<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 SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
COMMISSION FILE NUMBER: 33-10639-NY
MAN SANG HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0539570
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER NO.)
21/F RAILWAY PLAZA, 39 CHATHAM ROAD SOUTH, TSIMSHATSUI, KOWLOON, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
(852) 2317 5300
(ISSUER'S TELEPHONE NUMBER)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO __
AS OF SEPTEMBER 30, 1999, 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 Sheets as at
September 30, 1999 and March 31, 1999.............................F-1
Consolidated Statements of Income and
Comprehensive Income for the three months
ended September 30, 1999 and 1998 and six
months ended September 30, 1999 and 1998..........................F-3
Consolidated Statements of Cash Flows for
the six months ended September 30, 1999
and 1998..........................................................F-4
Notes to Consolidated Financial Statements.........................F-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................1
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ..................................................5
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>
September 30, 1999 March 31, 1999
----------------------------------------- -------------------------
S$ HK$ HK$
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents 9,818 75,889 66,196
Restricted cash 5,765 44,569 18,831
Accounts receivable, net of allowance for doubtful 7,502 57,990 54,922
accounts of HK$5,000 as of September 30, 1999 and
HK$5,000 as of March 31, 1999
Inventories
Raw materials 385 2,975 1,489
Work in progress 4,284 33,120 49,712
Finished goods 19,097 147,620 120,116
------------- -------------------------- -------------------------
23,766 183,715 171,317
Prepaid expenses 131 1,011 1,523
Other current assets 1,866 14,427 11,158
------------- -------------------------- -------------------------
Total current assets 48,848 377,601 323,947
Long-term investments 702 5,430 5,430
Property, plant and equipment 15,081 116,579 116,603
Accumulated depreciation (2,381) (18,411) (15,869)
------------- -------------------------- -------------------------
12,700 98,168 100,734
Real estate investment 4,692 36,270 33,193
Accumulated depreciation (496) (3,838) (3,351)
------------- -------------------------- -------------------------
4,196 32,432 29,842
------------ -------------------------- -------------------------
Total assets 66,446 513,631 459,953
============= ========================== =========================
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-1
<PAGE> 4
F-1
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited) - continued
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
S$ HK$ HK$
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Short-term borrowings 6,544 50,588 26,554
Current portion of long-term debt
Secured bank loans 573 4,429 4,429
Capital lease obligations 25 191 236
------------- -------------------------- -------------------------
598 4,620 4,665
Accounts payable 1,221 9,434 8,781
Accrued payroll and employee benefits 704 5,442 4,725
Other accrued liabilities 1,219 9,426 10,093
Income taxes payable 728 5,628 3,984
------------- -------------------------- -------------------------
Total current liabilities 11,014 85,138 58,802
Long-term debt
Secured bank loans 2,973 22,981 25,196
Capital lease obligations 29 222 315
------------- -------------------------- -------------------------
3,002 23,203 25,511
Minority interests 15,966 123,420 92,766
Stockholders' equity:
Common stock, par value US$0.001 4 33 33
- authorized: 25,000,000 shares;
issued and outstanding: 4,305,960 shares
Series A preferred stock, par value US$0.001 - 1 1
- authorized, issued and outstanding: 100,000 shares;
(entitled in liquidation to US$2,500 (HK$19,325))
Series B convertible preferred stock, par value US$0.001 - - -
- authorized: 100,000 shares; no shares outstanding
Additional paid-in capital 11,000 85,031 95,429
Retained earnings 25,254 195,215 185,623
Foreign currency translation adjustments 206 1,590 1,788
------------- -------------------------- -------------------------
Total stockholders' equity 36,464 281,870 282,874
============= ========================== =========================
Total liabilities and stockholders' equity 66,446 513,631 459,953
