FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
COMMISSION FILE NUMBER: 33-10639-NY
MAN SANG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0539570
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
21/F RAILWAY PLAZA, 39 CHATHAM ROAD SOUTH, TSIMSHATSUI, KOWLOON, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(852) 2317 5300
(ISSUER'S TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED N RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X]
AS OF NOVEMBER 12, 2004, 4,405,960 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
MAN SANG HOLDINGS, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as at
September 30, 2004 and March 31, 2004 F-1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Three and Six Months Ended
September 30, 2004 and 2003 F-3
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended September 30, 2004 and 2003 F-4
Notes to Condensed Consolidated Financial Statements F-5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 1
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 8
ITEM 4. Controls and Procedures 9
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 11
ITEM 6 Exhibits 12
SIGNATURES 13
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share data)
SEPTEMBER 30, 2004 MARCH 31, 2004
------------------ --------------
US$ HK$ HK$
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents 26,578 207,311 104,907
Marketable securities 1,012 7,892 7,776
Accounts receivable, net of allowance for doubtful 8,159 63,642 62,993
accounts of HK$22,308 as of September 30, 2004 and
HK$14,728 as of March 31, 2004
Inventories:
Raw materials 2,534 19,765 14,676
Work in progress 857 6,687 19,659
Finished goods 8,901 69,425 80,962
------ ------- -------
12,292 95,877 115,297
Prepaid expenses 401 3,125 3,169
Deposits and other receivables, net of allowance for
doubtful accounts of HK$2,769 as of September 30, 2004
and March 31, 2004 551 4,295 7,840
Other current assets 506 3,946 8,937
Income tax receivable 70 549 461
------ ------- -------
Total current assets 49,569 386,637 311,380
Deferred tax assets - - 174
Property, plant and equipment 20,896 162,986 157,528
Accumulated depreciation (5,656) (44,109) (41,737)
------ ------- -------
15,240 118,877 115,791
Real estate investment 7,870 61,386 99,608
Accumulated depreciation (1,425) (11,113) (10,935)
------ ------- -------
6,445 50,273 88,673
Long-term investments - - 856
------ ------- -------
Total assets 71,254 555,787 516,874
====== ======= =======
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
SEPTEMBER 30, 2004 MARCH 31, 2004
------------------ --------------
US$ HK$ HK$
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debts:
Secured bank loans 715 5,575 5,575
Accounts payable 1,237 9,649 13,234
Accrued payroll and employee benefits 1,336 10,420 8,523
Other accrued liabilities 1,284 10,016 9,979
Deposit on sale of real estate investment - - 7,160
Income taxes payable 1,227 9,573 4,264
------ ------- -------
Total current liabilities 5,799 45,233 48,735
Long-term debts:
Secured bank loans 414 3,229 6,016
Deferred tax liabilities 43 338 821
Minority interests 31,915 248,937 224,437
Stockholders' equity:
Series A preferred stock, par value US$0.001 - 1 1
- authorized, issued and outstanding: 100,000 shares;
(entitled in liquidation to US$2,500 (HK$19,500))
Series B convertible preferred stock, par value US$0.001 - - -
- authorized: 100,000 shares; no shares outstanding
Common stock, par value US$0.001 5 34 34
- authorized: 25,000,000 shares;
issued and outstanding: 4,405,960 shares as of
September 30, 2004 and March 31, 2004
Additional paid-in capital 7,835 61,117 61,051
Retained earnings 24,855 193,869 172,836
Accumulated other comprehensive income 388 3,029 2,943
------ ------- -------
Total stockholders' equity 33,083 258,050 236,865
------ ------- -------
Total liabilities and stockholders' equity 71,254 555,787 516,874
====== ======= =======
See accompanying notes to condensed consolidated financial statements
F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands except share data)
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------- ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
US$ HK$ HK$ US$ HK$ HK$
Net sales 13,844 107,983 101,508 26,546 207,061 168,396
Cost of goods sold (9,756) (76,098) (73,433) (18,935) (147,691) (123,279)
--------- --------- --------- --------- --------- ---------
Gross profit 4,088 31,885 28,075 7,611 59,370 45,117
Rental income, gross 167 1,301 1,487 369 2,879 2,875
--------- --------- --------- --------- --------- ---------
4,255 33,186 29,562 7,980 62,249 47,992
Selling, general and administrative expenses
- Pearls (3,210) (25,037) (17,625) (5,424) (42,299) (34,432)
- Real estate investment (492) (3,836) (3,270) (684) (5,339) (6,848)
--------- --------- --------- --------- --------- ---------
Operating income 553 4,313 8,667 1,872 14,611 6,712
Non-operating items
- Interest expense (5) (40) (141) (10) (78) (274)
- Interest income 14 110 65 22 169 159
- Gain on sales of a real estate investment 4,391 34,248 - 4,391 34,248 -
- Other income 24 188 397 107 835 1,058
--------- --------- --------- --------- --------- ---------
Income before income taxes and minority
interests 4,977 38,819 8,988 6,382 49,785 7,655
Income taxes (240) (1,873) (2,058) (556) (4,340) (3,333)
