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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K/A
AMENDMENT NO. 1
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File No. 33-10639-NY
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MAN SANG HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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NEVADA 87-0539570
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
21st Floor, Railway Plaza, 39 Chatham Road South
Tsimshatsui, Kowloon, Hong Kong
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, Include area code: (852) 2317 5300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes x No
--- ---
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $3,111,920 as of June 1, 1998, based upon the
closing price on the NASD Electronic Bulletin Board reported for such date.
Shares of Common Stock held by each executive officer and director and by each
person who beneficially owns more than 5% of the outstanding Common Stock have
been excluded in that such persons may under certain circumstances be deemed to
be affiliates. This determination of executive officer of affiliate status is
not necessarily a conclusive determination for other purposes.
4,305,960 shares of Common Stock Issued and Outstanding as of June 1, 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-K contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. The following discussion of results of operation, liquidity and
capital resources, derivative instruments, seasonality and inflation should be
read in conjunction with the financial statements and the notes thereto included
elsewhere herein.
OVERVIEW
In fiscal year 1998, the Company increased saltwater cultured pearls, with a
higher profit margin, in its product mix, and increased in marketing efforts in
Europe and North America. Net sales, gross profits and gross profit margin all
increased, although selling, general and administrative expenses also increased
at a slower pace. To improve the long-term stability of supply of saltwater
cultured pearls and to gain a more thorough understanding in the Company's
suppliers, the Company made an investment in a saltwater cultured pearl farm in
the PRC. In addition, the Company acquired new machines to improve quality and
efficiency in the processing of pearls. Finally, the Company's subsidiary, MSIL,
successfully completed a public offering of its shares, and the Group used
proceeds from such offering to develop its core business and to provide working
capital.
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,
1998 1997 1996
---- ---- ----
% % %
<S> <C> <C> <C>
Net sales 100.0 100.0 100.0
Cost of Sales 60.0 61.1 66.1
---- ---- ----
Gross Profit 40.0 38.9 33.9
Rental Income, Gross 2.1 2.3 1.8
--- --- ---
42.1 41.2 35.7
Selling, General and Administrative Expenses 21.9 22.4 17.3
---- ---- ----
Operating Income 20.2 18.8 18.4
Interest Expense (1.4) (2.5) (2.7)
Interest Income 1.3 0.3 0.2
Non-operating Income 8.2 0.3 0.1
--- --- ---
Income Before Income Taxes 28.3 16.9 16.0
Provision for Income Taxes 1.4 0.5 0.7
--- --- ---
Net Income before minority interest 26.9 16.4 15.3
Minority Interests 4.4 - -
--- ---- ----
Net Income 22.5 16.4 15.3
==== ==== ====
</TABLE>
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Net Sales and Gross Profit
Net sales increased by HK$13.9 million, or 5.6%, to HK$262.2 million in fiscal
1998 from HK$248.2 million in the prior year. The increase in net sales was
attributable to the
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implementation of the Company's plan to alter its sales mix with an emphasis on
increasing sales of higher margin cultured pearls. Cultured pearls represented
78.6% of net sales in fiscal 1998 as compared to 71.7% of net sales in the prior
year.
Gross profit increased by HK$8.3 million, or 8.6%, to HK$104.7 million for
fiscal 1998 compared to HK$96.5 million for the prior year. As a percentage of
sales, gross profit increased from 38.9% to 40.0%. The increase in gross profit
and gross profit margins resulted from the overall increase in sales and an
increase in the percentage of higher margin cultured pearls.
Rental Income
Gross rental income decreased by HK$0.1 million, or 2.6%, to HK$5.4 million for
fiscal 1998 compared to HK$5.6 million for the prior year. The insignificant
decrease was due to the increase in gross rental rate together with the decrease
in occupancy rate of the Man Sang Industrial City facility.
Selling, General and Administrative Expenses ("SG & A")
SG & A expenses were HK$57.4 million, consisting of HK$53.8 million attributable
to pearl operations and HK$3.5 million attributable to real estate operations,
for fiscal 1998, an increase of approximately HK$1.8 million, or 3.2%, from
HK$55.6 million, consisting of HK$52.2 million attributable to pearl operations
and HK$3.3 million attributable to real estate operations, during 1997. The
insignificant increase in SG & A was primarily due to effective cost control
exercised during fiscal 1998 in spite of the fact that the marketing and
promotion costs increased by HK$0.8 million or 22.9% to HK$4.3 million from
HK$3.5 million in the prior year. As a percentage of net sales, SG & A from
pearl operations decreased from 21.0% in fiscal 1997 to 20.5% in fiscal 1998,
while SG & A from real estate operation was 1.3% in fiscal 1998, at the same
level as in fiscal 1997.
