<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File No. 33-10639-NY
MAN SANG HOLDINGS, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
<S> <C>
Nevada 87-0539570
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
21st Floor, Railway Plaza, 39 Chatham Road South,
Tsimshatsui, Kowloon, Hong Kong
(Address 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:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, 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-KSB or any amendment to
this Form 10-KSB [X]
The issuer's revenues for its most recent fiscal year were $32,114,000.
As of May 31, 1997, 4,304,862 shares of common stock of the Registrant
were outstanding. As of such date, the aggregate market value of the common
stock held by non-affiliates, based on the average bid and asked price on the
NASD Electronic Bulletin Board, was approximately $5,919,185.
DOCUMENTS INCORPORATED BY REFERENCE
No annual reports to security holders, proxy or information statements,
or prospectuses filed pursuant to Rule 424(b) or (c) are incorporated by
reference in this report.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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TABLE OF CONTENTS
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Page
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PART I
<S> <C> <C>
ITEM 1. DESCRIPTION OF BUSINESS......................................... 1
ITEM 2. DESCRIPTION OF PROPERTIES.......................................11
ITEM 3. LEGAL PROCEEDINGS...............................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.............................................12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.....................................13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................14
ITEM 7. FINANCIAL STATEMENTS............................................20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT...............................22
ITEM 10. EXECUTIVE COMPENSATION..........................................24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...........................................27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................................................28
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K................................29
</TABLE>
SIGNATURES
FINANCIAL STATEMENTS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL AND ORGANISATION CHART
Man Sang Holdings, Inc. (the "Company"), through its wholly-owned subsidiaries,
is engaged in (i) the purchasing, processing, assembling, merchandising and
wholesale distribution of pearls and pearl jewelry products; and (ii) the
management and leasing of a commercial real estate complex in Shenzhen, the
People's Republic of China ("PRC" or "China"). The structure of the Company is
as follows:
MAN SANG
HOLDINGS, INC.
(Nevada)
100%
Man Sang International
(B.V.I.) Limited
(British Virgin Islands)
(holding company)
100% 100%
Man Sang Jewellery Hong Kong Man Sang
Company Limited Investments Limited
(Hong Kong) (Hong Kong)
(trading and holding (holding company)
company)
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<CAPTION>
<S> <C> <C> <C>
100% 100% 100% 100%
Overseas South Man Hing Jewellery Tangzhu Jewellery Peking Pearls
Pearls Limited Goods (Shenzhen) Goods (Shenzhen) Company Limited
(Hong Kong) Co Ltd Co Ltd (Hong Kong)
(PRC) (PRC)
(Trading) (Real estate leasing (Purchasing & processing (Trading)
and pearl products of freshwater pearls and 100%
assembling) of larger size saltwater
cultured pearls)
Damei Pearls Jewellery
Goods (Shenzhen)
Co Ltd
(PRC)
(Purchasing & processing
of smaller size saltwater
cultured pearls)
</TABLE>
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HISTORY OF THE COMPANY
The Company was incorporated in the State of Nevada in November of 1986 under
the name SBH Ventures, Inc. The Company was originally incorporated as a "blind
pool" company for the purpose of acquiring an operating business. In March of
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 stock 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 $.001 per share ("Common Stock")
and 100,000 shares of Series A Preferred Stock, par value $.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. Pursuant to
the terms of the Exchange, the Company changed its name to Man Sang Holdings,
Inc. and assumed the operations of Man Sang International (B.V.I.) Limited. The
management of Man Sang International (B.V.I.) Limited assumed control of the
Company.
Man Sang International (B.V.I.) Limited is a British Virgin Islands company that
holds, directly or indirectly, the interests of various operating subsidiaries
in Hong Kong and the PRC (the "Man Sang Group"). The foundation of the Man Sang
Group was laid in 1980 when Cheng Chung Hing, Ricky formed Man Sang Trading
Hong, a freshwater pearl trading company. In 1981, Cheng Tai Po formed Peking
Pearls Company, a Japanese cultured pearl trading company. As the business of
the Man Sang Group developed, Man Sang Jewellery Co. Ltd. and Peking Pearl Co.,
Ltd. were formed in Hong Kong in 1988 and 1991, respectively, to continue the
trading operations of the group. Subsequently, the Man Sang Group expanded its
operations to include pearl processing with the establishment of Man Hing
Jewellery Goods (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. in 1995 to assume and expand the Chinese
cultured pearl processing operations of Man Hing. In order to facilitate the
growth in existing operations and expansion into processing operations, and to
diversify its revenues, in 1991, the Man Sang Group commenced construction of a
25 building industrial facility in Shenzhen, PRC ("Man Sang Industrial City")
for use in pearl processing and corporate administration (5 buildings) and for
lease to third party industrial users (20 buildings). See "Item 1 - "Real Estate
Leasing Operations" and "Description of Properties." Finally, in 1995, the
various companies comprising the Man Sang Group were reorganized (the "Group
Reorganization") in a holding company structure with each of such companies
becoming a direct or indirect wholly-owned subsidiary of Man Sang International
(B.V.I.) Limited.
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* Unless otherwise indicated as Hong Kong dollars or HK$, all financial
information contained herein is presented in U.S. dollars. The
translations of Hong Kong dollar amounts into US dollars are for
reference purpose only and have been made at the exchange rate equal to
HK$7.73 for US$1, the approximate free rate of exchange at March 31,
1997.
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SIGNIFICANT DEVELOPMENTS IN FISCAL 1997
Issuance of Stock; Stock Split
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 $.001
per share ("Series B Preferred Stock"), for an aggregate purchasing price of
$6.76 million. The shares of Series B Preferred Stock were convertible into
shares of Common Stock commencing on or after 45 days following the sales of
such shares of Series B Preferred Stock. Each share of Series B Preferred Stock
was convertible into the number of shares of Common Stock determined by dividing
$1,000 by an amount equal to the lesser of (i) the market price of the Common
Stock on the closing date of the sale of such shares of Series B Preferred Stock
or (ii) 70% of the average closing bid price of the Common Stock for the five
trading days preceding the conversion. As of September 1996, all shares of
Series B Preferred Stock were converted into shares of Common Stock resulting in
the issuance by the Company of 5,219,448 shares of Common Stock. The proceeds
from the offering of Series B Preferred Stock were used to acquire pearl
inventories and to meet other working capital needs.
On October 10, 1996, the Company effected a 1-for-4 reverse split of its Common
Stock resulting in a reduction of the number of outstanding shares of Common
Stock from 17,219,448 to 4,304,862.
Summary of Financial Condition and Results of Operations in Fiscal 1997
In fiscal 1997, the Company experienced significant growth in revenues and
improvement of its financial conditions and results of operations. Net sales
increased by $5.3 million, or 20.0%, to $32.1 million in fiscal 1997 from $26.8
million in fiscal 1996. Profits attributable to the shareholders of the Company
increased by $1.16 million, or 28.3%, to $5.26 million in fiscal 1997 from $4.1
million in fiscal 1996.
At March 31, 1997, the Company had $21.4 million in consolidated net assets
compared to $10.3 million as at March 31, 1996, representing an increase of
108%. The debt to equity ratio also improved from 72% in fiscal 1996 to 37.2% in
fiscal 1997.
Earnings per share calculated on the basis of the profit in the amount of $5.26
million and the weight average number of 3,766,454 shares of Common Stock
outstanding during the year amounted to $1.40 for fiscal 1997, compared to $1.45
for fiscal 1996.
See Item 6 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the Company's business segments.
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New Subsidiary in the PRC
On December 7, 1996, Man Sang Jewellery Company Limited, an indirect
wholly-owned subsidiary of the Company, established Tangzhu Jewellery Goods
(Shenzhen) Co., Ltd., its wholly foreign-owned enterprise in the PRC
("Tangzhu"), to engage in the business of processing of larger Chinese cultured
pearls ranging in size from 6mm and up. The purpose of establishment of Tangzhu
is to strengthen the processing management of larger size pearls.
Purchase and Sale of Real Property
On November 23, 1996, the Company purchased certain real property located at
17th Floor, Silvercrest, 24 Macdonnell Road, Hong Kong, together with a one-car
parking space, for a purchase price of approximately $2.42 million The property
is currently used as a residence by the Chairman of the Company. See Item 10 -
"Executive Compensation"; Item 12 - "Certain Relationships and Related
Transactions".
On May 1, 1997, the Company sold certain real property located at Flat C, 28th
Floor, Glory Heights, 52 Lyttleton Road, Hong Kong, together with a one-car
parking space, for approximately $1.42 million, resulting in a net capital gain
in the amount of approximately $1.09 million. The property was formerly the
residence of the Chairman of the Company.
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. In recent years, the pearl industry has
undergone fundamental changes. Japan is losing its long held dominance as,
increasingly, pearls are being cultivated and processed in the PRC. However,
during 1996 and the first half of 1997, Japanese cultured pearls have been in
short supply and their prices have increased accordingly. The shortage of
Japanese cultured pearls couple with competitive pricing for Chinese cultured
pearls has led to the increased demand for Chinese cultured pearls. The Company
believes that this situation may continue during the rest of 1997.
In addition to Japan, China has emerged in recent years as a major supplier of
cultured pearls. Chinese cultured pearls are generally more competitively priced
than Japanese cultured pearls. The Company believes that the supply of Chinese
cultured pearls ranging in size from 5mm to 7mm is generally available and
reliable while the supply of Chinese pearls ranging in size from 7mm to 7.5mm is
expected to become available in the near future. The Company also believes
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that Chinese cultured pearls may eventually replace Japanese cultured pearls of
comparable qualities and similar size, as long as China continues to maintain
competitive prices, improve the quality of pearls and expand the product lines.
China is also a major supply of freshwater pearls. While the quantity of
freshwater pearls supplied from processing factories in China decreased in 1996
and the first half of 1997, the quality has improved. The prices have been
stable during this period.
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. Due to relative scarcity of and growing demand for South
Sea pearls, the prices have been increasing steadily in the past years.
On the demand side, the sale of pearls steadily declined from 1991 to 1994,
principally due to the strong Japanese yen, but rebounded in 1995 and has since
maintained a steady upward trend, as competitively priced Chinese products have
gained a larger percentage of the market. The demand for Tahitian pearls
increased in 1996, representing a reversal of a decreasing trend since 1994. The
strong demand resulted in a shortage of pearls in certain categories. The demand
for South Sea Pearls also continues to increase. The major markets for all
pearls products are Europe, the United States and Asian countries, with the
demand from the Asian market experiencing a steady growth in the past few years.
Business Strategy
The Company's business strategy is to provide a full range of pearls and pearl
jewelry products to jewelry manufacturers, wholesalers and retailers at
competitive prices.
To meet its objectives, the Company is developing strategies to increase market
penetration through internal growth, strategic acquisitions, expansion of
existing product lines and introduction of new product lines such as Tahitian
pearls and specially designed pearl jewelry products. To implement such
strategies, the Company is planning to expand its processing and assembling
capacity, purchase new bleaching and processing equipment and employ additional
personnel to expand processing capacity and to develop, launch and market new
pearl products. In addition, the Company is also identifying opportunities for
strategic acquisitions.
