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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 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 NO. 33-10639-NY
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MAN SANG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
NEVADA 87-0539570
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
21ST FLOOR, RAILWAY PLAZA, 39 CHATHAM ROAD SOUTH
TSIMSHATSUI, KOWLOON, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDE AREA CODE: (852) 2317 5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.001 PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes [X] No [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $2,722,930 as of June 1, 1999, 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, 1999.
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.
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 13
ITEM 3. LEGAL PROCEEDINGS........................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 14
ITEM 6. SELECTED FINANCIAL DATA..................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 22
ITEM 8. FINANCIAL STATEMENTS........................................ 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 24
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTIONS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT....................................................... 25
ITEM 11. EXECUTIVE COMPENSATION...................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 35
SIGNATURES
FINANCIAL STATEMENTS
</TABLE>
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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 jewelry 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:
[MAN SANG ORGANIZATIONAL CHART]
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 $171,000.* Subsequently, in
November 1991,
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* Unless otherwise indicated as Hong Kong dollars or HK$, all financial
information contained herein is presented in US 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, 1999. The Hong Kong dollar has been "pegged" to
the US 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
US dollar payment to the Exchange Fund, and any decrease in note circulation
is matched by US 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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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.
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 net proceeds of
approximately HK$123.6 million. Every warrant entitled 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 (the "Warrants"). After MSIL's IPO, Man Sang BVI
holds 73.02% or 345 million Shares. As of March 31, 1999, the Company had
issued 50 Shares upon exercise of the Warrants related to such Shares and on
such date, the subscription rights attaching to the remaining Warrants expired.
On August 12, 1998, at the 1998 Annual General Meeting of MSIL, MSIL
shareholders approved a final dividend for the year ended March 31, 1998 of
HK$0.03 per share, to be settled by way of allotment of fully paid shares in the
capital of MSIL (the "Scrip Shares") with a cash option (the "Scrip Dividend
Scheme"). Man Sang BVI elected to receive part of its final dividend in cash and
part of it in 10,000,000 Scrip Shares. As some MSIL shareholders elected to
receive cash dividend and some elected Scrip Shares, a total of 11,963,456 Scrip
Shares were allotted on October 8, 1998. After the allotment, Man Sang BVI
legally and beneficially owns approximately 73.28% or 355 million Shares.
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 Industry Development (Shenzhen) Co., Ltd. (formerly known as Man
Hing
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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 jewelry assembling business.
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, the PRC
("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 jewelry dates back over 1,500 years in the PRC. Large
scale commercial pearl production began in Japan in the late 19th century. The
farming, production and trading of pearls to meet demand for pearl jewelry is a
mature industry. Today's pearl industry and its growth are affected by consumer
preferences, worldwide economic conditions and availability of supply.
In today's pearl market, pearls are divided into two categories, i.e.
freshwater pearls and saltwater cultured pearls. Saltwater cultured pearls are,
in turn, divided into Japanese cultured pearls, Chinese cultured pearls,
Tahitian pearls and South Sea pearls.
In 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 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 8mm to be
generally available and reliable. 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
future.
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. Due to the relative scarcity of and growing demand for South Sea pearls,
their prices have been increasing steadily in the past years.
The PRC is a major supplier of freshwater pearls. The Company's processing
plant in Shenzhen has since 1996 increased the supply and improved the quality
of freshwater pearls while holding the prices stable. The Company anticipates
the supply of freshwater pearls ranging in size from 5mm to 7mm to be generally
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available and reliable, and that the stable supply of high quality freshwater
pearls ranging in size from 8mm to 10mm, or even sometimes up to 15mm, will
narrow the traditional price differences between freshwater pearls and Chinese
or Japanese saltwater cultured pearls and drive up demand. These larger
freshwater pearls contribute a higher gross profit margin than the traditional
smaller freshwater pearls.
Business Strategy
While the Company continues to provide a full range of pearls and pearl
jewelry products to jewelry manufacturers, wholesalers and retailers at
competitive prices, the Company's management team ("Management") has identified
larger size freshwater pearls as offering as high a gross profit margin as
saltwater pearls, and has taken steps to increase both products in the Company's
product mix. In fiscal 1998, the Company made an investment of Renminbi 5.1
million (approximately US$612,000) 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. In fiscal 1999, 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, which contributed to an increase in the net
sales in North America as a proportion to total net sales rising from 23.4% in
fiscal 1998 to 30.4% in fiscal 1999. The Company anticipates that it will
maintain its focus on saltwater cultured pearls as well as the larger size
freshwater pearls in fiscal year 2000, 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.
In fiscal 1999, the Company established a wholly owned subsidiary, Man Sang
Innovations Limited ("Man Sang Innovations"). In September 1998, Man Sang
Innovations obtained a license from The Walt Disney Company Asia Pacific Limited
to use the "Winnie the Pooh" cartoon character, and certain intellectual
property related to it, on jewelry to be assembled, marketed and sold in the PRC
(excluding Hong Kong). In March 1999, Man Sang Innovations also obtained a
license from Mattel, Inc. to use the "Barbie" character, and certain
intellectual property related to it, to assemble, market and sell 999 pink pearl
necklaces to celebrate the 40th anniversary of the Barbie doll. With these
projects, the Company begins to explore entering into similar arrangement with
other owners of internationally known trademarks to create jewelry products
bearing such trademarks or related intellectual property, and to create a new
market segment for the Company's products.
To create a new marketing and distribution channel, on March 8, 1999, the
Company established another wholly owned subsidiary, M.S. Electronic Emporium
Limited, to launch the Company's own e-commerce website to promote and sell the
Company's products under a new brand name "M.S. Collections". The Company
anticipates the development of its own brand name will improve the Company's
images in the retail market, and that it is more efficient and effective to
reach retail customers electronically.
Products
The Company presently offers six product lines including pearl jewelry,
freshwater pearls, Chinese cultured pearls, Japanese cultured pearls, South Sea
pearls and Tahitian pearls. Freshwater pearls are available in a variety of
shapes and sizes. The most commonly available sizes range from 2mm to 8mm, and
the price 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. However, since 1998, larger size freshwater pearls are
available in the market ranging from 8mm to 10mm, or even sometimes up to 15mm,
and the price for the larger size freshwater pearls can reach up to $2,000 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 $85,000 per 16 inch strand.
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The following table illustrates by pearl category the typical range of size
and wholesale price of cultured pearls the Company sells, with price variations
within each category reflecting size and qualitative differences:
<TABLE>
<CAPTION>
PRICE/
SIZE 16 INCH STRAND
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MM US$
<S> <C> <C>
Freshwater Pearls.................................. 2- 13 2- 2,000
Chinese cultured pearls............................ 5- 7.5 13- 500
Japanese cultured pearls........................... 7- 10 100- 3,000
Tahitian pearls.................................... 8- 16 1,000- 30,000
South Sea pearls................................... 10- 18 2,800- 85,000
</TABLE>
The Company also offers fully assembled pearl jewelry, including necklaces,
earrings, rings, pendants, broaches, bracelets, watches, cufflinks, and similar
miscellaneous pearl products. For the three years ended March 31, 1999,
freshwater and cultured pearls sales as a percentage of the Company's sales of
pearls and assembled pearl products were as follows:
<TABLE>
<CAPTION>
LOOSE ASSEMBLED
AND STRANDS PEARLS PEARL JEWELRY
---------------------- ----------------------
YEAR FRESHWATER CULTURED FRESHWATER CULTURED
---- ---------- -------- ---------- --------
% % % %
<S> <C> <C> <C> <C>
1999............................... 75 92 25 8
1998............................... 57 96 43 4
1997............................... 70 97 30 3
</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, the Philippines, 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,
well-trained and experienced 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 to capitalize on its volume purchasing and
relationship with farmers and suppliers to secure the best pricing and quality
when purchasing pearls and other jewelry raw materials, the Company generally
purchases raw materials from 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.
In fiscal 1999, the five largest suppliers of the Company accounted for
approximately 47.9% (1998: 40.5%) of the Company's total purchases, with the
largest supplier accounting for approximately 23.9% (1998: 17.5%) of the
Company's total purchases.
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In fiscal 1999, approximately 69.2% of the Company's purchases was made in
Renminbi, 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. However, no such derivative contract
was entered during the year. See "Item 7A -- Quantitative and Qualitative
Disclosures about Market Risk".
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 24,542 square feet and employ 234 workers while cultured
pearl processing and assembly operations occupy approximately 18,084 square feet
and employ 193 workers. The average compensation per factory worker is US$66 per
month while average supervisory compensation is US$181 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 specialized training by industry specialists from Japan. Prior to
participation in pearl processing operations, each worker is required to
participate in an extensive on-the-job training program utilizing poor quality
pearls for demonstration and training purposes.
Pearl processing occurs in batches or production cycles. Raw pearls and
other materials transported to the Company's processing facilities in Shenzhen
PRC are first sorted, medically bleached and, 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
jewelry products. Assembly and finishing may include the addition of clasps,
decorative jewelry pieces, or other specialty work requested by the customers to
produce finished jewelry pieces.
The Company presently has facilities and pearl processing personnel to
produce approximately 20,000kg of freshwater pearls and 10,400kg of cultured
pearls annually, same as fiscal 1998. Fiscal 1999 production totaled
approximately 18,726kg of freshwater pearls and 6,778kg of cultured pearls,
compared to the production of 12,946kg of freshwater pearls and 8,513kg of
cultured pearls in fiscal year 1998. The Company presently also has adequate
assembly and finishing personnel and facilities to produce approximately 1.2
million pieces of finished jewelry 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 groups organized by geographic
regions, presently markets freshwater pearls, Chinese cultured pearls, Japanese
cultured pearls, Tahitian pearls, South Sea pearls, and jewelry products.
The Company's marketing and sales staff maintains on-going communications
with a broad range of jewelry distributors, manufacturers and retailers
worldwide to assure that customers' pearl requirements are fully satisfied. The
Company's marketing and sales staff regularly visits all major pearl markets and
jewelry trade shows to display products, establish contacts with potential
customers and evaluate market trends. Apart from attending trade shows and
servicing customers, the Company's marketing and sales 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 web page to introduce
the Company and to advertise the Company's products. In addition, the
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Company has increased its efforts to market pearls and jewelry 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 1999, no customer accounted for more than 10 percent of the
Company's sales. For the year ended March 31, 1999, the five largest customers
of the Company accounted for approximately 18.6% (1998: 17.7%) of the Company's
sales with the largest customers accounted for approximately 4.4% (1998: 4.9%)
of the Company's sales. As at March 31, 1999, 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 1999, the Company's sales proceeds have thus far had very
minimal exposure to foreign exchange fluctuations. See "Item 7A -- Quantitative
and Qualitative Disclosures about Market Risk".
