-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, INKKfpgmJnHPqc4j9LXwgYjG+ZLEf5KFOszskxXS6n/L1QlrNyrzPm9GTCdLYGas +Cj5o51eETGfza7owAtgog== 0001116679-05-001683.txt : 20050628 0001116679-05-001683.hdr.sgml : 20050628 20050628094101 ACCESSION NUMBER: 0001116679-05-001683 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050628 DATE AS OF CHANGE: 20050628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAN SANG HOLDINGS INC CENTRAL INDEX KEY: 0000807630 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-JEWELRY, WATCHES, PRECIOUS STONES & METALS [5094] IRS NUMBER: 133165967 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20877 FILM NUMBER: 05918984 BUSINESS ADDRESS: STREET 1: 21/F RAILWAY PLAZA, 39 CHATHAM RD SOUTH STREET 2: TSIMSHATSUI KOWLOON CITY: HONG KONG STATE: K3 BUSINESS PHONE: 8529427722 MAIL ADDRESS: STREET 1: 21/F RAILWAY PLAZA, 39 CHATHAM RD SOUTH STREET 2: TSIMSHATSUI KOWLOON CITY: HONG KONG STATE: K3 FORMER COMPANY: FORMER CONFORMED NAME: UNIX SOURCE AMERICA INC DATE OF NAME CHANGE: 19950523 FORMER COMPANY: FORMER CONFORMED NAME: S B H VENTURES DATE OF NAME CHANGE: 19920101 10-K 1 man10k-062805.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ Form 10-K ------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________. Commission File No. 33-10639-NY MAN SANG HOLDINGS, INC. (Exact name of Registrant as specified in its charter) NEVADA 87-0539570 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 21st Floor, Railway Plaza, 39 Chatham Road South Tsimshatsui, Kowloon, Hong Kong (Address of principal executive offices) (Zip Code) Registrant's telephone number, Include area code: (852) 2317 5300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.001 par value ----------------------------- (Title of class) _________________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No ---- ---- Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $14,357,382 as of June 27, 2005, based upon the closing price on the NASD Electronic Bulletin Board reported for such date. Shares of Common Stock held by each executive officer and director and by each person who beneficially owns more than 5% of the outstanding Common Stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer of affiliate status is not necessarily a conclusive determination for other purposes. 4,555,960 shares of Common Stock Issued and Outstanding as of June 27, 2005. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS General and Organization Chart Man Sang Holdings, Inc. (the "Company," or "we" or "us"), through its subsidiaries, is principally engaged in the purchasing, processing, assembling, merchandising, and wholesale distribution of pearls, pearl jewelry products and jewelry products. In addition, the Company owns and operates a commercial real estate complex in Shenzhen, People's Republic of China (the "PRC"). The structure of the Company as of the date of this annual report on Form 10-K is as follows:
ORGANIZATIONAL CHART OF MAN SANG GROUP - -------------------------------------- ______________ MAN SANG HOLDINGS, INC. (Nevada) ______________ | | (Investment holding) 100% ______________________ Man Sang International (B.V.I.) Limited (B.V.I.) ______________________ | | (Investment holding) | ______________________________________ | | 49.40% 100% | | _____________ _________________ M.S. Electronic MAN SANG Emporium Limited INTERNATIONAL (B.V.I.) LIMITED _________________ (Bermuda) _____________ (E-commerce) | | (Investment holding) | ________________________________________________________________________________________________________________ | | | | | | | | | 100% 100% 100% | | | __________________ ________________ ___________________ Market Leader Man Sang Man Sang Technology Limited Enterprise Ltd. Innovations Limited (B.V.I.) (B.V.I.) (Hong Kong) __________________ ________________ ___________________ | | | (Investment | (Investment (Licensing & | holding) | holding) investment | ___________________________________________________________ holding) | | | | 100% 100% 100% 100% | | | | | | | | _____________ __________________ ________________ ___________________ Cyber Bizport Man Sang Jewellery M.S. Collections Man Sang Development Limited Company Limited Limited Company Limited (Hong Kong) (Hong Kong) (Hong Kong) (Hong Kong) _____________ __________________ ________________ ___________________ | | | | | (Investment | (Trading & | (Investment | (Property & | holding) | investment | holding) | investment | | holding) | | holding) | | | | | ____________________________ | __________________________ | | | | | | | | 100% 100% 100% 100% 100% 100% 100% 100% | | | | | | | | ____________ __________ _________ ___________ _______________ ____________ ___________ ______________ 4376zone.com Asean Gold Arcadia Man Hing Peking Pearls Excel Access Hong Kong Swift Millions Limited Limited Jewellery Industry Company Limited Limited Man Sang Limited (Hong Kong) (B.V.I.) Limited Development (Hong Kong) (Hong Kong) Investments (Hong Kong) (Hong (Shenzhen) Limited Kong) Co. Ltd. (Hong Kong) (P.R.C.) ____________ __________ _________ ___________ _______________ ____________ ___________ ______________ | | (Procurement) (Investment (Trading & (Real estate |Investment (Property (Property (Property holding & assembling leasing & | holding) holding) holding) holding) trading) of jewellery pearl | products) products 100% assembling) | | _______________ Damei Pearls Jewellery Goods (Shenzhen) Co. Ltd. (P.R.C.) _______________ (Purchasing & processing of pearls)
1 History of the Company The Company was incorporated in the State of Nevada in November 1986 under the name of SBH Ventures, Inc. The Company was originally incorporated as a "blind pool" company for the purpose of acquiring an operating business. In March 1987, the Company completed a public offering of 20,000,000 shares of common stock raising net proceeds of approximately $171,000.* Subsequently, in November 1991, the Company, in connection with a merger with an operating company, changed its name to UNIX Source America, Inc. and effected a 1-for-20 reverse stock split of its common stock. The operations of the merged companies proved unsuccessful and the Company ceased such business operations in 1992. In January 1996, the Company again effected a reverse split of its common stock on approximately a 1-for-14 basis and, following such reverse split, issued 11,000,000 shares of common stock, par value $0.001 per share ("Common Stock") and 100,000 shares of Series A Preferred Stock, par value $0.001 per share ("Series A Preferred Stock") in exchange (the "Exchange") for all of the outstanding securities of Man Sang International (B.V.I.) Limited, a British Virgin Islands company ("Man Sang BVI"). Pursuant to the terms of the Exchange, the Company changed its name to Man Sang Holdings, Inc. and assumed the operations of Man Sang BVI. The management of Man Sang BVI then assumed control of the Company. The foundation of the group of companies comprising the Company and its subsidiaries (the "Group") was laid in the early 1980's when Cheng Chung Hing, Ricky formed Man Sang Trading Hong, a freshwater pearl trading company, and Cheng Tai Po formed Peking Pearls Company, a Japanese cultured pearl trading company. As the business of the Group developed, Man Sang Jewellery Company Limited ("MSJ") and Peking Pearls Company Limited were formed in Hong Kong in 1988 and 1991, respectively, to continue the trading operations of the Group. Subsequently, the Group expanded its operations to include pearl processing with the establishment of Man Hing Industry Development (Shenzhen) Co., Ltd. ("Man Hing") in 1992 to process and assemble freshwater pearls and Chinese cultured pearls, and Damei Pearls Jewellery Goods (Shenzhen) Co., Ltd. ("Damei") in 1995 to assume and expand the Chinese cultured pearl processing operations of Man Hing. In view of the continuous expansion of Chinese cultured pearls business, in December 1996 the Group set up a subsidiary, Tangzhu Jewellery Goods (Shenzhen) Co., Ltd. ("Tangzhu") in the PRC to specialize in purchasing and processing Chinese cultured pearls of larger sizes with diameter from 6mm and above and, to a lesser extent, in processing other cultured pearls. As a result, Damei started to concentrate on the purchasing and processing of cultured pearls of smaller size with diameter below 6mm. The business of purchasing and processing of Chinese freshwater pearls was also transferred from Man Hing to Tangzhu whilst Man Hing started to concentrate on the pearl jewelry assembling business. ______________________________________ *Unless otherwise indicated as Hong Kong dollars or HK$, all financial information contained herein is presented in US dollars. The translations of Hong Kong dollar amounts into US dollars are for reference purpose only and have been made at the exchange rate of HK$7.80 for US$1, the approximate free rate of exchange at March 31, 2005. The Hong Kong dollar has been "pegged" to the US dollar since October 1983. The so-called "peg" is the Linked Exchange Rate System under which certificates of indebtedness issued by the Hong Kong Exchange Fund, which the three banks that issue the Hong Kong currency are required to hold as backing for the issue of Hong Kong dollar notes, are issued and redeemed against US dollars at a fixed exchange rate of HK$7.8 to US$1. In practice, therefore, any increase in note circulation is matched by a US dollar payment to the Exchange Fund, and any decrease in note circulation is matched by US dollar payment from the Exchange Fund. In the foreign exchange market, the exchange rate of Hong Kong dollar continues to be determined by forces of supply and demand. Against the fixed exchange rate for the issue and redemption of certificates of indebtedness, the market exchange rate generally stays close to the rate of HK$7.80 to US$1. 