--------- --------- --------- --------- --------- ---------
Income before minority interests 4,737 36,946 6,930 5,826 45,445 4,322
Minority interests (2,521) (19,666) (3,981) (3,130) (24,412) (3,268)
--------- --------- --------- --------- --------- ---------
Net income 2,216 17,280 2,949 2,696 21,033 1,054
Other comprehensive income, net of taxes and
minority interests
- Foreign currency translation
adjustments (1) (6) (29) 3 29 (34)
- Unrealized holding gain on
marketable securities 34 265 760 7 57 1,151
--------- --------- --------- --------- --------- ---------
Other comprehensive income, net of taxes and
minority interests 33 259 731 10 86 1,117
--------- --------- --------- --------- --------- ---------
Comprehensive income 2,249 17,539 3,680 2,706 21,119 2,171
========= ========= ========= ========= ========= =========
Basic earnings per common share 0.49 3.83 0.65 0.60 4.67 0.23
========= ========= ========= ========= ========= =========
Diluted earnings per common share 0.45 3.49 0.61 0.54 4.24 0.22
========= ========= ========= ========= ========= =========
Weighted average number of shares
of common stock
- for basic earnings per share 4,405,960 4,405,960 4,405,960 4,405,960 4,405,960 4,500,058
========= ========= ========= ========= ========= =========
- for diluted earnings per share 4,846,295 4,846,295 4,717,098 4,846,922 4,846,922 4,787,439
========= ========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements
F-3
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands)
SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
-------------------- -------
US$ HK$ HK$
CASH FLOW FROM OPERATING ACTIVITIES:
Net income 2,697 21,033 1,054
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for doubtful debts 972 7,580 73
Inventory write down 1,821 14,200 3,549
Impairment loss on property, plant and equipment - - 389
Impairment loss on real estate investment - - 1,762
Impairment loss on long term investment 110 856 -
Compensation expense 8 66 208
Depreciation and amortization 559 4,361 4,792
Gain on disposal of real estate investment (4,391) (34,248) -
(Gain) Loss on disposal of property, plant and equipment (3) (20) 2,637
Realized gain on sales of marketable securities - - (137)
Minority interests 3,130 24,412 3,268
Changes in operating assets and liabilities:
Accounts receivable (1,050) (8,189) 1,714
Inventories 671 5,230 151
Prepaid expenses 6 44 2,323
Deposits and other receivables 454 3,545 (1,076)
Other current assets 640 4,991 2,159
Income taxes receivable (11) (88) -
Deferred tax assets 22 174 (287)
Accounts payable (460) (3,585) 1,483
Accrued payroll and employee benefits 243 1,897 1,331
Other accrued liabilities 4 32 369
Deferred tax liabilities (62) (483) 334
Income taxes payable 681 5,309 2,484
------ ------- -------
Net cash provided by operating activities 6,041 47,117 28,580
------ ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (844) (6,586) (45,705)
Proceeds from disposal of marketable securities - - 1,803
Proceeds from disposal of property, plant and equipment 26 204 64
Proceeds from disposal of real estate investment 8,263 64,450 -
------ ------- -------
Net cash provided by (used in)investing activities 7,445 58,068 (43,838)
------ ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in short-term borrowings - - 18,848
Repayment of short-term borrowings - - (18,845)
Repayment of long-term debts (357) (2,787) (7,631)
Repurchase of common stock - - (4,797)
------ ------- -------
Net cash used in financing activities (357) (2,787) (12,425)
------ ------- -------
Net increase (decrease) in cash and cash equivalents 13,129 102,398 (27,683)
Cash and cash equivalents at beginning of period 13,450 104,907 83,766
Exchange adjustments - 6 (1)
------ ------- -------
Cash and cash equivalents at end of period 26,579 207,311 56,082
====== ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 10 76 280
------ ------- -------
Net income taxes paid 21 163 743
------ ------- -------
See accompanying notes to condensed consolidated financial statements
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 2004 balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. The
interim financial statements and notes thereto should be read in conjunction
with the financial statements and notes included in the annual report of Man
Sang Holdings, Inc. (the "Company") on Form 10-K for the fiscal year ended March
31, 2004. In the opinion of management, the interim financial statements reflect
all adjustments of a normal recurring nature necessary for a fair presentation
of the results for the interim periods presented. Operating results and cash
flows for interim periods are not necessarily indicative of results of the
entire year.
2. CURRENCY PRESENTATIONS AND FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated from their
functional currency to the reporting currency, at period-end exchange rates,
while revenues and expenses are translated at average exchange rates during the
period. Adjustments arising from such translation are reported as a separate
component of stockholders' equity. Gains or losses from foreign currency
transactions are included in the Statement of Operations. Aggregate net foreign
currency gains or losses were immaterial for all periods presented in this
report.
