UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________.
COMMISSION FILE NO. 33-10639-NY
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MAN SANG HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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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 $5,547,466 as of June 21, 2004, 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.
4,405,960 shares of Common Stock Issued and Outstanding as of June 21, 2004.
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 GROUP ORGANIZATIONAL CHART]
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 $0.001 per share ("Series A Preferred
Stock") in exchange (the "Exchange") for all of the outstanding securities of
Man Sang International (B.V.I.) Limited, a British Virgin Islands company ("Man
Sang BVI"). Pursuant to the terms of the Exchange, the Company changed its name
to Man Sang Holdings, Inc. and assumed the operations of Man Sang BVI. The
management of Man Sang BVI then assumed control of the Company.
The foundation of the group of companies comprising the Company and its
subsidiaries (the "Group") was laid in the early 1980's when Cheng Chung Hing,
Ricky formed Man Sang Trading Hong, a freshwater pearl trading company, and
Cheng Tai Po formed Peking Pearls Company, a Japanese cultured pearl trading
company. As the business of the Group developed, Man Sang Jewellery Company
Limited ("MSJ") and Peking Pearls Company Limited were formed in Hong Kong in
1988 and 1991, respectively, to continue the trading operations of the Group.
Subsequently, the Group expanded its operations to include pearl processing with
the establishment of Man Hing Industry Development (Shenzhen) Co., Ltd. ("Man
Hing") in 1992 to process and assemble freshwater pearls and Chinese cultured
pearls, and Damei Pearls Jewellery Goods (Shenzhen) Co., Ltd. ("Damei") in 1995
to assume and expand the Chinese cultured pearl processing operations of Man
Hing. In view of the continuous expansion of Chinese cultured pearls business,
in December 1996 the Group set up a subsidiary, Tangzhu Jewellery Goods
(Shenzhen) Co., Ltd. ("Tangzhu") in the PRC to specialize in purchasing and
processing Chinese cultured pearls of larger sizes with diameter from 6mm and
above and, to a lesser extent, in processing other cultured pearls. As a result,
Damei started to concentrate on the purchasing and processing of cultured pearls
of smaller size with diameter below 6mm. The business of purchasing and
processing of Chinese
- ---------------
*Unless otherwise indicated as Hong Kong dollars or HK$, 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, 2004. 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
freshwater pearls was also transferred from Man Hing to Tangzhu whilst Man Hing
started to concentrate on the pearl jewelry assembling business.
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,
3
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 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 MSBVI 36 million and 24 million of MSIL shares, respectively. After such
transaction, through MSBVI, 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.
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
4
industrial users (19 buildings). During the year, one of the buildings within
the second group of buildings has been demolished for reconstruction. 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
5
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 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 13 - 300
Japanese cultured pearls 7 - 10 100 - 2,000
Tahitian pearls 8 - 16 200 - 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, 2004,
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
% % % %
2004 35 73 65 26
2003 60 87 40 13
2002 66 92 34 8
We have established overseas customer bases during fiscal 2004 through our
effective marketing network, which, together with the increase in our assembled
jewelry product line in fiscal 2004, accounted for the increase in assembled
jewelry as a percentage of total sales in fiscal 2004.
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
6
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.
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 its volume purchasing and relationship 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 2004, our five largest suppliers the Company accounted for
approximately 52.6% (2003: 30.4%) of our total purchases, with the largest
supplier accounting for approximately 12.7% (2003: 13.2%) of our total
purchases.
In fiscal 2004, approximately 30.4% of our purchases were made in Hong Kong
dollars, with the remaining amount settled in US dollars, French Polynesian
francs, Renminbi 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 2004. 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 29,385 square feet and employ 241 workers while cultured pearl
processing and assembly operations occupy approximately 24,434 square feet and
employ 190 workers. The average compensation per factory worker is HK$686 per
month while average supervisory compensation is HK$1,763 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 and also 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
7
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.
We presently have facilities and pearl processing personnel to produce
approximately 29,000 kg (2003: 29,000 kg) of freshwater pearls and 10,000 kg
(2003: 10,000 kg) of cultured pearls annually. Fiscal 2004 production totaled
approximately 9,330 kg of freshwater pearls and 7,781 kg of cultured pearls,
compared to the production of 10,360 kg of freshwater pearls and 10,247 kg of
cultured pearls in fiscal 2003. We presently also have adequate assembly and
finishing personnel and facilities to produce approximately 1.3 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 two Internet web pages
(www.mspearl.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 2004, no customer accounted for more than 10% of our sales, and our
five largest customers accounted for approximately 22.1% (2003: 19.0%), with the
largest customer accounting for approximately 8.6% (2003: 9.2%) of our sales. As
of March 31, 2004, we had approximately 1,000 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
8
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 U.S. dollar
throughout fiscal 2004, 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, 2004, 2003 and 2002:
2004 2003 2002
HK$'000 % HK$'000 % HK$'000 %
Cultured Pearls
North America 76,436 20.0 76,140 23.6 60,000 21.2
Europe 23,148 6.1 21,864 6.8 30,924 11.0
Germany 9,725 2.5 7,790 2.4 11,075 3.9
Hong Kong 29,685 7.8 33,634 10.4 49,858 17.6
Japan 29,054 7.6 33,098 10.2 21,721 7.7
Other Asian countries 39,840 10.4 45,151 14.0 33,058 11.7
Others 7,052 1.8 5,378 1.7 7,419 2.6
------- ----- ------- ----- ------- -----
Sub-total 214,940 56.2 223,055 69.1 214,055 75.7
======= ===== ======= ===== ======= =====
Freshwater Pearls
North America 2,145 0.6 5,909 1.8 6,719 2.4
Europe 5,701 1.5 6,204 1.9 4,847 1.7
Germany 2,748 0.7 3,204 1.0 3,335 1.2
Hong Kong 1,860 0.5 7,251 2.3 2,420 0.9
Japan 5,499 1.4 4,848 1.5 6,243 2.2
Other Asian countries 4,363 1.2 6,140 1.9 8,317 2.9
Others 1,560 0.4 1,437 0.4 1,234 0.4
------- ----- ------- ----- ------- -----
Sub-total 23,876 6.3 34,993 10.8 33,115 11.7
------- ----- ------- ----- ------- -----
Assembled Pearl Jewelry
North America 38,943 10.2 10,781 3.3 6,936 2.4
Europe 16,801 4.4 10,950 3.4 7,338 2.6
Germany 54,091 14.1 19,257 6.0 855 0.3
Hong Kong 19,039 5.0 10,630 3.3 9,348 3.3
Japan 2,936 0.8 1,977 0.6 2,691 1.0
Other Asian countries 3,619 0.9 7,641 2.4 5,947 2.1
Others 7,878 2.1 3,798 1.1 2,430 0.9
------- ----- ------- ----- ------- -----
Sub-total 143,307 37.5 65,034 20.1 35,545 12.6
------- ----- ------- ----- ------- -----
Total 382,123 100.0 323,082 100.0 282,715 100.0
======= ===== ======= ===== ======= =====
A majority of sales (by dollar amount) in Hong Kong is for re-export to North
America, Europe and other Asian countries.
9
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,
2004 2003 2002
HK$'000 % HK$'000 % HK$'000 %
First Quarter 66,888 17.5 76,776 23.8 73,294 25.9
Second Quarter 101,508 26.6 81,445 25.2 72,645 25.7
Third Quarter 106,540 27.9 66,839 20.7 57,127 20.2
Fourth Quarter 107,187 28.0 98,022 30.3 79,649 28.2
------- ----- ------- ----- ------- -----
Total 382,123 100.0 323,082 100.0 282,715 100.0
======= ===== ======= ===== ======= =====
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 shop 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 472,291 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, 2004, Man Sang Industrial City consisted of 23 buildings
encompassing a total gross floor area of approximately 520,693 square feet. Of
the buildings in Man Sang Industrial City, 18 are factory buildings and 5 are
living quarters. 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
Throughout fiscal 2004, we utilized 5 buildings in Man Sang Industrial City for
pearl processing and assembly, administration and to house employees. The
remaining facilities were leased to third party industrial users, primarily
foreign investors and non-polluting light industry.
We employed a staff of 22 persons to provide required management, leasing,
maintenance and security for Man Sang Industrial City.