============= ========================== =========================
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-2
<PAGE> 5
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
1999 1998 1999 1998
------------------------------------- -----------------------------------------
US$ HK$ HK$ US$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Net sales 9,276 71,700 57,304 18,078 139,740 109,191
Cost of goods sold (6,062) (46,856) (37,893) (12,082) (93,390) (71,226)
----------- ---------- ------------ ------------ ------------ ------------
Gross profit 3,214 24,844 19,411 5,996 46,350 37,965
Rental income, gross 140 1,090 1,088 290 2,245 2,238
----------- ---------- ------------ ------------ ------------ ------------
3,354 25,934 20,499 6,286 48,595 40,203
Selling, general and administrative expenses
- Pearls (1,837) (14,202) (10,865) (3,576) (27,642) (24,698)
- Real estate investment (102) (795) (1,615) (203) (1,572) (2,463)
----------- ---------- ------------ ------------ ------------ ------------
Operating income 1,415 10,937 8,019 2,507 19,381 13,042
Non-operating items
- Interest expense (171) (1,312) (1,307) (321) (2,477) (2,369)
- Interest income 118 917 1,758 241 1,865 2,333
- Other income 14 104 169 27 207 329
----------- ---------- ------------ ------------ ------------ ------------
Income before income taxes and minority interest 1,376 10,646 8,639 2,454 18,976 13,335
Provision for income taxes (146) (1,133) (700) (514) (3,977) (782)
----------- ---------- ------------ ------------ ------------ ------------
Income before minority interest 1,230 9,513 7,939 1,940 14,999 12,553
Minority interest (465) (3,602) (2,530) (699) (5,407) (4,010)
----------- ---------- ------------ ------------ ------------ ------------
Net income 765 5,911 5,409 1,241 9,592 8,543
Other comprehensive income, before tax
- Foreign currency translation adjustments (36) (275) (7,933) (26) (198) (8,226)
- Income tax expense 0 0 0 0 0 0
----------- ---------- ------------ ------------ ------------ ------------
Other comprehensive income, net of tax (36) (275) (7,933) (26) (198) (8,226)
----------- ---------- ------------ ------------ ------------ ------------
Comprehensive income 729 5,636 (2,524) 1,215 9,394 317
=========== ========== ============ ============ ============ ============
Basic earnings per common share 0.18 1.37 1.26 0.29 2.23 1.98
=========== ========== ============ ============ ============ ============
Diluted earnings per common share 0.17 1.34 1.15 0.28 2.15 1.81
=========== ========== ============ ============ ============ ============
Weighted average number of shares of
of common stock
- for basic earnings per share 4,305,960 4,305,960 4,305,960 4,305,960 4,305,960 4,305,960
=========== ========== ============ ============ ============ ============
- for diluted earnings per share 4,399,078 4,399,078 4,688,785 4,464,366 4,464,366 4,712,104
========== ========= =========== ============ ============ ============
</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 SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands)
<TABLE>
<CAPTION>
Six Months Ended September 30,
1999 1998
------------------------------------------ -------------------------
US$ HK$ HK$
<S> <C> <C> <C>
Cash flow from operating activities:
Net income 1,241 9,592 8,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful debts 0 0 1,523
Compensation expense 41 314 2,366
Depreciation and amortization 389 3,008 2,745
Loss (gain) on sale of property, plant and equipment 0 2 (1)
Minority interests 699 5,407 4,010
Changes in operating assets and liabilities:
Accounts receivable (397) (3,068) (1,721)
Inventories (1,714) (12,250) 1,736
Prepaid expenses 66 512 841
Other current assets (421) (3,254) (2,645)
Accounts payable 82 633 1,146
Accrued payroll and employee benefits 28 717 2,905
Other accrued liabilities (87) (676) 2,748
Income taxes payable 476 1,643 540
-------------- ------------------------- --------------------------
Net cash provided by operating activities 403 2,580 24,736
-------------- ------------------------- --------------------------
Cash flow from investing activities:
Purchase of property, plant and equipment (391) (3,025) (35,465)
Increase in restricted cash (3,330) (25,738) (3,031)
Purchase of a subsidiary (600) (4,638) 0
Proceeds from sale of property, plant and equipment 0 0 11
------------- -------------------------- --------------------------
Net cash used in investing activities (4,321) (33,401) (38,485)