The consolidated financial statements of the Company are maintained, and its
consolidated financial statements are expressed, in Hong Kong dollars. The
translations of Hong Kong dollar amounts into United States dollars are for
convenience only and have been made at the rate of HK$7.8 to US$1, the
approximate free rate of exchange as of September 30, 2004. Such translations
should not be construed as representations that Hong Kong dollar amounts could
be converted into United States dollars at that rate or any other rate.
F-5
3. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issue Task Force ("EITF") reached its consensus on
Issue No. 03-6 "Participating Securities and the Two-Class Method under FASB
Statement No. 128, Earnings per Share". EITF No. 03-6 addresses how to determine
whether a security should be considered a "participating security" for purposes
of computing EPS and how to allocate earnings to a participating security when
using the two-class method for computing basic EPS. EITF No. 03-6 is effective
for reporting periods beginning after March 31, 2004 and should be applied by
restating previously reported EPS.
The issued and outstanding shares of Series A preferred stock of the Company,
which are entitled to participate in any dividends paid ratably with the holders
of common stock, are participating securities under EITF No. 03-6. According to
EITF No. 03-6 and SFAS No. 128, the undistributed earnings should be allocated
between the common stock and the participating securities based on the
contractual participation rights of the participating securities to share in
current earnings as if all earnings were distributed ratably, but separate
income statement presentation of the per share amounts attributable to the
participating securities, other than common stock, is not required. However, the
amount of earnings allocable to participating securities should be disclosed, as
a reconciling item, in the basic EPS calculation as disclosed in note 4 to the
condensed consolidated financial statements. No losses were allocated to the
Series A preferred stock because its contractual terms provide no obligation of
its holders to share in the Company's losses.
In November 2003 meeting, the EITF reached a consensus on disclosure guidance
previously discussed under EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
consensus provided for certain disclosure requirements that were effective for
fiscal years ending after December 15, 2003. We will adopt the disclosure
requirements during the fiscal year ended March 31, 2005.
In March 2004 meeting, the EITF reached a consensus on recognition and
measurement guidance previously discussed under EITF Issue No. 03-1. The
consensus clarifies the meaning of other-than-temporary impairment and its
application to investments classified as either available-for-sale or
held-to-maturity under FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and investments accounted for under
the cost method or the equity method. The recognition and measurement guidance
for which the consensus was reached in the March 2004 meeting is to be applied
to other-than-temporary impairment evaluations in reporting periods beginning
after June 15, 2004. In September 2004, the EITF delayed the effective date to
apply the measurement and recognition provisions relating to debt and equity
securities until the FASB issues additional guidance. We believe that this
consensus on the recognition and measurement guidance will not have a material
impact on our financial position, results of operations, or cash flows.
F-6
4. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128 by application of the
two-class method. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock and participating
securities according to dividends declared (or accumulated) and participation
rights in undistributed earnings. Per share data is calculated using the
weighted average number of shares of common stock outstanding during the period.
Man Sang International Limited ("MSIL"), a subsidiary of the Company whose
shares are listed on The Stock Exchange of Hong Kong Limited, adopted a share
option scheme (the "Old Share Option Scheme") on September 8, 1997. The Old
Share Option Scheme is administered by the Board of Directors of MSIL. On August
2, 2002, at the 2002 Annual General Meeting of MSIL, MSIL's shareholders
approved a share option scheme (the "New Share Option Scheme") to replace the
Old Share Option Scheme. No option has been granted under the New Share Option
Scheme and all the options granted under the Old Share Option Scheme lapsed in
October 2002.
For the Six
For the Quarter Months Ended
Ended September 30, September 30,
2003 2003
HK$'000 HK$'000
Net income 2,949 1,054
Allocation of undistributed earnings to participating
securities (Series A preferred stock) (65) (23)
--------- ---------
Undistributed earnings to common stock, adjusted 2,884 1,031
========= =========
No. of shares No. of shares
Weighted average-shares outstanding 4,405,960 4,500,058
Effect of dilutive securities stock options granted
by the Company 311,138 287,381
--------- ---------
Adjusted weighted average-shares outstanding 4,717,098 4,787,439
========= =========
HK$ HK$
Net earnings per share
Basic 0.65 0.23
========= =========
Diluted 0.61 0.22
========= =========
On June 7, 2002, the Company issued an aggregate of 410,000 shares of common
stock to two business consultants pursuant to their respective business
consulting agreements. On April 30, 2003, the Company repurchased the stock
issued to these consultants at a price of US $1.5 per share. These shares were
cancelled on May 12, 2003.