As of March 31, 2004, the 18 buildings in Man Sang Industrial City, excluding
the 5 buildings utilized for our pearl operations, were used for leasing to
third party industrial users. 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 2004 was approximately HK$3.60 million compared
to approximately HK$4.51 million for fiscal 2003. See " Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
Ended March 31, 2004 Compared to Year Ended March 31, 2003 - 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$37.0K** for a term of two
years starting from October 20,
- -----------------
** 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
2002. The rental income totaled approximately HK$444.0K for fiscal 2004
and approximately HK$203.5K for fiscal 2003. See "Item 2 - Properties -
Hong Kong."
b. 3,586 square feet at Unit 14 and half of Unit 15 of the 6th floor, Block
A, Focal Industrial Centre, 21 Man Lok Street, Kowloon, Hong Kong. A
tenancy agreement was made for a term of 3 years starting from February 1,
2001. The rental income totaled approximately HK$138.0K for fiscal 2004
and approximately HK$255.2K for fiscal 2003. See "Item 2 - Properties -
Hong Kong." This unit was disposed and completed on 31 October, 2003.
c. 1,585 square feet at Unit 16 of the 6th floor, Block A, Focal Industrial
Centre, 21 Man Lok Street, Kowloon, Hong Kong. A tenancy agreement was
made for a term of 3 years starting from May 12, 2001. The rental income
totaled approximately HK$82.1K for fiscal 2004 and approximately HK$152.2K
for fiscal 2003. See "Item 2 - Properties - Hong Kong." This unit was
disposed and completed on 31 October, 2003.
d. Parking space No. L-30 on the Ground Floor of Block A, Focal Industrial
Centre, 21 Man Lok Street, Kowloon, Hong Kong. A tenancy agreement was
made for a term of 2 years starting from September 1, 2002. The rental
income totaled approximately HK$23.6K for fiscal 2004 and approximately
HK$49.2K for fiscal 2003. See "Item 2 - Properties - Hong Kong." This unit
was disposed and completed on 31 October, 2003.
e. Parking space No. 3 on Floor L3 of Valverde, 11 May Road, Hong Kong. A
tenancy agreement on this property and property (f) below was made during
the year. See "Item 2 - Properties - Hong Kong."
f. 1,063 square feet at Flat A on 33rd Floor, Valverde, 11 May Road, Hong
Kong. A tenancy agreement on this property and property (e) above was
renewed at a total monthly rental of HK$30,000 for a term of 2 years
starting from March 15, 2004. Rental income on this property and property
(e) above totaled approximately HK$364.0K for fiscal 2004, and
approximately HK$456.0K for fiscal 2003. See "Item 2 - Properties - Hong
Kong."
g. 10,880 square feet at 19th Floor, Railway Plaza, 39 Chatham Road South,
Tsimshatsui, Kowloon, Hong Kong. A tenancy agreement was made for a term
of 1 year from March 15, 2002 and was vacated in April 2003. The rental
income totaled approximately HK$106.6K for fiscal 2004, compared to
approximately HK$1,827.8K for fiscal 2003. See "Item 2 - Properties - Hong
Kong." After the tenant's departure, we have moved our operations located
at 27th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon,
Hong Kong, to this location.
h. 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 15 August 2003 to 14
August 2006. The rental income totaled approximately HK$1,462.5K for
fiscal 2004. See "Item 2 - Properties- Hong Kong." On March 12, 2004, the
Company entered into a Sales and
12
Purchase Agreement to sell the premises to an independent third party.
This transaction is expected to be completed on September 15, 2004.
Competition
Competition among facilities such as Man Sang Industrial City is intense in the
Shenzhen Special Economic Zone. Because of economic incentives available for
businesses operating in the Shenzhen Special Economic Zone, numerous facilities
have been constructed to house such businesses. While a number of competing
facilities may offer greater amenities and may be operated by companies having
greater resources, and additional facilities may be constructed, we believe Man
Sang Industrial City is competitive with other similar facilities in the
Shenzhen Special Economic Zone based on both the quality of facilities and lease
rates.
Employees
As of May 31, 2004, we had 1,096 employees. No employee is governed by
collective bargaining agreements and we consider our relations with our
employees to be satisfactory. A breakdown of employees by function is as
follows:
Hong Kong PRC Total
Senior management 6 4 10
Marketing and sales 24 27 51
Purchasing 7 2 9
Finance and accounting 13 14 27
Processing and logistics 23 903 926
Human resources and administration 15 31 46
Real estate leasing - 22 22
Information technology 3 2 5
-- ----- -----
Total 91 1,005 1,096
== ===== =====
13
SEGMENT INFORMATION
Reportable segment income or loss, and segment assets are as follows:
Reportable Segment Income or Loss, and Segment Assets
2004 2003
HK$'000 HK$'000
Revenues from external customers
Pearls 382,123 323,082
Real estate investment 6,220 7,455
------- -------
388,343 330,537
======= =======
Interest expenses
Pearls 134 859
Real estate investment 111 503
Corporate assets 135 267
------- -------
380 1,629
======= =======
Depreciation and amortization
Pearls 6,620 6,051
Real estate investment 1,889 2,013
Corporate assets 918 1,232
------- -------
9,427 9,296
======= =======
Operating income
Pearls 24,309 24,843
Real estate investment (3,338) 175
------- -------
20,971 25,018
======= =======
Capital expenditure for segment assets
Pearls 24,078 8,963
Real estate investment 38,222 2,053
Corporate assets - 167
------- -------
62,300 11,183
======= =======
Segment assets
Pearls 372,671 334,251
Real estate investment 95,833 96,447
Corporate assets 48,370 53,046
------- -------
516,874 483,744
======= =======
14
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.
From April 1, 2000 through June 30, 2003, we leased the 27th Floor of Railway
Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong, with a gross
floor area of approximately 10,880 square feet, for the trading of pearl jewelry
and the retailing of jewelry and accessories through its e-commerce website,
www.4376zone.com. We have vacated the premises and moved our operations to 19th
Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong
with a gross floor area of 10,880 square feet, which we own.
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. In fiscal 2004, we used the property to house our
subsidiary, Intimex Business Solutions Company Limited and the property was left
vacant since October 2003.
We own Units 14, 15 and 16 on 6th Floor and a car-parking space at No. L30 on
the Ground Floor of Block A, Focal Industrial Centre, 21, Man Lok Street,
Kowloon, Hong Kong. The floor areas of the units are 2,412 square feet, 2,349
square feet and 1,585 square feet respectively. We use half of Unit 15 as
warehouse, and lease the rest of the units to independent third parties. In
fiscal 2004, all these units were sold effective as of October 31, 2003. See
"Item 1 - Business - Real Estate Leasing Operations - Leasing and Management"
above.
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,
15
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 March 12, 2004, the
Company entered into a Sale and Purchase Agreement to sell the premises to an
independent third party. This transaction is expected to be completed on
September 15, 2004.
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, 2004, Man Sang Industrial City consisted of 23 buildings encompassing
a total gross floor area of approximately 520,693 square feet. Throughout fiscal
2004, we used most of the units in 5 buildings for pearl processing,
administration and staff accommodation, and leased the remaining 18 buildings,
amounting to approximately 419,886 square feet of floor space and representing
approximately 80.6% of the total gross floor space of Man Sang Industrial City,
to independent third parties and industrial users not connected with us.
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.
On November 1, 2001, MSJ filed an action in the High Court of Hong Kong against
a customer, World Wide Imports, Inc. to claim approximately US$119,182 (for
which the Company has made full provision) plus interests and costs. As of May
31, 2003, we recovered HK$612,316 (approximately US$78,502), and another
HK$268,195 (approximately US$38,384) on December 30, 2003. The remaining
non-recoverable amount and its associated costs was immaterial and was fully
written off as bad debt expenses.
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, 2004.
16
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 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:
Over the quarter On the last day of quarter
High Low High Low
Period $ $ $ $
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
2003
June 30, 2002 1.20 0.60 1.05 0.75
September 30, 2002 1.32 0.85 0.90 0.85
December 31, 2002 1.38 0.65 1.10 1.05
March 31, 2003 1.40 1.05 1.10 1.10
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 May 31, 2004, 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.
17
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, 2004, 2003, 2002,
2001 and 2000 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 Item 7, 7A and 8 respectively, of this Report on Form
10-K.
