<PAGE> 1
MAN SANG HOLDINGS, INC.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File Number: 33-10639-NY
MAN SANG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0539570
(State or other jurisdiction
of incorporation or organization) (IRS Employer No.)
21/F Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong
(Address of principal executive officers)
(852) 2317 5300
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
As of June 30, 1999, 4,305,960 shares of common stock of the registrant
were outstanding.
<PAGE> 2
MAN SANG HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet as at
June 30, 1999 and March 31, 1999 .......................... F-1
Consolidated Statements of Income and
Comprehensive Income for the three months
ended June 30, 1999 and 1998............................... F-3
Consolidated Statements of Cash Flows for
the three months ended June 30, 1999 and 1998.............. F-4
Notes to Condensed Consolidated Financial Statements....... F-5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 1
ITEM 3. Quantitative and Qualitative Disclosures about............. 5
Market Risk
PART II - OTHER INFORMATION
SIGNATURES
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
--------------------------- ------------------
US$ HK$ HK$
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents 9,476 73,251 66,196
Restricted cash 3,441 26,597 18,831
Accounts receivable, net of allowance for doubtful 6,348 49,073 54,922
accounts of HK$5,000 as of June 30, 1999 and
HK$5,000 as of March 31, 1999
Inventories
Raw materials 205 1,588 1,489
Work in progress 6,292 48,638 49,712
Finished goods 18,003 139,161 120,116
-------- -------- --------
24,500 189,387 171,317
Prepaid expenses 233 1,797 1,523
Other current assets 1,645 12,716 11,158
-------- -------- --------
Total current assets 45,643 352,821 323,947
Long-term investments 702 5,430 5,430
Property, plant and equipment 15,124 116,909 116,603
Accumulated depreciation (2,213) (17,107) (15,869)
-------- -------- --------
12,911 99,802 100,734
Real estate investment 4,567 35,306 33,193
Accumulated depreciation (468) (3,622) (3,351)
-------- -------- --------
4,099 31,684 29,842
-------- -------- --------
Total assets 63,355 489,737 459,953
======== ======== ========
</TABLE>
F-1
<PAGE> 4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED) - CONTINUED
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
------------------------------ --------------
US$ HK$ HK$
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Short-term borrowings 4,269 33,001 26,554
Current portion of long-term debt
Secured bank loans 573 4,429 4,429
Capital lease obligations 28 214 236
-------------- --------------- --------------
601 4,643 4,665
Accounts payable 3,223 24,917 8,781
Accrued payroll and employee benefits 431 3,327 4,725
Other accrued liabilities 1,307 10,103 10,093
Income taxes payable 635 4,910 3,984
-------------- --------------- --------------
Total current liabilities 10,466 80,901 58,802
Long-term debt
Secured bank loans 3,116 24,089 25,196
Capital lease obligations 35 269 315
-------------- --------------- --------------
3,151 24,358 25,511
Minority interests 12,638 97,691 92,766
Stockholders' equity:
Common stock, par value US$0.001 4 33 33
- authorized: 25,000,000 shares;
issued and outstanding: 4,305,960 shares
Series A preferred stock, par value US$0.001 - 1 1
- authorized, issued and outstanding: 100,000 shares;
(entitled in liquidation to US$2,500 (HK$19,325))
Series B convertible preferred stock, par value US$0.001 - - -
- authorized: 100,000 shares; no shares outstanding
Additional paid-in capital 12,365 95,584 95,429
Retained earnings 24,489 189,304 185,623
Foreign currency translation adjustments 242 1,865 1,788
-------------- --------------- --------------
Total stockholders' equity 37,100 286,787 282,874
-------------- --------------- --------------
Total liabilities and stockholders' equity 63,355 489,737 459,953
============== =============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-2
<PAGE> 5
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------------------------------ -----------------
US$ HK$ HK$
<S> <C> <C> <C>
Net sales 8,802 68,040 51,887
Cost of goods sold (6,020) (46,534) (33,333)
---------- ---------- ----------
Gross profit 2,782 21,506 18,554
Rental income, gross 150 1,155 1,150
---------- ---------- ----------
2,932 22,661 19,704
Selling, general and administrative expenses
- Pearls (1,739) (13,440) (13,833)
- Real estate investment (101) (777) (848)
---------- ---------- ----------
Operating income 1,092 8,444 5,023
Non-operating items
- Interest expense (150) (1,165) (1,062)
- Interest income 123 948 575
- Other income 13 103 160
---------- ---------- ----------