Products
The Company presently offers six product lines, including pearl jewelry,
freshwater pearls, Chinese cultured pearls, Japanese cultured pearls, Tahitian
pearls and South Sea pearls. Freshwater pearls are available in a variety of
shapes with sizes ranging from 2mm to 10mm. Freshwater pearls are generally less
expensive than saltwater cultured pearls with wholesale prices typically ranging
from $2 to $300 per 16 inch strand depending on size, grade and shape. Saltwater
cultured pearls are generally round in shape and range in size from 5mm to 18mm.
Tahitian and South Sea 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
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cultured pearls. Wholesale prices of saltwater cultured pearls typically range
from $15 to $90,000 per 16 inch strand.
The following table illustrates the typical range of size and wholesale prices
of saltwater cultured pearls sold by the Company by category:
<TABLE>
<CAPTION>
SIZE PRICE/16 INCH STRAND
mm US$
<S> <C> <C>
Chinese cultured pearls 5 - 7 15 - 500
Japanese cultured pearls 7 - 10 120 - 4,000
Tahitian pearls 8 - 16 700 - 17,000
South Sea pearls 10 - 18 2,000 - 90,000
</TABLE>
The Company also offers fully assembled pearl jewelry, including necklaces,
earrings, rings, pendants, broaches, bracelets, watches, cufflinks and other
miscellaneous pearl products. For the two years ended March 31, 1997, the
percentage of the Company's total sales of each category of pearls and assembled
pearl products was as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Freshwater Cultured Freshwater Cultured
---------- -------- ---------- --------
% % % %
<S> <C> <C> <C> <C>
Loose and strands 70 97 70 99
Necklaces 12 3 14 1
Bracelets 5 -- 2 --
Earrings 4 -- 2 --
Pendants 4 -- -- --
Watches 2 -- 4 --
Chokers 1 -- 2 --
Bangles 1 -- 2 --
Other 1 -- 4 --
- ----------------- ---- ---- --- ---
Total 100 100 100 100
</TABLE>
Purchasing
The Company purchases freshwater and Chinese cultured pearls from various pearl
farms in the PRC, and purchases Japanese cultured pearls from pearl suppliers
and distributors in Hong Kong and Japan. To source Tahitian and South Sea
pearls, the Company attends pearl auctions held in Australia and Tahiti in
addition to purchasing directly from local pearl farmers.
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The purchase of pearls is conducted by the Company's full time trained
purchasing staff. The Company's purchasing is conducted from its offices in Hong
Kong and Shenzhen, PRC and a purchasing office in Zhangjiang, PRC, the site of
the largest Chinese cultured pearl farm. The Company's purchasing staff
maintains regular contacts with pearl farmers and suppliers in the PRC, Japan
and Hong Kong, enabling the Company 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. Management and the Company's purchasing staff meet
regularly to assess existing and anticipated pearl demand. The Company's
purchasing staff in turn inspects and purchases pearls in the quantities and of
the quality and nature necessary to meet existing and estimated demand.
The Company has no long-term purchase contracts, and instead negotiates the
purchase of pearls on an as needed basis to correspond with expected demand.
While the Company constantly seeks 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, the Company generally
purchases raw materials from a small number of suppliers at prices approximating
prevailing market prices. The Company believes that there are numerous alternate
supply sources and that the termination of the Company's relationship with any
of its existing sources would not materially adversely affect the Company. To
date, the Company has not experienced any difficulty in purchasing raw
materials.
Processing and Assembly
Pearl processing and assembly is conducted at the Company's facilities in
Shenzhen, PRC. Freshwater pearl processing and assembling operations presently
occupy approximately 12,800 square feet of space and employ 87 persons while
cultured pearl processing operations occupy approximately 26,000 square feet of
space and employ 357 persons. The average salary per factory worker is $72 per
month while the average salary per supervisor is $168 per month.
The Company, with the assistance of specialists from Japan, has trained its
workers and implemented 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, medically bleached and dyed and, if necessary, drilled. This
process, excluding drilling, takes approximately 21 days for freshwater pearls
and approximately 70 days for saltwater cultured pearls. Drilling takes
approximately 10 days. Next, the pearls are cleaned, dried, polished, graded,
sorted, strung, if necessary, and packaged. The entire production cycle takes
approximately 30 days for freshwater pearls and approximately 100 days for
saltwater cultured pearls .
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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.
The Company presently has facilities and pearl processing personnel to produce
approximately 20,000 kg (44,092 lbs) of freshwater pearls and 8,000 kg (17,637
lbs) of saltwater cultured pearls annually. Fiscal 1997 production totaled
approximately 15,100 kg (33,289 lbs) of freshwater pearls and 6,300 kg (13,889
lbs) of saltwater cultured pearls. The Company presently also has adequate
assembly and finishing personnel and facilities to produce approximately one
million pieces of finished jewelry annually.
Upon completion of processing, pearls are shipped to the Company's offices in
Hong Kong where they are stored for inspection by potential buyers.
Marketing
The Company markets its products from its facilities in Hong Kong. The Company's
sales staff, which is divided into regional groups, presently markets freshwater
pearls, Chinese cultured pearls, Japanese cultured pearls, Tahitian pearls and
South Sea pearls.
The Company's 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. The Company's
marketing and sales staff regularly visits all major pearl markets in the world
and attends major jewelry trade shows to display products, establish contacts
with potential customers and evaluate market trends. Apart from attending trade
shows and servicing customers, the Company's marketing and sales staff
principally operates from the Company's headquarters in Hong Kong, where buyers
personally visit and inspect the Company's products and place orders.
As part of its marketing efforts, the Company has established an Internet
webpage to introduce the Company and to advertise the Company's products.
Customers
The Company's customers consist principally of wholesale distributors and mass
merchandisers in Hong Kong and other Asian countries, Europe and North America.
In fiscal 1997, no customer accounted for more than 10 percent of the Company's
sales. As at March 31, 1997, the Company had approximately 600 regular
customers. While the Company has no long-term contract with any customer, most
of its existing customers have been customers of the Company for a number of
years. The Company does not believe that the loss of anyone customer would have
a material adverse effect on its financial condition or results of operations.
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The following table sets forth by region and by product the sales of the Company
for the year ended March 31, 1997:
<TABLE>
<CAPTION>
Freshwater Pearls Saltwater Cultured Pearls
----------------- -------------------------
REGION Amount % Amount %
- ------ ------ - ------ -
$'000 $'000
<S> <C> <C> <C> <C>
Hong Kong 2,008 21.7 5,654 24.7
Other Asian countries 2,362 25.6 5,680 24.8
Europe 3,709 40.2 5,988 26.2
North America 818 8.9 4,299 18.8
Others 338 3.6 1,258 5.5
---------------------- -----------------------
9,235 100 22,879 100
====================== =======================
</TABLE>
Seasonality
The Company's sales are seasonal in nature. The bulk of the Company's sales
occurs during the months of March, June and September (due to major
international jewelry trade shows held in Hong Kong in these three months).
Accordingly, the Company's results of operations for the first half of the year
are not proportionate to the results for the entire year.
Competition
With the exception of several large Japanese 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, the Company faces intense
competition. The principal historical competitors of the Company 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 Japanese cultured, Tahitian and South Sea pearls. Locally, the
Company competes with approximately 60 companies in Hong Kong engaging 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, the Company must compete with synthetically produced
pearls.
The Company believes that it is competitive in the industry because of its
advanced pearl processing and bleaching techniques, and processing facilities in
the PRC which allow the Company to process pearls at lower cost than many of its
competitors and because it is a leading purchaser and distributor of Chinese
cultured pearls. In addition, the Company provides one-stop shopping convenience
to customers and has historically maintained a close relationship with its
customers. Therefore, although competition is intense, the Company believes that
it is well positioned in the pearl industry. However, in a highly competitive
industry where many
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competitors have substantially greater technical, financial and marketing
resources than the Company, new competitors may enter into the market and
customer preferences may change unpredictably, there can be no assurance that
the Company will remain competitive.
REAL ESTATE LEASING OPERATIONS
Facilities
In connection with its expansion into pearl processing and assembling
operations, the Company 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 acquired by the Company with respect to Man Sang Industrial City have a
duration of fifty years. The Company acquired the land use rights relating to
Man Sang Industrial City and constructed such facility for approximately $3.4
million.
Man Sang Industrial City consists of 25 buildings totaling approximately 520,000
square feet. Nineteen of the buildings in Man Sang Industrial City are factory
buildings, five are living quarters and one contains shops and restaurants. 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
The Company presently utilizes five buildings in Man Sang Industrial City for
pearl processing and assembly, administration and to house employees. The
remaining facilities are leased to third party industrial users; primarily
foreign investors and non-polluting light industry.
The Company employs a staff of 25 persons to provide required management,
leasing, maintenance and security for Man Sang Industrial City.
As at March 31, 1997, all 20 buildings in Man Sang Industrial City, other than
the five buildings utilized for the Company's pearl operations, were under lease
to third party industrial users. Such facilities are typically offered under
leases ranging in duration from one year to three years. As of March 31, 1997,
the gross rental income from Man Sang Industrial City was approximately
$700,900, compared to approximately $475,000 for fiscal 1996.
In addition to Man Sang Industrial City, the Company owns an office unit in Hong
Kong (the "Hong Kong Rental Office") which it leases to a third party. The Hong
Kong Rental Office consists of 1,000 square feet of space at Wing Tuck
Commercial Building, Room 407, 177 - 183 Wing Lok Street and is leased for
annual rental income totaling approximately $22,300 for fiscal 1997, compared to
approximately $15,000 for fiscal 1996.
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Competition
Competition for 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, the Company
believes that 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, 1997, the Company had 556 employees including six executive
officers, seven persons engaged in pearl purchasing, 11 persons engaged in pearl
sales and marketing, 458 persons engaged in pearl processing and logistics, 25
engaged in real estate leasing, maintenance and administration, and 49 persons
engaged in administrative and support functions. None of the employees is
governed by collective bargaining agreements and the Company considers its
relations with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases two facilities in Hong Kong and owns the Hong Kong Rental
Office and Man Sang Industrial City in Shenzhen, PRC. Upon expiration of the
leases on October 9, 1996 and August 31, 1996, respectively, the Company's
administrative office moved from the leased premises at 14/F and Room 905 - 7 of
Sands Building, 17 Hankow Road, Tsimshatsui, Hong Kong to the 10,800 square feet
leased premises at 21st Floor, Railway Plaza, 39 Chatham Road South,
Tsimshatsui, Hong Kong. The lease term for the leased premises at Railway Plaza
is three years, commencing on July 1, 1996, with an optional renewal term of
three years at the expiration of the lease. The annual lease payment of the
lease is approximately $517,367. In addition, the Company leases a second
facility of approximately 990 square feet at Office A, 5/F., Eastern Flower
Centre, Nos. 22 and 24 Cameron Road, Kowloon, Hong Kong. This facility is used
principally as a sales office. Under a two year lease which commenced in
December 1995, annual lease payments with respect to this facility are
approximately $35,000. The Company believes that its facilities are suitable and
adequate for their current use.