------------- -------------------------- --------------------------
Cash flow from financing activities:
Repayment of bank overdrafts 0 0 (2,702)
Repayment of short-term borrowings (1,750) (13,529) (9,396)
Repayment of long-term debt (304) (2,353) (10,255)
Increase in bank overdrafts 0 0 2,702
Increase in short-term borrowings 4,859 37,562 25,868
Increase in long-term debt 0 0 20,000
Dividend paid to minority shareholders of a subsidiary (167) (1,292) 0
Net proceeds from issuance of shares by a subsidiary 1,000 7,730 0
Net proceeds from placing of shares by a subsidiary 1,649 12,751 0
-------------- -------------------------- -------------------------
Net cash provided by financing activities 5,287 40,869 26,217
-------------- -------------------------- -------------------------
Net increase in cash and cash equivalents 1,369 10,048 12,468
Cash and cash equivalents at beginning of period 8,564 66,196 83,918
Exchange adjustments (46) (355) (8,538)
============== ========================== =========================
Cash and cash equivalents at end of period 9,887 75,889 87,848
============== ========================== =========================
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 328 2,535 1,970
-------------- -------------------------- -------------------------
Income taxes 302 2,334 254
-------------- -------------------------- -------------------------
</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
SEPTEMBER 30, 1999
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 1999 balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the financial statements and
notes included in the annual report of Man Sang Holdings, Inc. (the "Company")
on Form 10-K for the fiscal year ended March 31, 1999. In the opinion of
management, the interim financial statements reflect all adjustments of a normal
recurring nature necessary for a fair presentation of the results for the
interim periods presented.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at period end
exchange rates, while revenues and expenses are translated at average exchange
rates during the period. Adjustments arising from translating foreign currency
financial statements are reported as a separate component of stockholders'
equity. Gains or losses from foreign currency translations are included in
income. Aggregate net foreign currency gains or losses were immaterial for all
periods.
The consolidated financial statements of the Company are maintained, and its
consolidated financial statements are expressed, in Hong Kong dollars. Unless
otherwise indicated as Hong Kong dollars or HK$, all financial information
contained herein is presented in United States 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$1, the approximate free rate of exchange
at September 30, 1999. Such translations should not be construed as
representations that Hong Kong dollar amounts could be converted into United
States dollars at that rate or any other rate.
F-5
<PAGE> 8
3. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128. Per share data is calculated
using the weighted average number of shares of common stock outstanding during
the period.
The reconciliation of the basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1999
----------------------------------------
Earnings Number of shares EPS
US$ US$
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders 764,648 4,305,960 0.18
====
Effect of dilutive
stock options granted
by the Company - 93,118
Diluted EPS
Net income available to
common stockholders,
including conversion 764,648 4,399,078 0.17
======= ========= ====
</TABLE>
<TABLE>
<CAPTION>
For the Six months ended September 30, 1999
-------------------------------------------
Earnings No. of shares EPS
US$ US$
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders 1,240,809 4,305,960 0.29
====
Effect of dilutive
stock options granted
by the Company - 158,406
Diluted EPS
Net income available to
common stockholders,
including conversion 1,240,809 4,464,366 0.28
========= ========= ====
</TABLE>
The effect on consolidated EPS of dilutive stock options granted and issued by
Man Sang International Limited ("MSIL"), the Company's subsidiary listed on The
Stock Exchange of Hong Kong Limited (the "Hong Kong Stock Exchange"), was not
included in the computation of diluted EPS because the exercise prices of such
options were greater than
F-6
<PAGE> 9
their average market prices.