Income before income taxes and minority interest 1,078 8,330 4,696
Provision for income taxes (368) (2,844) (82)
---------- ---------- ----------
Income before minority interest 710 5,486 4,614
Minority interest (234) (1,805) (1,480)
---------- ---------- ----------
Net income 476 3,681 3,134
Other comprehensive income, before tax
- Foreign currency translation adjustments 10 77 (293)
- Income tax expense 0 0 0
---------- ---------- ----------
Other comprehensive income, net of tax 10 77 (293)
---------- ---------- ----------
Comprehensive income 486 3,758 2,841
========== ========== ==========
Basic earnings per common share 0.11 0.85 0.73
========== ========== ==========
Diluted earnings per common share 0.11 0.82 0.66
========== ========== ==========
Weighted average number of shares
of common stock
- for basic earnings per share 4,305,960 4,305,960 4,305,960
========== ========== ==========
- for diluted earnings per share 4,482,359 4,482,359 4,721,408
========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-3
<PAGE> 6
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(Amounts expressed in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
--------------------------- ---------------
US$ HK$ HK$
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income 476 3,681 3,134
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful debts 0 0 520
Compensation expense 20 157 1,184
Depreciation and amortization 193 1,489 1,384
Loss on sale of property, plant and equipment 0 2 1
Minority interests 234 1,805 1,480
Changes in operating assets and liabilities:
Accounts receivable 756 5,848 (2,199)
Inventories (2,326) (17,979) (10,760)
Prepaid expenses (35) (274) 1,225
Other current assets (200) (1,548) (2,123)
Accounts payable 2,086 16,124 4,054
Accrued payroll and employee benefits (181) (1,398) (63)
Other accrued liabilities 0 5 (156)
Income taxes payable 120 926 (55)
------- ------- -------
Net cash provided by (used in) operating activities 1,143 8,838 (2,374)
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (312) (2,416) (33,967)
Increase in restricted cash (1,005) (7,767) 6,311
Purchase of a subsidiary (600) (4,638) 0
Proceeds from sale of property, plant and equipment 0 0 1
------- ------- -------
Net cash used in investing activities (1,917) (14,821) (27,655)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of bank overdrafts 0 0 (2,702)
Repayment of short-term borrowings (744) (5,752) (4,805)
Repayment of long-term debt (152) (1,176) (4,398)
Increase in bank overdrafts 0 0 2,702
Increase in short-term borrowings 1,578 12,199 4,504
Increase in long-term debt 0 0 20,000
Net proceeds from issuance of shares by a subsidiary 1,000 7,730 0
------- ------- -------
Net cash provided by financing activities 1,682 13,001 15,301
------- ------- -------
Net increase (decrease) in cash and cash equivalents 908 7,018 (14,728)
Cash and cash equivalents at beginning of period 8,564 66,196 83,918
Exchange adjustments 4 37 (295)
------- ------- -------
Cash and cash equivalents at end of period 9,476 73,251 68,895
======= ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 164 1,264 739
------- ------- -------
Income taxes 248 1,918 137
------- ------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-4
<PAGE> 7
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 1999 balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the financial statements and
notes included in the annual report of Man Sang Holdings, Inc. (the "Company")
on Form 10-K for the fiscal year ended March 31, 1999. In the opinion of
management, the interim financial statements reflect all adjustments of a normal
recurring nature necessary for a fair presentation of the results for the
interim periods presented.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at period end
exchange rates, while revenues and expenses are translated at average exchange
rates during the period. Adjustments arising from translating foreign currency
financial statements are reported as a separate component of stockholders'
equity. Gains or losses from foreign currency translations are included in
income. Aggregate net foreign currency gains or losses were immaterial for all
periods.
The consolidated financial statements of the Company are maintained, and its
consolidated financial statements are expressed, in Hong Kong dollars. The
translations of Hong Kong dollar amounts into United States dollars are for
convenience only and have been made at the rate of HK$7.73 to US$1, the
approximate free rate of exchange at June 30, 1999. Such translations should not
be construed as representations that Hong Kong dollars amounts could be
converted into United States dollars at that rate or any other rate.
3. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128. Per share data is calculated
using the weighted average number of shares of common stock outstanding during
the period. The reconciliation of the basic and diluted EPS is as follows:
F-5
<PAGE> 8
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1999
-----------------------------------
(Numerator) (Denominator) EPS
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders 476,161 4,305,960 0.11
====
Effect of dilutive
stock options granted
by the Company - 176,399
------- ---------
Diluted EPS
Net income available to
common stockholders,
including conversion 476,161 4,482,359 0.11
======= ========= ====
</TABLE>
The effect on consolidated EPS of dilutive stock options granted and issued by
Man Sang International Limited ("MSIL"), the Company's subsidiary listed on The
Stock Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange"), was not
included in the computation of diluted EPS because the exercise prices of such
options were greater than their average market prices.
During the quarter ended June 30, 1999, options granted on September 16, 1997
under the Company's 1996 Stock Option Plan to purchase 100,000 shares of the
Company's Common Stock lapsed following the resignation of an executive officer.
F-6
<PAGE> 9
4. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
<TABLE>
<CAPTION>
Reportable Segment Profit or Loss, and Segment Assets
-----------------------------------------------------
Quarter ended June 30
1999 1998
US$'000 US$'000
<S> <C> <C>
Revenues from external customers
Pearls 8,802 6,712
Real estate investment 150 149
------ ------
8,952 6,861
====== ======
Interest expense
Pearls 72 83
Real estate investment 0 0
------ ------
72 83
====== ======
Depreciation and amortization
Pearls 120 108
Real estate investment 23 22
------ ------
143 130
====== ======
Segment profit
Pearls 1,080 577
Real estate investment 49 39
------ ------
1,129 616
====== ======
Segment assets
Pearls 49,331 41,338
Real estate investment 4,099 3,871
------ ------
53,430 45,209
====== ======
Capital expenditure for segment assets
Pearls 312 136
Real estate investment 0 0
------ ------
312 136
====== ======
</TABLE>
F-7
<PAGE> 10
5. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are co-ordinated through its Hong Kong
subsidiaries and an analysis by destination is as follows:
<TABLE>
<CAPTION>
Quarter ended June 30
1999 1998
US$'000 US$'000
<S> <C> <C>
Net sales:
Hong Kong 1,419 1,508
Export:
Asian countries excluding Hong Kong 1,963 999
North America 2,435 1,681
Europe 2,703 2,297
Others 282 227
----- -----
8,802 6,712
===== =====
</TABLE>
A majority of sales (by dollar amount) in Hong Kong are for re-export to North
America and Europe.
The Company operates in only one geographic area. The location of the Company's
identifiable assets is as follows:
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
US$'000 US$'000
<S> <C> <C>
Hong Kong 45,441 44,641
Other regions of The People's
Republic of China 17,914 14,859
------ ------
63,355 59,500
====== ======
</TABLE>
6. DISCLOSURE ABOUT MAJOR CUSTOMERS
A substantial percentage of the Company's sales is made to a small number of
customers and is typically on an open account basis. In no periods did sales to
any one customer account for 10% or more of total sales.
F-8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. This Management's Discussion and Analysis should be read in
conjunction with the condensed consolidated financial statements and notes
thereto included elsewhere in this Form 10-Q and with the Company's annual
report on Form 10-K for the year ended March 31, 1999.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1999 increased by $2.1 million to $8.8
million, representing a 31.1% growth when compared to net sales of $6.7 million
during the same period in 1998. The increase in net sales was mainly
attributable to (i) an increase by 162.7% and 102.7%, respectively, in the net
sales of Chinese freshwater pearls and South Sea pearls; and (ii) a 17.7%, 44.9%
and 96.5% increase, respectively, in net sales in Europe, North America, and
Asian countries excluding Hong Kong, during the quarter ended June 30, 1999 when
compared to the same period in 1998. The Company attributes such increases in
net sales in part to its increased sales efforts and its shift in product mix
toward Chinese freshwater pearls, and in part to more stabilized currency and
financial markets in Asia during the quarter ended June 30, 1999 when compared
to the quarter ended June 30, 1998.
