<PAGE> 1
MAN SANG HOLDINGS, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
COMMISSION FILE NUMBER: 33-10639-NY
MAN SANG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0539570
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER NO.)
21/F RAILWAY PLAZA, 39 CHATHAM ROAD SOUTH, TSIMSHATSUI, KOWLOON, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(852) 2317 5300
(ISSUER'S TELEPHONE NUMBER)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO __
AS OF DECEMBER 31, 1998, 4,305,960 SHARES OF COMMON STOCK OF THE
REGISTRANT WERE OUTSTANDING.
<PAGE> 2
MAN SANG HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as at
December 31, 1998 and March 31, 1998 ....................... F-1
Consolidated Statements of Income and Comprehensive Income
for the three months ended December 31, 1998 and 1997 and
nine months ended December 31, 1998 and 1997 ............... F-3
Consolidated Statements of Cash Flows for
the nine months ended December 31, 1998 and 1997 ........... F-4
Notes to Consolidated Financial Statements ................. F-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 1
PART II - OTHER INFORMATION .......................................... 7
SIGNATURES
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
--------------------- --------------
US$ HK$ HK$
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ 8,964 69,288 83,918
Restricted cash .................................................. 1,631 12,605 9,525
Accounts receivable, net of allowance for doubtful ............... 5,494 42,471 52,195
accounts of HK$4,000 as of December 31, 1998 and
HK$1,977 as of March 31, 1998
Inventories
Raw materials ............................................... 189 1,464 1,421
Work in progress ............................................ 5,853 45,244 43,876
Finished goods .............................................. 15,170 117,261 109,198
-------- -------- --------
21,212 163,969 154,495
Prepaid expenses ................................................ 291 2,251 2,429
Other current assets ............................................ 1,161 8,973 14,563
-------- -------- --------
Total current assets ................................... 38,753 299,557 317,125
Long-term investments ................................................ 702 5,430 5,430
Property, plant and equipment ........................................ 14,499 112,076 61,853
Accumulated depreciation ........................................ (1,833) (14,171) (11,142)
-------- -------- --------
12,666 97,905 50,711
Real estate investment ............................................... 4,222 32,638 32,638
Accumulated depreciation ........................................ (383) (2,963) (2,554)
-------- -------- --------
3,839 29,675 30,084
-------- -------- --------
Total assets .......................................... 55,960 432,567 403,350
======== ======== ========
</TABLE>
F-1
<PAGE> 4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited) -- continued
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
----------------- --------------
US$ HK HK$
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ................................ 2,483 19,191 2,084
Current portion of long-term debt
Secured bank loans ............................... 573 4,429 3,179
Capital lease obligations ........................ 33 258 255
------- -------- --------
606 4,687 3,434
Accounts payable ..................................... 564 4,360 3,887
Accrued payroll and employee benefits ................ 486 3,760 2,922
Other accrued liabilities ............................ 1,540 11,906 8,937
Income taxes payable ................................ 562 4,347 3,586
------- -------- --------
Total current liabilities ................... 6,241 48,251 24,850
Long-term debt
Secured bank loans ............................... 3,403 26,303 18,791
Capital lease obligations ........................ 47 360 551
------- -------- --------
3,450 26,663 19,342
Minority interests ........................................ 11,329 87,572 88,944
Stockholders' equity:
Common stock, par value US$0.001 .......................... 4 33 33
- authorized: 25,000,000 shares;
issued and outstanding: 4,305,960 shares
Series A preferred stock, par value US$0.001 -- 1 1
- authorized, issued and outstanding: 100,000 shares;
(entitled in liquidation to US$2,500 (HK$19,325))
Series B convertible preferred stock, par value US$0.001 -- -- --
- authorized: 100,000 shares; no shares outstanding
Additional paid-in capital ................................ 12,475 96,432 93,627
Retained earnings ......................................... 23,532 181,900 176,808
Foreign currency translation adjustments .................. (1,071) (8,285) (255)
------- -------- --------
Total stockholders' equity .................. 34,940 270,081 270,214
======= ======== ========
Total liabilities and stockholders' equity .. 55,960 432,567 403,350
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 5
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended December 31, Nine Months Ended December 31,
------------------------------- ------------------------------
1998 1997 1998 1997
------------------------------- ------------------------------
US$ HK$ HK$ US$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................................... 5,697 44,031 53,882 19,822 153,222 193,937
Cost of goods sold .............................. (4,102) (31,706) (32,010) (13,316) (102,932) (116,520)