(Amounts expressed in thousands except share data)
2004 2003 2002 2001 2000
FOR THE FISCAL YEAR HK$ HK$ HK$ HK$ HK$
Net sales 382,123 323,082 282,715 311,109 279,289
Gross profit 104,147 89,922 96,439 16,433 91,136
Rental income - gross 6,220 7,455 7,526 5,526 4,620
SG&A expenses
- for net sales 79,838 65,079 65,901 77,076 64,836
- for rental 9,558 7,280 6,129 6,022 3,908
Operating income (loss) 20,971 25,018 31,935 (61,139) 27,012
Interest expenses 380 1,629 4,886 6,990 5,429
Interest income 279 690 2,785 5,799 5,014
Non-operating income 2,889 4,425 1,870 6,705 6,576
Other than temporary decline in
fair value of marketable
securities (2,474) (5,921) -- -- --
Income (loss) before
income taxes (N1) 21,285 22,583 31,704 (55,625) 33,173
Income taxes expenses (benefits) 7,027 3,719 1,206 (3,320) 4,811
Minority interests 11,266 9,943 14,189 (18,112) 8,531
Net income (loss) (N1) 2,992 8,921 16,309 (34,193) 19,831
Net income (loss)
- per share 0.67 1.88 3.70 (7.76) 4.59
Depreciation and amortization 9,427 9,296 9,252 9,162 6,698
Gross profit margin (%) 27.25 27.83 34.11 5.28 32.63
18
2004 2003 2002 2001 2000
AT MARCH 31 HK$ HK$ HK$ HK$ HK$
Working capital 262,645 288,315 268,781 219,929 304,234
Property, plant and
equipment, net 115,791 66,278 80,333 84,821 97,412
Real estate investments, net 88,673 96,447 81,986 84,369 33,027
Total assets 516,874 483,744 489,069 512,381 548,681
% Return on total assets 0.58 1.84 3.33 (6.67) 3.61
Non-current portion of long-term debts 6,016 16,435 22,010 29,306 20,890
Total liabilities
(excluding minority interests) 55,572 46,553 74,461 141,809 128,568
Minority interests 224,437 179,844 170,208 112,234 127,566
Stockholders' equity 236,865 257,347 244,400 258,338 292,547
Net book value per share 53.2 54.3 55.5 58.6 67.8
% Return on
stockholders' equity 1.26 3.47 6.67 (13.24) 6.78
Gearing ratio (N2) 0.05 0.09 0.23 0.47 0.34
Weighted average shares
outstanding 4,451,889 4,740,700 4,405,960 4,405,960 4,316,069
N1: Income before income taxes and net income is from continuing operations.
N2: "Gearing ratio" represents the ratio of the Company's total debts
to shareholders' equity.
N3: 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 unknown risks and uncertainties and other factors, any or
all of which could cause actual
19
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.
20
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 carryforwards
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
21
in the future, an adjustment to our deferred income tax assets would decrease
income in the period such determination was made.
OVERVIEW
Fiscal 2004
Fiscal 2004 was a volatile year for the Hong Kong economy. Further to the
negative impact on consumer spending after SARS (Severe Acute Respiratory
Syndrome) in the first quarter of the year, the economy has recovered quickly in
the latter part of the year. Our Group has closely monitored on the changing
market environment and responded to changes in our customer's taste and demand.
We used various flexible pricing strategies to re-engage our customers during
and after these major events to ensure that we respond efficiently to the market
situation, which in turn exerted pressure on our profit margin.
With global demand on South Sea pearls sustaining to grow, South Sea pearls
(including white and gold South Sea pearls and Tahitian black pearls) continue
to perform to be the largest share of our Group's total turnover, representing
approximately of 46.4% (2003: approximately 50%). South Sea pearls at present
are very popular among international fashion designers in their jewelry designs
and this trend will be expected to continue. In order to capitalize on this
growth, the Company has been strengthening on its marketing and sales efforts on
South Sea pearls and through its well established purchasing networks, the Group
can purchase top quality South Sea pearls in large amount and at competitive
prices. In addition, our Group also places emphasis on continual promotional and
marketing efforts on South Sea pearls in order to capture the market demand and
to further strengthen our Group's market share. On top of it, the Company also
provides value-added services including jewelry designs to customers to increase
our sales.
On the jewelry products side, the Company has been exploring on new potential
customers during the year, we have also further expanded on our marketing and
distribution network through marketing efforts such as attending international
trade shows and exhibitions, marketing campaigns and advertisements. We have
successfully increased our jewelry business' market share in Europe covering
various new segments of clients like retail chains and department stores. At the
same time, we have also strengthened our own production capabilities and product
quality so as to support on our increased sales generated. We have built up our
own design team offering unique and wider range of choices to jewelry customers.
Fiscal 2004 was a volatile year for Hong Kong economy. After the negative impact
on consumer spending from SARS in the first quarter of the year, the economy
recovered quickly in the latter part of the year. We have closely monitored on
the change of the market environment in response to customers' taste and demand,
while using various flexible pricing strategies to engage our customers to
ensure we are efficiently respond to the market situation which in turn having
pressure on our profit margin.
22
Looking Forward to 2005
Looking forward, we believe that the economy will continue to grow in a healthy
and steady pace despite policies taken by the China government recently to avoid
overheating China's economy. We are closely monitoring the market. While it may
be necessary on occasion to deploy various flexible marketing/pricing strategies
to re-engage our customers, which may in turn exert some downward pressure on
our profit margin, we continue to efficiently respond to, if not anticipate, our
customers' tastes and demands. We also believe that offering the right
product/service mix to our customers will bring about the best results to our
operations. In addition, as our Group further strengthens our core pearl
business and expands on assembled jewelry in our product mix simultaneously
through our aggressive marketing and flexible pricing strategies together with
effective cost controls measures, we are optimistic about achieving better
results. With the entry of China into the World Trade Organization and the
overall improvement in the worldwide economy, we look forward to having a
prosperous year ahead.
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,
2004 2003 2002
% % %
Net sales 100.0 100.0 100.0
Cost of sales 72.7 72.2 65.9
Gross profit 27.3 27.8 34.1
Rental income, gross 1.6 2.3 2.7
28.9 30.1 36.8
Selling, general and administrative expenses (23.4) (22.4) (25.5)
Operating income 5.5 7.7 11.3
Interest expenses (0.1) (0.5) (1.7)
Interest income 0.1 0.2 1.0
Non-operating income 0.8 1.4 0.6
Other than temporary decline in fair value
of marketable securities (0.7) (1.8) --
Income before income taxes and 5.6 7.0 11.2
Minority interests
Income taxes expenses (1.8) (1.1) (0.4)
Net income before minority interests 3.8 5.9 10.8
Minority interests (3.0) (3.1) (5.0)
Net income 0.8 2.8 5.8
23
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 after the impact of military
conflict between the United States of America and Republic of Iraq (the "Iraq
War") and the severe acute respiratory syndrome ("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, 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
the prior year by the 19th Floor, Railway Plaza, 39 Chatham Road South,
Tsimshatsui, Hong Kong, which has been occupied by the Company for internal use
since April 21, 2003. In addition, the Company experience a decrease in rental
income in Man Sang Industrial City located in PRC. The decrease in rental income
in Man Sang Industrial City is 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 in 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 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, 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.
24
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 3. 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 Taxes 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 MSBVI
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 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.
YEAR ENDED MARCH 31, 2003 COMPARED TO YEAR ENDED MARCH 31, 2002
Net Sales and Gross Profit
Net sales in fiscal 2003 increased by HK$40.4 million to HK$323.1 million,
representing a 14.3% increase when compared to net sales of HK$282.7 million in
fiscal 2002. We attribute such increase in net sales to, among other factors,
(i) our lowering of prices of Chinese cultured pearls on several occasions, in
part to increase sales, in part to move certain inventory as determined by
management, and in part to stay competitive with our customers in an intensely
competitive market, (ii) improvements in general business and consumer
confidence resulting in improvements in demand and market sentiment (until the
commencement of the Iraq War, and then the outbreak of SARS in the PRC, Hong
Kong and other countries), (iii) especially with respect to the fourth quarter,
contribution by the assembled jewelry business within our products mix
(comprising of assets, inventory and
25
clients) that we acquired in December 2002, and (iv) our increased marketing
efforts, flexible pricing strategies, and value added services to satisfy our
customers' needs.
Gross profit for fiscal 2003, on the other hand, reduced by HK$6.4 million from
HK$96.4 million for fiscal 2002 to HK$90.0 million. We attribute this decrease
in gross profit margin to (i) the occasional price reductions on Chinese
cultured pearls as described above, and (ii) the lower margin of the assembled
jewelry included our product mix.