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 SIX MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1999 1998 1999 1998
US$'000 US$'000 US$'000 US$'000
<S> <C> <C> <C> <C>
NET SALES:
Hong Kong 1,632 1,001 3,051 2,509
EXPORT:
Asian countries
excluding Hong Kong 1,678 1,092 3,641 2,091
North America 2,712 2,150 5,147 3,831
Europe 2,642 2,718 5,327 5,014
Others 630 453 912 680
------- ------ -------- -------
9,276 7,414 18,078 14,125
===== ===== ====== ======
</TABLE>
A majority of sales (by dollar amount) in Hong Kong are for re-export to North
America and Europe.
The Company operates in only one geographic area. The locations of the Company's
identifiable assets are as follows:
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
US$'000 US$'000
<S> <C> <C>
Hong Kong 49,327 44,641
Other regions of The People's
Republic of China 17,119 4,859
-------- --------
66,446 59,500
======= =======
</TABLE>
5. DISCLOSURE OF MAJOR CUSTOMERS
During the six months ended September 30, 1999, a substantial percentage of the
Company's
F-7
<PAGE> 10
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.
6. SIGNIFICANT EVENTS
On September 24, 1998, Man Sang Innovations Limited, a wholly owned subsidiary
of MSIL, entered into a License Agreement (the "License Agreement") with The
Walt Disney Company Asia Pacific Limited ("Disney") pursuant to which Man Sang
Innovations Limited and/or its affiliated companies were allowed to produce
jewellery articles bearing the "Winnie The Pooh" trademark (the "Trademark") and
sell the articles in the People's Republic of China (the "PRC") for a term of
one year from September 1, 1998 to August 31, 1999. The Company and Disney did
not renew the License Agreement.
7. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
<TABLE>
<CAPTION>
Reportable Segment Profit or Loss, and Segment Assets
As of, or As of, or
for the three months for the six months
ended, September 30 ended, September 30
1999 1998 1999 1998
US$'000 US$'000 US$'000 US'000
<S> <C> <C> <C> <C>
Revenues from external customers
Pearls 9,276 7,413 18,078 14,125
Real estate investment 141 141 290 290
------ ------ ------- --------
9,417 7,554 18,368 14,415
===== ===== ====== ======
Interest expense
Pearls 83 36 155 67
Real estate investment 13 - 13 -
------- --------- -------- ----------
96 36 168 67
======= ======= ======= ========
Depreciation and amortization
Pearls 123 105 242 213
Real estate investment 24 21 7 43
------- ------- ------ ------
147 126 289 256
====== ====== ===== =====
Segment profit
Pearls 1,414 1,172 2,494 1,749
Real estate investment 25 (68) 74 (29)
------- ------ ------- -------
1,439 1,103 2,568 1,720
===== ===== ===== =====
Capital expenditure for segment assets
Pearls 79 194 391 329
Real estate investment - - - -
-------- --------- --------- ---------
79 194 391 329
======= ====== ======= ======
</TABLE>
F-8
<PAGE> 11
<TABLE>
<S> <C> <C>
Segment assets
Pearls 52,495 43,026
Real estate investment 4,196 3,855
------- -------
56,691 46,881
------- -------
------- -------
</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. This Management's Discussion and Analysis and 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, 1999.
RESULTS OF OPERATIONS
Net Sales and Gross Profits
Net sales during the six-month period ended September 30, 1999 totaled $18.1
million, representing a 28.0% increase, compared to net sales of $14.1 million
during the same period in 1998. The increase in net sales was mainly
attributable to (i) an increase by 119.3% and 150.1%, respectively, in the net
sales of Chinese freshwater pearls and South Sea pearls; and (ii) a 6.2%, 34.3%
and 74.2% increase in net sales in Europe, North America, and Asian countries
excluding Hong Kong, during the six months ended September 30, 1999 when
compared to the same period in 1998. The Company attributes such increases in
net sales in part to its increased sales efforts and its shift in product mix
toward Chinese freshwater pearls and South Sea pearls, in part to more
stabilized currency and average economic performance of countries in the
Asia-Pacific region, and in part to private consumption that was comparatively
stronger than the same period in 1998.