------- ------- ------- ------- -------- --------
Gross profit .................................... 1,595 12,325 21,872 6,506 50,290 77,417
Rental income, gross ............................ 119 921 1,352 409 3,159 4,286
------- ------- ------- ------- -------- -------
1,714 13,246 23,224 6,915 53,449 81,703
Selling, general and administrative expenses
-- Pearls................................... (1,960) (15,150) (14,077) (5,155) (39,848) (41,608)
-- Real estate investment................... (152) (1,178) (1,122) (471) (3,641) (2,758)
------- ------- ------- ------- -------- -------
Operating income ................................ (398) (3,082) 8,025 1,289 9,960 37,337
Interest expense ................................ (157) (1,209) (740) (463) (3,578) (3,224)
Income in respect of subscription monies received
on subsidiary's public offering ............... 0 0 0 0 0 11,391
Interest income ................................. 134 1,034 1,704 436 3,367 2,227
Gain on sales of property, plant and equipment .. 0 0 0 0 0 8,415
Other income .................................... 15 114 217 57 443 654
------- ------- ------- ------- -------- -------
Income before income taxes and minority interest (406) (3,143) 9,206 1,319 10,192 56,800
Provision for income taxes ...................... (25) (193) 2,213 (126) (975) (2,934)
------- ------- ------- ------- -------- -------
Income before minority interest ................. (431) (3,336) 11,419 1,193 9,217 53,866
Minority interest ............................... (15) (115) (2,972) (534) (4,125) (6,522)
------- ------- ------- ------- -------- -------
Net income ...................................... (446) (3,451) 8,447 659 5,092 47,344
Other comprehensive income, before tax
- Foreign currency translation adjustments .... 25 196 (1,136) (1,039) (8,030) (1,814)
- Income tax expense .......................... 0 0 0 0 0 0
------- ------- ------- ------- -------- -------
Other comprehensive income, net of tax .......... 25 196 (1,136) (1,039) (8,030) (1,814)
------- ------- ------- ------- -------- -------
Comprehensive income ............................ (421) (3,255) 7,311 (380) (2,938) 45,530
======= ======= ======= ======= ======== =======
Basic earnings per common share ................. (0.10) (0.80) 1.96 0.15 1.18 11.00
======= ======= ======= ======= ======== =======
Diluted earnings per common share ............... (0.10) (0.80) 1.83 0.14 1.08 10.70
======= ======= ======= ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-3
<PAGE> 6
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED DECEMBER 31
(Amounts expressed in thousands)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
1998 1997
------------------ --------
US$ HK$ HK$
<S> <C> <C> <C>
Cash flow from operating activities:
Net income ..................................................................... 659 5,092 47,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful debts ................................................ 262 2,023 192
Compensation expense ........................................................ 459 3,551 0
Depreciation and amortization ............................................... 535 4,132 3,007
Gain on sale of property, plant and equipment ............................... 0 (1) (8,415)
Minority interests .......................................................... 534 4,125 6,522
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 996 7,701 205
Inventories ................................................................. (1,619) (12,514) (40,352)
Prepaid expenses ............................................................ 21 165 (1,081)
Other current assets ........................................................ (543) (4,197) (15,624)
Income taxes receivable ..................................................... 0 0 421
Accounts payable ............................................................ 63 487 (4,866)
Accrued payroll and employee benefits ....................................... 113 877 1,708
Other accrued liabilities ................................................... 410 3,168 5,058
Income taxes payable ........................................................ 100 775 2,816
------- ------- --------
Net cash provided by (used in) operating activities ............................ 1,990 15,384 (3,065)
------- ------- --------
Cash flow from investing activities:
Purchase of property, plant and equipment .................................. (5,395) (41,704) (8,338)
Expenditure on real estate investment ...................................... 0 0 (3,257)
Increase in restricted cash ................................................ (398) (3,080) (249)
Purchase of long-term investments .......................................... 0 0 (5,430)
Proceeds from sale of property, plant and equipment ........................ 1 11 11,025
------- ------- --------
Net cash used in investing activities .......................................... (5,792) (44,773) (6,249)
------- ------- --------
Cash flow from financing activities:
Repayment of bank overdrafts ............................................... (350) (2,702) (252,611)
Repayment of short-term borrowings ........................................ (1,765) (13,648) (109,866)
Repayment of long-term debt ................................................ (1,478) (11,427) (1,464)
Increase in bank overdrafts ................................................ 375 2,896 239,114
