<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, 2000
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, 2000, 4,405,960 SHARES OF COMMON STOCK OF THE
REGISTRANT WERE OUTSTANDING.
<PAGE> 2
MAN SANG HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
Page
----
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as at
September 30, 2000 and March 31, 2000 F-1
Condensed Consolidated Statements of Income
and Comprehensive Income for the three and
six months ended September 30, 2000 and 1999 F-3
Condensed Consolidated Statements of Cash
Flows for the six months ended September
30, 2000 and 1999 F-4
Notes to Condensed Consolidated Financial
Statements F-5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 1
ITEM 3. Quantitative and Qualitative Disclosures
about Market Risk 4
PART II - OTHER INFORMATION
SIGNATURES
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------------- --------------
US$ HK$ HK$
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 8,208 63,614 88,900
Restricted cash 8,170 63,314 62,330
Accounts receivable, net of allowance
for doubtful accounts of HK$5,000 as of
September 30, 2000 and HK$5,000 as of
March 31, 2000 10,555 81,802 55,524
Inventories
Raw materials 222 1,716 1,781
Work in progress 4,438 34,397 33,987
Finished goods 19,448 150,722 152,198
------ ------- -------
24,108 186,835 187,966
Prepaid expenses 290 2,249 3,876
Other current assets 2,096 16,245 13,316
------ ------- -------
Total current assets 53,427 414,059 411,912
Long-term investments 817 6,330 6,330
Available-for-sale securities 2,138 16,572 --
Goodwill 124 964 --
Property, plant and equipment 16,148 125,149 117,643
Accumulated depreciation (2,981) (23,105) (20,231)
------ ------- -------
13,167 102,044 97,412
Real estate investment 4,792 37,137 37,136
Accumulated depreciation (581) (4,504) (4,109)
------ ------- -------
4,211 32,633 33,027
------ ------- -------
Total assets 73,884 572,602 548,681
====== ======= =======
</TABLE>
F-1
<PAGE> 4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 MARCH 31, 2000
------------------------- --------------
US$ HK$ HK$
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 10,405 80,635 73,835
Current portion of long-term debt
Secured bank loans 571 4,429 4,429
Capital lease obligations 27 204 192
------ ------- -------
598 4,633 4,621
Accounts payable 1,031 7,986 8,396
Amount due to affiliate 236 1,832 604
Accrued payroll and employee benefits 878 6,804 4,026
Other accrued liabilities 1,600 12,403 12,006
Income taxes payable 803 6,225 4,190
------ ------- -------
Total current liabilities 15,551 120,518 107,678
Long-term debt
Secured bank loans 2,394 18,552 20,767
Capital lease obligations 2 18 123
------ ------- -------
2,396 18,570 20,890
Minority interests 17,245 133,652 127,566
Stockholders' equity:
Common stock, par value US$0.001 4 34 34
- authorized: 25,000,000 shares;
issued and outstanding; 4,405,960
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$19,375))
Series B convertible preferred stock, par value
US$0.001 -- -- --
- authorized: 100,000 shares; no shares
outstanding
Additional paid-in capital 11,348 87,943 85,636
Retained earnings 27,097 210,002 205,454
Accumulated other comprehensive income 243 1,882 1,422
------ ------- -------
Total stockholders' equity 38,692 299,862 292,547
------ ------- -------
Total liabilities and stockholders'
equity 73,884 572,602 548,681
====== ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE> 5
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------------ ---------- ------------------------ ----------
US$ HK$ HK$ US$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Net sales 12,333 95,581 71,700 22,844 177,042 139,740
Cost of goods sold (9,073) (70,320) (46,856) (16,324) (126,514) (93,390)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 3,260 25,261 24,844 6,520 50,528 46,350
Rental income, gross 179 1,388 1,090 339 2,630 2,245
---------- ---------- ---------- ---------- ---------- ----------
3,439 26,649 25,934 6,859 53,158 48,595
Selling, general and administrative expenses
- Pearls (2,849) (22,081) (14,202) (5,227) (40,511) (27,642)
- Real estate investment (167) (1,290) (795) (342) (2,646) (1,572)
---------- ---------- ---------- ---------- ---------- ----------
Operating income 423 3,278 10,937 1,290 10,001 19,381
Non-operating items
- Interest expense (227) (1,764) (1,312) (442) (3,428) (2,477)
- Interest income 153 1,185 917 347 2,690 1,865
- Other income 48 375 104 272 2,110 207
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
minority interest 397 3,074 10,646 1,467 11,373 18,976