F-7
On March 26, 2003, pursuant to the Company's 1996 Stock Option Plan, the
Compensation Committee granted to Cheng Chung Hing, Ricky, the Company's
President, Chairman, Chief Executive Officer and then Chief Financial Officer,
and Cheng Tai Po, the Company's Vice Chairman, non-qualified options to purchase
150,000 and 100,000 shares of the Company's common stock, respectively, at an
exercise price of US$1.1 per share, the latest closing price of the Company's
common stock as of the date of grant. Half of the options vested on March 26,
2004 and the remaining half vests on March 26, 2005.
For the Six
For the Quarter Months Ended
Ended September 30, September 30,
2004 2004
HK$'000 HK$'000
Net income 17,280 21,033
Allocation of undistributed earnings to participating
securities (Series A preferred stock) (384) (467)
--------- ---------
Undistributed earnings to common stock, adjusted 16,896 20,566
========= =========
No. of shares No. of shares
Weighted average-shares outstanding 4,405,960 4,405,960
Effect of dilutive securities stock options granted by the
Company 440,335 440,962
--------- ---------
Adjusted weighted average-shares outstanding 4,846,295 4,846,922
========= =========
HK$ HK$
Net earnings per share
Basic 3.83 4.67
========= =========
Diluted 3.49 4.24
========= =========
F-8
5. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are coordinated through its Hong Kong
subsidiaries. The following is an analysis by destination:
For the Quarter Ended For the Six Months Ended
September 30 September 30
2004 2003 2004 2003
HK$'000 HK$'000 HK$'000 HK$'000
------- ------- ------- -------
Net Sales:
Hong Kong * 10,293 13,942 25,425 24,163
Export:
North America 40,594 28,030 70,948 50,361
Europe (excluding Germany) 13,444 12,611 32,682 29,731
Germany 21,668 17,279 23,497 20,040
Japan 5,761 8,513 24,443 17,180
Other Asian countries 11,642 14,585 21,834 18,868
Others 4,581 6,548 8,232 8,053
------- ------- ------- -------
107,983 101,508 207,061 168,396
======= ======= ======= =======
* A majority of sales (by dollar amount) in Hong Kong are for re-export to North
America and Europe.
The Company operates primarily in one geographic area: Hong Kong and other
regions of The People's Republic of China (the "PRC"). The locations of the
Company's identifiable assets are as follows:
September 30, 2004 March 31, 2004
HK$'000 HK$'000
------------------ --------------
Hong Kong 468,730 427,092
PRC 87,057 89,782
------------------ --------------
555,787 516,874
================== ==============
6. DISCLOSURE OF MAJOR CUSTOMERS
During the three months ended September 30, 2004, one customer accounted for
10.1% of total sales. During the six months ended September 30, 2004, one
customer accounted for 10.9% of total sales. During the three and six months
ended September 30, 2003, there was no customer who accounted for 10.0% or more
of total sales. Generally, a substantial percentage of the Company's sales has
been made to a small number of customers and is typically on an open account
basis.
F-9
7. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
Reportable Segment Profit or Loss, and Segment Assets
For the quarter ended, For the six months ended,
September 30 September 30
2004 2003 2004 2003
HK$'000 HK$'000 HK$'000 HK$'000
------- ------- ------- -------
Revenues from external customers:
Pearls 107,983 101,508 207,061 168,396
Real estate investment 1,301 1,487 2,879 2,875
------- ------- ------- -------
109,284 102,995 209,940 171,271
======= ======= ======= =======
Operating income (loss):
Pearls 6,848 10,450 17,071 10,685
Real estate investment (2,535) (1,783) (2,460) (3,973)
------- ------- ------- -------
4,313 8,667 14,611 6,712
======= ======= ======= =======
Interest expense:
Pearls 11 82 24 82
Real estate investment 8 18 15 104
Corporate assets 21 41 39 88
------- ------- ------- -------
40 141 78 274
======= ======= ======= =======
Depreciation and amortization:
Pearls 1,379 1,702 2,892 3,469
Real estate investment 475 449 1,010 865
Corporate assets 230 229 459 458
------- ------- ------- -------
2,084 2,380 4,361 4,792
======= ======= ======= =======
Capital expenditure for segment assets:
Pearls 3,560 237 6,586 3,553
Real estate investment - 41,005 - 42,152
Corporate assets - - - -
------- ------- ------- -------
3,560 41,242 6,586 45,705
======= ======= ======= =======
As of
September As of March
30 , 2004 31,2004
HK$'000 HK$'000
--------- -----------
Segment assets:
Pearls 457,864 372,671
Real estate investment 50,273 95,833
Corporate assets 47,650 48,370
------- -------
555,787 516,874
======= =======
F-10
8. COMMON STOCK
On August 4, 2004, MSIL approved an ordinary share dividend of one share of
ordinary share for every ten ordinary shares owned by each of its record
shareholders.
