<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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
MAN SANG HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 87-0539570
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
21st Floor, Railway Plaza, 39 Chatham Road South
Tsimshatsui, Kowloon, Hong Kong
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDE AREA CODE: (852) 2317 5300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No __
Indicate by check if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $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.
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.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I ........................................................................................................ 1
ITEM 1. BUSINESS.............................................................................. 1
ITEM 2. PROPERTIES........................................................................... 13
ITEM 3. LEGAL PROCEEDINGS.................................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................................................. 15
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.................................................... 15
PART II
ITEM 6. SELECTED FINANCIAL DATA.............................................................. 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................................. 17
ITEM 8. FINANCIAL STATEMENTS................................................................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................. 27
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTIONS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT................................................................ 28
ITEM 11. EXECUTIVE COMPENSATION............................................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT................................................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.............................................................. 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS OF FORM 8-K............................................................ 41
SIGNATURES...................................................................................................... 44
FINANCIAL STATEMENTS
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL AND ORGANIZATION CHART
Man Sang Holdings, Inc. (the "Company"), through its subsidiaries, is primarily
engaged in (i) the purchasing, processing, assembling, merchandising, and
wholesale distribution of pearls and pearl jewellery products; and (ii) the
management and leasing of a commercial real estate complex in Shenzhen, People's
Republic of China (the "PRC"). The structure of the Company is as follows:-
ORGANIZATION CHART OF MAN SANG GROUP
MAN SANG
HOLDINGS, INC.
(Nevada)
|
(Investment holding)
100%
|
Man Sang International
(B.V.I.) Limited
(B.V.I.)
|
(Investment holding)
73.02%
|
|
MAN SANG
INTERNATIONAL
LIMITED
(Bermuda)
|
(Investment holding)
100%
|
Man Sang
Enterprise Limited
(B.V.I.)
|
(Investment holding)
|
<TABLE>
<CAPTION>
100% 100% 100% 100%
<S> <C> <C> <C>
Man Sang Jewellery Sokeen Limited Hong Kong Man Sang Golden Concord
Company Limited (Hong Kong) Investments Limited (Asia) Limited
(Hong Kong) (Hong Kong) (Hong Kong)
(Trading of pearl products
and investment holding) (Inactive) (Investment holding) (Investment holding)
</TABLE>
<TABLE>
<CAPTION>
100% 100% 100% 100% 100% 100% 100%
<S> <C> <C> <C> <C> <C> <C>
Asean Gold Overseas South Man Hing Tangzhu Jewellery Peking Pearls Excel Access Wealth-In
Limited Pearls Limited Goods Jewellery Goods (Shenzhen) Company Limited Limited Investment Limited
(B.V.I.) (Hong Kong) (Shenzhen) Co. Ltd. (Hong Kong) (Hong Kong) (Hong Kong)
Co. Ltd. (P.R.C.)
(P.R.C.)
(Investment (Trading (Real estate leasing Purchasing & (Trading (Property holding) (Property holding)
holding) of pearl & pearl jewellery processing of of pearl
products) assembling) freshwater pearls products)
& of larger
size saltwater 100%
cultured pearls)
Damei Pearls
Jewellery
Goods (Shenzhen)
Co. Ltd.
(P.R.C.)
(Purchasing &
processing
of smaller size
saltwater
cultured pearls)
</TABLE>
<PAGE> 4
HISTORY OF THE COMPANY
The Company was incorporated in the State of Nevada in November of 1986 under
the name of SBH Ventures, Inc. The Company was originally incorporated as a
"blind pool" company for the purpose of acquiring an operating business. In
March 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 split of its common stock on
approximately a 1-for-14 basis and, following such reverse split, issued
11,000,000 shares of common stock, par value $0.001 per share ("Common Stock")
and 100,000 shares of Series A Preferred Stock, par value $0.001 per share
("Series A Preferred Stock") in exchange (the "Exchange") for all of the
outstanding securities of Man Sang International (B.V.I.) Limited, a British
Virgin Islands company ("Man Sang BVI"). Pursuant to the terms of the Exchange,
the Company changed its name to Man Sang Holdings, Inc. and assumed the
operations of Man Sang BVI. The management of Man Sang BVI then assumed control
of the Company.
During the period from April to July 1996, the Company, in reliance on
Regulation S promulgated under the U.S. Securities Act of 1933, as amended, sold
and issued 6,760 shares of Series B Convertible Preferred Stock, par value
$0.001 per share ("Series B Preferred Stock"), for an aggregate purchasing price
of $6.76 million. All 6,760 shares of Series B Preferred Stock were converted
into 5,223,838 shares of Common Stock, of which 5,219,448 shares were issued in
fiscal 1997 before a 1-for-4 reverse stock split which the Company effected in
October 1996, and the balance of 4,390 shares of Common Stock issuable upon
conversion of Series B Preferred Stock were issued as 1,098 shares of Common
Stock (post reverse stock split) during fiscal 1998.
- --------
*Unless otherwise indicated as Hong Kong dollars or HK$, 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 of HK$7.73 for US$1, the approximate free rate of
exchange at March 31, 1998. The Hong Kong dollar has been "pegged" to the U.S.
dollar since October 1983. The so-called "peg" is the Linked Exchange Rate
System under which certificates of indebtedness issued by the Hong Kong Exchange
Fund, which the three banks that issue the Hong Kong currency are required to
hold as backing for the issue of Hong Kong dollar notes, are issued and redeemed
against US dollars at a fixed exchange rate of HK$7.8 to US$1. In practice,
therefore, any increase in note circulation is matched by a U.S. dollar payment
to the Exchange Fund, and any decrease in note circulation is matched by U.S.
dollar payment from the Exchange Fund. In the foreign exchange market, the
exchange rate of Hong Kong dollar continues to be determined by forces of supply
and demand. Against the fixed exchange rate for the issue and redemption of
certificates of indebtedness, the market exchange rate generally stays close to
the rate of HK$7.73 to US$1.
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<PAGE> 5
On July 30, 1997, Man Sang International Limited ("MSIL") was incorporated as an
exempted company under the Companies Act 1981 of Bermuda. On September 8, 1997,
Man Sang BVI acquired MSIL and underwent a corporate reorganization. Thereafter,
MSIL held directly or indirectly the interests of various operating subsidiaries
in Hong Kong and the PRC.
On September 26, 1997, MSIL successfully listed on The Hong Kong Stock Exchange
Limited and completed an initial public offering ("IPO") of 127,500,000 shares
(the "Shares") of HK$0.1 each at HK$1.08 per share with warrants in the
proportion of one warrant for every five shares raising the net proceeds of
approximately HK$123.6 million. Every warrant entitles the holder thereof to
subscribe for one Share at an exercise price of HK$1.3 from the date of issue up
to and including March 31, 1999. After MSIL's IPO, Man Sang BVI holds 73.02% or
345 million Shares, and warrants to purchase 69 million Shares, of MSIL's
capital stock.
The foundation of the group of companies comprising the Company and its
subsidiaries (the "Group") was laid in early 1980's when Cheng Chung Hing, Ricky
formed Man Sang Trading Hong, a freshwater pearl trading company and Cheng Tai
Po formed Peking Pearls Company, a Japanese cultured pearl trading company. As
the business of the Group developed, Man Sang Jewellery Company Limited and
Peking Pearls Company Limited were formed in Hong Kong in 1988 and 1991
respectively to continue the trading operations of the Group. Subsequently, the
Group expanded its operations to include pearl processing with the establishment
of Man Hing 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. ("Damei") in 1995 to assume and expand the
Chinese cultured pearl processing operations of Man Hing. In view of the
continuous expansion of Chinese cultured pearls business, in December 1996, the
Group set up a subsidiary, Tangzhu Jewellery Goods (Shenzhen) Co., Ltd.
("Tangzhu") in the PRC to specialize in purchasing and processing Chinese
cultured pearls of larger sizes with diameter from 6mm and above and, to a
lesser extent, in processing other cultured pearls. As a result, Damei started
to concentrate on the purchasing and processing of cultured pearls of smaller
size with diameter below 6mm. The business of purchasing and processing of
Chinese freshwater pearls was also transferred from Man Hing to Tangzhu whilst
Man Hing started to concentrate on the pearl jewellery assembling business.
-3-
<PAGE> 6
In order to facilitate the growth in existing operations and expansion into
processing operations, and to diversify its revenues, in 1991, the Group
commenced construction of a 24 building industrial facility in Shenzhen,
People's Republic of China ("Man Sang Industrial City") for use in pearl
processing and corporate administration (5 buildings) and for lease to third
party industrial users (19 buildings). See "Item 1 - Business - Real Estate
Leasing Operations" and "Item 2 - Properties".
PEARL OPERATIONS
Pearl Industry
The use of pearls in jewellery 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 jewellery 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 the Company's opinion, in recent years and especially since late 1996, Japan
is losing its long held dominance in the cultured pearl industry to the PRC as
(i) Japanese cultured pearls have been in poor harvests and have become more
expensive than they were previously, although such increase in prices may have
been partially offset by the depreciation of the Japanese yen; (ii) customers
increasingly regard Chinese cultured pearls to be close substitutes to Japanese
cultured pearls; (iii) increasingly cultured pearls are cultivated and processed
in the PRC; and (iv) Chinese cultured pearls are competitively priced. In
addition, Japan does not appear to be in a position to increase its supply of
cultured pearls in 1998, and Chinese cultured pearls may eventually replace
Japanese cultured pearls of comparable qualities and sizes. This would be the
case as long as the PRC cultured pearl industry continues to maintain
competitive prices, improve pearl quality and expand its product lines. The
Company expects the supply of Chinese cultured pearls ranging in size from 5mm
to 7mm to be generally available and reliable, and the supply of Chinese
cultured pearls ranging in size from 7mm to 9mm to become available in the near
future. However, strong demand from the United States and Europe for pearls,
together with supply shortage of Japanese cultured pearls, may lead to an
increase in the prices of Chinese cultured pearls in the coming year.
Tahitian pearls are sourced from French Polynesia and the Cook Islands, while
South Sea pearls are sourced mainly from Australia, Papua New Guinea, Indonesia
and the Philippines. These pearls are generally more expensive and are
considered superior in quality when compared to either Japanese or Chinese
cultured pearls, and cannot be easily substituted by the latter. Since the
beginning of the economic downturn in various Asian countries in late 1997,
although the demand for Tahitian pearls and South Sea pearls decreased in those
countries, demand from the United States and Europe for such pearls continue to
grow. Therefore, in 1997, when Tahitian pearls decreased in supply, they
actually increased in value and improved in quality. Also, due to the relative
scarcity of and growing demand for South Sea pearls, their prices have been
increasing steadily in the past years.
-4-
<PAGE> 7
China is a major supplier of freshwater pearls. While the quantity of freshwater
pearls supplied from processing factories in China has decreased since 1996, the
quality has improved and the prices have been stable. The Company anticipates
that the Chinese freshwater pearl market will remain stable, with steady
improvement in quality, in the foreseeable future.
Business Strategy
While the Company continues to provide a full range of pearls and pearl
jewellery products to jewellery manufacturers, wholesalers and retailers at
competitive prices, the Company's management team ("Management") has identified
saltwater cultured pearls as offering a higher gross profit margin than
freshwater pearls, and has taken steps to increase saltwater cultured pearls in
the Company's product mix. In fiscal year 1998, the Company made an investment
of Reminbi 5.1 million (approximately HK$4,730,000) for a 19.5% stake in a pearl
farm located in the PRC through a cooperative joint venture. The farm has a sea
area of 500 hectares and can cultivate up to 18.5 million oysters. Management
believes the farm can produce cultured pearls of diameter up to 9mm. Also in
fiscal year 1998, the Company purchased new bleaching and processing equipment,
and made a one-year agreement with a Japanese Company to upgrade the Company's
pearl bleaching techniques in order to increase the added value of processed
pearls. The Company increased its marketing efforts in Europe and North America
by making extra trips to visit existing and potential customers personally and
to educate them on the Company's products. The Company anticipates that it will
maintain its focus on saltwater cultured pearls in fiscal year 1999, and plans
to continue to increase its market penetration through internal growth,
strategic acquisitions, expansion of existing product lines and introduction of
new product lines.
Products
The Company presently offers six products lines including pearl jewellery,
freshwater pearls, Chinese cultured pearls, Japanese cultured pearls, South Sea
pearls and Tahitian pearls. Freshwater pearls are available in a variety of
shapes with sizes ranging from 2mm to 10mm. Freshwater pearls are generally less
expensive than cultured pearls with wholesale prices typically ranging from $2
to $300 per 16 inch strand depending on size, grade and shape. Saltwater
cultured pearls generally are round in shape and range in size from 5mm to 18mm.
South Sea and Tahitian pearls are considered to be the highest quality saltwater
cultured pearl and typically the largest and most expensive followed by Japanese
cultured pearls and Chinese cultured pearls. Wholesale prices of cultured pearls
typically range from $13 to $85,000 per 16 inch strand.