Provision for income taxes (307) (2,381) (1,133) (627) (4,864) (3,977)
---------- ---------- ---------- ---------- ---------- ----------
Income before minority interest 90 693 9,513 840 6,509 14,999
Minority interest (31) (240) (3,602) (253) (1,961) (5,407)
---------- ---------- ---------- ---------- ---------- ----------
Net income 59 453 5,911 587 4,548 9,592
Other comprehensive income
- Foreign currency translation adjustments 4 33 (275) 26 202 (198)
- Unrealized holding gain on available-
for-sale securities (58) (444) 0 33 258 0
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income, net of tax and
minority interest (54) (411) (275) 59 460 (198)
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income 5 42 5,636 646 5,008 9,394
========== ========== ========== ========== ========== ==========
Basic earnings per common share 0.01 0.10 1.37 0.13 1.03 2.23
========== ========== ========== ========== ========== ==========
Diluted earnings per common share 0.01 0.09 1.34 0.12 0.95 2.15
========== ========== ========== ========== ========== ==========
Weighted average number of shares
of common stock
- for basic earnings per share 4,405,960 4,405,960 4,305,960 4,405,960 4,405,960 4,305,960
========== ========== ========== ========== ========== ==========
- for diluted earnings per share 4,519,404 4,519,404 4,399,078 4,539,701 4,539,701 4,464,366
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-3
<PAGE> 6
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30
(Amounts expressed in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------
2000 1999
----------------------------
US$ HK$ HK$
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income 587 4,548 9,592
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Compensation expense for stock options 497 3,850 314
Amortization of goodwill 25 193 0
Depreciation and amortization 554 4,296 3,008
Loss on sale of property, plant and equipment 44 342 2
Realized gain on disposal of available-for-sale securities (86) (664) 0
Minority interests 253 1,961 5,407
Changes in operating assets and liabilities:
Accounts receivable (3,279) (25,412) (3,068)
Inventories 156 1,212 (12,250)
Prepaid expenses 210 1,627 512
Other current assets (375) (2,911) (3,254)
Accounts payable (54) (421) 633
Amount due to affiliate 158 1,228 0
Accrued payroll and employee benefits 358 2,777 717
Other accrued liabilities 50 389 (676)
Income taxes payable 263 2,035 1,643
------- ------- -------
Net cash (used in) provided by operating activities (639) (4,950) 2,580
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,153) (8,935) (3,025)
Purchase of available-for-sale securities (2,457) (19,047) 0
Increase in restricted cash (127) (984) (25,738)
Proceeds from sale of property, plant and equipment 11 90 0
Proceeds from sale of available-for-sale securities 454 3,518 0
------- ------- -------
Net cash used in investing activities (3,272) (25,358) (28,763)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings (6,014) (46,612) (13,529)
Repayment of long-term debt (298) (2,308) (2,353)
Increase in short-term borrowings 6,867 53,223 37,562
Dividend paid to minority shareholders of a subsidiary 0 (1) (1,292)
Investment from minority shareholder 0 0 3,092
Net proceeds from issuance of shares by a subsidiary 68 525 12,751
------- ------- -------
Net cash provided by financing activities 623 4,827 36,231
------- ------- -------
Net (decrease) increase in cash and cash equivalents (3,288) (25,481) 10,048
Cash and cash equivalents at beginning of period 11,471 88,900 66,196
Exchange adjustments 25 195 (355)
------- ------- -------
Cash and cash equivalents at end of period 8,208 63,614 75,889
======= ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest and financing charges 433 3,359 2,535
------- ------- -------
Income taxes 365 2,829 2,334
------- ------- -------
</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, 2000
(UNAUDITED)
1. INTERIM FINANCIAL PRESENTATION
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-Q. The March 31, 2000 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, 2000. 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 transactions and 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$7.75 to US$1, the approximate free rate of
exchange at September 30, 2000. Such translations should not be construed as
representations that Hong Kong dollar amounts could be converted into United
States dollars at that rate or any other rate.
3. INVESTMENTS
Investments in debt securities and equity securities with readily determinable
market values are classified into categories based on the Company's intent.