Rental Income
Gross rental income decreased by HK$71K, or 0.9%, from HK$7.53 million for
fiscal 2002 to $7.46 million for fiscal 2003. The decrease in gross rental
income was mainly attributable to the reduction in rental income in respect to
19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Hong Kong, by
HK$309,191 when compared to fiscal 2002. However, such decrease is partially
offset by the rental income in respect of the investment property at 17th Floor
and Car Parking Space No.16, 24 Macdonnell Road, Midlevels, Hong Kong, which
amounted to HK$203,500, when no rent was collected in respect of such property
in fiscal 2002.
Selling, General and Administrative Expenses ("SG&A expenses")
SG&A expenses for fiscal 2003 were HK$72.4 million, consisting of HK$65.1
million attributable to pearl operations and HK$7.3 million attributable to real
estate operations. This is an increase of approximately HK$0.4 million, or 0.5%,
from HK$72.0 million, consisting of HK$65.9 million attributable to pearl
operations and HK$6.1 million attributable to real estate operations, during
fiscal 2002.
As a percentage of net sales, SG&A expenses for pearl operations decreased from
23.3% in fiscal 2002 to 20.1% in fiscal 2003.
Interest Income
Interest income for fiscal 2003 decreased by HK$2.1 million to HK$0.7 million
from HK$2.8 million in fiscal 2002. The decrease in interest income was
principally due to lower interest rates in fiscal 2003 as compared to interest
rates in fiscal 2002, and a withdrawal of bank deposits to repay our bank debts.
See "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
26
Interest Expenses
Interest expenses for fiscal 2003 decreased by HK$3.3 million to HK$1.6 million
from HK$4.9 million in fiscal 2002 as a result of the drop in interest rate and
the use of bank deposits to repay part of its bank borrowings.
Income Taxes Expenses
Our income taxes expenses are HK$3.7 million for fiscal 2003, an increase of
HK$2.5 million when compared to an income taxes expense of HK$1.2 million for
fiscal 2002, which increase is mainly attributable to the full utilization in
fiscal 2003 of tax losses carried forward from prior years.
Net Income
Net income for fiscal 2003 decreased by HK$7.4 million to HK$8.9 million, when
compared to a net income of HK$16.3 million for fiscal 2002. Such decrease is
mainly due to a decrease in gross profit margin, and a decline of fair value of
HK$5.9 million on marketable securities purchased in fiscal 2001, which we
continue to intend to hold as long-term investment.
Income taxes and minority interests for fiscal 2003 was HK$28.5 million, and the
amount for fiscal 2002 was HK$31.7 million.
No off-balance sheet arrangement is noted during this fiscal 2004.
The Company is contractually obligated to make the following material payments
as of March 31, 2004:
LESS MORE
THAN 1 THAN 5
TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
CONTRACTUAL OBLIGATIONS (IN THOUSANDS)
Long Term Debt Obligations 11,591 5,575 6,016 - -
Capital Commitment Obligations 4,419 4,419 - - -
Operating lease obligations 454 448 6 - -
------- ------- ------- --- --
Total contractual obligations $16,464 $10,442 $ 6,022 $ - $-
======= ======= ======= === ==
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities be recognized when the liability is
incurred. Under Emerging Issue Task Force ("EITF") Issue 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an exit
plan. A fundamental conclusion reached by the FASB in this statement is that an
entity's commitment to a plan, by itself, does not create a present
27
obligation to others that meets the definition of a liability. Therefore, this
statement eliminates the definition and requirements for recognition of exit
costs in EITF Issue 94-3. This statement also established that fair value is the
objective for initial measurement of the liability and the liability should be
measured initially at fair value only when the liability is incurred. The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. There
was no significant impact on the Company's financial position and results of
operations as a result of the adoption of SFAS No. 146.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements" and provides guidance on the
identification of entities for which control is achieved through means other
than voting rights ("variable interest entities" or "VIEs") and how to determine
when and which business enterprise should consolidate the VIEs. This new model
for consolidation applies to an entity in which either: (1) the equity investors
(if any) lack one or more characteristics deemed essential to a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. Certain disclosure requirements of FIN 46
were effective for financial statements issued after January 31, 2003. In
December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of
Variable Interest Entities" ("FIN 46-R") to address certain FIN 46
implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are
as follows: (i) special-purpose entities ("SPEs") created prior to February 1,
2003. The Company must apply either the provisions of FIN 46 or early adopt the
provisions of FIN 46-R at the end of the first interim or annual reporting
period ending after December 15, 2003 (ii) non-SPEs created prior to February 1,
2003. The Company is required to adopt FIN 46-R at the end of the first interim
or annual reporting period ending after March 15, 2004, and (iii) all entities,
regardless of whether an SPE, that were created subsequent to January 31, 2003.
The provisions of FIN 46 were applicable for variable interests in entities
obtained after January 31, 2003. The Company does not have any SPEs and
therefore the Company will adopt the provision for the year ended March 31,
2005.
In May 2003, the FASB issued SFAS No. 150. "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The statement
establishes standards for how an issuer classifies and measures certain
financial instruments. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
statement requires that certain financial instruments that, under previous
guidance, could be accounted for as equity be classified as liabilities, or
assets in some circumstances.
28
This statement does not apply to features embedded in a financial instrument
that is not a derivative in its entirety. The statement also requires
disclosures about alternative ways of settling the instruments and the capital
structure of entities whose shares are mandatorily redeemable. The Company will
be required to adopt this statement during the year ended March 31, 2004.
Management is assessing, but has not yet determined, the impact that SFAS No.
150 will have, if any, on its financial position and results of operations.
In November 2002, the Emerging Issue Task Force ("EITF") reached a consensus on
Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with Multiple
Deliverables". EITF No.00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which the vendor will perform multiple revenue
generating activities. EITF No. 00-21 is effective for fiscal periods beginning
after June 15, 2003. The adoption of EITF No. 00-21 did not have a material
impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are funded by collection of accounts
receivable and sales of inventories. At March 31, 2004, the Company had working
capital of HK$262.6 million, which included a cash balance of HK$104.9 million,
compared to working capital of HK$288.3 million, which included a cash balance
of HK$83.8 million, at March 31, 2003. The current ratio was 6.4 to 1 in fiscal
2004 as compared with that of 10.6 to 1 in fiscal 2003. Net cash provided by
operating activities was HK$76.1 million and HK$29.6 million for fiscal 2004 and
fiscal 2003, respectively. The increase in cash and cash equivalents by HK$21.1
million was mainly generated by operating activities. In relation to the
disposal of the 8th Floor, Harcourt House, No. 39 Gloucester Road, Wanchai, Hong
Kong, we received a cash deposit of HK$7.2 million from the purchaser in May
2004.
Inventories decreased by HK$18.9 million from HK$134.2 million at March 31, 2003
to HK$115.3 million at March 31, 2004. The inventory turns in terms of months
decreased from 6.5 months in fiscal 2003 to 5.4 months in this fiscal year.
Inventories decreased mainly due to increased sales and improvement in inventory
management.
Long-term debts (including current portion of long-term debts) decreased from
HK$22.0 million at March 31, 2003 to HK$11.6 million. The decrease was
attributable to repayment of installment loans. The gearing ratio was 0.05 at
March 31, 2004, as compared with 0.07 at March 31, 2003. The decrease was mainly
attributable to the repayment of bank borrowings.
The Company had available working capital facilities of HK$95.5 million in total
with various banks at March 31, 2004. Such banking facilities include letter of
credit arrangements, import loans, overdraft and other facilities commonly used
in the jewelry business. All such banking facilities bear interest at floating
rates generally offered by banks in Hong Kong and in the PRC, and are subject to
periodic review. At March 31, 2004, the Company did not utilize such credit
facilities.
We expect that in fiscal 2005, there will be a further cash requirement of HK$
4.4 million to be incurred for the completion of the construction of an
industrial building under Man Sang Industrial City, and our acquisition of an
Enterprises Resources Planning system.
29
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 2004, the Company made approximately 27.5% of its purchases in US
Dollars, with the remaining amounts mainly settled in Hong Kong dollars,
Renminbi and Japanese Yen (together, 69.0% of total purchase). 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, 2004, there is 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 2004.