Increase in short-term borrowings ......................................... 3,953 30,560 73,281
Increase in long-term debt ................................................. 2,587 20,000 5,796
Dividend paid to minority shareholders of a subsidiary ..................... (429) (3,320) 0
Net proceeds from issuance of shares by a subsidiary ....................... 0 0 123,413
------- ------- --------
Net cash provided by financing activities ...................................... 2,893 22,359 77,663
------- ------- --------
Net (decrease) increase in cash and cash equivalents ........................... (909) (7,030) 68,349
Cash and cash equivalents at beginning of period ............................... 10,856 83,918 7,792
Exchange adjustments ........................................................... (983) (7,600) (1,388)
======= ======= ========
Cash and cash equivalents at end of period ..................................... 8,964 69,288 74,753
======= ======= ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refund) during the period for:
Interest and financing charges ............................................ 421 3,255 3,278
------- ------- --------
Income taxes .............................................................. 28 214 (301)
------- ------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-4
<PAGE> 7
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 1998 balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the financial statements and
notes included in the annual report of Man Sang Holdings, Inc. (the "Company")
on Form 10-K for the fiscal year ended March 31, 1998. In the opinion of
management, the interim financial statements reflect all adjustments of a normal
recurring nature necessary for a fair presentation of the results for the
interim periods presented.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued two
new disclosure standards, i.e. Statement of Financial Accounting Standards
("SFAS") No. 130 and No. 131. Both of these new standards are effective for
financial statements for periods beginning after December 15, 1997 and required
comparative information for earlier years to be restated. Results of operations
and financial position are not affected by implementation of these new
standards.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by, and distributions to, owners. Among
other disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, which supercedes 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 interim 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.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which amends the disclosure
requirements for pensions and other postretirement benefits. Adoption of the
standard does not significantly change the Company's financial statement
disclosures.
F-5
<PAGE> 8
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at period end
exchange rates, while revenues and expenses are translated at average exchange
rates during the period. Adjustments arising from translating foreign currency
financial statements are reported as a separate component of stockholders'
equity. Gains or losses from foreign currency translations are included in
income. Aggregate net foreign currency gains or losses were immaterial for all
periods.
The consolidated financial statements of the Company are maintained, and its
consolidated financial statements are expressed, in Hong Kong dollars. The
translations of Hong Kong dollar amounts into United States dollars are for
convenience only and have been made at the rate of HK$7.73 to US$1, the
approximate free rate of exchange at December 31, 1998. Such translations should
not be construed as representations that Hong Kong dollar amounts could be
converted into United States dollars at that rate or any other rate.
3. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128. Per share data is calculated
using the weighted average number of shares of common stock outstanding during
the period.
The reconciliation of the basic and diluted EPS is as follows:
[CAPTION]
<TABLE>
For the Quarter Ended December 31, 1998
--------------------------------------------
Earnings No. of shares EPS
------------ ------------- -------
HK$ HK$
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders ....... (3,450,905) 4,305,960 (0.8)
===
Effect of dilutive stock
options granted by the
Company ...................... -- --
Effect of dilutive stock
options and warrants
granted by MSIL (Note 1)...... -- --
---------- ---------
Diluted EPS
Net income available
to common stockholders,
including conversion ......... (3,450,905) 4,305,960 (0.8)
========== ========= ===
</TABLE>
F-6
<PAGE> 9
<TABLE>
<CAPTION>
For the Nine months ended December 31, 1998
--------------------------------------------
Earnings No. of shares EPS
--------- ------------- -------
HK$ HK$
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders ....... 5,092,352 4,305,960 1.18
====
Effect of dilutive stock
options granted by the
Company ...................... -- 396,445
Effect of dilutive stock
options and warrants
granted by MSIL .............. -- --
--------- ---------
Diluted EPS
Net income avaliable
to common stockholders,
including conversion ......... 5,092,352 4,702,405 1.08
========= ========= ====
</TABLE>
Note 1: MSIL represents Man Sang International Ltd., a subsidiary of the
Company whose shares are listed on The Stock Exchange of Hong Kong
Limited.
4. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are coordinated through its Hong Kong
subsidiaries and an analysis by destination is as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE NINE MONTHS
ENDED DECEMBER 31 ENDED DECEMBER 31
----------------- -------------------
1998 1997 1998 1997
------- -------- -------- --------
HK$'000 HK$'000 HK$'000 HK$'000
<S> <C> <C> <C> <C>
NET SALES:
Hong Kong** ............ 9,723 8,102 29,119 42,876
EXPORT:
Asian countries
excluding Hong Kong.... 5,964 9,297 22,125 38,282
North America .......... 13,894 13,723 43,508 44,050
Europe ................. 13,472 19,855 52,233 60,008
Others ................. 978 2,905 6,237 8,721
------ ------- ------- -------
44,031 53,882 153,222 193,937
====== ======= ======= =======
</TABLE>
F-7
<PAGE> 10
** A majority of sales (by dollar amount) in Hong Kong are for re-export to
North America and Europe.
The Company operates in only one geographic area. The location of the Company's
identifiable assets is as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
----------------- --------------
HK$'000 HK$'000
<S> <C> <C>
Hong Kong ...................... 334,030 319,191
Other regions of China ......... 98,537 84,159
------- -------
432,567 403,350
======= =======
</TABLE>
5. DISCLOSURE OF MAJOR CUSTOMERS
During the nine months ended December 31, 1998, no single customer accounts for
10% or more of total sales. A substantial percentage of the Company's sales is
on an open account basis.
F-8
<PAGE> 11
6. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
Reportable Segment Profit or Loss, and Segment Assets
[CAPTION]
<TABLE>
For the three months For the nine months
ended December 31 ended December 31
1998 1997 1998 1997
HK$'000 HK$'000 HK$'000 HK'000
<S> <C> <C> <C> <C>
Revenues from external customers
Pearls .............................. 44,031 53,882 153,222 193,937
Real estate investment .............. 921 1,352 3,159 4,286
------- ------- ------- -------
44,952 55,234 156,381 198,223
======= ======= ======= =======
Interest expense
Pearls .............................. 463 388 980 2,081
Real estate investment .............. 0 77 0 445
------- ------- ------- -------
463 465 980 2,526
======= ======= ======= =======
Depreciation and amortization
Pearls .............................. 844 752 2,492 2,239
Real estate investment .............. 159 195 489 488
------- ------- ------- -------
1,003 947 2,981 2,727
======= ======= ======= =======
Segment profit
Pearls .............................. (2,903) 7,501 10,614 34,002
Real estate investment .............. (258) 153 (483) 1,083
------- ------- ------- -------
(3,161) 7,654 10,131 35,085
======= ======= ======= =======
Capital expenditure for segment assets
Pearls .............................. 6,240 2,403 8,787 8,338
Real estate investment .............. 0 0 0 3,257
------- ------- ------- -------
6,240 2,403 8,787 11,595
======= ======= ======= =======
Segment assets
Pearls .............................. 325,462 348,824
Real estate investment .............. 29,675 28,826
------- -------
355,137 377,650
======= =======
</TABLE>
F-9
<PAGE> 12
ITEMS 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements.
RESULTS OF OPERATIONS
Nine-Month Period Ended December 31, 1998 Compared to Nine-Month Period Ended
December 31, 1997
Net sales during the nine-month period ended December 31, 1998 totaled HK$153.2
million, representing a 21.0% decrease, compared to net sales of HK$194.0
million during the same period in 1997. The decrease in net sales was
attributable, at least in part, to the following:
- - During the nine-month period ended December 31, 1998, both the economic
performance and consumer confidence in the Asia Pacific region has
remained weak. Demand, especially from Asian customers, was weak during
the nine-month period ended December 31, 1998, partly because the
weakness in the Asian economies has reduced purchaser confidence, and
partly because the Company's sales are denominated in U.S. dollars and
hence its products are more expensive in local currency terms to almost
all its Asian customers; by comparison during the nine-month period
ended December 31, 1997, the average economic performance of the
countries in the Asian Pacific region and private consumption was
stronger;
- - It appears to the Company that the weak Asian economies may have caused
the North American and European buyers to become conservative in their
purchases, and the Company's sales in those two regions decreased in
the nine-month period ended December 31, 1998, when compared to the
same period in 1997. In the Company's past experience, more purchasers
from North America and Europe would attend major international
jewellery trade shows held in Hong Kong in September and March;
therefore, the Company will increase its efforts to market pearls and
jewellery products to customers in those parts of the world.
