1996, and the balance of 4,390 shares of Common Stock issuable upon
conversion of Series B Preferred Stock were issued as 1,098 shares of Common
Stock (post reverse stock split) during fiscal 1998.
On July 30, 1997, Man Sang International Limited ("MSIL") was incorporated as an
exempted company under the Companies Act 1981 of Bermuda. On September 8, 1997,
Man Sang BVI acquired MSIL and underwent a corporate reorganization. Thereafter,
MSIL held directly or indirectly the interests of various operating subsidiaries
in Hong Kong and the PRC.
On September 26, 1997, MSIL successfully listed on The Stock Exchange of Hong
Kong Limited ("The Hong Kong Stock Exchange") and completed an initial public
offering ("IPO") of 127,500,000 shares ("Shares") of HK$0.1 each at HK$1.08 per
share with warrants (each an "IPO Warrant") in the proportion of 1 IPO Warrant
for every 5 Shares raising net proceeds of approximately HK$123.6 million. Every
IPO Warrant entitled the holder thereof to subscribe for one Share at an
exercise price of HK$1.3 from the date of issue up to and including March 31,
1999. After MSIL's IPO, Man Sang BVI held 73.02% or 345 million Shares. As of
March 31, 1999, the Company had issued 50 Shares upon exercise of the IPO
Warrants related to such Shares and on such date, the subscription rights
attaching to the remaining IPO Warrants expired.
On August 12, 1998, at the 1998 Annual General Meeting of MSIL, MSIL's
shareholders approved a final dividend for the year ended March 31, 1998 of
HK$0.03 per Share, settled by way of allotment of fully paid shares in the
capital of MSIL ("Scrip Shares") with a cash option ("Scrip Dividend Scheme").
Man Sang BVI elected to receive part of its final dividend in cash and part of
it in 10,000,000 Scrip Shares. As some of MSIL's shareholders elected to receive
cash dividend and some elected Scrip Shares, a total of 11,963,456 Scrip Shares
were allotted on October 8, 1998. After the allotment, Man Sang BVI legally and
beneficially owns approximately 73.28% or 355 million Shares.
On August 2, 1999, at the 1999 Annual General Meeting of MSIL, MSIL's
shareholders approved (i) a final dividend for the year ended March 31, 1999 in
the amount of HK$0.01 per share; and (ii) a "Bonus Issue of Warrants" (i.e. a
distribution of warrants (each a "Bonus Warrant")) to MSIL's shareholders on the
basis of 1 Bonus Warrant for every 5 Shares of MSIL held on August 2, 1999.
Pursuant to such shareholder approval, MSIL paid a cash dividend of
HK$4,844,635.06 to its shareholders on September 7, 1999. Each Bonus Warrant
entitles the holder thereof to subscribe in cash at an initial subscription
price of HK$0.40 per Share (subject to adjustment), and is exercisable at any
time from September 14, 1999 to September 13, 2001, both dates inclusive. 45,603
Shares were issued in fiscal 2000 upon exercise of the Bonus Warrants; all other
Bonus Warrants expired without exercise.
On August 6, 1999, MSIL appointed Kingsway SW Securities Limited as placing
agent on a fully underwritten basis in respect of the placing of 40,000,000 new
Shares of MSIL at a
3
price of HK$0.33 per Share. After the placement, MSIL had 524,463,506 shares
issued and outstanding. The legal and beneficial ownership of Man Sang BVI
reduced from 73.28% to 67.69% of the issued and outstanding shares of MSIL.
On August 2, 2000, at the 2000 Annual General Meeting of MSIL, MSIL's
shareholders approved a bonus issue of Shares to MSIL's shareholders on the
basis of 1 bonus Share for every 5 Shares of MSIL held on August 2, 2000 (the
"Bonus Issue"). Based on the 526,559,109 MSIL Shares issued and outstanding as
at August 2, 2000, 105,311,821 bonus Shares, credited as fully paid by way of
capitalization from the share premium account of MSIL, were allotted on August
3, 2000. The bonus Shares rank pari passu in all respects with the existing
issued Shares of MSIL. After the Bonus Issue, and the placement of Shares in
1999 and exercise of Bonus Warrants referred to above, Man Sang BVI legally and
beneficially owned approximately 67.42% of the issued and outstanding Shares of
MSIL.
On November 26, 2001, MSIL issued 120,000,000 Shares through a private
placement, which constituted approximately 18.99% of the issued share capital of
MSIL immediately before, and approximately 15.96% of the issued share capital of
MSIL immediately after, said placement. Said placement in 2001 (i) increased the
number of issued and outstanding Shares of MSIL from 631,870,930 to 751,870,930,
and therefore (ii) decreased Man Sang BVI's legal and beneficial ownership in
MSIL from 67.42% to 56.66%.
On June 7, 2002, the Company issued in aggregate 410,000 shares of Common Stock,
par value $0.001 per share, to 2 business consultants pursuant to 2 separate
business Consulting Agreements dated June 1, 2002.
On April 30, 2003, the Company repurchased in aggregate 410,000 shares of Common
Stock previously issued to 2 business consultants on June 7, 2002, at a price of
$1.5 per share. These shares were cancelled on May 12, 2003.
On August 6, 2003, MSIL approved an ordinary share dividend of one share of
ordinary share for every ten ordinary shares owned by each of its record
shareholders.
On October 6, 2003, Mr. Cheng Chung Hing, Ricky and Mr. Cheng Tai Po purchased
from Man Sang BVI 36 million and 24 million of MSIL shares, respectively. After
such transaction, through Man Sang BVI, the Company held 408.6 million MSIL
shares, representing 49.40% of the shares issued of MSIL, and remained the
principal shareholder of MSIL. The purchase price per share was the arithmetic
average of the closing price of MSIL shares for each of the five trading days
immediately preceding and including October 6, 2003.
On July 16, 2004, one of the Company's subsidiaries, Tangzhu, was merged into
Man Hing.
On August 4, 2004, MSIL approved an ordinary share dividend of one ordinary
share for every ten ordinary shares owned by each of its record shareholders.
In order to facilitate the growth in existing operations and expansion into
processing operations, and to diversify its revenues, in 1991, the Group
commenced construction of 24 buildings in an industrial facility in Shenzhen,
the PRC ("Man Sang Industrial City") for use in pearl processing and corporate
administration (5 buildings) and for lease to third party industrial users (19
buildings). During fiscal 2005, 2 additional buildings which are living
4
quarters have been completed, with one additional factory building still under
construction. See "Item 1 - Business - Real Estate Leasing Operations" and "Item
2 - Properties."
Pearl Operations
Pearl Industry
The use of pearls in jewelry dates back over 1,500 years in China. Large scale
commercial pearl production began in Japan in the late 19th century. The
farming, production and trading of pearls to meet demand for pearl jewelry is a
mature industry. Today's pearl industry and its growth are affected by consumer
preferences, worldwide economic conditions and availability of supply.
In today's pearl market, pearls are divided into two categories, i.e. freshwater
pearls and saltwater cultured pearls. Saltwater cultured pearls are, in turn,
divided into Japanese cultured pearls, Chinese cultured pearls, Tahitian pearls
and South Sea pearls.
The PRC is a major supplier of freshwater pearls. In addition to the traditional
smaller freshwater pearls ranging in size from 5mm to 7mm, there is a supply of
high quality freshwater pearls ranging in size from 8mm to 10mm, or even
sometimes up to 15mm since 1999. These larger freshwater pearls contribute a
higher gross profit margin than the traditional smaller freshwater pearls.
The PRC has emerged as a major supplier of cultured pearls, ranging in size from
5mm to 8mm. Since 1996, Japan has been losing its long held dominance in the
cultured pearl industry because Japanese cultured pearls have been in poor
harvests. Meanwhile, Chinese cultured pearls have been improving in quality and
competitively priced. As a result, the Company has been shifting its cultured
pearls product mix from Japanese to Chinese cultured pearls.
Tahitian pearls are sourced from French Polynesia and the Cook Islands, while
South Sea pearls are sourced mainly from Australia, Papua New Guinea, Indonesia
and the Philippines. These pearls are generally more expensive and are
considered superior in quality when compared to either Japanese or Chinese
cultured pearls, and cannot be easily substituted by the latter.
Products
We presently offer seven product lines including freshwater pearls, Chinese
cultured pearls, Japanese cultured pearls, South Sea pearls and Tahitian pearls,
pearl jewelry and other jewelry products. Freshwater pearls are available in a
variety of shapes and sizes. The most commonly available sizes range from 2mm to
8mm, and the price are generally less expensive than cultured pearls with
wholesale prices typically ranging from $2 to $300 per 16 inch strand depending
on size, grade and shape. However, since 1998, larger size freshwater pearls are
available in the market ranging from 8mm to 10mm, or even sometimes up to 15mm,
and the price for the larger size freshwater pearls can reach up to $1,000 per
16 inch strand depending on size, grade and shape. Saltwater cultured pearls
generally are round in shape and range in size from 5mm to 18mm. South Sea and
Tahitian pearls are considered to be the highest quality saltwater cultured
pearls and typically the largest and most
5
expensive followed by Japanese cultured pearls and Chinese cultured pearls.
Wholesale prices of cultured pearls typically range from $13 to $70,000 per
16-inch strand.
The following table illustrates by pearl category the typical range of size and
wholesale price of cultured pearls we sell, with price variations within each
category reflecting size and qualitative differences:
Size Price/16 inch strand
mm US$
Freshwater pearls 2 - 13 2 - 1,000
Chinese cultured pearl 5 - 7.5 10 - 400
Japanese cultured pearls 7 - 10 100 - 2,000
Tahitian pearls 8 - 16 150 - 15,000
South Sea pearl 8 - 18 300 - 70,000
We also offer fully assembled pearl jewelry, including necklaces, earrings,
rings, pendants, broaches, bracelets, watches, cufflinks, and similar
miscellaneous pearl products. For the three years ended March 31, 2005,
freshwater and cultured pearls sales as a percentage of our sales of pearls and
assembled pearl products were as follows:
Loose and Assembled
Year Strands Pearls Pearl Jewelry
Freshwater Cultured Freshwater Cultured
% % % %
2005 35 78 65 22
2004 35 73 65 26
2003 60 87 40 13
Purchasing
We purchase (i) Chinese cultured pearls from pearl farms and other suppliers in
the coastal areas of the southern part of the PRC, including Guangdong and
Guangxi Provinces; (ii) South Sea pearls from pearl farms and suppliers in Hong
Kong, Australia, the Philippines, and Japan; (iii) Tahitian pearls from pearl
farms and suppliers in French Polynesia; and (iv) freshwater pearls from pearl
farms and other suppliers in the eastern part of the PRC, including Jiangsu and
Zhejiang Provinces.
Our purchase of pearls is conducted by its full-time, well-trained and
experienced purchasing staff from our offices in Hong Kong and Shenzhen in the
PRC, and a special purchasing office in Zhangjiang in the PRC, the site of the
largest Chinese cultured pearl farm. The purchasing staff maintains regular
contacts with pearl farms and other suppliers in the PRC, Japan, Hong Kong,
Philippines and Tahiti, enabling us to buy directly from farmers whenever
possible, to secure the best prices available for pearls and to gain access to a
larger quantity of pearls. Our management and purchasing staff meet regularly to
assess existing and anticipated pearl demand. The purchasing staff in turn
inspects and purchases pearls in the quantities and of the quality and nature
necessary to meet existing and estimated demand.
6
We have no long-term purchase contracts, and instead negotiate the purchase of
pearls on an as-needed basis to correspond with expected demand. While we
constantly seek to capitalize on volume purchasing and relationships with
farmers and suppliers to secure the best pricing and quality when purchasing
pearls and other jewelry raw materials, we generally purchase raw materials from
suppliers at approximately prevailing market prices. We believe that there are
numerous alternate supply sources and that the termination of our relationship
with any of its existing sources would not materially adversely affect us. To
date, we have not experienced any difficulty in purchasing raw materials.
In fiscal 2005, our five largest suppliers the Company accounted for
approximately 53.5% (2004: 52.6%) of our total purchases, with the largest
supplier accounting for approximately 13.9% (2004: 12.7%) of our total
purchases.
In fiscal 2005, approximately 29.9% of our purchases were made in Hong Kong
dollars, with the remaining amount settled in US dollars, French Polynesian
francs, Renminbi ("RMB") or Japanese Yen. It is our policy not to enter into
derivative contracts such as forward contracts and options, unless we consider
it necessary to hedge against foreign exchange fluctuations. No such derivative
contract was entered into during fiscal 2005. See "Item 7A - Quantitative and
Qualitative Disclosures about Market Risk."
Processing and Assembly
Pearl processing and assembly are conducted at our facilities in Shenzhen, PRC.
Freshwater pearl processing and assembly operations presently occupy
approximately 37,566 square feet and employ 389 workers while cultured pearl
processing and assembly operations occupy approximately 16,253 square feet and
employ 101 workers. The average compensation per factory worker is HK$892 per
month while average supervisory compensation is HK$2,052 per month.
We, with the assistance of specialists from Japan, have trained our work force
to implement advanced Japanese bleaching technology. Each worker performs a
specific function and is supervised by an officer and technical assistants who
are university graduates with chemical technology training. Each worker also
receives specialized training by industry specialists from Japan. Prior to
participation in pearl processing operations, each worker is required to
participate in an extensive on-the-job training program utilizing poor quality
pearls for demonstration and training purposes.
Pearl processing occurs in batches or production cycles. Raw pearls and other
materials transported to the Company's processing facilities in Shenzhen, PRC
are first sorted, chemically bleached and, if necessary, drilled. This process,
excluding drilling, takes approximately 21 days for freshwater pearls and
approximately 70 days for saltwater cultured pearls. Drilling takes
approximately 10 days. Next, the pearls are cleaned, dried, waxed, graded,
sorted, strung, and if necessary, packaged. The entire production cycle takes
approximately 30 days for freshwater pearls and approximately 100 days for
saltwater cultured pearls.
Where appropriate, processed pearls are then incorporated into finished jewelry
products. Assembly and finishing may include the addition of clasps, decorative
jewelry pieces, or other specialty work requested by the customers to produce
finished jewelry pieces.
7
We presently have facilities and pearl processing personnel to produce
approximately 29,000 kg (2004: 29,000 kg) of freshwater pearls and 10,000 kg
(2004: 10,000 kg) of cultured pearls annually. Fiscal 2005 production totaled
approximately 16,238 kg of freshwater pearls and 693 kg of cultured pearls,
compared to the production of 9,330 kg of freshwater pearls and 7,781 kg of
cultured pearls in fiscal 2004. We presently also have adequate assembly and
finishing personnel and facilities to produce approximately 1.5 million pieces
of finished jewelry annually.
Upon completion of processing, pearls are shipped to our offices in Hong Kong
where they are stored for inspection by potential buyers.
Marketing
We market our products from our facilities in Hong Kong. Our sales staff, which
is divided into groups organized by geographic regions, presently markets
freshwater pearls, Chinese cultured pearls, Japanese cultured pearls, Tahitian
pearls, South Sea pearls, and jewelry products.
Our marketing and sales staff maintains on-going communications with a broad
range of jewelry distributors, manufacturers and retailers worldwide to assure
that customers' pearl requirements are fully satisfied. Our marketing and sales
staff regularly visits all major pearl markets and jewelry trade shows to
display products, establish contacts with potential customers and evaluate
market trends. Apart from attending trade shows and servicing customers, our
marketing and sales force principally operates from our headquarters in Hong
Kong, where buyers personally visit and inspect our products and place orders.
As part of our marketing efforts, we have established Internet web pages
(www.man-sang.com and www.4376zone.com)" to market our products. In addition, we
have increased our efforts to market pearls and jewelry products to customers in
Europe and North America.
Customers
Our customers consist principally of wholesale distributors and mass
merchandisers in Europe, the United States, Hong Kong and other Asian countries.
For fiscal 2005, one of our customers accounted for more than 10.0% of our
sales, and our five largest customers accounted for approximately 33.7% (2004:
22.1%), with the largest customer accounting for approximately 10.3% (2004:
8.6%) of our sales. As of March 31, 2005, we had approximately 1,030 customers.