The following table sets forth by region and by product the sales of the
Company for the three years ended March 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
US$'000 % US$'000 % US$'000 %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
CULTURED PEARLS
North America............................. 5,871 19.6 6,932 20.5 4,299 13.3
Europe.................................... 6,450 21.6 8,491 25.0 5,942 18.5
Hong Kong................................. 2,950 9.9 4,109 12.1 5,072 15.8
Other Asian countries..................... 2,316 7.7 5,125 15.1 5,676 17.7
Others.................................... 885 3.0 1,094 3.2 1,254 4.0
------ ---- ------ ---- ------ ----
Sub-total................................. 18,472 61.8 25,751 75.9 22,243 69.3
------ ---- ------ ---- ------ ----
FRESHWATER PEARLS
North America............................. 2,403 8.0 681 2.0 753 2.3
Europe.................................... 2,430 8.1 1,518 4.5 2,231 6.9
Hong Kong................................. 557 1.9 479 1.4 1,060 3.3
Other Asian countries..................... 1,694 5.7 1,082 3.2 1,764 5.5
Others.................................... 249 0.8 235 0.7 274 0.9
------ ---- ------ ---- ------ ----
Sub-total................................. 7,333 24.5 3,995 11.8 6,082 18.9
------ ---- ------ ---- ------ ----
Assembled pearl jewelry................... 4,068 13.7 4,168 12.3 3,789 11.8
------ ---- ------ ---- ------ ----
Total........................... 29,873 100 33,914 100 32,114 100
====== ==== ====== ==== ====== ====
</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 (during major international
jewelry 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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The following table sets forth the Company's unaudited net sales for the
fiscal years indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
US$'000 % US$'000 % US$'000 %
------- ---- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter............................ 6,712 22.5 8,670 25.6 7,225 22.5
Second Quarter........................... 7,413 24.8 9,448 27.9 8,202 25.5
Third Quarter............................ 5,697 19.1 6,971 20.5 7,350 22.9
Fourth Quarter........................... 10,051 33.6 8,825 26.0 9,337 29.1
------ ---- ------ ----- ------ ----
Total.......................... 29,873 100 33,914 100 32,114 100
====== ==== ====== ===== ====== ====
</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 has been 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.
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 $0.4 million.
On January 19, 1998, the Company approved a capital investment of
approximately $1.1 million to renovate, improve and expand the Company's pearl
processing plant in the Man Sang Industrial City. 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 new plant is a six-story building with total gross floor area of
approximately 33,584 square feet. The capital investment is financed by the
equity funds raised by MSIL during fiscal 1998.
9
<PAGE> 11
At March 31, 1999, Man Sang Industrial City consists of 24 buildings
encompassing a total gross floor area of approximately 549,233 square feet.
Twenty 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.
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 24 persons to provide required management,
leasing, maintenance and security for Man Sang Industrial City.
As of March 31, 1999, the 19 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. The gross rental
income from Man Sang Industrial City for fiscal 1999 was approximately $500,731
compared to approximately $682,187 for fiscal 1998. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
Ended March 31, 1999 Compared to Year Ended March 31, 1998 -- 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:
a. 957 square feet at Room 407, Wing Tuck Commercial Building, 177 - 183
Wing Lok Street, Hong Kong, leased for a rental income totaled
approximately $19,809 for fiscal 1999, approximately $22,285 for fiscal
1998. See "Item 2 -- Properties -- Hong Kong";
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 for a term of 3 years starting from June 1, 1998. The rental income
totaled approximately $36,222 for fiscal 1999. See "Item
2 -- Properties -- Hong Kong";
c. 1,585 square feet at Unit 16 of the 6th floor, Block A, Focal Industrial
Centre, 21 Man Lok Street, Kowloon, Hong Kong. A tenancy agreement for
Unit 16 was made on May 10, 1999 at a monthly rental of $1,845 for a
term of 2 years starting from May 12, 1999.
Competition
Competition among facilities such as Man Sang Industrial City is intense in
the Shenzhen Special Economic Zone. Because of economic incentives available for
businesses operating in the Shenzhen Special Economic Zone, numerous facilities
have been constructed to house such businesses. While a number of competing
facilities may offer greater amenities and may be operated by companies having
greater resources, and additional facilities may be constructed, the Company
believes that Man Sang Industrial City is competitive with other similar
facilities in the Shenzhen Special Economic Zone based on both the quality of
facilities and lease rates.
Employees
As of May 31, 1999, the Company had 590 employees. None of the employees is
governed by collective bargaining agreements and the Company considers its
relations with its employees to be satisfactory. The breakdown of employees by
function is as follows:
10
<PAGE> 12
<TABLE>
<CAPTION>
HONG KONG PRC TOTAL
--------- --- -----
<S> <C> <C> <C>
Senior management.......................................... 6 -- 6
Marketing and sales........................................ 20 -- 20
Purchasing................................................. 2 4 6
Finance and accounting..................................... 9 8 17
Processing and logistics................................... 14 468 482
Human resources and administration......................... 11 24 35
Real estate leasing........................................ -- 24 24
-- --- ---
Total...................................................... 62 528 590
== === ===
</TABLE>
SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as
follows:
REPORTABLE SEGMENT PROFIT OR LOSS, AND SEGMENT ASSETS
<TABLE>
<CAPTION>
1999 1998
------- -------
US$'000 US$'000
<S> <C> <C>
Revenues from external customers
Pearls.................................................. 29,873 33,914
Real Estate investment.................................. 557 705
------ ------
30,430 34,619
====== ======
Interest expenses
Pearls.................................................. 127 272
Real Estate investment.................................. 27 78
Corporate Assets........................................ 428 127
------- ------
582 477
====== ======
Depreciation and amortization
Pearls.................................................. 440 394
Real Estate investment.................................. 88 81
Corporate Assets........................................ 199 50
------ ------
727 525
====== ======
Segment Profit
Pearls.................................................. 2,122 6,585
Real Estate investment.................................. 18 251
------ ------
2,140 6,836
====== ======
Capital expenditure for segment assets
Pearls.................................................. 1,671 1,680
Real Estate investment.................................. -- 626
Corporate Assets........................................ 4,258 3,354
------ ------
5,929 5,660
====== ======
Segment assets
Pearls.................................................. 45,668 43,162
Real Estate investment.................................. 3,861 3,891
Corporate Assets........................................ 9,971 5,125
------ ------
59,500 52,178
====== ======
</TABLE>
11
<PAGE> 13
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.
In fiscal 1999, 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.
In its pearls business, the Company handles its manufacturing operations
and prepares its manufacturing accounting records manually, and uses a local
area network ("LAN") computer system to handle its trading activities and
prepare its financial accounting records using the Flex accounting software. In
addition, the Company uses a computerized lock at its principal office. The
Company has updated and tested its LAN computer system, its computerized lock,
and any other computer, information or operational network, system, software to
be Year 2000 compliance.
In its real estate business, the company handles all aspects of its
operations manually. The Company collects checks or cash from each tenant and
does not use any computerized or automated payment system. None of the machinery
or equipment used in the real estate business, such as elevators or vehicles, is
date sensitive.
Therefore, 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.
In both its pearl production process and in Man Sang Industrial City, the
Company uses water, electricity, and other forms of power. Payments by or to the
Company are frequently made in checks, the clearance of which depends on
computerized check clearing systems. Also, while the Company purchases most of
its raw materials such as pearls from the PRC, which are transported to the
Company's premises on trucks and are therefore not date sensitive, the Company
purchases some pearls from Japan and other locations (which pearls are
transported by air) and delivers most of its finished goods by air, therefore,
if any courier service which the Company uses, or the Hong Kong International
Airport or any other party related to the transportation of raw materials to or
finished goods from the Company are not Year 2000 compliant, such non-compliance
can have a material adverse impact on the Company's business. 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. Further, the Company believes that even
if its systems were not Year 2000 compliant by December 31,
12
<PAGE> 14
1999, any disruption to the Company's business will be insignificant because any
activity that is currently handled by a computerized system can be handled
manually without much difficulty or any material additional cost. Therefore, the
Company currently has no contingency plan to address potential failure, whether
of itself or any third parties to become Year 2000 compliant. The Company has
not incurred material operation expenses or investments in networks and systems
improvements, in order to be Year 2000 compliant.
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. In April, 1999, the Company renewed the tenancy for a further term of
three years commencing from July 1, 1999 and ending on June 30, 2002, with
another optional renewal term of three years upon expiry of the tenancy.
On March 9, 1999, the Company commenced leasing the premises at Unit 801
and 802, 8th Floor, Multifield Plaza, 3 Prat Avenue, Tsimshatsui, Kowloon, Hong
Kong for the trading pearls and pearl products. The premises has a gross floor
area of approximately 1,899 square feet. The lease has a term from March 9, 1999
to March 8, 2002.
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 was rented to an independent
third party at a monthly rental of $1,857 with tenancy expiring on September 19,
1999. However, due to the economic downturn in Hong Kong in fiscal 1999, the
tenant requested to cancel the tenancy and enter into a new one at a lower
rental. On January 30, 1999, the Company accepted the request and entered into a
new tenancy with the existing tenant for a term of two years at a monthly rental
of $1,238, from February 1, 1999 to January 30, 2001, with an optional renewal
term of two years upon expiry of the tenancy. See "Item 1 -- Business -- Real
Estate Leasing Operations -- Leasing and Management" above.
The Company owns Units 14, 15 and 16 on 6th Floor and a car-parking space
at No. L30 on the Ground Floor of Block A, Focal Industrial Centre, 21, Man Lok
Street, Kowloon, Hong Kong. The floor areas of the units are 2,412 square feet,
2,349 square feet and 1,585 square feet respectively. The Group uses half of
Unit 15 as warehouse. The rest of the units are leased out to independent third
parties. See "Item 1 -- Business -- Real Estate Leasing Operations -- Leasing
and Management" above.
The Company owns a residential flat with a gross floor area of
approximately 2,643 square feet 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.
The Company owns a residential flat with a gross floor area of
approximately 1,063 square feet on 33rd Floor, and a parking space on 3rd Floor
at Valverde, 11 May Road, Hong Kong, which it uses as accommodation for senior
executives.
On April 8, 1998, the Company purchased a flat with a gross floor area of
approximately 2,838 square feet on 20th Floor, The Mayfair, 1 May Road, Hong
Kong, for a consideration of approximately US$5.1 million. The Company intends
to hold such property on a long-term basis and use it as the Vice-Chairman's
residence.
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, 1999, Man Sang Industrial City consisted of 24 buildings
encompassing a total gross floor area of approximately 549,233 square feet. The
Company presently utilizes most of the units in five buildings for pearl
processing, administration and staff accommodation. The remaining 19 buildings,
amounting to approximately 451,248 square feet of floor space
13
<PAGE> 15
and representing approximately 79.7% 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. The new plant is a six-story
building with total gross floor area of approximately 33,584 square feet and was
completed in May 1999.
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, 1999.
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>
ON THE LAST DAY OF
OVER THE QUARTER QUARTER
---------------- ------------------
PERIOD HIGH LOW HIGH LOW
- ------ ------ ------ ------- -------
$ $ $ $
<S> <C> <C> <C> <C>
1999
June 30, 1998............................................... 5.00 1.00 1.875 1.875
September 30, 1998.......................................... 3.00 1.531 1.625 1.531
December 31, 1998........................................... 1.531 0.937 0.937 0.937
March 31, 1999.............................................. 2.187 0.875 1.75 1.75
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
</TABLE>
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.
HOLDERS
The number of record holders of the Company's Common Stock as of May 31,
1999, was 222. This number does not include an indeterminate number of
stockholders whose shares are held by brokers in street name.
14
<PAGE> 16
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, 1999,
1998, 1997, 1996, and 1995, 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.