2 During the period from April to July 1996, the Company, in reliance on Regulation S promulgated under the U.S. Securities Act of 1933, as amended, sold and issued 6,760 shares of Series B Convertible Preferred Stock, par value $0.001 per share ("Series B Preferred Stock"), for an aggregate purchasing price of $6.76 million. All 6,760 shares of Series B Preferred Stock were converted into 5,223,838 shares of Common Stock, of which 5,219,448 shares were issued in fiscal 1997 before a 1-for-4 reverse stock split which the Company effected in October 1996, and the balance of 4,390 shares of Common Stock issuable upon conversion of Series B Preferred Stock were issued as 1,098 shares of Common Stock (post reverse stock split) during fiscal 1998. On July 30, 1997, Man Sang International Limited ("MSIL") was incorporated as an exempted company under the Companies Act 1981 of Bermuda. On September 8, 1997, Man Sang BVI acquired MSIL and underwent a corporate reorganization. Thereafter, MSIL held directly or indirectly the interests of various operating subsidiaries in Hong Kong and the PRC. On September 26, 1997, MSIL successfully listed on The Stock Exchange of Hong Kong Limited ("The Hong Kong Stock Exchange") and completed an initial public offering ("IPO") of 127,500,000 shares ("Shares") of HK$0.1 each at HK$1.08 per share with warrants (each an "IPO Warrant") in the proportion of 1 IPO Warrant for every 5 Shares raising net proceeds of approximately HK$123.6 million. Every IPO Warrant entitled the holder thereof to subscribe for one Share at an exercise price of HK$1.3 from the date of issue up to and including March 31, 1999. After MSIL's IPO, Man Sang BVI held 73.02% or 345 million Shares. As of March 31, 1999, the Company had issued 50 Shares upon exercise of the IPO Warrants related to such Shares and on such date, the subscription rights attaching to the remaining IPO Warrants expired. On August 12, 1998, at the 1998 Annual General Meeting of MSIL, MSIL's shareholders approved a final dividend for the year ended March 31, 1998 of HK$0.03 per Share, settled by way of allotment of fully paid shares in the capital of MSIL ("Scrip Shares") with a cash option ("Scrip Dividend Scheme"). Man Sang BVI elected to receive part of its final dividend in cash and part of it in 10,000,000 Scrip Shares. As some of MSIL's shareholders elected to receive cash dividend and some elected Scrip Shares, a total of 11,963,456 Scrip Shares were allotted on October 8, 1998. After the allotment, Man Sang BVI legally and beneficially owns approximately 73.28% or 355 million Shares. On August 2, 1999, at the 1999 Annual General Meeting of MSIL, MSIL's shareholders approved (i) a final dividend for the year ended March 31, 1999 in the amount of HK$0.01 per share; and (ii) a "Bonus Issue of Warrants" (i.e. a distribution of warrants (each a "Bonus Warrant")) to MSIL's shareholders on the basis of 1 Bonus Warrant for every 5 Shares of MSIL held on August 2, 1999. Pursuant to such shareholder approval, MSIL paid a cash dividend of HK$4,844,635.06 to its shareholders on September 7, 1999. Each Bonus Warrant entitles the holder thereof to subscribe in cash at an initial subscription price of HK$0.40 per Share (subject to adjustment), and is exercisable at any time from September 14, 1999 to September 13, 2001, both dates inclusive. 45,603 Shares were issued in fiscal 2000 upon exercise of the Bonus Warrants; all other Bonus Warrants expired without exercise. On August 6, 1999, MSIL appointed Kingsway SW Securities Limited as placing agent on a fully underwritten basis in respect of the placing of 40,000,000 new Shares of MSIL at a 3 price of HK$0.33 per Share. After the placement, MSIL had 524,463,506 shares issued and outstanding. The legal and beneficial ownership of Man Sang BVI reduced from 73.28% to 67.69% of the issued and outstanding shares of MSIL. On August 2, 2000, at the 2000 Annual General Meeting of MSIL, MSIL's shareholders approved a bonus issue of Shares to MSIL's shareholders on the basis of 1 bonus Share for every 5 Shares of MSIL held on August 2, 2000 (the "Bonus Issue"). Based on the 526,559,109 MSIL 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, were allotted on August 3, 2000. The bonus Shares rank pari passu in all respects with the existing issued Shares of MSIL. After the Bonus Issue, and the placement of Shares in 1999 and exercise of Bonus Warrants referred to above, Man Sang BVI legally and beneficially owned approximately 67.42% of the issued and outstanding Shares of MSIL. On November 26, 2001, MSIL issued 120,000,000 Shares through a private placement, which constituted approximately 18.99% of the issued share capital of MSIL immediately before, and approximately 15.96% of the issued share capital of MSIL immediately after, said placement. Said placement in 2001 (i) increased the number of issued and outstanding Shares of MSIL from 631,870,930 to 751,870,930, and therefore (ii) decreased Man Sang BVI's legal and beneficial ownership in MSIL from 67.42% to 56.66%. On June 7, 2002, the Company issued in aggregate 410,000 shares of Common Stock, par value $0.001 per share, to 2 business consultants pursuant to 2 separate business Consulting Agreements dated June 1, 2002. On April 30, 2003, the Company repurchased in aggregate 410,000 shares of Common Stock previously issued to 2 business consultants on June 7, 2002, at a price of $1.5 per share. These shares were cancelled on May 12, 2003. On August 6, 2003, MSIL approved an ordinary share dividend of one share of ordinary share for every ten ordinary shares owned by each of its record shareholders. On October 6, 2003, Mr. Cheng Chung Hing, Ricky and Mr. Cheng Tai Po purchased from Man Sang BVI 36 million and 24 million of MSIL shares, respectively. After such transaction, through Man Sang BVI, the Company held 408.6 million MSIL shares, representing 49.40% of the shares issued of MSIL, and remained the principal shareholder of MSIL. The purchase price per share was the arithmetic average of the closing price of MSIL shares for each of the five trading days immediately preceding and including October 6, 2003. On July 16, 2004, one of the Company's subsidiaries, Tangzhu, was merged into Man Hing. On August 4, 2004, MSIL approved an ordinary share dividend of one ordinary share for every ten ordinary shares owned by each of its record shareholders. In order to facilitate the growth in existing operations and expansion into processing operations, and to diversify its revenues, in 1991, the Group commenced construction of 24 buildings in an industrial facility in Shenzhen, the PRC ("Man Sang Industrial City") for use in pearl processing and corporate administration (5 buildings) and for lease to third party industrial users (19 buildings). During fiscal 2005, 2 additional buildings which are living 4 quarters have been completed, with one additional factory building still under construction. See "Item 1 - Business - Real Estate Leasing Operations" and "Item 2 - Properties." Pearl Operations Pearl Industry The use of pearls in jewelry dates back over 1,500 years in China. Large scale commercial pearl production began in Japan in the late 19th century. The farming, production and trading of pearls to meet demand for pearl jewelry is a mature industry. Today's pearl industry and its growth are affected by consumer preferences, worldwide economic conditions and availability of supply. In today's pearl market, pearls are divided into two categories, i.e. freshwater pearls and saltwater cultured pearls. Saltwater cultured pearls are, in turn, divided into Japanese cultured pearls, Chinese cultured pearls, Tahitian pearls and South Sea pearls. The PRC is a major supplier of freshwater pearls. In addition to the traditional smaller freshwater pearls ranging in size from 5mm to 7mm, there is a supply of high quality freshwater pearls ranging in size from 8mm to 10mm, or even sometimes up to 15mm since 1999. These larger freshwater pearls contribute a higher gross profit margin than the traditional smaller freshwater pearls. The PRC has emerged as a major supplier of cultured pearls, ranging in size from 5mm to 8mm. Since 1996, Japan has been losing its long held dominance in the cultured pearl industry because Japanese cultured pearls have been in poor harvests. Meanwhile, Chinese cultured pearls have been improving in quality and competitively priced. As a result, the Company has been shifting its cultured pearls product mix from Japanese to Chinese cultured pearls. Tahitian pearls are sourced from French Polynesia and the Cook Islands, while South Sea pearls are sourced mainly from Australia, Papua New Guinea, Indonesia and the Philippines. These pearls are generally more expensive and are considered superior in quality when compared to either Japanese or Chinese cultured pearls, and cannot be easily substituted by the latter. Products We presently offer seven product lines including freshwater pearls, Chinese cultured pearls, Japanese cultured pearls, South Sea pearls and Tahitian pearls, pearl jewelry and other jewelry products. Freshwater pearls are available in a variety of shapes and sizes. The most commonly available sizes range from 2mm to 8mm, and the price are generally less expensive than cultured pearls with wholesale prices typically ranging from $2 to $300 per 16 inch strand depending on size, grade and shape. However, since 1998, larger size freshwater pearls are available in the market ranging from 8mm to 10mm, or even sometimes up to 15mm, and the price for the larger size freshwater pearls can reach up to $1,000 per 16 inch strand depending on size, grade and shape. Saltwater cultured pearls generally are round in shape and range in size from 5mm to 18mm. South Sea and Tahitian pearls are considered to be the highest quality saltwater cultured pearls and typically the largest and most 5 expensive followed by Japanese cultured pearls and Chinese cultured pearls. Wholesale prices of cultured pearls typically range from $13 to $70,000 per 16-inch strand. The following table illustrates by pearl category the typical range of size and wholesale price of cultured pearls we sell, with price variations within each category reflecting size and qualitative differences:
Size Price/16 inch strand mm US$ Freshwater pearls 2 - 13 2 - 1,000 Chinese cultured pearl 5 - 7.5 10 - 400 Japanese cultured pearls 7 - 10 100 - 2,000 Tahitian pearls 8 - 16 150 - 15,000 South Sea pearl 8 - 18 300 - 70,000
We also offer fully assembled pearl jewelry, including necklaces, earrings, rings, pendants, broaches, bracelets, watches, cufflinks, and similar miscellaneous pearl products. For the three years ended March 31, 2005, freshwater and cultured pearls sales as a percentage of our sales of pearls and assembled pearl products were as follows:
Loose and Assembled Year Strands Pearls Pearl Jewelry Freshwater Cultured Freshwater Cultured % % % % 2005 35 78 65 22 2004 35 73 65 26 2003 60 87 40 13
Purchasing We purchase (i) Chinese cultured pearls from pearl farms and other suppliers in the coastal areas of the southern part of the PRC, including Guangdong and Guangxi Provinces; (ii) South Sea pearls from pearl farms and suppliers in Hong Kong, Australia, the Philippines, and Japan; (iii) Tahitian pearls from pearl farms and suppliers in French Polynesia; and (iv) freshwater pearls from pearl farms and other suppliers in the eastern part of the PRC, including Jiangsu and Zhejiang Provinces. Our purchase of pearls is conducted by its full-time, well-trained and experienced purchasing staff from our offices in Hong Kong and Shenzhen in the PRC, and a special purchasing office in Zhangjiang in the PRC, the site of the largest Chinese cultured pearl farm. The purchasing staff maintains regular contacts with pearl farms and other suppliers in the PRC, Japan, Hong Kong, Philippines and Tahiti, enabling us to buy directly from farmers whenever possible, to secure the best prices available for pearls and to gain access to a larger quantity of pearls. Our management and purchasing staff meet regularly to assess existing and anticipated pearl demand. The purchasing staff in turn inspects and purchases pearls in the quantities and of the quality and nature necessary to meet existing and estimated demand. 