As noted above, the Company also has a 50 year term land use rights in respect
of the land of Man Sang Industrial City, in Shenzhen, PRC, a manufacturing
facility on an industrial estate on which 25 buildings have been constructed and
owned by the Company. The Company presently uses three buildings at this
facility for processing and assembly and two of the buildings to house its
workers. The remaining 20 buildings are leased to various third parties. The
Company anticipates expanding its processing and assembling operations at this
facility, but will also retain a portion of the facility for long-term rental.
The Company also owns the Hong Kong Rental Office which it leases to a third
party. See Item 1 - "Real Estate Leasing Operations". Finally, the Company has
acquired and owns an apartment, at 17th Floor, Silvercrest, 24 MacDonnell Road,
Hong Kong, together with a parking space. See Item 1 - "Significant
Development"; Item
<PAGE> 14
- 12 -
10 - "Executive Compensation". In the opinion of management, all of the
Company's properties are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its property is subject to any pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through the
solicitation of proxies or otherwise, during the fourth quarter of the Company's
fiscal year ended March 31, 1997.
<PAGE> 15
- 13 -
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock has been listed on the OTC Bulletin Board since 1987.
However, the market for these securities has historically been extremely limited
and sporadic, particularly during the period prior to the Exchange.
The high and low bid prices for the Company's Common Stock for each quarter
during the Company's last two fiscal years were as follows:
<TABLE>
<CAPTION>
Period High Low
-----------------------------------------------------
<S> <C> <C> <C>
1996
----
June 30, '95 -- --
September 30, '95 -- --
December 31, '95 -- --
March 31, '96 $14.00 $14.00
1997
----
June 30, '96 14.00 12.00
September 30, '96 5.125 4.50
December 31, '96(1) 3.81 3.50
March 31, '97(1) 2.875 2.875
</TABLE>
- ------------------
(1) Bid prices reflect 1-for-4 reverse stock split effective on October 10,
1996.
The above bid information is provided by Boomberg LP. The bid information above
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transaction.
Holders
The number of record holders of the Company's Common Stock as of May 31, 1997
was 259. This number does not include an indeterminate number of stockholders
whose shares are held by brokers in street name.
<PAGE> 16
- 14 -
Dividends
The Company has not paid any dividends with respect to its Common Stock, and
does not intend to pay dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company through its wholly-owned subsidiaries is engaged in (i) the
purchasing, processing, assembling, merchandising and wholesale distribution of
pearls and pearl jewelry products; and (ii) the management and leasing of a
commercial real estate complex in Shenzhen, PRC.
The principal cost of the Company's pearl business is the cost of raw materials,
processed pearls and other materials used in processing and assembling pearls
and pearl products. The Company purchases freshwater pearls and Chinese cultured
pearls in the PRC, and purchases Japanese cultured pearls, South Sea pearls and
other materials primarily in Hong Kong, Japan, Tahiti and Australia through
dealers and at international trade auctions. Other significant costs of the
Company's pearl business are labor costs associated with pearl processing and
assembling, marketing costs and corporate overhead.
The following discussion of results of operations, liquidity and capital
resources, seasonality and inflation should be read in conjunction with the
financial statements and the notes thereto included elsewhere herein.
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:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------
1997 1996
------ ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of Sales 61.1 66.1
------ ------
Gross Profit 38.9 33.9
Rental Income, Gross 2.3 1.8
------ ------
41.2 35.7
Selling, General and Administrative Expenses 22.4 17.3
------ ------
Operating Income 18.8 18.4
Interest Expense (2.5) (2.7)
Interest Income 0.3 0.2
Other Income 0.3 0.1
------ ------
Income Before Income Taxes 16.9 16.0
</TABLE>
<PAGE> 17
- 15 -
<TABLE>
<S> <C> <C>
Provision for Income Taxes 0.5 0.7
----- -----
Net Income 16.4% 15.3%
----- -----
</TABLE>
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Net Sales and Gross Profit
Net sales increased by HK$41.3 million, or 20%, to HK$248.2 million in fiscal
1997 from HK$206.9 million in the prior year. The increase in net sales was
attributable to the implementation of the Company's plan to alter its sales mix
with an emphasis on increasing sales of higher margin cultured pearls. Saltwater
cultured pearls, including Chinese cultured pearls, Japanese cultured pearls,
Tahitian pearls and South Sea pearls, represented 71.7% of net sales in fiscal
1997 as compared to 55.9% of net sales in the prior year.
Gross profits increased by HK$26.4 million, or 37.7%, to HK$96.4 million for
fiscal 1997 compared to HK$70.0 million for the prior year. As a percentage of
sales, gross profits increased from 33.9% to 38.9%. The increase in gross
profits and gross profit margins resulted from the overall increase in sales and
an increase in the percentage of higher margin saltwater cultured pearls.
Rental Income
Gross rental income increased by HK$1.8 million, or 47.4%, to HK$5.6 million for
fiscal 1997 compared to HK$3.8 million for the prior year. The increase in gross
rental income was attributable to an increase in occupancy rate from 71.4% to
84.2% in the Man Sang Industrial City facility located in the PRC.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses were HK$55.5 million, consisting of HK$52.2 million attributable
to pearl operations and HK$3.3 million attributable to real estate operations,
for fiscal 1997, an increase of approximately HK$19.7 million, or 55.0%, from
HK$35.8 million, consisting of HK$33.6 million attributable to pearl operations
and HK$2.2 million attributable to real estate operations, during 1996. The
increase in SG&A was primarily due to increased marketing expenses associated
with the higher sales volume, including exhibition expenses and advertising and
promotion expenses for trade shows, increased salaries attributable to hiring of
additional staff to support the expanded scope of operations, increases in
management salaries and the expenses associated with relocation of the Company's
executive offices. Impact of inflation also increased certain operating expenses
in the PRC. As a percentage of net sales, SG&A from pearl operations increased
from 16.2% in fiscal 1996 to 21.1% in fiscal 1997, while SG&A from real estate
operations increased from 1.1% in fiscal 1996 to 1.3% in fiscal 1997.
Interest Expenses, Net
Net interest expense increased by HK$0.4 million, or 7.7%, to HK$5.6 million for
fiscal 1997,
<PAGE> 18
- 16 -
from HK$5.2 million for the comparable period in the prior year. The increase in
net interest expense was due principally to an increase in the amount of
borrowings during the period to finance higher inventory holding costs
associated with higher levels of production and sales. The Company's average
borrowing rate decreased to 9.3% per annum for the period as compared to 12.2%
for the prior year.
Income Taxes
Income taxes for fiscal 1997 were HK$1.1 million compared to HK$1.4 million for
the prior year. The reduction in income taxes is attributable to a tax holiday
available to the Company in the PRC. Pursuant to the existing tax laws in the
PRC, the Company's three operating subsidiaries in the PRC, which are located in
the Shenzhen Special Economic Zone, are eligible for an exemption from PRC
income taxes on their processing operations for two years beginning with the
first profit-making year of such operations. Thereafter, for the next three
years profits from such operations are eligible for a 50% exemption from PRC
taxation. In 1995 and 1996, two subsidiaries applied for the full exemption and
the remaining subsidiary will apply for exemption during 1997. The exemptions
applicable to these companies will expire in 1999, 2000 and 2002, respectively.
The exemption does not apply to rental income.
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995
Net Sales and Gross Profit
Net sales increased by HK$48.2 million, or 30.2%, to HK$206.9 million in fiscal
1996 from HK$158.8 million in the prior year. The increase in net sales is
attributable to (i) a 92.2% increase in sales of Chinese cultured pearls, and
(ii) a 132.4% increase in sales of higher priced Japanese and South Sea cultured
pearls.
Gross profits increased by HK$27.9 million, or 66.2%, to HK$70.0 million for
fiscal 1996 compared to HK$42.1 million for the prior year. As a percentage of
sales, gross profits increased from 26.5% to 33.9%. The increase in gross
profits and gross profit margin resulted from the increase in sales and an
increase in the percentage of sales of higher margin cultured pearls.
Rental Income
Gross rental income increased by HK$86,000, or 2.3%, to HK$3.8 million for
fiscal 1996 compared to HK$3.7 million for the prior year. The increase in gross
rental income was attributable to a 2% increase in occupancy rates in 1996 in
the Man Sang Industrial City facility located in the PRC.
Selling, General and Administrative Expenses ("SG&A")
SG&A were HK$35.8 million, consisting of HK$33.6 million attributable to pearl
operations and HK$2.2 million attributable to real estate operations, for fiscal
1996, an increase of approximately HK$14.1 million, or 64.3%, from HK$21.8
million, consisting of HK$19.7
<PAGE> 19
- 17 -
million attributable to pearl operations and HK$2.1 million attributable to real
estate operations, during 1995. The increase in SG&A was primarily due to
increased marketing expenses associated with the higher sales volume, including
hiring additional marketing personnel and a 10% salary increase for all
marketing personnel, combined with an increase in management salaries, expansion
of the Company's executive offices and the impact of inflation which increased
certain operating expenses in PRC. As a percentage of net sales, SG&A from pearl
operations increased from 12.4% in fiscal 1995 to 16.2% in fiscal 1996, while
SG&A from real estate operations decreased from 1.3% in fiscal 1995 to 1.1% in
fiscal 1996.
Interest Expense, Net
Net interest expense increased by HK$2.4 million, or 85.7%, to HK$5.2 million
for fiscal 1996, from HK$2.8 million for the comparable period in the prior
year. The increase in net interest expense is due principally to an increase in
the amount of borrowings during the period to finance inventory holding costs
associated with higher production and sales as well as an increase in the
Company's borrowing rate to an average of 12.2% for the period as compared to
11.4% for the prior year.
Income Taxes
Income taxes for fiscal 1996 were HK$1.4 million as compared to HK$1.5 million
for the prior year. The reduction in income taxes is attributable to a tax
holiday available to the Company in the PRC. Pursuant to the existing tax laws
in the PRC, the Company's two operating subsidiaries in the PRC, which operate
in the Shenzhen Special Economic Zone, are eligible for an exemption from PRC
income taxes on their processing operations for two years beginning with the
first profitable year of such operations. Thereafter, for the next three years
profits from such operations are eligible for a 50% exemption from PRC taxation.
In 1995 and 1996, both subsidiaries applied for the full exemption,
respectively. The exemptions applicable to these companies will expire in 1999
and 2000, respectively. The exemption does not apply to rental income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund accounts receivable and
inventories and, to a lesser extent, to expand its business operations. The
Company historically has financed its working capital requirements through a
combination of internally generated cash and bank borrowings. At March 31, 1997,
the Company had working capital of HK$115.0 million and a cash balance of
HK$16.9 million compared to working capital of HK$43.7 million and a cash
balance of HK$9.6 million at March 31, 1996. The improvement in working capital
was attributable to a combination of (i) cash flows from profitable operations,
and (ii) the receipt of HK$44.1 million of net proceeds from the sale of Series
B Preferred Stock during the year.