The following table illustrates by pearl category the typical range of size and
wholesale price of cultured pearls the Company sells, with price variations
within each category reflecting size and qualitative differences:
-5-
<PAGE> 8
<TABLE>
<CAPTION>
SIZE PRICE/16 INCH STRAND
mm US$
<S> <C> <C>
Chinese cultured pearls 5 - 7.5 13 - 500
Japanese cultured pearls 7 - 10 150 - 4,000
Tahitian pearls 8 - 16 1,300 - 17,000
South Sea pearls 10 - 18 2,800 - 85,000
</TABLE>
The Company also offers fully assembled pearl jewellery, including necklaces,
earrings, rings, pendants, broaches, bracelets, watches, cufflinks, and similar
miscellaneous pearl products. For the three years ended March 31, 1998, as a
percentage of the Company's total sales, sales of pearls and assembled pearl
products by category was as follows:
<TABLE>
<CAPTION>
Loose Assembled
Year and Strands Pearls Pearls Jewellery
---- ------------------ ----------------
Freshwater Cultured Freshwater Cultured
% % % %
<S> <C> <C> <C> <C> <C>
1998 57 96 43 4
1997 70 97 30 3
1996 70 99 30 1
</TABLE>
Purchasing
The Company purchases (i) Chinese cultured pearls from pearl farms and other
suppliers in the coastal areas of the southern part of the PRC, including
Guangdong and Guangxi Provinces, (ii) Japanese cultured pearls from pearl farms
and other suppliers in Japan, (iii) South Sea pearls from pearl farms and
suppliers in Hong Kong, Australia and Japan; (iv) Tahitian pearls from pearl
farms and suppliers in French Polynesia; and (v) freshwater pearls from pearl
farms and other suppliers in the eastern part of the PRC, including Jiangsu and
Zhejiang Provinces.
The Company's purchase of pearls is conducted by its full-time and well-trained
purchasing staff from the Company's offices in Hong Kong and Shenzhen in the
PRC, and a special purchasing office in Zhangjiang in the PRC, the site of the
largest Chinese cultured pearl farm. The purchasing staff maintains regular
contacts with pearl farms and other suppliers in the PRC, Japan 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 purchasing staff meet regularly to assess existing
and anticipated pearl demand. The purchasing staff in turn inspects and
purchases pearls in the quantities and of the quality and nature necessary to
meet existing and estimated demand.
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
-6-
<PAGE> 9
to capitalize on its volume purchasing and relationship with farmers and
suppliers to secure the best pricing and quality when purchasing pearls and
other jewellery raw materials, the Company generally purchases raw materials
from suppliers at prices approximately 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.
For the year ended March 31, 1998, the five largest suppliers of the Company
accounted for approximately 40.5% (1997: 38.4%) of the Company's total
purchases, with the largest supplier accounting for approximately 17.5% (1997:
17.2%) of the Company's total purchases.
For the year ended March 31, 1998, approximately 68.1% of the Company's
purchases was made in Reminbi, with the remaining amount settled in Japanese
Yen, French francs, Hong Kong dollars or US dollars. It is the Company's policy
to enter into derivative contracts such as forward contracts and options to
hedge against foreign exchange fluctuations whenever necessary.
Processing and Assembly
Pearl processing and assembly are conducted at the Company's facilities in
Shenzhen, PRC. Freshwater pearl processing and assembling operations presently
occupy approximately 9,472 square feet and employ 90 workers while cultured
pearl processing and assembly operations occupy approximately 29,816 square feet
and employ 288 workers. The average compensation per factory worker is US$77 per
month while average supervisory compensation is US$168 per month.
The Company, with the assistance of specialists from Japan, has trained its work
force to implement advanced Japanese bleaching technology. Each worker performs
a specific function and is supervised by an officer and technical assistants who
are university graduates with chemical technology training and also specialised
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, if necessary, drilled. This process,
excluding drilling, takes approximately 21 days for freshwater pearls and
approximately 70 days for saltwater cultured pearls. Drilling takes
approximately 10 days. Next, the pearls are cleaned, dried, waxed, graded,
sorted, strung, and if necessary, packaged. The entire production cycle takes
approximately 30 days for freshwater pearls and approximately 100 days for
saltwater cultured pearls.
Where appropriate, processed pearls are then incorporated into finished
jewellery products. Assembly and finishing may include the addition of clasps,
decorative jewellery pieces, or other specialty work requested by the customers
to produce finished jewellery pieces.
-7-
<PAGE> 10
The Company presently has facilities and pearl processing personnel to produce
approximately 20,000 kg of freshwater pearls and 10,400 kg of cultured pearls
annually, compared to capacity for 20,000 kg of freshwater pearls and 8,000 kg
of cultured pearls in fiscal year 1997. Fiscal year 1998 production totaled
approximately 12,946 kg of freshwater pearls and 8,513 kg of cultured pearls,
compared to the production of 15,100 kg of freshwater pearls and 6,300 kg of
cultured pearls in fiscal year 1997. The Company presently also has adequate
assembly and finishing personnel and facilities to produce approximately one
million pieces of finished jewellery annually.
Upon completion of manufacturing, 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 jewellery 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 and jewellery
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 force 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. In addition, the Company has increased its
efforts to market pearls and jewellery products to customers in Europe and North
America.
Customers
The Company's customers consist principally of wholesale distributors and mass
merchandisers in Europe, the United States, Hong Kong and other Asian countries.
In fiscal 1998, no customer accounted for more than 10 percent of the Company's
sales. For the year ended March 31, 1998, the five largest customers of the
Company accounted for approximately 17.7% (1997: 20%) of the Company's sales
with the largest customers accounted for approximately 4.9% (1997: 7.3%) of the
Company's sales. As at March 31, 1998, the Company had approximately 600
customers. The Company has no long-term contract with any customer. Most of the
Company's customers have been its customers for a number of years. The Company
does not believe that the loss of any one customer will have a material adverse
effect on its financial condition or results of operations.
The Company's policy is to denominate all its sales in either US dollars or Hong
Kong dollars. Since Hong Kong dollar remained "pegged" to the U.S. dollar
throughout fiscal year 1998, the Company's sales proceeds have thus far had very
minimal exposure to foreign exchange
-8-
<PAGE> 11
fluctuations. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation - Risks Associated with Weak Asian
Economies." With respect to currency exchange risks for fiscal year 1999, see
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risks Associated with Weak Asian Economies."
The following table sets forth by region and by product the sales of the Company
for the three years ended March 31, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
HK$'000 % HK$'000 % HK$'000 %
<S> <C> <C> <C> <C> <C> <C>
Cultured Pearls
North America 53,587 20.5 33,233 13.3 18,037 8.7
Europe 65,633 25.0 45,926 18.5 29,413 14.2
Hong Kong 31,762 12.1 39,205 15.8 33,293 16.1
Other Asian countries 39,614 15.1 43,874 17.7 21,556 10.4
Others 8,457 3.2 9,695 4.0 6,913 3.3
------- ---- ------- ---- ------- ----
Sub-total 199,053 75.9 171,933 69.3 109,212 52.7
------- ---- ------- ---- ------- ----
Freshwater Pearls
North America 5,265 2.0 5,819 2.3 3,685 1.8
Europe 11,734 4.5 17,247 6.9 19,503 9.4
Hong Kong 3,705 1.4 8,192 3.3 11,941 5.8
Other Asian countries 8,362 3.2 13,638 5.5 26,769 12.9
Others 1,814 0.7 2,120 0.9 7,350 3.6
------- ---- ------- ---- ------- ----
Sub-total 30,880 11.8 47,016 18.9 69,248 33.5
------- ---- ------- ---- ------- ----
Assembled pearl
jewellery 32,225 12.3 29,291 11.8 28,464 13.8
------- ---- ------- ---- ------- ----
Total 262,158 100 248,240 100 206,924 100
======= === ======= === ======= ===
</TABLE>
A majority of sales (by dollar amount) in Hong Kong are for re-export to North
America and Europe.
Seasonality
The Company's sales are seasonal in nature. The bulk of the Company's sales
occur during the months of March, June and September (due to major international
jewellery trade shows held in Hong Kong in these three months). Accordingly, the
results of any interim period are not necessarily indicative of the results that
might be expected during a full year.
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<PAGE> 12
The following table sets forth the Company's unaudited net sales for the fiscal
years indicated:-
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
1998 1997 1996
HK$'000 % HK$'000 % HK$'000 %
------- - ------- - ------- -
<S> <C> <C> <C> <C> <C> <C>
First Quarter 67,021 25.6 55,847 22.5 44,177 21.4
Second Quarter 73,034 27.9 63,403 25.5 71,015 34.3
Third Quarter 53,882 20.5 56,820 22.9 42,894 20.7
Fourth Quarter 68,221 26.0 72,170 29.1 48,838 23.6
Total 262,158 100 248,240 100 206,924 100
======= ==== ======= ==== ======= ====
</TABLE>
Competition
With the exception of several large Japanese cultured pearl and South Sea pearl
suppliers, the pearl business is highly fragmented with limited brand name
recognition or consumer loyalty. Selection is generally a function of design
appeal, perceived value and quality in relationship to price.
Internationally, 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 such pearls. Nevertheless,
their competitiveness could be impaired by the current weakness in Japan's
economy, and the poor harvest of Japanese cultured pearls.
Locally, the Company competes with approximately 60 companies in Hong Kong that
engage actively in the freshwater pearl and Chinese cultured pearl business.
Most of such local companies are small operators and some are engaged only in
pearl trading. In addition to genuine pearls, 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 shop 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 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, and there can be no
assurance that the Company will remain competitive.
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<PAGE> 13
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 with a total site area of approximately 472,291 square feet acquired by
the Company with respect to Man Sang Industrial City have a duration of fifty
years starting from September 1, 1991. The Company acquired the land use rights
relating to Man Sang Industrial City and constructed such facility for
approximately $3.4 million.
At March 31, 1998, Man Sang Industrial City consists of 23 buildings
encompassing a total gross floor area of approximately 518,231 square feet.
Nineteen of the buildings in Man Sang Industrial City are factory buildings and
four are living quarters. In addition to factories, dormitories and shops, Man
Sang Industrial City has green zones, playgrounds and other amenities typically
offered in industrial/living complexes in the PRC.
In February 1998, the Company demolished one building in Man Sang Industrial
City that contained shops and a restaurant in order to provide a site on which
to build a pearl processing plant. The net book value of the block was
HK$188,096. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Commitment."
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 27 persons to provide required management,
leasing, maintenance and security for Man Sang Industrial City.
As of March 31, 1998, the 18 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, 1998,
the gross rental income from Man Sang Industrial City was approximately HK$5.3
million compared to approximately HK$5.4 million for fiscal 1997. See "Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year Ended March 31, 1998 Compared to Year Ended March 31, 1997 -
Rental Income."
In addition to Man Sang Industrial City, the Company owns rental properties in
Hong Kong ("Hong Kong Rental Properties") which were leased to independent third
parties. The Hong Kong Rental Properties consist of the properties as follows:-
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<PAGE> 14
a. 957 square feet at Wing Tuck Commercial Building, Room 407, 177 - 183
Wing Lok Street, Hong Kong, leased for annual rental income totalling
approximately HK$172,260 for fiscal year 1998, at the same level as in
fiscal year 1997;
b. 3,586 square feet at Unit 14 and half of Unit 15 of the 6th floor,
Block A, Focal Industrial Centre, 21 Man Lok Street, Kowloon, Hong
Kong. A tenancy agreement for Unit 14 and half of Unit 15 was made on
March 25, 1998 at a monthly rental of HK$28,000 for a term of 3 years
starting from June 1, 1998.
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 31,1998, the Company had 539 employees. None of the employees is
governed by collective bargaining agreements and the Company considers its
relations with its employees to be satisfactory. The breakdown of employees by
function is as follows:-
<TABLE>
<CAPTION>
Hong Kong PRC Total
--------- --- -----
<S> <C> <C> <C>
Senior management 5 - 5
Marketing and sales 17 - 17
Purchasing 3 4 7
Finance and accounting 9 8 17
Processing and logistics 7 415 422
Human resources and administration 13 31 44
Real estate leasing - 27 27
---------- --------- ----------
54 485 539
Total ========== ========== ==========
</TABLE>
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of potential problems with computer systems or
any equipment with computer chips that use dates where the date has been stored
as just two digits (e.g. 97 for 1997). On January 1, 2000, any clock or date
recording mechanism including date sensitive software which uses only two digits
to represent the year, may recognize a date using 00 as the
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<PAGE> 15
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
The Company is using both internal and external resources to identify
significant applications that will require modification, and to make such
modifications, to ensure Year 2000 Compliance. The Company plans to complete and
test the modifications of all significant applications by March 31, 1999.
The Company has planned to communicate with others with whom it does significant
business to determine their Year 2000 Compliance readiness and the extent to
which the Company is vulnerable to any third party Year 2000 issues. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's system,
would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans.
ITEM 2. PROPERTIES
HONG KONG
The head office of the Group at 21st Floor, Railway Plaza, 39 Chatham Road
South, Tsimshatsui, Kowloon, Hong Kong has a gross floor area of approximately
10,880 square feet. The Company is leasing such space from July 1, 1996 to June
30, 1999, with an optional renewal term of three years upon expiry of the
tenancy.
Until December 10, 1997, the Company leased a commercial unit at Office A, 5th
floor, Eastern Flower Centre, Nos. 22 and 24 Cameron Road, Kowloon, Hong Kong
for use as a showroom and office for its pearl jewellery business. The gross
floor area of the premises is approximately 928 square feet. The tenancy
agreement commenced on December 11, 1995 and expired on December 10, 1997.