Interest Income
Interest income for fiscal 1998 increased by HK$2.6 million to HK$3.3 million
from HK$0.7 million in fiscal 1997, principally due to interest income from the
increased working capital raised from MSIL's IPO.
Income In Respect of Subscription Monies Received on Subsidiary's Public
Offering
In MSIL's IPO, each subscriber for shares deposited his or her subscription
money into an escrow account for up to five days before the closing of the
offering (the "Five-Day Period"), which money earned interest. MSIL did not have
any beneficial interest in the funds held in the escrow account over the
Five-Day Period (e.g., MSIL was not allowed to withdraw any funds in the account
during the Five-Day Period). Since interest income is generally defined as
compensation for the use of one's money, interest income earned over the
Five-Day Period should be the subscribers' interest income, not MSIL's.
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Pursuant to an agreement between each subscriber and MSIL (the "Subscription
Agreement"), immediately after the Five-Day Period (i.e., upon the completion of
the offering and allotment of MSIL's shares), however, MSIL received all funds
in the escrow account, less any "unused principal" (i.e., funds deposited for
subscription of MSIL shares that were not allotted to the subscribers).
Therefore, under the Subscription Agreement, the subscribers paid MSIL their
interest income earned over the Five-Day Period as a fee for their opportunity
to purchase MSIL's shares.
Interest Expense
Interest expense decreased by HK$2.6 million, or 41.7%, to HK$3.7 million for
fiscal 1998, from HK$6.3 million for the comparable period in the prior year.
The decrease in interest expense was due principally to (i) increased working
capital arisen from cash flow generated from internal operations, proceeds from
sales of the Leasehold Property, and the new funds raised from the issue of
shares by MSIL, and (ii) decrease in short-term working capital borrowing. The
Company's average borrowing rate increased to 10.25% per annum for fiscal 1998
as compared to 9.3% for the prior year.
Income Taxes
Income taxes and provision therefor for fiscal 1998 increased by HK$2.4 million
to HK$3.5 million, representing a 213.0% increase from the income tax of HK$1.1
million for the same period in 1997. Such significant increase was principally
due to:-
- - increase in operating income arisen from the increase in net sales and
gross profit;
- - a prudent and conservative provision for what the Company considers to
be an unlikely contingency. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operation - Year Ended
March 31, 1998 Compared to Year Ended March 31, 1997 - Income In
Respect Of Subscription Monies Received on Subsidiary's Public
Offering";
- - a PRC subsidiary, which was exempted from PRC income taxes in fiscal
1997, started paying income tax at a rate of approximately 7.5% during
fiscal 1998 under the Income Tax Law of the PRC.
Pursuant to the Income Tax Law of the PRC, the Company's three operating
subsidiaries, namely Man Hing, Damei Pearls and Tangzhu, located in the Shenzhen
Special Economic Zone, are eligible for an exemption from PRC income taxes on
their processing operations for two years starting from the first profitable
year of operation in the calendar year of 1994, 1995 and 1997 respectively and
are entitled to a 50% relief from PRC income tax for the following three years
under the Income Tax Law of the PRC. The exemption applicable to these companies
will expire in 1999, 2000 and 2002 respectively. The exemption does not apply to
rental income.
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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 20.0%, 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. Cultured
pearls represented 71.7% of net sales in fiscal 1997 as compared to 55.9% of net
sales in the prior year.
Gross profit increased by HK$26.4 million, or 37.7%, to HK$96.5 million for
fiscal 1997 compared to HK$70.0 million for the prior year. As a percentage of
sales, gross profit increased from 33.9% to 38.9%. The increase in gross profit
and gross profit margins resulted from the overall increase in sales and an
increase in the percentage of higher margin cultured pearls.
Rental Income
Gross rental income increased by HK$1.8 million, or 47.7%, 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$55.6 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$2.3 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 21.0% in fiscal 1997, while SG & A from real estate
operation increased from 1.1% in 1996 to 1.3% in fiscal 1997.
Interest Expense, net
Net interest expense increased by HK$0.4 million, or 6.9%, to HK$5.6 million for
fiscal 1997, 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 borrowing 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.