We have no long-term contract with any customer. Most of our customers have been
in business with us for a number of years. We do not believe that the loss of
any one customer will have a material adverse effect on our financial condition
or results of operations.
Our policy is to denominate predominantly all our sales in either US dollars or
Hong Kong dollars. Since Hong Kong dollar remained "pegged" to the US dollar
throughout fiscal 2005, our sales proceeds have thus far had minimal exposure to
foreign exchange fluctuations. See "Item 7A - Quantitative and Qualitative
Disclosures about Market Risk."
The following table sets forth by region and by product our net sales for the
years ended March 31, 2005, 2004 and 2003:
8
2005 2004 2003
HK$'000 % HK$'000 % HK$'000 %
Cultured Pearls
North America 62,922 15.3 76,436 20.0 76,140 23.6
Europe 19,990 4.8 23,148 6.1 21,864 6.8
Germany 7,058 1.7 9,725 2.5 7,790 2.4
Hong Kong 31,803 7.7 29,685 7.8 33,634 10.4
Japan 30,610 7.4 29,054 7.6 33,098 10.2
Other Asian countries 30,095 7.3 39,840 10.4 45,151 14.0
Others 6,734 1.6 7,052 1.8 5,378 1.7
------------ --------- ------------- --------- -------------- --------
Sub-total 189,212 45.8 214,940 56.2 223,055 69.1
============ ========= ============= ========= ============== ========
Freshwater Pearls
North America 4,549 1.1 2,145 0.6 5,909 1.8
Europe 6,016 1.5 5,701 1.5 6,204 1.9
Germany 4,061 1.0 2,748 0.7 3,204 1.0
Hong Kong 2,497 0.6 1,860 0.5 7,251 2.3
Japan 10,665 2.6 5,499 1.4 4,848 1.5
Other Asian countries 5,682 1.4 4,363 1.2 6,140 1.9
Others 1,350 0.3 1,560 0.4 1,437 0.4
------------ --------- ------------- --------- -------------- --------
Sub-total 34,820 8.5 23,876 6.3 34,993 10.8
------------ --------- ------------- --------- -------------- --------
Assembled Pearl Jewelry
North America 77,628 18.8 38,943 10.2 10,781 3.3
Europe 20,557 5.0 16,801 4.4 10,950 3.4
Germany 64,992 15.8 54,091 14.1 19,257 6.0
Hong Kong 10,554 2.6 19,039 5.0 10,630 3.3
Japan 4,870 1.2 2,936 0.8 1,977 0.6
Other Asian countries 2,439 0.6 3,619 0.9 7,641 2.4
Others 7,190 1.7 7,878 2.1 3,798 1.1
------------ --------- ------------- --------- -------------- --------
Sub-total 188,230 45.7 143,307 37.5 65,034 20.1
------------ --------- ------------- --------- -------------- --------
Total 412,262 100.0 382,123 100.0 323,082 100.0
============ ========= ============= ========= ============== ========
A majority of sales (by dollar amount) in Hong Kong is for re-export to North
America, Europe and other Asian countries.
Seasonality
Our sales are seasonal in nature. The bulk of our sales occur during the months
of March, June and September (during major international jewelry trade shows
held in Hong Kong in these three months). Accordingly, the results of any
interim period are not necessarily indicative of the results that might be
expected during a full year.
The following table sets forth our unaudited net sales for the fiscal years
indicated:
Fiscal Year Ended March 31,
2005 2004 2003
HK$'000 % HK$'000 % HK$'000 %
9
First Quarter 99,078 24.0 66,888 17.5 76,776 23.8
Second Quarter 107,983 26.2 101,508 26.6 81,445 25.2
Third Quarter 109,074 26.5 106,540 27.9 66,839 20.7
Fourth Quarter 96,127 23.3 107,187 28.0 98,022 30.3
------------ ---------------------- -------- ---------------- ---------
Total 412,262 100.0 382,123 100.0 323,082 100.0
============ ======== ============ ======== ================ =========
Competition
With the exception of several large Japanese cultured pearl and South Sea pearl
suppliers, the pearl business is highly fragmented with limited brand name
recognition or consumer loyalty. Selection is generally a function of design
appeal, perceived value and quality in relationship to price.
Internationally, we face intense competition. Our principal historical
competitors in the Japanese cultured, Tahitian and South Sea pearl markets are
Japanese companies. Firms such as Tasaki, Mikimoto, Tokyo and K. Otsuki are the
largest traders and distributors of such pearls. Nevertheless, their
competitiveness has been impaired by the current weakness in Japan's economy,
and the poor harvest of Japanese cultured pearls.
Locally, we compete with approximately 60 companies in Hong Kong that engage
actively in the freshwater pearl and Chinese cultured pearl business. Most of
such local companies are small operators and some are engaged only in pearl
trading. In addition to genuine pearls, we must compete with synthetically
produced pearls.
We believe that we are competitive in the industry because of our advanced pearl
processing and bleaching techniques, and processing facilities in the PRC which
allow us to process pearls at cost that is lower than many of our competitors
and because we are a leading purchaser and distributor of Chinese cultured
pearls. In addition, we provide one-stop shopping convenience to customers and
have historically maintained a close relationship with our customers. Therefore,
although competition is intense, we believe that we are well positioned in the
pearl industry. However, in a highly competitive industry where many competitors
have substantially greater technical, financial and marketing resources than us,
new competitors may enter into the market and customer preferences may change
unpredictably, and there can be no assurance that we will remain competitive.
10
Real Estate Leasing Operations
Facilities
In connection with our expansion into pearl processing and assembling
operations, we acquired land use rights with respect to, and constructed, an
industrial complex ("Man Sang Industrial City") located in Gong Ming Zhen,
Shenzhen Special Economic Zone, PRC in September 1991. The land use rights with
a total site area of approximately 470,000 square feet we acquired with respect
to Man Sang Industrial City have a duration of 50 years starting from September
1, 1991. We acquired the land use rights relating to Man Sang Industrial City
and constructed such facility for approximately $3.4 million.
As of March 31, 2005, Man Sang Industrial City consisted of 26 completed
buildings and 1 additional building which is still under construction
encompassing a total gross floor area of approximately 780,000 square feet. Of
the 26 completed buildings in Man Sang Industrial City, 17 buildings are rental
properties, and the remaining 9 buildings are for the Company's own use. In
addition to factories, dormitories and shops, Man Sang Industrial City has green
zones, playgrounds and other amenities typically offered in industrial/living
complexes in the PRC.
Leasing and Management
During fiscal 2005, we utilized 9 buildings in Man Sang Industrial City for
pearl processing, pearl and jewelry assembly, administration, and staff
accommodation. The remaining facilities were leased to third party industrial
users, primarily foreign investors and non-polluting light industry.
We employed a staff of 24 persons to provide required management, leasing,
maintenance and security for Man Sang Industrial City.
As of March 31, 2005, the 17 buildings in Man Sang Industrial City, excluding
the 9 buildings utilized for our pearl operations, were used for leasing
purposes to independent third parties and industrial users not connected with
us. Such facilities are typically offered under leases ranging in duration from
1 year to 3 years. The gross rental income from Man Sang Industrial City for
fiscal 2005 was approximately HK$2.89 million compared to approximately HK$3.6
million for fiscal 2004. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year Ended March 31, 2005
Compared to Year Ended March 31, 2004 - Rental Income."
In addition to Man Sang Industrial City, we own rental properties in Hong Kong
("Hong Kong Rental Properties") which were leased to independent third parties.
The Hong Kong Rental Properties consist of the properties as follows:
a. 2,643 square feet on 17th Floor and a car parking space No.16 on 2nd
Floor, Silvercrest, No.24 Macdonnell Road, Midlevels, Hong Kong. A
tenancy agreement was made at a monthly rental of HK$38.0K** for a term
of two years starting from October 25, 2004. The rental income totaled
approximately HK$413.4K for fiscal 2005 and approximately HK$444.0K for
fiscal 2004. See "Item 2 - Properties - Hong Kong."
______________________________________
** As used in this report, the letter "K" appearing immediately after a dollar
amount denotes rounding to the nearest HK$1,000; as an example, HK$250,499 may
be rounded to "HK$250K."
11
b. Parking space No. 3 on Floor L3 of Valverde, 11 May Road, Hong Kong. A
tenancy agreement on this property and property (c) below was made
during the year. See "Item 2 - Properties - Hong Kong."
c. 1,063 square feet at Flat A on 33rd Floor, Valverde, 11 May Road, Hong
Kong. A tenancy agreement on this property and property (b) above was
renewed at a total monthly rental of HK$30.0K for a term of 2 years
starting from March 15, 2004. Rental income on this property and
property (b) above totaled approximately HK$360.0K for fiscal 2005, and
approximately HK$364.0K for fiscal 2004. See "Item 2 - Properties -
Hong Kong."
d. 8th Floor, Harcourt House No. 39 Gloucester Road, Wanchai, Hong Kong
was acquired and the transaction was completed on August 15, 2003. A
tenancy agreement has been made for a term of 3 years from August 15,
2003 to August 14, 2006. The rental income totaled approximately
HK$1,072.5K for fiscal 2005, and approximately HK$1,462.5K for fiscal
2004. See "Item 2 - Properties- Hong Kong." On September 15, 2004, we
sold this property for HK$71.6 million.
Competition
Competition among facilities such as Man Sang Industrial City is intense in the
Shenzhen Special Economic Zone. Because of economic incentives available for
businesses operating in the Shenzhen Special Economic Zone, numerous facilities
have been constructed to house such businesses. While a number of competing
facilities may offer greater amenities and may be operated by companies having
greater resources, and additional competing facilities may be constructed, we
believe Man Sang Industrial City is competitive with other similar facilities in
the Shenzhen Special Economic Zone based on both the quality of facilities and
lease rates.
Employees
As of May 31, 2005, we had 1,284 employees. No employee is governed by
collective bargaining agreements and we consider our relations with our
employees to be satisfactory. A breakdown of employees by function is as
follows:
Hong Kong PRC Total
Senior management 5 5 10
Marketing and sales 24 24 48
Purchasing 6 3 9
Finance and accounting 13 15 28
Processing and logistics 18 1,075 1,093
Human resources and administration 14 45 59
Real estate leasing - 31 31
Information technology 4 2 6
----- ----- -----
Total 84 1,200 1,284
===== ===== =====
12
Segment Information
Reportable segment income or loss, and segment assets are as follows:
Reportable Segment Income or Loss, and Segment Assets
2005 2004 2003
HK$'000 HK$'000 HK$'000
Revenues from external customers
Pearls 412,262 382,123 323,082
Real estate investment 4,646 6,220 7,455
-------------- -------------- --------------
416,908 388,343 330,537
============== ============== ==============
Interest expenses
Pearls 33 134 859
Real estate investment 18 111 503
Corporate assets 49 135 267
-------------- -------------- --------------
100 380 1,629
============== ============== ==============
Depreciation and amortization
Pearls 5,602 6,620 6,051
Real estate investment 1,637 1,889 2,013
Corporate assets 918 918 1,232
-------------- -------------- --------------
8,157 9,427 9,296
============== ============== ==============
Operating income
Pearls 35,386 24,309 24,843
Real estate investment (6,381) (3,338) 175
-------------- -------------- --------------
29,005 20,971 25,018
============== ============== ==============
Capital expenditure for segment assets
Pearls 8,536 24,078 8,963
Real estate investment 1,473 38,222 2,053
Corporate assets - - 167
-------------- -------------- --------------
10,009 62,300 11,183
============== ============== ==============
Segment assets
Pearls 449,219 372,671 334,251
Real estate investment 62,232 95,833 96,447
Corporate assets 47,790 48,370 53,046
-------------- -------------- --------------
559,241 516,874 483,744
============== ============== ==============
13
ITEM 2. PROPERTIES
Hong Kong
The head office of the Group at 21st Floor and 19th Floor, Railway Plaza, 39
Chatham Road South, Tsimshatsui, Kowloon, Hong Kong has a gross floor area on
each floor of approximately 10,880 square feet. We have renewed our tenancy
agreement of 21st Floor for a term of 2 years commencing July 1, 2004.
We own the property at Room 407, Wing Tuck Commercial Centre, 177 - 183 Wing Lok
Street, Sheung Wan, Hong Kong. The gross floor area of the premises is
approximately 957 square feet. The property has been left vacant since October
2003.
We own two residential flats with a gross floor area of approximately 1,784
square feet on Flat C and Flat D on 15th Floor, Windsor Mansion, 29-31 Chatham
Road South, Tsimshatsui, Kowloon, Hong Kong, which we use as quarters for PRC
employees on business trips to Hong Kong.
We own a residential flat with a gross floor area of approximately 1,063 square
feet on 33rd Floor, and a parking space at No. 3 on L3 Floor of Valverde, 11 May
Road, Hong Kong, which we lease to an independent third party. See "Item 1 -
Business - Real Estate Leasing Operations - Leasing and Management" above.
We own a residential flat with a gross floor area of approximately 2,838 square
feet on 20th Floor, The Mayfair, 1 May Road, Hong Kong, which we use as our
Chairman's residence since February 6, 2002.
We own an investment property with a gross floor area of approximately 10,880
square feet at 19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong, which we had leased to an independent third party until
April 21, 2003. See "Item 1 - Business - Real Estate Leasing Operations -
Leasing and Management" above. In May 2003, we moved certain operations
previously located on the 27th Floor of the same building into these premises.
We acquired an investment property with a gross floor area of approximately
17,000 square feet at 8th Floor, Harcourt House, No. 39 Gloucester Road,
Wanchai. Hong Kong. The transaction was completed on August 15, 2003. The
premises are leased to an independent third party. See "Item 1 - Business - Real
Estate Leasing Operations - Leasing and Management" above. On September 15,
2004, we sold this property for HK$71.6 million.
People's Republic of China
As noted above, we own the land use rights to the site of Man Sang Industrial
City for a term of 50 years from September 1, 1991 to September 1, 2041. On
March 31, 2005, Man Sang Industrial City consisted of 26 completed buildings and
1 additional building which is still under construction encompassing a total
gross floor area of approximately 780,000 square feet. Throughout fiscal 2005,
we used most of the units in 9 buildings for pearl processing, pearl and jewelry
assembly, administration and staff accommodation, and the remaining 17 buildings
are used for leasing purposes to independent third parties and industrial users
not
14
connected with us, amounting to approximately 370,000 square feet of floor space
and representing approximately 46.9% of the total gross floor space of Man Sang
Industrial City.
ITEM 3. LEGAL PROCEEDINGS
On December 2, 2003, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders through the solicitation
of proxies or otherwise, during the fourth quarter of our fiscal year ended
March 31, 2005.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock has been reported on the Over-The-Counter (OTC) Electronic
Bulletin Board since 1987 and is under the symbol "MSHI.OB." However, the market
for these securities has historically been extremely limited and sporadic.
The high ask and low bid prices for our Common Stock for each quarter, and on
the last day of each quarter, during our last two fiscal years were as follows:
Period Over the quarter On the last day of quarter
High Low High Low
$ $ $ $
2005
June 30, 2004 4.25 2.70 3.50 3.50
September 30, 2004 4.00 2.55 3.40 3.40
December 31, 2004 10.95 3.40 10.00 9.46
March 31, 2005 10.70 6.63 7.51 7.51
2004
June 30, 2003 2.35 0.90 2.30 2.25
September 30, 2003 3.45 1.50 1.82 1.82
December 31, 2003 2.00 1.27 1.65 1.65
March 31, 2004 4.60 1.45 4.00 3.65
The above bid information reflects inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Holders
The number of record holders of our Common Stock as of March 31, 2005, was
approximately 200. This number does not include an indeterminate number of
stockholders whose shares are held by brokers in street name.
Dividends
We have not paid any dividends with respect to our Common Stock during the two
preceding fiscal years, and do not intend to pay dividends in the foreseeable
future.