9. DISPOSAL OF REAL ESTATE
On March 12, 2004, the Company entered into a Sale and Purchase Agreement to
sell real estate located at 8th Floor, Harcourt House, No.39 Gloucester Road,
Wanchai, Hong Kong to an independent third party for a consideration of HK$71.6
million. The transaction was completed on September 15, 2004. No Hong Kong
Profits Tax is provided as the gain is capital in nature.
F-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, which are, by their nature, subject to risks and uncertainties. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements, other than statements of historical fact,
including statements regarding industry prospects and future results of
operations or financial position, made in this Form 10-Q are forward looking.
Words such as "anticipates," "believes," "expects," "future" and "intends" and
similar expressions may identify forward-looking statements. These
forward-looking statements include, without limitation, statements relating to:
our future performance, our expansion efforts, demand for our products; the
state of economic conditions and our markets; currency and exchange rate
fluctuations; and our ability to meet its liquidity requirements. These
forward-looking statements are based on assumptions and analyses made by us in
light of our experience and perception of historical trends, current conditions
and expected future developments, as well as other factors we believe to be
appropriate in particular circumstances. However, whether actual results and
developments will meet our expectations and predictions depends on a number of
known and unknown risks and uncertainties and other factors, any or all of which
could cause actual results, performance or achievements to differ materially
from our expectations, whether expressed or implied by such forward-looking
statements (which may relate to, among other things, the Company's sales, costs
and expenses, income, inventory performance, and receivables). Primarily engaged
in the processing and trading of pearls and pearl jewelry products, and in real
estate investment, our ability to achieve our objectives and expectations are
derived at least in part from assumptions regarding economic conditions,
consumer tastes, and developments in our competitive environment. The following
assumptions, among others, could materially affect the likelihood that we will
achieve our objectives and expectations communicated through these
forward-looking statements: (i) that low or negative growth in the economies or
the financial markets of its customers, particularly in the United States and in
Europe, will not occur and reduce discretionary spending on goods that might be
perceived as "luxuries"; (ii) that the Hong Kong dollar will remain pegged to
the US dollar at US$1 to HK$7.8; (iii) that customer's choice of pearls
vis-a-vis other precious stones and metals will not change adversely; (iv) that
we will continue to obtain a stable supply of pearls in the quantities, of the
quality and on terms we require; (v) that there will not be a substantial
adverse change in the exchange relationship between the renminbi ("RMB") and the
Hong
1
Kong or US dollar; (vi) that there will not be substantial increase in tax
burden of our subsidiaries operating in the PRC; (vii) that there will not be
substantial change in climate and environmental conditions at the source regions
of pearls that could have material effect on the supply and pricing of pearls;
and (viii) that there will not be substantial adverse change in the real estate
market conditions in the PRC and in Hong Kong. The following discussion of
results of operation, and liquidity and capital resources should be read in
conjunction with the financial statements and the notes thereto included
elsewhere in this Form 10-Q and with our annual report on Form 10-K for the year
ended March 31, 2004, which contains a further description of risks and
uncertainties related to forward-looking statements, as well as other aspects of
our business. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We
will not publicly release any revisions to these forward-looking statements
after the date hereof. Readers are urged, however, to review the factors set
forth in reports that we file from time to time with the Securities and Exchange
Commission.
OVERVIEW
For the six months ended September 30, 2004, the Company and its subsidiaries
(the "Group") recorded net sales of approximately HK$ 207.1 million,
representing an increase of 23.0% as compared to the same period in 2003. Net
income was approximately HK$21.0 million after including the gain of HK$ 34.2
million on the disposal of one of our real estate investments (See Note 9 to the
Condensed Consolidated Financial Statements included herewith). Excluding the
effect of the contribution of this disposal gain, the improvement in performance
is mainly due to an increase in sales in the first quarter of fiscal 2005
compared to the same period in fiscal 2004, which was adversely affected by the
negative economic effects of Severe Acute Respiratory Syndrome ("SARS") and the
Iraq war.
On the pearl business side, South Sea pearls including white and gold South Sea
pearls and Tahitian Black pearls continue to be our key contributor to our sales
performance, representing 47.1% of the Group's total sales for the six months
ended September 30, 2004. Buyers have been more active in recent auctions and
tradeshows due to better economic conditions worldwide and are more confident
about their future sales. Sales of assembled jewelry products continue to grow
at a healthy pace.
Overall, international fashion designers predict that the demand for pearl
jewelry will continue to grow over the next few years. Pearls and pearl jewelry
products have gained a firm foothold in the fashion world and are becoming more
popular among young and trendy consumers, with new designs combining all types
of pearls and jewelry materials, and various price ranges to
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suit different customers.
FUTURE TRENDS
We continue to expand our core pearl business and also place emphasis in further
enlarging our assembled jewelry products business by offering the products and
services that suit our customers' needs as well as using flexible pricing
strategies. By attending international tradeshows and exhibitions and adopting
aggressive marketing strategies, we believe that we can further enlarge our
market share and customer base. We also closely monitor changes in market
demand, environment and conditions so that we can react in line with such
changes. At the same time, we will continue to maintain effective cost control
measures to bring the best results to our operations. Looking forward, with the
worldwide economic condition continually improving, we anticipate that the
performance in the coming quarters will continue to look promising and positive.