Net cash used in operating activities was HK$12.8 million and HK$4.9 million for
fiscal 1997 and fiscal 1996, respectively. Net cash flows from the Company's
operating activities were attributable to the Company's income and changes in
operating assets and liabilities.
<PAGE> 20
- 18 -
Cash flows used in investing activities were HK$26.0 million and HK$1.2 million
for fiscal 1997 and fiscal 1996, respectively. Cash flows used in investing
activities were mainly for the acquisition of a leasehold property and
expenditure on leasehold improvement and furniture and fixture due to office
relocation.
Cash flows provided by financing activities were HK$45.7 million and HK$10.6
million for fiscal 1997 and fiscal 1996, respectively. Cash flows provided by
financing activities were mainly attributable to the receipt of HK$44.1 million
of net proceeds from the sale of Series B Preferred Stock during the year.
Inventories increased by HK$53.6 million to HK$139.5 million at March 31, 1997
from HK$85.9 million at March 31, 1996. The increase in inventories was
attributable to higher purchasing and production to meet increased demand for
the Company's Chinese cultured pearls as a result of a large decrease in the
supply of Japanese cultured pearls, introduction of Tahitian pearls as a new
product line and due to a change in the mix of the inventory to a higher
percentage of more expensive saltwater cultured pearls. Inventories of Chinese
cultured pearls and South Sea pearls increased by HK$32.2 million and HK$21.4
million, respectively, during the year. The increase in inventories was
primarily financed with short-term borrowings and proceeds from the sale of
Series B Preferred Stock.
Accounts receivable increased to HK$47.5 million at March 31, 1997 as compared
to HK$33.8 million at March 31, 1996. The increase in accounts receivable was
attributable to a slightly more favorable credit terms offered to selected
customers. The average turnover of accounts receivable for fiscal 1997 was 70
days as compared to 60 days for fiscal 1996.
Property, plant and equipment increased by HK$23.2 million to HK$32.9 million at
March 31, 1997 from HK$9.7 million at March 31, 1996. The increase was
principally a result of (i) expenditure of HK$4.1 million on leasehold
improvements and HK$1.5 million on furniture and fixture relating to the
relocation of the Company's offices to its current location in August 1996, and
(ii) the acquisition of a leasehold property for HK$18.7 million, which is
provided to the Company's Chairman as residential accommodation.
At March 31, 1997, the Company had available banking facilities totaling
HK$101.1 million with various banks. Such banking facilities include letter of
credit arrangements, overdraft protection and other facilities commonly utilized
in the jewelry business. All such bank facilities bear interest at floating
rates generally based on the bank's prime lending rates and are subject to
annual review. At March 31, 1997, the Company had utilized approximately HK$51.6
million of its credit facilities as compared to HK$53.9 million which had been
utilized at March 31, 1996.
Long-term borrowings increased by HK$9.5 million to HK$10.0 million at March 31,
1997 from HK$0.5 million at March 31, 1996. The increase was mainly attributable
to an increase of an installment loan of HK$10.0 million and a capital lease
obligation of HK$0.3 million for the acquisition of a leasehold property and a
motor vehicle, respectively.
<PAGE> 21
- 19 -
During the fiscal year 1997, the Company issued 6,760 shares of Series B
Preferred Stock raising approximately HK$44.1 million net of offering costs.
During the six months ended September 30, 1996, all such issued Series B
Preferred Stock was converted to Common Stock.
Historically, currency fluctuations have had little, if any, impact on the
Company, and the Company does not believe that they will have any significant
impact in the future. However, in the event any currency fluctuation becomes
material, the Company would consider engaging in hedging transactions in order
to minimize risk.
SEASONALITY
The pearl business is highly seasonal, with the highest sales usually occurring
during the months of March, June and September (due to major international
jewelry trade shows held in Hong Kong in these months). Accordingly, the results
of any interim period are not necessarily indicative of the results that might
be expected during a full fiscal year.
The following table sets forth the Company's unaudited net sales for the fiscal
years indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-------------------------------------
1997 1996
---- ----
HK$'000 % HK$'000 %
------- - ------- -
<S> <C> <C> <C> <C>
First Quarter 55,847 22.5 44,177 21.4
Second Quarter 63,403 25.5 71,015 34.3
Third Quarter 56,820 22.9 42,894 20.7
Fourth Quarter 72,170 29.1 48,838 23.6
------- ----- ------- -----
Total 248,240 100.0 206,924 100.0
------- ----- ------- -----
</TABLE>
INFLATION
The PRC economy has experienced periods of strong growth and high inflation in
recent years. While certain costs of operating in the PRC have increased as a
result of such inflation, inflation historically has not had a material effect
on the Company's result of operations. When the price of pearls increases, the
cost historically has been passed on to the customers. Furthermore, because the
Company does not have either long-term supply contracts or long-term contracts
with customers, prices are quoted based on the prevailing prices for pearls or
pearl products. Accordingly, the Company does not believe inflation will have a
material adverse effect on its future operations.
<PAGE> 22
- 20 -
ITEM 7. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................................. F-1
Consolidated Statements of Income for the years ended March 31, 1997,
1996 and 1995............................................................................. F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996................................. F-3
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1997, 1996 and 1995............................................................ F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1997
1996 and 1995............................................................................. F-6
Notes to Consolidated Financial Statements................................................ F-8
</TABLE>
<PAGE> 23
[DELOITTE TOUCHE TOHMATSU LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Man Sang Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Man Sang
Holdings, Inc. and its subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 1997, 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 auditing standards generally
accepted in the United States of America. 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 Man Sang
Holdings, Inc. and its subsidiaries as of March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 1997 in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
DELOITTE TOUCHE TOHMATSU
Hong Kong
May 16, 1997
F-1
<PAGE> 24
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Year ended March 31,
1997 1997 1996 1995
---------- ---------- ---------- ----------
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Net sales .................................. 32,114 248,240 206,924 158,754
Cost of sales .............................. 19,634 151,773 136,879 116,606
---------- ---------- ---------- ----------
Gross profit ............................... 12,480 96,467 70,045 42,148
Rental income, gross ....................... 723 5,591 3,785 3,699
---------- ---------- ---------- ----------
13,203 102,058 73,830 45,847
Selling, general and administrative expenses
Pearls ................................... (6,759) (52,247) (33,577) (19,691)
Real estate investment ................... (428) (3,312) (2,259) (2,060)
---------- ---------- ---------- ----------
Operating income ........................... 6,016 46,499 37,994 24,096
Interest expense ........................... (818) (6,320) (5,651) (3,085)
Interest income ............................ 96 744 434 270
Other income ............................... 109 844 240 --
---------- ---------- ---------- ----------
Income before income taxes ................. 5,403 41,767 33,017 21,281
Provision for income taxes (note 3) ........ 146 1,132 1,434 1,463
---------- ---------- ---------- ----------
Net income ................................. 5,257 40,635 31,583 19,818
========== ========== ========== ==========
Earnings per share of common stock ......... $ 1.40 $ 10.79 $ 11.23 $ 7.21
========== ========== ========== ==========
Weighted average number of shares of
common stock outstanding ................. 3,766,454 3,766,454 2,812,500 2,750,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 25
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31,
----------------------------
1997 1997 1996
------ ------- -------
US$ HK$ HK$
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................... 2,190 16,928 9,602
Accounts receivable, net of allowance
for doubtful accounts of HK$1,000 in 1997 and
HK$567 in 1996 .............................. 6,146 47,505 33,809
Advances to related parties (note 11) ......... -- -- 50
Inventories (note 4) .......................... 18,055 139,563 85,941
Prepaid expenses .............................. 175 1,357 1,194
Other current assets .......................... 491 3,795 6,749
Income taxes receivable ....................... 56 437 --
------ ------- -------
Total current assets ........................ 27,113 209,585 137,345
Property, plant and equipment, net
(note 5) ...................................... 4,251 32,862 9,697
Real estate investment, net (note 6) ............ 3,367 26,028 26,199
------ ------- -------
Total assets .................................... 34,731 268,475 173,241
====== ======= =======
</TABLE>
F-3
<PAGE> 26
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
(Dollars in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
----------------------------
1997 1997 1996
------ ------- -------
US$ HK$ HK$
<S> <C> <C> <C>
Current liabilities:
Short-term borrowings (note 7) .......................... 6,675 51,596 56,625
Current portion of long-term debt (note 8) .............. 194 1,498 363
Accounts payable ........................................ 3,089 23,882 22,429
Advances from related parties (note 11) ................. -- -- 2,815
Accrued payroll and employee benefits ................... 1,013 7,832 1,248
Other accrued liabilities ............................... 1,213 9,375 10,130
Income taxes payable .................................... 51 395 21
------ ------- -------
Total current liabilities ............................. 12,235 94,578 93,631
------ ------- -------
Long-term debt (note 8) ................................... 1,100 8,502 178
------ ------- -------
Stockholders' equity:
Common stock of par value US$0.001
- authorized 25,000,000 shares in 1997 and
100,000,000 shares in 1996; issued and outstanding,
4,304,862 shares in 1997 and 12,000,000 shares
in 1996 (note 10) ................................. 4 33 93
Series A preferred stock US$0.001 par value
- authorized, issued and outstanding 100,000
shares in 1997 and 1996 (entitled in liquidation
to US$2,500 (HK$19,325)) .......................... -- 1 1
Series B convertible preferred stock US$0.001
par value
- authorized 100,000 shares; 6,760 shares issued and
converted into 5,219,448 shares of common stock
and no shares outstanding in 1997 and unissued in
1996 (note 10) .................................. -- -- --
Additional paid-in capital .............................. 5,958 46,059 1,907
Retained earnings ....................................... 15,245 117,840 77,205
Cumulative translation adjustments ...................... 189 1,462 226
------ ------- -------
Total stockholder's equity ................................ 21,396 165,395 79,432
------ ------- -------
Total liabilities and stockholders' equity ................ 34,731 268,475 173,241
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 27
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Series A
Common stock preferred stock
--------------------------- -------------------------
Shares Amount Shares Amount
----------- ------ -------- -------
HK$ HK$
<S> <C> <C> <C> <C>
Balance at March 31, 1994 .... 10,000 77 -- --
Translation adjustment ....... -- -- -- --
Net income ................... -- -- -- --
----------- ---- -------- -------
Balance at March 31, 1995 .... 10,000 77 -- --
Share exchange (note 1) ...... (10,000) -- -- --
Reverse split (note 1) ....... 1,000,000 -- -- --
Issuance of common stock
of US$0.001 par value and
Series A preferred stock
(note 1) ................... 11,000,000 16 100,000 1
Translation adjustment ....... -- -- -- --
Net income ................... -- -- -- --
----------- ---- -------- -------
Balance at March 31, 1996 .... 12,000,000 93 100,000 1
Issuance of Series B preferred
stock of US$0.001 par
value ...................... -- -- -- --
Conversion of Series B
preferred stock to common
stock ...................... 5,219,448 40 -- --
Reverse split (note 10) ...... (12,914,586) (100) -- --
Translation adjustment ....... -- -- -- --
Net income ................... -- -- -- --
----------- ---- -------- -------
Balance at March 31, 1997 .... 4,304,862 33 100,000 1
----------- ---- -------- -------
US$4 --
==== =======
</TABLE>
<TABLE>
<CAPTION>
Series B Total
preferred stock Additional Cumulative stock-
------------------------- paid-in Retained translation holders'