In addition, the Company's interest expense is sensitive to fluctuations in the
general level of Hong Kong interest rates determined on the basis of Hong Kong
Inter-bank Offer Rate ("HIBOR"). As the Hong Kong Dollar is pegged to the US
Dollar, which in turn correlates Hong Kong interest rates to US interest rates,
any movement in US dollar interest rates is expected to have a corresponding
bearing on Hong Kong dollar interest rates. Since interest rates in the United
States have been falling since June 30, 2000, three-month HIBOR has decreased by
6.391% from 6.5% as at June 30, 2000 to 0.109% as at March 31, 2004, largely in
line with changes in US dollar rates. During fiscal 2004, the Company did not
expect risks of a material rise in Hong Kong interest rates, and did not enter
into derivative contracts or other arrangements to hedge against such risks. At
March 31, 2004, the Company had Hong Kong dollar bank borrowings of about
HK$11.6 million, and the weighted average interest rate was 1.50% per annum. Due
to the recovery of the economy in US and PRC, there is an expectation in the
market on an increase in interest rate in the coming year. However, in regard of
our coming long term and short term financing requirement, no material adverse
financial effect to the Company will be anticipated.
30
ITEM 8. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Statements of Income and Comprehensive Income for the years
ended March 31, 2004, 2003 and 2002 F-2
Consolidated Balance Sheets as of March 31, 2004 and 2003 F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the years
ended March 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A. CONTROLS AND PROCEDURES
As of March 31, 2004, 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, 2004 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
The Company's Chief Executive Officer and Chief Financial Officer do not expect
that the Company's disclosure controls or internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the system are met. Further, the design of a control system must
reflect the fact that there are resources constraints, and the benefits of
controls
31
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.
32
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 2004 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2004 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 2004 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2004 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 2004 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2004 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 2004 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2004 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 2004 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after March 31, 2004 and
is incorporated herein by reference.
33
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 as part of this Form 10-K.
(b) REPORT ON FORM 8-K
A report on Form 8-K was filed on March 3, 2004 to announce that the Company had
entered into an agreement to sell certain property.
(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)
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)
34
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)
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)
35
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
36
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 29, 2004
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 29, 2004
CHENG Chung Hing, Ricky and Chief Executive Officer
/s/ AU Moon Ying, Henry Chief Financial Officer June 29, 2004
AU Moon Ying, Henry
/s/ CHENG Tai Po Vice Chairman of the Board June 29, 2004
CHENG Tai Po
/s/ YAN Sau Man, Amy Vice President and Director June 29, 2004
YAN Sau Man, Amy
37
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 2004; 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 2004, a copy of any such annual
report or proxy materials shall be forwarded to the 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)
38
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
39
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
40
MAN SANG HOLDINGS, INC.
Consolidated Financial Statements
Years ended March 31, 2004, 2003 and 2002
and Report of Independent Registered Public
Accounting Firm
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC.
Report of Independent Registered Public Accounting Firm ... F-1
Consolidated Statements of Income and Comprehensive Income
for the years ended March 31, 2004, 2003 and 2002 ....... F-2
Consolidated Balance Sheets as of March 31, 2004 and 2003.. F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2004, 2003 and 2002 ............... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2004, 2003 and 2002 ........................... F-6
Notes to Consolidated Financial Statements ................ F-8
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 sheets of Man Sang
Holdings, Inc. and subsidiaries (the "Company") as of March 31, 2004 and 2003,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 2004, 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 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. 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 2003, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142 "Goodwill and other
Intangible Assets" on April 1, 2002.
Our audits 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.
Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
June 29, 2004
F-1
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands except share data)
Year ended March 31,
----------------------------------------------------
2004 2004 2003 2002
---------- ---------- ---------- ----------
US$ HK$ HK$ HK$
Net sales .................................................... 48,990 382,123 323,082 282,715
Cost of sales ................................................ (35,638) (277,976) (233,160) (186,276)
---------- ---------- ---------- ----------
Gross profit ................................................. 13,352 104,147 89,922 96,439
Rental income, gross ......................................... 798 6,220 7,455 7,526
---------- ---------- ---------- ----------
14,150 110,367 97,377 103,965
Selling, general and administrative expenses:
Pearls ..................................................... (10,235) (79,838) (65,079) (65,901)
Real estate investment ..................................... (1,226) (9,558) (7,280) (6,129)
---------- ---------- ---------- ----------
Operating income ............................................. 2,689 20,971 25,018 31,935
Interest expenses ............................................ (49) (380) (1,629) (4,886)
Interest income .............................................. 36 279 690 2,785
Equity in loss of an affiliate ............................... - - (60) -
Other income ................................................. 370 2,889 4,485 1,870
Other than temporary decline in fair value of
marketable securities ...................................... (317) (2,474) (5,921) -
---------- ---------- ---------- ----------
Income before income taxes and
minority interests ......................................... 2,729 21,285 22,583 31,704
Income tax expenses .......................................... (901) (7,027) (3,719) (1,206)
Minority interests ........................................... (1,444) (11,266) (9,943) (14,189)
---------- ---------- ---------- ----------
Net income ................................................... 384 2,992 8,921 16,309
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments ................... 4 29 536 719
Unrealized holding gain (loss) on marketable
securities arising during the year ....................... 193 1,507 (2,043) (1,363)
Reclassification adjustment for other than
temporary decline in fair value of marketable
securities included in net income for the year ........... 157 1,222 3,355 -
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of
taxes ...................................................... 354 2,758 1,848 (644)
---------- ---------- ---------- ----------
Comprehensive income ......................................... 738 5,750 10,769 15,665
========== ========== ========== ==========
Basic earnings per common share .............................. $ 0.09 $ 0.67 $ 1.88 $ 3.70
========== ========== ========== ==========
Diluted earnings per common share ............................ $ 0.08 $ 0.62 $ 1.88 $ 3.70
========== ========== ========== ==========
Weighted average number of shares of common stock outstanding:
- basic earnings per share ................................. 4,451,889 4,451,889 4,740,700 4,405,960
========== ========== ========== ==========
- diluted earnings per share ............................... 4,855,699 4,855,699 4,740,700 4,405,960
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-2
\
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
March 31,
---------------------------
2004 2004 2003
------- ------- -------
US$ HK$ HK$
Current assets:
Cash and cash equivalents .......................... 13,450 104,907 83,766
Marketable securities .............................. 997 7,776 9,978
Accounts receivable, net of allowance
for doubtful accounts of HK$14,728 and HK$9,216
in 2004 and 2003, respectively ................... 8,076 62,993 69,840
Inventories ........................................ 14,782 115,297 134,210
Prepaid expenses ................................... 406 3,169 6,340
Deposits and other receivables, net of allowance for
doubtful accounts of HK$2,769 in 2004 ............ 1,005 7,840 5,109
Other current assets ............................... 1,146 8,937 8,732
Income taxes receivable ............................ 59 461 458
------- ------- -------
Total current assets ............................. 39,921 311,380 318,433
Property, plant and equipment, net ................. 14,845 115,791 66,278
Real estate investment, net ........................ 11,368 88,673 96,447
Long-term investments .............................. 110 856 2,586
Deferred tax assets ................................ 22 174 -
------- ------- -------
Total assets ..................................... 66,266 516,874 483,744
======= ======= =======
F-3
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
(Dollars in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
---------------------------
2004 2004 2003
------- ------- -------
US$ HK$ HK$
Current liabilities:
Current portion of long-term debts ...................... 715 5,575 5,575
Accounts payable ........................................ 1,697 13,234 5,554
Accrued payroll and employee benefits ................... 1,093 8,523 7,188
Other accrued liabilities ............................... 1,279 9,979 9,577
Deposit on sale of real estate investment ............... 918 7,160 -
Income taxes payable .................................... 547 4,264 2,224
------- ------- -------
Total current liabilities ............................. 6,249 48,735 30,118
------- ------- -------
Long-term debts ........................................... 771 6,016 16,435
------- ------- -------
Deferred tax liabilities .................................. 105 821 -
------- ------- -------
Minority interests ........................................ 28,774 224,437 179,844
------- ------- -------
Commitments and contingencies (note 12)
Stockholders' equity:
Series A preferred stock US$0.001 par value
- authorized, issued and outstanding 100,000
shares in 2004 and 2003 (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$0.001
- authorized 25,000,000 shares; issued and outstanding,
4,405,960 shares and 4,815,960 shares in 2004
and 2003, respectively ............................ 4 34 37
Additional paid-in capital .............................. 7,827 61,051 60,633
Retained earnings ....................................... 22,158 172,836 196,491
Accumulated other comprehensive income .................. 378 2,943 185
------- ------- -------
Total stockholders' equity ............................ 30,367 236,865 257,347
------- ------- -------
Total liabilities and stockholders' equity ............ 66,266 516,874 483,744
======= ======= =======
See accompanying notes to consolidated financial statements.