Gross profit for the six-month period ended September 30, 1999 increased by $1.1
million, or 22.1%, to $6.0 million, compared to $4.9 million for the same period
in 1998. As a percentage of net sales, gross profit decreased slightly from
34.8% for the six-month period ended September 30, 1998 to 33.2% for the same
period in 1999. The decrease in gross profit margin resulted from, at least in
part, the shift in the Company's product mix from saltwater cultured pearls
toward more lower priced freshwater pearls of comparable size and quality.
Chinese freshwater pearls represented 41.2% of net sales for the six-month
period ended September 30, 1999 as compared to 24.1% of net sales for the same
period in 1998; while the sales of Chinese cultured pearls (with relatively
higher gross profit margin) reduced to 32.3% of net sales for the six-month
period ended September 30, 1999 as compared to 57.0% of net sales for the same
period in 1998.
Rental Income
Gross rental income for the six-month period ended September 30, 1999 was around
$290K*
- --------
*As used in this 10-Q, the letter "K" appearing immediately after a dollar
amount denotes rounding to the nearest $1,000; as an example, $250,499 may be
rounded to "$250K".
1
<PAGE> 13
approximately the same as that of the same period in 1998. The occupancy rate in
the Man Sang Industrial City facility located in Shenzhen, the PRC was 77.4% as
at September 30, 1999.
Selling, General and Administrative Expenses ("SG&A")
SG&A were $3.8 million, consisting of $3.6 million attributable to pearl
operations and $0.2 million attributable to real estate operations, for the
six-month period ended September 30, 1999, an increase of approximately $265K,
or 7.5%, from $3.5 million, consisting of $3.2 million attributable to pearl
operations and $0.3 million attributable to real estate operations, for the same
period in 1998. As a percentage of net sales, SG&A for pearl operations
decreased from 22.6% for the six-month period ended June 30, 1998 to 19.8% for
the same period in 1999, while SG&A for real estate operations decreased from
2.2% for the six-month period ended September 30, 1998 to 1.1% for the same
period in 1999.
Interest Income
Net interest expenses for the six-month period ended September 30, 1999,
increased by $74K to $79K when compared to the same period in the prior year.
The increase in net interest expense was due principally to (1) a decrease in
interest income of $61K, derived from the decrease of net interest rate during
the period; (2) an increase in short-term borrowing by approximately $2.25
million during the quarter ended September 30, 1999. The Company's weighted
average interest rate for the six-month period ended September 30, 1999 was
6.6%.
Income Taxes
2
<PAGE> 14
Income taxes and provision therefor for the six-month period ended September 30,
1999 increased by $413K to $514K as compared to $101K for the same period in
1998. Such significant increase was principally due to:-
- Increase in operating income arisen from the increase in net sales and
gross profit;
- A PRC subsidiary, which was exempted from PRC income taxes in the
calendar year of 1998, started paying income tax at a rate of 7.5% during
calendar year of 1999 under the Income Tax Law of the PRC;
- Another PRC subsidiary, which was entitled for a 50% relief from PRC
income taxes, in calendar year of 1998, started paying income tax at a
rate of 15% during calendar year of the 1999 under the Income Tax Law of
the PRC.
Under the Income Tax Law of the PRC, three operating subsidiaries of the
Company, namely Man Hing Industry Development (Shenzhen) Co. Ltd., Damei Pearls
Jewellery Goods (Shenzhen) Co. Ltd., and Tangzhu Jewellery Goods (Shenzhen) Co.
Ltd., all of which are located in the Shenzhen Special Economic Zone of the PRC,
are (i) exempt from PRC income taxes on income derived from pearls processing
operations (but not on any rental income) for two years, beginning with the
first profitable year of operation, and (ii) entitled to a 50% relief from PRC
income taxes on income derived from pearls processing operations (but not on any
rental income) for the three years after the expiration of the two-year tax
exemption. Since the three subsidiaries first became profitable in the years
1994, 1995 and 1997, the exemptions expired in the years 1996, 1997 and 1999;
and the 50% relief expire in the years 1999, 2000 and 2002, respectively.