There can be no assurance that the weakness in the Asian economies will not
spread to other parts of the world, or that demand from North America and Europe
will not weaken. Therefore, the results of any interim period are not
necessarily indicative of the results that might be expected during a full year.
The Management's Discussion and Analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto included elsewhere
in this Form 10-Q and in the Company's annual report on Form 10-K for the year
ended March 31, 1998.
Gross profit for the nine-month period ended December 31, 1998 decreased by
HK$27.1 million, representing a 35.0% decrease over the gross profit of HK$77.4
million for the same period in
1
<PAGE> 13
1997. As a percentage of net sales, gross profit decreased from 39.9% for the
nine-month period ended December 31, 1997 to 32.8% for the same period in 1998.
The drop in gross profit margin was principally attributable to increased sales
discount to customers and an increased proportion of sales of lower margin
freshwater pearls. Freshwater pearls represented 26.2% of net sales during the
nine-month period ended December 31, 1998, compared with 23.3% during the same
period in 1997.
Gross rental income for the nine-month period ended December 31, 1998 decreased
by HK$1.1 million or 26.3% from HK$4.3 million for the same period in 1997. 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 People's Republic of China. The occupancy rate
decreased from 82.0% for the nine-month period ended December 31, 1997 to 73.6%
for the same period in 1998.
Selling, general and administrative expenses ("SG&A") during the nine-month
period ended December 31, 1998 totaled HK$43.5 million, consisting of HK$39.8
million attributable to pearl operations and HK$3.6 million attributable to real
estate operations, compared with HK$44.4 million, consisting of HK$41.6 million
attributable to pearl operations and HK$2.8 million attributable to real estate
operations, during the same period in 1997, a decrease of HK$0.9 million, or
2.0%. As a percentage of net sales, SG&A for pearl operations increased from
21.5% for the nine-month period ended December 31, 1997 to 26.0% for the same
period in 1998, while SG&A for real estate operations increased from 1.4% for
the nine-month period ended December 31, 1997 to 2.4% for the same period in
1998. This was principally attributable to the decrease in net sales during the
nine-month period ended December 31, 1998 as compared with the same period in
1997.
A gain on sale of property, plant and equipment for the nine-month period ended
December 31, 1997 was HK$8.4 million which was principally derived from the sale
of a leasehold property for HK$11.0 million during the quarter ended June 30,
1997.
Interest income for the nine months ended December 31, 1998 increased by HK$1.1
million, or 51.2%, to HK$3.4 million. The increase in interest income was
primarily due to an increased working capital sourced from the funds generated
internally and that raised from MSIL's initial public offering ("IPO") in
September 1997.
Interest expense for the nine months ended December 31, 1998 increased by HK$0.4
million, or 11.0%, to HK$3.6 million from the comparable period in the prior
year. The increase in interest expense was due principally to an increase in
bank borrowings, acquisition of a leasehold property and hedging of the
Company's net investment in the PRC's subsidiaries. See "Material Changes in
Financial Condition, Liquidity and Capital Resources".
The income in respect of subscription monies for the nine months ended December
31, 1997 in the amount of HK$11.4 million was income earned from subscription
monies received on MSIL's IPO in September 1997.
2
<PAGE> 14
Net income for the nine-month period ended December 31, 1998 decreased by
HK$42.3 million to HK$5.1 million representing 89.2% decrease from HK$47.3
million for the same period in 1997. The decrease was attributable to, among
other things,:
(i) a decrease in net sales and gross profit margin during the nine-month
period ended December 31, 1998;
(ii) the non-recurrent items of a gain on sales of property, plant and
equipment of HK$8.4 million, and an income on subscription monies of
HK$11.4 million for the nine-month period ended December 31, 1997.