F-4
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands except share data)
Series A Series B Accumulated Total
preferred stock preferred stock Common stock Additional other stock-
--------------- --------------- ------------------ paid-in Retained comprehensive holders'
Shares Amount Shares Amount Shares Amount capital earnings (loss) income equity
------- ------ ------ ------ --------- ------ ---------- --------- ------------- ---------
HK$ HK$ HK$ HK$ HK$ HK$ HK$
Balance at March 31, 2001 ..... 100,000 1 - - 4,405,960 34 88,061 171,261 (1,019) 258,338
Issuance of common shares
by subsidiary ............... - - - - - - (29,603) - - (29,603)
Translation adjustment ........ - - - - - - - - 719 719
Unrealized holding loss on
marketable securities ....... - - - - - - - - (1,363) (1,363)
Net income .................... - - - - - - - 16,309 - 16,309
------- --- --- --- --------- ---- -------- --------- ------ ---------
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
======= === === === ========= ==== ======== ========= ====== =========
- - US$4 US$7,827 US$22,158 US$378 US$30,367
=== === ==== ======== ========= ====== =========
See accompanying notes to consolidated financial statements.
F-5
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended March 31,
----------------------------------------
2004 2004 2003 2002
-------- ------ ------- ---------
US$ HK$ HK$ HK$
Cash flow from operating activities
Net income .......................................... 384 2,992 8,921 16,309
Adjustments to reconcile net income to net
cash provided by operating activities:
Bad debt provision ................................ 1,222 9,530 440 5,054
Inventory write down .............................. 1,830 14,273 - -
Provision for impairment loss of goodwill ......... - - - 591
Provision for impairment loss of long-term
investments ..................................... 222 1,730 - 3,000
Other than temporary decline in fair value
of marketable securities ........................ 317 2,474 5,921 -
Depreciation and amortization ..................... 1,209 9,427 9,296 9,252
Impairment loss on property, plant and equipment... 50 389 - -
Impairment loss on real estate investment ......... 226 1,762 - -
Loss on disposal of real estate investment ........ 252 1,965 - -
Loss (gain) on sale of property, plant and
equipment ....................................... 88 685 603 (55)
Minority interests ................................ 1,444 11,266 9,943 14,189
Realized gain on sale of marketable securities .... (127) (991) - -
Stock compensation expenses ....................... 53 418 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 ............................. 206 1,611 (10,559) (3,315)
Inventories ..................................... 612 4,774 (15,700) (7,471)
Prepaid expenses ................................ 406 3,171 (3,998) (813)
Deposits and other receivables .................. (856) (6,676) 8,382 (6,707)
Other current assets ............................ - 3 7,152 (7,347)
Income taxes receivable ......................... - (3) (458) 1,725
Deferred tax assets ............................. (22) (174) 2,188 1,455
Accounts payable ................................ 982 7,657 2,238 261
Amount due to affiliate ......................... - - - (184)
Accrued payroll and employee benefits ........... 171 1,335 2,655 18
Other accrued liabilities ....................... (195) (1,518) 176 (2,632)
Deposit on sale of real estate investment ....... 918 7,160 - -
Deferred tax liabilities ........................ 105 821 - -
Income taxes payable ............................ 262 2,040 1,851 (390)
------ ------- ------ ------
Net cash provided by operating activities ........... 9,759 76,121 29,553 22,940
------ ------- ------ ------
Cash flow from investing activities
Decrease in restricted cash ......................... - - 16,169 48,710
Proceeds from disposal of long-term investments ..... - - 900 -
Proceeds from sale of property, plant and equipment.. 136 1,062 452 73
Proceeds from sale of real estate investment ........ 666 5,196 - -
Proceeds from disposal of subsidiaries .............. - - 341 -
Purchase of property, plant and equipment ........... (2,956) (23,058) (6,137) (2,207)
Acquisition of a business ........................... 48 373 (5,200) -
Acquisition of an affiliate ......................... - - (300) -
Purchase of long-term investments ................... - - (156) -
Purchase of marketable securities ................... (3) (27) - (3,578)
Purchase of real estate investment .................. (4,900) (38,222) - -
Proceeds from sale of marketable securities ......... 766 5,972 - -
------ ------- ------- ------
Net cash (used in) provided by investing
activities ........................................ (6,243) (48,704) 6,069 42,998
------ ------- ------- ------
F-6
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Dollars in thousands)
Year ended March 31,
---------------------------------------
2004 2004 2003 2002
------ ------- ------- -------
US$ HK$ HK$ HK$
Cash flow from financing activities
Increase in short-term borrowings ................. - - 942 16,170
Proceeds from partial disposal of a subsidiary .... 1,146 8,940 - -
Repayment of short-term borrowings ................ - - (29,377) (61,378)
Repayment of long-term debts ...................... (1,336) (10,416) (5,575) (18,148)
Repurchase of common stock ........................ (615) (4,797) - -
Net proceeds from issuance of common shares
by a subsidiary ................................. - - - 14,030
------ ------- ------- -------
Net cash used in financing activities ............. (805) (6,273) (34,010) (49,326)
------ ------- ------- -------
Net increase in cash and cash equivalents ......... 2,711 21,144 1,612 16,612
Cash and cash equivalents at beginning of year .... 10,739 83,766 82,152 65,294
Exchange adjustments .............................. - (3) 2 246
------ ------- ------- -------
Cash and cash equivalents at end of year .......... 13,450 104,907 83,766 82,152
====== ======= ======= =======
Supplementary disclosures of cash flow information:
Cash paid (refunded) during the year for:
Interest and finance charges .................... 51 396 1,670 4,821
Income taxes paid (refunded) .................... 643 5,012 2,676 (1,584)
====== ======= ======= =======
Non-cash investing and financing activities:
Consideration for purchase of a business settled
through accounts receivable ..................... 24 190 - -
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 accompanying notes to consolidated financial statements.
F-7
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$22
million, as a distribution to shareholders.
As a result of this transaction, the Company's equity interest in MSIL was
reduced to 49.40%. 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, 2004 and 2003,
the Company had an equity interest of 49.40% and 56.6% in MSIL,
respectively.
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 5.1 million (HK$4.7 million) 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.
F-8
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
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 issurance 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 consultancy
services.
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 IBS. 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.
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
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$190 which was settled by an offset of a
receivable from the vendor. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets acquired based on the estimated fair values at the
date of acquisition. The operating results of this business have been
included in the consolidated financial statements since the date of
acquisition.
The following table presents the allocation of the purchase price to the
assets and liabilities acquired:
HK$
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.
F-10
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
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 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.
Starting from April 1, 2002, the Company has adopted 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.
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
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.
Unrealised 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,
2004 2003
------ ------
HK$ HK$
Publicly traded corporate equity securities listed in Hong Kong:
Gross unrealized gains (losses) net of minority interests, included
in accumulated other comprehensive income ....................... 723 (2,980)
====== ======
Fair value of marketable securities ............................... 7,776 9,978
====== ======
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.
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, 2004.
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
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 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").
Reconciliation of the basic and diluted EPS is as follows:
For the year ended March 31, 2004 For the year ended March 31, 2003
--------------------------------- ---------------------------------
Earnings Shares EPS Earnings Shares EPS
-------- --------- ----------- -------- --------- -----------
HK$'000 HK$ HK$'000 HK$
Basic EPS
Net income available to common
stockholders 2,992 4,451,889 0.67 8,921 4,740,700 1.88
---- ----
Effect of dilutive securities
Stock options granted by the
Company - 403,810 - -
----- --------- ----- ---------
Diluted EPS
Net income available to common
stockholders, including conversion 2,992 4,855,699 0.62 8,921 4,740,700 1.88
===== ========= ==== ===== ========= ====
For the year ended March 31, 2002
----------------------------------
Earnings Shares EPS
-------- --------- -------------
HK$'000 HK$
Basic EPS
Net income available to common
stockholders 16,309 4,405,960 3.70
----
Effect of dilutive securities
Stock options granted by the
Company - -
------ ---------
Diluted EPS
Net income available to common
stockholders, including conversion 16,309 4,405,960 3.70
====== ========= ====
For the year ended March 31, 2002 and 2003, the effect on consolidated EPS
of both warrants and options issued by MSIL and options issued by the
Company were not included in the computation of diluted earnings per share
because it would have resulted in an antidilutive effect.
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
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 income.
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$3,293 at March 31, 2003 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, 2004. 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.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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.
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
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.