Investments held to maturity, which the Company has the intent and ability to
hold to maturity, are carried at cost. Investments available for sale are
carried at estimated fair value. Unrealized holding gains and losses are
excluded from earnings and reported, net of income taxes, as a separate
component of stockholders' equity until realized. For all investment
securities, unrealized
F-5
<PAGE> 8
losses that are other than temporary are recognized in net income. Realized
gains and losses are determined on the specific identification method and are
reflected in net income.
4. GOODWILL
Goodwill represents the excess of acquisition cost over the net assets
acquired. Goodwill is amortized on a straight-line basis over three years.
Periodically, the Company reviews the recoverability of goodwill from expected
future operating cash flows on an undiscounted basis. In management's opinion,
no material impairment exists at September 30, 2000.
5. EARNINGS PER SHARE ("EPS")
EPS is calculated in accordance with SFAS No. 128. Per share data is calculated
using the weighted average number of shares of common stock outstanding during
the period.
The reconciliation of the basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1999
----------------------------------------
Earnings No. of shares EPS
US$ US$
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders 762,675 4,305,960 0.18
Effect of dilutive stock
options granted by the Company -- 93,118
Effect of dilutive stock
options and warrants granted
by MSI -- --
---------
Diluted EPS
Net income available to
common stockholders,
including conversion 762,675 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 1,237,607 4,305,960 0.29
====
Effect of dilutive stock
options granted by the Company -- 158,406
</TABLE>
F-6
<PAGE> 9
Effect of dilutive stock
options and warrants granted
by MSIL -- --
--------- --------- ----
Diluted EPS
Net income available to
common stockholders,
including conversion 1,237,607 4,464,366 0.28
========= ========= ====
Man Sang International Ltd. ("MSIL"), a subsidiary of the Company whose shares
are listed on The Stock Exchange of Hong Kong Limited ("The Hong Kong Stock
Exchange"), adopted a share option scheme (the "Share Option Scheme") on
September 8, 1997. The Share Option Scheme is administered by the MSIL Board of
Directors, whose decisions are final and binding on all parties.
The effect on consolidated EPS of dilutive stock options granted and issued by
MSIL, was not included in the computation of dilutive EPS because exercise
prices of such options were greater than their average market prices.
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 2000
----------------------------------------
Earnings No. of shares EPS
US$ US$
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders 58,401 4,405,960 0.01
====
Effect of dilutive stock
options granted by the Company - 113,444
Effect of dilutive stock
options and warrants granted
by MSIL (5,496) -
------- ---------
Diluted EPS
Net income available to
common stockholders,
including conversion 52,905 4,519,404 0.01
====== ========= ====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended September 30,
----------------------------------------
2000
----
Earnings No. of shares EPS
US$ US$
<S> <C> <C> <C>
Basic EPS
Net income available
to common stockholders 586,847 4,405,960 0.13
====
Effect of dilutive stock
options granted by the Company - 133,741
Effect of dilutive stock
options and warrants granted
</TABLE>
F-7
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
by MSIL (27,484) -
------- ---------
Diluted EPS
Net income available to
common stockholders,
including conversion 559,363 4,539,701 0.12
======= ========= ====
</TABLE>
On April 28, 2000, MSIL granted to its directors and certain of its senior
employees options to subscribe for 33,000,000 MSIL shares of nominal value of
HK$0.10 at an exercise price of HK$0.297 per share. The exercise price
represented approximately 80% of the average closing price of each MSIL share
as stated in the daily quotation sheets of The Hong Kong Stock Exchange for the
five trading days immediately preceding the date on which the options were
granted. The options can be exercised in a period of two years commencing on
the expiry of six months after the options are accepted in accordance with the
Share Option Scheme, and expiring on the last day of such two-year period.
For each of the three-month and six-month periods ended September 30, 2000, to
the extent that the average market price of MSIL's ordinary shares was higher
than the exercise price of any option on warrant issued by MSIL, the effect on
consolidated EPS of such dilutive options or warrants was included in the
computation of diluted EPS, and to the extent that the average market price of
MSIL's ordinary shares was lower than the exercise price of any option or
warrant issued by MSIL, the effect on consolidated EPS of such anti-dilutive
options or warrants was excluded from the computation of diluted EPS.