<TABLE>
<CAPTION>
FOR THE YEAR
----------------------------------------------------
1999 1998 1997 1996(NI) 1995(NI)
US$ US$ US$ US$ US$
-------- -------- -------- -------- --------
(AMOUNTS EXPRESSED IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales......................................... 29,873 33,914 32,114 26,769 20,537
Gross profit...................................... 10,026 13,550 12,480 9,061 5,452
Rental income -- Gross............................ 557 705 723 490 478
SG & A
-- for net sales................................ 7,904 6,965 6,759 4,344 2,547
-- for rental................................... 539 454 428 292 266
Operating income.................................. 2,140 6,836 6,016 4,915 3,117
Interest expense.................................. 582 477 818 731 399
Interest Income................................... 520 431 96 56 35
Non-operating income.............................. 83 2,794 109 31 --
Income before -- income taxes(N2)................. 2,161 9,584 5,403 4,271 2,753
Income taxes...................................... 302 458 146 185 189
Minority Interests................................ 718 1,498 -- -- --
Net income(N2).................................... 1,141 7,628 5,257 4,086 2,564
Net income -- per share(N3)....................... 0.27 1.77 1.40 1.45 0.93
Depreciation and amortization..................... 727 525 402 420 355
Gross profit margin(%)............................ 33.56 39.96 38.9 33.9 26.5
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31
---------------------------------------------------------
1999 1998 1997 1996(NI) 1995(NI)
US$ US$ US$ US$ US$
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working capital......................... 34,300 37,810 14,878 5,656 1,331
Property, plant and equipment, net...... 13,031 6,560 4,251 1,254 1,452
Real estate investment, net............. 3,860 3,892 3,367 3,389 3,410
Total Assets............................ 59,500 52,178 34,731 22,411 20,275
% Return on Total Assets................ 1.92 14.62 15.14 18.23 12.64
Long-term Debt.......................... 3,300 2,502 1,100 23 68
Total Liabilities (excluding minority
interest)............................. 10,907 5,716 13,335 12,135 14,151
Minority interests...................... 12,000 11,506 -- -- --
Shareholders' equity.................... 36,593 34,956 21,396 10,276 6,124
Net Book value per share(N3)............ 8.49 8.12 5.68 3.65 2.23
% Return on shareholders' equity........ 3.12 21.82 24.57 39.76 41.86
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AT MARCH 31
---------------------------------------------------------
1999 1998 1997 1996 1995
US$ US$ US$ US$ US$
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gearing Ratio(N4)....................... 0.53 0.42 0.37 0.72 0.98
Weighted average shares
outstanding(N3)....................... 4,305,960 4,305,458 3,766,454 2,812,500 2,750,000
</TABLE>
- ---------------
N1: The financial data for the years ended March 31, 1996 and 1995 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.
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-K contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. The following discussion of results of operation, liquidity and
capital resources, derivative instruments, seasonality and inflation should be
read in conjunction with the financial statements and the notes thereto included
elsewhere herein.
OVERVIEW
In fiscal 1999, net sales totaled $29.9 million, representing a 11.8%
decrease, compared to net sales of $33.9 million in fiscal 1998. The decrease in
net sales was attributable, at least in part, to the weak performance of most
economies in Asia during fiscal 1999, leading to a drop in both confidence of
and demand by consumers in Asia and buyers from Asia, North America and Europe.
In addition, since the Company's sales are denominated in US dollars and many
Asian currencies have been weak when compared to the US dollar during fiscal
1999, the Company's products have been more expensive in local currency terms to
its Asian customers.
In response to such external conditions, the Company embarked on several
major projects. First, the Company focused on promoting its products in North
American market. Second, the Company took advantage of the relatively recent
improvement in the quality of freshwater pearls and shifted its product mix from
saltwater cultured pearls toward more lower priced freshwater pearls of
comparable size and quality. Third, to open new market segments and distribution
channels, the Company established subsidiaries to (i) obtain licenses from
Disney and Mattel to make jewelry based on internationally known trademarks, and
(ii) establish an e-commerce website to sell less expensive jewelry
electronically at a retail level.
While sales to North American customers rose by approximately 14.3% during
fiscal 1999, and the Company has started selling jewelry on the website, there
can be no assurance that any or all of the above projects will be successful in
eliminating or limiting the adverse effects of the weak Asian economies on the
Company. However, the Company's performance during the third quarter of fiscal
1999 is the worst it has ever experienced, and both the Asian economies and the
Company's performance exhibit improvement in the fourth quarter of fiscal 1999
when compared to the third quarter.
17
<PAGE> 19
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,
-----------------------
1999 1998 1997
----- ----- -----
% % %
<S> <C> <C> <C>
Net sales................................................... 100.0 100.0 100.0
Cost of Sales............................................... 66.4 60.0 61.1
----- ----- -----
Gross Profit................................................ 33.6 40.0 38.9
Rental Income, Gross........................................ 1.9 2.1 2.3
----- ----- -----
35.5 42.1 41.2
Selling, General and Administrative Expenses................ 28.3 21.9 22.4
----- ----- -----
Operating Income............................................ 7.2 20.2 18.8
Interest Expense............................................ (2.0) (1.4) (2.5)
Interest Income............................................. 1.7 1.3 0.3
Non-operating Income........................................ 0.3 8.2 0.3
----- ----- -----
Income Before Income Taxes.................................. 7.2 28.3 16.9
Provision for Income Taxes.................................. 1.0 1.4 0.5
----- ----- -----
Net Income before minority interest......................... 6.2 26.9 16.4
Minority Interests.......................................... 2.4 4.4 --
----- ----- -----
Net Income.................................................. 3.8 22.5 16.4
===== ===== =====
</TABLE>
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
Net Sales and Gross Profit
Net sales decreased by $4.0 million, or 11.8%, to $29.9 million in fiscal
1999 from $33.9 million in the prior year. The decrease in net sales was
attributable at least in part to the weakness of most economies in Asia. In
response, the Company has among other things shifted its product mix to lower
priced freshwater pearls. Freshwater pearls represented 31.6% of net sales in
fiscal 1999 as compared to 21.1% of net sales in the prior year.
Gross profit decreased by $3.5 million, or 26.0%, to $10.0 million for
fiscal 1999 compared to $13.5 million for the prior year. As a percentage of
sales, gross profit decreased from 39.9% to 33.6%. The decrease in gross profit
and gross profit margins resulted from the overall decrease in sales, an
increase in sales discount to customers, and an increase of freshwater pearls
in the Company's product mix.
Rental Income
Gross rental income decreased by $147K**, or 20.9%, to $557K for fiscal
1999 compared to $704K for the prior year. The decrease in gross rental income
was due to economic weakness in Asia which in turn adversely affected the
occupancy rate in the Man Sang Industrial City facility located in Shenzhen, the
PRC. The occupancy rate was 72.8% as at March 31, 1999.
Selling, General and Administrative Expenses ("SG & A")
SG & A expenses were $8.4 million, consisting of $7.9 million attributable
to pearl operations and $0.5 million attributable to real estate operations, for
fiscal 1999, an increase of approximately $1 million, or 13.5%, from $7.4
million, consisting of $7.0 million attributable to pearl operations and $0.4
million attributable to real estate operations, during 1998. The increase in SG
& A was primarily attributable to the termination
- ---------------------
**As used in this 10-K, 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".
18
<PAGE> 20
of $102K to Ng Hak Yee, Patrick an increase of depreciation expense of $193K, an
increase in the provision for doubtful debt of $267K. As a percentage of net
sales, SG & A from pearl operations increased from 20.5% in fiscal 1998 to 26.5%
in fiscal 1999, while SG & A from real estate operations increased from 1.3% in
fiscal 1998 to 1.8% in fiscal 1999.
Interest Income
Interest income for fiscal 1999 increased by $89K to $520K from $431K in
fiscal 1998, principally due to cash raised from MSIL's initial public offering
("IPO") in September 1997.
Income In Respect of Subscription Monies Received On Subsidiary's Public
Offering
The income in respect of subscription monies for MSIL's IPO, in the amount
of $1.5 million, arose in fiscal 1998 and is non-recurring.
Interest Expense
Interest expense increased by $105K, or 22.0%, to $582K for fiscal 1999,
from $477K for fiscal 1998. The increase in interest expense was due principally
to an increase in long term bank borrowings for acquisition of a leasehold
property in Hong Kong, and short term bank borrowings by the Company's
subsidiaries in PRC to minimize the impact of a possible devaluation of the
Renminbi. The Company's average borrowing rate fell to 7.6% per annum for fiscal
1999 as compared to 10.3% for the prior year.
Income Taxes
Income taxes and provision therefor for fiscal 1999 decreased by $156K to
$302K, representing a 34.1% decrease from the income tax of $458K for the same
period in 1998. Such significant decrease was principally due to decrease in
operating income.
Net Income
Net income for the year decreased by $6.5 million to $1.1 million
representing 85.5% decrease from $7.6 million in fiscal year 1998. The decrease
was attributable to, among other things:
(i) a decrease in net sales (See Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview)
and gross profit margin (in part due to an increase of small size
freshwater pearls in the Company's product mix) for the year;
(ii) a gain on sales of property, plant and equipment of $1.1 million, and
an income of $1.5 million on subscription monies for MSIL's IPO in
fiscal 1998, both of which is not recurrent in fiscal 1999.
Excluding income taxes, minority interest and non-recurrent items, the
operating profit from the pearls and real estate businesses during the year was
$2.2 million, representing a 68.6% decrease, compared to that of $7.0 million in
fiscal year 1998.
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Net Sales and Gross Profit
Net sales increased by $1.8 million, or 5.6%, to $33.9 million in fiscal
1998 from $32.1 million in the prior year. The increase in net sales was
attributable to the implementation of the Company's emphasis on increasing sales
of higher margin cultured pearls in its product mix. 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 $1.1 million, or 8.6%, to $13.5 million for
fiscal 1998 compared to $12.4 million for the prior year. As a percentage of
sales, gross profit increased from 38.9% to 40.0%. The increase in gross
19
<PAGE> 21
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 $20K, or 2.6%, to $704K for fiscal 1998
compared to $724K 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 $7.4 million, consisting of $7 million attributable to
pearl operations and $0.4 million attributable to real estate operations, for
fiscal 1998, an increase of approximately $0.2 million, or 3.2%, from $7.2
million, consisting of $6.8 million attributable to pearl operations and $0.4
million attributable to real estate operations, during fiscal 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 $0.1 million or 22.9% to $0.5 million from $0.4
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 $335K to $431K from $96K 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.
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 $341K, or 41.7%, to $477K for fiscal 1998,
from $818K 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 10.3% 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 $312K to
$458K, representing a 213.0% increase from the income tax of $146K for the same
period in fiscal 1997. Such significant increase was principally due to:
- increase in operating income arisen from the increase in net sales and
gross profit;
20
<PAGE> 22
- 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.
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, 1999, the Company had working capital of $34.3 million and a cash balance of
$11.0 million compared to working capital of $37.8 million and a cash balance of
$12.1 million at March 31, 1998. The current ratio was 5.5 in fiscal 1999 as
compared with that of 12.8 in fiscal 1998. The decrease in working capital is
mainly due to the increase of short-term borrowing in the subsidiaries in PRC of
approximately $3.2 million. The loans are secured by deposit of $2 million and
the mortgage of 5 buildings in Man Sang Industrial City. The borrowing was used
to purchase pearls and finance the daily operating activities of the PRC
subsidiaries. The main purpose of the borrowings is to minimize the impact of a
possible devaluation of the Renminbi.
Net cash provided by and used in operating activities was $0.9 million and
$3.1 million for fiscal 1999 and fiscal 1998, 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 $2.1 million to $22.1 million at March 31, 1999
and the inventory turns in terms of month increased from 11.2 months in fiscal
1998 to 12.7 months this fiscal. 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 $3.9
million at March 31, 1999, an increase of $1.0 million compared with the prior
year. The increase was attributable to a net increase of installment loan for
the acquisition of real property (described in the following paragraph) in
fiscal 1999. The interest rates of the installment loan ranged from HIBOR + 2.5%
to HIBOR + 3.0%, where HIBOR represents Hong Kong Interbank Offered Rate. The
gearing ratio was 0.53 at March 31, 1999, as compared with 0.42 at March 31,
1998.