3
<PAGE> 15
Net Income
Net income for the six-month period ended September 30, 1999 increased by $135K
to $1.2 million, representing an 12.3% increase from $1.1 million for the same
period in 1998. The increase was attributable to, among other things, an
increase in net sales during the six-month period ended September 30, 1999.
Excluding income taxes and minority interests, the operating profit during the
six-month period ended September 30, 1999 was $2.5 million, representing a 42.3%
increase, compared to that of $1.7 million during the same period in 1998.
Liquidity and Capital Resources
The Company's primary liquidity needs are to fund accounts receivable and
inventories and, to a lesser extent, to expand its business operations. At
September 30, 1999, the Company had working capital of $37.8 million and a cash
balance of $15.6 million compared to working capital of $34.3 million and a cash
balance of $11.0 million at March 31, 1999. The current ratio was 4.4 as at
September 30, 1999 as compared with that of 5.5 as at March 31, 1999. Net cash
provided by operating activities was $403K for the six-month period ended
September 30, 1999 as compared to $3.2 million for the same period in 1998. The
increase in working capital is mainly due to net increase in cash and cash
equivalents by $4.6 million (as compared to net increase in cash and cash
equivalents of $0.9 million for the six-month period ended September 30, 1998).
During the six-month period ended September 30, 1999, a subsidiary of the
Company in the PRC obtained an additional short-term loan of Renminbi 18.0
million (approximately $2.25 million). The proceeds of such loan were used to
purchase pearls and to finance daily operating activities of the Company's PRC
subsidiaries. The main purpose of the loan is to minimize the impact of any
devaluation of the Renminbi. Taking into account of such loan, the total
short-term borrowings by the Company's subsidiaries in the PRC amounted to
approximately $6.5 million. The loans are secured by a deposit of $5.25 million
(in US dollars) and the mortgage of 5 buildings in Man Sang Industrial City.
Inventories increased by $1.6 million to $23.8 million at September 30, 1999 and
the inventory turns decreased to 10.7 months as at September 30, 1999 from 12.7
months as at March 31, 1999. The increase in inventories was attributable to
higher purchasing and production to meet increased demand for the freshwater
pearls.
Long-term debt (including current portion of long-term debt) was $3.6 million at
September 30, 1999, a decrease of $304K compared to that at March 31, 1999. The
decrease was attributable to repayment of installment loan during the period.
The gearing ratio was 0.72 at September 30, 1999, compared to 0.53 at March 31,
1999. The increase in gearing ratio was mainly due to an increase in short-term
borrowings of Renminbi 18.0 million (approximately $2.25 million) by a
subsidiary in PRC, such increase is secured by an additional deposit of
4
<PAGE> 16
$2.25 million.
The Company had available working capital facilities of $7.1 million in total
with various banks at September 30, 1999. Such banking facilities include letter
of credit arrangements, import loans, overdraft protection and other facilities
commonly used in the jewelry business. All such banking facilities bear interest
at floating rates generally based on prime lending rates, and are subject to
periodic review. At September 30, 1999, the Company only utilized approximately
$44K of its credit facilities.
The Company believes that funds to be generated from internal operations and the
existing banking facilities will enable the Company to meet anticipated future
cash flow requirements.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of potential problems with computer systems or
any equipment with computer chips that use dates where the date has been stored
as just two digits rather than four to identify the relevant year (e.g. 97 for
1997). These applications may not be able to distinguish between 21st and 20th
century dates. On January 1, 2000, any clock or date recording mechanism
including date sensitive software which uses only two digits to represent the
year, may recognize a date using 00 as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruption of
operations.
The Company implemented a "Year 2000 Compliance" program, using both internal
and external resources to identify significant applications that would require
modification, and making such modifications, to ensure Year 2000 Compliance. The
Company has completed the implementation of its program on March 31, 1999. With
regard to the Company's software applications, the Company has identified
critical and non-critical software applications, and updated and/or developed
software applications to ensure, or obtained certification, that its software
applications are Year 2000 compliant.