16
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected consolidated financial data for the Company
and its subsidiaries covering the fiscal years ended March 31, 2005, 2004, 2003,
2002 and 2001 and the selected balance sheet data at March 31 of each such year.
This summary should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements provided in Items 7, 7A and 8 respectively, of this Report on Form
10-K.
(Amounts expressed in thousands except share data)
For the fiscal year 2005 2004 2003 2002 2001
HK$ HK$ HK$ HK$ HK$
Net sales 412,262 382,123 323,082 282,715 311,109
Gross profit 117,248 104,147 89,922 96,439 16,433
Rental income - gross 4,646 6,220 7,455 7,526 5,526
SG&A expenses
- for net sales 81,862 79,838 65,079 65,901 77,076
- for rental 11,207 9,558 7,280 6,129 6,022
Operating income (loss) 29,005 20,971 25,018 31,935 (61,139)
Interest expenses 100 380 1,629 4,886 6,990
Interest income 1,067 279 690 2,785 5,799
Gain on sale of a real estate 34,248 - - - -
investment
Non-operating income 1,617 2,889 4,425 1,870 6,705
Other than temporary decline in - (2,474) (5,921) - -
fair value of marketable
securities
Income (loss) before
income taxes (N1) 65,837 21,285 22,583 31,704 (55,625)
Income tax expenses (benefits) 6,129 7,027 3,719 1,206 (3,320)
Minority interests 32,792 11,266 9,943 14,189 (18,112)
Net income (loss) (N1) 26,916 2,992 8,921 16,309 (34,193)
Net income available to common 26,319 2,926 8,737 15,947 (34,193)
stockholders
Net income (loss)
- per share (N2) 5.97 0.66 1.84 3.70 (7.76)
Depreciation and amortization 8,157 9,427 9,296 9,252 9,162
Gross profit margin (%) 28.44 27.25 27.83 34.11 5.28
17
At March 31 2005 2004 2003 2002 2001
HK$ HK$ HK$ HK$ HK$
Working capital 357,028 262,645 288,315 268,781 219,929
Property, plant and
equipment, net 119,061 115,791 66,278 80,333 84,821
Real estate investments, net 47,144 88,673 96,447 81,986 84,369
Total assets 559,241 516,874 483,744 489,069 512,381
% Return on total assets 4.81 0.58 1.84 3.33 (6.67)
Non-current portion of long- - 6,016 16,435 22,010 29,306
term debts
Total liabilities (excluding 36,963 55,572 46,553 74,461 141,809
minority interests)
Minority interests 257,562 224,437 179,844 170,208 112,234
Stockholders' equity 264,716 236,865 257,347 244,400 258,338
Net book value per share 60.06 53.2 54.3 55.5 58.6
% Return on
stockholders' equity 10.17 1.26 3.47 6.67 (13.24)
Gearing ratio (N2) - 0.05 0.09 0.23 0.47
Weighted average shares
outstanding 4,407,878 4,451,889 4,740,700 4,405,960 4,405,960
N1: Income before income taxes and net income is from continuing
operations.
N2: The figures for fiscal 2001 to fiscal 2004 have been restated according
to EITF 03-6 which became effective during fiscal 2005.
N3: "Gearing ratio" represents the ratio of the Company's total debts to
shareholders' equity.
N4: No dividend was paid in the fiscal years presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-K contain forward-looking
statements that are, by their nature, subject to risks and uncertainties. These
forward-looking statements include, without limitation, statements relating to:
(a) future supplies, demands, and purchase and sale prices of pearl and pearl
jewelry in the international pearl and jewelry markets, and real estate in Hong
Kong and the PRC; (b) sales and profitability of the Company's product and its
future product mix; (c) the amount and nature of, and potential for, future
developments and competitions; (d) expansion, consolidation and other trends in
the pearl and jewelry industry; (e) the Company's business strategy; (f) the
Company's estimated financial information regarding its business; (g) tax
exemptions and tax rates; and (h) exchange rates. These forward-looking
statements are based on assumptions and analyses made by the Company in light of
its experience and perception of historical trends, current conditions and
expected future developments, as well as other factors the Company believes to
be appropriate in particular circumstances. However, whether actual results and
developments will meet the Company's expectations and predictions depends on a
number of known and
18
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 pearls jewelry products, and in real
estate investment, the Company's ability to achieve its objectives and
expectations are derived at least in part form assumptions regarding economic
conditions, consumer tastes, and developments in its competitive environment.
The following assumptions, among others, could materially affect the likelihood
that the Company will achieve its objectives and expectations communicated
through these forward-looking statements: (i) that low or negative growth in the
economies or the financial markets of our customers, particularly in the United
States and in Europe, will not occur and reduce discretionary spending on goods
that might be perceived as "luxuries"; (ii) that the Hong Kong dollar will
remain pegged to the US dollar at US$1 to HK$7.8; (iii) that customer's choice
of pearls vis-a-vis other precious stones and metals will not change adversely;
(iv) that the Company will continue to obtain a stable supply of pearls in the
quantities, of the quality and on terms required by the Company; (v) that there
will not be a substantial adverse change in the exchange relationship between
RMB and the Hong Kong or US dollar; (vi) that there will not be substantial
increase in tax burden of subsidiaries of the Company operating in the PRC;
(vii) that there will not be substantial change in climate and environmental
conditions at the source regions of pearls that could have material effect on
the supply and pricing of pearls; and (viii) that there will not be substantial
adverse change in the real estate market conditions in the PRC and in Hong Kong.
We cannot guarantee any of the forward-looking statements, which are subject to
risks, uncertainties and assumptions that are difficult to predict. Actual
results may differ materially from those we forecast in forward-looking
statements due to a variety of factors, including those set forth above. We do
not intend to update any forward-looking statements due to new information,
future events or otherwise. If we do update or correct one or more
forward-looking statements, investors and others should not conclude that we
will make additional updates or corrections with respect to other
forward-looking statements.
The following discussion of results of operation, liquidity and capital
resources, derivative instruments, seasonality and inflation should be read in
conjunction with the financial statements and the notes thereto include
elsewhere herein.
Critical Accounting Policies and Estimates
Management's discussion and analysis of results of operations and financial
condition are based upon our consolidated financial statements. These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles require management to make
certain estimates and assumptions that affect amounts reported and disclosed in
the financial statements and related notes. The most significant estimates and
assumptions include valuation of inventories, provisions for income taxes and
uncollectible accounts, the recoverability of non-consolidated investments and
long-lived assets. Actual results could differ from these estimates.
Periodically, the Company reviews all significant estimates and assumptions
affecting the financial statements and records the effect of any necessary
adjustments.
19
The following critical accounting policies rely upon assumptions and estimates
and were used in the preparation of the Company's consolidated financial
statements:
Allowance for doubtful accounts: We maintain an allowance for doubtful accounts
based on estimates of the credit-worthiness of our customers. If the financial
condition of our customers was to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Inventories write-downs: We write down the amount by which the cost of
inventories (determined by the weighted average method) exceeds their estimated
market values based on assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Long-lived assets: We periodically evaluate the carrying value of long-lived
assets to be held and used, including goodwill and other intangible assets,
whenever events and circumstances indicate that the carrying value of the asset
may no longer be recoverable. An impairment loss, measured based on the
estimated fair value of the asset, is recognized if expected future undiscounted
cash flows are less than the carrying amount of the assets.
Non-consolidated investments: An adverse change in market conditions or poor
operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments (which we determine
by referring to the operating results of, and the return generated from, such
investments), thereby possibly requiring an impairment charge.
Marketable securities: We hold for long-term investment purposes certain
publicly traded securities, which are classified as available for sale.
Management periodically reviews these investments for other than temporary
decline in value. In our review in fiscal 2004, taking into account the length
of time and the extent to which the market value of certain securities have been
below cost, and other qualitative factors, management determined that a decline
in value of such securities was other than temporary, which we recognized in our
income statement. Management will continue to periodically review the market
value of our investments in securities, and if it determines in the future,
based at least in part on the length of time and the extent to which the market
value is less than cost as well as the financial conditions and prospects of the
respective issuers, that an other than temporary decline in value occurs, we may
be required to make further write-downs for such decline in value.
Allowances for Deferred Income Tax Assets: Tax benefits arising from deductible
temporary differences, unused tax credits and net operating loss carry forwards
are recognized as deferred tax assets. We record a valuation allowance to reduce
our deferred income tax assets to an amount that we believe will more likely
than not be realized. We have considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need and amount
for the valuation allowance. In the event we were to determine that we would be
able to realize our deferred income tax assets in the future in excess of our
net recorded amount, an adjustment to our deferred income tax assets would
increase income in the period such determination was made. Alternatively, should
we determine that we would not be able to realize all or part of our net
deferred income tax assets in the future, an adjustment to our deferred income
tax assets would decrease income in the period such determination was made.
20
Overview
Fiscal 2005
Net sales in fiscal 2005 increased by HK$30.2 million to HK$412.3 million,
representing a 7.9% increase when compared to net sales of HK$382.1 million in
fiscal 2004. The positive growth this year was mainly due to an overall
improvement in global economy, an increase in the Group's sales in pearls and
jewelry as well as its adoption of flexible and effective pricing strategies.
Net income for fiscal 2005 showed an increase of HK$23.9 million to HK$26.9
million, when compared to a net income of HK$3.0 million for fiscal 2004. This
increase in net income was mainly attributed to higher gross profit and the
disposal of a real estate investment by the Company.
Given the sustaining demand for South Sea pearls, we continue to place emphasis
on the sale of South Sea pearls, which comprised approximately 42.1% of our
Company's fiscal 2005 total sales. In order to further increase our strength in
the pearl sector, we created our own in-house design and manufacturing teams,
which gives us better quality control in designing and producing assembled pearl
jewelry and jewelry products. Through competitive prices and improved quality,
we managed to have solid growth in the sales of our finished jewelry products.
While South Sea pearls attract sophisticated customers, freshwater pearls still
have great potential in the youth and teenage market. We maintain classical and
elegant designs of pearl strands and jewelry products for our more sophisticated
customers while at the same time develop fashionable and trendy designs
targeting younger and teenage customers with prices ranging from affordable to
high end.
We maintain our quality and prices of products through our experienced buyers
and our good purchasing network together with our unique pearl processing
techniques and skills in producing finished products. We also emphasize offering
fashionable and vivid designs to maintain the attraction of our products.
In order to maintain the market exposure of our Company and products as well as
to keep abreast of the latest fashion and jewelry market trends, we attend
international tradeshows and exhibitions. At the same time, we keep investing in
our production facilities to solidify our back-end manufacturing operations in
order to support our increased sales orders while maintaining our good quality
of production.
Future Trends
We will continue to build our customer base in order to expand our assembled
jewelry sales while working to maintain our strong market position in our core
pearl business. Looking ahead, we believe that the global economy will keep on
growing at a healthy pace and we will keep pursuing new business opportunities
including venturing into new market segments, enlarging our customer base, and
strengthening market share. We will also keep an eye on potential investment
opportunities beyond the pearl and jewelry industry with a view to bringing
about the best returns to the Group and its shareholders. In the coming fiscal
year, we intend to pursue aggressive marketing strategies offering the right
product and service
21
mix to engage new customers and keep our current customers, while at the same
time maintain effective cost control measures. We believe our performance in the
coming fiscal year will continue to be promising.
Results of Operations
The following table sets forth for the fiscal years indicated certain items from
the Consolidated Statements of Income expressed as a percentage of net sales:
Year Ended March 31,
2005 2004 2003
% % %
Net sales 100.0 100.0 100.0
Cost of sales 71.6 72.7 72.2
----- ----- -----
Gross profit 28.4 27.3 27.8
Rental income, gross 1.1 1.6 2.3
----- ----- -----
29.5 28.9 30.1
===== ===== =====
Selling, general and administrative expenses (22.5) (23.4) (22.4)
----- ----- -----
Operating income 7.0 5.5 7.7
Interest expenses (0.1) (0.1) (0.5)
Interest income 0.3 0.1 0.2
Gain on sale of a real estate investment 8.3 - -
Non-operating income 0.4 0.8 1.4
Other than temporary decline in fair value
of marketable securities - (0.7) (1.8)
----- ----- -----
Income before income taxes and Minority interests 15.9 5.6 7.0
===== ===== =====
Income tax expenses (1.5) (1.8) (1.1)
----- ----- -----
Net income before minority interests 14.4 3.8 5.9
Minority interests (8.0) (3.0) (3.1)
----- ----- -----
Net income 6.4 0.8 2.8
===== ===== =====
Year Ended March 31, 2005 Compared to Year Ended March 31, 2004
Net Sales and Gross Profit
Net sales in fiscal 2005 increased by HK$30.2 million to HK$412.3 million,
representing a 7.9% increase when compared to net sales of HK$382.1 million in
fiscal 2004. We attribute such increase in net sales to the improvements in
general business and consumer confidence resulting in improvements in demand and
market sentiment following recovery from the impact of the Iraq War and SARS in
the PRC, Hong Kong and other countries with the increased revenue contribution
on pearls and jewelry finished products.
Gross profit for fiscal 2005 increased by HK$13.1 million from HK$104.1 million
for fiscal 2004 to HK$117.2 million, representing an increase of 12.6% while
gross profit margin increased to 28.4% from 27.3% in fiscal 2004. The increase
in gross profit resulted primarily
22
from the increase in turnover. We attribute the increase in gross profit margin
mainly to our change in sales mix.
Rental Income
Gross rental income decreased by HK$1.6 million, or 25.3%, from HK$6.2 million
for fiscal 2004 to $4.6 million for fiscal 2005. The decrease in gross rental
income was mainly attributable to the reduction in rental income as a result of
the disposal of 8th Floor, Harcourt House, 39 Gloucester Road, Wanchai, Hong
Kong completed on September 15, 2004. In addition, the Company experienced a
decrease in rental income in Man Sang Industrial City located in PRC mainly due
to a lower occupancy rate when compared to the last fiscal year.
Selling, General and Administrative Expenses ("SG&A expenses")
SG&A expenses for fiscal 2005 were HK$92.9 million, consisting of HK$81.9
million attributable to pearl operations and HK$11.0 million attributable to
real estate operations. This is an increase of approximately HK$3.5 million, or
3.9%, from HK$89.4 million, consisting of HK$79.8 million attributable to pearl
operations and HK$9.6 million attributable to real estate operations, during
fiscal 2004.
The increase in SG&A expenses in pearl operations was mainly due to increased
headcount and salary expenses related to our increased jewelry business and
commission expenses incurred on increased sales. The increase in SG&A expenses
in the real estate operations was mainly due to an increased spending on repair
and maintenance expenditures on some of the industrial buildings located in
Shenzhen, PRC, but was offset by the loss on demolition of one of the buildings
located in Shenzen, PRC, for reconstruction and loss on disposal of one of our
property located in Hong Kong for last year.
As a percentage of net sales, SG&A expenses for pearl operations decreased from
20.9% in fiscal 2004 to 19.9% in fiscal 2005.
Interest Income
Interest income for fiscal 2005 increased by HK$0.8 million to HK$1.1 million
from HK$0.3 million in fiscal 2004. The increase in interest income was
principally due to higher interest rates and increased bank deposits in fiscal
2005 as compared to fiscal 2004. See "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk."
Interest Expenses
Interest expenses for fiscal 2005 decreased by HK$0.3 million to HK$0.1 million
from HK$0.4 million in fiscal 2004 as a result of the repayment of bank
borrowings during the year.
Income Tax Expenses
Our income tax expenses were HK$6.1 million for fiscal 2005, a decrease of
HK$0.9 million when compared to an income tax expenses of HK$7.0 million for
fiscal 2004, which decrease is mainly attributable to the absence of the
one-time payment for income tax expenses in fiscal 2005 for certain taxable gain
associated with the disposal of MSIL shares by Man Sang
23
BVI in fiscal 2004. However, the decrease in our income tax expenses between
fiscal 2005 and fiscal 2004 has been mitigated, in part, by the effect of higher
operating income in fiscal 2005.