During fiscal year 1998, the lease payment with respect to this premises was
approximately HK$189,505. After the expiry of the term, the Company did not
renew the tenancy agreement and the pearl jewellery business was moved to
Company-owned premises at Focal Industrial Centre.
The Company owns an investment property at Room 407, Wing Tuck Commercial
Centre, 177 - 183 Wing Lok Street, Sheung Wan, Hong Kong. The gross floor area
of the premises is approximately 957 square feet. It is rented to an
independent third party. See "Item 1 - Business - Real Estate Leasing
Operations - Leasing and Management" above.
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<PAGE> 16
In July 1997, the Company acquired Units 14, 15 and 16 on 6th Floor of Block A,
Focal Industrial Centre, No. 21, Man Lok Street, Kowloon, Hong Kong for a
consideration of approximately HK$8,568,400. The floor areas of the units are
2,412 sq. ft., 2,349 sq. ft and 1,585 sq. ft. respectively. The Group used Unit
16 and half of Unit 15 as showroom and office for pearl jewellery business. Unit
14 and half of Unit 15 are leased out to an independent third party. See "Item 1
- - Business - Real Estate Leasing Operations - Leasing and Management" above.
In October 1997, the Company purchased a car-parking space at No. L30 on the
Ground Floor of Focal Industrial Centre, No. 21, Man Lok Street, Kowloon, Hong
Kong for a consideration of HK$950,000.
The Company owns a residential flat with a gross floor area of approximately
2,643 sq. ft. on the 17th Floor, and a parking space on 2nd Floor, at
Silvercrest, 24 MacDonnell Road, Hong Kong, which it uses as the Chairman's
residence.
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 one parking
space in the building (the "Leasehold Property"), for approximately HK$11.0
million, resulting in a net capital gain in the amount of approximately HK$8.4
million. Prior to the sale, the Company used the Leasehold Property as the
residence of the Chairman of the Company.
On March 16, 1998, the Company purchased a flat with a gross floor area of
approximately 1,063 sq. ft. on 33rd Floor of Valverde, 11 May Road, Hong Kong
for a consideration of approximately HK$15,050,000. The Company intends to hold
such property on a long-term basis and provide accommodation to senior
executives in such property.
PEOPLE'S REPUBLIC OF CHINA
As noted above, the Company owns the land use rights to the site of Man Sang
Industrial City for a term of 50 years from September 1, 1991 to September 1,
2041. On March 31, 1998, Man Sang Industrial City consists of 23 buildings
encompassing a total gross floor area of approximately 518,231 sq. ft. The
Company presently utilizes most of the units in five buildings for pearl
processing, administration and staff accommodation. The remaining 18 buildings,
amounting to approximately 437,794 sq. ft. of floor space and representing
approximately 84.5% of the total gross floor space of Man Sang Industrial City,
are leased to independent third parties and industrial users not connected with
the Company.
In February 1998, the Company demolished one building in Man Sang Industrial
City that contained shops and a restaurant in order to provide a site on which
to build a pearl processing plant.
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<PAGE> 17
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, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock has been quoted on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board since 1987 and is traded
under the symbol "MSHI". 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, and
on the last day of each quarter, during the Company's last two fiscal years were
as follows:-
<TABLE>
<CAPTION>
Period Over the quarter On the last day of quarter
High Low High Low
---- --- ---- ---
$ $ $ $
<S> <C> <C> <C> <C>
1998
June 30, 1997 (*) 2.87 1.12 1.62 1.37
September 30, 1997 (*) 2.25 1.37 1.81 1.75
December 31, 1997 (*) 2.125 1.37 1.37 1.37
March 31, 1998 (*) 1.75 0.625 1.44 1.25
1997
June 30, 1996 3.87 3.00 3.50 3.00
September 30, 1996 3.50 1.00 1.28 1.13
December 31, 1996 (*) 6.00 3.50 3.81 3.50
March 31, 1997 (*) 3.50 1.75 2.875 2.875
</TABLE>
(*) Bid prices reflect 1-for-4 reverse stock split effective on October 10,
1996.
The above bid information is provided by Bloomberg LP, and reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transaction.
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<PAGE> 18
HOLDERS
The number of record holders of the Company's Common Stock as of May 31, 1998
was 236. This number does not include an indeterminate number of stockholders
whose shares are held by brokers in street name.
DIVIDENDS
The Company has not paid any dividends with respect to its Common Stock during
the two preceding fiscal years, and does not intend to pay dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain selected consolidated financial data for the Company
and its subsidiaries covering the fiscal years ended March 31, 1998, 1997, 1996,
1995 and 1994, and the selected balance sheet data at March 31 of each such
year. This summary should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Financial
Statements provided in Item 7 and 8 respectively, of this Report on Form 10-K.
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
FOR THE YEAR 1998 1997 1996 1995 1994
HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C>
Net sales 262,158 248,240 206,924 158,754 150,464
Gross profit 104,746 96,467 70,045 42,148 36,960
Rental income-Gross 5,446 5,591 3,785 3,699 893
SG & A
- for net sales 53,841 52,247 33,577 19,691 17,147
- for rental 3,509 3,312 2,259 2,060 1,592
Operating income 52,842 46,499 37,994 24,096 19,114
Interest expense 3,685 6,320 5,651 3,085 1,071
Interest Income 3,335 744 434 270 156
Non-operating income 21,595 844 240 -- --
Income before
- income taxes (N2) 74,087 41,767 33,017 21,281 18,199
Income taxes 3,543 1,132 1,434 1,463 3,453
Minority Interests 11,576 -- -- -- --
Net income (N2) 58,968 40,635 31,583 19,818 14,746
Net income
- per share (N3) 13.70 10.79 11.23 7.21 5.36
Depreciation and
amortization 4,056 3,110 3,247 2,746 2,068
Interest coverage 4.74 13.14 14.61 12.66 5.56
Gross profit margin(%) 39.96 38.9 33.9 26.5 24.6
</TABLE>
-16-
<PAGE> 19
<TABLE>
<CAPTION>
AT MARCH 31 1998 1997 1996 1995 1994
HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C>
Working capital 292,275 115,007 43,714 10,286 (5,289)
Property, plant
and equipment, net 50,711 32,862 9,697 11,221 26,471
Real estate
investment, net 30,084 26,028 26,199 26,355 5,783
Total Assets 403,350 268,475 173,241 156,726 106,285
% Return on Total Assets 14.62 15.14 18.23 12.64 13.87
Long-term Debt 19,342 8,502 178 522 1,067
Total Liabilities (excluding
minority interest) 44,192 103,080 93,809 109,386 80,387
Minority interests 88,944 -- -- -- --
Shareholders' equity 270,214 165,395 79,432 47,340 25,898
Net Book value
per share (N3) 62.76 43.92 28.24 17.21 9.42
% Return on
shareholders' equity 21.82 24.57 39.76 41.86 56.94
Gearing Ratio (N4) 0.42 0.37 0.72 0.98 1
Weighted average shares
outstanding (N3) 4,305,458 3,766,454 2,812,500 2,750,000 2,750,000
</TABLE>
N1: The financial data for the years ended March 31, 1996, 1995 and 1994 is
proforma, and has been prepared as if the Group structure resulting
from Man Sang BVI's merger in January 1996 with Unix Source America,
Inc. was in existence from April 1, 1994 through March 31, 1996. See
"Item 1 - Business - History of the Company."
N2: Income before income taxes and net income is from continuing
operations.
N3: Per share data and weighted average shares outstanding have been
retroactively restated to give effect to the 1-for-4 reverse split in
1997.
N4: "Gearing ratio" represents the ratio of the Company's total debts and
minority interests to shareholders' equity.
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.
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<PAGE> 20
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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<PAGE> 21
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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<PAGE> 22
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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<PAGE> 23
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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<PAGE> 24
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) interest income of about HK$11.4 million was earned from funds
deposited for subscription monies of 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$67.5 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
-22-
<PAGE> 25
(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.
-23-
<PAGE> 26
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
-24-
<PAGE> 27
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.
-25-
<PAGE> 28
ITEM 8. 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, 1998, 1997 and 1996 F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1998, 1997 and 1996 F-5
Consolidated Statement of Cash Flows for the years
ended March 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
-26-
<PAGE> 29
ITEM 9. 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
contained 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 BVI 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.
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<PAGE> 30
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTIONS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of June 26, 1998, the name and age, position
held with the Company and term of office, of each director or executive officer
of the Company, and the period or periods during which he or she has served in
his or her respective position(s).
<TABLE>
<CAPTION>
Name Age Position(s) held Term of office
- ---- --- ---------------- --------------
<S> <C> <C> <C>
Cheng Chung Hing, Ricky 37 President and
Chairman of the Board 1/96 - present
Chief Executive Officer 1/98 - present
Cheng Tai Po 46 Vice Chairman of
the Board 1/96 - present
Yan Sau Man, Amy 35 Vice President and
Director 1/96 - present
Hung Kwok Wing, Sonny 34 Vice President and
Director 11/96 - present
Ng Hak Yee, Patrick 36 Chief Financial Officer 12/95 - 3/96
and
3/97 - present
Director 9/97 - present
Sio Kam Seng, Sam 39 Chief Executive Officer
and Director 1/96 - 1/98
Lai Chau Ming, Matthew 45 Director 11/96 - present
Yuen Ka Lok, Ernest 35 Director 11/96 - present
Ho Suk Han, Sophia 29 Secretary 1/98 - 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.
-28-
<PAGE> 31
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 BVI since December 1995. He was appointed a member of the
Compensation Committee of the Board of Directors since September 8, 1997. On
January 2, 1998, he was appointed Chief Executive Officer of the Company. Mr.
Cheng was appointed as Chairman and a Director of MSIL on August 8, 1997 and
August 4, 1997, respectively. Prior to the reorganization of the Group in late
1995 which culminated in the Exchange in January 1996 (the "Group
Reorganization"), he had served as chairman and president of various companies
within the Man Sang Group. Mr. 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 BVI since December 1995. He
was appointed as Deputy Chairman and a Director of MSIL on August 8, 1997 and
August 4, 1997, respectively. Prior to the Group Reorganization, he had served
as vice-chairman of various companies within the Man Sang Group. Mr. Cheng has
over 15 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.
Yan Sau Man, Amy, has served as Vice President and a Director of the Company
since January 8, 1996 and of the Man Sang BVI since December 1995. She was
appointed as a Director of MSIL on August 12, 1997. 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. He was appointed as a Director of MSIL on August
12, 1997. Prior to joining the Company, Mr. Hung was employed as Deputy Manager
of Dah Sing Bank from February 1996 to October 1996 and as a Branch Manager of
The Hongkong and Shanghai Banking Corporation Limited 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 and as a Director of the Company since September 8, 1997. He was
appointed as Company Secretary and a Director of MSIL on August 8, 1997 and
August 12, 1997 respectively. He initially joined the Man Sang Group as
Controller in April 1994 and served as Chief Financial Officer of Man Sang BVI
from December 1995 to March 1996. Mr. Ng is responsible for financial management
of the Man Sang Group and participates in formulation and execution of corporate
policies. 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
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<PAGE> 32
April 1993 to March 1994, Mr. Ng was 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 a certified public
accountant, a fellow of the Association of Chartered Certified Accountants and
also an associate of the Hong Kong Society of Accountants.
Lai Chau Ming, Matthew, has served as a Director of the Company since November
1996. He was appointed a Member of the Compensation Committee of the Board of
Directors since September 8, 1997. Mr. Lai is currently employed as a Senior
Manager of Vickers Ballas Hong Kong Limited ("Vickers Ballas"). Prior to his
joining Vickers Ballas in July 1996, Mr. Lai served from 1972 to 1996 as a
Senior Manager of Sun Hung Kai Investment Company Limited, one of the biggest
investment companies in Hong Kong. Mr. Lai has over 25 years' experience in
investment. He is experienced in the areas of financial management and planning.
Yuen Ka Lok, Ernest, has served as a Director of the Company since November
1996. He was appointed Chairman of the Compensation Committee of the Board of
Directors since September 8, 1997. Mr. Yuen was also appointed a Director of
MSIL on August 12, 1997. Mr. Yuen is a solicitor and is currently a Partner in
the law firm of Messrs. Yuen & Partners. Mr. Yuen joined Messrs. Ivan Tang & Co
("ITC") as a Consultant in August 1994 and became a Partner in January 1996.
ITC, Hong Kong office changed its practice name to Yuen & Partners in August
1997. Prior to his joining ITC, from March 1992 to August 1994, Mr. Yuen was
employed as an Assistant Solicitor at Messrs. Van Langenbery & Lau ("VLL") and
Messrs. AB Nasir, respectively. Prior to his joining VLL, Mr. Yuen was an
Articled Clerk at Messrs. Robin Bridge & John Liu. From 1985 to 1987, Mr. Yuen
was an audit trainee at Price Waterhouse, an international accounting firm. Mr.
Yuen is experienced in the civil and criminal litigations as well as the general
commercial transactions.
Ho Suk Han, Sophia, has served as the Secretary of the Company since January
1998. Miss Ho has over 7 years' experience in company secretarial work in an
international accounting firm and various listed companies in Hong Kong. She is
an associate of The Hong Kong Institute of Company Secretaries and The Institute
of Chartered Secretaries and Administrators in Hong Kong Limited.