6 We have no long-term purchase contracts, and instead negotiate the purchase of pearls on an as-needed basis to correspond with expected demand. While we constantly seek to capitalize on volume purchasing and relationships with farmers and suppliers to secure the best pricing and quality when purchasing pearls and other jewelry raw materials, we generally purchase raw materials from suppliers at approximately prevailing market prices. We believe that there are numerous alternate supply sources and that the termination of our relationship with any of its existing sources would not materially adversely affect us. To date, we have not experienced any difficulty in purchasing raw materials. In fiscal 2005, our five largest suppliers the Company accounted for approximately 53.5% (2004: 52.6%) of our total purchases, with the largest supplier accounting for approximately 13.9% (2004: 12.7%) of our total purchases. In fiscal 2005, approximately 29.9% of our purchases were made in Hong Kong dollars, with the remaining amount settled in US dollars, French Polynesian francs, Renminbi ("RMB") or Japanese Yen. It is our policy not to enter into derivative contracts such as forward contracts and options, unless we consider it necessary to hedge against foreign exchange fluctuations. No such derivative contract was entered into during fiscal 2005. See "Item 7A - Quantitative and Qualitative Disclosures about Market Risk." Processing and Assembly Pearl processing and assembly are conducted at our facilities in Shenzhen, PRC. Freshwater pearl processing and assembly operations presently occupy approximately 37,566 square feet and employ 389 workers while cultured pearl processing and assembly operations occupy approximately 16,253 square feet and employ 101 workers. The average compensation per factory worker is HK$892 per month while average supervisory compensation is HK$2,052 per month. We, with the assistance of specialists from Japan, have trained our work force to implement advanced Japanese bleaching technology. Each worker performs a specific function and is supervised by an officer and technical assistants who are university graduates with chemical technology training. Each worker also receives specialized training by industry specialists from Japan. Prior to participation in pearl processing operations, each worker is required to participate in an extensive on-the-job training program utilizing poor quality pearls for demonstration and training purposes. Pearl processing occurs in batches or production cycles. Raw pearls and other materials transported to the Company's processing facilities in Shenzhen, PRC are first sorted, chemically bleached and, if necessary, drilled. This process, excluding drilling, takes approximately 21 days for freshwater pearls and approximately 70 days for saltwater cultured pearls. Drilling takes approximately 10 days. Next, the pearls are cleaned, dried, waxed, graded, sorted, strung, and if necessary, packaged. The entire production cycle takes approximately 30 days for freshwater pearls and approximately 100 days for saltwater cultured pearls. Where appropriate, processed pearls are then incorporated into finished jewelry products. Assembly and finishing may include the addition of clasps, decorative jewelry pieces, or other specialty work requested by the customers to produce finished jewelry pieces. 7 We presently have facilities and pearl processing personnel to produce approximately 29,000 kg (2004: 29,000 kg) of freshwater pearls and 10,000 kg (2004: 10,000 kg) of cultured pearls annually. Fiscal 2005 production totaled approximately 16,238 kg of freshwater pearls and 693 kg of cultured pearls, compared to the production of 9,330 kg of freshwater pearls and 7,781 kg of cultured pearls in fiscal 2004. We presently also have adequate assembly and finishing personnel and facilities to produce approximately 1.5 million pieces of finished jewelry annually. Upon completion of processing, pearls are shipped to our offices in Hong Kong where they are stored for inspection by potential buyers. Marketing We market our products from our facilities in Hong Kong. Our sales staff, which is divided into groups organized by geographic regions, presently markets freshwater pearls, Chinese cultured pearls, Japanese cultured pearls, Tahitian pearls, South Sea pearls, and jewelry products. Our marketing and sales staff maintains on-going communications with a broad range of jewelry distributors, manufacturers and retailers worldwide to assure that customers' pearl requirements are fully satisfied. Our marketing and sales staff regularly visits all major pearl markets and jewelry trade shows to display products, establish contacts with potential customers and evaluate market trends. Apart from attending trade shows and servicing customers, our marketing and sales force principally operates from our headquarters in Hong Kong, where buyers personally visit and inspect our products and place orders. As part of our marketing efforts, we have established Internet web pages (www.man-sang.com and www.4376zone.com)" to market our products. In addition, we have increased our efforts to market pearls and jewelry products to customers in Europe and North America. Customers Our customers consist principally of wholesale distributors and mass merchandisers in Europe, the United States, Hong Kong and other Asian countries. For fiscal 2005, one of our customers accounted for more than 10.0% of our sales, and our five largest customers accounted for approximately 33.7% (2004: 22.1%), with the largest customer accounting for approximately 10.3% (2004: 8.6%) of our sales. As of March 31, 2005, we had approximately 1,030 customers. We have no long-term contract with any customer. Most of our customers have been in business with us for a number of years. We do not believe that the loss of any one customer will have a material adverse effect on our financial condition or results of operations. Our policy is to denominate predominantly all our sales in either US dollars or Hong Kong dollars. Since Hong Kong dollar remained "pegged" to the US dollar throughout fiscal 2005, our sales proceeds have thus far had minimal exposure to foreign exchange fluctuations. See "Item 7A - Quantitative and Qualitative Disclosures about Market Risk." The following table sets forth by region and by product our net sales for the years ended March 31, 2005, 2004 and 2003: 8
2005 2004 2003 HK$'000 % HK$'000 % HK$'000 % Cultured Pearls North America 62,922 15.3 76,436 20.0 76,140 23.6 Europe 19,990 4.8 23,148 6.1 21,864 6.8 Germany 7,058 1.7 9,725 2.5 7,790 2.4 Hong Kong 31,803 7.7 29,685 7.8 33,634 10.4 Japan 30,610 7.4 29,054 7.6 33,098 10.2 Other Asian countries 30,095 7.3 39,840 10.4 45,151 14.0 Others 6,734 1.6 7,052 1.8 5,378 1.7 ------------ --------- ------------- --------- -------------- -------- Sub-total 189,212 45.8 214,940 56.2 223,055 69.1 ============ ========= ============= ========= ============== ======== Freshwater Pearls North America 4,549 1.1 2,145 0.6 5,909 1.8 Europe 6,016 1.5 5,701 1.5 6,204 1.9 Germany 4,061 1.0 2,748 0.7 3,204 1.0 Hong Kong 2,497 0.6 1,860 0.5 7,251 2.3 Japan 10,665 2.6 5,499 1.4 4,848 1.5 Other Asian countries 5,682 1.4 4,363 1.2 6,140 1.9 Others 1,350 0.3 1,560 0.4 1,437 0.4 ------------ --------- ------------- --------- -------------- -------- Sub-total 34,820 8.5 23,876 6.3 34,993 10.8 ------------ --------- ------------- --------- -------------- -------- Assembled Pearl Jewelry North America 77,628 18.8 38,943 10.2 10,781 3.3 Europe 20,557 5.0 16,801 4.4 10,950 3.4 Germany 64,992 15.8 54,091 14.1 19,257 6.0 Hong Kong 10,554 2.6 19,039 5.0 10,630 3.3 Japan 4,870 1.2 2,936 0.8 1,977 0.6 Other Asian countries 2,439 0.6 3,619 0.9 7,641 2.4 Others 7,190 1.7 7,878 2.1 3,798 1.1 ------------ --------- ------------- --------- -------------- -------- Sub-total 188,230 45.7 143,307 37.5 65,034 20.1 ------------ --------- ------------- --------- -------------- -------- Total 412,262 100.0 382,123 100.0 323,082 100.0 ============ ========= ============= ========= ============== ========
A majority of sales (by dollar amount) in Hong Kong is for re-export to North America, Europe and other Asian countries. Seasonality Our sales are seasonal in nature. The bulk of our sales occur during the months of March, June and September (during major international jewelry trade shows held in Hong Kong in these three months). Accordingly, the results of any interim period are not necessarily indicative of the results that might be expected during a full year. The following table sets forth our unaudited net sales for the fiscal years indicated:
Fiscal Year Ended March 31, 2005 2004 2003 HK$'000 % HK$'000 % HK$'000 %
9
First Quarter 99,078 24.0 66,888 17.5 76,776 23.8 Second Quarter 107,983 26.2 101,508 26.6 81,445 25.2 Third Quarter 109,074 26.5 106,540 27.9 66,839 20.7 Fourth Quarter 96,127 23.3 107,187 28.0 98,022 30.3 ------------ ---------------------- -------- ---------------- --------- Total 412,262 100.0 382,123 100.0 323,082 100.0 ============ ======== ============ ======== ================ =========
Competition With the exception of several large Japanese cultured pearl and South Sea pearl suppliers, the pearl business is highly fragmented with limited brand name recognition or consumer loyalty. Selection is generally a function of design appeal, perceived value and quality in relationship to price. Internationally, we face intense competition. Our principal historical competitors in the Japanese cultured, Tahitian and South Sea pearl markets are Japanese companies. Firms such as Tasaki, Mikimoto, Tokyo and K. Otsuki are the largest traders and distributors of such pearls. Nevertheless, their competitiveness has been impaired by the current weakness in Japan's economy, and the poor harvest of Japanese cultured pearls. Locally, we compete with approximately 60 companies in Hong Kong that engage actively in the freshwater pearl and Chinese cultured pearl business. Most of such local companies are small operators and some are engaged only in pearl trading. In addition to genuine pearls, we must compete with synthetically produced pearls. We believe that we are competitive in the industry because of our advanced pearl processing and bleaching techniques, and processing facilities in the PRC which allow us to process pearls at cost that is lower than many of our competitors and because we are a leading purchaser and distributor of Chinese cultured pearls. In addition, we provide one-stop shopping convenience to customers and have historically maintained a close relationship with our customers. Therefore, although competition is intense, we believe that we are well positioned in the pearl industry. However, in a highly competitive industry where many competitors have substantially greater technical, financial and marketing resources than us, new competitors may enter into the market and customer preferences may change unpredictably, and there can be no assurance that we will remain competitive. 10 Real Estate Leasing Operations Facilities In connection with our expansion into pearl processing and assembling operations, we acquired land use rights with respect to, and constructed, an industrial complex ("Man Sang Industrial City") located in Gong Ming Zhen, Shenzhen Special Economic Zone, PRC in September 1991. The land use rights with a total site area of approximately 470,000 square feet we acquired with respect to Man Sang Industrial City have a duration of 50 years starting from September 1, 1991. We acquired the land use rights relating to Man Sang Industrial City and constructed such facility for approximately $3.4 million. As of March 31, 2005, Man Sang Industrial City consisted of 26 completed buildings and 1 additional building which is still under construction encompassing a total gross floor area of approximately 780,000 square feet. Of the 26 completed buildings in Man Sang Industrial City, 17 buildings are rental properties, and the remaining 9 buildings are for the Company's own use. In addition to factories, dormitories and shops, Man Sang Industrial City has green zones, playgrounds and other amenities typically offered in industrial/living complexes in the PRC. Leasing and Management During fiscal 2005, we utilized 9 buildings in Man Sang Industrial City for pearl processing, pearl and jewelry assembly, administration, and staff accommodation. The remaining facilities were leased to third party industrial users, primarily foreign investors and non-polluting light industry. We employed a staff of 24 persons to provide required management, leasing, maintenance and security for Man Sang Industrial City. As of March 31, 2005, the 17 buildings in Man Sang Industrial City, excluding the 9 buildings utilized for our pearl operations, were used for leasing purposes to independent third parties and industrial users not connected with us. Such facilities are typically offered under leases ranging in duration from 1 year to 3 years. The gross rental income from Man Sang Industrial City for fiscal 2005 was approximately HK$2.89 million compared to approximately HK$3.6 million for fiscal 2004. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Year Ended March 31, 2005 Compared to Year Ended March 31, 2004 - Rental Income." In addition to Man Sang Industrial City, we own rental properties in Hong Kong ("Hong Kong Rental Properties") which were leased to independent third parties. The Hong Kong Rental Properties consist of the properties as follows: a. 2,643 square feet on 17th Floor and a car parking space No.16 on 2nd Floor, Silvercrest, No.24 Macdonnell Road, Midlevels, Hong Kong. A tenancy agreement was made at a monthly rental of HK$38.0K** for a term of two years starting from October 25, 2004. The rental income totaled approximately HK$413.4K for fiscal 2005 and approximately HK$444.0K for fiscal 2004. See "Item 2 - Properties - Hong Kong." ______________________________________ ** As used in this report, the letter "K" appearing immediately after a dollar amount denotes rounding to the nearest HK$1,000; as an example, HK$250,499 may be rounded to "HK$250K." 11 b. Parking space No. 3 on Floor L3 of Valverde, 11 May Road, Hong Kong. A tenancy agreement on this property and property (c) below was made during the year. See "Item 2 - Properties - Hong Kong." c. 1,063 square feet at Flat A on 33rd Floor, Valverde, 11 May Road, Hong Kong. A tenancy agreement on this property and property (b) above was renewed at a total monthly rental of HK$30.0K for a term of 2 years starting from March 15, 2004. Rental income on this property and property (b) above totaled approximately HK$360.0K for fiscal 2005, and approximately HK$364.0K for fiscal 2004. See "Item 2 - Properties - Hong Kong." d. 8th Floor, Harcourt House No. 39 Gloucester Road, Wanchai, Hong Kong was acquired and the transaction was completed on August 15, 2003. A tenancy agreement has been made for a term of 3 years from August 15, 2003 to August 14, 2006. The rental income totaled approximately HK$1,072.5K for fiscal 2005, and approximately HK$1,462.5K for fiscal 2004. See "Item 2 - Properties- Hong Kong." On September 15, 2004, we sold this property for HK$71.6 million. Competition Competition among facilities such as Man Sang Industrial City is intense in the Shenzhen Special Economic Zone. Because of economic incentives available for businesses operating in the Shenzhen Special Economic Zone, numerous facilities have been constructed to house such businesses. While a number of competing facilities may offer greater amenities and may be operated by companies having greater resources, and additional competing facilities may be constructed, we believe Man Sang Industrial City is competitive with other similar facilities in the Shenzhen Special Economic Zone based on both the quality of facilities and lease rates. Employees As of May 31, 2005, we had 1,284 employees. No employee is governed by collective bargaining agreements and we consider our relations with our employees to be satisfactory. A breakdown of employees by function is as follows:
Hong Kong PRC Total Senior management 5 5 10 Marketing and sales 24 24 48 Purchasing 6 3 9 Finance and accounting 13 15 28 Processing and logistics 18 1,075 1,093 Human resources and administration 14 45 59 Real estate leasing - 31 31 Information technology 4 2 6 ----- ----- ----- Total 84 1,200 1,284 ===== ===== =====
12 Segment Information Reportable segment income or loss, and segment assets are as follows:
Reportable Segment Income or Loss, and Segment Assets 2005 2004 2003 HK$'000 HK$'000 HK$'000 Revenues from external customers Pearls 412,262 382,123 323,082 Real estate investment 4,646 6,220 7,455 -------------- -------------- -------------- 416,908 388,343 330,537 ============== ============== ============== Interest expenses Pearls 33 134 859 Real estate investment 18 111 503 Corporate assets 49 135 267 -------------- -------------- -------------- 100 380 1,629 ============== ============== ============== Depreciation and amortization Pearls 5,602 6,620 6,051 Real estate investment 1,637 1,889 2,013 Corporate assets 918 918 1,232 -------------- -------------- -------------- 8,157 9,427 9,296 ============== ============== ============== Operating income Pearls 35,386 24,309 24,843 Real estate investment (6,381) (3,338) 175 -------------- -------------- -------------- 29,005 20,971 25,018 ============== ============== ============== Capital expenditure for segment assets Pearls 8,536 24,078 8,963 Real estate investment 1,473 38,222 2,053 Corporate assets - - 167 -------------- -------------- -------------- 10,009 62,300 11,183 ============== ============== ============== Segment assets Pearls 449,219 372,671 334,251 Real estate investment 62,232 95,833 96,447 Corporate assets 47,790 48,370 53,046 -------------- -------------- -------------- 559,241 516,874 483,744 ============== ============== ==============
13 ITEM 2. PROPERTIES Hong Kong The head office of the Group at 21st Floor and 19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong has a gross floor area on each floor of approximately 10,880 square feet. We have renewed our tenancy agreement of 21st Floor for a term of 2 years commencing July 1, 2004. We own the property at Room 407, Wing Tuck Commercial Centre, 177 - 183 Wing Lok Street, Sheung Wan, Hong Kong. The gross floor area of the premises is approximately 957 square feet. The property has been left vacant since October 2003. We own two residential flats with a gross floor area of approximately 1,784 square feet on Flat C and Flat D on 15th Floor, Windsor Mansion, 29-31 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong, which we use as quarters for PRC employees on business trips to Hong Kong. We own a residential flat with a gross floor area of approximately 1,063 square feet on 33rd Floor, and a parking space at No. 3 on L3 Floor of Valverde, 11 May Road, Hong Kong, which we lease to an independent third party. See "Item 1 - Business - Real Estate Leasing Operations - Leasing and Management" above. We own a residential flat with a gross floor area of approximately 2,838 square feet on 20th Floor, The Mayfair, 1 May Road, Hong Kong, which we use as our Chairman's residence since February 6, 2002. We own an investment property with a gross floor area of approximately 10,880 square feet at 19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong, which we had leased to an independent third party until April 21, 2003. See "Item 1 - Business - Real Estate Leasing Operations - Leasing and Management" above. In May 2003, we moved certain operations previously located on the 27th Floor of the same building into these premises. We acquired an investment property with a gross floor area of approximately 17,000 square feet at 8th Floor, Harcourt House, No. 39 Gloucester Road, Wanchai. Hong Kong. The transaction was completed on August 15, 2003. The premises are leased to an independent third party. See "Item 1 - Business - Real Estate Leasing Operations - Leasing and Management" above. On September 15, 2004, we sold this property for HK$71.6 million. People's Republic of China As noted above, we own the land use rights to the site of Man Sang Industrial City for a term of 50 years from September 1, 1991 to September 1, 2041. On March 31, 2005, Man Sang Industrial City consisted of 26 completed buildings and 1 additional building which is still under construction encompassing a total gross floor area of approximately 780,000 square feet. Throughout fiscal 2005, we used most of the units in 9 buildings for pearl processing, pearl and jewelry assembly, administration and staff accommodation, and the remaining 17 buildings are used for leasing purposes to independent third parties and industrial users not 14 connected with us, amounting to approximately 370,000 square feet of floor space and representing approximately 46.9% of the total gross floor space of Man Sang Industrial City. ITEM 3. LEGAL PROCEEDINGS On December 2, 2003, Arcadia Jewellery Limited ("Arcadia"), a subsidiary of the Company, filed a lawsuit in Hong Kong against its former general manager and certain other parties for breach of certain agreements. On December 22, 2003, this former general manager filed a lawsuit in Hong Kong against Arcadia. Arcadia intends to pursue its claim and defend against the former general manager's claims vigorously. Although it is not possible to predict with certainty at the moment the outcome of these unresolved legal actions or the range of possible loss or recovery, the Company does not believe that the resolution of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholders through the solicitation of proxies or otherwise, during the fourth quarter of our fiscal year ended March 31, 2005. 15 PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Common Stock has been reported on the Over-The-Counter (OTC) Electronic Bulletin Board since 1987 and is under the symbol "MSHI.OB." However, the market for these securities has historically been extremely limited and sporadic. The high ask and low bid prices for our Common Stock for each quarter, and on the last day of each quarter, during our last two fiscal years were as follows:
Period Over the quarter On the last day of quarter High Low High Low $ $ $ $ 2005 June 30, 2004 4.25 2.70 3.50 3.50 September 30, 2004 4.00 2.55 3.40 3.40 December 31, 2004 10.95 3.40 10.00 9.46 March 31, 2005 10.70 6.63 7.51 7.51 2004 June 30, 2003 2.35 0.90 2.30 2.25 September 30, 2003 3.45 1.50 1.82 1.82 December 31, 2003 2.00 1.27 1.65 1.65 March 31, 2004 4.60 1.45 4.00 3.65
The above bid information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Holders The number of record holders of our Common Stock as of March 31, 2005, was approximately 200. This number does not include an indeterminate number of stockholders whose shares are held by brokers in street name. Dividends We have not paid any dividends with respect to our Common Stock during the two preceding fiscal years, and do not intend to pay dividends in the foreseeable future. 16 ITEM 6. SELECTED FINANCIAL DATA Set forth below is certain selected consolidated financial data for the Company and its subsidiaries covering the fiscal years ended March 31, 2005, 2004, 2003, 2002 and 2001 and the selected balance sheet data at March 31 of each such year. This summary should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements provided in Items 7, 7A and 8 respectively, of this Report on Form 10-K.