Net Income
Net income for fiscal 2005 increased by HK$23.9 million to HK$26.9 million, when
compared to a net income of HK$3.0 million for fiscal 2004. Such increase is
mainly due to higher gross profit and the gain on disposal of one of our real
estate property located at 8th Floor, Harcourt House, 39 Gloucester Road,
Wanchai, Hong Kong but was offset by an increase in SG&A expenses and minority
interests.
Year Ended March 31, 2004 Compared to Year Ended March 31, 2003
Net Sales and Gross Profit
Net sales in fiscal 2004 increased by HK$59.0 million to HK$382.1 million,
representing a 18.3% increase when compared to net sales of HK$323.1 million in
fiscal 2003. We attribute such increase in net sales to, among other factors,
(i) improvements in general business and consumer confidence resulting in
improvements in demand and market sentiment following the impact of the Iraq War
and SARS in the PRC, Hong Kong and other countries, (ii) the increased revenue
contribution on pearls and jewelry finished products, (iii) our increased
marketing efforts and flexible pricing strategies, and (iv) value added services
to satisfy our customers' needs.
Gross profit for fiscal 2004 increased by HK$14.1 million from HK$90.0 million
for fiscal 2003 to HK$104.1 million, representing an increase of 15.8% while
gross profit margin decreased to 27.3% from 27.8% in fiscal 2003. The increase
in gross profit resulted primarily from the increase in turnover. We attribute
the decrease in gross profit margin mainly to our flexible pricing strategy on
fresh water pearls, as well as the increase in assembled jewelry in our product
mix, which dilutes the gross profit margin to a lower extent.
Rental Income
Gross rental income decreased by HK$1.3 million, or 16.6%, from HK$7.5 million
for fiscal 2003 to $6.2 million for fiscal 2004. The decrease in gross rental
income was mainly attributable to the reduction in rental income generated in
fiscal year 2004 by the 19th Floor, Railway Plaza, 39 Chatham Road South,
Tsimshatsui, Hong Kong, which had been occupied by the Company for internal use
since April 21, 2003. In addition, the Company experienced a decrease in rental
income in Man Sang Industrial City located in PRC. The decrease in rental income
in Man Sang Industrial City was mainly due to one of the buildings having been
demolished in the first quarter of fiscal 2004. However, such decrease was
partially offset by the additional rental income contribution generated by the
property at 8th Floor, Harcourt House 39 Gloucester Road, Wanchai, Hong Kong
acquired on August 15, 2003.
Selling, General and Administrative Expenses ("SG&A expenses")
SG&A expenses for fiscal 2004 were HK$89.4 million, consisting of HK$79.8
million attributable to pearl operations and HK$9.6 million attributable to real
estate operations. This is an increase of approximately HK$17 million, or 23.5%,
from HK$72.4 million, consisting
24
of HK$65.1 million attributable to pearl operations and HK$7.3 million
attributable to real estate operations, during fiscal 2003.
The increase in SG&A expenses in pearl operations was mainly due to (i)
increased headcount and salary expenses related to our acquired jewelry
business, (ii) bad debt provision made on customers, while the increase in SG&A
expenses in the real estate operations was mainly due to (i) a loss arising on
the demolition of one of the buildings for reconstruction in Shenzhen, PRC and
(ii) a loss arising from the disposal of one of our properties located at Focal
Industrial Centre, 21 Man Lok Street, Kowloon, Hong Kong.
As a percentage of net sales, SG&A expenses for pearl operations increased from
20.1% in fiscal 2003 to 20.9% in fiscal 2004.
Interest Income
Interest income for fiscal 2004 decreased by HK$0.4 million to HK$0.3 million
from HK$0.7 million in fiscal 2003. The decrease in interest income was
principally due to lower interest rates in fiscal 2004 as compared to fiscal
2003. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
Interest Expenses
Interest expenses for fiscal 2004 decreased by HK$1.2 million to HK$0.4 million
from HK$1.6 million in fiscal 2003 as a result of the reduction in bank
borrowings and lower interest rate during the year.
Income Tax Expenses
Our income tax expenses were HK$7.0 million for fiscal 2004, an increase of
HK$3.3 million when compared to an income tax expenses of HK$3.7 million for
fiscal 2003, which increase is mainly attributable to higher taxable operating
income and taxable gain associated with the disposal of MSIL shares by Man Sang
BVI when compared to fiscal 2003.
Net Income
Net income for fiscal 2004 decreased by HK$5.9 million to HK$3.0 million, when
compared to a net income of HK$8.9 million for fiscal 2003. Such decrease is
mainly due to an increase in SG&A expenses, higher income taxes and minority
interests, plus a decrease in other income and a decrease in "other than
temporary decline of fair value of marketable securities". The higher minority
interests is due to the decrease in effective shareholdings on MSIL from 56.7%
throughout fiscal 2003 to 49.4% since October 2003.
Off-balance Sheet Arrangements and Contractual Obligations
No off-balance sheet arrangement is noted during this fiscal 2005.
The Company is contractually obligated to make the following material payments
as of March 31, 2005:
25
Total Less than 1 1-3 years 3-5 years More than 5
year years
Contractual Obligations
HK'000 HK'000 HK'000 HK'000 HK'000
Capital Commitment Obligations 3,568 3,568 - - -
Operating lease obligations 2,204 1,773 431 - -
-------------------------------------------------------------------------
Total contractual obligations 5,772 5,341 431 - -
Recent Accounting Pronouncements
In a meeting held in November 2003, the Emerging Issue Task Force ("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 adopted
the disclosure requirements during the fiscal year ended March 31, 2005.
In March 2004 meeting, 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 the consensus was reached in the March 2004 meeting 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
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. 123 (revised 2004), "Share-Based
Payment". This statement provides 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
26
purchase plans. SFAS No. 123(R) replaces SFAS 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 this statement as of the first
interim or annual reporting period that begins after June 15, 2005. In March
2005, the SEC published Staff Accounting Bulletin No. 107 "Share-Based Payment",
("SAB 107") to give public entities guidance in applying the provisions of SFAS
No. 123(R), and to users of financial statements in analyzing the information
provided under that Statement. SAB 107 is to be applied upon the adoption of
Statement No. 123(R). The Company believes that SFAS No. 123(R) and SAB 107 will
not have significant impact on its financial statements when it is adopted.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception
from fair value measurement for nonmonetary exchanges of similar productive
assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions", and replaces it with an exception for exchanges that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
the fiscal periods beginning after June 15, 2005, and is required to be adopted
by the Company effective January 1, 2006. The Company does not expect SFAS No.
153 will have a material impact on the consolidated results of operations or
financial condition.
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations" to clarify that an entity must
recognize a liability for the fair value of a conditional asset retirement
obligation when incurred if the liability's fair value can be reasonably
estimated. FIN 47 also defines when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. FIN 47
is effective no later than the end of fiscal years ending after December 15,
2005. Retrospective application of interim financial information is permitted
but is not required. Early adoption of this Interpretation is encouraged. The
adoption of FIN 47 will not have a material impact on the Company's consolidated
financial statements.
Liquidity and Capital Resources
The Company's primary liquidity needs are funded by collection of accounts
receivable and sales of inventories. At March 31, 2005, the Company had working
capital of HK$357.0 million, which included a cash balance of HK$243.3 million,
compared to working capital of HK$262.6 million, which included a cash balance
of HK$104.9 million, at March 31, 2004. The current ratio was 11.0 to 1 in
fiscal 2005 as compared with that of 6.4 to 1 in fiscal 2004. Net cash provided
by operating activities was HK$87.6 million and HK$76.1 million for fiscal 2005
and fiscal 2004, respectively. The increase in cash and cash equivalents by
HK$138.4 million was mainly generated by operating activities and the disposal
of a real estate investment located at the 8th Floor, Harcourt House, No. 39
Gloucester Road, Wanchai, Hong Kong.
Inventories decreased by HK$32.6 million from HK$115.3 million at March 31, 2004
to HK$82.7 million at March 31, 2005. The inventory turns in terms of months
decreased from 5.4 months in fiscal 2004 to 4.0 months in this fiscal year.
Inventories decreased mainly due to increased sales and improvement in inventory
management.
27
Long-term debts (including current portion of long-term debts) decreased from
HK$11.6 million at March 31, 2004 to nil. The decrease was attributable to
repayment of installment loans. The gearing ratio was zero at March 31, 2005, as
compared with 0.05 at March 31, 2004. The decrease was mainly attributable to
the repayment of bank borrowings.
The Company had available working capital facilities of HK$47.0 million in total
with various banks at March 31, 2005. Such banking facilities include letter of
credit arrangements, import loans, overdraft and other facilities commonly used
in the jewelry business. All such banking facilities bear interest at floating
rates generally offered by banks in Hong Kong and in the PRC, and are subject to
periodic review. At March 31, 2005, the Company did not utilize such credit
facilities.
We expect that in fiscal 2006, there will be a further cash requirement of
HK$3.6 million to be incurred for the completion of the construction of an
industrial building under Man Sang Industrial City, and our implementation of an
Enterprises Resources Planning system.
The Company believes that funds to be generated from internal operations and the
existing banking facilities will enable the Company to meet anticipated future
cash flow requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In fiscal 2005, the Company made approximately 43.6% of its purchases in US
dollars and approximately 44.1% of purchases in Hong Kong dollars, RMB and
Japanese Yen (together, 87.7% of total purchases). The Company's policy is to
denominate all its sales in either US dollars or Hong Kong dollars. Since the
Hong Kong dollar remained "pegged" to the US dollar 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. 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. Therefore, we believe that the imminent risk of a substantial fluctuation
of the RMB exchange rate remains low. At March 31, 2005, there are no short-term
RMB bank borrowings.
Therefore, since most of the Company's purchases are made in currencies that the
Company believes have low risk of appreciation or devaluation, and sales are
made in US dollars, the Company's management determined that the Company's
currency risk in the foreseeable future should not be material, and that no
derivative contracts such as forward contracts or options to hedge against
foreign exchange fluctuations were necessary during fiscal 2005.
In addition, the Company's interest expense is based on Hong Kong Inter-bank
Offer Rate ("HIBOR"). At March 31, 2005, the Company had fully repaid all the
outstanding bank borrowings during the year. During fiscal 2005, no derivative
contracts or other arrangement to hedge against the increase in interest rates
have been made. Due to the recovery of the economy in US, HK and PRC, there is
an expectation in the market that interest rates in the coming year will
continue to increase. However, in regards to our coming long-term and short-term
financing requirements, no material adverse financial effect to the Company are
anticipated. Despite news regarding increasing pressure on the PRC government to
allow the
28
appreciation of RMB against other currencies, including US dollars (to which the
HK dollar is pegged), we do not anticipate an urgent need to enter into forward
currency contracts to hedge against the appreciation of RMB.
29
ITEM 8. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm issued by Moores
Rowland Mazars F-1
Report of Independent Registered Public Accounting Firm issued by Deloitte
Touche Tohmatsu F-2
Consolidated Statements of Income and Comprehensive Income for the years
ended March 31, 2005, 2004 and 2003 F-3
Consolidated Balance Sheets as of March 31, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the years
ended March 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 30, 2004, our Audit Committee approved the dismissal of Deloitte Touche
Tohmatsu ("Deloitte") as our independent accountants to be replaced by Moores
Rowland Mazurs. We have had no disagreements with Deloitte as our independent
accountants. We reported the change of independent accountants on two Form 8-Ks
filed on July 7, 2004 and a Form 8-K/A filed on July 13, 2004, with the
Securities and Exchange Commission, and are incorporated herein by reference.
ITEM 9A. CONTROLS AND PROCEDURES
As of March 31, 2005, 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 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 change was made in the Company's internal control over financial reporting
during the fiscal quarter ended March 31, 2005 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
30
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 given design will succeed in achieving its stated
goals under all potential future conditions.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item will be included in the Company's proxy
statement for its 2005 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2005 and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's proxy
statement for its 2005 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2005 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be included in the Company's proxy
statement for its 2005 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2005 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's proxy
statement for its 2005 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2005 and
is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be included in the Company's proxy
statement for its 2005 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2005 and
is incorporated herein by reference.
32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Items Files as Part of Report:
1. Financial Statements
The financial statements of the Company as set forth in the Index to
Consolidated Financial Statements under Part II, Item 8 of this Form 10-K are
hereby incorporated by reference.
2. Exhibits
The exhibits listed under Item 15(c) are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission, and
are incorporated by reference as indicated below.
(b) Report on Form 8-K
A report on Form 8-K was filed on July 7, 2004 to announce dismissal of the
Company's certifying accountant.
A report on Form 8-K was filed on July 7, 2004 to announce appointment the
Company's new certifying accountant.
A report on Form 8-K/A was filed on July 13, 2004 to attach a letter from the
Company's former certifying accountant to the Securities and Exchange
Commission, as required by Regulation S-K Item 304(a)3.
A report on Form 8-K was filed on September 16, 2004 to announce the disposition
of assets by the Company.
A report on Form 8-K was filed on March 15, 2005 to announce resignation of
directors of the Company, appointment of a new director of the Company, and
appointment of an audit committee chairman.
(c) Exhibits
Exhibit No. Description
3.1 Restated Articles of Incorporation of Man Sang
Holdings, Inc., including the Certificate of
Designation, Preferences and Rights of a Series of
100,000 Shares of Preferred Stock, $.001 Par Value,
Designated "Series A Preferred Stock," filed on
January 12, 1996 (1)
3.2 Certificate of Designation, Preferences and Rights of
a Series of 100,000 Shares of Preferred Stock, $.001
Par Value, Designated "Series B Preferred Stock,"
dated April 1, 1996 (2)
33
3.3 Amended Bylaws of Man Sang Holdings, Inc., effective
as of January 10, 1996 (1)
10.1 Acquisition Agreement, Dated December __, 1995,
between Unix Source America, Inc. and the
Shareholders of Man Sang International (B.V.I.)
Limited (1)
10.2 Tenancy Agreement, dated June 24, 1996, between Same
Fast Limited and Man Sang Jewellery Company Limited
(3)
10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3)
10.4 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Cheng Chung Hing
(5)
10.5 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Cheng Tai Po (5)
10.6 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Hung Kwok Wing (5)
10.7 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Sio Kam Seng (5)
10.8 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Ng Hak Yee (5)
10.9 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Yan Sau Man Amy
(5)
10.10 Contract dated November 8, 1997, between Nan'ao
Shaohe Pearl Seawater Culture Co., Ltd. of Guangdong
Province, People's Republic of China, Man Sang
Jewellery Co., Ltd. of Hong Kong and Chung Yuen
Company o/b Golden Wheel Jewellery Mfr. Ltd. of Hong
Kong to establish a cooperative joint venture in
Nan'ao County, Guangdong Province, People's Republic
of China (6)
10.11 Agreement dated January 2, 1998, between Overlord
Investment Company Limited and Excel Access Limited,
a subsidiary of the Company, pursuant to which Excel
Access Limited will purchase certain real property
located at Flat A, 33rd Floor, of Valverde, 11 May
Road, Hong Kong for HK$15,050,000 (6)
10.12 Agreement for Sale and Purchase dated February 24,
1998, between City Empire Limited and Wealth-In
Investment Limited, a subsidiary of the Company,
pursuant to which Wealth-In Investment Limited
purchased certain real property located at Flat B on
the 20th Floor of The Mayfair, One May Road, Hong
Kong, at a purchase price of HK$39,732,200 (7)
34
10.13 Service Agreement, dated February 10, 2000, between
Man Sang International Limited and Wong Ka Ming (8)
10.14 Service Agreement, dated August 31, 2000, between Man
Sang International Limited and Cheng Chung Hing (8)
10.15 Service Agreement, dated August 31, 2000, between Man
Sang International Limited and Cheng Tai Po (8)
10.16 Service Agreement, dated August 31, 2000, between Man
Sang International Limited and Yan Sau Man, Amy (8)
13.1 Annual report to security holders (4)
21.1 Subsidiaries of the Company
24.1 Power of Attorney (included on page 37)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-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 exhibits filed with the Company's
Current Report on Form 8-K dated January 8, 1996
(2) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A dated June 17, 1996
(3) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10- QSB for the quarterly period ended
December 31, 1996
(4) Incorporated by reference to the Form 10- KSB/A for the fiscal year
ended March 31, 1997
(5) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1997
(6) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1997
(7) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998
(8) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000
35
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, Man Sang Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
Date: June 28, 2005
By: /s/CHENG Chung Hing, Ricky
--------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President and
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cheng Chung Hing, Ricky and Henry Au, his
attorney-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Annual Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Name Title Date
/s/ CHENG Chung Hing, Ricky Chairman of the Board, President, June 28, 2005
- --------------------------- and Chief Executive Officer
CHENG Chung Hing, Ricky
/s/ AU Moon Ying, Henry Chief Financial Officer June 28, 2005
- ---------------------------
AU Moon Ying, Henry
/s/ CHENG Tai Po Vice Chairman of the Board June 28, 2005
- ---------------------------
CHENG Tai Po
/s/ HUNG Kwok Wing, Sonny Director June 28, 2005
- ---------------------------
HUNG Kwok Wing, Sonny
36
SUPPLEMENTAL REPORTS TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY
NON-REPORTING ISSUERS
No annual report or proxy material has been forwarded to securities holders of
the Registrant covering the Registrant's fiscal 2005; however, if any annual
report or proxy material is furnished to security holders in connection with the
annual meeting of stockholders to be held in 2005, a copy of any such annual
report or proxy materials shall be forwarded to the Securities and Exchange
Commission when it is forwarded to security holders.