During fiscal 1999, the Company purchased a leasehold property at The
Mayfair, 1 May Road for approximately $5.1 million. The Company intends to hold
the property on a long term basis and use it as the Vice-Chairman's residence.
For details of the properties, see "Item 2 -- Properties." The investment was
financed by installment loan of approximately $2.6 million, and the balance was
financed by the net cash flows from the Company's operating activities.
The Company had available working capital facilities of $7.1 million in
total with various banks at March 31, 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, and are
subject to periodic review. At March 31, 1999, the Company utilized
approximately $0.2 million of its credit facilities, with $6.9 million
unutilized.
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.
21
<PAGE> 23
CAPITAL COMMITMENT
On January 19, 1998, the Company approved a capital investment of
approximately $1.1 million to renovate, improve and expand the Company's pearl
processing plant in the Man Sang Industrial City. The new plant is a six-story
building with total gross floor area of approximately 33,584 square feet. The
capital investment is completed in May 1999, and was financed by the equity
funds raised by MSIL during fiscal 1998.
On March 9, 1999, the Company commenced leasing Unit 801 and 802, 8th
Floor, Multifield Plaza, 3 Prat Avenue, Tsimshatsui, Kowloon, Hong Kong for
trading pearls and pearl products. The renovation cost of approximately $28,460
was settled in May 1999.
On September 2, 1998, Man Sang Innovations Limited, a wholly owned
subsidiary of MSIL entered into an agreement with a state-owned company of the
PRC to establish an equity joint venture company in the PRC. The name of the
joint venture is Beijing Sai Long Jewellery Co., Ltd. ("BSLJC") with its office
in Beijing. Man Sang Innovations Limited owns 60% of BSLJC. The provisional
business licence was issued by the State Administration of Industry and Commerce
of the PRC on February 25, 1999. The registered capital of BSLJC is $1.0
million, and the 60% subscription of $600,000 was made by Man Sang Innovations
Limited in April 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In fiscal 1999, the Company made approximately 69.2% of its purchases in
Renminbi (the currency of the PRC), with the remaining amounts mainly settled in
Japanese Yen, Hong Kong dollars and French francs. The weakness in the economies
of most Asian countries has forced most of the Asian countries to devalue their
currency as against the US dollar. Although the Renminbi has not been devalued
in fiscal 1999, 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 fiscal 1999, the Company's sales proceeds have thus far had very
minimal exposure to foreign exchange fluctuations. However, if the US dollar
remains relatively stronger than most of the Asian currencies, it will be more
expensive for Asian customers to purchase pearls from the Company, and demand
may fall.
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 Management determined that no derivative
contracts such as forward contracts and options to hedge against foreign
exchange fluctuations were necessary during the year.
Currencies whose fluctuations are most likely to have the most significant
impact on the Company's operating results include the Renminbi and Japanese
Yen. The Company estimates that a 10% change in foreign exchange rates,
assuming everything else being equal, would impact reported operating income by
less than $200,000. The Company believes that this quantitative measure has
inherent limitations because it does not take into account any changes in either
the customers' purchasing pattern, or the Company's purchasing, financing and
operating strategies.
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 $3.3 million, ranged
from HIBOR + 2.5% to HIBOR + 3.0% in fiscal 1999 (where HIBOR represents Hong
Kong Interbank Offered Rate). Part of the risk of interest rate fluctuation in
the installment loan was hedged by a one-year interest rate swap agreement
("IRSA"). The IRSA, which expired on May 11, 1999, converted interest rate
exposure under the installment loans from a floating rate to a fixed rate basis.
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 March 31, 1999, the aggregate amount
outstanding under all banking facilities and the installment loans was
approximately $3.9 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
$19,500 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.
22
<PAGE> 24
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 and Comprehensive Income
for the years ended March 31, 1999, 1998 and 1997......... F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998... F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999, 1998 and 1997................. F-5
Consolidated Statement of Cash Flows for the years ended
March 31, 1999, 1998 and 1997............................. F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
23
<PAGE> 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
24
<PAGE> 26
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 15, 1999, 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...................... 38 President and
Chairman of the Board 1/96 -- present
Chief Executive Officer 1/98 -- present
Chief Financial Officer 2/99 -- present
Cheng Tai Po................................. 47 Vice Chairman of the Board 1/96 -- present
Yan Sau Man, Amy............................. 36 Vice President and 1/96 -- present
Director
Hung Kwok Wing, Sonny........................ 35 Vice President and 11/96 -- present
Director
Lai Chau Ming, Matthew....................... 46 Director 11/96 -- present
Yuen Ka Lok, Ernest.......................... 36 Director 11/96 -- 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 shareholders or until his or her
earlier resignation or removal.
INFORMATION REGARDING EXECUTIVE OFFICERS
The following table sets forth the names, ages and offices of the present
executive officers of the Company. The periods during which such persons have
served in such capacities and information with respect to non-employee directors
are indicated in the description of business experience of such persons below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------------------------------------
<S> <C> <C>
Cheng Chung Hing, Ricky.................... 38 President, Chairman, Chief Executive
Officer, Chief Financial Officer
Cheng Tai Po............................... 47 Vice Chairman
Yan Sau Man, Amy........................... 36 Vice President
Hung Kwok Wing, Sonny...................... 35 Vice President
Sun Kam Fai, Zacky......................... 37 Vice President
Ho Suk Han, Sophia......................... 30 Secretary
</TABLE>
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
CHENG Chung Hing, Ricky, co-founder of the Company with its subsidiaries
(the "Group"), has served as Chairman of the Board of Directors and President of
the Company since January 8, 1996, and of Man Sang International (B.V.I.)
Limited ("Man Sang BVI") since December 1995. He was appointed a member of the
Compensation Committee of the Board of Directors on September 8, 1997 but
resigned on September 18, 1998. He was appointed Chief Executive Officer and
Chief Financial Officer of the Company on January 2, 1998 and February 27, 1999
respectively. Mr. Cheng was appointed Chairman and a Director of Man Sang
International Limited ("MSIL"), an indirect subsidiary listed on The Stock
Exchange of Hong Kong Limited, on August 8, 1997 and August 4, 1997,
respectively. Prior to the reorganization of the Group in late 1995 which
culminated in the Company's issuance of Common Stock and Series A Preferred
Stock in exchange for all the outstanding securities of Man Sang BVI in January
1996 (the "Group Reorganization"), he had served as chairman and president of
various companies within the Group. Mr. Cheng has over 15 years'
25
<PAGE> 27
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 Group, has served as Vice Chairman of the
Company since January 8, 1996 and of Man Sang BVI since December 1995. He was
appointed Deputy Chairman and a Director of MSIL on August 8 and August 4, 1997,
respectively. Prior to the Group Reorganization, he had served as vice-chairman
of various companies within the Group. Mr. Cheng has over 15 years' experience
in the pearl business and is responsible for purchasing and processing of 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 Man Sang BVI since December 1995. She was
appointed as a Director of MSIL on August 12, 1997. Ms. Yan joined the 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 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 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.
LAI Chau Ming, Matthew, has served as a Director of the Company since
November 1996. He was appointed a member of the Compensation Committee and a
member of the Audit Committee of the Board of Directors on September 8, 1997 and
September 18, 1998 respectively. Mr. Lai is currently employed as 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 26 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 and a member of
the Audit Committee of the Board of Directors on September 8, 1997 and September
18, 1998 respectively. 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. The Hong Kong
office of ITC 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 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 (now known as PricewaterhouseCoopers), an
international accounting firm. Mr. Yuen is experienced in civil and criminal
litigations as well as the general commercial transactions.
SUN Kam Fai, Zacky, joined the Company in March 1999 and has served as Vice
President of the Company since May 3, 1999. He is responsible for financial
management and participates in formulation and execution of corporate policies.
Mr. Sun was the Financial Controller of CCT Communication Group Limited in Hong
Kong from December 1997 to February 1999 and of Synergy Power Corporation Pty
Ltd in Australia from May 1995 to June 1997. In June 1992, he established an
independent accounting firm in Hong Kong, which he managed until October 1994.
From April 1987 to June 1992, Mr. Sun served as Project Manager of Toplus
Development Limited to explore investment opportunities. From 1984 to 1987, Mr.
Sun was an audit trainee at Ernst & Whinney (now known as Ernst & Young), an
international accounting firm. He is a Certified Public Accountant, a fellow of
the Association of the Chartered Certified Accountants, an associate of the
Australian Society of Certified Public Accountants and an associate of the Hong
Kong Society of Accountants.
26
<PAGE> 28
HO Suk Han, Sophia, has served as Secretary of the Company since January
1998. Miss Ho has over 8 years' experience in company secretarial work in an
international accounting firm and several 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 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 Form 3 in respect
thereof in February 1997; (ii) Cheng Chung Hing, Ricky and Cheng Tai Po became
the 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 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 (resigned in February 1999);
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."
COMMITTEES
Audit Committee
The Board of Directors established an Audit Committee on September 18, 1998
with Alexander Reid Hamilton as Chairman, and Yuen Ka Lok, Ernest and Lai Chau
Ming, Matthew as Committee members. Mr. Hamilton is a Director and Chairman of
the Audit Committee of MSIL. He was a partner in an international accounting
firm for 16 years and has over 21 years of audit and accounting experience. Mr.
Hamilton serves as audit committee member of several companies which are listed
on The Stock Exchange of Hong Kong Limited. With his rich experience, the
Company invited him to act as Chairman of the Audit Committee.
The Committee is to make such examinations as are necessary to monitor the
corporate financial reporting and the internal and external audits of the
Company. Besides the monitoring function, the Committee also makes
recommendations on improvements and conduct any other duties as the Board of
Directors may delegate. During the year ended March 31, 1999, the Audit
Committee held two meetings to review the financial results of the Company
before presentation to the Board of Directors for approval and release.
Compensation Committee
The Board of Directors established a Compensation Committee on September 8,
1997 with Yuen Ka Lok, Ernest as Chairman, and Cheng Chung Hing, Ricky and Lai
Chau Ming, Matthew as Committee members. To promote the Committee's
independence, Cheng Chung Hing, Ricky resigned as Compensation Committee member
on September 18, 1998.
The Compensation Committee is to deliberate and stipulate the compensation
policy for the Company and to administer the 1996 Stock Option Plan. During the
year ended March 31, 1999, the Compensation Committee met seven times (six of
which were either via full board meetings or by unanimous written consents of
action of all directors) to discuss and review the compensation policies of the
Company, including but not limited to the grant and administration of stock
options to consultants of the Company. The Company engaged consultants during
the year ended March 31, 1999 with the aim of enhancing shareholder value. To
27
<PAGE> 29
closely link the consultants' compensation with the Company's stock price, the
Compensation Committee granted stock options as a principal part of the
consultants' compensation.
Besides the Audit and Compensation Committee, the Board of Directors
presently maintains no other committees.
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. The employee directors of the Company have
entered into Services Agreement with MSIL. See "Item 11 -- Executive
Compensation -- Employment Agreements". Other executive officers in the
management team were employed by a subsidiary of MSIL.
In the 1998 Annual General Meeting of MSIL held in August 1998, the
shareholders of MSIL passed a resolution to authorize its Board of Directors to
fix remuneration of all directors (which for MSIL would include all its
executives) for the year. The MSIL Board determined that the compensation
packages of its directors were generally competitive. Hence, the compensation
packages remained unchanged for fiscal 1999, save for Cheng Tai Po's (as
described in the next paragraph).