Shares Amount capital earnings adjustments equity
------- ------- ---------- --------- ----------- ---------
HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 .... -- -- 1,924 25,804 (1,907) 25,898
Translation adjustment ....... -- -- -- -- 1,624 1,624
Net income ................... -- -- -- 19,818 -- 19,818
------- ------- -------- --------- ------- ---------
Balance at March 31, 1995 .... -- -- 1,924 45,622 (283) 47,340
Share exchange (note 1) ...... -- -- -- -- -- --
Reverse split (note 1) ....... -- -- -- -- -- --
Issuance of common stock
of US$0.001 par value and
Series A preferred stock
(note 1) ................... -- -- (17) -- -- --
Translation adjustment ....... -- -- -- -- 509 509
Net income ................... -- -- -- 31,583 -- 31,583
------- ------- -------- --------- ------- ---------
Balance at March 31, 1996 .... -- -- 1,907 77,205 226 79,432
Issuance of Series B preferred
stock of US$0.001 par
value ...................... 6,760 -- 44,092 -- -- 44,092
Conversion of Series B
preferred stock to common
stock ...................... (6,760) -- (40) -- -- --
Reverse split (note 10) ...... -- -- 100 -- -- --
Translation adjustment ....... -- -- -- -- 1,236 1,236
Net income ................... -- -- -- 40,635 -- 40,635
------- ------- -------- --------- ------- ---------
Balance at March 31, 1997 .... -- -- 46,059 117,840 1,462 165,395
------- ------- -------- --------- ------- ---------
-- US$5,958 US$15,245 US$189 US$21,396
======= ======== ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 28
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------
1997 1997 1996 1995
------- -------- -------- -------
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Cash flow from operating activities
Net income ................................... 5,257 40,635 31,583 19,818
Adjustments to reconcile net income to net
cash used in operating activities:
Bad debt provision ......................... 129 1,000 575 261
Depreciation and amortization .............. 402 3,110 3,247 2,746
Loss on sale of property, plant and
equipment ................................ 58 450 54 --
Changes in operating assets and liabilities:
Accounts receivable ...................... (1,901) (14,694) (5,956) (10,324)
Inventories .............................. (6,861) (53,039) (5,495) (35,393)
Prepaid expenses ......................... (21) (163) (898) 35
Other current assets ..................... 381 2,943 (4,428) (1,099)
Income taxes receivable .................. (56) (437) 583 (583)
Accounts payable ......................... 157 1,212 (29,082) 9,370
Accrued payroll and employee benefits .... 851 6,580 531 304
Other accrued liabilities ................ (105) (814) 4,627 2,777
Income taxes payable ..................... 48 374 (250) (4,259)
------- -------- -------- -------
Net cash used in operating activities ........ (1,661) (12,843) (4,909) (16,347)
------- -------- -------- -------
Cash flow from investing activities
Purchase of property, plant and equipment .... (3,367) (26,030) (1,381) (7,354)
Expenditure on real estate investment ........ -- -- (83) (221)
Proceeds from sale of property, plant
and equipment .............................. -- -- 234 --
------- -------- -------- -------
Net cash used in investing activities ........ (3,367) (26,030) (1,230) (7,575)
------- -------- -------- -------
Cash flow from financing activities
Increase in long-term debt ................... 1,332 10,300 -- --
Repayment of long-term debt .................. (109) (841) (529) (482)
Increase in short-term borrowings ............ 19,473 150,530 109,166 29,688
Repayment of short-term borrowings ........... (20,010) (154,681) (97,006) (11,768)
Increase in bank overdrafts .................. 54,652 422,459 269,323 15,537
Repayment of bank overdrafts ................. (54,779) (423,442) (270,246) (12,950)
Advances from related parties ................ 18 139 31,058 --
Repayments to related parties ................ (376) (2,904) (31,176) (1,996)
Net proceed from issuance of convertible
preferred stock ............................ 5,704 44,092 -- --
------- -------- -------- -------
Net cash provided by financing activities .... 5,905 45,652 10,590 18,029
------- -------- -------- -------
</TABLE>
F-6
<PAGE> 29
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------
1997 1997 1996 1995
----- ------ ----- ------
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents ..................................... 877 6,779 4,451 (5,893)
Cash and cash equivalents at beginning
of period ....................................... 1,242 9,602 4,783 9,045
Exchange adjustments .............................. 71 547 368 1,631
----- ------ ----- ------
Cash and cash equivalents at end of period ........ 2,190 16,928 9,602 4,783
===== ====== ===== ======
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest and finance charges .................... 877 6,780 5,651 3,703
===== ====== ===== ======
Income taxes .................................... 154 1,195 1,098 6,305
===== ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 30
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
Man Sang Holdings, Inc. (the "Company") was incorporated in the State of
Nevada, the United States of America on November 14, 1986. On January 8,
1996, the outstanding shares of common stock of the Company of 14,080,650
shares were reduced to 1,000,000 shares by a reverse split on a 14.08065
for 1 basis. On the same date, the Company undertook a reorganization (the
"Reorganization") pursuant to which 11,000,000 shares of common stock and
100,000 shares of Series A preferred stock were issued in exchange for the
entire outstanding 10,000 ordinary shares of Man Sang International
(B.V.I.) Limited, a British Virgin Islands corporation.
The exchange of shares has been accounted for as reverse acquisition and
the Company, as the continuing legal entity, is assumed to be the
acquiree. The accompanying financial statements include the consolidated
results of operations and financial position of Man Sang Holdings, Inc.
and its subsidiaries for all periods presented. Prior to the
Reorganization the financial information is represented by Man Sang
International (B.V.I.) Limited and its subsidiaries.
The principal activities of the Company comprise the processing and sale
of fresh water and cultured pearls. The selling and administrative
activities are performed in Hong Kong and the processing activities are
conducted by subsidiaries operating in the People's Republic of China
("China"). The Company also derives rental income from real estate located
at its pearl processing facility in China and from an office in Hong Kong.
The financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of
America ("U.S. GAAP"), which differ from those used in the statutory
accounts of its subsidiaries. The principal adjustments made by the
Company to conform the statutory accounts of the subsidiaries to U.S. GAAP
relate to the amortization of property held for real estate investment,
which is not amortized for local statutory reporting. At March 31, 1997,
there was no material difference between the retained earnings computed
under US GAAP and the retained earnings available for distribution
prepared in accordance with the accounting principles used in the
preparation of the statutory accounts of the subsidiaries.
F-8
<PAGE> 31
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements
include the assets, liabilities, revenues and expenses of all its
subsidiaries. All material intra-group transactions and balances have been
eliminated.
Cash and cash equivalents - Cash and cash equivalents include cash on
hand, demand deposits, interest bearing savings accounts, and time
certificates of deposit with an original maturity of three months or less.
Inventories - Inventories are stated at the lower of cost determined by
the weighted average method, or market. Finished goods inventories consist
of raw materials, direct labour and overhead associated with the
processing of pearls.
Property, plant and equipment - Property, plant and equipment is stated at
cost. Depreciation and amortization are provided on the straight-line
method based on the estimated useful lives of the assets detailed as
follows:
<TABLE>
<S> <C>
Leasehold land and buildings 50 years, or less if the lease period
is shorter
Plant and machinery 4 years
Furniture and equipment 4 years
Motor vehicles 4 years
</TABLE>
Construction in progress is stated at cost which comprises land cost and
the related construction costs. Borrowing costs incurred in connection
with the construction of the property are capitalized until the
construction of the property is completed. Interest capitalized was nil in
1997 and 1996, and HK$617 in 1995. No depreciation is provided until the
construction is completed.
Real estate investment - Leasehold land and buildings held for investment
is 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 lease involved up to a
maximum of 50 years.
Revenue recognition - The Company recognizes revenue at the time products
are shipped to customers. 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 at enacted statutory
rates for temporary differences resulting from differences between the
book and tax bases of assets and liabilities. During the periods presented
there were no significant temporary differences. The Company does not
provide United States federal income taxes on undistributed earnings of
foreign subsidiaries as such earnings are intended to be permanently
reinvested in those operations.
F-9
<PAGE> 32
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Foreign currency translation - Assets and liabilities of foreign
subsidiaries are translated 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.
Aggregate net foreign currency gains or losses were immaterial for all
periods.
Earnings per share - Earnings per share is calculated on the basis of
2,750,000 shares of common stock issued in the reverse acquisition for
1995, 2,812,500 weighted average number of common stock in issue in 1996
and 3,766,454 weighted average number of common stock in issue in 1997.
Earnings per common share data has been retroactively restated to give
effect to the 1-for-4 reverse split in 1997.
Employee benefits - The Company does not provide for any retirement or
postretirement benefits as such benefits, if any, are not significant.
Translation into United States Dollars - 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 US dollars are for convenience only and have been
made at the rate of HK$7.73 to US$1, the approximate free rate of exchange
at March 31, 1997. Such translations should not be construed as
representations that the Hong Kong dollar amounts could be converted into
US dollars, at that rate or any other rate.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Reclassifications - Certain reclassifications have been made to prior
period amounts to conform with the current year presentation.
F-10
<PAGE> 33
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
3. INCOME TAXES
Income is subject to taxation in the various countries in which the
Company and its subsidiaries operate.
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996 1995
------- ------- -------
HK$ HK$ HK$
<S> <C> <C> <C>
Hong Kong.................................... (1,333) 2,870 8,755
China........................................ 48,694 30,147 12,526
Corporate expenses, net...................... (5,594) -- --
------- ------- -------
41,767 33,017 21,281
======= ======= =======
</TABLE>
As a consequence of the Reorganization on January 8, 1996, certain
activities conducted by the Company's subsidiaries may result in current
income recognition, for U.S. tax purposes, by the Company even though no
actual distribution is received by the Company from the subsidiaries.
However, such income, when distributed, would generally be considered
previously taxed income to the Company and thus would not be subject to
U.S. federal income tax again.
Hong Kong companies are subject to Hong Kong taxation on their activities
conducted in Hong Kong. Under the current Hong Kong laws, dividends and
capital gains arising from the realization of investments are not subject
to income taxes and no withholding tax is imposed on payments of dividends
by the Hong Kong incorporated subsidiaries to the Company.
The Company has three subsidiaries which are incorporated in China and
operate in the special economic zone of Shenzhen. These companies are
subject to Chinese 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 Chinese 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. Two subsidiaries have applied for the
full exemption and the other subsidiary will apply for exemption during
1997. The exemptions applicable to these companies will expire in 1999,
2000 and 2002, respectively. These exemptions do not apply to rental
income.
F-11
<PAGE> 34
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
3. INCOME TAXES - continued
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996 1995
------- ------- -------
HK$ HK$ HK$
<S> <C> <C> <C>
United States................................ 444 195 --
Foreign subsidiaries operating in:
Hong Kong.................................. 529 1,197 1,223
China...................................... 159 42 240
------- ------- -------
1,132 1,434 1,463
======= ======= =======
</TABLE>
Had the tax holidays and concessions detailed above not been available,
the tax charge would have been increased by HK$9,354 in 1997, HK$5,412 in
1996 and HK$2,398 in 1995.