INDEX TO EXHIBITS
The following documents are filed herewith or have been included as exhibits to
previous filings with the Securities and Exchange Commission, and are
incorporated by reference as indicated below.
Exhibit No. Description
3.1 Restated Articles of Incorporation of Man Sang
Holdings, Inc., including the Certificate of
Designation, Preferences and Rights of a Series of
100,000 Shares of Preferred Stock, $.001 Par Value,
Designated "Series A Preferred Stock," filed on
January 12, 1996 (1)
3.2 Certificate of Designation, Preferences and Rights of
a Series of 100,000 Shares of Preferred Stock, $.001
Par Value, Designated "Series B Preferred Stock,"
dated April 1, 1996 (2)
3.3 Amended Bylaws of Man Sang Holdings, Inc., effective
as of January 10, 1996 (1)
10.1 Acquisition Agreement, Dated December __, 1995,
between Unix Source America, Inc. and the
Shareholders of Man Sang International (B.V.I.)
Limited (1)
10.2 Tenancy Agreement, dated June 24, 1996, between Same
Fast Limited and Man Sang Jewellery Company Limited
(3)
10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3)
10.4 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Cheng Chung Hing
(5)
10.5 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Cheng Tai Po (5)
10.6 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Hung Kwok Wing (5)
37
10.7 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Sio Kam Seng (5)
10.8 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Ng Hak Yee (5)
10.9 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Yan Sau Man Amy
(5)
10.10 Contract dated November 8, 1997, between Nan'ao
Shaohe Pearl Seawater Culture Co., Ltd. of Guangdong
Province, People's Republic of China, Man Sang
Jewellery Co., Ltd. of Hong Kong and Chung Yuen
Company o/b Golden Wheel Jewellery Mfr. Ltd. of Hong
Kong to establish a cooperative joint venture in
Nan'ao County, Guangdong Province, People's Republic
of China (6)
10.11 Agreement dated January 2, 1998, between Overlord
Investment Company Limited and Excel Access Limited,
a subsidiary of the Company, pursuant to which Excel
Access Limited will purchase certain real property
located at Flat A, 33rd Floor, of Valverde, 11 May
Road, Hong Kong for HK$15,050,000 (6)
10.12 Agreement for Sale and Purchase dated February 24,
1998, between City Empire Limited and Wealth-In
Investment Limited, a subsidiary of the Company,
pursuant to which Wealth-In Investment Limited
purchased certain real property located at Flat B on
the 20th Floor of The Mayfair, One May Road, Hong
Kong, at a purchase price of HK$39,732,200 (7)
10.13 Service Agreement, dated February 10, 2000, between
Man Sang International Limited and Wong Ka Ming (8)
10.14 Service Agreement, dated August 31, 2000, between Man
Sang International Limited and Cheng Chung Hing (8)
10.15 Service Agreement, dated August 31, 2000, between Man
Sang International Limited and Cheng Tai Po (8)
10.16 Service Agreement, dated August 31, 2000, between Man
Sang International Limited and Yan Sau Man, Amy (8)
13.1 Annual report to security holders (4)
21.1 Subsidiaries of the Company
24.1 Power of Attorney (included on page 37)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
38
31.2 Rule 13a-14(a)/15d-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 exhibits filed with the Company's
Current Report on Form 8- K dated January 8, 1996
(2) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A dated June 17, 1996
(3) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10- QSB for the quarterly period ended
December 31, 1996
(4) Incorporated by reference to the Form 10- KSB/A for the fiscal year
ended March 31, 1997
(5) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1997
(6) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1997
(7) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998
(8) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. PAGE
Report of Independent Registered Public Accounting Firm issued by Moores
Rowland Mazars F-1
Report of Independent Registered Public Accounting Firm issued by Deloitte
Touche Tohmatsu F-2
Consolidated Statements of Income and Comprehensive Income for the years
ended March 31, 2005, 2004 and 2003 F-3
Consolidated Balance Sheets as of March 31, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the years
ended March 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders of
Man Sang Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Man Sang
Holdings, Inc. and subsidiaries (the "Company") as of March 31, 2005, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for the year ended March 31, 2005, all
expressed in Hong Kong dollars. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
March 31, 2005, and the consolidated results of its operations and its cash
flows for the year ended March 31, 2005 in conformity with U.S. generally
accepted accounting principles.
Our audit also comprehended the translation of Hong Kong dollar amounts into
U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2. Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
Moores Rowland Mazars
Chartered Accountants
Certified Public Accountants
Hong Kong
June 28, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders of
Man Sang Holdings, Inc.
We have audited the consolidated balance sheet of Man Sang Holdings, Inc. and
subsidiaries (the "Company") as of March 31, 2004, and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash
flows for each of the two years in the period ended March 31, 2004, all
expressed in Hong Kong dollars (except for the revisions to earnings per share
required by Company's adoption of Emerging Issues Task Force 03-06,
"Participating Securities and the Two-Class Method" under Statement of Financial
Accounting Standards No. 128 "Earnings Per Share", during the fiscal year ended
March 31, 2005). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
March 31, 2004, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended March 31, 2004 in conformity
with accounting principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
June 29, 2004
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share data)
Year ended March 31,
--------------------------------------------------------
2005 2005 2004 2003
US$ HK$ HK$ HK$
Net sales 52,854 412,262 382,123 323,082
Cost of sales (37,822) (295,014) (277,976) (233,160)
--------- --------- --------- ---------
Gross profit 15,032 117,248 104,147 89,922
Rental income, gross 596 4,646 6,220 7,455
--------- --------- --------- ---------
15,628 121,894 110,367 97,377
Selling, general and administrative expenses:
Pearls (10,495) (81,862) (79,838) (65,079)
Real estate investment (1,414) (11,027) (9,558) (7,280)
--------- --------- --------- ---------
Operating income 3,719 29,005 20,971 25,018
Interest expense (13) (100) (380) (1,629)
Interest income 137 1,067 279 690
Equity in loss of an affiliate - - - (60)
Gain on sales of a real estate investment 4,391 34,248 - -
Other income 207 1,617 2,889 4,485
Other than temporary decline in fair value of
marketable securities - - (2,474) (5,921)
--------- --------- --------- ---------
Income before income taxes and minority interests 8,441 65,837 21,285 22,583
Income tax expense (786) (6,129) (7,027) (3,719)
Minority interests (4,204) (32,792) (11,266) (9,943)
--------- --------- --------- ---------
Net income 3,451 26,916 2,992 8,921
--------- --------- --------- ---------
Other comprehensive income, net of taxes:
Foreign currency translation adjustments 1 6 29 536
Unrealized holding gain (loss) on marketable
securities arising during the year 41 319 1,507 (2,043)
Reclassification adjustment for other than
temporary decline in fair value of marketable
securities included in net income for the year - - 1,222 3,355
--------- --------- --------- ---------
Other comprehensive income, net of taxes 42 325 2,758 1,848
--------- --------- --------- ---------
Comprehensive income 3,493 27,241 5,750 10,769
========= ========= ========= =========
Basic earnings per common share $0.77 $5.97 $0.66 $1.84
========= ========= ========= =========
Diluted earnings per common share $0.68 $5.28 $0.60 $1.84
========= ========= ========= =========
Weighted average number of shares of common stock outstanding:
- basic earnings per share 4,407,878 4,407,878 4,451,889 4,740,700
========= ========= ========= =========
- diluted earnings per share 4,985,323 4,985,323 4,855,699 4,740,700
========= ========= ========= =========
See accompany notes to consolidated financial statements.
F-3
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share data)
March 31,
------------------------------------------------
2005 2005 2004
US$ HK$ HK$
ASSETS
Current assets:
Cash and cash equivalents 31,192 243,297 104,907
Marketable securities 1,080 8,422 7,776
Accounts receivable, net of allowance for doubtful accounts
of HK$22,807 and HK$14,728 in 2005 and 2004, respectively 6,083 47,450 62,993
Inventories 10,603 82,705 115,297
Prepaid expenses 576 4,489 3,169
Deposits and other receivables, net of allowance for doubtful
accounts of HK$3,721 and HK$2,769 in 2005 and 2004,
respectively 686 5,349 7,840
Other current assets 49 382 8,937
Income taxes receivable 88 684 461
--------------- --------------- ----------------
Total current assets 50,357 392,778 311,380
Property, plant and equipment, net 15,264 119,061 115,791
Real estate investment, net 6,044 47,144 88,673
Long-term investments - - 856
Deferred tax assets 33 258 174
--------------- --------------- ----------------
Total assets 71,698 559,241 516,874
=============== =============== ================
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share data)
March 31,
------------------------------------------------
2005 2005 2004
US$ HK$ HK$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debts - - 5,575
Accounts payable 1,101 8,588 13,234
Accrued payroll and employee benefits 1,533 11,958 8,523
Other accrued liabilities 1,361 10,617 9,979
Deposit on sale of real estate investment - - 7,160
Income taxes payable 588 4,587 4,264
--------------- --------------- ----------------
Total current liabilities 4,583 35,750 48,735
--------------- --------------- ----------------
Long-term debts - - 6,016
--------------- --------------- ----------------
Deferred tax liabilities 156 1,213 821
--------------- --------------- ----------------
Minority interests 33,021 257,562 224,437
--------------- --------------- ----------------
Commitments and contingencies (note 12)
Stockholders' equity:
Series A preferred stock US$0.001 par value
- authorized, issued and outstanding 100,000 shares
in 2005 and 2004 (entitled in liquidation
to US$2,500 (HK$19,500)) - 1 1
Series B preferred stock US$0.001 par value
- authorized 100,000 shares; no shares outstanding - - -
Common stock of par value US$0.001
- authorized 25,000,000 shares; issued and outstanding,
4,455,960 shares and 4,405,960 shares in 2005 and
2004, respectively 4 35 34
Additional paid-in capital 7,905 61,660 61,051
Retained earnings 25,609 199,752 172,836
Accumulated other comprehensive income 420 3,268 2,943
--------------- --------------- ----------------
Total stockholders' equity 33,938 264,716 236,865
--------------- --------------- ----------------
Total liabilities and stockholders' equity 71,698 559,241 516,874
=============== =============== ================
See accompany notes to consolidated financial statements.
F-5
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share data)
Accumul-
ated
other
Series A Series B Addit- compre- Total
-------------------- ------------------ ional hensive Stock-
Preferred stock Preferred Stock Common stock paid-in Retained (loss) holders'
-------------------- ------------------ ------------------- capital earnings income equity
Shares Amount Shares Amount Shares Amount -------- -------- -------- --------
HK$ HK$ HK$ HK$ HK$ HK$ HK$
Balance at March 31,
2002 100,000 1 - - 4,405,960 34 58,458 187,570 (1,663) 244,400
Issuance of common
shares - - - - 410,000 3 2,171 - - 2,174
Stock compensation
expense - - - - - - 4 - - 4
Translation adjustment - - - - - - - - 536 536
Unrealized holding loss
on marketable
securities - - - - - - - - (2,043) (2,043)
Other than temporary
decline in fair
value of marketable
securities - - - - - - - - 3,355 3,355
Net income - - - - - - - 8,921 - 8,921
---------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Balance at March 31,
2003 100,000 1 - - 4,815,960 37 60,633 196,491 185 257,347
Repurchase of common
stock - - - - (410,000) (3) - (4,794) - (4,797)
Stock compensation
expense - - - - - - 418 - - 418
Translation adjustment - - - - - - - - 29 29
Unrealized holding gain
on marketable
securities - - - - - - - - 1,507 1,507
Other than temporary
decline in fair
value of marketable
securities - - - - - - - - 1,222 1,222
Deemed distribution to
shareholders (note 1) - - - - - - - (21,853) - (21,853)
Net income - - - - - - - 2,992 - 2,992
---------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Balance at March 31,
2004 100,000 1 - - 4,405,960 34 61,051 172,836 2,943 236,865
Issuance of common
stock upon exercise
of stock options - - - - 50,000 1 475 - - 476
Stock compensation
expense - - - - - - 134 - - 134
Translation adjustment - - - - - - - - 6 6
Unrealized holding gain
on marketable
securities - - - - - - - - 319 319
Net income - - - - - - - 26,916 - 26,916
---------- -------- -------- -------- --------- -------- -------- -------- -------- --------
Balance at March 31,
2005 100,000 1 - - 4,455,960 35 61,660 199,752 3,268 264,716
========== ======== ======== ======== ========= ======== ======== ======== ======== ========
- - US$4 US$7,905 US$25,609 US$420 US$33,938
======== ======== ======== ========= ========= ======== =========
As of March 31, 2005, 2004 and 2003, retained earnings in the amounts of
HK$4,867, HK$4,867 and HK$5,454, respectively, have been reserved by the
subsidiaries in the People's Republic China (the "PRC") in accordance with the
relevant PRC regulations, this reserve is only distributable in the event of
liquidation of these PRC subsidiaries.
See accompany notes to consolidated financial statements.