Gross profit for the quarter ended June 30, 1999 increased by $0.4 million, or
15.9%, to $2.8 million, compared to $2.4 million for the same period in 1998. As
a percentage of net sales, gross profit decreased from 35.8% for the quarter
ended June 30, 1998 to 31.6% for the same period in 1999. The decrease in gross
profit margin resulted from, at least in part, the shift in the Company's
product mix from saltwater cultured pearls toward lower priced freshwater pearls
of comparable size and quality. Chinese freshwater pearls represented 40.1% of
net sales for the quarter ended June 30, 1999 as compared to 20.0% of net sales
for the same period in 1998, while Chinese cultured pearls (with relatively
higher gross profit margin) represented only 30.3% of net sales for the quarter
ended June 30, 1999, compared to 55.3% of net sales for the same period in 1998.
Rental Income
Gross rental income for the quarter ended June 30, 1999 was around $150K,*
approximately the same as that of the same period in 1998. The occupancy rate in
the Man Sang Industrial City facility located in Shenzhen, the People's Republic
of China ("PRC") was 74.0% as at June 30, 1999.
- --------
**As used in this 10-Q, the letter "K" appearing immediately after a dollar
amount denotes rounding to the nearest $1,000; as an example, $250,499 may be
rounded to "$250K".
1
<PAGE> 12
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses were $1.8 million, consisting of $1.7 million attributable to
pearl operations and $0.1 million attributable to real estate operations, for
the quarter ended June 30, 1999, a decrease of approximately $60K, or 3.2%, from
$1.9 million, consisting of $1.8 million attributable to pearl operations and
$0.1 million attributable to real estate operations, for the same period in
1998. As a percentage of net sales, SG&A from pearl operations decreased from
26.7% for the quarter ended June 30, 1998 to 19.8% for the same period in 1999,
while SG&A from real estate operations decreased from 1.6% for the quarter ended
June 30, 1998 to 1.1% for the same period in 1999.
Interest Income
Net interest expense decreased by $35K, or 55.6%, to $28K from the comparable
period in the prior year. The decrease in net interest expense was due
principally to an increase in interest income of $48K, derived from the increase
of net cash balance during the period. In addition, the Company's weighted
average short-term borrowing rate decreased from 10.25% per annum for the
quarter ended June 30, 1998 to 7.0% for the same period in 1999.
Income Taxes
Income taxes and provision therefor for quarter ended June 30, 1999 increased by
$357K to $368K as compared to only $11K for the same period in 1998. Such
significant increase was principally due to:-
- - an increase in operating income as a result of increases in net sales and
gross profit;
- - a PRC subsidiary, which was previously exempted from PRC income taxes,
started paying income tax at a rate of 7.5% during calendar year of 1999;
and
- - another PRC subsidiary, which was previously entitled for a 50% relief from
PRC income taxes, started paying income tax at a rate of 15% during
calendar year of 1999.
Under the PRC Foreign Investment Enterprise and Foreign Enterprise Income Tax
Law, three operating subsidiaries of the Company, namely Man Hing Industry
Development (Shenzhen) Co. Ltd., Damei Pearls Jewellery Goods (Shenzhen) Co.
Ltd., and Tangzhu Jewellery Goods (Shenzhen) Co. Ltd., all of which are located
in the Shenzhen Special Economic Zone of the PRC, are (i) exempted from PRC
income taxes on income derived from pearls processing operations (but not any
rental income) for two years, beginning with the first profitable year of
operation, and (ii) entitled to a 50% relief from PRC income taxes on income
derived from pearls processing operations (but not any rental income) for the
three years after the expiration of the two-year tax exemption. Since the three
subsidiaries first became profitable in the years 1994, 1995 and 1997, the
exemptions expired in the years 1996, 1997 and 1999; and the 50% relief expire
in the years 1999, 2000 and 2002, respectively.
2
<PAGE> 13
Net Income
Net income for the quarter ended June 30, 1999 increased by $71K to $476K,
representing a 17.4% increase from $405K for the same period in 1998. The
increase was attributable to, among other things, an increase in net sales
during the quarter ended June 30, 1999.
Excluding income taxes and minority interests, the operating profit during the
quarter ended June 30, 1999 was $1.1 million, representing a 77.4% increase,
compared to that of $607K during the same period in 1998.