The Company has updated and tested its local area network computer system, its
computerized lock, and any other computer, information or operational network,
system, software to be Year 2000 compliant. The Company believes that the
internal risks associated with the Year 2000 Issue are minimal. However, the
Company's customers, suppliers and other external relationships may present
risks over which the Company has no control.
The Company has initiated communications with, and has obtained assurance from,
some of the parties, such as Flexsystem (accounting software company), Chubb
Security (security alarm system), and Secretaries Limited (share registrars of
MSIL), with which the Company does business, that they are Year 2000 compliant.
However, the Company has not been able to obtain any assurance in writing from
any utility company, bank, airline or courier service regarding its Year 2000
compliance, although
5
<PAGE> 17
representatives from many such companies have orally indicated to the Company
that they are Year 2000 compliant.
6
<PAGE> 18
There can be no assurance that the Company's compliance program will be
successful or that the date change from 1999 to 2000 will not adversely affect
the Company's operations and financial results, nor can there be any assurance
that the systems of third parties with which the Company does business will be
timely converted, or that a failure to convert by any such third party, or a
conversion that is incompatible with the Company's networks or systems, would
not have an adverse effect on the Company. However, the Company does not
anticipate that its operation or services will experience any interruption or
disruption as a result of any failure, and any such disruption will be
insignificant because, as a contingency plan, any activities that are currently
handled by a computerized system can be handled manually without much difficulty
or any material additional cost. The Company has not incurred material operation
expenses or investments in networks and systems improvements in connection with
Year 2000 compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the six-month period ended September 30, 1999, the Company made
approximately 63.0% of its purchases in Renminbi, with the remaining amounts
mainly settled in Hong Kong dollars, US dollars and Japanese Yen (only 4% of
total purchase).
The Company's policy is to denominate all its sales in either US dollar or Hong
Kong dollars. Since Hong Kong dollars remained "pegged" to the US dollar
throughout the period, the Company's sales proceeds have thus far had very
minimal exposure to foreign exchange fluctuations.
Therefore, since purchases are made in currencies that have devaluation pressure
and sales are made in US dollars, the currency risk in the foreseeable future
should be immaterial, and the Company's Management determined that no derivative
contracts such as forward contracts and options to hedge against foreign
exchange fluctuations were necessary during the period.
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 $3.0 million, was between
HIBOR+3.0% and 3.5% during the period (where HIBOR represents the Hong Kong
Interbank Offered Rate). All other installment loans and banking facilities of
the Company bear interest at floating rates generally based on prime lending
rates, which are subject to periodic review.
The Company does not expect significant changes in Hong Kong interest rates in
the foreseeable future. As at September 30, 1999, the aggregate amount
outstanding under all banking facilities and the installment loans was
approximately $3.5 million. Therefore, even
7
<PAGE> 19
a change of 0.5% in HIBOR and prime lending rates will lead to an increase in
interest expense of only approximately $17,500 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.
8
<PAGE> 20
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
9
<PAGE> 21
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/ Zacky Sun
_______________________________________
Zacky Sun, Chief Financial Officer
Date: November 11, 1999
10
<PAGE> 22
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
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,583,000
<SECURITIES> 0
<RECEIVABLES> 8,149,000
<ALLOWANCES> 647,000
<INVENTORY> 23,766,000
<CURRENT-ASSETS> 48,848,000
<PP&E> 15,081,000
<DEPRECIATION> 2,381,000
<TOTAL-ASSETS> 66,446,000
<CURRENT-LIABILITIES> 11,014,000
<BONDS> 3,600,000
0
0
<COMMON> 4,000
<OTHER-SE> 36,460,000
<TOTAL-LIABILITY-AND-EQUITY> 66,446,000
<SALES> 18,078,000
<TOTAL-REVENUES> 18,368,000
<CGS> 12,082,000
<TOTAL-COSTS> 3,779,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321,000
<INCOME-PRETAX> 2,454,000
<INCOME-TAX> 514,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,241,000
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.28
</TABLE>