F-6
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share data)
Year ended March 31,
-------------------------------------------------------------
2005 2005 2004 2003
US$ HK$ HK$ HK$
Cash flow from operating activities
Net income 3,451 26,916 2,992 8,921
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt provision 1,161 9,057 9,530 440
Inventory write down 4,141 32,300 14,273 -
Provision for impairment loss of long-term
investments 110 856 1,730 -
Other than temporary decline in fair value of
marketable securities - - 2,474 5,921
Depreciation and amortization 1,046 8,157 9,427 9,296
Impairment loss on property, plant and equipment 336 2,617 389 -
Impairment loss on real estate investment - - 1,762 -
(Gain) loss on sale of real estate investment (4,391) (34,248) 1,965 -
(Gain) loss on sale of property, plant and equipment (17) (136) 685 603
Minority interest 4,204 32,792 11,266 9,943
Realized gain on sale of marketable securities - - (991) -
Stock compensation expense 17 134 418 4
Equity in loss of an affiliate - - - 60
Loss on disposal of subsidiaries - - - 438
Changes in operating assets and liabilities, net of
effects from sale of subsidiaries:
Accounts receivable 946 7,384 1,611 (10,559)
Inventories 39 303 4,774 (15,700)
Prepaid expenses (169) (1,319) 3,171 (3,998)
Deposits and other receivables 198 1,540 (6,676) 8,382
Other current assets 179 1,395 3 7,152
Income taxes receivable (29) (223) (3) (458)
Deferred tax assets (11) (84) (174) 2,188
Accounts payable (596) (4,649) 7,657 2,238
Accrued payroll and employee benefits 440 3,435 1,335 2,655
Other accrued liabilities 82 636 (1,518) 176
Deposit on sale of real estate investment - - 7,160 -
Income taxes payable 41 323 2,040 1,851
Deferred tax liabilities 50 392 821 -
-------------- -------------- -------------- --------------
Net cash provided by operating activities 11,228 87,578 76,121 29,553
-------------- -------------- -------------- --------------
Cash flow from investing activities
Decrease in restricted cash - - - 16,169
Proceeds from disposal of long-term investments - - - 900
Proceeds from sale of property, plant and equipment 41 320 1,062 452
Proceeds from sale of real estate investment 9,181 71,610 5,196 -
Proceeds from disposal of subsidiaries - - - 341
Purchase of property, plant and equipment (1,283) (10,009) (23,058) (6,137)
Acquisition of a business - - 373 (5,200)
Acquisition of an affiliate - - - (300)
Purchase of long-term investments - - - (156)
Purchase of marketable securities - - (27) -
Purchase of real estate investment - - (38,222) -
Proceeds from sale of marketable securities - - 5,972 -
-------------- -------------- -------------- --------------
Net cash provided by (used in) investing activities 7,939 61,921 (48,704) 6,069
-------------- -------------- -------------- --------------
F-7
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share data)
Year ended March 31,
----------------------------------------------------------------
2005 2005 2004 2003
US$ HK$ HK$ HK$
Cash flow from financing activities
Increase in short-term borrowings - - - 942
Proceeds from partial disposal of a subsidiary - - 8,940 -
Repayment of short-term borrowings - - - (29,377)
Repayment of long-term debts (1,486) (11,591) (10,416) (5,575)
Repurchase of common stock - - (4,797) -
Net proceeds from issuance of common stock 61 476 - -
-------------- -------------- -------------- --------------
Net cash used in financing activities (1,425) (11,115) (6,273) (34,010)
-------------- -------------- -------------- --------------
Net increase in cash and cash equivalents 17,742 138,384 21,144 1,612
Cash and cash equivalents at beginning of year 13,450 104,907 83,766 82,152
Exchange adjustments - 6 (3) 2
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of year 31,192 243,297 104,907 83,766
============== ============== ============== ==============
Supplementary disclosures of cash flow information
Cash paid during the year for:
Interest and finance charges 14 108 396 1,670
Income taxes paid 727 5,672 5,012 2,676
============== ============== ============== ==============
Non-cash investing and financing activities:
Consideration for purchase of a business settled
through accounts receivable - - 190 -
Issuance of common shares to consultants as
consideration for their services - - - 2,174
============== ============== ============== ==============
Disposal of subsidiaries:
Assets disposed of, including interest in an
affiliate of HK$240 - - - (7,571)
Liabilities disposed of - - - 1,850
Minority interests - - - 1,720
-------------- -------------- -------------- --------------
Net assets disposed of - - - (4,001)
Cash consideration received - - - 2,307
Inventories received - - - 1,256
-------------- -------------- -------------- --------------
Loss on disposal of subsidiaries - - - (438)
============== ============== ============== ==============
Net cash proceeds from disposal of subsidiaries:
Cash consideration received - - - 2,307
Cash and cash equivalents disposed of - - - (1,966)
- - - 341
============== ============== ============== ==============
See accompany notes to consolidated financial statements.
F-8
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
1. ORGANIZATION AND ACQUISITION AND DIVESTITURE
Activities and organization
Man Sang Holdings, Inc. (the "Company") was incorporated in the State
of Nevada, the United States of America on November 14, 1986.
The principal activities of the Company comprise the processing and
sale of South Sea, fresh water and cultured pearls and pearl jewelry
products. The selling and administrative activities are performed in
the Hong Kong Special Administrative Region of the People's Republic of
China ("Hong Kong") and the processing activities are conducted by
subsidiaries operating in Guangdong Province, the People's Republic of
China ("the PRC"). The Company also derives rental income from real
estate located at its pearl processing facility in the PRC and from
offices in Hong Kong. The Company's activities are principally
conducted by its subsidiary, Man Sang International Limited ("MSIL"), a
Bermuda incorporated company which is listed on The Stock Exchange of
Hong Kong Limited.
On October 6, 2003, Messrs. Cheng Chung Hing and Cheng Tai Po, major
beneficial shareholders and directors of the Company purchased a 7.2%
equity interest in MSIL from Man Sang International (B.V.I.) Limited,
which is a wholly-owned subsidiary of the Company and through which the
Company holds all of its equity interest in MSIL. The aggregate
consideration was HK$8,940, and the purchase price per share was the
arithmetic average of the closing price of MSIL shares for each of five
trading days immediately preceding and including October 6, 2003. In
connection with this transaction between parties under common control,
the Company has recorded the amount by which value of the net assets in
MSIL attributable to the shares of MSIL sold (as represented by the 60
million MSIL shares sold) exceeded the consideration, in the amount of
HK$21,852, as a distribution to shareholders.
As a result of this transaction the Company's equity interest in MSIL,
was reduced to 49.4%. The Company continues to account for MSIL as a
consolidated subsidiary because it continues to have control over the
operating and financial decision of MSIL. As of March 31, 2005 and
2004, the Company had an equity interest of 49.4% in MSIL.
Acquisition and divestiture
The Company has also made a number of investments in companies that
supply the Company or distribute its products. The Company has an
investment of Renminbi 5,100 (HK$4,730) for a 19.5% stake in a pearl
farm located in Nan'ao County in Guangdong Province in the PRC through
a cooperative joint venture which has a duration of 11 years. In case
of termination or liquidation of the joint venture, the Company is
entitled to receive 19.5% of the net assets of the joint venture. As a
result of the poor operating performance of the pearl farm, the Company
recognized impairment losses of HK$3,000 in 2002 and HK$1,730 in 2004.
In April 2000, MSIL acquired all the issued share capital of Intimex
Business Solutions Company Limited ("IBS") for a consideration of
HK$2,100 which was satisfied by the issuance of 42,000,000 new shares
of HK$0.05 each in Cyber Bizport Limited, a wholly owned subsidiary of
MSIL, representing 21% of the enlarged issued share capital of Cyber
Bizport Limited. As a result, MSIL holds a 79% equity interest in Cyber
Bizport Limited which in turn holds the entire equity interest in IBS.
The principal business of IBS is the provision of computer consulting
services.
F-9
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
1. ORGANIZATION AND ACQUISITION AND DIVESTITURE (CONTINUED)
Acquisition and divestiture (Continued)
The acquisition was accounted for as a purchase and the results of IBS
and its subsidiary have been included in the accompanying consolidated
financial statements since the date of acquisition. The excess of the
purchase consideration over the fair value of the net assets acquired
was HK$1,179 and was recorded as goodwill which was initially amortized
on a straight-line basis over three years. In view of the
unsatisfactory financial performance of IBS, the Company recorded an
impairment loss for the entire unamortized amount of goodwill, totaling
HK$591 in 2002.
On March 31, 2003, the Company acquired the remaining 21% equity
interest of Cyber Bizport Limited in exchange for its entire 79%
indirect equity interest in MSIL. The Company has accounted for this
transaction under the purchase method of accounting. Accordingly, the
fair value of the Company's equity interest in IBS, totaling HK$341 was
treated as the purchase price for accounting purpose. There was no
significant goodwill as a result of this acquisition.
In July 2002, a wholly-owned subsidiary of the Company acquired a 30%
equity interest of China South City Holdings Limited for HK$300, which
was accounted for using the equity method in the accompanying financial
statements. There was no significant goodwill as a result of this
acquisition. In December 2002, the Company disposed of its entire
equity interest in that subsidiary to Messrs. Cheng Chung Hing and
Cheng Tai Po for a consideration of HK$300.
On October 17, 2002, the Company disposed of its entire 18% equity
interest in Gold Treasure International Jewellery Company Limited
("GTI") for a consideration of HK$900. The principal business of GTI
was the production of accessories in gold, silver and/or other gems.
On December 1, 2002, a wholly owned subsidiary of MSIL acquired a
business by acquiring property, plant and equipment, inventories and
customer information from a jewelry company for a total consideration
of HK$7,200. The acquisition was accounted for as a purchase and
HK$5,046 of the purchase price was allocated to property, plant and
equipment and HK$2,154 to inventories based on their respective fair
values at the date of acquisition. The fair value of the customer
information acquired is considered to be insignificant by the Company's
management. The results of the acquired business have been included in
the consolidated financial statements since the date of acquisition.
On February 1, 2004, a wholly owned subsidiary of MSIL acquired all of
the assets and liabilities including customer information of a jewelry
factory for a total consideration of HK$190 which was settled by an
offset of a receivable from the vendor. The acquisition was accounted
for using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets acquired based on the estimated
fair values at the date of acquisition. The operating results of this
business have been included in the consolidated financial statements
since the date of acquisition.
F-10
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
1. ORGANIZATION AND ACQUISITION AND DIVESTITURE (CONTINUED)
The following table presents the allocation of the purchase price to
the assets and liabilities acquired:
HK$
---
Property, plant and equipment 1,020
Inventories 164
Accounts receivable 370
Other current assets 208
Cash and cash equivalents 373
Accounts payable (23)
Other accrued liabilities (1,922)
----------------
190
================
The fair value of the customer information acquired is considered to be
insignificant by the Company's management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements of the
Company have been prepared in accordance with the accounting principles
generally accepted in the United States of America ("US GAAP").
Principles of consolidation - The consolidated financial statements
include the assets, liabilities, revenues and expenses of Man Sang
Holdings, Inc. and all of its subsidiaries. All material intra-group
transactions and balances have been eliminated. An affiliate over which
the Company has the ability to exert significant influence, but does
not have a controlling interest (generally 20% to 50% owned), is
accounted for using the equity method. The Company's share of earnings
of the affiliate is included in the accompanying consolidated
statements of income and comprehensive income.
Goodwill - The excess of the purchase price over the fair value of net
assets acquired is recorded on the consolidated balance sheet as
goodwill.
Prior to April 1, 2002, goodwill was amortized on a straight-line basis
over its estimated useful life of three years. Amortization expense was
HK$195 in 2002. Management determined that goodwill was impaired, and
therefore recognized an impairment loss of HK$591 during the year ended
March 31, 2002.
F-11
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Starting from April 1, 2002, the Company has adopted Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets" which requires that upon adoption, amortization of
goodwill and other intangible assets with indefinite lives will cease
and instead, the carrying value of these intangible assets will be
evaluated for impairment on an annual basis. Identifiable intangible
assets with definitive lives will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
There was no effect on the consolidated financial statements of the
Company upon the adoption of SFAS No. 142. Reported net income and
earnings per share assuming non-amortization of goodwill for 2002 under
SFAS No. 142 would not be significantly different from the actual
amounts.
Cash and cash equivalents - Cash and cash equivalents include cash on
hand, demand deposits, interest bearing savings accounts, and time
certificates of deposit with a maturity of three months or less when
purchased.
Inventories - Inventories are stated at the lower of cost determined by
the weighted average method, or market value. Finished goods
inventories consist of raw materials, direct labor and overhead
associated with the processing of pearls.
Marketable securities - The Company classifies its marketable
securities as available-for-sale and carries them at market value with
a corresponding recognition of net unrealized holding gain or loss (net
of tax) as a separate component of stockholders' equity until realized.
Unrealized losses are charged against net earnings when a decline in
fair value is determined to be other than temporary. Gains and losses
on sales of securities are computed on a specific identification basis.
Marketable securities comprise:
March 31, 2005 March 31, 2004
HK$ HK$
Publicly traded corporate equity securities listed in Hong Kong:
Gross unrealized gains net of minority interests, included in
accumulated other comprehensive income 1,042 723
================ =================
Fair value of marketable securities 8,422 7,776
================ =================
During the years ended March 31, 2004 and 2003, the Company recognized
losses of HK$2,474 and HK$5,921, respectively, on its marketable
securities due to declines in fair values that were determined by
management to be other than temporary.
Long-lived assets - The Company periodically evaluates the carrying
value of long-lived assets to be held and used, including goodwill and
other intangible assets through March 31, 2002, whenever events and
circumstances indicate that the carrying value of the asset may no
longer be recoverable. An impairment loss, measured based on the fair
value of the asset, is recognized if expected future undiscounted cash
flows are less than the carrying amount of the assets.
F-12
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment - Property, plant and equipment is stated
at cost. Depreciation is provided using the straight-line method based
on the estimated useful lives of the assets as follows:
Leasehold land and buildings 50 years, or less if the lease period is shorter
Plant and machinery 4 to 5 years
Furniture and equipment 4 years
Motor vehicles 4 years
Assets under construction are not depreciated until construction is
complete and the assets are ready for their intended use. No interest
was capitalized in the three years ended March 31, 2005.
Real estate investment - Leasehold land and buildings held for
investment are stated at cost. Cost includes the cost of the purchase
of the land and construction costs, including finance costs incurred
during the construction period. Depreciation of land and buildings is
computed using the straight-line method over the term of the underlying
lease of the land on which the buildings are located up to a maximum of
50 years.
Long-term investments - The Company's long-term investments are
accounted for under the cost method. The Company periodically evaluates
the carrying value of long-term investments held, whenever events and
circumstances indicate that the carrying value of the investment may no
longer be recoverable. The Company recognizes impairment losses based
on the estimated fair value of the investments.
Revenue recognition - The Company recognizes revenue at the time
products are shipped to customers and collectibility for such sales is
reasonably assured. Property rental income is recognized on a
straight-line basis over the term of the lease, and is stated at the
gross amount.
Income taxes - Deferred income taxes are provided using the asset and
liability method. Under this method, deferred income taxes are
recognized for all significant temporary differences and classified as
current or non-current based upon the classification of the related
asset or liability in the financial statements. A valuation allowance
is provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all, the
deferred tax asset will not be realized.
Net earnings per share ("EPS") - Basic EPS excludes dilution and is
computed by dividing net income attributable to common shareholders by
the weighted average of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (warrants to
purchase common stock and common stock options) were exercised or
converted into common shares. EPS for all periods presented have been
computed in accordance with SFAS No. 128 "Earnings Per Share" issued by
the Financial Accounting Standards Board ("FASB").
F-13
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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.
Reconciliation of the basic and diluted EPS is as follows:
For the year ended March 31, 2005 For the year ended March 31, 2004 For the year ended March 31, 2003
Earnings Shares EPS Earnings Shares EPS Earnings Shares EPS
----------- --------- --------- ----------- --------- --------- ----------- --------- ---------
HK$'000 HK$ HK$'000 HK$ HK$'000 HK$
Basic EPS:
Net income 26,916 2,992 8,921
Allocated to Series
A preferred stock (597) (66) (184)
----------- ----------- -----------
Net income available
to common
stockholders,
adjusted 26,319 4,407,878 5.97 2,926 4,451,889 0.66 8,737 4,740,700 1.84
========= ========= =========
Effect of dilutive
securities
Stock options granted
by the Company - 577,445 - 403,810 - -
----------- --------- ----------- --------- ----------- ---------
Diluted EPS:
Net income available
to common
stockholders,
including conversion 26,319 4,985,323 5.28 2,926 4,855,699 0.60 8,737 4,740,700 1.84
========== ========= ========= ========== ========= ========= =========== ========= =========
Foreign currency translation - Assets and liabilities of foreign
subsidiaries are translated from their functional currency to Hong Kong
Dollars at year end exchange rates, while revenues and expenses are
translated at average exchange rates during the year. Adjustments
arising from translating foreign currency financial statements are
reported as a separate component of stockholders' equity. Gains or
losses from foreign currency transactions are included in the statement
of income.
F-14
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency risk - The Renminbi ("RMB") is not a freely
convertible currency. The State Administration for Foreign Exchange,
under the authority of the People's Bank of China, controls the
conversion of RMB into foreign currencies. The value of the RMB is
subject to changes in central government policies and to international
economic and political developments affecting supply and demand in the
China Foreign Exchange Trading System market. The cash and cash
equivalents of the Company included aggregate amounts of HK$10,309 at
March 31, 2005 and HK$12,448 at March 31, 2004, which are denominated
in RMB.