The Board of Directors of both the Company and MSIL recognized that
purchasing and processing techniques are critical to the success of the
Company's business and, in recognition of Cheng Tai Po's foresight and endeavor
to minimize the respective costs, provided him a leasehold property at no cost
as his personal residence, commencing October 1998.
As at July 5, 1999, the Company via its subsidiary, Man Sang BVI, holds
355,000,000 shares, or 73.28% of the issued capital, of MSIL. Since the overall
compensation of the executive officers of the Company was determined by the
Board of Directors of MSIL, the Company's Compensation Committee takes up a
monitoring function. The Committee reviews the decisions of the MSIL Board in
relation to this issue. Should the Committee disagree with the decisions of the
MSIL Board, the Committee may advise the Company's Board of Directors to vote in
any general meeting of MSIL against authorizing the MSIL Board to fix
compensation for MSIL's directors and executives.
For fiscal 1999, all executive officers received their salaries and part of
their bonus (if applicable) from MSIL.
With respect to the Chairman and the Vice Chairman, the Compensation
Committee members 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 limit the adverse effects of the weakness in
Asian economies over the past year and to steer the Company towards more
profitable business. The Committee members 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, Chairman of
the Board and Cheng Tai Po, Vice Chairman.
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, 1999
28
<PAGE> 30
of the Company's Chief Executive Officer and each of its other most highly
compensated executive officers whose compensation exceeded $100,000 (the "Named
Officers") during fiscal 1999.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------ UNDERLYING
NAME AND OTHER ANNUAL OPTIONS OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(3) GRANTED(6) COMPENSATION
- ------------------ ----- ------- ------- --------------- ---------- ------------
($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Cheng Chung Hing, Ricky........ 1999 388,100 291,074(1) 92,135(4) 0
Chairman of the Board, 1998 388,100 323,400(2) 92,135(4) 100,000 &
President, CEO and CFO 11,800,000
1997 388,100 323,400 45,650(4) 0
Cheng Tai Po................... 1999 388,100 291,074(1) 93,710(5) 0
Vice Chairman 1998 388,100 323,400(2) -- 100,000 &
11,800,000
1997 388,100 323,400 -- 0
Yan Sau Man, Amy............... 1999 129,366 -- -- 0
Vice President & Director 1998 129,366 -- -- 100,000 &
5,000,000
1997 124,191 -- -- 0
Hung Kwok Wing, Sonny.......... 1999 129,366 -- -- 0
Vice President 1998 129,366 -- -- 100,000 &
and Director(7) 4,000,000
Ng Hak Yee, Patrick............ 1999 118,586 -- -- 0 102,231(9)
(7 & 8) (resigned on 1998 129,366 -- -- 100,000 &
February 27, 1999) 4,000,000
</TABLE>
- ---------------
(1) Cheng Chung Hing, Ricky and Cheng Tai Po received bonus of $161,708 and
$129,366 from each of the Company and MSIL respectively for fiscal 1999.
(2) Half of the bonus of each of Cheng Chung Hing, Ricky and Cheng Tai Po for
fiscal 1998 was paid by the Company, and half of which was 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) and (2) 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) In addition to the amounts referred to in note (1) above, Cheng Tai Po is
provided the right to use a leasehold property of the Company at no cost as
his personal residence commencing on October 11, 1998. The estimated fair
rental value of such leasehold property was $93,710. 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.
29
<PAGE> 31
(6) Each Named Executive received options from both the Company and MSIL in
fiscal 1998.
(7) In fiscal 1998, each of Hung Kwok Wing, Sonny and 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.
(8) Subsequent to the resignation of Ng Hak Yee, Patrick, the options granted to
him by the Company and MSIL expired on May 27, 1999 and March 27, 1999
respectively.
(9) A termination pay of $102,231 was made to Ng Hak Yee, Patrick.
OPTION GRANTS IN FISCAL 1999
In fiscal 1999, neither the Company nor MSIL granted any option to any of
its directors or executive officers.
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 commenced on June 19, 1996 and ended on March 31, 1999, the Company's
1999 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 the
accompanying annual report on Form 10-K for the fiscal year ended March 31,
1999.
30
<PAGE> 32
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
Base
Period
Company/Index Name 6/19/96 3/31/97 3/31/98 3/31/99
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Company's Common Stock $100 $15.57 $8.93 $12.50
- -------------------------------------------------------------------
IWI's Common Stock $100 $46.67 $8.32 $ 3.73
- -------------------------------------------------------------------
</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 jewelry 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 jewelry 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 Hing, Ricky; Cheng Tai Po; Yan Sau Man, Amy; and Hung Kwok Wing, Sonny 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, 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, and Hung Kwok Wing, Sonny shall be HK$3
million, HK$3 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, and Hung
Kwok Wing, Sonny 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.
31
<PAGE> 33
COMPENSATION OF DIRECTORS
No employee of the Company receives any compensation for his or her service
as a Director. The non-employee directors of the Company were compensated for
their services as directors in fiscal 1999 as follows:
<TABLE>
<CAPTION>
NON-EMPLOYEE DIRECTORS DIRECTORS' FEE
- ---------------------- --------------
$
<S> <C>
Lai Chau Ming, Matthew.................................. 12,937
Yuen Ka Lok, Ernest..................................... 25,873
</TABLE>
MSIL paid $25,873 to Alexander Reid Hamilton (who is not a director of the
Company) for his services as a director of MSIL. No additional compensation of
any nature was paid to any non-employee director of the Company for their
services as directors.
An amount of $500 is to be paid to each of the non-employee director and
Alexander Reid Hamilton for their participation in Audit Committee meetings. In
fiscal 1999, the Audit Committee members were compensated as follows:
<TABLE>
<CAPTION>
AMOUNT RECEIVED
-------------------
AUDIT COMMITTEE MEMBERS THE COMPANY MSIL
- ----------------------- ----------- ----
($) ($)
<S> <C> <C>
Lai Chau Ming, Matthew.................................. 1,000 N/A
Yuen Ka Lok, Ernest..................................... 1,000 500
Alexander Reid Hamilton................................. 1,000 500
</TABLE>
- ---------------
Audit Committee of MSIL met only once in fiscal 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Cheng Chung Hing, Ricky, Chairman of the Board, Chief Executive Officer,
Chief Financial Officer and President of the Company, was a member of the
Compensation Committee. To promote the Committee's independence, he resigned as
Compensation Committee member on September 18, 1998. The other two members of
the Committee are not executives of the Company or any of its subsidiaries, but
Yuen Ka Lok, Ernest, is a partner of Messrs. Yuen & Partners, one of the legal
advisors to the Company and its subsidiaries. Messrs. Yuen & Partners receives
its standard professional fees in the provision of legal services to the Company
and its subsidiaries.
Except as described in this and the immediately preceding paragraph, 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 the Company's Compensation Committee, (ii)
served as a director of another entity, one of whose executive officers served
on 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 Cheng Tai Po and Yan Sau Man, Amy, serve as directors in several companies
of which 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.
32
<PAGE> 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The information furnished in the following table indicates beneficial
ownership of shares of the Company's Common Stock, as of June 15, 1999, by (i)
each shareholder of the Company who is known by the Company to be beneficial
owner of more than 5% of the Company's Common Stock, (ii) each director, nominee
for director and Named Officer of the Company, individually, and (iii) all
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ------------------- ----------------------- ----------------
<S> <C> <C>
Cafoong Limited(2)(4)..................... 2,750,000 58%
Cheng Chung Hing, Ricky(2)(3)(4).......... 2,800,000 59%
Cheng Tai Po(2)(3)(4)..................... 2,800,000 59%
Yan Sau Man, Amy(3)(4).................... 50,000 1%
Hung Kwok Wing, Sonny(3)(4)............... 50,000 1%
Lai Chau Ming, Matthew(4)................. -0- *
Yuen Ka Lok, Ernest(4).................... -0- *
Sun Kam Fai, Zacky(4)..................... -0- *
Ho Suk Han, Sophia(4)..................... -0- *
All executive officers and directors as a
group (8 persons)....................... 2,950,000 62%
</TABLE>
- ---------------
* Less than 1%
(1) This 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 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) Each of Cheng Chung Hung, Ricky, Cheng Tai Po, Yan Sau Man, Amy and Hung
Kwok Wing, Sonny has the right, within 60 days, to exercise non-qualified
options granted under the 1996 Stock Option Plan, to purchase 50,000 shares
of Common Stock of the Company.
(4) Address is 21st Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong.
33
<PAGE> 35
PREFERRED STOCK
The following table is furnished as of June 15, 1999, to indicate
beneficial ownership of the Company's Series A Preferred Shares by each
shareholder of the Company who is known by the Company to be a beneficial owner
of more than 5% of the Company's Series A Preferred Shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
- ------------------- -------------------------- ----------------
<S> <C> <C>
Cafoong Limited (1)(2)................. 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 the shares of Series
A Preferred Stock of the Company owned by Cafoong Limited.
(2) Address is 21st Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui,
Kowloon, Hong Kong.
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
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. The maximum amount advanced to Cheng
Chung Hing, Ricky and Cheng Tai Po during the past three years was $230,110 and
$106,360 respectively. During fiscal 1999, the Company advanced $33,839 to Cheng
Chung Hing, Ricky and $106,360 to Cheng Tai Po respectively. Both of them repaid
the amount before March 31, 1999. 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 at March 31, 1999. The maximum amount owed to Cheng Chung Hing, Ricky
and to Cheng Tai Po during the past three years was $94,306 and $-0-
respectively.
Finally, during the past three years, Cheng Chung Hing, Ricky has utilized
a leasehold property of the Company as his personal residence at no cost to him.
Since October 11, 1998, Cheng Tai Po has utilized a leasehold property of the
Company as his personal residence at no cost to him. See "Item 11 -- Executive
Compensation".
Yuen Ka Lok, Ernest, a director of both the Company and MSIL, the Chairman
of the Compensation Committee and a member of the Audit Committee of the Board
of Directors of the Company, is a partner of Messrs. Yuen & Partners, one of the
legal advisors to the Company. Messrs. Yuen & Partners receives its standard
professional fees in the provision of legal services to the Company.
Alexander Reid Hamilton, Chairman of the Audit Committee of the Board of
Directors of the Company is a director of MSIL.
34
<PAGE> 36
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
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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)
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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)
10.12 Agreement for Sale and Purchase dated February 24, 1998,
between City Empire Limited and Wealth-In Investment
Limited, a subsidiary of the Company, pursuant to which
Wealth-In Investment Limited purchased certain real property
located at Flat B on the 20th Floor of The Mayfair, One May
Road, Hong Kong, at a purchase price of HK$39,732,200 (7)
13.1 Annual report to security holders (4)
21.1 Subsidiaries of the Company
24.1 Power of Attorney (included on page [45])
27.1 Financial data schedule
99.1 Share Option Scheme of Man Sang International Limited, a
subsidiary of the Company (6)
</TABLE>
- ---------------
(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
(7) Incorporated by reference to the exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998
(D) FINANCIAL STATEMENT SCHEDULE
See Item 14(a)(2) of this Form 10-K.
36
<PAGE> 38
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 25th day of June,
1999.
MAN SANG HOLDINGS, INC.