Excluding income taxes, minority interest and non-recurrent items, the operating
profit from pearls and real estate investment during the nine-month period ended
December 31, 1998 was HK$10.0 million, representing a 73.3% decrease, compared
to that of HK$37.3 million during the same period in 1997.
Three-Month Period Ended December 31, 1998 Compared to Three-Month Period Ended
December 31, 1997
Net sales during the three-month period ended December 31, 1998 totaled HK$44.0
million, representing a 18.3% decrease, compared to net sales of HK$53.9 million
during the same period in 1997. The decrease in net sales was attributable, at
least in part, to the reasons set forth in the discussion of net sales for the
nine-month period ended December 31, 1998 compared to the nine-month period
ended December 31, 1997, above.
Gross profit for the three-month period ended December 31, 1998 decreased by
HK$9.5 million, representing a 43.6% decrease over the gross profit of HK$21.9
million for the same period in 1997. As a percentage of net sales, gross profit
decreased from 40.6% for the three-month period ended December 31, 1997 to 28.0%
for the same period in 1998. The drop in gross profit margin was principally
attributable to increased sales discount to customers and an increased
proportion of sales of lower margin freshwater pearls. Freshwater pearls
represented 31.4% of net sales during the three-month period ended December 31,
1998, compared with 21.0% during the same period in 1997.
Gross rental income for the three-month period ended December 31, 1998 decreased
by HK$0.4 million or 31.9% from HK$1.4 million for the same period in 1997. 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 People's Republic of China. The occupancy rate
decreased from 85.7% for the three-month period ended December 31, 1997 to 68.9%
for the same period in 1998.
SG&A during the three-month period ended December 31, 1998 totaled HK$16.3
million, consisting of HK$15.2 million attributable to pearl operations and
HK$1.2 million attributable to real estate operations, compared with HK$15.2
million, consisting of HK$14.1 million attributable to pearl operations and
HK$1.1 million attributable to real estate operations, during the same period in
1997, an increase of HK$1.1 million, or 7.4%. As a percentage of net sales,
3
<PAGE> 15
SG&A for pearl operations increased from 26.1% for the three-month period ended
December 31, 1997 to 34.4% for the same period in 1998, while SG&A for real
estate operations increased from 2.1% for the three-month period ended December
31, 1997 to 2.7% for the same period in 1998. This was principally attributable
to the decrease in net sales during the three-month period ended December 31,
1998 as compared with the same period in 1997.
Interest income for the three months ended December 31, 1998 decreased by HK$0.7
million, or 39.3%, to HK$1.0 million from HK$1.7 million for the same period in
1997. The decrease in interest income was primarily due to a decrease in cash
balance.
Interest expense for the three months ended December 31, 1998 increased by
HK$0.5 million, or 63.4%, to HK$1.2 million from HK$0.7 million for the same
period in the prior year. The increase in interest expense was due principally
to increase in bank borrowings, acquisition of leasehold properties and hedging
of the Company's net investment in the PRC's subsidiaries. See "Material Changes
in Financial Condition, Liquidity and Capital Resources".
Net loss of HK$3.5 million for the three-month period ended December 31, 1998
was attributable to decrease in both net sales and gross profit margin during
the three months ended December 31, 1998.
MATERIAL CHANGES IN FINANCIAL CONDITION, 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
December 31, 1998, the Company had working capital of HK$251.3 million and an
available cash balance of HK$69.3 million, compared with working capital of
HK$292.3 million and an available cash balance of HK$83.9 million at March 31,
1998. The decrease in working capital was attributable to additions of property,
plant and equipment, and an addition of new short-term bank borrowings for an
amount of RMB 19.6 million, which was primarily for the hedging of the Company's
net investment in the PRC's subsidiaries against the devaluation of Renminbi.
The current ratio was 6.2 as at December 31, 1998 as compared with 12.8 as at
March 31, 1998.
Long-term debt (including current portion of long-term debt) was HK$31.3 million
at December 31, 1998, an increase of HK$8.6 million compared with that at March
31, 1998. The increase was primarily attributable to an increase of an
installment loan for the acquisition of a real property. The interest rates of
the installment loans ranged from HIBOR + 2.5% to 3.0% where HIBOR represents
Hong Kong Interbank Offered Rate. Part of the risk of interest rate fluctuation
in the installment loans bearing interest at floating rates is hedged by a
one-year interest rate swap agreement ("IRSA") with a notional amount of HK$20
million. The IRSA maturing on May 11, 1999 converts interest rate exposure from
a floating rate to a fixed rate basis. The gearing ratio was 0.51 at December
31, 1998, as compared with 0.41 at March 31, 1998.