FAMILY RELATIONSHIPS
Cheng Chung Hing, Ricky and Cheng Tai Po are brothers. Other than the foregoing,
there are no family relationships among 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 copies of the forms provided to the Company, or
written representations that no other filing of forms was required, the Company
has found that (i) Cafoong Limited became the beneficial owner of more than 10%
of the Common Stock on January 8, 1996, and such company filed a Form 3 in
respect thereof in February 1997; (ii) Cheng Chung Hing, Ricky and Cheng Tai Po
became indirect beneficial owners of more than 10% of the Company's Common Stock
on January 8, 1996, by virtue of their respective holding of 60% and 40% of all
the issued and outstanding stock of Cafoong Limited and such individuals
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<PAGE> 33
filed Forms 3 in respect thereof on February 20, 1997; and (iii) Cheng Chung
Hing, Ricky; Cheng Tai Po; Yan Sau Man, Amy; Ng Hak Yee, Patrick Sio Kam
Seng, Sam and Hung Kwok Wing, Sonny were granted non-qualified stock options to
purchase Common Stock on September 16, 1997, and such individuals filed Forms 4
in respect thereof on April 9, 1998. See "Item 11- Executive Compensation."
ITEM 11. EXECUTIVE COMPENSATION
OVERVIEW; AND THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
While for convenience of reference this annual report on Form 10-K has used "the
Company" when referring to the overall business of the Group, the Company itself
actually has no employees. For fiscal 1998, all executive officers receive their
salaries and half of their bonus (if applicable) from MSIL. In September 1997,
the Company's Board of Directors established a Compensation Committee. However,
the total salary and bonus of each executive officer for fiscal 1998 was
determined by Cheng Chung Hing, Ricky; Cheng Tai Po; Yan Sau Man, Amy; Hung Kwok
Wing, Sonny and Ng Hak Yee, Patrick (the "Five Directors") at the beginning of
fiscal 1998. The Five Directors, who are also directors of MSIL, in determining
the overall compensation of the executive officers, (i) recognized that from
fiscal 1994 through fiscal 1997, the Company was consistently profitable -- its
net income increased by 175.6%, its gross profit margin increased from 24.6% to
38.9%, and its net book value per share increased from HK$9.42 to HK$43.92, (ii)
considered the importance of attracting and retaining the highly skilled
executive officers in the management team that has been responsible for such
financial performance, (iii) acknowledged the efforts, skills and
responsibilities of, and contributions made by, each such executive officer, and
(iv) considered the competitiveness of the Company's compensation packages.
With respect to the Chairman and the Vice Chairman, the Five Directors
acknowledged that they have brought to the Company not only their expertise and
personal relationships in the pearl industry, but also their vision, foresight
and efforts to bring about the Company's financial performance over the past
several years, and to steer the Company toward the more profitable cultured
pearl business. The Five Directors also took into account the need to retain
such highly qualified officers by providing competitive compensation packages,
and granted a bonus to each of Cheng Chung Hing, Ricky, President, Chief
Executive Officer and Chairman of the Board and Cheng Tai Po, Vice Chairman.
In September 1997, the newly established Compensation Committee of the Company's
Board of Directors, the Company's Board of Directors, and the Board of MSIL
recognized that over the past several years, the price of the Company's Common
Stock has not reflected the Company's year-after-year improvements in financial
performance. As an incentive to the executives to improve the relationship
between stock price and financial performance, when MSIL entered into employment
agreements with certain executives of the Company, the salaries of these
executives were fixed at their 1998 levels, but each such executive was granted
options to purchase the Company's Common Stock and MSIL's shares. See "Item 11 -
Executive Compensation Employment Agreements" and "Item 11 - Executive
Compensation - Options Grants in Fiscal
-31-
<PAGE> 34
Year 1998." One of the Compensation Committee's objectives is to make a portion
of the executives' compensation more dependent on the performance of the
Company's Common Stock, in addition to its financial performance and results of
operations.
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 and
its subsidiaries during the three years ended March 31, 1998 of the Company's
Chief Executive Officer and each of its other most highly compensated executive
officers whose compensation exceeded $100,000 (the "Named Officers") during
fiscal 1998.
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Compensation
Securities
Name and Principal Other Annual Underlying
Position Year Salary Bonus Compensation(3) Option Grant
-------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
$ $ $ # (5)
Cheng Chung Hing, Ricky 1998 388,100 323,400(2) 92,135(4) 100,000 &
Chairman of the Board, 11,800,000
President and CEO 1997 388,100 323,400 45,650(4) 0
1996 194,049 - 41,000(4) N/A
Cheng Tai Po 1998 388,100 323,400(2) - 100,000 &
Vice Chairman 11,800,000
1997 388,100 323 400 - 0
1996 194,049 - - N/A
Yan Sau Man, Amy 1998 129,366 - - 100,000 &
Vice President and Director 5,000,000
1997 124,191 - - 0
1996 88,394 - - N/A
Hung Kwok Wing, Sonny 1998 129,366 - - 100,000 &
Vice President and Director (6) 4,000,000
Ng Hak Yee, Patrick 1998 129,366 - - 100,000 &
Chief Financial Officer and 4,000,000
Director (6)
Sio Kam Seng, Sam (7) 1998 100,976 - - 100,000 &
(resigned on Jan. 2, 1998) 2,000,000
1997 129,366 - - 0
1996 55,727 - - N/A
</TABLE>
(1) Information is shown for the March 31 fiscal years of the Company, and,
prior to January 8, 1996, of Man Sang BVI, which employed the Named
Officers. Each of the Named Officers began serving the Company in his
or her capacity as indicated in "Item 10 Directors, Executive Officers,
Promotions and Control Persons; Compliance with Section
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<PAGE> 35
16(a) of the Exchange Act - Identification of Directors and Executive
Officers." The compensation shown for the Named Officers for the period
commencing on April 1, 1995 through January 7, 1996 was paid by Man
Sang BVI.
(2) Half of the bonus of each of Mr. Cheng Chung Hing, Ricky and Mr. Cheng
Tai Po for fiscal 1998 is paid by the Company, and half of which is
paid by MSIL.
(3) 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.
(4) 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 $92,135. The estimated fair rental
value is based on the "rateable value" assessed by the Rating and
Valuation Department of The Government of Hong Kong Special
Administrative Region. 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.
(5) Each Named Executive received options from both the Company and MSIL.
See "Item 11 - Executive Compensation - Options Grants in Fiscal Year
1998."
(6) In fiscal 1998, each of Mr. Hung Kwok Wing, Sonny and Mr. Ng Hak Yee,
Patrick became, for the first time, a person whose compensation is to
be reported in this table. Therefore, their compensation in prior years
is not reported.
(7) Subsequent to the resignation of Mr. Sio Kam Seng, Sam, the options
granted to him by the Company and MSIL expired on April 2, 1998,
and February 2, 1998, respectively.
OPTION GRANTS IN FISCAL YEAR 1998
The Company
The Compensation Committee and the Board recognized the need for continuously
providing competitive compensation and strong incentives to the directors and
senior employees of the Company who have made significant contribution to the
operations and financial performance of the Company, and to increase the portion
of each executive's compensation that is related to the performance of the
Company's stock. In this respect, on September 16, 1997, pursuant to the
Company's 1996 Stock Option Plan, the Committee granted at no consideration to
certain directors and senior employees non-qualified options (half of which vest
on September 16, 1998, and half of which vest on September 16, 1999) to purchase
a total of 850,000 shares of the Company's Common Stock, at an exercise price of
$1.22 per share (representing 85% of the fair market value of the Common Stock
on the date of grant as determined pursuant to Article 6.2 of the 1996 Stock
Option Plan). On the same day, the Board unanimously adopted a Consent of
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<PAGE> 36
Action to approve, ratify and confirm such grant of options to Mr. Cheng Chung
Hing, Ricky, Chairman and President of the Company, and a member of the
Compensation Committee. These options are not intended to be eligible for
special tax treatment as an Incentive Stock Option under Section 422 of the
Internal Revenue Code of 1986, as amended.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of
Stock Price Appreciation for
Individual Grants Option Term
Number of Percent of
Securities Total Options
Underlying Granted to
Name and Options Employees Exercise Expiration
Principal Position Granted in 1998 Price Date 5% 10%
------------------ ------- ------- ----- ---- -- ---
(#) (%) ($/Share) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Cheng Chung Hing, Ricky 100,000 11.76 1.22 9/16/2007 110,932 248,905
Chairman of the Board,
President and Chief
Executive Officer
Cheng Tai Po 100,000 11.76 1.22 9/16/2007 110,932 248,905
Vice Chairman
Yan Sau Man, Amy 100,000 11.76 1.22 9/16/2007 110,932 248,905
Vice President
Hung Kwok Wing, Sonny 100,000 11.76 1.22 9/16/2007 110,932 248,905
Vice President
Ng Hak Yee, Patrick 100,000 11.76 1.22 9/16/2007 110,932 248,905
Chief Financial Officer
Sio Kam Seng, Sam* 100,000 11.76 1.22 9/16/2007 110,932 248,905
(Chief Executive Officer,
resigned on 1/2/1998)
</TABLE>
*Subsequent to the resignation of Mr. Sio Kam Seng, Sam, the options granted to
him expired on April 2, 1998, pursuant to the Company's 1996 Stock Option Plan.
MSIL
MSIL adopted a share option scheme (the "Share Option Scheme") on September 8,
1997. The Share Option Scheme is administered by the MSIL Board of Directors,
whose decisions are final and binding on all parties.
Options to subscribe for MSIL shares of nominal value of HK$0.10 were granted to
the directors and certain senior employees of MSIL on October 16 and December 3,
1997 at a subscription price of HK$0.6208 and HK$0.446 per share respectively.
The subscription price represented 80% of the average closing prices of the
shares on The Stock Exchange of Hong Kong Limited as stated in such exchange's
daily quotation sheets for the five trading days immediately preceding the date
on which the options were offered to the directors and employees. The options
can be exercised in a period of two years commencing on the expiry of six months
after the options are accepted in accordance with the Share Option Scheme, and
expiring on the last day of such two-year period.
-34-
<PAGE> 37
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rate of
Stock Price Appreciation for
Individual Grants Option Term
Number of Percent of
Securities Total MSIL Options
Underlying Granted to
Name and Options Employees Exercise Expiration
Principal Position Granted in 1998 Price Date 5% 10%
------------------ ------- ------- ---------- ---------- -- ---
(#) %) (HK$/Share) (HK$) (HK$)
<S> <C> <C> <C> <C> <C> <C>
Cheng Chung Hing, Ricky 10,000,000 21.16 0.6208 4/19/2000 2,561,285 3,651,080
Chairman of the Board, 1,800,000 3.81 0.446 6/8/2000 332,235 473,290
President and Chief
Executive Officer
Cheng Tai Po 10,000,000 21.16 0.6208 4/19/2000 2,561,285 3,651,080
Vice Chairman 1,800,000 3.81 0.446 6/8/2000 332,235 473,290
Yan Sau Man, Amy 5,000,000 10.58 0.6208 4/19/2000 1,280,643 1,825,540
Vice President
Hung Kwok Wing, Sonny 4,000,000 8.47 0.6208 4/19/2000 1,024,514 1,460,432
Vice President
Ng Hak Yee, Patrick 4,000,000 8.47 0.6208 4/19/2000 1,024,514 1,460,432
Chief Financial Officer
Sio Kam Seng, Sam* 2,000,000 4.23 0.6208 4/19/2000 512,257 730,216
(Chief Executive Officer,
resigned on 1/2/1998)
</TABLE>
*Subsequent to the resignation of Mr. Sio Kam Seng, Sam, the options granted to
him expired on February 2, 1998, pursuant to MSIL's Share Option Scheme.
PERFORMANCE GRAPH
The following graph summarizes cumulative total shareholder return (assuming
reinvestment of dividends) on the Common Stock of the Company and IWI Holding
Limited ("IWI"), a peer issuer selected by the Company. The Company's Common
Stock was first registered under Section 12(g) of the Securities Exchange Act of
1934, as amended, on June 17, 1996. As there was no trading of the Company's
Common Stock on June 17 and June 18, 1996, the trading price of the Common Stock
of the Company was not available. Therefore, the measurement period hereto
-35-
<PAGE> 38
commenced on June 19, 1996 and ended on March 31, 1998, the Company's 1998
fiscal year end date. The graph assumes that $100 was invested on June 19, 1996.
The comparisons in this graph are required by the Securities and Exchange
Commission and are not intended to forecast or be indicative of future stock
price performance or the financial performance of the Company. Shareholders are
encouraged to review the Financial Statements of the Company contained in Item 8
above.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
6/19/96 3/31/97 3/31/98
------- ------- -------
<S> <C> <C> <C>
The Company's Common Stock $100 $15.57 $8.93
IWI's Common Stock $100 $46.67 $8.32
</TABLE>
As there is no broad equity market index for the OTC Bulletin Board where the
Company's Common Stock is traded and there is no published industry or
line-of-business index for the pearl or jewellery business in which the Company
is engaged, the Company has selected IWI as a peer issuer for comparison. IWI is
engaged primarily in the design, assembly, merchandising and wholesale
distribution of jewellery and whose shares are traded on NASDAQ.