6. DISCLOSURE OF GEOGRAPHIC INFORMATION
All of the Company's sales of pearls are co-ordinated through its Hong Kong
subsidiaries and an analysis by destination is as follows:
<TABLE>
<CAPTION>
For the quarter For the six months
ended September 30 ended September 30
2000 1999 2000 1999
US$'000 US$'000 US$'000 US$'000
<S> <C> <C> <C> <C>
Net Sales:
Hong Kong * 2,616 1,628 4,697 3,043
Export:
Asian countries excluding
Hong Kong 3,604 1,674 6,687 3,632
North America 3,196 2,706 5,885 5,134
Europe 2,516 2,616 4,855 5,313
Others 401 628 720 909
------ ------ ------ ------
12,333 9,252 22,844 18,031
====== ====== ====== ======
</TABLE>
F-8
<PAGE> 11
* A majority of sales (by dollar amount) in Hong Kong are for re-export to
North America and Europe.
F-9
<PAGE> 12
The Company operates in only one geographic area. The location of the Company's
identifiable assets is as follows:
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
US$'000 US$'000
<S> <C> <C>
Hong Kong 55,816 50,942
Other regions of the People's
Republic of China ("PRC") 18,068 19,856
------ ------
73,884 70,798
====== ======
</TABLE>
7. DISCLOSURE OF MAJOR CUSTOMERS
During the six months ended September 30, 2000, no single customer accounts for
10% or more of total sales. A substantial percentage of the Company's sales is
made to a small number of customers and is typically on an open account basis.
8. SIGNIFICANT EVENTS
On July 18, 2000, the Company entered into an Agreement for Sale and Purchase
to purchase certain property located at Flat C and Flat D on the 15th Floor of
Windsor Mansion, 29-31 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong, for
a total of approximately $438,710. The Company closed such purchase on August 4,
2000, and intends to hold such property on a long-term basis and use it as a
staff quarter.
The Service Agreement between MSIL and Mr. Cheng Chung Hing, Ricky dated
September 8, 1997, expired after the close of business of August 31, 2000. On
August 31, 2000, MSIL entered into another Service Agreement with Mr. Cheng
Chung Hing, Ricky, which is attached as Exhibit 10.1 of this Form 10-Q.
The Service Agreement between MSIL and Mr. Cheng Tai Po dated September 8,
1997, expired after the close of business of August 31, 2000. On August 31,
2000, MSIL entered into another Service Agreement with Mr. Cheng Tai Po, which
is attached as Exhibit 10.2 of this Form 10-Q.
The Service Agreement between MSIL and Ms. Yan Sau Man, Amy dated September 8,
1997, expired after the close of business of August 31, 2000. On August 31,
2000, MSIL entered into another Service Agreement with Ms. Yan Sau Man, Amy,
which is attached as Exhibit 10.3 of this Form 10-Q.
F-10
<PAGE> 13
9. SEGMENT INFORMATION
Reportable segment profit or loss, and segment assets are disclosed as follows:
<TABLE>
<CAPTION> Reportable Segment Profit or Loss, and Segment Assets
-----------------------------------------------------
For the three months For the six months ended,
ended, September 30 September 30
2000 1999 2000 1999
US$'000 US$'000 US$'000 US$'000
<S> <C> <C> <C> <C>
Revenue from external customers
Pearls 12,333 9,252 22,844 18,031
Real estate investment 179 141 339 290
------ ----- ------ ------
12,512 9,393 23,183 18,321
====== ===== ====== ======
Operating income
Pearls 411 1,373 1,293 2,414
Real estate investment 12 38 (3) 87
------ ----- ------ ------
423 1,411 1,290 2,501
====== ===== ====== ======
Interest expense
Pearls 89 83 173 155
Real estate investment 73 13 146 13
Corporate assets 65 73 123 152
------ ----- ------ ------
227 169 442 320
====== ===== ====== ======
Depreciation and amortization
Pearls 211 123 401 242
Real estate investment 25 24 50 47
Corporate assets 53 49 103 99
------ ----- ------ ------
289 196 554 388
====== ===== ====== ======
Capital expenditure for segment
assets
Pearls 592 78 605 390
Real estate investment 0 0 0 0
Corporate assets 541 0 548 0
------ ----- ------ ------
1,133 78 1,153 390
====== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
As of As of
September 30, March 31,
2000 2000
US$'000 US$'000
<S> <C> <C>
Segment assets
Pearls 57,599 56,905
Real estate investment 4,211 4,262
Corporate assets 12,074 9,631
------- -------
73,884 70,798
======= =======
</TABLE>
F-11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. This Management's Discussion and Analysis should be read in
conjunction with the condensed consolidated financial statements and notes
thereto included elsewhere in this Form 10-Q and with the Company's annual
report on Form 10-K for the year ended March 31, 2000.