(Amounts expressed in thousands except share data) For the fiscal year 2005 2004 2003 2002 2001 HK$ HK$ HK$ HK$ HK$ Net sales 412,262 382,123 323,082 282,715 311,109 Gross profit 117,248 104,147 89,922 96,439 16,433 Rental income - gross 4,646 6,220 7,455 7,526 5,526 SG&A expenses - for net sales 81,862 79,838 65,079 65,901 77,076 - for rental 11,207 9,558 7,280 6,129 6,022 Operating income (loss) 29,005 20,971 25,018 31,935 (61,139) Interest expenses 100 380 1,629 4,886 6,990 Interest income 1,067 279 690 2,785 5,799 Gain on sale of a real estate 34,248 - - - - investment Non-operating income 1,617 2,889 4,425 1,870 6,705 Other than temporary decline in - (2,474) (5,921) - - fair value of marketable securities Income (loss) before income taxes (N1) 65,837 21,285 22,583 31,704 (55,625) Income tax expenses (benefits) 6,129 7,027 3,719 1,206 (3,320) Minority interests 32,792 11,266 9,943 14,189 (18,112) Net income (loss) (N1) 26,916 2,992 8,921 16,309 (34,193) Net income available to common 26,319 2,926 8,737 15,947 (34,193) stockholders Net income (loss) - per share (N2) 5.97 0.66 1.84 3.70 (7.76) Depreciation and amortization 8,157 9,427 9,296 9,252 9,162 Gross profit margin (%) 28.44 27.25 27.83 34.11 5.28
17
At March 31 2005 2004 2003 2002 2001 HK$ HK$ HK$ HK$ HK$ Working capital 357,028 262,645 288,315 268,781 219,929 Property, plant and equipment, net 119,061 115,791 66,278 80,333 84,821 Real estate investments, net 47,144 88,673 96,447 81,986 84,369 Total assets 559,241 516,874 483,744 489,069 512,381 % Return on total assets 4.81 0.58 1.84 3.33 (6.67) Non-current portion of long- - 6,016 16,435 22,010 29,306 term debts Total liabilities (excluding 36,963 55,572 46,553 74,461 141,809 minority interests) Minority interests 257,562 224,437 179,844 170,208 112,234 Stockholders' equity 264,716 236,865 257,347 244,400 258,338 Net book value per share 60.06 53.2 54.3 55.5 58.6 % Return on stockholders' equity 10.17 1.26 3.47 6.67 (13.24) Gearing ratio (N2) - 0.05 0.09 0.23 0.47 Weighted average shares outstanding 4,407,878 4,451,889 4,740,700 4,405,960 4,405,960
N1: Income before income taxes and net income is from continuing operations. N2: The figures for fiscal 2001 to fiscal 2004 have been restated according to EITF 03-6 which became effective during fiscal 2005. N3: "Gearing ratio" represents the ratio of the Company's total debts to shareholders' equity. N4: No dividend was paid in the fiscal years presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section and other parts of this Form 10-K contain forward-looking statements that are, by their nature, subject to risks and uncertainties. These forward-looking statements include, without limitation, statements relating to: (a) future supplies, demands, and purchase and sale prices of pearl and pearl jewelry in the international pearl and jewelry markets, and real estate in Hong Kong and the PRC; (b) sales and profitability of the Company's product and its future product mix; (c) the amount and nature of, and potential for, future developments and competitions; (d) expansion, consolidation and other trends in the pearl and jewelry industry; (e) the Company's business strategy; (f) the Company's estimated financial information regarding its business; (g) tax exemptions and tax rates; and (h) exchange rates. These forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors the Company believes to be appropriate in particular circumstances. However, whether actual results and developments will meet the Company's expectations and predictions depends on a number of known and 18 unknown risks and uncertainties and other factors, any or all of which could cause actual results, performance or achievements to differ materially from the Company's expectations, whether expressed or implied by such forward-looking statements (which may relate to, among other things, the Company's sales, costs and expenses, income, inventory performance, and receivables). Primarily engaged in the processing and trading of pearls and pearls jewelry products, and in real estate investment, the Company's ability to achieve its objectives and expectations are derived at least in part form assumptions regarding economic conditions, consumer tastes, and developments in its competitive environment. The following assumptions, among others, could materially affect the likelihood that the Company will achieve its objectives and expectations communicated through these forward-looking statements: (i) that low or negative growth in the economies or the financial markets of our customers, particularly in the United States and in Europe, will not occur and reduce discretionary spending on goods that might be perceived as "luxuries"; (ii) that the Hong Kong dollar will remain pegged to the US dollar at US$1 to HK$7.8; (iii) that customer's choice of pearls vis-a-vis other precious stones and metals will not change adversely; (iv) that the Company will continue to obtain a stable supply of pearls in the quantities, of the quality and on terms required by the Company; (v) that there will not be a substantial adverse change in the exchange relationship between RMB and the Hong Kong or US dollar; (vi) that there will not be substantial increase in tax burden of subsidiaries of the Company operating in the PRC; (vii) that there will not be substantial change in climate and environmental conditions at the source regions of pearls that could have material effect on the supply and pricing of pearls; and (viii) that there will not be substantial adverse change in the real estate market conditions in the PRC and in Hong Kong. We cannot guarantee any of the forward-looking statements, which are subject to risks, uncertainties and assumptions that are difficult to predict. Actual results may differ materially from those we forecast in forward-looking statements due to a variety of factors, including those set forth above. We do not intend to update any forward-looking statements due to new information, future events or otherwise. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements. The following discussion of results of operation, liquidity and capital resources, derivative instruments, seasonality and inflation should be read in conjunction with the financial statements and the notes thereto include elsewhere herein. Critical Accounting Policies and Estimates Management's discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The most significant estimates and assumptions include valuation of inventories, provisions for income taxes and uncollectible accounts, the recoverability of non-consolidated investments and long-lived assets. Actual results could differ from these estimates. Periodically, the Company reviews all significant estimates and assumptions affecting the financial statements and records the effect of any necessary adjustments. 19 The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of the Company's consolidated financial statements: Allowance for doubtful accounts: We maintain an allowance for doubtful accounts based on estimates of the credit-worthiness of our customers. If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories write-downs: We write down the amount by which the cost of inventories (determined by the weighted average method) exceeds their estimated market values based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Long-lived assets: We periodically evaluate the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, whenever events and circumstances indicate that the carrying value of the asset may no longer be recoverable. An impairment loss, measured based on the estimated fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying amount of the assets. Non-consolidated investments: An adverse change in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments (which we determine by referring to the operating results of, and the return generated from, such investments), thereby possibly requiring an impairment charge. Marketable securities: We hold for long-term investment purposes certain publicly traded securities, which are classified as available for sale. Management periodically reviews these investments for other than temporary decline in value. In our review in fiscal 2004, taking into account the length of time and the extent to which the market value of certain securities have been below cost, and other qualitative factors, management determined that a decline in value of such securities was other than temporary, which we recognized in our income statement. Management will continue to periodically review the market value of our investments in securities, and if it determines in the future, based at least in part on the length of time and the extent to which the market value is less than cost as well as the financial conditions and prospects of the respective issuers, that an other than temporary decline in value occurs, we may be required to make further write-downs for such decline in value. Allowances for Deferred Income Tax Assets: Tax benefits arising from deductible temporary differences, unused tax credits and net operating loss carry forwards are recognized as deferred tax assets. We record a valuation allowance to reduce our deferred income tax assets to an amount that we believe will more likely than not be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need and amount for the valuation allowance. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of our net recorded amount, an adjustment to our deferred income tax assets would increase income in the period such determination was made. Alternatively, should we determine that we would not be able to realize all or part of our net deferred income tax assets in the future, an adjustment to our deferred income tax assets would decrease income in the period such determination was made. 20 Overview Fiscal 2005 Net sales in fiscal 2005 increased by HK$30.2 million to HK$412.3 million, representing a 7.9% increase when compared to net sales of HK$382.1 million in fiscal 2004. The positive growth this year was mainly due to an overall improvement in global economy, an increase in the Group's sales in pearls and jewelry as well as its adoption of flexible and effective pricing strategies. Net income for fiscal 2005 showed an increase of HK$23.9 million to HK$26.9 million, when compared to a net income of HK$3.0 million for fiscal 2004. This increase in net income was mainly attributed to higher gross profit and the disposal of a real estate investment by the Company. Given the sustaining demand for South Sea pearls, we continue to place emphasis on the sale of South Sea pearls, which comprised approximately 42.1% of our Company's fiscal 2005 total sales. In order to further increase our strength in the pearl sector, we created our own in-house design and manufacturing teams, which gives us better quality control in designing and producing assembled pearl jewelry and jewelry products. Through competitive prices and improved quality, we managed to have solid growth in the sales of our finished jewelry products. While South Sea pearls attract sophisticated customers, freshwater pearls still have great potential in the youth and teenage market. We maintain classical and elegant designs of pearl strands and jewelry products for our more sophisticated customers while at the same time develop fashionable and trendy designs targeting younger and teenage customers with prices ranging from affordable to high end. We maintain our quality and prices of products through our experienced buyers and our good purchasing network together with our unique pearl processing techniques and skills in producing finished products. We also emphasize offering fashionable and vivid designs to maintain the attraction of our products. In order to maintain the market exposure of our Company and products as well as to keep abreast of the latest fashion and jewelry market trends, we attend international tradeshows and exhibitions. At the same time, we keep investing in our production facilities to solidify our back-end manufacturing operations in order to support our increased sales orders while maintaining our good quality of production. Future Trends We will continue to build our customer base in order to expand our assembled jewelry sales while working to maintain our strong market position in our core pearl business. Looking ahead, we believe that the global economy will keep on growing at a healthy pace and we will keep pursuing new business opportunities including venturing into new market segments, enlarging our customer base, and strengthening market share. We will also keep an eye on potential investment opportunities beyond the pearl and jewelry industry with a view to bringing about the best returns to the Group and its shareholders. In the coming fiscal year, we intend to pursue aggressive marketing strategies offering the right product and service 21 mix to engage new customers and keep our current customers, while at the same time maintain effective cost control measures. We believe our performance in the coming fiscal year will continue to be promising. Results of Operations The following table sets forth for the fiscal years indicated certain items from the Consolidated Statements of Income expressed as a percentage of net sales:
Year Ended March 31, 2005 2004 2003 % % % Net sales 100.0 100.0 100.0 Cost of sales 71.6 72.7 72.2 ----- ----- ----- Gross profit 28.4 27.3 27.8 Rental income, gross 1.1 1.6 2.3 ----- ----- ----- 29.5 28.9 30.1 ===== ===== ===== Selling, general and administrative expenses (22.5) (23.4) (22.4) ----- ----- ----- Operating income 7.0 5.5 7.7 Interest expenses (0.1) (0.1) (0.5) Interest income 0.3 0.1 0.2 Gain on sale of a real estate investment 8.3 - - Non-operating income 0.4 0.8 1.4 Other than temporary decline in fair value of marketable securities - (0.7) (1.8) ----- ----- ----- Income before income taxes and Minority interests 15.9 5.6 7.0 ===== ===== ===== Income tax expenses (1.5) (1.8) (1.1) ----- ----- ----- Net income before minority interests 14.4 3.8 5.9 Minority interests (8.0) (3.0) (3.1) ----- ----- ----- Net income 6.4 0.8 2.8 ===== ===== =====
Year Ended March 31, 2005 Compared to Year Ended March 31, 2004 Net Sales and Gross Profit Net sales in fiscal 2005 increased by HK$30.2 million to HK$412.3 million, representing a 7.9% increase when compared to net sales of HK$382.1 million in fiscal 2004. We attribute such increase in net sales to the improvements in general business and consumer confidence resulting in improvements in demand and market sentiment following recovery from the impact of the Iraq War and SARS in the PRC, Hong Kong and other countries with the increased revenue contribution on pearls and jewelry finished products. Gross profit for fiscal 2005 increased by HK$13.1 million from HK$104.1 million for fiscal 2004 to HK$117.2 million, representing an increase of 12.6% while gross profit margin increased to 28.4% from 27.3% in fiscal 2004. The increase in gross profit resulted primarily 22 from the increase in turnover. We attribute the increase in gross profit margin mainly to our change in sales mix. Rental Income Gross rental income decreased by HK$1.6 million, or 25.3%, from HK$6.2 million for fiscal 2004 to $4.6 million for fiscal 2005. The decrease in gross rental income was mainly attributable to the reduction in rental income as a result of the disposal of 8th Floor, Harcourt House, 39 Gloucester Road, Wanchai, Hong Kong completed on September 15, 2004. In addition, the Company experienced a decrease in rental income in Man Sang Industrial City located in PRC mainly due to a lower occupancy rate when compared to the last fiscal year. Selling, General and Administrative Expenses ("SG&A expenses") SG&A expenses for fiscal 2005 were HK$92.9 million, consisting of HK$81.9 million attributable to pearl operations and HK$11.0 million attributable to real estate operations. This is an increase of approximately HK$3.5 million, or 3.9%, from HK$89.4 million, consisting of HK$79.8 million attributable to pearl operations and HK$9.6 million attributable to real estate operations, during fiscal 2004. The increase in SG&A expenses in pearl operations was mainly due to increased headcount and salary expenses related to our increased jewelry business and commission expenses incurred on increased sales. The increase in SG&A expenses in the real estate operations was mainly due to an increased spending on repair and maintenance expenditures on some of the industrial buildings located in Shenzhen, PRC, but was offset by the loss on demolition of one of the buildings located in Shenzen, PRC, for reconstruction and loss on disposal of one of our property located in Hong Kong for last year. As a percentage of net sales, SG&A expenses for pearl operations decreased from 20.9% in fiscal 2004 to 19.9% in fiscal 2005. Interest Income Interest income for fiscal 2005 increased by HK$0.8 million to HK$1.1 million from HK$0.3 million in fiscal 2004. The increase in interest income was principally due to higher interest rates and increased bank deposits in fiscal 2005 as compared to fiscal 2004. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." Interest Expenses Interest expenses for fiscal 2005 decreased by HK$0.3 million to HK$0.1 million from HK$0.4 million in fiscal 2004 as a result of the repayment of bank borrowings during the year. Income Tax Expenses Our income tax expenses were HK$6.1 million for fiscal 2005, a decrease of HK$0.9 million when compared to an income tax expenses of HK$7.0 million for fiscal 2004, which decrease is mainly attributable to the absence of the one-time payment for income tax expenses in fiscal 2005 for certain taxable gain associated with the disposal of MSIL shares by Man Sang 23 BVI in fiscal 2004. However, the decrease in our income tax expenses between fiscal 2005 and fiscal 2004 has been mitigated, in part, by the effect of higher operating income in fiscal 2005. Net Income Net income for fiscal 2005 increased by HK$23.9 million to HK$26.9 million, when compared to a net income of HK$3.0 million for fiscal 2004. Such increase is mainly due to higher gross profit and the gain on disposal of one of our real estate property located at 8th Floor, Harcourt House, 39 Gloucester Road, Wanchai, Hong Kong but was offset by an increase in SG&A expenses and minority interests. Year Ended March 31, 2004 Compared to Year Ended March 31, 2003 Net Sales and Gross Profit Net sales in fiscal 2004 increased by HK$59.0 million to HK$382.1 million, representing a 18.3% increase when compared to net sales of HK$323.1 million in fiscal 2003. We attribute such increase in net sales to, among other factors, (i) improvements in general business and consumer confidence resulting in improvements in demand and market sentiment following the impact of the Iraq War and SARS in the PRC, Hong Kong and other countries, (ii) the increased revenue contribution on pearls and jewelry finished products, (iii) our increased marketing efforts and flexible pricing strategies, and (iv) value added services to satisfy our customers' needs. Gross profit for fiscal 2004 increased by HK$14.1 million from HK$90.0 million for fiscal 2003 to HK$104.1 million, representing an increase of 15.8% while gross profit margin decreased to 27.3% from 27.8% in fiscal 2003. The increase in gross profit resulted primarily from the increase in turnover. We attribute the decrease in gross profit margin mainly to our flexible pricing strategy on fresh water pearls, as well as the increase in assembled jewelry in our product mix, which dilutes the gross profit margin to a lower extent. Rental Income Gross rental income decreased by HK$1.3 million, or 16.6%, from HK$7.5 million for fiscal 2003 to $6.2 million for fiscal 2004. The decrease in gross rental income was mainly attributable to the reduction in rental income generated in fiscal year 2004 by the 19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Hong Kong, which had been occupied by the Company for internal use since April 21, 2003. In addition, the Company experienced a decrease in rental income in Man Sang Industrial City located in PRC. The decrease in rental income in Man Sang Industrial City was mainly due to one of the buildings having been demolished in the first quarter of fiscal 2004. However, such decrease was partially offset by the additional rental income contribution generated by the property at 8th Floor, Harcourt House 39 Gloucester Road, Wanchai, Hong Kong acquired on August 15, 2003. Selling, General and Administrative Expenses ("SG&A expenses") SG&A expenses for fiscal 2004 were HK$89.4 million, consisting of HK$79.8 million attributable to pearl operations and HK$9.6 million attributable to real estate operations. This is an increase of approximately HK$17 million, or 23.5%, from HK$72.4 million, consisting 24 of HK$65.1 million attributable to pearl operations and HK$7.3 million attributable to real estate operations, during fiscal 2003. The increase in SG&A expenses in pearl operations was mainly due to (i) increased headcount and salary expenses related to our acquired jewelry business, (ii) bad debt provision made on customers, while the increase in SG&A expenses in the real estate operations was mainly due to (i) a loss arising on the demolition of one of the buildings for reconstruction in Shenzhen, PRC and (ii) a loss arising from the disposal of one of our properties located at Focal Industrial Centre, 21 Man Lok Street, Kowloon, Hong Kong. As a percentage of net sales, SG&A expenses for pearl operations increased from 20.1% in fiscal 2003 to 20.9% in fiscal 2004. Interest Income Interest income for fiscal 2004 decreased by HK$0.4 million to HK$0.3 million from HK$0.7 million in fiscal 2003. The decrease in interest income was principally due to lower interest rates in fiscal 2004 as compared to fiscal 2003. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." Interest Expenses Interest expenses for fiscal 2004 decreased by HK$1.2 million to HK$0.4 million from HK$1.6 million in fiscal 2003 as a result of the reduction in bank borrowings and lower interest rate during the year. Income Tax Expenses Our income tax expenses were HK$7.0 million for fiscal 2004, an increase of HK$3.3 million when compared to an income tax expenses of HK$3.7 million for fiscal 2003, which increase is mainly attributable to higher taxable operating income and taxable gain associated with the disposal of MSIL shares by Man Sang BVI when compared to fiscal 2003. Net Income Net income for fiscal 2004 decreased by HK$5.9 million to HK$3.0 million, when compared to a net income of HK$8.9 million for fiscal 2003. Such decrease is mainly due to an increase in SG&A expenses, higher income taxes and minority interests, plus a decrease in other income and a decrease in "other than temporary decline of fair value of marketable securities". The higher minority interests is due to the decrease in effective shareholdings on MSIL from 56.7% throughout fiscal 2003 to 49.4% since October 2003. Off-balance Sheet Arrangements and Contractual Obligations No off-balance sheet arrangement is noted during this fiscal 2005. The Company is contractually obligated to make the following material payments as of March 31, 2005: 25
Total Less than 1 1-3 years 3-5 years More than 5 year years Contractual Obligations HK'000 HK'000 HK'000 HK'000 HK'000 Capital Commitment Obligations 3,568 3,568 - - - Operating lease obligations 2,204 1,773 431 - - ------------------------------------------------------------------------- Total contractual obligations 5,772 5,341 431 - -
Recent Accounting Pronouncements In a meeting held in November 2003, the Emerging Issue Task Force ("EITF") reached a consensus on disclosure guidance previously discussed under EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". The consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. We adopted the disclosure requirements during the fiscal year ended March 31, 2005. In March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-1. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In September 2004, the EITF delayed the effective date to apply the measurement and recognition provisions relating to debt and equity securities until the FASB issues additional guidance. We believe that this consensus on the recognition and measurement guidance will not have a material impact on our financial position, results of operations, or cash flows. In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4". This statement amends Accounting Research Bulletin No. 43, Chapter 4 to clarify that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" and that fixed production overhead costs should be allocated to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005; however, earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The provisions of SFAS No. 151 should be applied prospectively. There was no significant impact on the Company's financial position and results of operations as a result of the adoption of SFAS No. 151. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment". This statement provides investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share 26 purchase plans. SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". Public entities (other than those filing as small business issuers) will be required to apply this statement as of the first interim or annual reporting period that begins after June 15, 2005. In March 2005, the SEC published Staff Accounting Bulletin No. 107 "Share-Based Payment", ("SAB 107") to give public entities guidance in applying the provisions of SFAS No. 123(R), and to users of financial statements in analyzing the information provided under that Statement. SAB 107 is to be applied upon the adoption of Statement No. 123(R). The Company believes that SFAS No. 123(R) and SAB 107 will not have significant impact on its financial statements when it is adopted. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - - An Amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions", and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005, and is required to be adopted by the Company effective January 1, 2006. The Company does not expect SFAS No. 153 will have a material impact on the consolidated results of operations or financial condition. In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement Obligations" to clarify that an entity must recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application of interim financial information is permitted but is not required. Early adoption of this Interpretation is encouraged. The adoption of FIN 47 will not have a material impact on the Company's consolidated financial statements. Liquidity and Capital Resources The Company's primary liquidity needs are funded by collection of accounts receivable and sales of inventories. At March 31, 2005, the Company had working capital of HK$357.0 million, which included a cash balance of HK$243.3 million, compared to working capital of HK$262.6 million, which included a cash balance of HK$104.9 million, at March 31, 2004. The current ratio was 11.0 to 1 in fiscal 2005 as compared with that of 6.4 to 1 in fiscal 2004. Net cash provided by operating activities was HK$87.6 million and HK$76.1 million for fiscal 2005 and fiscal 2004, respectively. The increase in cash and cash equivalents by HK$138.4 million was mainly generated by operating activities and the disposal of a real estate investment located at the 8th Floor, Harcourt House, No. 39 Gloucester Road, Wanchai, Hong Kong. Inventories decreased by HK$32.6 million from HK$115.3 million at March 31, 2004 to HK$82.7 million at March 31, 2005. The inventory turns in terms of months decreased from 5.4 months in fiscal 2004 to 4.0 months in this fiscal year. Inventories decreased mainly due to increased sales and improvement in inventory management. 27 Long-term debts (including current portion of long-term debts) decreased from HK$11.6 million at March 31, 2004 to nil. The decrease was attributable to repayment of installment loans. The gearing ratio was zero at March 31, 2005, as compared with 0.05 at March 31, 2004. The decrease was mainly attributable to the repayment of bank borrowings. The Company had available working capital facilities of HK$47.0 million in total with various banks at March 31, 2005. Such banking facilities include letter of credit arrangements, import loans, overdraft and other facilities commonly used in the jewelry business. All such banking facilities bear interest at floating rates generally offered by banks in Hong Kong and in the PRC, and are subject to periodic review. At March 31, 2005, the Company did not utilize such credit facilities. We expect that in fiscal 2006, there will be a further cash requirement of HK$3.6 million to be incurred for the completion of the construction of an industrial building under Man Sang Industrial City, and our implementation of an Enterprises Resources Planning system. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In fiscal 2005, the Company made approximately 43.6% of its purchases in US dollars and approximately 44.1% of purchases in Hong Kong dollars, RMB and Japanese Yen (together, 87.7% of total purchases). 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 at a consistent rate, the Company feels that the exposure of its sales proceeds to foreign exchange fluctuations is minimal. On the other hand, the RMB is not a fully convertible currency and the PRC government determines its exchange rate against other currencies. To the best of our knowledge, the PRC has not declared any intention to either devalue or revalue its currency, however, there can be no assurance that a decision to allow the currency to fluctuate in the future will not be taken. Therefore, we believe that the imminent risk of a substantial fluctuation of the RMB exchange rate remains low. At March 31, 2005, there are no short-term RMB bank borrowings. Therefore, since most of the Company's purchases are made in currencies that the Company believes have low risk of appreciation or devaluation, and sales are made in US dollars, the Company's management determined that the Company's currency risk in the foreseeable future should not be material, and that no derivative contracts such as forward contracts or options to hedge against foreign exchange fluctuations were necessary during fiscal 2005. In addition, the Company's interest expense is based on Hong Kong Inter-bank Offer Rate ("HIBOR"). At March 31, 2005, the Company had fully repaid all the outstanding bank borrowings during the year. During fiscal 2005, no derivative contracts or other arrangement to hedge against the increase in interest rates have been made. Due to the recovery of the economy in US, HK and PRC, there is an expectation in the market that interest rates in the coming year will continue to increase. However, in regards to our coming long-term and short-term financing requirements, no material adverse financial effect to the Company are anticipated. Despite news regarding increasing pressure on the PRC government to allow the 28 appreciation of RMB against other currencies, including US dollars (to which the HK dollar is pegged), we do not anticipate an urgent need to enter into forward currency contracts to hedge against the appreciation of RMB. 29 ITEM 8. FINANCIAL STATEMENTS MAN SANG HOLDINGS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Registered Public Accounting Firm issued by Moores Rowland Mazars F-1 Report of Independent Registered Public Accounting Firm issued by Deloitte Touche Tohmatsu F-2 Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2005, 2004 and 2003 F-3 Consolidated Balance Sheets as of March 31, 2005 and 2004 F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2005, 2004 and 2003 F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004 and 2003 F-7 Notes to Consolidated Financial Statements F-11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 30, 2004, our Audit Committee approved the dismissal of Deloitte Touche Tohmatsu ("Deloitte") as our independent accountants to be replaced by Moores Rowland Mazurs. We have had no disagreements with Deloitte as our independent accountants. We reported the change of independent accountants on two Form 8-Ks filed on July 7, 2004 and a Form 8-K/A filed on July 13, 2004, with the Securities and Exchange Commission, and are incorporated herein by reference. ITEM 9A. CONTROLS AND PROCEDURES As of March 31, 2005, an evaluation was performed under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. No change was made in the Company's internal control over financial reporting during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company's Chief Executive Officer and Chief Financial Officer do not expect that the Company's disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resources constraints, and the benefits of controls 30 must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any given design will succeed in achieving its stated goals under all potential future conditions. 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this Item will be included in the Company's proxy statement for its 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 2005 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be included in the Company's proxy statement for its 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 2005 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item will be included in the Company's proxy statement for its 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 2005 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS The information required by this Item will be included in the Company's proxy statement for its 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 2005 and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item will be included in the Company's proxy statement for its 2005 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days after March 31, 2005 and is incorporated herein by reference. 32 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Items Files as Part of Report: 1. Financial Statements The financial statements of the Company as set forth in the Index to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K are hereby incorporated by reference. 2. Exhibits The exhibits listed under Item 15(c) 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. (b) Report on Form 8-K A report on Form 8-K was filed on July 7, 2004 to announce dismissal of the Company's certifying accountant. A report on Form 8-K was filed on July 7, 2004 to announce appointment the Company's new certifying accountant. A report on Form 8-K/A was filed on July 13, 2004 to attach a letter from the Company's former certifying accountant to the Securities and Exchange Commission, as required by Regulation S-K Item 304(a)3. A report on Form 8-K was filed on September 16, 2004 to announce the disposition of assets by the Company. A report on Form 8-K was filed on March 15, 2005 to announce resignation of directors of the Company, appointment of a new director of the Company, and appointment of an audit committee chairman. (c) Exhibits Exhibit No. Description 3.1 Restated Articles of Incorporation of Man Sang Holdings, Inc., including the Certificate of Designation, Preferences and Rights of a Series of 100,000 Shares of Preferred Stock, $.001 Par Value, Designated "Series A Preferred Stock," filed on January 12, 1996 (1) 3.2 Certificate of Designation, Preferences and Rights of a Series of 100,000 Shares of Preferred Stock, $.001 Par Value, Designated "Series B Preferred Stock," dated April 1, 1996 (2) 33 3.3 Amended Bylaws of Man Sang Holdings, Inc., effective as of January 10, 1996 (1) 10.1 Acquisition Agreement, Dated December __, 1995, between Unix Source America, Inc. and the Shareholders of Man Sang International (B.V.I.) Limited (1) 10.2 Tenancy Agreement, dated June 24, 1996, between Same Fast Limited and Man Sang Jewellery Company Limited (3) 10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3) 10.4 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Cheng Chung Hing (5) 10.5 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Cheng Tai Po (5) 10.6 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Hung Kwok Wing (5) 10.7 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Sio Kam Seng (5) 10.8 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Ng Hak Yee (5) 10.9 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Yan Sau Man Amy (5) 10.10 Contract dated November 8, 1997, between Nan'ao Shaohe Pearl Seawater Culture Co., Ltd. of Guangdong Province, People's Republic of China, Man Sang Jewellery Co., Ltd. of Hong Kong and Chung Yuen Company o/b Golden Wheel Jewellery Mfr. Ltd. of Hong Kong to establish a cooperative joint venture in Nan'ao County, Guangdong Province, People's Republic of China (6) 10.11 Agreement dated January 2, 1998, between Overlord Investment Company Limited and Excel Access Limited, a subsidiary of the Company, pursuant to which Excel Access Limited will purchase certain real property located at Flat A, 33rd Floor, of Valverde, 11 May Road, Hong Kong for HK$15,050,000 (6) 10.12 Agreement for Sale and Purchase dated February 24, 1998, between City Empire Limited and Wealth-In Investment Limited, a subsidiary of the Company, pursuant to which Wealth-In Investment Limited purchased certain real property located at Flat B on the 20th Floor of The Mayfair, One May Road, Hong Kong, at a purchase price of HK$39,732,200 (7) 34 10.13 Service Agreement, dated February 10, 2000, between Man Sang International Limited and Wong Ka Ming (8) 10.14 Service Agreement, dated August 31, 2000, between Man Sang International Limited and Cheng Chung Hing (8) 10.15 Service Agreement, dated August 31, 2000, between Man Sang International Limited and Cheng Tai Po (8) 10.16 Service Agreement, dated August 31, 2000, between Man Sang International Limited and Yan Sau Man, Amy (8) 13.1 Annual report to security holders (4) 21.1 Subsidiaries of the Company 24.1 Power of Attorney (included on page 37) 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer ______________________________________ (1) Incorporated by reference to the exhibits filed with the Company's Current Report on Form 8-K dated January 8, 1996 (2) Incorporated by reference to the exhibits filed with the Company's Registration Statement on Form 8-A dated June 17, 1996 (3) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10- QSB for the quarterly period ended December 31, 1996 (4) Incorporated by reference to the Form 10- KSB/A for the fiscal year ended March 31, 1997 (5) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 (6) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997 (7) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (8) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 35 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: June 28, 2005 By: /s/CHENG Chung Hing, Ricky -------------------------------- CHENG Chung Hing, Ricky Chairman of the Board, President and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cheng Chung Hing, Ricky and Henry Au, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Name Title Date /s/ CHENG Chung Hing, Ricky Chairman of the Board, President, June 28, 2005 - --------------------------- and Chief Executive Officer CHENG Chung Hing, Ricky /s/ AU Moon Ying, Henry Chief Financial Officer June 28, 2005 - --------------------------- AU Moon Ying, Henry /s/ CHENG Tai Po Vice Chairman of the Board June 28, 2005 - --------------------------- CHENG Tai Po /s/ HUNG Kwok Wing, Sonny Director June 28, 2005 - --------------------------- HUNG Kwok Wing, Sonny