RESULTS OF OPERATIONS
For the Six-Month Period Ended September 30, 2004 compared to Six-Month Period
Ended September 30, 2003.
Sales and Gross Profit
Net sales for the six months ended September 30, 2004 increased by HK$38.7
million, or 23.0% to HK$207.1 million, compared to net sales of HK$168.4 million
for the six months ended September 30, 2003. We believe that the overall
increase in sales was mainly attributable to the improvement in the global
economy and consumer confidence as compared with the negative impact of the war
in Iraq and SARS on consumer spending during the six months ended September 30,
2003. The increase in sales was mainly from increases in sales of South Sea
pearls and finished products.
Gross profit for the six months ended September 30, 2004 increased by HK$14.3
million, or 31.6%, to HK$59.4 million from HK$45.1 million for the six months
ended September 30, 2003. As a percentage of net sales, gross profit margin
increased 1.9% to 28.7% for the six months ended September 30, 2004 from 26.8%
for the six months ended September 30, 2003. The increase in gross profit margin
was mainly attributable to the increase in pearl sales, which have a higher
gross profit margin than jewelry products.
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Rental Income
Gross rental income for the six month periods ended September 30, 2003 and
September 30, 2004 were each approximately HK$2.9 million. During the six month
period ended September 30, 2004, we experienced an increase in gross rental
income from our real estate located at 8th Floor, Harcourt House, No. 39
Gloucester Road, Wanchai, Hong Kong. This increase, however, was offset by a
nearly equal decrease in gross rental income during the same period from our
real estate located at 19th Floor, Railway Plaza, No.39 Chatham Road South,
Tsimshatsui, Kowloon, Hong Kong, due to a change from rental activity to our own
use of the property.
Selling, General and Administrative Expense ("SG & A expense")
SG&A expense for the six months ended September 30, 2004 was HK$47.6 million,
consisting of HK$42.3 million attributable to pearl operations and HK$5.3
million attributable to real estate operations. SG&A expense for the six months
ended September 30, 2004, increased approximately HK$6.3 million, or 15.4%, from
HK$41.3 million for the six months ended September 30, 2003, which consisted of
HK$34.5 million attributable to pearl operations and HK$6.8 million attributable
to real estate. The higher SG&A expenses attributable to pearl operations is
mainly due to higher exhibition expenses and an increase in our provision for
doubtful accounts, but is offset by lower real estate expenses. The decrease in
SG&A expenses attributable to real estate was mainly due to the loss arising
from the demolition of one of our buildings for reconstruction in Man Sang
Industrial City in Shenzhen, which was written off in the first quarter of
fiscal 2004.
As a percentage of net sales, SG&A expenses attributable to pearl operations
were 20.4% for both the six months ended September 30, 2004 and September 30,
2003.
Interest Expense
As a result of our reduction in outstanding bank loans during the fiscal year
2005, interest expense decreased by HK$196K*, or 71.5%, to HK$78K for the six
months ended September 30, 2004 from HK$274K for the six months ended September
30, 2003.
- -----------------------
* As used in this report, the letter "K" appearing immediately after a Hong Kong
dollar amount denotes rounding to the nearest HK$1,000; as an example,
HK$250,499 may be rounded to "HK$250K."
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Interest Income
Interest income increased by HK$10K, or 6.3%, to HK$169K for the six months
ended September 30, 2004 from HK$159K for the six months ended September 30,
2003. The increase was due principally to higher cash balances during the six
months ended September 30, 2004.
Gain on Disposal of Real Estate
During the six months ended September 30, 2004, we sold real estate located at
8th Floor, Harcourt House, No.39 Gloucester Road, Wanchai, Hong Kong to an
independent third party for HK$71.6 million, resulting in a disposal gain of HK
$34.2 million. The sales transaction was completed on September 15, 2004.
Income Tax Expense
Income tax expense for the six months ended September 30, 2004 was HK$4.3
million, compared to the HK$3.3 million during the six months ended September
30, 2003. The increase was due to increased taxable income generated during the
six months ended September 30, 2004.
Net Income
Net income for the six months ended September 30, 2004 was HK$21.0 million,
compared to net income of HK$1.1 million for the six months ended September 30,
2003. The increase was mainly attributable to the increase in sales, gross
profit and the gain arising on the disposal of real estate in the second quarter
of fiscal 2005.
RESULTS OF OPERATIONS
Three-Month Period Ended September 30, 2004 compared to Three-Month Period Ended
September 30, 2003.
Sales and Gross Profit
Net sales for the three months ended September 30, 2004 increased by HK$6.5
million, or 6.4% to HK$108.0 million, compared to net sales of HK$101.5 million
during the three months ended September 30, 2003. The overall increase in sales
was mainly attributable to improvement in the global economy and consumer
confidence.