The Company had available working capital facilities of HK$58 million in total
with various banks at December 31, 1998. Such banking facilities include letter
of credit arrangements, import loans, overdraft protection and other facilities
commonly utilized in jewellery business. All such banking facilities bear
interest at floating rates generally based on prime lending rates which are
4
<PAGE> 16
subject to periodic review. At December 31, 1998, the Company had utilized
approximately HK$0.3 million of its credit facilities with HK$57.7 million
unutilized.
The Company believes that funds to be generated from internal operations and the
available banking facilities will enable the Company to meet the working capital
requirements in the foreseeable future.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of potential problems with computer systems or
any equipment with computer chips that use dates where the date has been stored
as just two digits (e.g. 97 for 1997). On January 1, 2000, any clock or date
recording mechanism including date sensitive software which uses only two digits
to represent the year, may recognize a date using 00 as the year 1900 rather
than the year 2000. This could result, in certain businesses, in significant
processing inaccuracies and potentially even system failure, causing disruption
of operations.
In its pearl 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. In addition, the Company uses a computerized
lock at its principal office. The Company has initiated a compliance program,
using internal resources and external consultants to identify, make and test any
required modification to its LAN computer system, its computerized lock, and any
other computer, information or operational network or system. The Company has
completed and tested the Year 2000 compliance of its computerized lock, and
believes it will complete the implementation of its compliance program on or
before March 31, 1999.
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.
The Company has conducted a survey with those third parties with whom it does
significant business to determine their Year 2000 readiness and the extent to
which the Company is vulnerable to any third party Year 2000 issues. Thus far,
the survey has shown that (i) the Company's suppliers are mainly pearl farmers
who do not use any computer or machinery or equipment that is date sensitive,
and (ii) the Company's customers are pearl or jewellery buyers who seldom, if
ever, conclude any purchase without a personal inspection of pearls or jewellery
at the Company's office, and consequently few, if any, orders are placed by
computers. The Company estimates that the impact of any third party Year 2000
non-compliance on its business is immaterial.
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
5
<PAGE> 17
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. 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 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. The Company currently has no contingency plan to
address potential failure, whether of itself or such third parties, to become
Year 2000 compliant in a timely manner. However, the Company has not incurred,
and believes it will not incur, operating expenses or investments in networks
and systems improvements in excess of $5,000, in order to be Year 2000
compliant. As an example, the Company's lock system has been made Year 2000
compliant without extra cost to the Company. In addition, the Company does not
anticipate that its operations or services will experience any interruption or
disruption as a result of the required changes. Further, the Company believes
that even if its systems were not Year 2000 compliant by December 31, 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.
6
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
27.1 Financial Data Schedule
7
<PAGE> 19
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, Man Sang Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
By: /s/ Cheng Chung Hing
-----------------------------------------
Cheng Chung Hing, Chief Executive Officer
By: /s/ Patrick Ng
-----------------------------------------
Patrick Ng, Chief Financial Officer
Date: February 12, 1999
8
<PAGE> 20
INDEX TO EXHIBITS
The following document is filed herewith or has been included as exhibit to
previous filings with the Securities and Exchange Commission and is incorporated
by reference as indicated below.
Exhibit No. Description
27.1 Financial Data Schedule
9
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 7.73
<CASH> 81,893,000
<SECURITIES> 0
<RECEIVABLES> 46,471,000
<ALLOWANCES> 4,000,000
<INVENTORY> 163,969,000
<CURRENT-ASSETS> 299,557,000
<PP&E> 112,076,000
<DEPRECIATION> 14,171,000
<TOTAL-ASSETS> 432,567,000
<CURRENT-LIABILITIES> 48,251,000
<BONDS> 31,350,000
<COMMON> 33,000
0
1,000
<OTHER-SE> 270,047,000
<TOTAL-LIABILITY-AND-EQUITY> 432,567,000
<SALES> 153,222,000
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<INTEREST-EXPENSE> 3,578,000
<INCOME-PRETAX> 10,192,000
<INCOME-TAX> 975,000
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