The PRC subsidiaries conduct their business substantially in the PRC,
and their financial performance and position are measured in terms of
RMB. Any devaluation of the RMB against the United States dollar would
consequently have an adverse effect on the financial performance and
asset values of the Company when measured in terms of United States
dollars.
Stock-based compensation - The Company has elected to account for its
stock option plan using the fair value method in accordance with SFAS
No.123 "Accounting for Stock-Based Compensation". Under the fair value
method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the vesting period.
Staff retirement plan costs - The Company's costs related to the
defined contribution retirement plans are charged to the consolidated
statement of income as incurred.
Translation into United States Dollars - The financial statements of
the Company are maintained, and its consolidated financial statements
are expressed, in Hong Kong dollars. The translations of Hong Kong
dollar amounts into U.S. dollars are for the convenience of readers in
the United States of America only and have been made at the rate of
HK$7.8 to US$1, the approximate free rate of exchange at March 31,
2005. Such translations should not be construed as representations that
the Hong Kong dollar amounts could be converted into U.S. dollars at
that rate or any other rate.
Advertising and promotion costs - Advertising and promotion expenses
are expensed when incurred. Advertising costs included in selling,
general and administrative expenses were HK$821, HK$1,587 and HK$868
for the years ended March 31, 2005, 2004 and 2003, respectively.
Use of estimates - The preparation of financial statements in
conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Comprehensive income - The Company reports comprehensive income in
accordance with SFAS No. 130, "Reporting Comprehensive Income".
Accumulated other comprehensive income represents translation
adjustments and unrealized holding losses on marketable securities and
is included in the stockholders' equity section of the balance sheet.
F-15
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent changes in accounting pronouncements - In November 2003 meeting,
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 adopted the disclosure requirements during the fiscal year
ended March 31, 2005 (see note 2 - marketable securities above).
In March 2004 meeting, 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 the consensus was
reached in the March 2004 meeting 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 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. 123 (revised 2004),
"Share-Based Payment". This statement provides 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
SFAS 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 this statement as of the first interim or annual
reporting period that begins after June 15, 2005. In March 2005, the
SEC published Staff Accounting Bulletin No. 107 "Share-Based Payment",
("SAB 107") to give public entities guidance in applying the provisions
of SFAS No. 123(R), and to users of financial statements in analyzing
the information provided under that Statement. The SAB is to be applied
upon the adoption of Statement No. 123(R). The Company believes that
SFAS No. 123(R) and SAB 107 will not have significant impact on its
financial statements when it is adopted.
F-16
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29". SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, "Accounting for Nonmonetary Transactions", and replaces
it with an exception for exchanges that do not have commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No.
153 is effective for the fiscal periods beginning after June 15, 2005,
and is required to be adopted by the Company effective January 1, 2006.
The Company does not expect SFAS No. 153 will have a material impact on
the consolidated results of operations or financial condition.
In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations" to clarify
that an entity must recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. FIN 47 also defines
when an entity would have sufficient information to reasonably estimate
the fair value of an asset retirement obligation. FIN 47 is effective
no later than the end of fiscal years ending after December 15, 2005.
Retrospective application of interim financial information is permitted
but is not required. Early adoption of this Interpretation is
encouraged. The adoption of FIN 47 will not have a material impact on
the Company's consolidated financial statements.
3. OTHER INCOME
Year ended March 31,
------------------------------------------
2005 2004 2003
Other income consists of the following: HK$ HK$ HK$
Gain on sale of marketable securities - 991 -
Foreign currency exchange gain, net - - 452
Other 1,617 1,898 4,033
------------ ------------ -----------
1,617 2,889 4,485
============ ============ ===========
F-17
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
4. INCOME TAXES
Income is subject to taxation in the various countries in which the
Company and its subsidiaries operate.
The components of income before income taxes and minority interests are
as follows:
Year ended March 31,
------------------------------------------
2005 2004 2003
HK$ HK$ HK$
Hong Kong 81,960 25,954 17,564
Other regions in the PRC (11,617) 692 11,246
Corporate expense, net (4,506) (5,361) (6,227)
------------ ------------ -----------
65,837 21,285 22,583
============ ============ ===========
Certain activities conducted by the Company's subsidiaries may result
in current income recognition, for U.S. tax purpose, by the Company
even though no actual distribution is received by the Company from the
subsidiaries. However, such income, when distributed, would generally
be considered previously taxed income to the Company and thus would not
be subject to U.S. federal income tax again.
Hong Kong companies are subject to Hong Kong taxation on their
activities conducted in Hong Kong. Under the current Hong Kong laws,
dividends and capital gains arising from the realization of investments
are not subject to income taxes and no withholding tax is imposed on
payments of dividends by the Hong Kong incorporated subsidiaries to the
Company.
The Company has subsidiaries which are incorporated in Guangdong
Province, China and operate in the special economic zone of Shenzhen.
These companies are subject to PRC income taxes at the applicable tax
rate (currently 15%) on taxable income based on income tax laws
applicable to foreign enterprises. Pursuant to the same income tax
laws, the subsidiaries are fully exempt from PRC income tax on their
manufacturing operations for two years starting from the first
profitable year, followed by a 50% exemption for the next three years.
The exemptions applicable to all the subsidiaries expired on or before
December 31, 2002. These exemptions do not apply to rental income.
F-18
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
4. INCOME TAXES (CONTINUED)
The provision for income tax expense (benefit) consists of the follows:
Year ended March 31,
-------------------------------------------
2005 2004 2003
HK$ HK$ HK$
Current tax
Subsidiaries operating in:
Hong Kong 6,254 7,301 (88)
Other regions (482) (921) 1,619
------------ ------------ -----------
5,772 6,380 1,531
Deferred tax
Subsidiaries operating in Hong Kong 357 647 2,188
------------ ------------ -----------
Total 6,129 7,027 3,719
============ ============ ===========
A reconciliation between the provision for income tax expense computed
by applying the United States statutory tax rate to income before
income taxes and minority interests and the actual provision for income
tax expenses is as follows:
Year ended March 31,
-------------------------------------------
2005 2004 2003
HK$ HK$ HK$
Applicable U.S. federal tax rate 34% 34% 34%
============ ============ ===========
Provision of income taxes at the applicable U.S. federal
tax rate on income for the year 22,385 7,237 7,678
Non-deductible expenses 2,463 6,899 4,099
Non-taxable income (6,610) (693) (218)
Changes in valuation allowance 66 (2,312) (1,491)
International rate difference (11,443) (5,895) (6,197)
Tax on sales of shares of MSIL (note 1) - 2,700 -
Others (732) (909) (152)
------------ ------------ -----------
6,129 7,027 3,719
============ ============ ===========
F-19
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
4. INCOME TAXES (CONTINUED)
Temporary differences and operating loss carry forwards that give rise
to deferred tax assets and liabilities are as follows:
March 31,
--------------------------
2005 2004
HK$ HK$
Deferred tax assets:
Operating loss carry forwards 4,302 5,019
Valuation allowance (3,887) (3,821)
------------ -------------
Net deferred tax assets 415 1,198
Deferred tax liabilities:
Property, plant and equipment (1,370) (1,845)
------------ -------------
(955) (647)
============ =============
The deferred tax balances are classified in the consolidated balance
sheet as follows:
Year ended March 31,
--------------------------
2005 2004
HK$ HK$
Non-current assets 258 174
Non-current liabilities (1,213) (821)
------------ -------------
(955) (647)
============ =============
As of March 31, 2005, subsidiaries of the Company had total losses
available for carry forward for Hong Kong tax purposes, subject to the
agreement of the Hong Kong Inland Revenue Department, amounting to
approximately HK$24,502, which have no expiration date. The tax loss
carry forwards can only be utilized by the subsidiaries generating the
losses.
Due to the uncertainty of the ability of the subsidiaries to realize
the resultant deferred tax asset of HK$4,302, the Company has
established a valuation allowance in the amount of HK$3,887.
U.S. deferred tax liabilities have not been provided on approximately
HK$372,000 of undistributed earnings of foreign subsidiaries because
the Company intends to reinvest those earnings permanently. It is not
practicable to estimate the amount of additional taxes that might be
payable upon distribution of such earnings.
F-20
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
5. INVENTORIES
Inventories by major categories are summarized as follows:
Year ended March 31,
--------------------------
2005 2004
HK$ HK$
Raw materials 18,037 14,676
Work in progress 14,520 19,659
Finished goods 50,148 80,962
------------ -------------
82,705 115,297
============ =============
During the years ended March 31, 2005 and 2004, the Company made a
write-down of inventories, amounting to HK$32,300 and HK$14,273,
respectively. No similar write-down of inventories was made for the
year ended March 31, 2003.
6. STAFF RETIREMENT PLANS
The Company participates in a Mandatory Provident Fund Scheme ("MPF
Scheme") for all qualifying employees in Hong Kong with effect from
December 1, 2000. The assets of the MPF Scheme are held separately from
those of the Company in funds under the control of an independent
trustee. The Company contributes 5% of relevant payroll costs (monthly
contribution is limited to 5% of HK$20 for each eligible employee) to
the MPF Scheme, which contribution is matched by employees.
The employees of the Company's subsidiaries in the PRC are members of a
state-managed retirement benefits scheme operated by the local PRC
government. The subsidiaries are required to contribute 8% of the
average basic salary to the retirement benefit scheme to fund the
benefits. The only obligation of the Company with respect to the
retirement benefit scheme is to make the specified contributions.
The total contributions made for the years ended March 31, 2005, 2004
and 2003 amounted to HK$993, HK$820 and HK$737, respectively.
F-21
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Year ended March 31,
--------------------------
2005 2004
HK$ HK$
Leasehold land and buildings 119,194 106,959
Construction in progress 15,088 21,925
Plant and machinery 11,049 12,706
Furniture and equipment 12,761 11,360
Motor vehicles 5,055 4,578
------------ -------------
163,147 157,528
Less: Accumulated depreciation (44,086) (41,737)
------------ -------------
Net book value 119,061 115,791
============ =============
8. REAL ESTATE INVESTMENT
Year ended March 31,
--------------------------
2005 2004
HK$ HK$
At cost:
Leasehold land and buildings
- Hong Kong 36,280 74,502
- Other regions of the PRC 21,837 25,106
------------ -------------
58,117 99,608
Less: Accumulated depreciation (10,973) (10,935)
------------ -------------
Net book value 47,144 88,673
============ =============
The real estate investment in other regions of the PRC represents the
Company's interest in an industrial complex known as Man Sang
Industrial City located in Gong Ming Zhen, Shenzhen. Part of the
industrial complex is used by the Company and is included in property,
plant and equipment. The remaining leasehold land and buildings are
classified as real estate investment and are leased to unaffiliated
third parties under non-cancelable operating lease agreements. The real
estate investment in Hong Kong principally represents office premises
leased to unaffiliated third parties under non-cancelable operating
lease agreements. Leases are negotiated for an average term of one to
three years and rentals are fixed during the relevant lease period.
F-22
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
8. REAL ESTATE INVESTMENT (CONTINUED)
Rental income relating to such operating leases is included in gross
rental income in the consolidated statements of income and amounted to
HK$4,646, HK$6,220 and HK$7,455 for the years ended March 31, 2005,
2004 and 2003, respectively.
The future aggregate minimum rental receivables under non-cancelable
operating leases are as follows:
As of
March 31,
2005
HK$
Year ending March 31,
2006 3,282
2007 2,027
2008 960
2009 366
2010 306
Thereafter 509
-------------
7,450
=============
In March 2004, the Group entered into a sales and purchase agreement to
dispose of a real estate investment to a third party at a consideration
of HK$71,600. Included in other current assets as of March 31, 2004 was
a stakeholder's deposit of HK$7,160 held by a solicitor firm, Messrs.
Yuen & Partners in respect of the disposal. The transaction was
completed on September 15, 2004.
9. SHORT-TERM BORROWINGS
The Company has obtained bank credit facilities relating to short term
borrowings in the amount of HK$47,000 and HK$95,450 at March 31, 2005
and 2004, respectively. The facilities were unused as of March 31, 2005
and 2004.
Interest rates are generally based on the banks' prime lending rates
and the credit lines are normally subject to periodic review. There are
no significant covenants or other financial restrictions relating to
the credit lines.
As of March 31, 2005, leasehold land and buildings with a net book
value of HK$69,864 and real estate investment with a net book value of
HK$13,552 were pledged as collateral for the above facilities and the
long-term debts described in note 11. There is no restriction on the
use of the assets pledged for such facilities and bank loans.
F-23
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
Year ended March 31,
--------------------------
2005 2004
HK$ HK$
Accrued expenses 4,153 3,126
Deposits received 1,760 1,767
Value-added tax payable 1,056 1,830
Purchase consideration for a business 1,000 1,000
Sundry payables 947 951
Others 1,701 1,305
------------ -------------
10,617 9,979
============ =============
11. LONG-TERM DEBTS
Year ended March 31,
-----------------------------
2005 2004
HK$ HK$
Long-term debts consist of:
Bank loan bearing interest at Hong Kong Inter-Bank
Offered Rate ("HIBOR") (0.174% at March 31,
2004) plus 1.25%, repayable by monthly
installments of HK$156 through 2007 - 4,375
Bank loan bearing interest at HIBOR plus 1.1%, repayable
by quarterly installments of HK$625 through 2007 - 5,416
Bank loan bearing interest at HIBOR plus 1.5%, repayable
by quarterly installments of HK$300 through 2006 - 1,800
------------ ---------------
Total - 11,591
Current portion of long-term debts - (5,575)
------------ ---------------
Long-term debts, less current portion - 6,016
============ ===============
All of the Company's long-term debts were fully repaid during the year.
There are no significant covenants or other financial restrictions
relating to the Company's long-term debts.
Details of assets pledged by the Company as collateral for the above
bank loans are described in note 9.
F-24
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
12. COMMITMENTS AND CONTINGENCIES
The Company leases premises under various operating leases which do not
contain any escalation clauses and all of the leases contain a renewal
option. Rental expense under operating leases was HK$1,793, HK$3,693
and HK$3,974 for the years ended March 31, 2005, 2004 and 2003,
respectively.
As of March 31, 2005, the Company and its subsidiaries were obligated
under non-cancelable operating leases requiring minimum rentals as
follows:
Operating
leases
HK$
Year ending March 31,
2006 1,773
2007 431
----------
2,204
==========
As of March 31, 2005, the Company had commitments of HK$3,568 relating
to the acquisition of property, plant and equipment.
On December 2, 2003, Arcadia Jewellery Limited ("Arcadia"), a
subsidiary of the Company, filed a lawsuit in Hong Kong against its
former general manager and certain other parties (the "Defendants") for
breach of a business transfer agreement and an employment agreement and
a consultancy agreement ("Case 1"). Arcadia is claiming against the
Defendants for, inter alia, account and inquiry; repayment of monies of
at least HK$832; damages; interest; a declaration that the consultancy
agreement is null and void and Arcadia is entitled to rescind the same;
a declaration that Arcadia is entitled to exercise its rights under the
business transfer agreement (i.e. not to pay the balance of the
purchase consideration of HK$1,000); return of the purported
consultancy fees or earnest money, the amount of which is to be
assessed; costs and further or other relief.
On December 22, 2003, this former general manager filed a lawsuit in
Hong Kong against Arcadia in respect of the aforesaid employment
agreement for monetary claim of approximately HK$395 and also a
declaration that the restraint of trade covenants under the aforesaid
employment agreement are void and unenforceable. Afterwards, this
former general manager agreed to transfer his monetary claim to the
Labour Tribunal in Hong Kong and consolidate the rest of his case into
Case 1. Although it is not possible to predict with certainty at the
moment the outcome of these unresolved legal actions or pending claim
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 financial position or operating results.
F-25
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
13. CAPITAL STOCK
The Company's capital stock consists of common stock and Series A
preferred stock and Series B convertible preferred stock.