RESULTS OF OPERATIONS
Net sales for the six-month period ended September 30, 2000 increased by $4.8
million to $22.8 million, representing a 26.7% growth when compared to net
sales of $18.0 million during the same period in 1999. The increase in net
sales was mainly attributable to the increase by 140.6% in the net sales of
South Sea and Tahitian pearls. The Company attributes such increases in net
sales in part to its increased sales efforts and its shift in product mix
towards South Sea and Tahitian pearls, and in part to private consumption that
was comparatively stronger than the same period in 1999.
Gross profit for the six-month period ended September 30, 2000 increased by $0.5
million, or 9.0%, to $6.5 million, compared to $6.0 million for the same period
in 1999. As a percentage of net sales, gross profit decreased from 33.2% for the
six-month period ended September 30, 1999 to 28.5% for the same period in 2000.
The increase in gross profit resulted mainly from the overall increase in sales,
while the decrease in gross profit margin resulted, at least in part, from the
shift of the Company's product mix from Chinese Cultured pearls towards higher
priced South Sea and Tahitian pearls that yield lower margins. South Sea and
Tahitian pearls represented 42.2% of net sales for the six-month period ended
September 30, 2000, compared to 22.2% of net sales for the same period in 1999.
Chinese Cultured pearls constituted 27.2% of net sales for the six-month period
ended September 30, 2000, as compared to 32.3% of net sales for the same period
in 1999.
1
<PAGE> 15
Rental Income
Gross rental income for the six-month period ended September 30, 2000 was
approximately $339K*, representing an increase of approximately $50K, or 17.1%,
as compared to the same period in 1999. The increase in gross rental income was
attributable to (i) an increase in occupancy rate from 77.4% to 93.7% in the Man
Sang Industrial City facility located in Shenzhen, the People's Republic of
China; (ii) the additional rental income generated from the Company's rental
properties in Hong Kong including (a) car-parking space at No. L30 on the Ground
Floor of Block A, Focal Industrial Centre, 21 Man Lok Street, Kowloon, Hong
Kong; (b) car-parking space at No.3 on L3 Floor of Valverde, 11 May Road, Hong
Kong and; (c) Unit 16 on 6th Floor, Block A, Focal Industrial Centre, 21 Man Lok
Street, Kowloon, Hong Kong.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses were $5.6 million, consisting of $5.2 million attributable to
pearl operations and $0.4 million attributable to real estate operations, for
the six-month period ended September 30, 2000, an increase of approximately $1.8
million, or 47.7%, from $3.8 million, consisting of $3.6 million attributable to
pearl operations and $0.2 million attributable to real estate operations, for
the same period in 1999. During the six-month period ended September 30, 2000,
in addition to increase in compensation expenses, marketing expenses and other
operating expenses (as net sales increased and the Company continued to develop
its Internet business), the increase in SG&A was primarily attributable to
increased depreciation and repair and maintenance expenses for certain real
estate investment which were previously leasehold land and buildings.
As a percentage of net sales, SG&A from pearl operations increased from 19.8%
for the six-month period ended September 30, 1999 to 22.9% for the same period
in 2000, while SG&A from real estate operations increased from 1.1% for the
six-month period ended September 30, 1999 to 1.5% for the same period in 2000.
Interest Income
Interest income increased by $106K, or 44.2%, to $347K from the comparable
period in the prior year. The increase in interest income was due principally to
the increased working capital raised from the placement of 40,000,000 new shares
in the capital of MSIL at a price of HK$0.33 per share in August 1999; and an
increase in net sales for the six-month period ended September 30, 2000.
Interest Expense
Interest expenses increased by $123K, or 38.4%, to $442K from the comparable
period in the prior year. The increase in interest expense was due principally
to increased import loans to finance the purchase of inventory and an increase
short-term bank borrowings by the
----------------------------
* 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".