A reconciliation between the provision for income taxes computed by
applying the United States statutory tax rate to income before taxes and
the actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996 1995
------- ------- ------
HK$ HK$ HK$
<S> <C> <C> <C>
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 ...... 14,201 11,226 7,236
International rate difference ....................... (469) (1,225) (278)
Overprovision in prior years ........................ (117) -- --
Tax attributable to income not subject to taxation .. (12,483) (8,567) (5,516)
Other ............................................... -- -- 21
------- ------- ------
Income tax provision ................................ 1,132 1,434 1,463
======= ======= ======
</TABLE>
U.S. deferred tax liabilities have not been provided on approximately
HK$159,000 in undistributed earnings of foreign subsidiaries because the
Company intends to reinvest those earnings permanently. If such earnings
were paid as dividends to the Company in a single distribution, the
estimated U.S. income tax, net of foreign tax credits, if allowable, would
be approximately HK$47,000.
F-12
<PAGE> 35
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
4. INVENTORIES
Inventories by major categories are summarized as follows:
<TABLE>
<CAPTION>
March 31,
1997 1996
------- -------
HK$ HK$
<S> <C> <C>
Raw materials......................................... 12,432 13,615
Work in progress...................................... 39,531 8,080
Finished goods........................................ 87,600 64,246
------- -------
139,563 85,941
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
1997 1996
HK$ HK$
------- -------
<S> <C> <C>
Leasehold land and buildings.......................... 31,222 10,076
Plant and machinery .................................. 2,630 2,665
Furniture and equipment............................... 3,913 2,635
Motor vehicles........................................ 3,321 2,487
Less: accumulated depreciation........................ (8,224) (8,166)
------- -------
Net book value........................................ 32,862 9,697
======= =======
</TABLE>
F-13
<PAGE> 36
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
5. PROPERTY, PLANT AND EQUIPMENT - continued
Included in property, plant and equipment are assets acquired under
capital leases with the following net book values:
<TABLE>
<CAPTION>
March 31,
1997 1996
------- -------
HK$ HK$
<S> <C> <C>
At cost:
Furniture and equipment............................... -- 17
Motor vehicles........................................ 360 1,142
------- -------
360 1,159
Less: accumulated depreciation........................ 45 1,151
------- -------
315 8
======= =======
</TABLE>
Amortization of capital lease assets, which is included in depreciation
expense in the accompanying consolidated statements of income, was HK$49
in 1997, HK$289 in 1996 and HK$290 in 1995.
6. REAL ESTATE INVESTMENT
<TABLE>
<CAPTION>
March 31,
1997 1996
------- -------
HK$ HK$
<S> <C> <C>
At cost:
Leasehold land and buildings.......................... 28,009 27,571
Less: accumulated depreciation........................ (1,981) (1,372)
------- -------
26,028 26,199
======= =======
</TABLE>
Leasehold land and buildings principally represent the Company's interest
in an industrial complex known as Man Sang Industrial City located in Gong
Ming Zhen, Shenzhen, the People's Republic of China. 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 leased to unaffiliated third
parties under cancellable operating lease agreements. Rental income
relating to such cancellable operating leases is included in gross rental
income in the statements of income and amounted to HK$5,591 in 1997,
HK$3,785 in 1996 and HK$3,699 in 1995.
F-14
<PAGE> 37
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
7. SHORT-TERM BORROWINGS
Short-term borrowings comprise:
<TABLE>
<CAPTION>
March 31,
1997 1996
------- -------
HK$ HK$
<S> <C> <C>
Bank borrowings:
Import bank loans................................... 22,284 16,510
Bank overdrafts..................................... 13,632 14,615
Other bank loans.................................... 15,680 22,800
------- -------
Total bank borrowings............................... 51,596 53,925
Other borrowings...................................... - 2,700
------- -------
51,596 56,625
======= =======
Weighted average interest rate on
borrowings at end of period......................... 9.3% 12.2%
======= =======
At end of period:
Bank credit facilities................................ 101,145 57,400
Utilized ............................................. 51,596 53,925
------- -------
Bank credit facilities available...................... 49,549 3,475
======= =======
</TABLE>
Interest rates are generally based on the banks' prime lending rates and
the credit lines are normally subject to annual review. There are no
significant covenants or other financial restrictions relating to the
Company's short-term borrowings.
At March 31, 1997, leasehold land and buildings with a net book value of
HK$21,110, real estate investments with a net book value of HK$12,090 and
cash of HK$9,060 were pledged as collateral for the above facilities and
bank loan described in note 8. There is no restriction on the use of the
assets pledged for such facilities and bank loans. All bank credit
facilities have been guaranteed, at no cost, by related parties, as
described in note 11. These guarantees continue until released by the
banks or on repayment of the amounts drawn under the facilities.
Other borrowings were from unrelated individuals. These borrowings which
were unsecured were repaid during the year ended March 31, 1997, at March
31, 1996 the weighted average interest rate on these borrowings was 17.3%
per annum.
F-15
<PAGE> 38
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
1997 1996
------ ----
HK$ HK$
<S> <C> <C>
Long-term debt consists of:
Bank loan bearing interest at Hong Kong Prime rate
(8.75% at March 31, 1997) plus 1.25%, repayable by
monthly instalments of HK$22 through November 1997 .... 154 392
Bank loan bearing interest at Hong Kong Inter Bank Offer
Rate (5.75% at March 31, 1997) plus 2.5%, repayable by
monthly instalments of HK$104 through November 2004 .. 9,583 --
Capital lease obligations bearing interest at 7% to 14.5%
per annum ............................................. 263 149
------ ---
Total ................................................... 10,000 541
Current portion of long-term debt ....................... 1,498 363
------ ---
Long-term debt, less current portion .................... 8,502 178
====== ===
</TABLE>
Maturities of long-term debt as of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
HK$
<S> <C>
Year ending March 31,
1998................................................................ 1,498
1999................................................................ 1,354
2000................................................................ 1,315
2001................................................................ 1,250
2002................................................................ 1,250
After 2002.......................................................... 3,333
-------
10,000
=======
</TABLE>
There are no significant covenants or financial restrictions relating to
the Company's long-term debt.
Details of assets pledged by the Company and guarantees given by related
parties as collateral for the above bank loans are described in note 7.
F-16
<PAGE> 39
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
9. COMMITMENTS AND CONTINGENCIES
The Company leases premises under various operating leases which do not
contain any escalation clause and one of the leases contains a renewal
option. Rental expense under operating leases was HK$3,413 in 1997,
HK$2,739 in 1996 and HK$2,344 in 1995.
As at March 31, 1997, the Company and its subsidiaries were obligated
under capital leases and non-cancellable operating leases requiring
minimum rentals as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
HK$ HK$
<S> <C> <C>
Year ending March 31,
1998................................................... 120 4,191
1999................................................... 120 4,001
2000................................................... 70 1,000
------- -------
Total minimum lease payments............................. 310 9,192
=======
Less: amount representing interest....................... 47
-------
Present value of minimum lease payments.................. 263
=======
</TABLE>
10. CAPITAL STOCK
The Company's capital stock consists of common stock and Series A
preferred stock and Series B convertible preferred stock.
Pursuant to a resolution of the Board of Directors on October 2, 1996
which authorized a one-for-four reverse split on common stock effective
October 10, 1996, the number of authorized shares of common stock was
decreased to 25,000,000 shares and the outstanding shares of common stock
were decreased to 4,304,862. The par value of each share of common stock
remained at $0.001 per share.
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 (50%) 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.
F-17
<PAGE> 40
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
10. CAPITAL STOCK - continued
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 are convertible into common stock commencing
on or after 45 days following the sale of such shares. Each Series B
preferred shares is convertible into the number of shares of common stock
determined by dividing US$1 by an amount equal to the lesser of (1) the
market price of the common stock on the closing date of the sale of such
shares or (2) 70% of the average closing bid price of the common stock for
the five trading days preceding the conversion. The right of the holders
of Series B preferred shares to convert such shares into common stock
shall expire on December 31, 1997.
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.
During the year, the Company sold 6,760 shares of Series B preferred stock
pursuant to an offering for sale to certain non-residents of the United
States under Regulation S of the Securities Act of 1933, representing
gross proceeds of US$6,760 (approximately HK$52,255). All of the shares of
Series B preferred stock were subsequently converted into 5,219,448 shares
of common stock before the reverse split was effective on October 10,
1996. At March 31, 1997, no shares of Series B preferred stock were
outstanding.
F-18
<PAGE> 41
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
11. RELATED PARTY TRANSACTIONS
(a) During the year ended March 31, 1996, the Company advanced amounts
to, and borrowed amounts from, directors Mr. T.P. Cheng and Mr. C.H.
Cheng, who were also the beneficial controlling stockholders of the
Company, and companies in which Mr. C.H. Cheng is a stockholder. All
balances were made on an interest-free basis. The following table
summarizes the balances between the Company, the directors and
companies owned by the directors:
<TABLE>
<CAPTION>
March 31,
1997 1996
------- -------
HK$ HK$
<S> <C> <C>
Advances to affiliated companies................ -- 50
======= =======
Advances from:
Mr. C.H. Cheng................................ -- 2,666
Affiliated companies.......................... -- 149
------- -------
Total advances from related parties............. -- 2,815
======= =======
</TABLE>
All balances were fully settled on May 30, 1996.
(b) The Company's credit facilities with banks have been guaranteed by
the directors who have issued unlimited joint and several guarantees
to secure all the bank facilities set out in note 7. No charges have
been made in respect of these guarantees.
(c) During the periods presented, a leasehold property was provided free
of charge to Mr. C.H. Cheng for his residential use.
F-19
<PAGE> 42
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
12. STOCK OPTION PLAN
In October of 1996, the Company approved the establishment of the 1996
Stock Option Plan (the Plan), under which stock options awards may be made
to employees, directors and consultants of the Company. The Plan will be
administered by a Compensation Committee to be appointed by the directors
with the advice and recommendations of senior management and will be
comprised solely of non-employee directors 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 will be
1,000,000 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).
No options have been granted under the Plan.
F-20
<PAGE> 43
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
13. 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 the year ended
March 31, 1996, the Company had sales of pearls representing 11.4% of net
sales to KJM Company Limited. In no other 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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Percentage of
accounts receivable
March 31,
1997 1996
----- -----
<S> <C> <C>
Five largest receivable balances..................... 48.15% 63.32%
</TABLE>
The Company has not experienced any significant difficulty in collecting
its accounts receivable in the past and is not aware of any financial
difficulties being experienced by its major customers.
Bad debt provisions were HK$1,000 in 1997, HK$575 in 1996 and HK$261 in
1995. The deductions from the allowance for doubtful accounts which
represented write-offs of bad debts were HK$567 in 1997, HK$64 in 1996 and
HK$205 in 1995.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No.107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. The estimates presented herein are
not necessarily indicative of amounts that the Company could realize in a
current market exchange.