EMPLOYMENT AGREEMENTS
The Company itself has no employment agreement with any of its officers or
employees. However, MSIL entered into Service Agreements with each of Cheng
Chung Hung, Ricky; Cheng Tai Po; Yan Sau Man, Amy; Hung Kwok Wing, Sonny; and Ng
Hak Yee, Patrick, on September 8, 1997. The major terms of these agreements are
as follows:-
- - each service agreement is for an initial term of 3 years commencing on
September 1,
-36-
<PAGE> 39
1997, and may be terminated by either party by giving the other written
notice of not less than 3 months;
- - the annual basic salary payable to each of Cheng Chung Hing Ricky,
Cheng Tai Po, Yan Sau Man Amy, Hung Kwok Wing, Sonny and Ng Hak Yee,
Patrick, shall be HK$3 million, HK$3 million, HK$1 million, HK$1
million and HK$1 million respectively, subject to annual review by the
Board of MSIL every year; and
- - each of Cheng Chung Hing, Ricky, Cheng Tai Po, Yan Sau Man, Amy, Hung
Kwok Wing, Sonny and Ng Hak Yee, Patrick is also entitled to a
discretionary bonus in respect of each financial year. The amount of
such discretionary bonuses shall be determined by the MSIL Board each
year, provided that the aggregate of all discretionary bonuses payable
by MSIL to its executive directors in any financial year shall not
exceed 10% of the net profits (after tax and after extraordinary items)
of MSIL for such year as shown in its audited accounts.
NON-EMPLOYEE DIRECTORS COMPENSATION
The non-employee directors of the Company were compensated for their services as
directors in fiscal 1998 as follows:-
<TABLE>
<CAPTION>
Non-employee Directors Directors' Fee
----------------------- --------------
$
<S> <C>
Lai Chau Ming, Matthew 12,937
Yuen Ka Lok, Ernest 19,564
</TABLE>
No additional compensation of any nature was paid to any non-employee director
of the Company for their services as directors. In addition, MSIL paid $13,256
to Mr. Alexander Reid Hamilton (who is not a director of the Company) for his
services as a director of MSIL.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Cheng Chung Hing, Ricky, Chairman of the Board, Chief Executive and
President of the Company, is a member of the Compensation Committee. The other
two members are not executives of the Company or any of its subsidiaries, but
Mr. Yuen Ka Lok, Ernest, is a partner of Messrs. Yuen & Partners, one of the
legal advisors to the Company and its subsidiaries, and Mr. Lai Chau Ming,
Matthew, is a Senior Manager at Vickers Ballas, an affiliate of the Sponsor and
Manager, and one of the underwriters, in MSIL's IPO. Messrs. Yuen & Partners
receives its standard professional fees in the provision of legal services to
the Company and its subsidiaries, and Vickers Ballas' affiliate and MSIL dealt
with each other in an arms-length manner.
Except as described in this and the immediately preceding paragraphs, no
executive officer of the Company, (i) served as a member of the compensation
committee (or other board committee performing similar functions or, in the
absence of any such committee, the board of directors) of another entity, one of
whose executive officers served on
-37-
<PAGE> 40
the Company's Compensation Committee, or (iii) served as a
member of the compensation committee (or other board committee performing
similar functions or, in the absence of any such committee, the board of
directors) of another entity, one of whose executive officers served as a
director of the Company. Both Mr. Cheng Tai Po and Ms. Yau Sau Man, Amy, serve
as a director in several companies of which Mr. Cheng Chung Hing, Ricky is also
a director; however, neither of them is a Member of the Compensation Committee
of the Company's Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
COMMON STOCK
The following table is furnished as of June 26, 1998, 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 Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
<S> <C> <C> <C>
Cafoong Limited(2)(3) 2,750,000 64%
Cheng Chung Hing, Ricky(2)(3) 2,750,000 64%
Cheng Tai Po(2)(3) 2,750,000 64%
Yan Sau Man, Amy(3) - 0 - *
Hung Kwok Wing, Sonny(3) - 0 - *
Ng Hak Yee, Patrick(3) - 0 - *
Lai Chau Ming, Matthew(3) - 0 - *
Yuen Ka Lok, Ernest(3) - 0 - *
Ho Suk Han, Sophia(3) - 0 - *
All executive officers and directors
as a group (8 persons) 2,750,000 64%
</TABLE>
* : Less than 1%
(1) The disclosure is made pursuant to certain rules and regulations promulgated
by the Securities and Exchange Commission and the number of shares shown as
beneficially owned by any person may not be deemed to be beneficially owned for
other purposes. Unless otherwise indicated in these footnotes, each named
individual has sole voting and investment power with respect to such shares of
Common Stock, subject to community property laws, where applicable.
(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
38
<PAGE> 41
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 26, 1998, 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 Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------- ------------------------ ----------------
<S> <C> <C>
Cafoong Limited(1) 100,000 100%
</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
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 13. 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- as
of March 31, 1998. However, during fiscal 1998, the Company advanced to Mr.
Cheng Tai Po, Vice Chairman of the Company, a maximum amount of $65,700. The
maximum amount advanced to Cheng Chung Hing, Ricky during the past three years
was $356,268. Advances to Cheng Tai Po totaled $-0- as of March 31, 1998. The
maximum amount advanced to Cheng Tai Po during the past three years was
$524,913. 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, Ricky totaled $-0- and advances from Cheng Tai Po totaled $-0-
as of March 31, 1998. The maximum amount owed to Cheng Chung Hing, Ricky and to
Cheng Tai Po during the past three years was $724,993 and $-0- respectively.
- 39 -
<PAGE> 42
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".
Mr. Lai Chau Ming, Matthew, a Director of the Company and a Member of the
Compensation Committee of the Company's Board, is a Senior Manager of Vickers
Ballas, an affiliate of the Sponsor and Manager, and one of the underwriters, in
MSIL's IPO.
Mr. Yuen Ka Lok, Ernest, a director of both the Company and MSIL, and the
Chairman of the Compensation Committee of the Board of Directors of the Company,
is a partner of Messrs. Yuen & Partners, one of the legal advisors to the Group.
Messrs. Yuen & Partners receives its standard professional fees in the provision
of legal services to the Group.
- 40 -
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) ITEMS FILED AS PART OF REPORT:
1. FINANCIAL STATEMENTS
The financial statements of the Company as set forth in the Index to
Consolidated Financial Statements under Part II, Item 8 of this Form
10-K are hereby incorporated by reference.
2. Financial Statement Schedule
The financial statement schedule of the Company as set forth in Exhibit
27.1 to this Form 10-K is hereby incorporated by reference.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this
Form 10-K.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated September 12, 1997, and a Current
Report on Form 8-K/A, were filed by the Registrant with the Securities
and Exchange Commission to report under Item 5 thereof the initial
public offering of Man Sang International Limited.
(c) EXHIBITS
Exhibit No. Description
3.1 Restated Articles of Incorporation of Man Sang
Holdings, Inc., including the Certificate of
Designation, Preferences and Rights of a Series of
100,000 Shares of Preferred Stock, $.001 Par Value,
Designated "Series A Preferred Stock", filed on
January 12, 1996 (1)
3.2 Certificate of Designation, Preferences and Rights of
a Series of 100,000 Shares of Preferred
-41-
<PAGE> 44
Stock, $.001 Par Value, Designated "Series B
Preferred Stock", dated April 1, 1996 (2)
3.3 Amended Bylaws of Man Sang Holdings, Inc., effective
as of January 10, 1996 (1)
10.1 Acquisition Agreement, Dated December __, 1995,
between Unix Source America, Inc. and the
Shareholders of Man Sang International (B.V.I.)
Limited (1)
10.2 Tenancy Agreement, dated June 24, 1996, between Same
Fast Limited and Man Sang Jewellery Company Limited
(3)
10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3)
10.4 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Cheng Chung Hing
(5)
10.5 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Cheng Tai Po (5)
10.6 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Hung Kwok Wing (5)
10.7 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Sio Kam Seng (5)
10.8 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Ng Hak Yee (5)
10.9 Service Agreement, dated September 8, 1997, between
Man Sang International Limited and Yan Sau Man Amy
(5)
10.10 Contract dated November 8, 1997, between Nan'ao
Shaohe Pearl Seawater Culture Co., Ltd. of Guangdong
Province, People's Republic of China, Man Sang
Jewellery Co., Ltd. of Hong Kong and Chung Yuen
Company o/b Golden Wheel Jewellery Mfr. Ltd. of Hong
Kong to
-42-
<PAGE> 45
establish a cooperative joint venture in Nan'ao
County, Guangdong Province, People's Republic of
China (6)
10.11 Agreement dated January 2, 1998, between Overlord
Investment Company Limited and Excel Access Limited,
a subsidiary of the Company, pursuant to which Excel
Access Limited will purchase certain real property
located at Flat A, 33rd Floor, of Valverde, 11 May
Road, Hong Kong for HK$15,050,000 (6)
13.1 Annual report to security holders (4)
21.1 Subsidiaries of the Company
24.1 Power of Attorney (included on page 44).
27.1 Financial data schedule
99.1 Share Option Scheme of Man Sang International
Limited, a subsidiary of the Company (6)
- ------------------------------------------------
(1) Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K dated January 8, 1996
(2) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A dated June 17, 1996
(3) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended December
31, 1996
(4) Incorporated by reference to the Form 10-KSB/A for the fiscal year
ended March 31, 1997
(5) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1997
(6) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1997
(d) FINANCIAL STATEMENT SCHEDULE
See Item 14(a)(2) of this Form 10-K.
-43-
<PAGE> 46
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 29th day of June,
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 apepars
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 June 29, 1998
CHENG Chung Hing, Ricky and Chief Executive Officer
/s/ CHENG Tai Po
___________________________ Vice Chairman of the Board June 29, 1998
CHENG Tai Po
/s/ YAN Sau Man, Amy
___________________________ Vice President and Director June 29, 1998
YAN Sau Man, Amy
/s/ HUNG Kwok Wing, Sonny
___________________________ Vice President and Director June 29, 1998
HUNG Kwok Wing, Sonny
/s/ NG Hak Yee, Patrick
___________________________ Chief Financial Officer and Director June 29, 1998
NG Hak Yee, Patrick
</TABLE>
-44-
<PAGE> 47
SUPPLEMENTAL REPORTS TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report or proxy material has been forwarded to securities holders of
the Registrant covering the Registrant's last fiscal year; 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.
-45-
<PAGE> 48
MAN SANG HOLDINGS, INC.
Consolidated Financial Statements Years ended March
31, 1998, 1997 and 1996 and Independent Auditors'
Report
<PAGE> 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC.