2
<PAGE> 16
Company's subsidiaries in PRC to minimize the impact of a possible devaluation
of the Renminbi. The Company's weighted average short-term borrowing rate
decreased from 6.6% per annum for the six-month period ended June 30, 1999 to
6.25% for the same period in 2000.
Income Taxes
Income taxes and provision therefor for the six-month period ended September 30,
2000, increased by $114K to $627K as compared to $513K for the same period in
1999. The effective tax rate increased from approximately 21% in the six-month
period ended September 30, 1999 to approximately 43% in the same period in 2000,
which increase was principally due to:
- an increase in net sales and gross profit;
- Damei Pearls Jewellery Goods (Shenzhen) Co., Ltd., a PRC subsidiary, which
was entitled to a 50% relief from PRC income taxes in the calendar
year 1999, started paying income tax at a rate of 15% during calendar year
of 2000 under the Income Tax law of the PRC; and
- compensation expenses related to options granted by MSIL are not
deductible for Hong Kong tax purposes.
Other Income
Other income increased from $27K for the six-month period ended September 30,
1999, to $272K for the same period in 2000, which increase was mainly
attributable to gains from foreign currency transactions and translations, and
to realized gains from the sales of available-for-sale securities of other
companies unaffiliated with the Group.
Net Income
Net income for the six-month period ended September 30, 2000 decreased by $651K
to $587K, representing a 52.6% decrease from $1.2 million for the same period in
1999. The decrease was attributable to, among other things, an increase in SG&A
expenses during the six-month period ended September 30, 2000.
Excluding income taxes and minority interests, the operating profit during the
six-month period ended September 30, 2000 was $1.5 million, representing a 40.1%
decrease, compared to that of $2.4 million during the same period in 1999.
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, 2000, the Company had working capital of $37.9 million and a cash
balance of $16.4 million, compared to working capital of $39.3 million and a
cash balance of $19.5 million at March 31, 2000. The current ratio was 3.4 to 1
as of September 30, 2000 as compared with that of 3.8 to 1 as of March 31, 2000.
Net cash used in operating activities was $639K for the six-month period ended
September 30, 2000, while net cash provided by operating activities was $333K
for the same period in 1999. The decrease in cash and cash equivalents by $3.3
million was mainly used in financing the increase in accounts receivable,
purchase of available-for-sale securities and property, plant and equipment.
Inventories decreased by $0.1 million to $24.1 million at September 30, 2000
when compared to March 31, 2000 and the inventory turns improved from 11.5
months as at March 31, 2000 to 8.8 months as at September 30, 2000.
Long-term debt (including current portion of long-term debt) was $3.0 million at
September 30, 2000, a decrease of $298K compared to that at March 31, 2000. The
decrease was attributable to repayment of installment loan during the six-month
period ended September 30, 2000. The gearing ratio was 0.79 at September 30,
2000, compared to 0.78 at March 31, 2000.
The Company had available working capital facilities of $12.9 million in total
with various banks at September 30, 2000. 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
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<PAGE> 17
rates, and are subject to periodic review. At September 30, 2000, the Company
utilized approximately $2.1 million 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the six-month period ended September 30, 2000, the Company made
approximately 32.5% of its purchases in Renminbi, with the remaining amounts
mainly settled in Hong Kong dollars, US dollars and Japanese Yen (only 3.6% of
total purchase). Although Renminbi has not been devalued, the Company's
Management believes that more likely than not (i) the Renminbi will be devalued
in the foreseeable future, and (ii) the Company will be able to purchase its
pearls at lower prices (in US dollar terms).
The Company's policy is to denominate all its sales in either US dollars or
Hong Kong dollars. Since the Hong Kong dollar 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 six-month period ended
September 30, 2000.
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
HIBOR+2.5% to HIBOR+3.0% during the 3-month period (where HIBOR represents Hong
Kong Interbank Offered Rate). All other installment loans and banking
facilities of the Company bear interest at floating rates generally based on
prime lending rates, which are subject to periodic review.
The Company does not expect significant changes in Hong Kong interest rates in
the foreseeable future. As at September 30, 2000, the aggregate amount
outstanding under all banking facilities and the installment loans was
approximately $5.1 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 $25,500 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.