The carrying amounts of cash, accounts receivable, accounts payable,
short-term borrowings and long-term debt are reasonable estimates of their
fair value. The interest rates on the Company's short-term borrowings and
long-term debt approximate those which would have been available at March
31, 1997 for debt of the same remaining maturities.
All the financial instruments are for trade purposes.
F-21
<PAGE> 44
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
15. SEGMENT INFORMATION
Contributions of the major activities, profitability information and asset
information are summarized below:
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996 1995
------- ------- -------
HK$ HK$ HK$
<S> <C> <C> <C>
Net revenues
Pearls..................................... 248,240 206,924 158,754
Real estate investment..................... 5,591 3,785 3,699
------- ------- -------
253,831 210,709 162,453
======= ======= =======
Operating income
Pearls..................................... 44,220 36,468 22,457
Real estate investment..................... 2,279 1,526 1,639
------- ------- -------
46,499 37,994 24,096
======= ======= =======
Identifiable assets
Pearls..................................... 215,864 143,161 126,029
Real estate investment..................... 26,276 26,915 27,710
Corporate assets........................... 26,335 3,165 2,987
------- ------- -------
268,475 173,241 156,726
======= ======= =======
Depreciation and amortization
Pearls..................................... 1,725 1,962 1,507
Real estate investment..................... 1,196 1,227 1,181
Corporate assets........................... 189 58 58
------- ------- -------
3,110 3,247 2,746
======= ======= =======
Capital expenditure
Pearls..................................... 7,373 1,381 2,716
Real estate investment..................... - 83 4,572
Corporate assets........................... 18,657 - 287
------- ------- -------
26,030 1,464 7,575
======= ======= =======
</TABLE>
F-22
<PAGE> 45
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
15. SEGMENT INFORMATION - continued
All of the Company's sales of pearls are coordinated through the Hong Kong
subsidiaries and an analysis by destination is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1997 1996 1995
------- ------- -------
HK$ HK$ HK$
<S> <C> <C> <C>
Net sales:
Hong Kong.................................. 59,232 47,507 33,721
Export:
Asian countries excluding Hong Kong........ 62,164 61,831 41,746
North America.............................. 39,556 23,448 24,254
Europe..................................... 74,964 60,035 46,047
Others..................................... 12,324 14,103 12,986
------- ------- -------
248,240 206,924 158,754
======= ======= =======
</TABLE>
The Company operates in only one geographic area. The location of the
Company's identifiable assets is as follows:
<TABLE>
<CAPTION>
March 31,
1997 1996 1995
------- ------- --------
HK$ HK$ HK$
<S> <C> <C> <C>
China........................................ 91,798 71,135 71,923
Hong Kong.................................... 176,677 102,106 84,803
------- ------- -------
268,475 173,241 156,726
======= ======= =======
</TABLE>
16. SUBSEQUENT EVENT
In May 1997, the Company sold a leasehold property at a consideration of
HK$11,000 resulting in a gain on sale of HK$8,416.
F-23
<PAGE> 46
- 21 -
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Following the Exchange, on March 21, 1996, the Company's Board of Directors
selected Deloitte Touche Tohmatsu to serve as its new independent accountants
and dismissed Mantyla, McReynolds & Associates, Certified Public Accountants, of
Salt Lake City, Utah which previously served as the independent accountants for
the Company.
Mantyla, McReynolds & Associates' report on the financial statements of the
Company for the fiscal year ended December 31, 1995 and through March 21, 1996
contains no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles. In connection
with its audits for fiscal 1995 and through March 21, 1996, there were no
disagreements with Mantyla, McReynolds & Associates on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to the satisfaction of Mantyla,
McReynolds & Associates would have caused them to make reference thereto in its
reports on the financial statements for such periods.
Prior to the Exchange, Deloitte Touche Tohmatsu served as the principal
accounting firm for Man Sang International (B.V.I.) Limited with respect to the
financial statements of such company for fiscal 1995 and through March 21, 1996.
The information described above regarding the Company's decision to dismiss
Mantyla, McReynolds & Associates as its independent accountants and select
Deloitte Touche Tohmatsu as its new independent accountants, along with a letter
from Mantyla, McReynolds & Associates stating that it agrees with the above
information regarding the Company's change of accountants, was fully disclosed
in a Form 8-K filed with the SEC on March 28, 1996.
<PAGE> 47
- 22 -
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of June 1997 the names and ages
of, nature of all positions and offices held by all directors and executive
officers of the Company and the period or periods during which each such
director or executive officer has served in his or her respective positions.
<TABLE>
<CAPTION>
Name Age Position(s) held Term of Office
- ---- --- ---------------- --------------
<S> <C> <C> <C>
CHENG Chung Hing, Ricky 36 President and Chairman
of the Board 1/96 to present
CHENG Tai Po 44 Vice Chairman of the
Board 1/96 to present
SIO Kam Seng, Sam 38 Chief Executive Officer
and Director 1/96 to present
YAN Sau Man, Amy 34 Vice President and
Director 1/96 to present
HUNG Kwok Wing, Sonny 33 Vice President and
Director 11/96 to present
NG Hak Yee, Patrick 35 Chief Financial Officer 4/94 to 3/96
and
3/97 to present
</TABLE>
TERM OF OFFICE
Each of the directors of the Company serves until his or her successor is duly
elected at the next annual meeting of stockholders or until his or her earlier
resignation or removal.
BUSINESS EXPERIENCE
Cheng Chung Hing, Ricky, co-founder of the Man Sang Group, has served as
Chairman of the Board of Directors and President of the Company since January 8,
1996, and of Man Sang International (B.V.I.) Limited since December 1995. Prior
to the Group Reorganization in 1995, he had served as chairman and president of
various companies within the Man Sang Group. Mr.
<PAGE> 48
- 23 -
Cheng has over 15 years experience in the pearl business and is responsible for
overall planning, strategic formulation and business development of the Company.
Cheng Tai Po, co-founder of the Man Sang Group, has served as Vice Chairman of
the Company since January 8, 1996 and of Man Sang International (B.V.I.) Limited
since December 1995. Prior to the Group Reorganization in 1995, he had served as
vice-chairman of various companies within the Man Sang Group. Mr. Cheng has over
12 years experience in the pearl business and is responsible for purchasing and
production of Chinese cultured pearls as well as overall planning, strategic
formulation and business development of the Company.
Sio Kam Seng, Sam, has served as Chief Executive Officer and a Director of the
Company since January 8, 1996 and of Man Sang International (B.V.I.) Limited
since December 1995. Mr. Sio also served as Chief Financial Officer of Man Sang
International (B.V.I.) Limited and then the Company from December 1995 to June
1, 1996. Mr. Sio joined the Man Sang Group in 1995 and has been responsible for
overall planning, strategic formulation, business development and daily
operations. Prior to joining the Man Sang Group, from 1992 to 1995, Mr. Sio
served as Assistant General Manager of Sime Insurance Brokers Group, a publicly
traded Malaysia based insurance brokerage company. From 1989 to 1992, Mr. Sio
served as Area Manager for Hong Kong Bank Insurance Group. Mr. Sio has over 15
years experience in sales, marketing and administrative management and is an
associate of the institute of Administrative Management of the United Kingdom.
Yan Sau Man, Amy, has served as Vice President and a Director of the Company
since January 8, 1996 and of the Man Sang International (B.V.I.) Limited since
December of 1995. Ms. Yan joined the Man Sang Group in 1984 and has been
responsible for overall marketing and sales activities of the Company.
Hung Kwok Wing, Sonny, has served as Vice President and a Director of the
Company since November 1, 1996. Prior to joining the Company, Mr. Hung was
employed as Deputy Manager of Dah Sing Bank from February 1996 to October 1996
and as Branch Manager of the Hong Kong Bank from 1991 to February 1996. Mr. Hung
is responsible for formulation and execution of corporate policies and
participates in the development and implementation of corporate planning
programs. Mr. Hung received his bachelor's degree in Finance and Banking from
San Francisco State University and master's degree in Business Administration
from the University of Strathclyde, U.K.
Ng Hak Yee, Patrick, has served as Chief Financial Officer of the Company since
March 7, 1997. He initially joined the Man Sang Group as Controller in April
1994 and served as Chief Financial Officer of Man Sang International (B.V.I.)
Limited from December 1995 to March 1996. From April 1996 to March 1997, Mr. Ng
first joined Termbray Industries International (Holdings) Ltd., a listed company
in Hong Kong, and served as Group Financial Controller, and then established and
managed an independent accounting firm in which he is still a principal,
although he is no longer involved in the day-to-day operations of the firm. From
April 1993 to March 1994, Mr. Ng was a Financial Controller of Paxar Far East
Limited in Hong Kong. Mr. Ng was an auditor at KPMG Peat Marwick, an
international accounting firm from 1985 to 1991. He is
<PAGE> 49
- 24 -
a certified public accountant, an associate of the Hong Kong Society of
Accountants and also an associate of the Chartered Association of Certified
Accountants.
FAMILY RELATIONSHIPS
Cheng Chung Hing, Ricky and Cheng Tai Po are brothers. Other than the foregoing,
there are no family relationships between the above-named directors and
executive officers of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely on a review of the copies of the forms provided to the Company, or
written representations that no other filing of forms was required, the Company
believes that during the fiscal year ended March 31, 1997, all Section 16(a)
filing requirements applicable to such reporting persons were complied with.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning cash and non-cash
compensation paid or accrued for services in all capacities to the Company
during the three years ended March 31, 1997 of the Company's Chief Executive
Officer and each of its other officers whose compensation exceeded $100,000 (the
"Named Officers") during fiscal year 1997.
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Other Annual
Position Year(1) Salary Bonus Compensation
------------------- ------- ------ ----- ------------
$ $ $ $
<S> <C> <C> <C> <C>
Cheng Chung Hing, Ricky 1997 388,100 323,400 45,650(2)(3)
Chairman of the Board & 1996 194,049 -- 41,000(2)(3)
President 1995 51,726 -- 48,890(2)(3)
Cheng Tai Po 1997 388,100 323,400 --
Vice Chairman 1996 194,049 -- --
1995 43,967 -- --
Sio Kam Seng, Sam 1997 129,366 -- --
1996 55,727 -- --
1995 -- -- --
Yan Sau Man, Amy 1997 124,191 -- --
1996 88,394 -- --
1995 38,173 -- --
</TABLE>
<PAGE> 50
- 25 -
(1) Information is shown for the March 31 fiscal years of the Company and
prior to January 8, 1996, Man Sang International (B.V.I.) Limited,
which employed the Named Officers. Each of the Named Officers began
serving the Company in his or her capacity as indicated in Item 9 -
"Identity of Directors and Officers" on January 8, 1996, the effective
date of the Exchange. See Item 1 - "History of the Company". The
compensation shown for the Name Officers for the fiscal year ended
March 31, 1995 and the period commencing on April 1, 1995 through
January 7, 1996 was paid by Man Sang International (B.V.I.) Limited.
(2) Although the officers receive certain perquisites such as Company
provided life insurance and medical insurance, the value of such
perquisites did not exceed the lesser of $50,000 or 10% of the
officer's salary and bonus.