The voting rights of the holders of common stock are subject to the
rights of the outstanding Series A preferred shares which, as a class,
is entitled to one-third voting control of the Company. Accordingly,
the holders of common stock and Series A preferred shares hold, in the
aggregate, more than fifty percent of the total voting rights and they
can elect all of the directors of the Company.
Holders of the 100,000 issued and outstanding shares of Series A
preferred stock (the "Series A preferred shares") are entitled, as a
class, to one-third voting control of the Company in all matters voted
on by stockholders and a liquidation preference of US$25 per share.
Except for the foregoing, the holders of the Series A preferred shares
have no preferences or rights in excess of those generally available to
the holders of common stock. The holders of Series A preferred shares
are entitled to participate in any dividends paid ratably with the
holders of common stock.
The directors have authorized a series of preferred stock designated as
Series B convertible preferred stock (the "Series B preferred shares").
A total of 100,000 Series B preferred shares were authorized. Except to
the extent declared by the directors from time to time, if ever, no
dividends are payable with respect to the Series B preferred shares.
Additionally, the Series B preferred shares have no voting rights
except that the approval of holders of a majority of such shares is
required to (1) authorize, create or issue any shares of any class or
series ranking senior to the Series B preferred shares as to
liquidation preference, (2) amend, alter or repeal, by any means, the
Company's certificate of incorporation if the powers, preferences, or
special rights of the Series B preferred shares would be adversely
affected, or (3) become subject to any restriction on the Series B
preferred shares, other than restrictions arising solely under Nevada
law or existing under the certificate of incorporation as in effect on
December 31, 1995. The Series B preferred shares have a liquidation
preference of US$1,000 per share and are subject, at the election of
the Company, to redemption or conversion at such price after December
31, 1997. At March 31, 2005, no shares of Series B preferred stock were
outstanding.
On June 7, 2002, the Company issued in aggregate 410,000 shares of
common stock of par value US$0.001 per share to two business
consultants pursuant to two separate business consulting agreements
dated June 1, 2002. The amount of the relevant compensation expenses of
approximately HK$2,174, being the fair value of the shares issued, is
being recognized over the service period of the contracts.
Approximately HK$181, HK$1,087 and HK$906 was charged to the statement
of income during the years ended March 31, 2005, 2004 and 2003,
respectively.
On April 30, 2003, the Company repurchased 410,000 shares of common
stock, par value US$0.001 per share at a price of US$1.5 per share.
These shares were cancelled on May 2, 2003.
During the year ended March 31, 2005, 50,000 stock options were
exercised at a price of US$1.22 per share. A total of 50,000 shares of
common stock, par value of US$0.001 was issued accordingly.
F-26
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
14. STOCK OPTION PLANS
MSIL options
On August 2, 2002, MSIL adopted a new share option scheme (the "2002
Scheme") and terminated the one adopted on September 8, 1997 (the "1997
Scheme"). In accordance with the 2002 Scheme, MSIL may grant options to
any person being an employee, officer, agent, or consultant of group
headed by MSIL ("MSIL Group") including executive or non-executive
directors of MSIL Group to subscribe for shares in MSIL at a price
determined by the board of directors of MSIL being at least the highest
of (a) the closing price of the shares on The Stock Exchange of Hong
Kong Limited (the "Stock Exchange") on the date of grant of the option,
which must be a trading day; (b) the average closing price of the
shares on the Stock Exchange for the five trading days immediately
preceding the date of grant of the option; and (c) the nominal value of
the shares. The purpose of the 2002 Scheme is to provide incentives to
the people who were granted options to contribute to MSIL Group and to
enable MSIL Group to recruit high-caliber employees and attract
resources that are valuable to MSIL Group.
The total number of shares which may be issued upon exercise of all
options to be granted, together with all options to be granted under
any other share option scheme(s) of MSIL and/or any of its
subsidiaries, must not represent more than 10% of the nominal amount of
all the issued shares of MSIL as at August 2, 2002.
The 2002 Scheme is valid and effective for a period of 10 years
commencing August 2, 2002. At March 31, 2004, 75,187,093 options were
available for future grant under the 2002 Scheme. No options have been
granted as of March 31, 2005 under the 2002 Scheme.
During the year ended March 31, 2003, all options granted under the
1997 Scheme lapsed and no options were exercisable under the 2002
Scheme as of March 31, 2005.
Company options
In October of 1996, the Company approved the establishment of the Man
Sang Holdings, Inc. 1996 Stock Option Plan (the "Plan"), under which
stock options awards ("Holding Company Options") may be made to
employees, directors and consultants of the Company. The Plan will
remain effective until October 2006 unless terminated earlier by the
Board of Directors.
The maximum number of shares of common stock which may be issued or
delivered and as to which awards may be granted under the Plan was
1,000,000 shares, which was subsequently revised to 2,000,000 shares,
as adjusted by the anti dilution provisions contained in the Plan. The
exercise price for a stock option must be at least equal to 100% (110%
with respect to incentive stock options granted to persons holding ten
percent or more of the outstanding common stock) of the fair market
value of the common stock on the date of grant of such stock option for
incentive stock options, which are available only to employees of the
Company, and 85% of the fair market value of the common stock on the
date of grant of such stock option for other stock options.
F-27
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
14. STOCK OPTION PLANS (CONTINUED)
Company options (Continued)
The duration of each option will be determined by the Compensation
Committee, but no option will be exercisable more than ten years from
the date of grant (or, with respect to incentive stock options granted
to persons holding ten percent or more of the outstanding common stock
not more than five years from the date of grant). Unless otherwise
determined by the Compensation Committee and provided in the applicable
option agreement, options will be exercisable within three months of
any termination of employment, including termination due to disability,
death or normal retirement (but no later than the expiration date of
the option).
Option activity of the Holding Company Options is as follows:
Number of Exercise price with the
Holding Company weighted average exercise
Options price in parenthesis
Outstanding at March 31, 2003 and 2004 700,000 US$1.22 and US$1.10 (US$1.1771)
Exercised (note 13) (50,000) US$1.22
---------------
Outstanding at March 31, 2005 650,000 US$1.22 and US$1.10 (US$1.1738)
===============
The total number of options exercisable was 650,000 and 575,000
as of March 31, 2005 and 2004, respectively, at the weighted
average exercise prices of US$1.1738 and US$1.1939,
respectively.
Additional information on options outstanding as of March 31, 2005 is
as follows:
Options outstanding and exercisable as of
March 31, 2005
----------------------------------------------------
Weighted average
Exercise price Date of grant Number outstanding remaining contractual
and exercisable life (years)
US$
1.10 March 26, 2003 250,000 8.00
1.22 September 16, 1997 400,000 2.55
----------------------- ---------------------------
650,000 4.65
======================= ===========================
F-28
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
14. STOCK OPTION PLANS (CONTINUED)
Company options (Continued)
For stock options granted on September 16, 1997, the holders can
subscribe for the shares of common stock at a subscription price of
US$1.22 per share. 50% of the granted stock options vested and became
exercisable on September 16, 1998 and the remainder vested and became
exercisable on September 16, 1999. The options expire on September 15,
2007. The total fair value of stock option granted to employees on
March 26, 2003 was HK$556. The holders can subscribe for the shares of
common stock at a subscription price of US$1.10 per share, 50% of which
vested and became exercisable on March 26, 2004, and the remainder will
vest and become exercisable on March 26, 2005. The options will expire
on March 25, 2013.
As of March 31, 2005 and 2004, 1,200,000 options were available for
future grant under the Plan.
Compensation expenses
The Company has elected to account for the Holding Company Options
using the fair value method The fair value of each Holding Company
Option granted on March 26, 2003 was calculated to be US$0.28, using
the Black-Scholes option pricing model, with the following assumptions:
Risk-free interest rate per annum 1.25%
Expected life 2 years
Expected volatility 45%
Expected dividend yield Nil
The total compensation expense of the Holding Company Options
recognized in the consolidated statements of income for the years ended
March 31, 2005, 2004 and 2003 were HK$134, HK$418 and HK$4,
respectively.
15. RELATED PARTY TRANSACTIONS
During the periods presented, certain leasehold properties were
provided free of charge to Messrs. Cheng Chung Hing and Cheng Tai Po
for their residential use.
In December 2002, the Company disposed of its entire equity interest of
a wholly owned subsidiary which held a 30% equity interest of China
South City Holdings Limited, for a consideration of HK$300 to Messrs.
Cheng Chung Hing and Cheng Tai Po. The carrying value of the net assets
disposed of amounted to approximately HK$240.
The Company paid professional fees of HK$237, HK$375 and HK$301 for the
years ended March 31, 2005, 2004 and 2003, respectively to Messrs. Yuen
& Partners for the provision of legal and professional services to the
Company. Mr. Yuen Ka Lok, Ernest, a director of the Company and MSIL
(resigned as a director of MSIL during the year), the Chairman of the
Compensation Committee and the Audit Committee of the Board of
Directors of the Company, is a partner of Messrs. Yuen & Partners.
F-29
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company paid standard brokerage fees to DBS Vickers (Hong Kong)
Limited ("DBS Vickers") for holding certain securities on behalf of the
Company and maintains a securities account with DBS Vickers. Mr. Lai
Chau Ming, Matthew, a director of the Company, a member of the
Compensation Committee and the Audit Committee of the Board of
Directors of the Company, is a Sales Associate Director of DBS Vickers.
The amounts of brokerage fees paid to DBS Vickers during the periods
presented were considered insignificant by the management.
During the year ended March 31, 2004, the Company sold a 7.2% equity
interest in MSIL to Messrs. Cheng Chung Hing and Cheng Tai Po through
Man Sang International (B.V.I.) Limited (see note 1 for details).
During the years ended March 31, 2005 and 2004, the Company sold
jewelry products amounting to HK$636 and HK$298, respectively, to China
South International Industrial Materials City (Shenzhen) Co., Ltd.
("CSII"), a company in which Messrs. Cheng Chung Hing and Cheng Tai Po
have beneficial interests.
In addition, a reimbursement amounting to HK$554 was received from CSII
for the salaries of staff who had provided services to CSII during the
year.
16. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
A substantial percentage of the Company's sales is made to a small
number of customers and is typically on an open account basis. For the
years ended March 31, 2004 and 2003, no customer accounted for 10% or
more of total sales. During the year ended March 31, 2005, only one of
our customers accounted for more than 10% of our sales (approximately
10.3%).
Details of the amounts receivable from the five customers with the
largest receivable balances at March 31, 2005 and 2004 are as follows:
Percentage of accounts
receivable March 31,
--------------------------
2005 2004
Five largest receivable balances 57.21% 39.91%
F-30
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
16. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED)
An analysis of the allowance for doubtful accounts for trade
receivables for each of the three years in the period ended March 31,
2005 is as follows:
Year ended March 31,
------------------------------------------------
2005 2004 2003
HK$ HK$ HK$
Balance at beginning of year 14,728 9,216 10,054
Addition of allowance charged to statement of income 8,105 5,590 440
Direct write-off charged against allowance (26) (78) (1,278)
--------------- --------------- ----------------
Balance at end of year 22,807 14,728 9,216
=============== =============== ================
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, marketable
securities, accounts receivable and accounts payable approximate their
fair values because of the short-term nature of these amounts. The
carrying amounts of long-term debts approximate their fair values as
their interest rates approximate those which would have been available
as of the balance sheet date for debts of the same remaining
maturities.
18. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and
interim reporting standards for enterprise business segments and
related disclosures about its products and services, geographic areas
and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
The Company's chief operating decision maker evaluates segment
performance and allocates resources based on several factors of which
the primary financial measures are revenues from external customers and
operating income.
F-31
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
18. SEGMENT INFORMATION (CONTINUED)
Contributions of the major activities, profitability information and
asset information are summarized below:
Year ended March 31,
---------------------------------
2005 2004 2003
HK$ HK$ HK$
Revenues from external customers:
Pearls 412,262 382,123 323,082
Real estate investment 4,646 6,220 7,455
---------- ------------ ---------
416,908 388,343 330,537
========== ============ =========
Operating income:
Pearls 35,386 24,309 24,843
Real estate investment (6,381) (3,338) 175
---------- ------------ ---------
29,005 20,971 25,018
========== ============ =========
Interest expense:
Pearls 33 134 859
Real estate investment 18 111 503
Corporate assets 49 135 267
---------- ------------ ---------
100 380 1,629
========== ============ =========
F-32
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
18. SEGMENT INFORMATION (CONTINUED)
Year ended March 31,
---------------------------------
2005 2004 2003
HK$ HK$ HK$
Depreciation and amortization:
Pearls 5,602 6,620 6,051
Real estate investment 1,637 1,889 2,013
Corporate assets 918 918 1,232
---------- ------------ ---------
8,157 9,427 9,296
========== ============ =========
Capital expenditure for segment assets:
Pearls 8,536 24,078 8,963
Real estate investment 1,473 38,222 2,053
Corporate assets - - 167
---------- ------------ ---------
10,009 62,300 11,183
========== ============ =========
Segment assets:
Pearls 449,219 372,671 334,251
Real estate investment 62,232 95,833 96,447
Corporate assets 47,790 48,370 53,046
---------- ------------ ---------
559,241 516,874 483,744
========== ============ =========
Long-lived assets:
Pearls 65,557 77,228 28,353
Real estate investment 62,232 88,673 96,447
Corporate assets 38,674 39,593 40,511
---------- ------------ ---------
166,463 205,494 165,311
========== ============ =========
The operating income of the pearl segment for the year ended March 31,
2004 has been arrived at after an impairment charge of HK$1,730,
recognized in respect of the Company's 19.5% stake in a pearl farm (see
note 2).
Corporate assets consist principally of marketable securities and
leasehold land and buildings held as quarters used by certain directors
and employees of the Company.
F-33
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- --------------------------------------------------------------------------------
(Dollars in thousands except share data)
18. SEGMENT INFORMATION (CONTINUED)
All of the Company's sales of pearls are coordinated through the Hong
Kong subsidiaries and an analysis by destination is as follows:
Year ended March 31,
------------------------------------
2005 2004 2003
HK$ HK$ HK$
Net sales:
Hong Kong 44,854 50,584 51,515
Export:
North America 145,099 117,524 92,830
Europe 122,674 112,214 69,269
Japan 46,145 37,489 39,923
Asian countries, other than Japan 38,216 47,822 58,932
Others 15,274 16,490 10,613
----------- ----------- ------------
412,262 382,123 323,082
=========== =========== ============
The Company operates in only one geographic area. The location of the
Company's identifiable assets is as follows:
Year ended March 31,
------------------------------------
2005 2004 2003
HK$ HK$ HK$
Hong Kong 469,158 427,092 399,628
Other regions of the PRC 90,083 89,782 84,116
----------- ----------- ------------
559,241 516,874 483,744
=========== =========== ============
The Company derived operating revenue from the following customer,
which accounted for over 10% of operating revenue:
Year ended March 31,
---------------------------------------------------------------
2005 2004 2003
--------------------- ------------------- ---------------------
HK$ % HK$ % HK$ %
Customer A 42,255 10 32,851 9 29,345 9
=========== ========= ========== ======== =========== ==========
Accounts receivable related to this customer were HK$12,385 and
HK$13,078, as of March 31, 2005 and 2004, respectively.
F-34
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share data)
19. QUARTERLY DATA (UNAUDITED)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
HK$ HK$ HK$ HK$
2005
Net sales 99,078 107,983 109,074 96,127
Gross profit 27,485 31,885 28,400 29,478
Operating income 10,298 4,313 5,093 9,301
Net income 3,753 17,280 1,322 4,561
Basic earnings per common share 0.83 3.83 0.29 1.01
Diluted earnings per common share 0.76 3.49 0.26 0.89
2004
Net sales 66,888 101,508 106,540 107,187
Gross profit 17,042 28,075 23,827 35,203
Operating (loss) income (1,955) 8,667 6,243 8,016
Net (loss) income (1,895) 2,949 (718) 2,656
Basic (loss) earnings per common share,
restated (0.41) 0.65 (0.16) 0.59
Diluted (loss) earnings per common share,
restated (0.41) 0.61 (0.16) 0.54
F-35