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 June
30, 1999, the Company had working capital of $35.2 million and a cash balance of
$12.9 million, compared to working capital of $34.3 million and a cash balance
of $11.0 million at March 31, 1999. The current ratio was 4.4 as at June 30,
1999 as compared with that of 5.5 as at March 31, 1999. Net cash provided by
operating activities was $1.1 million for the quarter ended June 30, 1999, while
net cash used in operating activities was $307K for the same period in 1998. The
increase in working capital during the quarter ended June 30, 1999, is mainly
due to (i) a net increase in cash and cash equivalents of $0.9 million during
the period (as compared to a net decrease in cash and cash equivalents of $1.9
million for the quarter ended June 30, 1998); and (ii) a decrease in accounts
receivable of approximately $756K.
During the quarter ended June 30, 1999, a subsidiary of the Company in the PRC
obtained an additional short-term loan of approximately $964K (Renminbi 8.0
million). The proceeds of such loan were used to purchase pearls and finance
daily operating activities of the Company's PRC subsidiaries. The main purpose
of the loan is to minimize the impact of any devaluation of the Renminbi. Taking
such loan into account, the total short-term borrowings by the Company's
subsidiaries in the PRC amounted to approximately $4.2 million, which borrowings
are secured by deposits of an aggregate amount of $3.0 million and the mortgage
of 5 buildings in Man Sang Industrial City.
Inventories increased by $2.4 million to $24.5 million at June 30, 1999 and the
inventory turns improved from 12.7 months as at March 31, 1999 to 11.4 months as
at June 30, 1999. The increase in inventories was attributable to higher
purchasing and production to meet increased demand for the freshwater pearls.
Long-term debt (including current portion of long-term debt) was $3.7 million at
June 30, 1999, a decrease of $152K compared to that at March 31, 1999. The
decrease was attributable to repayment of installment loan during the quarter
ended June 30, 1999. The gearing ratio was 0.56 at June 30, 1999, compared to
0.53 at March 31, 1999. The increase in gearing ratio was mainly due to an
increase in short-term borrowings of approximately $964K by a subsidiary in PRC,
which increase is secured by a deposit of $1.0 million.
The Company had available working capital facilities of $7.1 million in total
with various banks at June 30, 1999. Such banking facilities include letter of
credit arrangements, import loans, overdraft protection and other facilities
commonly used in the jewelry business. All such banking facilities bear interest
at floating rates generally based on prime lending rates,
3
<PAGE> 14
and are subject to periodic review. At June 30, 1999, the Company only utilized
approximately $19K of its credit facilities.
The Company believes that funds to be generated from internal operations and the
existing banking facilities will enable the Company to meet anticipated future
cash flow requirements.
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 rather than four to identify the relevant year (e.g. 97 for
1997). These applications may not be able to distinguish between 21st and 20th
century dates. 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 year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruption of
operations.
The Company implemented a "Year 2000 Compliance" program, using both internal
and external resources to identify significant applications that would require
modification, and making such modifications, to ensure Year 2000 Compliance. The
Company has completed the implementation of its program on March 31, 1999. With
regard to the Company's software applications, the Company has identified
critical and non-critical software applications, and updated and/or developed
software applications to ensure, or obtained certification, that its software
applications are Year 2000 compliant.
The Company has updated and tested its local area network computer system, its
computerized lock, and any other computer, information or operational network,
system, software to be Year 2000 compliance. The Company believes that the
internal risks associated with the Year 2000 Issue are minimal. However, the
Company's customers, suppliers and other external relationships may present
risks over which the Company has no control.
The Company has initiated communications with, and has obtained assurance from,
some of the parties, such as Flexsystem (accounting software company), Chubb
Security (security alarm system), and Secretaries Limited (share registrars of
MSIL), with which the Company does business, that they are Year 2000 compliant.
However, the Company has not been able to obtain any assurance in writing from
any utility company, bank, airline or courier service regarding its Year 2000
compliance, although representatives from many such companies have orally
indicated to the Company that they are Year 2000 compliant.