(3) In addition to the amounts referred to in note (1) above, Cheng Chung
Hing, Ricky is provided the right to use a leasehold property of the
Company at no cost as his personal residence. The estimated fair rental
value of such leasehold property was $45,650. The estimated fair rental
value is based on the "rateable value" assessed by the Rating and
Valuation Department of the Hong Kong Government. According to the Hong
Kong Rating Ordinance (Cap. 116), rateable value is an estimate of the
annual rental of the relevant premises at a designated valuation
reference date. When assessing a rateable value, all factors which
would affect rental value, such as age and size of the premises,
quality of finishes, location, transport facilities, amenities and open
market rents, are considered.
No long-term compensation was paid for any of the principal officers.
EMPLOYMENT AGREEMENTS
The Company has no employment agreements with any of its officers or employees.
The salaries of the Company's principal officers have been fixed for the fiscal
year ending March 31, 1998 as follows:
<TABLE>
<CAPTION>
Name Salary Housing Allowance
- ---- ------- ------------------
$ $
<S> <C> <C>
Cheng Chung Hing, Ricky 388,100 45,650
Cheng Tai Po 388,100 -
Sio Kam Seng, Sam 129,366 -
Yan Sau Man, Amy 129,366 -
Hung Kwok Wing, Sonny 129,366 -
Ng Hak Yee, Patrick 129,366 -
</TABLE>
<PAGE> 51
- 26 -
A discretionary performance bonus may be awarded to each principal officer by
the Board of Directors.
DIRECTOR COMPENSATION
Each non-employee director of the Company is paid a fee of $600 for each Board
of Directors meeting or committee meeting attended. The Company also reimburses
each director for all expenses of attending such meetings.
No additional compensation of any nature is paid to employee directors.
MAN SANG HOLDINGS, INC. 1996 STOCK OPTION PLAN
Man Sang Holdings, Inc. 1996 Stock Option Plan (the "Plan"), which was approved
by the shareholders of the Company on November 15, 1996, provides for the award
of incentive stock options ("ISOs") and non-qualified stock options ("NSOs") to
key employees of the Company or its subsidiaries and NSOs to certain
non-employees of the Company or its subsidiaries.
Administration
The Plan is administered by the compensation committee designated by the Board
of Directors of the Company. The compensation committee determines and
designates the individuals to whom awards under the Plan should be made and the
amount and terms and conditions of the awards. The compensation committee may
adopt and amend rules relating to the administration of the Plan, but only the
Board of Directors may amend or terminate the Plan. The Plan is administered in
accordance with Rule 16b-3 adopted under the Exchange Act.
Eligibility
Awards under the Plan may be made to key employees and directors of the Company
and its subsidiaries, and to nonemployee consultants.
Shares Available
Subject to adjustment as provided in the Plan, a maximum of 1,000,000 shares of
Common Stock are reserved for issuance thereunder. If an option granted under
the Plan expires or is terminated or canceled, the unissued shares subject to
such option are again available under the Plan.
Term
The Plan will continue in effect for a term of ten years from the date on which
the Plan is adopted by the Board.
<PAGE> 52
- 27 -
Stock Option Grants
The compensation committee may grant ISOs and NSOs under the Plan. As of June 1,
1997 no ISO or NSO has been granted under the Plan. With respect to each option
grant, the compensation committee determines the number of shares subject to the
option, the option price, the period of the option, the time or times at which
the option may be exercised and the other terms and conditions of the option.
Change in Capital Structure
The Plan provides that if the outstanding shares of Common Stock or other
securities of the Company, or both, for which the option is then exercisable are
changed or exchanged by declaration of a stock dividend, stock split,
combination of shares or recapitalization, the number and kind of shares of
Common Stock or other securities which are subject to this Plan or subject to
any outstanding options, and the exercise prices, will be adjusted so as to
maintain the proportionate number of shares or other securities without changing
the aggregate exercise price. In the event of a merger or consolidation where
the Company is not a surviving corporation, sale of all of Company's assets or
sale of more than 50% of Company's outstanding shares of Common Stock, the
compensation committee may, at its sole discretion, accelerate the vesting
schedule of the outstanding options.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table is furnished as of June 23, 1997, to indicate beneficial
ownership of shares of the Company's Common Stock by (i) each shareholder of the
Company who is known by the Company to be a beneficial owner of more than 5% of
the Company's Common Stock, (ii) each director, nominee for director and Named
Officer of the Company, individually, and (iii) all officers and directors of
the Company as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
<S> <C> <C>
Cafoong Limited (2)(3)................... 2,750,000 64%
SIO Kam Seng, Sam (3).................... -0- *
YAN Sau Man, Amy (3).................. -0- *
All executive officers and directors
as a group (6 persons).................. 2,750,000 64%
</TABLE>
- ------------------
* Less than 1%
(1) The persons named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned
by them, subject to community property laws, where applicable, and the
information contained in the footnotes to the table.
<PAGE> 53
- 28 -
(2) Cafoong Limited owns directly 1,357,875 shares of Common Stock of the
Company. Cafoong Limited also owns indirectly 1,392,125 shares of
Common Stock of the Company by virtue of holding all issued and
outstanding shares of certain British Virgin Islands companies which
own such shares of Common Stock of the Company. Because Cheng Chung
Hing, Ricky and Cheng Tai Po own 60% and 40%, respectively, of all
issued and outstanding stock, and are directors, of Cafoong Limited,
they may be deemed to be the beneficial owners of the shares of Common
Stock of the Company which are owned, directly or indirectly, by
Cafoong Limited.
(3) Address is 21st Floor, Railway Plaza, 39 Chatham Road South,
Tsimshatsui, Kowloon, Hong Kong.
PREFERRED STOCK
The following table is furnished as of June 23, 1997, to indicate beneficial
ownership of the Company's Series A Preferred Shares by each shareholder of the
Company who is known by the Company to be a beneficial owner of more than 5% of
the Company's Series A Preferred Shares.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
<S> <C> <C>
Cafoong Limited (1).......... 100,000 100.0%
</TABLE>
- ------------------
(1) Cheng Chung Hing, Ricky and CHENG Tai Po own 60% and 40%, respectively,
of all issued and outstanding stock, and are directors, of Cafoong
Limited and, accordingly, are deemed to be the beneficial owners of the
shares of Series A Preferred Stock of the Company owned by Cafoong
Limited.
CHANGES IN CONTROL
To the knowledge of management, there are no present arrangements or pledges of
securities of the Company which may result in a change in control of the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past three years, the Company has loaned funds and received advances
from Cheng Chung Hing, Ricky and Cheng Tai Po, the founders and principal
shareholders of the Company. Advances to Cheng Chung Hing, Ricky totaled $-0- at
March 31, 1997. The maximum amount advanced to Cheng Chung Hing, Ricky during
the past three years was $1,132,000 . Advances to Cheng Tai Po totaled $-0- at
March 31, 1997. The maximum amount advanced to Cheng Tai Po during the past
three years was $1,258,000. All such advances were made on an interest free
basis and without definitive repayment terms.
During the same period, Cheng Chung Hing, Ricky and Cheng Tai Po advanced funds
to the Company on an interest free basis and repayable on demand. Advances from
Cheng Chung Hing,
<PAGE> 54
- 29 -
Ricky totaled $-0- and advances from Cheng Tai Po totaled $-0- at March 31,
1997. The maximum amount owed to Cheng Chung Hing, Ricky and to Cheng Tai Po
during the past three years was $752,000 and -0-, respectively.
Finally, during the past three years, Cheng Chung Hing, Ricky has utilized a
leasehold property of the Company as his personal residence at no cost to Mr.
Cheng. See "Executive Compensation".
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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)
21.1 List of Subsidiaries
- ------------------------------------
(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
<PAGE> 55
- 30 -
(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
FORM 8-K
During the fourth quarter of the Company's fiscal year ended March 31, 1997, no
reports on Form 8-K have been filed.
<PAGE> 56
- 31 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
Date: June 27, 1997 By /s/ Cheng Chung Hing, Ricky
------------------------------
CHENG Chung Hing, Ricky
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Cheng Chung Hing, Ricky President and Chairman of the Board June 27, 1996
- ---------------------------------------- (Principal Executive Officer)
CHENG Chung Hing, Ricky
/s/ Cheng Tai Po Vice Chairman of the Board June 27, 1996
- ----------------------------------------
CHENG Tai Po
/s/ Sio Kam Seng, Sam Chief Executive Officer and Director June 27, 1996
- ----------------------------------------
SIO Kam Seng, Sam
/s/ Yan Sau Man, Amy Vice President and Director June 27, 1996
- ----------------------------------------
YAN Sau Man, Amy
/s/ Hung Kwok Wing, Sonny Vice President and Director June 27, 1996
- ----------------------------------------
HUNG Kwok Wing, Sonny
/s/ Ng Hak Yee, Patrick Chief Financial Officer June 27, 1996
- ---------------------------------------- (Principal Financial and Accounting Officer)
NG Hak Yee, Patrick
</TABLE>
<PAGE> 57
- 32 -
SUPPLEMENTAL INFORMATION 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 during the period covered by this Report; 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 1997, a copy of any such annual
report or proxy materials shall be forwarded to the Commission when it is
forwarded to security holders.
<PAGE> 58
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)
21.1 List of Subsidiaries
- ------------------------------------
(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
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries
MAN SANG HOLDINGS, INC.
Name Jurisdiction
---- ------------
Man Sang International (B.V.I.) Limited British Virgin Islands
Hong Kong Man Sang Investment Limited Hong Kong
Man Sang Jewellery Company Limited Hong Kong
Peking Pearls Company Limited Hong Kong
Man Hing Jewellery Goods (Shenzhen) Co., Ltd. People's Republic of China
Overseas South Pearls Limited Hong Kong
Damei Pearls Jewellery Goods (Shenzhen) Co., Ltd. People's Republic of China
Tangzhu Jewellery Goods (Shenzhen) Co., Ltd. People's Republic of China
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> HONG KONG DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 7.73
<CASH> 16,928,000
<SECURITIES> 0
<RECEIVABLES> 47,505,000
<ALLOWANCES> 1,567,000
<INVENTORY> 139,563,000
<CURRENT-ASSETS> 209,585,000
<PP&E> 32,862,000
<DEPRECIATION> 8,224,000
<TOTAL-ASSETS> 268,475,000
<CURRENT-LIABILITIES> 94,578,000
<BONDS> 8,502,000
0
1,000
<COMMON> 33,000
<OTHER-SE> 165,361,000
<TOTAL-LIABILITY-AND-EQUITY> 268,475,000
<SALES> 248,240,000
<TOTAL-REVENUES> 253,831,000
<CGS> 151,773,000
<TOTAL-COSTS> 55,559,000
<OTHER-EXPENSES> 6,320,000
<LOSS-PROVISION> 1,000,000
<INTEREST-EXPENSE> 6,320,000
<INCOME-PRETAX> 41,767,000
<INCOME-TAX> 1,132,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,635,000
<EPS-PRIMARY> 10.19
<EPS-DILUTED> 9.44
</TABLE>