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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 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. At March
31, 1998, the Company had working capital of HK$292.3 million and a cash balance
of HK$93.4 million compared to working capital of HK$115.0 million and a cash
balance of HK$16.9 million at March 31, 1997. The current ratio was 12.8 in
fiscal 1998 as compared with that of 2.2 in fiscal 1997. The increase in working
capital and the improvement in liquidity have reduced the Company's need for
short-term borrowing, and are attributable to a combination of the following
reasons:-
(a) net proceeds of approximately HK$123.4 million was raised from MSIL's
IPO;
(b) income of about HK$11.4 million was earned in respect of subscription
monies received on MSIL'S IPO;
(c) proceeds of approximately HK$11.0 million from sales of the Leasehold
Property; and
(d) net cash of HK$24.1 million provided by operating activities. See "Item
8 - Financial Statements - Consolidated Statement of Cash Flows for the
years ended March 31, 1998, 1997 and 1996."
In respect of the use of net proceeds of HK$123.4 million raised from MSIL's IPO
during the period from the date the new funds was raised to March 31, 1998, they
were used as follows:-
(a) approximately HK$15.0 million for the purchase of pearls including
South Sea pearls, Tahitian pearls, Japanese cultured pearls, Chinese
cultured pearls and freshwater pearls, and accessories;
(b) approximately HK$4.7 million for making an investment in a Chinese
cultured pearl farm located in the PRC, as described in "Item 1 -
Business - Business Strategy" above;
(c) approximately HK$2.4 million for expansion of the pearl jewellery
business; and
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(d) the unutilized balance has been placed on short-term bank deposits in
Hong Kong banks and used as working capital.
Net cash provided by and used in operating activities was HK$24.1 million and
HK$12.8 million for fiscal 1998 and fiscal 1997, respectively. Net cash flows
from the Company's operating activities were attributable to the Company's
income and changes in operating assets and liabilities.
Inventories increased by HK$14.9 million to HK$154.5 million at March 31, 1998
and the inventory turns in terms of month increased from 9.0 months in fiscal
1997 to 11.2 months this fiscal. 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 supply of Japanese
cultured pearls and due to expansion of pearls business.
Long-term debt (including current portion of long-term debt) was HK$22.8 million
at March 31, 1998, an increase of HK$12.8 million compared with the prior year.
The increase was attributable to an increase of installment loans for the
acquisition of various real properties (described in the following paragraph) in
fiscal 1998, and a capital lease obligation for a motor vehicle. The interest
rates of the installment loans ranged from HIBOR + 2.5% to HIBOR + 3%, where
HIBOR represents Hong Kong Interbank Offered Rate. The gearing ratio was 0.42 at
March 31, 1998, as compared with 0.37 at March 31, 1997.
During fiscal 1998, the Company purchased approximately HK$24.1 million in
property, plant and equipment. The property at Unit 16 and half of Unit 15 in
the Focal Industrial Centre, of approximately HK$3.8 million, is used for
expansion of pearl jewellery business; and the leasehold property at Valverde,
11 May Road, of approximately HK$15.1 million, is held for long-term purpose and
as accommodation for senior executives. The Company also acquired Unit 14 and
half of Unit 15 at Focal Industrial Centre, at a price of approximately HK$4.8
million, for long term investment purpose and from which rental income shall be
earned. For details of the properties, see "Item 2 - Properties." These
investment activities were financed by installment loans of approximately
HK$13.5 million, and the proceeds of HK$11.0 million derived from sales of the
Leasehold Property.
The Company had available working capital facilities of HK$85.6 million in total
with various banks at March 31, 1998. Such banking facilities include letter of
credit arrangements, import loans, overdraft protection and other facilities
commonly used in the jewellery business. All such banking facilities bear
interest at floating rates generally based on prime lending rates, and are
subject to periodic review. At March 31, 1998, the Company utilized
approximately HK$2.1 million of its credit facilities, with HK$83.5 million
unutilized. Despite the weaknesses in various Asian economies (see "Item 7 -
Management's Discussion And Analysis of Financial Condition and Results of
Operation - Risks Associated with Weak Asian Economies"), the Company has not
experienced any decrease in its banks' confidence in the Company's liquidity, or
their willingness to extend credit to the Company.
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The Company believes that funds to be generated from internal operations, the
existing banking facilities and the new equity funds raised by MSIL will enable
the Company to meet anticipated future cash flow requirements.
RISKS ASSOCIATED WITH WEAK ASIAN ECONOMIES
Countries in the Asia Pacific region have recently experienced weaknesses in
their currency, banking and equity markets. These weaknesses could adversely
affect, among other things, consumer demand for luxury goods in the region
(perhaps including the Company's pearls and pearl products which may be
considered luxury consumer goods), and the U.S. dollar value of the Company's
foreign currency denominated sales (e.g., to the extent sales are denominated in
Hong Kong dollars). In addition, the Company's interest income and expense is
sensitive to fluctuations in the general level of Hong Kong interest rates.