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Gross profit for the three months ended September 30, 2004 increased by HK$3.8
million, or 13.6%, to HK$31.9 million from HK$28.1 million in the three months
ended September 30, 2003. As a percentage of net sales, gross profit margin
increased 1.8% to 29.5% for the three months ended September 30, 2004 from 27.7%
for the three months ended September 30, 2003. The increase in gross profit
margin was mainly attributable to the increase in pearl sales, which have a
higher gross profit margin than jewelry products.
Rental Income
Gross rental income for the three months ended September 30, 2004 was
approximately HK$1.3 million representing a decrease of approximately HK$186K,
or 12.5%, as compared to HK$1.5 million for the three months ended September 30,
2003. The decrease in gross rental income was mainly attributable to lower
rental income on our properties in Man Sang Industrial City in Shenzhen due to a
recent vacancy.
Selling, General and Administrative Expense ("SG & A expense")
SG&A expense was HK$28.8 million for the three months ended September 30, 2004,
consisting of HK$25.0 million attributable to pearl operations and HK$3.8
million attributable to real estate operations. SG&A expense for the three
months ended September 30, 2004, increased approximately HK$7.9 million, or
38.2%, from HK$20.9 million for the three months ended September 30, 2003, which
consisted of HK$17.6 million attributable to pearl operations and HK$3.3 million
attributable to real estate. The increase in SG&A expense attributable to pearl
operations is mainly due to higher exhibition expenses and an increase in our
provision for doubtful accounts and the impairment of long-term investments. The
increase in SG&A expense attributable to the real estate side was mainly due to
the write-off of a receivable related to a recent vacancy in one of our
properties in Man Sang Industrial City in Shenzhen.
As a percentage of net sales, SG&A expense attributable to pearl operations
increased 5.8 % to 23.2% for the three months ended September 30, 2004 from
17.4% for the three months ended September 30, 2003.
Interest Expense
As a result of our reduction in outstanding bank loans during the fiscal year
2005, interest expense decreased by HK$101K, or 71.6%, to HK$40K for the three
months ended September 30, 2004 from HK$141K for the three months ended
September 30, 2003 .
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Interest Income
Interest income increased by HK$45K, or 69.2%, to HK$110K for the three months
ended September 30, 2004 from HK$65K for the three months ended September 30,
2003. The increase was due principally to higher cash balances during the three
months ended September 30, 2004.
Gain on Disposal of Real Estate
During the three months ended September 30, 2004, we sold real estate located at
8th Floor, Harcourt House, No.39 Gloucester Road, Wanchai, Hong Kong to an
independent third party for HK$71.6 million, resulting in a disposal gain of HK
$34.2 million. The sales transaction was completed on September 15, 2004.
Income Tax Expense
Income tax expense for the three months ended September 30, 2004 was HK$1.9
million, compared to HK$2.1 million for the three months ended September 30,
2003. The decrease was due to lower taxable income generated during the three
months ended September 30, 2004.
Net Income
Net income for the three months ended September 30, 2004 was HK$17.3 million,
compared to net income of HK$2.9 million during the three months ended September
30, 2003. The increase was mainly attributable to an increase in sales, gross
profit and the gain arising on the disposal of real estate in the second quarter
of fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are funded by collection of accounts receivable and
sales of inventory. As of September 30, 2004, we had working capital of HK$341.4
million, which included a cash balance of HK$207.3 million. The current ratio
was 8.5 to 1 as of September 30, 2004. Net cash provided by operating activities
was approximately HK$47.1 million for the six months ended September 30, 2004.
Net cash provided by investing activities for the six months ended September 30,
2004 was HK$58.1 million and net cash used in financing activities was HK$2.8
million.
Inventories were HK$95.9 million as of September 30, 2004. The inventory
turnover period was 4.6 months as of September 30, 2004.
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Accounts receivable were HK$63.6 million as of September 30, 2004. Debtors'
turnover period was 56.1 days as of September 30, 2004.
Long-term debt (including the current portion of long-term debt) was HK$8.8
million as of September 30, 2004. The gearing ratio was 0.03 as of September 30,
2004, calculated based on debt of HK$8.8 million and stockholder equity of
HK$258.1 million.
We had available working capital facilities of HK$47.0 million with various
banks at September 30, 2004. Such banking facilities include letter of credit
arrangements, import loans, overdraft and other facilities commonly used in the
jewelry business. All such banking facilities bear interest at floating rates
generally offered by banks in Hong Kong and are subject to periodic review. As
of September 30, 2004, we had a zero balance on each of these credit facilities.
We believe that our existing cash, cash equivalents, banking facilities and
funds to be generated from internal operations will be sufficient to meet its
anticipated future liquidity requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2004, we had no derivative contracts, such as forward
contracts and options to hedge against foreign exchange fluctuations.