There can be no assurance that the Company's compliance program will be
successful or that the date change from 1999 to 2000 will not adversely affect
the Company's operations and financial results, nor can there be any assurance
that the systems of third parties with which the Company does business will be
timely converted, or that a failure to convert by any such third party, or a
conversion that is incompatible with the Company's networks or systems, would
not have an adverse effect on the Company. However, the Company does not
anticipate that its operation or services will experience any interruption or
disruption as a result of any failure, and any such disruption will be
insignificant because, as a contingency
4
<PAGE> 15
plan, any activities that are currently handled by a computerized system can be
handled manually without much difficulty or any material additional cost. The
Company has not incurred material operation expenses or investments in networks
and systems improvements in connection with Year 2000 compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the quarter ended June 30, 1999, the Company made approximately 60.9% of
its purchases in Renminbi, with the remaining amounts mainly settled in Hong
Kong dollars, US dollars and Japanese Yen (only 6% of total purchase). Although
Renminbi has not been devalued, the Company's Management believes that more
likely than not (i) the Renminbi will be devalued in the foreseeable future, and
(ii) the Company will be able to purchase its pearls at lower prices (in US
dollar terms).
The Company's policy is to denominate all its sales in either US dollar or Hong
Kong dollars. Since Hong Kong dollars remained "pegged" to the US dollar
throughout the period, the Company's sales proceeds have thus far had very
minimal exposure to foreign exchange fluctuations.
Therefore, since purchases are made in currencies that have devaluation pressure
and sales are made in US dollars, the currency risk in the foreseeable future
should be immaterial, and the Company's Management determined that no derivative
contracts such as forward contracts and options to hedge against foreign
exchange fluctuations were necessary during the quarter.
In addition, the Company's interest expense is sensitive to fluctuations in the
general level of Hong Kong interest rates. The interest rates of the installment
loans, with principal amount of approximately $3.2 million, was HIBOR+3.0%
during the 3-month period (where HIBOR represents Hong Kong Interbank Offered
Rate). All other installment loans and banking facilities of the Company bear
interest at floating rates generally based on prime lending rates, which are
subject to periodic review.
The Company does not expect significant changes in Hong Kong interest rates in
the foreseeable future. As at June 30, 1999, the aggregate amount outstanding
under all banking facilities and the installment loans was approximately $3.7
million. Therefore, even a change of 0.5% in HIBOR and prime lending rates will
lead to an increase in interest expense of only approximately $18,500 per annum.
As a result, the Company believes that the risk associated with fluctuations in
interest rate is immaterial, and no derivative contracts are necessary.
5
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company is the sole parent of Man Sang International (B.V.I.) Limited, a
company incorporated in the British Virgin Islands ("MSBVI"). As at August 2,
1999, MSBVI in turn legally and beneficially owned approximately 73.28% of the
issued and outstanding shares of Man Sang International Limited, a company
incorporated as an exempted company under the Companies Act 1981 of Bermuda
("MSIL"). MSIL is listed on the Hong Kong Stock Exchange.
MSIL'S SHAREHOLDERS APPROVED FINAL DIVIDEND FOR THE YEAR ENDED MARCH 31, 1999
On August 2, 1999, MSIL's shareholders approved a final dividend for the year
ended March 31, 1999 in the amount of HK$0.01 per share, payable to shareholders
whose names appeared on MSIL's register of shareholders on August 2, 1999.
On August 2, 1999, MSIL had 484,463,506 shares issued and outstanding. A cash
dividend of HK$4,844,635.06 will be payable to MSIL's shareholders on September
7, 1999.
BONUS ISSUE OF WARRANTS BY MSIL
On August 2, 1999, MSIL's shareholders also approved a "Bonus Issue of Warrants"
(i.e., a distribution of warrants) to MSIL's shareholders on the basis of one
warrant for every five shares of MSIL held on August 2, 1999. Each warrant
entitles the holder thereof to subscribe in cash at an initial subscription
price of HK$0.40 per share (subject to adjustment). The closing price of MSIL's
shares on August 2, 1999, as quoted on the Hong Kong Stock Exchange, was HK$0.37
per share.
6
<PAGE> 17
The warrants will be issued in early September, 1999, in registered form and
will be exercisable at any time from September 14, 1999 until 4:00 p.m. on
September 13, 2001, both dates inclusive. New shares issued on the exercise of
the warrants will rank pari passu in all respects with the shares existing on
the relevant exercise date.
Fractional entitlements to the warrants will not be issued to MSIL's
shareholders but will be aggregated and sold and any net proceeds of such sales
will be retained for the benefit of MSIL.
Documents relating to the Bonus Issue of Warrants have not been registered or
filed under the securities or equivalent legislation of any jurisdiction other
than Bermuda and Hong Kong. As a result, warrants will not be issued to
shareholders whose addresses as shown on MSIL's register of shareholders on
August 2, 1999 were outside Hong Kong (the "Overseas Shareholders").