However, as described below, the Company believes that overall, it is well
positioned to minimize such risks.
The Company produces, markets and sells a full range of pearls and pearl
jewellery products for different market segments, has already increased its
marketing efforts in Europe and North America, and has taken steps to stabilize
both demand for and supply of its pearls. See "Item 1 Business - Pearl
Operations - Business Strategy" and "Item 1 - Business - Pearl Operations
Customers."
In addition, the Company's policy is to denominate all its sales and assets in
U.S. dollars or Hong Kong dollars. The Hong Kong Government has, throughout
fiscal 1998 and since the beginning of fiscal 1999, repeatedly assured the
public that the Hong Kong dollar's "peg" to the U.S. dollar will not be changed
and the Hong Kong dollar will not be devalued. See "Item 1 - Business History of
the Company." Similarly, the governor of PRC's central bank has reassured the
public that the Reminbi will not be devalued. Therefore, based on information
available to Management at this time, Management does not anticipate significant
fluctuations in the exchange rate between the U.S. dollar and the Hong Kong
dollar in the foreseeable future. As the Company makes its purchases of pearls
and other raw materials in Japan, PRC and other countries in local currencies,
and those currencies have generally exhibited weakness since mid-1997 when
compared to the U.S. dollar, Management does not believe the Company is exposed
to undue amount of risk arising from fluctuations of the exchange rates between
those currencies and the U.S. dollar.
Nevertheless, to balance between bearing currency and interest rate risks and
the cost of hedging against such risks, the Company is a party to financial
instruments with off balance sheet risk which it uses in the normal course of
business to manage its exposure to movements in foreign exchange rates on
transactions not denominated in U.S. dollars and changes in interest rates on
its net cost of borrowing. The Company enters into foreign exchange forward
contracts and currency options to hedge against foreign exchange fluctuations
whenever necessary, and enters into interest rate swaps, interest rate forward
contracts and other derivatives to hedge against interest rate exposures. The
Company monitors its exchange and interest rate hedges on a continuous basis,
both on a stand-alone basis and in conjunction with each other, from both an
accounting and an economic perspective. However, given the horizons of the
Company's risk management activities, there can be no assurance that the
aforementioned programs will offset
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more than a portion of the adverse financial impact resulting from unfavorable
movements in either foreign exchange or interest rates. The Company does not
engage in leveraged hedging, but its recent borrowings may increase the costs of
its hedging transactions.
Overall, the Company believes it is well positioned to minimize material adverse
impact that the recent economic developments in the Asia Pacific region may have
on the Company.
Capital Commitment
On January 19, 1998, the Company approved a capital investment of approximately
HK$8.4 million to renovate, improve and expand the Company's pearl processing
plant in the Man Sang Industrial City. The new plant shall be a six-story
building with total gross floor area of approximately 30,000 sq. ft.. The
capital investment is expected to be completed by the end of 1998. The capital
investment shall be financed by the equity funds raised by MSIL during fiscal
1998.
On February 24, 1998, the Company entered into an Agreement for Sale and
Purchase to purchase certain real property located at Flat B on the 20th Floor
of The Mayfair, No. 1 May Road, Hong Kong with a gross floor area of
approximately 2,838 sq. ft. for HK$39,732,200. The title to the property was
transferred on April 8, 1998 (the "Completion Date"). The Company paid a sum of
HK$7,946,400 as deposit and the balance was paid on the Completion Date. In
respect of the financing of the property purchase, 70% was financed by a bank
and the remaining 30% was financed by internal funds. The Company intends to
hold such property on a long-term basis and shall be used as the Vice Chairman's
residence.
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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, this 14th day of July,
1998.
MAN SANG HOLDINGS, INC.
By: /s/ CHENG Chung Hing, Ricky
___________________________
CHENG Chung Hing, Ricky
Chairman of the Board, President
and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cheng Chung Hing, Ricky, his attorney-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ CHENG Chung Hing, Ricky
___________________________ Chairman of the Board, President July 14, 1998
CHENG Chung Hing, Ricky and Chief Executive Officer
/s/ CHENG Tai Po
___________________________ Vice Chairman of the Board July 14, 1998
CHENG Tai Po
/s/ YAN Sau Man, Amy
___________________________ Vice President and Director July 14, 1998
YAN Sau Man, Amy
/s/ HUNG Kwok Wing, Sonny
___________________________ Vice President and Director July 14, 1998
HUNG Kwok Wing, Sonny
/s/ NG Hak Yee, Patrick
___________________________ Chief Financial Officer and Director July 14, 1998
NG Hak Yee, Patrick
</TABLE>
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