Recent changes in accounting pronouncements - In May 2003, the FASB issued
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." The statement establishes
standards for how an issuer classifies and measures certain financial
instruments. This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
statement requires that certain financial instruments that, under previous
guidance, could be accounted for as equity be classified as liabilities,
or assets in some circumstances. This statement does not apply to features
embedded in a financial instrument that is not a derivative in its
entirety. The statement also requires disclosures about alternative ways
of settling the instruments and the capital structure of entities whose
shares are mandatorily redeemable. The adoption of SFAS No. 150 did not
have any impact on its financial position or results of operations.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities". FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" and provides
guidance on the identification of entities for which control is achieved
through means other than voting rights ("variable interest entities" or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIEs. This new model for consolidation applies to an
entity in which either: (1) the equity investors (if any) lack one or more
characteristics deemed essential to a controlling financial interest or
(2) the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support
from other parties. Certain disclosure requirements of FIN 46 were
effective for financial statements issued after January 31, 2003. In
December 2003, the FASB issued FIN 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46-R") to address
certain FIN 46 implementation issues. The effective dates and impact of
FIN 46 and FIN 46-R are as follows: (i) special-purpose entities ("SPEs")
created prior to February 1, 2003. The Company must apply either the
provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end
of the first interim or annual reporting period ending after December 15,
2003, (ii) non-SPEs created prior to February 1, 2003. The Company is
required to adopt FIN 46-R at the end of the first interim or annual
reporting period ending after March 15, 2004, and (iii) all entities,
regardless of whether an SPE, that were created subsequent to January 31,
2003. The provisions of FIN 46 were applicable for variable interests in
entities obtained after January 31, 2003. The Company does not have any
SPEs and therefore the Company will adopt the provision for the year ended
March 31, 2005.
In November 2002, the Emerging Issue Task Force ("EITF") reached a
consensus on Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements
with Multiple Deliverables". EITF No.00-21 addresses certain aspects of
the accounting by a vendor for arrangements under which the vendor will
perform multiple revenue generating activities. EITF No. 00-21 is
effective for fiscal periods beginning after June 15, 2003. The adoption
of EITF No. 00-21 did not have a material impact on the Company's
financial position or results of operations.
F-15
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
3. OTHER INCOME
Other income consists of the following:
Year ended March 31,
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Gain on sale of marketable securities ....... 991 - -
Foreign currency exchange gain, net ......... - 452 378
Others ...................................... 1,898 4,033 1,492
----- ----- -----
2,889 4,485 1,870
===== ===== =====
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,
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Hong Kong...................... 25,954 17,564 2,927
Other regions in the PRC....... 692 11,246 32,159
Corporate expenses, net........ (5,361) (6,227) (3,382)
------ ------ ------
21,285 22,583 31,704
====== ====== ======
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.
F-16
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
4. INCOME TAXES - continued
The Company has three 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 profit-making year,
followed by a 50% exemption for the next three years. The exemptions
applicable to all the three subsidiaries expired on December 31, 2002,
2000 and 1999, respectively. These exemptions do not apply to rental
income.
The provision for income tax expenses (benefits) consists of the
following:
Year ended March 31,
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Current tax:
Subsidiaries operating in:
Hong Kong............................... 7,301 (88) 7
Other regions........................... (921) 1,619 (256)
----- ----- -----
6,380 1,531 (249)
Deferred tax:
Subsidiaries operating in Hong Kong....... 647 2,188 1,455
----- ----- -----
Total 7,027 3,719 1,206
===== ===== =====
Had the tax holidays and concessions detailed above not been available,
the tax charge would have been increased by HK$385 in 2002. Both basic and
diluted earnings per share in 2002 would have been reduced by HK$0.09.
F-17
\
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
4. INCOME TAXES - continued
A reconciliation between the provision for income tax expenses computed by
applying the United States statutory tax rate to income before income
taxes and minority interests and the actual provision for income tax
expenses is as follows:
Year ended March 31,
2004 2003 2002
---- ---- ----
HK$ 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.. 7,237 7,678 10,779
Non-deductible expenses ........................ 6,899 4,099 480
Non-taxable income ............................. (693) (218) (4,579)
Changes in valuation allowance ................. (2,312) (1,491) 2,134
International rate difference .................. (5,895) (6,197) (7,305)
Tax on sales of shares of MSIL (note 1) ........ 2,700 - -
Others ......................................... (909) (152) (303)
------- ------- -------
Income tax expenses ............................ 7,027 3,719 1,206
======= ======= =======
Temporary differences and operating loss car rise to deferred tax assets
and liabilities are as follows:
March 31,
2004 2003
---- ----
HK$ HK$
Deferred tax assets:
Operating loss carryforwards........... 5,019 6,133
Valuation allowance.................... (3,821) (6,133)
------ ------
Net deferred tax assets.................. 1,198 -
Deferred tax liabilities:
Property, plant and equipment.......... (1,845) -
------ ------
(647) -
====== ======
The deferred tax balances are classified in the consolidated balance sheet
as follows:
March 31,
2004 2003
---- ----
HK$ HK$
Non-current assets.................... 174 -
Non-current liabilities............... (821) -
---- ----
(647) -
==== ====
F-18
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
4. INCOME TAXES - continued
At March 31, 2004, subsidiaries of the Company had total losses available
for carryforward for Hong Kong tax purposes, subject to the agreement of
the Hong Kong Inland Revenue Department, amounting to approximately
HK$28,685, which have no expiration date. The effective tax loss
carryforwards of HK$5,019 can only be utilized by the subsidiaries
generating the losses.
Due to the uncertainty of the realization of certain operating loss
carryforwards, the Company has established a valuation allowance against
these loss carryforwards in the amount of HK$3,821.
U.S. deferred tax liabilities have not been provided on approximately
HK$311,000 of undistributed earnings of foreign subsidiaries because the
Company intends to reinvest those earnings permanently. It is not
practicable to estimate the amount of additional taxes that might be
payable upon distribution of such earnings.
5. INVENTORIES
Inventories by major categories are summarized as follows:
March 31,
2004 2003
---- ----
HK$ HK$
Raw materials....................... 14,676 12,917
Work in progress.................... 19,659 29,399
Finished goods...................... 80,962 91,894
------- -------
115,297 134,210
======= =======
During the year ended March 31, 2004, the Company made a write-down of
inventories, amounting to HK$14,273. No similar write-down of inventories
was made for the years ended March 31, 2003 and 2002.
F-19
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
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, 2004, 2003 and
2002 amounted to HK$820, HK$737 and HK$622, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31,
2004 2003
---- ----
HK$ HK$
Leasehold land and buildings............... 106,959 72,408
Construction in progress................... 21,925 3,516
Plant and machinery ....................... 12,706 11,911
Furniture and equipment.................... 11,360 9,394
Motor vehicles............................. 4,578 4,578
Less: accumulated depreciation............. (41,737) (35,529)
------- -------
Net book value............................. 115,791 66,278
======= =======
F-20
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
8. REAL ESTATE INVESTMENT
March 31,
2004 2003
---- ----
HK$ HK$
At cost:
Leasehold land and buildings - Hong Kong......................... 74,502 78,513
- Other regions of the PRC.......... 25,106 27,631
Less: accumulated depreciation................................... (10,935) (9,697)
------- ------
88,673 96,447
======= ======
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 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 two years and rentals are fixed
during the relevant lease period.
Rental income relating to such operating leases is included in gross
rental income in the consolidated statements of income and amounted to
HK$6,220 in 2004, HK$7,455 in 2003 and HK$7,526 in 2002.
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 is a stakeholder's deposit of
HK$7,160 held by a solicitor firm, Messrs. Yuen & Partners in respect of
the disposal. The transaction is subject to customary closing conditions
and is expected to be completed on or before September 15, 2004.
9. SHORT-TERM BORROWINGS
The Company has obtained bank credit facilities relating to short term
borrowings in the amount of HK$95,450 and HK$70,563 at March 31, 2004 and
2003, respectively. The facilities were unused as of March 31, 2004 and
2003.
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.
At March 31, 2004, leasehold land and buildings with a net book value of
HK$80,013 and real estate investments with a net book value of HK$69,325
were pledged as collateral for the above facilities and the long-term
debts described in note 11. There is no restriction on the use of the
assets pledged for such facilities and bank loans.