During the six months ended September 30, 2004, we made approximately 39.8% of
our purchases in US dollars and 59.6% in Hong Kong dollars and RMB combined.
We denominate our sales in either US Dollars or Hong Kong Dollars. Since the
Hong Kong Dollar remained "pegged" to the US Dollar at a consistent rate, we
feel that the exposure of our sales proceeds to foreign exchange fluctuations is
minimal. On the other hand, the RMB is not a fully convertible currency and the
PRC government determines its exchange rate against other currencies. We do not
believe that the PRC intends to devalue or revalue the RMB; however, there is no
assurance that the PRC will not decide to allow the currency to fluctuate in the
future. We believe that the imminent risk of a substantial fluctuation of the
RMB exchange rate remains low. As of September 30, 2004, we have no short-term
RMB bank loans.
8
Because most of our purchases are made in currencies that we believe have low
risk of appreciation or devaluation and sales are made in US dollars, we have
determined that our currency risk in the foreseeable future should not be
material, and that no derivative contracts, such as forward contracts and
options to hedge against foreign exchange fluctuations, were necessary during
this quarter.
As of September 30, 2004, we had Hong Kong dollar bank borrowings of HK$8.8
million, the weighted average interest rate of which was 2.0% per annum. Our
interest expense is sensitive to fluctuations in the general level of Hong Kong
interest rates determined on the basis of Hong Kong Inter-bank Offer Rate
("HIBOR"). Because the Hong Kong dollar is pegged to the US dollar, which
correlates Hong Kong interest rates to US interest rates, any change in US
interest rates will likely affect Hong Kong interest rates. Since the US economy
has slowed down and US interest rates have remained low, the three-month HIBOR
has decreased by 5.4% from 6.5% as of June 30, 2000 to 1.1% as of September 30,
2004. Therefore, we do not foresee material risks of an increase in Hong Kong
interest rates in the foreseeable future and did not enter into derivative
contracts or other arrangements to hedge against such risk. Due to the recovery
of the economy in the US and the PRC, there is an expectation in the market that
interest rates will increase in the coming calendar year; however, we do not
anticipate any material financial effect related to its upcoming long-term and
short-term financing requirements.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in our reports under the Securities and Exchange
Act of 1934. In accordance with Rule 14a-15(b) of the Securities and Exchange
Act of 1934, an evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the our
disclosure controls and procedures as of September 30, 2004. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of September 30,
2004 to ensure that material information relating to the company was made known
to them by others within the company, particularly during the period in which
this Quarterly Report on Form 10-Q was being prepared. No significant change was
made in our internal control over financial reporting during the fiscal quarter
ended September 30, 2004 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
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Our Chief Executive Officer and Chief Financial Officer do not expect that our
disclosure controls or internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdown can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based partly on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on August 4, 2004 in Tsimshatsui,
Kowloon, Hong Kong
1) Election of Directors
All six incumbent directors were re-elected without opposition to serve one-year
terms in office. The results of this election were as follows:
Name of Director For Withheld
---------------- --- --------
Cheng Chung Hing, Ricky 3,999,394 (including 3,899,394 votes of common
stockholders and 100,000 votes from preferred
stockholders 1,000
Cheng Tai Po; 3,999,394 (including 3,899,394 votes of common
stockholders and 100,000 votes from preferred 1,000
stockholders
Yan Sau Man, Amy 3,999,394 (including 3,899,394 votes of common
stockholders and 100,000 votes from preferred 1,000
stockholders
Lai Chau Ming, Matthew 3,999,394 (including 3,899,394 votes of common
stockholders and 100,000 votes from preferred 1,000
stockholders
Yuen Ka Lok, Ernest 3,999,394 (including 3,899,394 votes of common
stockholders and 100,000 votes from preferred 1,000
stockholders
Lee Kang Bor, Thomas 3,999,394 (including 3,899,394 votes of common
stockholders and 100,000 votes from preferred
stockholders 1,000
2) Ratification of Independent Auditors
The appointment of Moores Rowland Mazars as the independent auditors for fiscal
year 2005 was ratified. The results of the shareholder vote were as follows:
For Against Abstain
--- ------- -------
Appointment of Moores Rowland 3,999,394 (including 3,899,394
Mazars as independent auditors votes of common stockholders and
100,000 votes from preferred
stockholders 1,000 Nil
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ITEM 6 EXHIBITS
EXHIBITS
3.1 Restated Articles of Incorporation including the Certificate of
Designation, of the Series A Preferred Stock. (1)
3.2 Certificate of Designation of the Series B Preferred Stock. (2)
3.3 Amended Bylaws. (1)
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
(1) Incorporated by reference to the Company's current report on Form 8-K dated
January 8, 1996.
(2) Incorporated by reference to the Company's registration statement on Form
8-A dated June 17, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
Date: November 12, 2004
By: /s/ CHENG Chung Hing, Ricky
------------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer
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