By:
/s/ Cheng Chung Hing, Ricky
------------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer
and Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Cheng Chung Hing, Ricky, his
attorney-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Annual Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Cheng Chung Hing, Ricky Chairman of the Board, President, Chief June 25, 1999
- --------------------------------------------- Executive Officer and Chief Financial
CHENG Chung Hing, Ricky Officer
/s/ Cheng Tai Po Vice Chairman of the Board June 25, 1999
- ---------------------------------------------
CHENG Tai Po
/s/ Yan Sau Man, Amy Vice President and Director June 25, 1999
- ---------------------------------------------
YAN Sau Man, Amy
/s/ Hung Kwok Wing, Sonny Vice President and Director June 25, 1999
- ---------------------------------------------
HUNG Kwok Wing, Sonny
</TABLE>
37
<PAGE> 39
MAN SANG HOLDINGS, INC.
-----------------------
Consolidated Financial Statements
Years ended March 31, 1999, 1998 and 1997
and Independent Auditors' Report
<PAGE> 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC.
<TABLE>
<S> <C>
Independent Auditors' Report.................................... F-1
Consolidated Statements of Income and Comprehensive Income
for the years ended March 31, 1999, 1998 and 1997............. F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998....... F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999, 1998 and 1997..................... F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997................................. F-6
Notes to Consolidated Financial Statements...................... F-8
</TABLE>
<PAGE> 41
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, 1999 and 1998, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1999, 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
DELOITTE TOUCHE TOHMATSU
Hong Kong
June 25, 1999
F-1
<PAGE> 42
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------------------
1999 1999 1998 1997
---------- ---------- ---------- ----------
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Net sales .................................................... 29,873 230,915 262,158 248,240
Cost of sales ................................................ 19,847 153,415 157,412 151,773
---------- ---------- ---------- ----------
Gross profit ................................................. 10,026 77,500 104,746 96,467
Rental income, gross ......................................... 557 4,304 5,446 5,591
---------- ---------- ---------- ----------
10,583 81,804 110,192 102,058
Selling, general and administrative expenses
Pearls ..................................................... (7,904) (61,101) (53,841) (52,247)
Real estate investment ..................................... (539) (4,167) (3,509) (3,312)
---------- ---------- ---------- ----------
Operating income ............................................. 2,140 16,536 52,842 46,499
Gain on sale of property, plant and equipment ................ -- -- 8,221 --
Interest expense ............................................. (582) (4,500) (3,685) (6,320)
Income in respect of subscription monies
received on subsidiary's public offering
(note 1) ................................................... -- -- 11,391 --
Interest income .............................................. 520 4,018 3,335 744
Other income ................................................. 83 645 1,983 844
---------- ---------- ---------- ----------
Income before income taxes and minority
interests .................................................. 2,161 16,699 74,087 41,767
Provision for income taxes (note 3) .......................... (302) (2,333) (3,543) (1,132)
Minority interests ........................................... (718) (5,551) (11,576) --
---------- ---------- ---------- ----------
Net income ................................................... 1,141 8,815 58,968 40,635
Other comprehensive income, net of tax:
Foreign currency translation adjustments ................... 264 2,043 (1,717) 1,236
---------- ---------- ---------- ----------
Comprehensive income ......................................... 1,405 10,858 57,251 41,871
========== ========== ========== ==========
Basic earnings per common share .............................. $ 0.27 $ 2.05 $ 13.70 $ 10.79
========== ========== ========== ==========
Diluted earnings per common share ............................ $ 0.24 $ 1.89 $ 13.42 $ 10.00
========== ========== ========== ==========
Weighted average number of shares of common stock outstanding:
- basic .................................................... 4,305,960 4,305,960 4,305,458 3,766,454
- diluted .................................................. 4,665,172 4,665,172 4,390,097 4,062,992
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 43
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31,
---------------------------------
1999 1999 1998
------- ------- -------
US$ HK$ HK$
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................... 8,564 66,196 83,918
Restricted cash (note 7) ...................... 2,436 18,831 9,525
Accounts receivable, net of allowance
for doubtful accounts of HK$5,000 in 1999 and
HK$1,977 in 1998 ............................ 7,105 54,922 52,195
Inventories (note 4) .......................... 22,162 171,317 154,495
Prepaid expenses .............................. 197 1,523 2,429
Other current assets .......................... 1,443 11,158 14,563
------ ------- -------
Total current assets ........................ 41,907 323,947 317,125
Property, plant and equipment, net
(note 5) ...................................... 13,031 100,734 50,711
Real estate investment, net (note 6) ............ 3,860 29,842 30,084
Long-term investments (note 1) .................. 702 5,430 5,430
------ ------- -------
Total assets .................................... 59,500 459,953 403,350
====== ======= =======
</TABLE>
F-3
<PAGE> 44
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued
(Dollars in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
------------------------------------
1999 1999 1998
-------- -------- --------
US$ HK$ HK$
<S> <C> <C> <C>
Current liabilities:
Short-term borrowings (note 7) .......................... 3,435 26,554 2,084
Current portion of long-term debt (note 8) .............. 604 4,665 3,434
Accounts payable ........................................ 1,136 8,781 3,887
Accrued payroll and employee benefits ................... 611 4,725 2,922
Other accrued liabilities ............................... 1,306 10,093 8,937
Income taxes payable .................................... 515 3,984 3,586
------- -------- --------
Total current liabilities ............................. 7,607 58,802 24,850
------- -------- --------
Long-term debt (note 8) ................................... 3,300 25,511 19,342
------- -------- --------
Minority interests ........................................ 12,000 92,766 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 1999 and 1998 (note 10) ....... 4 33 33
Series A preferred stock US$0.001 par value
- authorized, issued and outstanding 100,000
shares in 1999 and 1998 (entitled in liquidation
to US$2,500 (HK$19,325)) (note 10) ................ -- 1 1
Series B convertible preferred stock US$0.001 par value
- authorized 100,000 shares; no shares outstanding
(note 10) ............................................. -- -- --
Additional paid-in capital .............................. 12,345 95,429 93,627
Retained earnings ....................................... 24,013 185,623 176,808
Cumulative translation adjustments ...................... 231 1,788 (255)
------- -------- --------
Total stockholders' equity ................................ 36,593 282,874 270,214
------- -------- --------
Total liabilities and stockholders' equity ................ 59,500 459,953 403,350
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 45
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Series A Series B
Common stock preferred stock preferred stock
------------------------ ---------------- -----------------------
Amount Amount Amount
------- ------- -------
Shares HK$ Shares HK$ Shares HK$
---------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 ..... 12,000,000 93 100,000 1 - -
Issuance of Series B preferred
stock of US$0.001 par value .. - - - - 6,760 -
Conversion of Series B preferred
stock to common stock ........ 5,219,448 40 - - (6,760) -
Reverse split (note 10) ........ (12,914,586) (100) - - - -
Translation adjustment ......... - - - - - -
Net income ..................... - - - - - -
---------- ------- ------- ------- ------- -------
Balance at March 31, 1997 ..... 4,304,862 33 100,000 1 - -
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) ............... - - - - - -
Compensation expense ........... - - - - - -
Translation adjustment ......... - - - - - -
Net income ..................... - - - - - -
---------- ------- ------- ------- ------- -------
Balance at March 31, 1998 ..... 4,305,960 33 100,000 1 - -
Compensation expense ........... - - - - - -
Translation adjustment ......... - - - - - -
Net income ..................... - - - - - -
---------- ------- ------- ------- ------- -------
Balance at March 31, 1999 ..... 4,305,960 33 100,000 1 - -
========== ======= ======= ======= ======= =======
- US$4 - - - -
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Cumulative stock-
paid-in Retained translation holders'
capital earnings adjustments equity
-------- -------- ------ --------
HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Balance at March 31, 1996 ..... 1,907 77,205 226 79,432
Issuance of Series B preferred
stock of US$0.001 par value .. 44,092 - - 44,092
Conversion of Series B preferred
stock to common stock ........ (40) - - -
Reverse split (note 10) ........ 100 - - -
Translation adjustment ......... - - 1,236 1,236
Net income ..................... - 40,635 - 40,635
-------- -------- ------ --------
Balance at March 31, 1997 ..... 46,059 117,840 1,462 165,395
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 - - 45,533
Compensation expense ........... 2,035 - - 2,035
Translation adjustment ......... - - (1,717) (1,717)
Net income ..................... - 58,968 - 58,968
-------- -------- ------ --------
Balance at March 31, 1998 ..... 93,627 176,808 (255) 270,214
Compensation expense ........... 1,802 - - 1,802
Translation adjustment ......... - - 2,043 2,043
Net income ..................... - 8,815 - 8,815
-------- -------- ------ --------
Balance at March 31, 1999 ..... 95,429 185,623 1,788 282,874
======== ======== ====== ========
US$12,345 US$24,013 US$231 US$36,593
========== ========== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 46
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------------------
1999 1999 1998 1997
------ ------- -------- --------
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Cash flow from operating activities
Net income ..................................... 1,141 8,815 58,968 40,635
Adjustments to reconcile net income to net
cash provided (used) in operating activities:
Bad debt provision ........................... 391 3,023 977 1,000
Compensation expense ......................... 342 2,641 2,035 -
Depreciation and amortization ................ 727 5,622 4,056 3,110
(Gain) loss on sale of property, plant and
equipment .................................. (6) (45) (8,221) 450
Minority interests ........................... 718 5,551 11,576 -
Changes in operating assets and liabilities:
Accounts receivable ........................ (744) (5,749) (5,674) (14,694)
Inventories ................................ (2,063) (15,945) (15,897) (53,039)
Prepaid expenses ........................... 118 910 (1,074) (163)
Other current assets ....................... (785) (6,067) (1,354) 2,943
Income taxes receivable .................... - - 437 (437)
Accounts payable ........................... 633 4,889 (19,604) 1,212
Accrued payroll and employee benefits ...... 232 1,792 (4,904) 6,580
Other accrued liabilities .................. 142 1,099 (386) (814)
Income taxes payable ....................... 51 394 3,193 374
------ ------- -------- --------
Net cash provided (used) in operating activities 897 6,930 24,128 (12,843)
------ ------- -------- --------
Cash flow from investing activities
Purchase of property, plant and equipment ...... (5,929) (45,833) (32,785) (25,670)
Increase in restricted cash .................... (1,204) (9,306) (465) (3,199)
Proceeds from sale of property, plant
and equipment ................................ 16 123 11,047 -
Expenditure on real estate investment .......... - - (4,842) -
Purchase of long-term investments .............. - - (5,430) -
------ ------- -------- --------
Net cash used in investing activities .......... (7,117) (55,016) (32,475) (28,869)
------ ------- -------- --------
Cash flow from financing activities
Increase in short-term borrowings .............. 5,460 42,210 78,040 150,530
Increase in long-term debt ..................... 2,587 20,000 14,100 9,940
Increase in bank overdrafts .................... 375 2,896 239,114 422,459
Repayment of short-term borrowings ............. (2,295) (17,740) (113,920) (154,681)
Repayment of long-term debt .................... (1,630) (12,601) (2,020) (841)
Dividend paid to minority shareholders ......... (429) (3,320) - -
Repayment of bank overdrafts ................... (375) (2,896) (252,746) (423,442)
Net proceeds from issuance of stock by
subsidiary ................................... - - 123,413 -
Net proceeds from issuance of convertible
preferred stock .............................. - - - 44,092
Advances from related parties .................. - - - 139
Repayments to related parties .................. - - - (2,904)
------ ------- -------- --------
Net cash provided by financing activities ...... 3,693 28,549 85,981 45,292
------ ------- -------- --------
</TABLE>
F-6
<PAGE> 47
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------
1999 1999 1998 1997
------- ------- ------- -----
US$ HK$ HK$ HK$
<S> <C> <C> <C> <C>
Net (decrease) increase in cash and cash
equivalents ..................................... (2,527) (19,537) 77,634 3,580
Cash and cash equivalents at beginning
of year ......................................... 10,856 83,918 7,868 3,741
Exchange adjustments .............................. 235 1,815 (1,584) 547
------- ------- ------- -----
Cash and cash equivalents at end of year .......... 8,564 66,196 83,918 7,868
======= ======= ======= =====
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest and finance charges .................... 585 4,525 3,751 6,780
Income taxes paid ............................... 250 1,935 606 1,195
</TABLE>
Capital lease obligations were incurred to acquire motor vehicles of HK$Nil in
1999, HK$696 in 1998 and HK$360 in 1997.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 48
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.