Independent Auditors' Report.................................................F-1
Consolidated Statements of Income for the years ended
March 31, 1998, 1997 and 1996..............................................F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997....................F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1998, 1997 and 1996..................................F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996..............................................F-6
Notes to Consolidated Financial Statements...................................F-8
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the 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, 1998 and 1997,
and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
March 31, 1998, 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended March 31, 1998 in
conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE TOUCHE TOHMATSU
DELOITTE TOUCHE TOHMATSU
Hong Kong
June 29, 1998
F-1
<PAGE> 51
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1998 1998 1997 1996
---- ---- ---- ----
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Net sales ................................... 33,914 262,158 248,240 206,924
Cost of sales ............................... 20,364 157,412 151,773 136,879
---------- ---------- ---------- ----------
Gross profit ................................ 13,550 104,746 96,467 70,045
Rental income, gross ........................ 705 5,446 5,591 3,785
---------- ---------- ---------- ----------
14,255 110,192 102,058 73,830
Selling, general and administrative expenses
Pearls .................................... (6,965) (53,841) (52,247) (33,577)
Real estate investment .................... (454) (3,509) (3,312) (2,259)
---------- ---------- ---------- ----------
Operating income ............................ 6,836 52,842 46,499 37,994
Interest expense ............................ (477) (3,685) (6,320) (5,651)
Income in respect of subscription monies
received on subsidiary's public offering
(note 1) .................................. 1,474 11,391 -- --
Interest income ............................. 431 3,335 744 434
Gain on sale of property, plant and equipment 1,064 8,221 -- --
Other income ................................ 256 1,983 844 240
---------- ---------- ---------- ----------
Income before income taxes and minority
interests ................................. 9,584 74,087 41,767 33,017
Provision for income taxes (note 3) ......... (458) (3,543) (1,132) (1,434)
Minority interests .......................... (1,498) (11,576) -- --
---------- ---------- ---------- ----------
Net income .................................. 7,628 58,968 40,635 31,583
========== ========== ========== ==========
Basic earnings per common share ............. $ 1.77 $ 13.70 $ 10.79 $ 11.23
========== ========== ========== ==========
Diluted earnings per common share ........... $ 1.74 $ 13.42 $ 10.00 $ 11.23
========== ========== ========== ==========
Weighted average number of shares of
common stock outstanding
- basic ................................... 4,305,458 4,305,458 3,766,454 2,812,500
- diluted ................................. 4,390,097 4,390,097 4,062,992 2,812,500
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 52
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31,
---------
1998 1998 1997
---- ---- ----
US$ HK$ HK$
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................... 10,856 83,918 7,868
Restricted cash (note 7) ...................... 1,232 9,525 9,060
Accounts receivable, net of allowance
for doubtful accounts of HK$1,977 in 1998 and
HK$1,000 in 1997 ............................ 6,752 52,195 47,505
Inventories (note 4) .......................... 19,986 154,495 139,563
Prepaid expenses .............................. 314 2,429 1,357
Other current assets .......................... 1,884 14,563 3,795
Income taxes receivable ....................... -- -- 437
------ ------- -------
Total current assets ........................ 41,024 317,125 209,585
Property, plant and equipment, net
(note 5) ...................................... 6,560 50,711 32,862
Real estate investment, net (note 6) ............ 3,892 30,084 26,028
Long-term investments (note 1) .................. 702 5,430 --
------ ------- -------
Total assets .................................... 52,178 403,350 268,475
====== ======= =======
</TABLE>
F-3
<PAGE> 53
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
(Dollars in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
---------
1998 1998 1997
---- ---- ----
US$ HK$ HK$
<S> <C> <C> <C>
Current liabilities:
Short-term borrowings (note 7) .......................... 270 2,084 51,596
Current portion of long-term debt (note 8) .............. 444 3,434 1,498
Accounts payable ........................................ 503 3,887 23,882
Accrued payroll and employee benefits ................... 377 2,922 7,832
Other accrued liabilities ............................... 1,156 8,937 9,375
Income taxes payable .................................... 464 3,586 395
------- -------- -------
Total current liabilities ............................. 3,214 24,850 94,578
------- -------- -------
Long-term debt (note 8) ................................... 2,502 19,342 8,502
------- -------- -------
Minority interests ........................................ 11,506 88,944 --
======= ======== =======
Stockholders' equity:
Common stock of par value US$0.001
- authorized 25,000,000 shares; issued and outstanding,
4,305,960 shares in 1998 and 4,304,862 shares
in 1997 (note 10) ................................. 4 33 33
Series A preferred stock US$0.001 par value
- authorized, issued and outstanding 100,000
shares in 1998 and 1997 (entitled in liquidation
to US$2,500 (HK$19,325)) (note 10) ................ -- 1 1
Series B convertible preferred stock US$0.001 par value
- authorized 100,000 shares; no shares outstanding
(note 10) ............................................. -- -- --
Additional paid-in capital .............................. 12,112 93,627 46,059
Retained earnings ....................................... 22,873 176,808 117,840
Cumulative translation adjustments ...................... (33) (255) 1,462
------- -------- -------
Total stockholders' equity ................................ 34,956 270,214 165,395
------- -------- -------
Total liabilities and stockholders' equity ................ 52,178 403,350 268,475
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Series A Series B Additional
Common stock preferred stock preferred stock paid-in
Shares Amount Shares Amount Shares Amount capital
HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 ..... 10,000 77 -- -- -- -- 1,924
Share exchange (note 1) ........ (10,000) -- -- -- -- -- --
Reverse split (note 1) ......... 1,000,000 -- -- -- -- -- --
Issuance of common stock of
US$0.001par value and Series
A preferred stock (note 1) ... 11,000,000 16 100,000 1 -- -- (17)
Translation adjustment ......... -- -- -- -- -- -- --
Net income ..................... -- -- -- -- -- -- --
----------- ---- -------- ------- ------- ------ --------
Balance at March 31, 1996 ..... 12,000,000 93 100,000 1 -- -- 1,907
Issuance of Series B preferred
stock of US$0.001 par value .. -- -- -- -- 6,760 -- 44,092
Conversion of Series B preferred
stock to common stock ........ 5,219,448 40 -- -- (6,760) -- (40)
Reverse split (note 10) ........ (12,914,586) (100) -- -- -- -- 100
Translation adjustment ......... -- -- -- -- -- -- --
Net income ..................... -- -- -- -- -- -- --
----------- ---- -------- ------- ------- ------ --------
Balance at March 31, 1997 ..... 4,304,862 33 100,000 1 -- -- 46,059
Issuance of common stock of
US$0.001 par value ........... 1,098 -- -- -- -- -- --
Public offering of common shares
by subsidiary, net of issuance
costs (note 1) ............... -- -- -- -- -- -- 45,533
Compensation expense:
- the Company ................ -- -- -- -- -- -- 1,034
- a listed subsidiary ........ -- -- -- -- -- -- 1,001
Translation adjustment ......... -- -- -- -- -- -- --
Net income ..................... -- -- -- -- -- -- --
----------- ---- -------- ------- ------- ------ --------
Balance at March 31, 1998 ..... 4,305,960 33 100,000 1 -- -- 93,627
----------- ---- -------- ------- ------- ------ --------
US$4 -- -- US$12,112
---- ------- ------ --------
</TABLE>
<TABLE>
<CAPTION>
Total
Cumulative stock-
Retained translation holders'
earnings adjustments equity
HK$ HK$ HK$
<S> <C> <C> <C>
Balance at March 31, 1995 ..... 45,622 (283) 47,340
Share exchange (note 1) ........ -- -- --
Reverse split (note 1) ......... -- -- --
Issuance of common stock of
US$0.001par value and Series
A preferred stock (note 1) ... -- -- --
Translation adjustment ......... -- 509 509
Net income ..................... 31,583 -- 31,583
--------- --------- --------
Balance at March 31, 1996 ..... 77,205 226 79,432
Issuance of Series B preferred
stock of US$0.001 par value .. -- -- 44,092
Conversion of Series B preferred
stock to common stock ........ -- -- --
Reverse split (note 10) ........ -- -- --
Translation adjustment ......... -- 1,236 1,236
Net income ..................... 40,635 -- 40,635
--------- --------- ---------
Balance at March 31, 1997 ..... 117,840 1,462 165,395
Issuance of common stock of
US$0.001 par value ........... -- -- --
Public offering of common shares
by subsidiary, net of issuance
costs (note 1) ............... -- -- 45,533
Compensation expense:
- the Company ................ -- -- 1,034
- a listed subsidiary ........ -- -- 1,001
Translation adjustment ......... -- (1,717) (1,717)
Net income ..................... 58,968 -- 58,968
--------- --------- ---------
Balance at March 31, 1998 ..... 176,808 (255) 270,214
--------- --------- ---------
US$22,873 US$(33) US$34,956
--------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 55
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1998 1998 1997 1996
---- ---- ---- ----
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Cash flow from operating activities
Net income ..................................... 7,628 58,968 40,635 31,583
Adjustments to reconcile net income to net
cash provided (used) in operating activities:
Bad debt provision ........................... 126 977 1,000 575
Compensation expense ......................... 263 2,035 -- --
Depreciation and amortization ................ 525 4,056 3,110 3,247
Loss (gain) on sale of property, plant and
equipment .................................. (1,064) (8,221) 450 54
Minority interests ........................... 1,498 11,576 -- --
Changes in operating assets and liabilities:
Accounts receivable ........................ (734) (5,674) (14,694) (5,956)
Inventories ................................ (2,056) (15,897) (53,039) (5,495)
Prepaid expenses ........................... (138) (1,074) (163) (898)
Other current assets ....................... (175) (1,354) 2,943 (4,428)
Income taxes receivable .................... 56 437 (437) 583
Accounts payable ........................... (2,536) (19,604) 1,212 (29,082)
Accrued payroll and employee benefits ...... (634) (4,904) 6,580 531
Other accrued liabilities .................. (50) (386) (814) 4,627
Income taxes payable ....................... 413 3,193 374 (250)
------- -------- -------- --------
Net cash provided (used) in operating activities 3,122 24,128 (12,843) (4,909)
------- -------- -------- --------
Cash flow from investing activities
Purchase of property, plant and equipment ...... (4,242) (32,785) (25,670) (1,381)
Purchase of long-term investments .............. (702) (5,430) -- --
Expenditure on real estate investment .......... (626) (4,842) -- (83)
Increase in restricted cash .................... (60) (465) (3,199) (5,861)
Proceeds from sale of property, plant
and equipment ................................ 1,429 11,047 -- 234
------- -------- -------- --------
Net cash used in investing activities .......... (4,201) (32,475) (28,869) (7,091)
------- -------- -------- --------
Cash flow from financing activities
Repayment of bank overdrafts ................... (32,697) (252,746) (423,442) (270,246)
Repayment of short-term borrowings ............. (14,737) (113,920) (154,681) (97,006)
Repayment of long-term debt .................... (261) (2,020) (841) (529)
Increase in bank overdrafts .................... 30,933 239,114 422,459 269,323
Net proceeds from issuance of stock by
subsidiary ................................... 15,965 123,413 -- --
Increase in short-term borrowings .............. 10,096 78,040 150,530 109,166
Increase in long-term debt ..................... 1,823 14,100 9,940 --
Net proceeds from issuance of convertible
preferred stock .............................. -- -- 44,092 --
Advances from related parties .................. -- -- 139 31,058
Repayments to related parties .................. -- -- (2,904) (31,176)
------- -------- -------- --------
Net cash provided by financing activities ...... 11,122 85,981 45,292 10,590
------- -------- -------- --------
</TABLE>
F-6
<PAGE> 56
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1998 1998 1997 1996
---- ---- ---- ----
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents ..................................... 10,043 77,634 3,580 (1,410)
Cash and cash equivalents at beginning
of year ......................................... 1,018 7,868 3,741 4,783
Exchange adjustments .............................. (205) (1,584) 547 368
------- ------- ----- ------
Cash and cash equivalents at end of year .......... 10,856 83,918 7,868 3,741
======= ======= ===== ======
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest and finance charges .................... 485 3,751 6,780 5,651
Income taxes paid ............................... 78 606 1,195 1,098
</TABLE>
Capital lease obligations were incurred to acquire motor vehicles of HK$696
(US$90) in 1998, HK$360 in 1997 and HK$Nil in 1996.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 57
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, although 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 subsequent to the
Reorganization. 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, Special Administrative Region of
the People's Republic of China ("Hong Kong") and the processing
activities are conducted by subsidiaries operating in Guangdong
Province, the People's Republic of China ("China"). The Company also
derives rental income from real estate located at its pearl processing
facility in China and from offices in Hong Kong.
On November 8, 1997, the Company made an investment of Renminbi 5.1
million (HK$4.7 million) for a 19.5% stake in a pearl farm located in
Nan'ao County in Guangdong Province in China through a cooperative
joint venture which has a duration of 11 years. In case of termination
or liquidation of the joint venture, the Company is entitled to receive
19.5% of the net assets of the joint venture.
During the three years ended March 31, 1998, over 94% of the Company's
purchases were pearls. As pearl is a commodity and its value is subject
to prevailing market conditions, it is a customary practice in the
pearl market that buyers and sellers of pearls do not normally enter
into any long-term contracts. The Company currently does not have any
fixed term purchase contracts with any pearl farmers or suppliers. The
Company also considers that any adverse change in climate and
environmental conditions at the source regions of pearls may have an
adverse effect on pearl harvesting and hence the supply of pearls. The
Company has developed relationships with a network of suppliers to
ensure a continuous supply of different types of pearls.
F-8
<PAGE> 58
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
The Company has adopted a policy of diversification of sources under
which pearls are purchased from different suppliers in different
countries or regions so that the Company is less susceptible to changes
in raw materials supply due to the changes in climate and environmental
conditions at any particular source region. The Company negotiates the
purchases of pearls on an as needed basis at prevailing market prices.
The prices of pearls fluctuate according to demand and supply
conditions in the market. Any significant increase in the prices of
pearls may affect the profitability of the Company. The Company has
expanded its product range in recent years in order to reduce the
impact of price fluctuations of any one type of pearl. However, there
can be no assurance that pearls will be available from its suppliers in
the quantities, of the quality and on the terms required by the
Company. For each of the three years ended March 31, 1998 the largest
supplier of the Company accounted for approximately 17.5%, 17.2% and
21.4% of the Company's total purchases, respectively.
Of the Company's purchases, approximately 68% in 1998, 55% in 1997 and
67% in 1996 was settled in Renminbi ("RMB"), the currency of China.
Accordingly, the Company has a direct exposure to the risk of any
adverse exchange rate fluctuation in RMB. Nevertheless, the Company has
not recorded any material foreign currency gain or loss or experienced
any difficulties in obtaining sufficient RMB during the past three
years.
Since January 1, 1994, the government of China has adopted a unified
floating exchange rate system to allow the exchange rate of RMB to be
largely determined by market supply and demand and promulgated a series
of rules and policy to provide a platform for full convertibility of
RMB. Even though the prevailing exchange rate for RMB to Hong Kong
dollars is relatively stable under the current regime as a result of
the above system, there can be no assurance that such exchange rate
will not become volatile or that there will be no deterioration of the
macroeconomic environment in either China or Hong Kong which may lead
to a fluctuation in the exchange rate for RMB to Hong Kong dollars. In
the case of a significant appreciation in RMB, the costs of purchases
of the Company may increase significantly, which will have an adverse
effect on the profitability of the Company.
F-9
<PAGE> 59
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
Man Sang International Limited ("MSIL"), an indirectly owned subsidiary
of the Company and a company incorporated on July 30, 1997 as an
exempted company under the Companies Act 1981 of Bermuda (as amended),
applied for listing on The Stock Exchange of Hong Kong Limited (the
"Hong Kong Stock Exchange") of shares of HK$0.1 each of the capital
stock (the "Shares") and the warrants to purchase the Shares (the
"Warrants"), including, inter alia, 127.5 million Shares (the "New
Issue") to be offered and sold to the investing public in Hong Kong at
HK$1.08 per share for an aggregate offering price of HK$137.7 million,
together with the Warrants in the proportion of one Warrant for every
five shares. Each Warrant entitles the holder thereof to subscribe for
one Share at an exercise price of HK$1.3 each from the date of issue up
to and including March 31, 1999.