Arrangements will be made for the warrants that would otherwise be issued to the
Overseas Shareholders to be sold as soon as practicable. Any net proceeds of
such sales, will be distributed in Hong Kong dollars to such Overseas
Shareholders pro rata to their respective shareholdings in MSIL, provided that
amounts of less than HK$100 will not be distributed but will be retained for the
benefit of MSIL.
The Bermuda Monetary Authority has already granted its approval of the issuance
of the warrants. MSIL has applied, with the Hong Kong Stock Exchange, for the
listing of, and the permission to deal in, the warrants and any shares to be
issued upon the exercise of the warrants. MSIL expects that dealings in the
warrants will commence on September 14, 1999. The proposed board lot for trading
is 20,000 warrants, with an aggregate exercise price of HK$8,000.
PLACEMENT OF NEW SHARES OF MSIL
On August 6, 1999, MSIL entered into a conditional placing agreement with
Kingsway SW Securities Limited ("Kingsway"), pursuant to which MSIL appointed
Kingsway and Kingsway agreed to accept the appointment, as placing agent on a
fully underwritten basis in respect of the placing (the "Placing") of 40,000,000
new shares (the "Placing Shares") in the capital of MSIL at a price of HK$0.33
per share (the "Placing Price"). No director, chief executive, or substantial
shareholder of MSIL, is a director, chief executive, or substantial shareholder
of Kingsway.
The Placing Shares represented approximately 8.26% of MSIL's total issued share
capital as at August 6, 1999, and approximately 7.63% of MSIL's issued share
capital as enlarged by the issue of the Placing Shares. The Placing Shares would
be issued under the general mandate granted by MSIL's shareholders on August 2,
1999, to MSIL's directors, and when fully paid, allotted and issued, would rank
pari passu in all respects with the existing shares of MSIL.
Kingsway undertook to place the Placing Shares to more than six placees who
would be institutional, professional and/or other investors, independent of the
directors, chief executives or substantial shareholders of MSIL, or any of
MSIL's subsidiaries or an associate of any of them (as defined in The Rules
Governing the Listing of Securities on the Hong Kong Stock Exchange).
7
<PAGE> 18
The Placing Price of HK$0.33 per share represented a discount of approximately
13.16% to the closing price of HK$0.38 per share as quoted on the Hong Kong
Stock Exchange on August 6, 1999 and a discount of approximately 10.81% to the
average closing price of HK$0.37 per share as quoted on the Hong Kong Stock
Exchange on the last ten trading days up to and including August 6, 1999.
The Placing Price was negotiated on an arm's length basis between MSIL and
Kingsway. The board of directors of MSIL considered the Placing to be fair and
reasonable to MSIL and its shareholders as a whole.
MSIL and Kingsway expect to close the Placing on or about August 21, 1999 (or on
such other date as both parties may mutually agree), which is conditional upon
(i) the Hong Kong Stock Exchange granting its approval for the listing of, and
permission to deal in, the Placing Shares; and (ii) the filing of the relevant
documents or obtaining of the necessary waiver relating to the Placing as
required by Bermuda law.
Net proceeds of the Placing were estimated to be approximately HK$12.75 million,
which would be used in development of retail market for pearls and pearl
products in the PRC, and as general working capital.
The exercise price of MSIL's bonus warrants (as described above) might, as a
result of the Placing, be adjusted in accordance with the terms of the warrant
instrument, subject to confirmation by the auditors of MSIL or a merchant bank
approved by MSIL.
Upon completion of the Placing, MSIL would have 524,463,506 shares issued and
outstanding. The legal and beneficial ownership of MSBVI would be reduced from
73.28% to 67.69% of the issued and outstanding shares of MSIL.
ITEM 6. EXHIBITS
(A) Exhibits
Exhibit No. Description
27.1 Financial Data Schedule
(B) Reports on Form 8-K
None
8
<PAGE> 19
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, Man Sang Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
Date: August 12, 1999
By: /s/ Sun Kam Fai, Zacky
--------------------------------
Sun Kam Fai, Zacky
Chief Financial Officer
9
<PAGE> 20
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
27.1 Financial Data Schedule
10
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<PERIOD-START> APR-01-1999
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