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, 1999, over 95% 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.
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, 1999 the largest
supplier of the Company accounted for approximately 23.9%, 17.5% and
17.2% of the Company's total purchases, respectively.
F-8
<PAGE> 49
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
Of the Company's purchases, approximately 69% in 1999, 68% in 1998 and
55% in 1997 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.
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. At March 31, 1999, the warrants
expired and no warrants were exercised in the year ended March 31,
1999.
F-9
<PAGE> 50
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
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 an 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, the
restatement of real estate investment at cost, which is stated at open
market value estimated by external professional valuers for local
statutory reporting, and the recognition of compensation cost over the
service period for the stock options granted by the Company, which is
not required for local statutory reporting. At March 31, 1999, 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> 51
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 using 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
Assets under construction are not depreciated until construction is
complete and the assets are put into use.
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.
F-11
<PAGE> 52
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
Capitalization of borrowing costs - Borrowing costs directly
attributable to the acquisition, construction or production of
qualifying assets, i.e. assets that necessarily take a substantial
period of time to get ready for their intended use or sale, are
capitalized as part of the cost of those assets. Capitalization of such
borrowing costs ceases when the assets are substantially ready for
their intended use or sale. Borrowing costs capitalized amounted to
HK$340 during the year ended March 31, 1999.
Revenue recognition - The Company recognizes revenue at the time
products are shipped to customers. Property rental is recognized on a
straight-line basis over the term of the lease, and is stated at the
gross amount.
Income taxes - Deferred income taxes are provided at enacted statutory
rates for temporary differences resulting from differences between the
book and tax bases of assets and liabilities. During the periods
presented there were no significant temporary differences. The Company
does not provide United States federal income taxes on undistributed
earnings of foreign subsidiaries as such earnings are intended to be
permanently reinvested in those operations.
Earnings per share ("EPS") - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". This pronouncement
provides for the calculation of basic and diluted EPS which is
different from the previous calculation of primary and fully diluted
EPS and requires restatement of such EPS information for all prior
periods presented. Reconciliation of the basic and diluted EPS is as
follows:
<TABLE>
<CAPTION>
For the year ended For the year ended For the year ended
March 31, 1999 March 31, 1998 March 31, 1997
-------------------------- -------------------------- --------------------------
Earnings Shares EPS Earnings Shares EPS Earnings Shares EPS
-------- ------- --- -------- ------ --- -------- ------ ---
HK$'000 HK$ HK$'000 HK$ HK$'000 HK$
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to
common stockholders 8,815 4,305,960 2.05 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 -- 359,212 -- 84,639 -- --
Effect of dilutive stock options
granted by a listed subsidiary -- -- (46) -- -- --
----- --------- ------ --------- ------ ---------
Diluted EPS
Net income available to
common stockholders,
including conversion 8,815 4,665,172 1.89 58,922 4,390,097 13.42 40,635 4,062,992 10.00
====== ========= ==== ====== ========= ===== ====== ========= =====
</TABLE>
In 1998, the effect on consolidated EPS of warrants issued by MSIL,
which enabled 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. These warrants expired during the year ended March 31,
1999.
F-12
<PAGE> 53
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Foreign currency translation - Assets and liabilities of foreign
subsidiaries are translated at year end exchange rates, while revenues
and expenses are translated at average exchange rates during the year.
Adjustments arising from translating foreign currency financial
statements are reported as a separate component of stockholders'
equity. Gains or losses from foreign currency transactions are included
in income. Aggregate net foreign currency gains or losses were
immaterial for all periods.
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, 1999. 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 adopted - In 1999, the Company adopted SFAS
No.130, "Reporting Comprehensive Income" and SFAS No.131, "Disclosures
about Segments of an Enterprise and Related Information" and
comparative information for earlier years has been amended to conform
to the presentation adopted in 1999.
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.
F-13
<PAGE> 54
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
New accounting standard not yet adopted - The Financial Accounting
Standards has issued a new standard SFAS No.133, "Derivative
Instruments and Hedging Activities". Management has not yet completed
the analysis of the impact this would have on the financial statements
of the Company.
3. INCOME TAXES
Income is subject to taxation in the various countries in which the
Company and its subsidiaries operate.
The components of income before income taxes and minority interests are
as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1999 1998 1997
------ ------ ------
HK$ HK$ HK$
<S> <C> <C> <C>
Hong Kong................................ 8,117 21,867 (1,333)
Other regions in China................... 14,579 59,350 48,694
Corporate expenses, net.................. (5,997) (7,130) (5,594)
------ ------ ------
16,699 74,087 41,767
====== ====== ======
</TABLE>
F-14
<PAGE> 55
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
3. INCOME TAXES - continued
As a consequence of the Reorganization on January 8, 1996, certain
activities conducted by the Company's subsidiaries may result in
current income recognition, for U.S. tax purposes, by the Company even
though no actual distribution is received by the Company from the
subsidiaries. However, such income, when distributed, would generally
be considered previously taxed income to the Company and thus would not
be subject to U.S. federal income tax again.
Hong Kong companies are subject to Hong Kong taxation on their
activities conducted in Hong Kong. Under the current Hong Kong laws,
dividends and capital gains arising from the realization of investments
are not subject to income taxes and no withholding tax is imposed on
payments of dividends by the Hong Kong incorporated subsidiaries to the
Company.
The Company has three subsidiaries which are incorporated in 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,
1999 1998 1997
----- ----- -----
HK$ HK$ HK$
<S> <C> <C> <C>
Current tax:
United States................................ 287 1,769 444
Foreign subsidiaries operating in:
Hong Kong.................................. 1,941 1,154 529
Other regions in China..................... 105 620 159
----- ----- -----
2,333 3,543 1,132
===== ===== =====
</TABLE>
Had the tax holidays and concessions detailed above not been available,
the tax charge would have been increased by HK$2,247 in 1999, HK$9,282
in 1998 and HK$9,354 in 1997.
F-15
<PAGE> 56
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
3. INCOME TAXES - continued
A reconciliation between the provision for income taxes computed by
applying the United States statutory tax rate to income before taxes
and the actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1999 1998 1997
------ ------- -------
HK$ 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.................... 5,677 25,190 14,201
International rate difference..................................... (3,338) (21,824) (16,145)
Adjustment of estimated tax due................................... (554) (555) (117)
Other............................................................. 548 732 3,193
------ ------- -------
Income tax provision.............................................. 2,333 3,543 1,132
====== ======= =======
</TABLE>
U.S. deferred tax liabilities have not been provided on approximately
HK$202,000 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$58,000.
4. INVENTORIES
Inventories by major categories are summarized as follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
------- -------
HK$ HK$
<S> <C> <C>
Raw materials................. 1,489 1,421
Work in progress.............. 49,712 43,876
Finished goods................ 120,116 109,198
------- -------
171,317 154,495
======= =======
</TABLE>
F-16
<PAGE> 57
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,
1999 1998
------- -------
HK$ HK$
<S> <C> <C>
Leasehold land and buildings................. 92,961 49,909
Plant and machinery ......................... 3,789 3,145
Furniture and equipment...................... 5,113 4,623
Motor vehicles............................... 4,211 4,176
Less: accumulated depreciation............... (15,869) (11,142)
Construction in progress..................... 10,529 -
------- -------
Net book value 100,734 50,711
======= ======
</TABLE>
Included in property, plant and equipment are assets acquired under
capital leases with the following net book values:
<TABLE>
<CAPTION>
March 31,
1999 1998
----- -----
HK$ HK$
<S> <C> <C>
At cost:
Motor vehicles............................... 1,230 1,230
Less: accumulated depreciation............... (543) (236)
----- -----
687 994
===== =====
</TABLE>
Amortization of capital lease assets, which is included in depreciation
expense in the accompanying consolidated statements of income, was
HK$307 in 1999, HK$191 in 1998 and HK$49 in 1997.
F-17
<PAGE> 58
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
6. REAL ESTATE INVESTMENT
<TABLE>
<CAPTION>
March 31,
1999 1998
------ ------
HK$ HK$
<S> <C> <C>
At cost:
Leasehold land and buildings - Hong Kong............................ 5,568 5,568
- Other regions of China......... 27,625 27,070
Less: accumulated depreciation....................................... (3,351) (2,554)
------ ------
29,842 30,084
====== ======
</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$4,304 in 1999, HK$5,446 in 1998 and HK$5,591 in 1997.
F-18
<PAGE> 59
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
7. SHORT-TERM BORROWINGS
Short-term borrowings comprise:
<TABLE>
<CAPTION>
March 31,
1999 1998
------ ------
HK$ HK$
<S> <C> <C>
Bank borrowings:
Import bank loans................................ 1,432 2,084
Other bank loans................................. 25,122 --
------ ------
Total bank borrowings.............................. 26,554 2,084
====== ======
Weighted average interest rate on
borrowings at end of year........................ 7.57% 10.25%
====== ======
At end of year:
Bank credit facilities............................. 55,000 85,600
Utilized .......................................... 1,432 2,084
------ ------
Bank credit facilities available................... 53,568 83,516
====== ======
</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, 1999, leasehold land and buildings with a net book value
of HK$78,383, real estate investments with a net book value of
HK$13,361 and cash of HK$18,831 were pledged as collateral for the
above facilities and bank loans described in note 8. Other than the
cash pledged, there is no restriction on the use of the assets pledged
for such facilities and bank loans.
F-19
<PAGE> 60
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31,
1999 1998
------ ------
HK$ HK$
<S> <C> <C>
Long-term debt consists of:
Bank loan bearing interest at Hong Kong Inter Bank Offer Rate ("HIBOR")
(5.71% at March 31, 1999)plus 2.5%,
repayable by quarterly instalment of HK$625 through 2007..................... 17,917 --
Bank loan bearing interest at HIBOR plus 3%, repayable by
quarterly instalments of HK$300 through 2006................................. 7,800 9,000
Bank loan bearing interest at Best Lending Rate (8.75% at
March 31, 1999) plus 0.25%, repayable by monthly instalments
of HK$53 through 2005........................................................ 3,390 4,026
Bank loan bearing interest at Best Lending Rate plus 0.25%,
repayable by monthly instalments of HK$8 through 2005........................ 518 611
Bank loan bearing interest at HIBOR plus 2.5%, repayable
by monthly instalments of HK$104 and fully repaid in
August 1998.................................................................. -- 8,333
Capital lease obligations bearing interest at 9.13% to 11.83%
per annum.................................................................... 551 806
------ ------
Total.......................................................................... 30,176 22,776
Current portion of long-term debt.............................................. 4,665 3,434
------ ------
Long-term debt, less current portion........................................... 25,511 19,342
====== ======
</TABLE>
Maturities of long-term debt as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
HK$
<S> <C>
Year ending March 31,
2000............................................ 4,665
2001............................................ 4,621
2002............................................ 4,552
2003............................................ 4,429
2004............................................ 4,429
After 2004...................................... 7,480
------
30,176
======
</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> 61
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 all of the leases contain a renewal
option. Rental expense under operating leases was HK$4,028 in 1999,
HK$4,190 in 1998 and HK$3,413 in 1997.