On September 25, 1997, the Hong Kong Stock Exchange granted the listing
and permission to deal the Shares and the Warrants of MSIL and the
trading of such Shares and Warrants commenced on the Hong Kong Stock
Exchange on September 26, 1997. Following the initial public offering
of the New Issue, the Company holds 73.02% of the capital stock of
MSIL. In connection with the initial public offering of the New Issue,
net proceeds of approximately HK$123.4 million were raised and a fee of
approximately HK$11.4 million was received by the Company as part of
the arrangement of the New Issue in the initial public offering. The
Company has not recognized any gain arising on the amount in excess of
the Company's carrying value of its interest in MSIL and such amount
has been included in the stockholders' equity as part of the additional
paid-in capital.
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, and
the restatement of real estate investment at cost, which is stated at
open market value estimated by external professional valuers for local
statutory reporting. At March 31, 1998, 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-10
<PAGE> 60
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 Man Sang
Holdings, Inc. and 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 labor 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:
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
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.
Valuation of long-lived assets - The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including
goodwill and other intangible assets, when events and circumstances
warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from
such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair market value of the long-lived
asset. Fair market value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair market values are reduced for disposal
costs.
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.
F-11
<PAGE> 61
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
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 ("EPS") - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". This pronouncement
provides for the calculation of basic and diluted EPS which is
different from the previous calculation of primary and fully diluted
EPS and requires restatement of such EPS information for all prior
periods presented. Reconciliation of the basic and diluted EPS is as
follows:
<TABLE>
<CAPTION>
For the year ended March 31, 1998 For the year ended March 31, 1997
--------------------------------- ---------------------------------
Earnings Shares EPS Earnings Shares EPS
HK$'000 HK$ HK$'000 HK$
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to
common stockholders 58,968 4,305,458 13.70 40,635 3,766,454 10.79
Effect of dilutive securities ----- -----
series B preferred stock - - - 296,538
Effect of dilutive stock options
granted by the Company - 84,639 - -
Effect of dilutive stock options
granted by a listed subsidiary (46) - - -
------- --------- ------- ---------
Diluted EPS
Net income available to
common stockholders,
including conversion 58,922 4,390,097 13.42 40,635 4,062,992 10.00
------- --------- ----- ------- --------- -----
</TABLE>
The effect on consolidated EPS of warrants issued by MSIL, which enable
its holders to purchase ordinary shares of MSIL, was not included in
the computation of diluted EPS because the exercise price of the
warrants was greater than the average market price of such ordinary
shares.
F-12
<PAGE> 62
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Stock option plan - The Company has elected to account for its stock
option plan using the fair value method in accordance with SFAS No.123
"Accounting for Stock-Based Compensation". Under the fair value method,
compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period.
Employee benefits - The Company does not provide for any retirement or
post-retirement 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, 1998. 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.
New accounting standards not yet adopted - In June 1997, the FASB
issued two new disclosure standards. Results of operations and
financial position will be unaffected by implementation of these new
standards.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires
that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, establishes standards for the way
that public enterprises report information about operating segments in
financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic
areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
F-13
<PAGE> 63
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent
issuance of these standards, management has been unable to fully
evaluate the impact, if any, they may have on future financial
statement disclosures.
In February 1998, the FASB issued SFAS No.132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which amends the
disclosure requirements for pensions and other postretirement benefits.
Adoption of the standard will not significantly change the Company's
financial statement disclosures.
INCOME TAXES
Income is subject to taxation in the various countries in which the
Company and its subsidiaries operate.
The components of income before income taxes and minority interests are
as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
---- ---- ----
HK$ HK$ HK$
<S> <C> <C> <C>
Hong Kong......................................................... 21,867 (1,333) 2,870
Other regions in China............................................ 59,350 48,694 30,147
Corporate expenses, net........................................... (7,130) (5,594) -
------- ------- -------
74,087 41,767 33,017
======= ======= =======
</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.
F-14
<PAGE> 64
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
3. INCOME TAXES - continued
The Company has three subsidiaries which are incorporated in Guangdong
Province, China and operate in the special economic zone of Shenzhen.
These companies are subject to 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. These subsidiaries have applied for the full exemption. The
exemptions applicable to these companies will expire in 1999, 2000 and
2002, respectively. These exemptions do not apply to rental income.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
---- ---- ----
HK$ HK$ HK$
Current tax:
<S> <C> <C> <C>
United States..................................................... 1,769 444 195
Foreign subsidiaries operating in:
Hong Kong....................................................... 1,154 529 1,197
Other regions in China.......................................... 620 159 42
------- ------- -------
3,543 1,132 1,434
======= ======= =======
</TABLE>
Had the tax holidays and concessions detailed above not been available,
the tax charge would have been increased by HK$9,282 in 1998, HK$9,354
in 1997 and HK$5,412 in 1996.
F-15
<PAGE> 65
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
3. INCOME TAXES - continued
A reconciliation between the provision for income taxes computed by
applying the United States statutory tax rate to income before taxes
and the actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
---- ---- ----
HK$ 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.................... 25,190 14,201 11,226
International rate difference..................................... (21,824) (16,145) (8,676)
Overprovision in prior years...................................... (555) (117) -
Tax attributable to income not subject to taxation................ - - (1,311)
Other............................................................. 732 3,193 195
------- ------- -------
Income tax provision.............................................. 3,543 1,132 1,434
======= ======= =======
</TABLE>
U.S. deferred tax liabilities have not been provided on approximately
HK$231,000 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$51,000.
4. INVENTORIES
Inventories by major categories are summarized as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
HK$ HK$
<S> <C> <C>
Raw materials.................................................................. 1,421 12,432
Work in progress............................................................... 43,876 39,531
Finished goods................................................................. 109,198 87,600
------- -------
154,495 139,563
======= =======
</TABLE>
F-16
<PAGE> 66
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
1998 1997
HK$ HK$
<S> <C> <C>
Leasehold land and buildings................................................... 49,909 31,222
Plant and machinery ........................................................... 3,145 2,630
Furniture and equipment........................................................ 4,623 3,913
Motor vehicles................................................................. 4,176 3,321
Less: accumulated depreciation................................................. (11,142) (8,224)
------- -------
Net book value 50,711 32,862
======= =======
Included in property, plant and equipment are assets acquired under
capital leases with the following net book values:
March 31,
1998 1997
HK$ HK$
At cost:
Motor vehicles................................................................. 1,230 360
Less: accumulated amortization................................................. 236 45
------- -------
994 315
======= =======
</TABLE>
Amortization of capital lease assets, which is included in depreciation
expense in the accompanying consolidated statements of income, was
HK$191 in 1998, HK$49 in 1997 and HK$289 in 1996.
F-17
<PAGE> 67
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
6. REAL ESTATE INVESTMENT
<TABLE>
<CAPTION>
March 31,
1998 1997
HK$ HK$
<S> <C> <C>
At cost:
Leasehold land and buildings - Hong Kong...................................... 5,568 748
- Other regions of China................... 27,070 27,261
Less: accumulated depreciation................................................. (2,554) (1,981)
------- -------
30,084 26,028
======= =======
</TABLE>
The real estate investment in other regions of China represents the
Company's interest in an industrial complex known as Man Sang
Industrial City located in Gong Ming Zhen, Shenzhen. Part of the
industrial complex is used by the Company and is included in property,
plant and equipment. The remaining leasehold land and buildings are
classified as real estate investment and leased to unaffiliated third
parties under cancelable operating lease agreements. The real estate
investment in Hong Kong represents the Company's office premises leased
to unaffiliated third parties under non cancelable operating lease
agreements.
Rental income relating to such operating leases is included in gross
rental income in the consolidated statements of income and amounted to
HK$5,446 in 1998, HK$5,591 in 1997 and HK$3,785 in 1996.
F-18
<PAGE> 68
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
7. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Short-term borrowings comprise:
March 31,
1998 1997
---- ----
HK$ HK$
<S> <C> <C>
Bank borrowings:
Import bank loans............................................................ 2,084 22,284
Bank overdrafts.............................................................. - 13,632
Other bank loans............................................................. - 15,680
------- -------
Total bank borrowings.......................................................... 2,084 51,596
======= =======
Weighted average interest rate on
borrowings at end of year.................................................... 10.25% 9.3%
======= =======
At end of year:
Bank credit facilities......................................................... 85,600 91,145
Utilized ...................................................................... 2,084 51,596
------- -------
Bank credit facilities available............................................... 83,516 39,549
======= =======
</TABLE>
Interest rates are generally based on the banks' prime lending rates
and the credit lines are normally subject to periodic review. There are
no significant covenants or other financial restrictions relating to
the Company's short-term borrowings.
At March 31, 1998, leasehold land and buildings with a net book value
of HK$38,546, real estate investments with a net book value of HK$4,778
and cash of HK$9,525, of which HK$6,531 was released subsequent to
March 31, 1998, were pledged as collateral for the above facilities and
bank loans described in note 8. Other than the cash pledged, there is
no restriction on the use of the assets pledged for such facilities and
bank loans.
F-19
<PAGE> 69
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
HK$ HK$
Long-term debt consists of:
<S> <C> <C>
Bank loan bearing interest at Hong Kong Inter Bank Offer Rate ("HIBOR")
plus 3%, repayable by quarterly
installments of HK$300 through 2005.......................................... 9,000 -
Bank loan bearing interest at HIBOR plus 2.5%, repayable
by monthly installments of HK$104 through November 2004...................... 8,333 9,583
Bank loan bearing interest at Best Lending Rate plus 0.25%,
repayable by monthly installments of HK$53 through 2004...................... 4,026 -
Bank loan bearing interest at Best Lending Rate plus 0.25%,
repayable by monthly installments of HK$8 through 2004....................... 611 -
Bank loan bearing interest at Hong Kong Prime rate
plus 1.25%, repayable by monthly installments of HK$22
through November 1997........................................................ - 154
Capital lease obligations bearing interest at 9.13% to 11.83%
per annum.................................................................... 806 263
------- -------
Total.......................................................................... 22,776 10,000
Current portion of long-term debt.............................................. 3,434 1,498
------- -------
Long-term debt, less current portion........................................... 19,342 8,502
======= =======
Maturities of long-term debt as of March 31, 1998 are as follows:
HK$
Year ending March 31,
1999............................................................................................... 3,434
2000............................................................................................... 3,415
2001............................................................................................... 3,371
2002............................................................................................... 3,302
2003............................................................................................... 3,179
After 2003......................................................................................... 6,075
-------
22,776
=======
</TABLE>
There are no significant covenants or financial restrictions relating
to the Company's long-term debt.
Details of assets pledged by the Company as collateral for the above
bank loans are described in note 7.
F-20
<PAGE> 70
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 clauses and one of the leases contains a renewal
option. Rental expense under operating leases was HK$4,190 in 1998,
HK$3,413 in 1997 and HK$2,739 in 1996.
As at March 31, 1998, the Company and its subsidiaries were obligated
under capital leases and non cancelable operating leases requiring
minimum rentals as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
HK$ HK$
<S> <C> <C>
Year ending March 31,
1999.............................................................................. 339 4,001
2000.............................................................................. 290 1,000
2001.............................................................................. 219 -
2002.............................................................................. 128 -
------- -------
Total minimum lease payments........................................................ 976 5,001
=======
Less: amount representing interest.................................................. 170
-------
Present value of minimum lease payments............................................. 806
=======
</TABLE>
At March 31, 1998, the Company was committed to purchase a property in
Hong Kong at a cost of HK$39,731, of which HK$7,946 was paid by the
Company during the year as deposit. In addition, the Company also had
commitment of HK$8,400 relating to the construction of leasehold
properties in China.
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 of 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.
F-21
<PAGE> 71
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued (Dollars in thousands
except share data)
10. CAPITAL STOCK - continued
Holders of the 100,000 issued and outstanding shares of Series A
preferred stock (the "Series A preferred shares") are entitled, as a
class, to one-third voting control of the Company in all matters voted
on by stockholders and a liquidation preference of US$25 per share.
Except for the foregoing, the holders of the Series A preferred shares
have no preferences or rights in excess of those generally available to
the holders of common stock. The holders of Series A preferred shares
are entitled to participate in any dividends paid ratably with the
holders of common stock.
The directors have authorized a series of preferred stock designated as
Series B convertible preferred stock (the "Series B preferred shares").
A total of 100,000 Series B preferred shares were authorized. Except to
the extent declared by the directors from time to time, if ever, no
dividends are payable with respect to the Series B preferred shares.
Additionally, the Series B preferred shares have no voting rights
except that the approval of holders of a majority of such shares is
required to (1) authorize, create or issue any shares of any class or
series ranking senior to the Series B preferred shares as to
liquidation preference, (2) amend, alter or repeal, by any means, the
Company's certificate of incorporation if the powers, preferences, or
special rights of the Series B preferred shares would be adversely
affected, or (3) become subject to any restriction on the Series B
preferred shares, other than restrictions arising solely under Nevada
law or existing under the certificate of incorporation as in effect on
December 31, 1995.
The Series B preferred shares are convertible into common stock
commencing on or after 45 days following the sale of such shares. Each
of the 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 expired 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.
At March 31, 1998, no shares of Series B preferred stock were
outstanding.