F-21
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31,
2004 2003
---- ----
HK$ HK$
Accrued expenses............................. 3,126 4,652
Deposits received............................ 1,767 1,006
Value-added tax payable...................... 1,830 -
Purchase consideration for a business........ 1,000 2,000
Sundry payables.............................. 951 688
Others....................................... 1,305 1,231
----- -----
9,979 9,577
===== =====
11. LONG-TERM DEBTS
March 31,
2004 2003
---- ----
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 instalments of HK$156 through 2007................................. 4,375 11,094
Bank loan bearing interest at HIBOR plus 1.1%, repayable by
quarterly instalments of HK$625 through 2007.................................. 5,416 7,916
Bank loan bearing interest at HIBOR plus 1.5%, repayable by
quarterly instalments of HK$300 through 2006.................................. 1,800 3,000
------ ------
Total........................................................................... 11,591 22,010
Current portion of long-term debts.............................................. (5,575) (5,575)
------ ------
Long-term debts, less current portion........................................... 6,016 16,435
====== ======
Maturities of long-term debts as of March 31, 2004 are as follows:
HK$
Year ending March 31,
2005............................................................................ 5,575
2006............................................................................ 4,975
2007............................................................................ 1,041
------
11,591
======
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-22
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$3,693 in 2004,
HK$3,974 in 2003 and HK$4,678 in 2002.
As at March 31, 2004, the Company and its subsidiaries were obligated
under non-cancelable operating leases requiring minimum rentals as
follows:
Operating
leases
------
HK$
Year ending March 31,
2005................................. 448
2006................................. 6
---
Total minimum lease payments......... 454
===
At March 31, 2004, the Company had commitments of HK$4,419 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-23
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, 2004, no shares of Series
B preferred stock were outstanding.
F-24
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
13. CAPITAL STOCK - continued
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$906 and HK$1,087 was
charged to the income statement during the years ended March 31, 2003 and
2004.
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.
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, 2004 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, 2004.
F-25
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
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 antidilution 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.
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 Exercise price
of Holding with the weighted average
Company Options exercise price in parenthesis
--------------- -----------------------------
Outstanding at April 1, 2001 500,000 US$1.22
Cancelled (50,000) US$1.22
-------
Outstanding at March 31, 2002 450,000 US$1.22
Granted in 2003 250,000 US$1.1
-------
Outstanding at March 31, 2003 and 2004 700,000 US$1.22 and US$1.1 (US$1.1771)
=======
The total number of options exercisable were 700,000 as of March 31, 2004
and 2003, respectively, at the weighted average exercise prices of
US$1.1771.
F-26
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
Additional information on options outstanding at March 31, 2004 is as
follows:
Options outstanding
and exercisable as
of March 31, 2004
-----------------
Weighted
Number average
outstanding remaining
and contractual
Exercise price Date of grant exercisable life (years)
- -------------- ------------- ----------- ------------
US$
1.10 March 26, 2003 250,000 9.00
1.22 September 16, 1997 450,000 3.55
------- ----
700,000 5.50
======= ====
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.
At March 31, 2004 and 2003, 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,
2004 and 2003 were HK$418 and HK$4, respectively.
F-27
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
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.
In addition, the Company advanced HK$770 in 2002 to certain directors on
an interest-free basis without specific repayment terms. The amount was
repaid during that year.
The Company paid professional fees of HK$375 in 2004, HK$301 in 2003 and
HK$36 in 2002 to Messrs. Yuen & Partners for the provision of legal and
professional services to the Company. Mr. Yuen Ka Lok, Ernest, a director
of both the Company and MSIL, the Chairman of the Compensation Committee
and a member of the Audit Committee of the Board of Directors of the
Company, is a partner of Messrs. Yuen & Partners.
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 fiscal 2004, the Group sold jewelry products amounting to
HK$298 to China South International Industrial Materials City (Shenzhen)
Co., Ltd., a company in which Messrs. Cheng Chung Hing and Cheng Tai Po
have beneficial interests.
In addition, the Company sold a 7.2% equity interest in MSIL to Messrs.
Cheng Chung Hing and Cheng Tai Po through Man Sang International (B.V.I.)
Limited (see note 1 for details).
F-28
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
16. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
A substantial percentage of the Company's sales is made to a small number
of customers and is typically on an open account basis. In no period did
sales to any one customer account for 10% or more of total sales.
Details of the amounts receivable from the five customers with the largest
receivable balances at March 31, 2004 and 2003 are as follows:
Percentage of
accounts receivable
March 31,
2004 2003
---- ----
HK$ HK$
Five largest receivable balances........... 39.91% 39.95%
An analysis of the allowance for doubtful debts for trade receivables for
each of the three years ended March 31, 2004 is as follows:
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Balance at beginning of year........................ 9,216 10,054 5,214
Addition of allowance charged to income ............ 5,590 440 5,054
Direct write-off charged against allowance.......... (78) (1,278) (214)
------ ------ ------
Balance at end of year.............................. 14,728 9,216 10,054
====== ====== ======
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 at March 31, 2004 for
debts of the same remaining maturities.
F-29
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
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.
Contributions of the major activities, profitability information and asset
information are summarized below:
Year ended March 31,
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Revenues from external customers:
Pearls........................................... 382,123 323,082 282,715
Real estate investment........................... 6,220 7,455 7,526
------- ------- -------
388,343 330,537 290,241
======= ======= =======
Operating income:
Pearls........................................... 24,309 24,843 30,538
Real estate investment........................... (3,338) 175 1,397
------- ------- -------
20,971 25,018 31,935
======= ======= =======
Interest expenses:
Pearls........................................... 134 859 1,873
Real estate investment........................... 111 503 2,460
Corporate assets................................. 135 267 553
------- ------- -------
380 1,629 4,886
======= ======= =======
Depreciation and amortization:
Pearls........................................... 6,620 6,051 6,031
Real estate investment........................... 1,889 2,013 1,827
Corporate assets................................. 918 1,232 1,394
------- ------- -------
9,427 9,296 9,252
======= ======= =======
Capital expenditure for segment assets:
Pearls........................................... 24,078 8,963 2,162
Real estate investment........................... 38,222 2,053 -
Corporate assets................................. - 167 45
------- ------- -------
62,300 11,183 2,207
======= ======= =======
F-30
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,
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Segment assets:
Pearls.............................. 372,671 334,251 334,579
Real estate investment.............. 95,833 96,447 81,986
Corporate assets.................... 48,370 53,046 72,504
------- ------- -------
516,874 483,744 489,069
======= ======= =======
Long-lived assets:
Pearls.............................. 77,228 28,353 25,573
Real estate investment.............. 88,673 96,447 81,986
Corporate assets.................... 39,593 40,511 58,090
------- ------- -------
205,494 165,311 165,649
======= ======= =======
The operating income of the pearl segment for the years ended March 31,
2004 and 2002 has been arrived at after an impairment charge of HK$1,730
and HK$3,000 respectively, recognized in respect of the Company's 19.5%
stake in a pearl farm (see note 2).
Corporate assets consist principally of marketable securities and
leasehold land and buildings held as quarters used by certain directors
and employees of the Company.
All of the Company's sales of pearls are coordinated through the Hong Kong
subsidiaries and an analysis by destination is as follows:
Year ended March 31,
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Net sales:
Hong Kong................................ 50,584 51,515 61,626
Export:
North America............................ 117,524 92,830 73,655
Europe................................... 112,214 69,269 58,374
Japan.................................... 37,489 39,923 30,655
Asian countries, other than Japan........ 47,822 58,932 47,322
Others................................... 16,490 10,613 11,083
------- ------- -------
382,123 323,082 282,715
======= ======= =======
F-31
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
18. SEGMENT INFORMATION - continued
The Company operates in only one geographic area. The location of the
Company's identifiable assets is as follows:
March 31,
2004 2003 2002
---- ---- ----
HK$ HK$ HK$
Hong Kong............................. 427,092 399,628 371,558
Other regions of the PRC.............. 89,782 84,116 117,511
------- ------- -------
516,874 483,744 489,069
======= ======= =======
19. QUARTERLY DATA (UNAUDITED)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
HK$ HK$ HK$ HK$
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 earnings (loss) per common share (0.41) 0.67 (0.16) 0.60
Diluted earnings (loss) per common share (0.41) 0.63 (0.16) 0.55
2003
Net sales 76,776 81,445 66,839 98,022
Gross profit 24,319 28,031 15,208 22,364
Operating income 10,204 13,096 21 1,697
Net income (loss) 3,966 6,241 (511) (775)
Basic earnings (loss) per common share 0.88 1.30 (0.11) (0.16)
Diluted earnings (loss) per common share 0.88 1.30 (0.11) (0.16)
*******
F-32