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<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
NEW OFFICE LEASE
On April 1, 2000, Man Sang Jewellery Company Limited, a wholly owned subsidiary
of MSIL, entered into a tenancy agreement to lease the 27th Floor of Railway
Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong for a term of 3
years, at a monthly rental of approximately $23,200. The Group plans to use
such premises to house its operations in business solutions as carried out by
Intimex Business Solutions Company Limited and its former principals, and its
operations in retail sale of jewellery and accessories as carried out by
Arcadia Jewellery Limited ("Arcadia") (through traditional retail) and
4376zone.com Limited (through its e-commerce website, www.4376zone.com). In
connection with such new tenancy, on July 8, 2000, Arcadia surrendered without
compensation the office space it previously leased at Units 801 and 802,
Multifield Plaza, 3 Prat Avenue, Tsimshatsui, Kowloon, Hong Kong.
PURCHASE OF PUBLICLY TRADED SECURITIES
During the six-month period ended September 30, 2000, MSIL, the Company's
subsidiary, purchased approximately $2.5 million of available-for-sale
securities issued by companies unaffiliated with the Group and listed on The
Hong Kong Stock Exchange.
BONUS ISSUE OF SHARES BY MSIL
The Company is the sole parent of Man Sang International (B.V.I.) Limited, a
company incorporated in the British Virgin Islands ("MSBVI"). As at August 2,
2000, MSBVI legally and beneficially owned approximately 67.42% of the issued
and outstanding shares of MSIL.
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<PAGE> 19
On August 2, 2000, MSIL's shareholders approved a bonus issue of shares to
MSIL's shareholders on the basis of one bonus for every five shares of MSIL
held on August 2, 2000 (the "Bonus Issue"). Based on 526,559,109 shares issued
and outstanding as at August 2, 2000, 105,311,821 bonus shares, credited as
fully paid by way of capitalization from the share premium account of MSIL, (the
"Bonus Shares") were allotted on August 3, 2000. The Bonus Shares rank pari
passu in all respects with the existing issued shares of MSIL.
No fractional shares were issued; they were aggregated and were sold in the
public market. The proceeds from such sales were retained for the benefit of
the Company.
Documents relating to the Bonus Issue have only been registered or filed under
the securities legislation of Hong Kong. As a result, shares were not issued to
shareholders whose addresses as shown on MSIL's register of shareholders on
August 2, 2000 were outside Hong Kong (the "Overseas Shareholders").
Arrangements were made for the bonus shares that would otherwise be issued to
the Overseas Shareholders to be sold in the public market as soon as
practicable. Any net proceeds of such sales, after deduction of expenses, were
distributed in Hong Kong dollars to such Overseas Shareholders pro rata to their
respective shareholdings in MSIL, provided that amounts of less than HK$100 were
not distributed but were retained for the benefit of MSIL.
MSIL has applied with The Hong Kong Stock Exchange, and The Hong Kong Stock
Exchange has granted its approval for the listing of, and the permission to
deal in, the Bonus Shares. Dealings in the Bonus Shares commenced on August 10,
2000. After the Bonus Issue, MSBVI legally and beneficially owned approximately
67.42% of the issued and outstanding shares of MSIL.
Pursuant to the Bonus Issue, the subscription prices of outstanding share
options and warrants are adjusted on the same basis of one for every five
options and warrants granted.
ITEM 6. EXHIBITS
(A) Exhibits
Exhibit No. Description
10.1 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Cheng Chung Hing
10.2 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Cheng Tai Po
10.3 Service Agreement, dated August 31, 2000, between Man Sang
International Limited and Yan Sau Man, Amy
27.1 Financial Data Schedule
(B) Reports on Form 8-K
None
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<PAGE> 20
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, Man Sang Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MAN SANG HOLDINGS, INC.
Date: November 14, 2000
By: /s/ CHENG Chung Hing
-------------------------------
CHENG Chung Hing, Ricky
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
<PAGE> 21
INDEX TO EXHIBITS
The following documents are filed herewith or have been included as exhibits to
previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.
Exhibit No. Description
10.1 Service Agreement, dated August 31, 2000, between Man Sang International
Limited and Cheng Chung Hing
10.2 Service Agreement, dated August 31, 2000, between Man Sang International
Limited and Cheng Tai Po
10.3 Service Agreement, dated August 31, 2000, between Man Sang International
Limited and Yan Sau Man, Amy
27.1 Financial Data Schedule