F-22
<PAGE> 72
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued (Dollars in thousands
except share data)
11. RELATED PARTY TRANSACTIONS
The Company's credit facilities with banks were guaranteed by the
directors who had issued unlimited joint and several guarantees to
secure all the bank facilities set out in note 7. These guarantees were
released following the listing of the Shares and the Warrants of MSIL
on the Hong Kong Stock Exchange. No charges were made in respect of
these guarantees.
During the periods presented, a leasehold property was provided free of
charge to Mr. C.H. Cheng for his residential use.
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 and settled on May 30, 1996.
12. STOCK OPTION PLANS
In October of 1996, the Company approved the establishment of the Man
Sang Holdings, Inc. 1996 Stock Option Plan (the "Plan"), under which
stock options awards 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 comprise solely
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.
F-23
<PAGE> 73
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued (Dollars in thousands
except share data)
12. STOCK OPTION PLANS - continued
The duration of each option will be determined by the Compensation
Committee, but no option will be exercisable more than ten years from
the date of grant (or, with respect to incentive stock options granted
to persons holding ten percent or more of the outstanding common stock
not more than five years from the date of grant). Unless otherwise
determined by the Compensation Committee and provided in the applicable
option agreement, options will be exercisable within three months of
any termination of employment, including termination due to disability,
death or normal retirement (but no later than the expiration date of
the option).
Pursuant to the Plan, the Company granted, on September 16, 1997,
non-qualified stock options (the "Holding Company Options") to the
directors and certain senior employees of the Company to purchase, in
aggregate, 850,000 shares of common stock of the Company, at an
exercise price of US$1.22 per share (which represented 85% of the fair
market value of the common stock on the date of grant as determined
pursuant to Article 6.2 of the Plan). Fifty percent (50%) of such
Holding Company Options are exercisable on or after September 16, 1998
and balance are exercisable on or after September 16, 1999; however, no
Holding Company Option may be exercised after September 16, 2007. All
options granted were outstanding at March 31, 1998. Compensation cost
based on the fair value of the options on the date of grant is being
amortized over the period between the date of grant and the earliest
date on which the options may be exercised.
On September 8, 1997, MSIL adopted a share option scheme (the "Scheme")
to grant options to purchase MSIL ordinary shares (the "MSIL Options")
to any full-time employee of MSIL or any of MSIL's subsidiaries (an
"MSIL Employee"). Pursuant to the Scheme, MSIL may, at any time until
the end of the day on September 7, 2007, and from time to time, grant
MSIL Options to any MSIL Employee, at an exercise price of not less
than 80% of the average of the closing prices of MSIL ordinary shares
on the Hong Kong Stock Exchange for the five trading days immediately
preceding the date of grant or the nominal value of MSIL ordinary
shares of HK$0.10 per share, whichever is higher. The maximum number of
shares in respect of which MSIL Options may be granted under the Scheme
may not exceed such number of shares as shall represent 10% of the
issued share capital of MSIL from time to time excluding any shares
issued upon the exercise of MSIL Options granted pursuant to the
Scheme.
Pursuant to the Scheme, the MSIL Options may be exercised by the
grantee at any time during the two-year option period commencing on the
expiry of six months after the date on which such MSIL Option is
accepted and expiring on the last day of the two-year period or the end
of the day on September 7, 2007, whichever is earlier.
F-24
<PAGE> 74
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued (Dollars in thousands
except share data)
12. STOCK OPTION PLANS - continued
MSIL granted, on October 16, 1997 and December 3, 1997, MSIL Options to
certain MSIL Employees to purchase 38,600,000 and 8,650,000 ordinary
shares of MSIL, respectively, at the exercise price of HK$0.6208 per
share and HK$0.4460 per share, respectively, which were less than the
market price per share on date of grant. The MSIL Options granted were
accepted by grantees on October 20, 1997 and December 8, 1997,
respectively. They may be exercised during the two-year periods
commencing April 20, 1998 and June 8, 1998, respectively. During the
year, 2,000,000 MSIL Options lapsed following the resignation of an
executive director of MSIL.
The Company has elected to account for the Holding Company Options and
the MSIL Options using the Fair Value Method. The fair values of each
Holding Company Option and each MSIL Option granted on September 16,
1997, October 16, 1997 and December 3, 1997 were calculated to be
US$0.63, HK$0.13 and HK$0.19, respectively using the Black-Scholes
Model, with the following assumptions:
<TABLE>
<CAPTION>
Holding
Company MSIL
Options Options
------- -------
<S> <C> <C>
(a) Risk-free interest rate per annum 5.9% 5.25%
(b) Expected life 2 years 2 years
(c) Expected volatility 63% 33%
(d) Expected dividend yield Nil 5%
</TABLE>
The total compensation expense of the Holding Company Options and the
MSIL Options recognized in the consolidated statement of income for the
year ended March 31, 1998 was HK$2,035.
F-25
<PAGE> 75
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Percentage of
accounts receivable
March 31,
1998 1997
---- ----
<S> <C> <C>
Five largest receivable balances............................................. 43.14% 48.15%
</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$1,977 in 1998, HK$1,000 in 1997 and HK$575
in 1996. The deductions from the allowance for doubtful accounts which
represented write-offs of bad debts were HK$Nil in 1998, HK$567 in 1997
and HK$64 in 1996.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.107,
"Disclosures About Fair Value of Financial Instruments". The estimated
fair value amounts have been determined by the Company, using available
market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts
that the Company could realize in a current market exchange.
The carrying amounts of cash, accounts receivable, accounts payable,
short-term borrowings and long-term debt are reasonable estimates of
their fair values. The interest rates on the Company's short-term
borrowings and long-term debt approximate those which would have been
available at March 31, 1998 for debt of the same remaining maturities.
All the financial instruments are for trade purposes.
F-26
<PAGE> 76
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
15. SEGMENT INFORMATION
Contributions of the major activities, profitability information and
asset information are summarized below:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1997 1996
---- ---- ----
HK$ HK$ HK$
<S> <C> <C> <C>
Net revenues
Pearls.......................................................... 262,158 248,240 206,924
Real estate investment.......................................... 5,446 5,591 3,785
------- ------- -------
267,604 253,831 210,709
======= ======= =======
Operating income
Pearls.......................................................... 50,905 44,220 36,468
Real estate investment.......................................... 1,937 2,279 1,526
------- ------- -------
52,842 46,499 37,994
======= ======= =======
Identifiable assets
Pearls.......................................................... 333,645 215,864 143,161
Real estate investment.......................................... 30,084 26,276 26,915
Corporate assets................................................ 39,621 26,335 3,165
------- ------- -------
403,350 268,475 173,241
======= ======= =======
Depreciation and amortization
Pearls.......................................................... 3,043 1,725 1,962
Real estate investment.......................................... 627 1,196 1,227
Corporate assets................................................ 386 189 58
------- ------- -------
4,056 3,110 3,247
======= ======= =======
Capital expenditure
Pearls.......................................................... 12,984 7,373 1,381
Real estate investment.......................................... 4,842 - 83
Corporate assets................................................ 25,927 18,657 -
------- ------- -------
43,753 26,030 1,464
======= ======= =======
</TABLE>
F-27
<PAGE> 77
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,
1998 1997 1996
HK$ HK$ HK$
<S> <C> <C> <C>
Net sales:
Hong Kong....................................................... 51,070 59,232 47,507
Export:
Asian countries excluding Hong Kong............................. 51,656 62,164 61,831
North America................................................... 61,312 39,556 23,448
Europe.......................................................... 86,738 74,964 60,035
Others.......................................................... 11,382 12,324 14,103
------- ------- -------
262,158 248,240 206,924
======= ======= =======
</TABLE>
The Company operates in only one geographic area. The location of the
Company's identifiable assets is as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997 1996
---- ---- ----
HK$ HK$ HK$
<S> <C> <C> <C>
Hong Kong......................................................... 319,191 176,677 102,106
Other regions of China............................................ 84,159 91,798 71,135
------- ------- --------
403,350 268,475 173,241
======= ======= ========
</TABLE>
F-28
<PAGE> 78
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
16. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
HK$'000 HK$'000 HK$'000 HK$'000
1998
<S> <C> <C> <C> <C>
Net sales 67,021 73,034 53,882 68,221
Gross profit 26,630 28,915 21,872 27,329
Operating income 14,023 15,283 8,025 15,511
Net income 20,559 18,338 8,447 11,624
Basic earnings per share 4.78 4.26 1.96 2.70
Diluted earnings per share 4.78 4.23 1.83 2.70
1997
Net sales 55,847 63,403 56,820 72,170
Gross profit 21,935 22,047 21,371 31,114
Operating income 13,412 12,639 12,630 7,818
Net income 11,132 12,115 10,531 6,857
Basic earnings per share 3.71 3.50 2.45 1.59
Diluted earnings per share 3.33 2.82 2.45 1.59
Common stock price
1998 Quarter
High Low
US$ US$
First 2.870 1.120
Second 2.250 1.370
Third 2.125 1.370
Fourth 1.750 0.625
1997 Quarter
First 3.87 3.00
Second 3.50 1.00
Third 6.00 3.50
Fourth 3.50 1.75
</TABLE>
F-29
<PAGE> 79
INDEX TO EXHIBITS
The following documents are filed herewith or have been included as exhibits to
previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
Exhibit No. Description
3.1 Restated Articles of Incorporation of Man Sang Holdings, Inc.,
including the Certificate of Designation, Preferences and Rights of a
Series of 100,000 Shares of Preferred Stock, $.001 Par Value,
Designated "Series A Preferred Stock", filed on January 12, 1996 (1)
3.2 Certificate of Designation, Preferences and Rights of a Series of
100,000 Shares of Preferred Stock, $.001 Par Value, Designated "Series
B Preferred Stock", dated April 1, 1996 (2)
3.3 Amended Bylaws of Man Sang Holdings, Inc., effective as of January 10,
1996 (1)
10.1 Acquisition Agreement, Dated December __, 1995, between Unix Source
America, Inc. and the Shareholders of Man Sang International (B.V.I.)
Limited (1)
10.2 Tenancy Agreement, dated June 24, 1996, between Same Fast Limited and
Man Sang Jewellery Company Limited (3)
10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3)
10.4 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Cheng Chung Hing (5)
10.5 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Cheng Tai Po (5)
10.6 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Hung Kwok Wing (5)
10.7 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Sio Kam Seng (5)
10.8 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Ng Hak Yee (5)
10.9 Service Agreement, dated September 8, 1997, between Man Sang
International Limited and Yan Sau Man Amy (5)
<PAGE> 80
10.10 Contract dated November 8, 1997, between Nan'ao Shaohe Pearl Seawater
Culture Co., Ltd. of Guangdong Province, People's Republic of China,
Man Sang Jewellery Co., Ltd. of Hong Kong and Chung Yuen Company o/b
Golden Wheel Jewellery Mfr. Ltd. of Hong Kong to establish a
cooperative joint venture in Nan'ao County, Guangdong Province,
People's Republic of China (6)
10.11 Agreement dated January 2, 1998, between Overlord Investment Company
Limited and Excel Access Limited, a subsidiary of the Company, pursuant
to which Excel Access Limited will purchase certain real property
located at Flat A, 33rd Floor, of Valverde, 11 May Road, Hong Kong for
HK$15,050,000 (6)
13.1 Annual report to security holders (4)
21.1 Subsidiaries of the Company
24.1 Power of Attorney (included on page 44).
27.1 Financial data schedule
99.1 Share Option Scheme of Man Sang International Limited, a subsidiary of
the Company (6)
- -----------------------------------------
(1) Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K dated January 8, 1996
(2) Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form 8-A dated June 17, 1996
(3) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-QSB for the quarterly period ended December
31, 1996
(4) Incorporated by reference to the Form 10-KSB/A for the fiscal year
ended March 31, 1997
(5) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1997
(6) Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
31, 1997
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MAN SANG HOLDINGS, INC.
Man Sang International (B.V.I.) Limited
Man Sang International Limited
Man Sang Enterprise Limited
Hong Kong Man Sang Investments Limited
Peking Pearls Company Limited
Man Sang Jewellery Company Limited
Overseas South Pearls Limited
Sokeen Limited
Golden Concord (Asia) Limited
Excel Access Limited
Wealth-In Investment Limited
Asean Gold Limited
Damei Pearls Jewellery Goods (Shenzhen) Co. Ltd.
Man Hing Jewellery Goods (Shenzhen) Co., Ltd.
Tangzhu Jewellery Goods (Shenzhen) Co., Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> HONG KONG DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 7.73
<CASH> 93,443,000
<SECURITIES> 0
<RECEIVABLES> 54,172,000
<ALLOWANCES> 1,977,000
<INVENTORY> 154,495,000
<CURRENT-ASSETS> 317,125,000
<PP&E> 61,853,000
<DEPRECIATION> 11,142,000
<TOTAL-ASSETS> 403,350,000
<CURRENT-LIABILITIES> 24,850,000
<BONDS> 22,776,000
0
1,000
<COMMON> 33,000
<OTHER-SE> 270,180,000
<TOTAL-LIABILITY-AND-EQUITY> 403,350,000
<SALES> 262,158,000
<TOTAL-REVENUES> 267,604,000
<CGS> 157,412,000
<TOTAL-COSTS> 57,350,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 977,000
<INTEREST-EXPENSE> 3,685,000
<INCOME-PRETAX> 74,087,000
<INCOME-TAX> 3,543,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,968,000
<EPS-PRIMARY> 13.70
<EPS-DILUTED> 13.42
</TABLE>