As at March 31, 1999, the Company and its subsidiaries were obligated
under capital leases and non cancelable operating leases requiring
minimum rentals as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
HK$ HK$
--- -----
<S> <C> <C>
Year ending March 31,
2000.......................................... 290 1,243
2001.......................................... 219 284
2002.......................................... 128 256
--- -----
Total minimum lease payments.................... 637 1,783
=====
Less: amount representing interest.............. 86
---
Present value of minimum lease payments......... 551
===
</TABLE>
At March 31, 1999, the Company was committed to invest approximately
HK$4,638 in a company established in China. In addition, the Company
had commitments of HK$650 relating to the construction in progress and
the acquisition of the other property, plant and equipment.
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 of the total voting rights and they
can elect all of the directors of the Company.
F-21
<PAGE> 62
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, 1999, no shares of Series B preferred stock were
outstanding.
F-22
<PAGE> 63
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
11. 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.
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 of such Holding
Company Options are exercisable on or after September 16, 1998 and
balance is exercisable on or after September 16, 1999; however, no
Holding Company Option may be exercised after September 16, 2007.
On July 1, 1998 and February 1, 1999, the Company granted 250,000 and
100,000 Holding Company Options, respectively, to two consulting
companies to purchase in aggregate, 350,000 shares of common stock of
the Company at exercise prices ranging from US$1.50 to US$5.00 per
share. The 250,000 options granted on July 1, 1998 were cancelled on
January 15, 1999.
F-23
<PAGE> 64
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
11. STOCK OPTION PLANS - continued
A summary of movements of the Holdings Company Options during the three
years ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Number Option price per share
of Holding with the weighted average
Company Options option price in parenthesis
--------------- ---------------------------
<S> <C> <C>
Outstanding at 4.1.1996 and 4.1.1997 -
Granted on 9.16.1997 850,000 US$1.22
=======
Outstanding at 3.31.1998 850,000 US$1.22
Granted on 7.1.1998 and 2.1.1999 350,000 US$1.5,US$3, & US$5
(US$3.429)
Cancelled (350,000) US$1.22, US$3 & US$5
======= (US$3.0625)
Outstanding at 3.31.1999 850,000 US$1.22 & US$1.5
======= (US$1.2529)
</TABLE>
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.
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.
F-24
<PAGE> 65
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands except share data)
11. STOCK OPTION PLANS - continued
A summary of movements of the MSIL options during the three years ended
March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Number Option price per share
MSIL with the weighted average
Options option price in parenthesis
------- ---------------------------
<S> <C> <C>
Outstanding at 4.1.1996 and 4.1.1997 --
Granted on 10.16.1997 and 12.3.1997 47,250,000 HK$0.6208 & HK$0.4460
(HK$0.5888)
Cancelled (2,000,000) HK$0.6208
----------
Outstanding at 3.31.1998 45,250,000 HK$0.6208 & HK$0.4460
(HK$0.5874)
Cancelled (4,000,000) HK$0.6208
----------
Outstanding at 3.31.1999 41,250,000 HK$0.6208 & HK$0.4460
========== (HK$0.5841)
</TABLE>
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 granted on February 1, 1999 and September 16,
1997 and of each MSIL Option granted on October 16, 1997 and December
3, 1997 were calculated to be US$0.32, US$0.63, HK$0.13 and HK$0.19,
respectively, using the Black-Scholes Model, with the following
assumptions:
<TABLE>
<CAPTION>
MSIL Options
Holding Company granted on
Options granted on 10.16.1997
2.1.1999 9.16.1997 and 12.3.1997
-------- --------- -------------
<S> <C> <C> <C>
(a) Risk-free interest rate per annum 4.75% 5.9% 5.25%
(b) Expected life 3 year 2 years 2 years
(c) Expected volatility 60% 63% 33%
(d) Expected dividend yield Nil 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, 1999 and March 31, 1998 was HK$2,641 and HK$2,035,
respectively.
F-25
<PAGE> 66
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
12. 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, leasehold properties were provided free
of charge to Mr. C.H. Cheng and Mr. T.P. Cheng for their 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.
In addition, the Company advanced HK$1,084 in 1999, HK$508 in 1998 and
HK$2,311 in 1997 to certain directors on an interest-free basis without
specific repayment terms. All amounts were repaid each year.
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 no
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Percentage of
accounts receivable
March 31,
1999 1998
---- ----
<S> <C> <C>
Five largest receivable balances............... 35.58% 43.14%
</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$5,000 in 1999, HK$1,977 in 1998 and
HK$1,000 in 1997. The deductions from the allowance for doubtful
accounts which represented write-offs of bad debts were HK$567 in 1997.
F-26
<PAGE> 67
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.107,
"Disclosures About Fair Value of Financial Instruments". The estimated
fair value amounts have been determined by the Company, using available
market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts
that the Company could realize in a current market exchange.
The carrying amounts of cash, accounts receivable, accounts payable,
short-term borrowings and long-term debt are reasonable estimates of
their fair values. The interest rates on the Company's short-term
borrowings and long-term debt approximate those which would have been
available at March 31, 1999 for debt of the same remaining maturities.
All the financial instruments are for trade purposes.
F-27
<PAGE> 68
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
15. SEGMENT INFORMATION
Contributions of the major activities, profitability information and
asset information are summarized below:
<TABLE>
<CAPTION>
Year ended March 31,
1999 1998 1997
------- ------- -------
HK$ HK$ HK$
<S> <C> <C> <C>
Revenues from external customers
Pearls.......................................................... 230,915 262,158 248,240
Real estate investment.......................................... 4,304 5,446 5,591
------- ------- -------
235,219 267,604 253,831
======= ======= =======
Operating income
Pearls.......................................................... 16,399 50,905 44,220
Real estate investment.......................................... 137 1,937 2,279
------- ------- -------
16,536 52,842 46,499
======= ======= =======
Interest expense
Pearls.......................................................... 983 2,104 4,630
Real estate investment.......................................... 207 600 1,381
Corporate asset................................................. 3,310 981 309
------- ------- -------
4,500 3,685 6,320
======= ======= =======
Depreciation and amortization
Pearls.......................................................... 3,405 3,043 1,725
Real estate investment.......................................... 681 627 1,196
Corporate assets................................................ 1,536 386 189
------- ------- -------
5,622 4,056 3,110
======= ======= =======
Capital expenditure for segment assets
Pearls.......................................................... 12,916 12,984 7,373
Real estate investment.......................................... - 4,842 -
Corporate assets................................................ 32,917 25,927 18,657
------- ------- -------
45,833 43,753 26,030
======= ======= =======
</TABLE>
F-28
<PAGE> 69
MAN SANG HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Dollars in thousands)
15. SEGMENT INFORMATION - continued
<TABLE>
<CAPTION>
Year ended March 31,
1999 1998 1997
------- ------- -------
HK$ HK$ HK$
<S> <C> <C> <C>
Segment assets
Pearls.......................................................... 353,018 333,645 215,864
Real estate investment.......................................... 29,842 30,084 26,276
Corporate assets................................................ 77,093 39,621 26,335
------- ------- -------
459,953 403,350 268,475
======= ======= =======
of which
Long-Lived assets
Pearls.......................................................... 31,326 22,226 11,752
Real estate investment.......................................... 29,842 30,084 26,028
Corporate assets................................................ 74,838 33,915 21,110
------- ------- -------
136,006 86,225 58,890
======= ======= =======
</TABLE>
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,
1999 1998 1997
------- ------- -------
HK$ HK$ HK$
<S> <C> <C> <C>
Net sales:
Hong Kong....................................................... 40,966 51,070 59,232
Export:
Asian countries excluding Hong Kong............................. 32,573 51,656 62,164
North America................................................... 70,094 61,312 39,556
Europe.......................................................... 77,542 86,738 74,964
Others.......................................................... 9,740 11,382 12,324
------- ------- -------
230,915 262,158 248,240
======= ======= =======
</TABLE>
The Company operates in only one geographic area. The location of the
Company's identifiable assets is as follows:
<TABLE>
<CAPTION>
March 31,
1999 1998 1997
---- ---- ----
HK$ HK$ HK$
<S> <C> <C> <C>
Hong Kong......................................................... 345,083 319,191 176,677
Other regions of China............................................ 114,870 84,159 91,798
------- ------- --------
459,953 403,350 268,475
SS ======= ======= =======
</TABLE>
F-29
<PAGE> 70
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
<S> <C> <C> <C> <C>
1999
Net sales 51,887 57,304 44,031 77,693
Gross profit 18,554 19,411 12,325 27,210
Operating income (loss) 5,023 8,019 (3,082) 6,576
Net income (loss) 3,134 5,409 (3,451) 3,723
Basic earnings per share 0.73 1.26 (0.80) 0.86
Diluted earnings per share 0.66 1.15 (0.80) 0.83
1998
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
</TABLE>
Common stock price
<TABLE>
<CAPTION>
1999 Quarter
High Low
---- ---
US$ US$
<S> <C> <C>
First 5.000 1.000
Second 3.000 1.531
Third 1.531 0.937
Fourth 2.187 0.875
1998 Quarter
First 2.870 1.120
Second 2.250 1.370
Third 2.125 1.370
Fourth 1.750 0.625
</TABLE>
F-30
<PAGE> 71
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 fiscal 1999; 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 1999, a copy of any such annual
report or proxy materials shall be forwarded to the Commission when it is
forwarded to security holders.
<PAGE> 72
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.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
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)
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)
10.12 Agreement for Sale and Purchase dated February 24, 1998,
between City Empire Limited and Wealth-In Investment
Limited, a subsidiary of the Company, pursuant to which
Wealth-In Investment Limited purchased certain real property
located at Flat B on the 20th Floor of The Mayfair, One May
Road, Hong Kong, at a purchase price of HK$39,732,200(7)
13.1 Annual report to security holders(4)
21.1 Subsidiaries of the Company
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
24.1 Power of Attorney (included on page [45])
27.1 Financial data schedule
99.1 Share Option Scheme of Man Sang International Limited, a
subsidiary of the Company(6)
</TABLE>
- ---------------
(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
(7) Incorporated by reference to the exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998
<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 Ltd.
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 Industry Development (Shenzhen) Co., Ltd.
Tangzhu Jewellery Goods (Shenzhen) Co., Ltd.
M.S. Electronic Emporium Limited
Man Sang Innovations Limited
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 11,000,000
<SECURITIES> 0
<RECEIVABLES> 7,752,000
<ALLOWANCES> 647,000
<INVENTORY> 22,162,000
<CURRENT-ASSETS> 41,907,000
<PP&E> 15,084,000
<DEPRECIATION> 2,053,000
<TOTAL-ASSETS> 59,500,000
<CURRENT-LIABILITIES> 7,607,000
<BONDS> 3,904,000
0
0
<COMMON> 4,000
<OTHER-SE> 36,593,000
<TOTAL-LIABILITY-AND-EQUITY> 59,500,000
<SALES> 29,873,000
<TOTAL-REVENUES> 30,430,000
<CGS> 19,847,000
<TOTAL-COSTS> 8,443,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 391,000
<INTEREST-EXPENSE> 582,000
<INCOME-PRETAX> 2,161,000
<INCOME-TAX> 302,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,141,000
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.24
</TABLE>