36 SUPPLEMENTAL REPORTS TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS No annual report or proxy material has been forwarded to securities holders of the Registrant covering the Registrant's fiscal 2005; however, if any annual report or proxy material is furnished to security holders in connection with the annual meeting of stockholders to be held in 2005, a copy of any such annual report or proxy materials shall be forwarded to the Securities and Exchange Commission when it is forwarded to security holders. 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 3.1 Restated Articles of Incorporation of Man Sang Holdings, Inc., including the Certificate of Designation, Preferences and Rights of a Series of 100,000 Shares of Preferred Stock, $.001 Par Value, Designated "Series A Preferred Stock," filed on January 12, 1996 (1) 3.2 Certificate of Designation, Preferences and Rights of a Series of 100,000 Shares of Preferred Stock, $.001 Par Value, Designated "Series B Preferred Stock," dated April 1, 1996 (2) 3.3 Amended Bylaws of Man Sang Holdings, Inc., effective as of January 10, 1996 (1) 10.1 Acquisition Agreement, Dated December __, 1995, between Unix Source America, Inc. and the Shareholders of Man Sang International (B.V.I.) Limited (1) 10.2 Tenancy Agreement, dated June 24, 1996, between Same Fast Limited and Man Sang Jewellery Company Limited (3) 10.3 Man Sang Holding, Inc. 1996 Stock Option Plan (3) 10.4 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Cheng Chung Hing (5) 10.5 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Cheng Tai Po (5) 10.6 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Hung Kwok Wing (5) 37 10.7 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Sio Kam Seng (5) 10.8 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Ng Hak Yee (5) 10.9 Service Agreement, dated September 8, 1997, between Man Sang International Limited and Yan Sau Man Amy (5) 10.10 Contract dated November 8, 1997, between Nan'ao Shaohe Pearl Seawater Culture Co., Ltd. of Guangdong Province, People's Republic of China, Man Sang Jewellery Co., Ltd. of Hong Kong and Chung Yuen Company o/b Golden Wheel Jewellery Mfr. Ltd. of Hong Kong to establish a cooperative joint venture in Nan'ao County, Guangdong Province, People's Republic of China (6) 10.11 Agreement dated January 2, 1998, between Overlord Investment Company Limited and Excel Access Limited, a subsidiary of the Company, pursuant to which Excel Access Limited will purchase certain real property located at Flat A, 33rd Floor, of Valverde, 11 May Road, Hong Kong for HK$15,050,000 (6) 10.12 Agreement for Sale and Purchase dated February 24, 1998, between City Empire Limited and Wealth-In Investment Limited, a subsidiary of the Company, pursuant to which Wealth-In Investment Limited purchased certain real property located at Flat B on the 20th Floor of The Mayfair, One May Road, Hong Kong, at a purchase price of HK$39,732,200 (7) 10.13 Service Agreement, dated February 10, 2000, between Man Sang International Limited and Wong Ka Ming (8) 10.14 Service Agreement, dated August 31, 2000, between Man Sang International Limited and Cheng Chung Hing (8) 10.15 Service Agreement, dated August 31, 2000, between Man Sang International Limited and Cheng Tai Po (8) 10.16 Service Agreement, dated August 31, 2000, between Man Sang International Limited and Yan Sau Man, Amy (8) 13.1 Annual report to security holders (4) 21.1 Subsidiaries of the Company 24.1 Power of Attorney (included on page 37) 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 38 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer ______________________________________ (1) Incorporated by reference to the exhibits filed with the Company's Current Report on Form 8- K dated January 8, 1996 (2) Incorporated by reference to the exhibits filed with the Company's Registration Statement on Form 8-A dated June 17, 1996 (3) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10- QSB for the quarterly period ended December 31, 1996 (4) Incorporated by reference to the Form 10- KSB/A for the fiscal year ended March 31, 1997 (5) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 (6) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997 (7) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (8) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 39 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. PAGE Report of Independent Registered Public Accounting Firm issued by Moores Rowland Mazars F-1 Report of Independent Registered Public Accounting Firm issued by Deloitte Touche Tohmatsu F-2 Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2005, 2004 and 2003 F-3 Consolidated Balance Sheets as of March 31, 2005 and 2004 F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2005, 2004 and 2003 F-6 Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004 and 2003 F-7 Notes to Consolidated Financial Statements F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and the Stockholders of Man Sang Holdings, Inc. We have audited the accompanying consolidated balance sheet of Man Sang Holdings, Inc. and subsidiaries (the "Company") as of March 31, 2005, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for the year ended March 31, 2005, all expressed in Hong Kong dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2005, and the consolidated results of its operations and its cash flows for the year ended March 31, 2005 in conformity with U.S. generally accepted accounting principles. Our audit also comprehended the translation of Hong Kong dollar amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such U.S. dollar amounts are presented solely for the convenience of readers in the United States of America. Moores Rowland Mazars Chartered Accountants Certified Public Accountants Hong Kong June 28, 2005 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and the Stockholders of Man Sang Holdings, Inc. We have audited the consolidated balance sheet of Man Sang Holdings, Inc. and subsidiaries (the "Company") as of March 31, 2004, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the two years in the period ended March 31, 2004, all expressed in Hong Kong dollars (except for the revisions to earnings per share required by Company's adoption of Emerging Issues Task Force 03-06, "Participating Securities and the Two-Class Method" under Statement of Financial Accounting Standards No. 128 "Earnings Per Share", during the fiscal year ended March 31, 2005). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2004, and the consolidated results of its operations and its cash flows for each of the two years in the period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong June 29, 2004 F-2
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share data) Year ended March 31, -------------------------------------------------------- 2005 2005 2004 2003 US$ HK$ HK$ HK$ Net sales 52,854 412,262 382,123 323,082 Cost of sales (37,822) (295,014) (277,976) (233,160) --------- --------- --------- --------- Gross profit 15,032 117,248 104,147 89,922 Rental income, gross 596 4,646 6,220 7,455 --------- --------- --------- --------- 15,628 121,894 110,367 97,377 Selling, general and administrative expenses: Pearls (10,495) (81,862) (79,838) (65,079) Real estate investment (1,414) (11,027) (9,558) (7,280) --------- --------- --------- --------- Operating income 3,719 29,005 20,971 25,018 Interest expense (13) (100) (380) (1,629) Interest income 137 1,067 279 690 Equity in loss of an affiliate - - - (60) Gain on sales of a real estate investment 4,391 34,248 - - Other income 207 1,617 2,889 4,485 Other than temporary decline in fair value of marketable securities - - (2,474) (5,921) --------- --------- --------- --------- Income before income taxes and minority interests 8,441 65,837 21,285 22,583 Income tax expense (786) (6,129) (7,027) (3,719) Minority interests (4,204) (32,792) (11,266) (9,943) --------- --------- --------- --------- Net income 3,451 26,916 2,992 8,921 --------- --------- --------- --------- Other comprehensive income, net of taxes: Foreign currency translation adjustments 1 6 29 536 Unrealized holding gain (loss) on marketable securities arising during the year 41 319 1,507 (2,043) Reclassification adjustment for other than temporary decline in fair value of marketable securities included in net income for the year - - 1,222 3,355 --------- --------- --------- --------- Other comprehensive income, net of taxes 42 325 2,758 1,848 --------- --------- --------- --------- Comprehensive income 3,493 27,241 5,750 10,769 ========= ========= ========= ========= Basic earnings per common share $0.77 $5.97 $0.66 $1.84 ========= ========= ========= ========= Diluted earnings per common share $0.68 $5.28 $0.60 $1.84 ========= ========= ========= ========= Weighted average number of shares of common stock outstanding: - basic earnings per share 4,407,878 4,407,878 4,451,889 4,740,700 ========= ========= ========= ========= - diluted earnings per share 4,985,323 4,985,323 4,855,699 4,740,700 ========= ========= ========= =========
See accompany notes to consolidated financial statements. F-3
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share data) March 31, ------------------------------------------------ 2005 2005 2004 US$ HK$ HK$ ASSETS Current assets: Cash and cash equivalents 31,192 243,297 104,907 Marketable securities 1,080 8,422 7,776 Accounts receivable, net of allowance for doubtful accounts of HK$22,807 and HK$14,728 in 2005 and 2004, respectively 6,083 47,450 62,993 Inventories 10,603 82,705 115,297 Prepaid expenses 576 4,489 3,169 Deposits and other receivables, net of allowance for doubtful accounts of HK$3,721 and HK$2,769 in 2005 and 2004, respectively 686 5,349 7,840 Other current assets 49 382 8,937 Income taxes receivable 88 684 461 --------------- --------------- ---------------- Total current assets 50,357 392,778 311,380 Property, plant and equipment, net 15,264 119,061 115,791 Real estate investment, net 6,044 47,144 88,673 Long-term investments - - 856 Deferred tax assets 33 258 174 --------------- --------------- ---------------- Total assets 71,698 559,241 516,874 =============== =============== ================
F-4
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - continued - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share data) March 31, ------------------------------------------------ 2005 2005 2004 US$ HK$ HK$ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debts - - 5,575 Accounts payable 1,101 8,588 13,234 Accrued payroll and employee benefits 1,533 11,958 8,523 Other accrued liabilities 1,361 10,617 9,979 Deposit on sale of real estate investment - - 7,160 Income taxes payable 588 4,587 4,264 --------------- --------------- ---------------- Total current liabilities 4,583 35,750 48,735 --------------- --------------- ---------------- Long-term debts - - 6,016 --------------- --------------- ---------------- Deferred tax liabilities 156 1,213 821 --------------- --------------- ---------------- Minority interests 33,021 257,562 224,437 --------------- --------------- ---------------- Commitments and contingencies (note 12) Stockholders' equity: Series A preferred stock US$0.001 par value - authorized, issued and outstanding 100,000 shares in 2005 and 2004 (entitled in liquidation to US$2,500 (HK$19,500)) - 1 1 Series B preferred stock US$0.001 par value - authorized 100,000 shares; no shares outstanding - - - Common stock of par value US$0.001 - authorized 25,000,000 shares; issued and outstanding, 4,455,960 shares and 4,405,960 shares in 2005 and 2004, respectively 4 35 34 Additional paid-in capital 7,905 61,660 61,051 Retained earnings 25,609 199,752 172,836 Accumulated other comprehensive income 420 3,268 2,943 --------------- --------------- ---------------- Total stockholders' equity 33,938 264,716 236,865 --------------- --------------- ---------------- Total liabilities and stockholders' equity 71,698 559,241 516,874 =============== =============== ================
See accompany notes to consolidated financial statements. F-5
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share data) Accumul- ated other Series A Series B Addit- compre- Total -------------------- ------------------ ional hensive Stock- Preferred stock Preferred Stock Common stock paid-in Retained (loss) holders' -------------------- ------------------ ------------------- capital earnings income equity Shares Amount Shares Amount Shares Amount -------- -------- -------- -------- HK$ HK$ HK$ HK$ HK$ HK$ HK$ Balance at March 31, 2002 100,000 1 - - 4,405,960 34 58,458 187,570 (1,663) 244,400 Issuance of common shares - - - - 410,000 3 2,171 - - 2,174 Stock compensation expense - - - - - - 4 - - 4 Translation adjustment - - - - - - - - 536 536 Unrealized holding loss on marketable securities - - - - - - - - (2,043) (2,043) Other than temporary decline in fair value of marketable securities - - - - - - - - 3,355 3,355 Net income - - - - - - - 8,921 - 8,921 ---------- -------- -------- -------- --------- -------- -------- -------- -------- -------- Balance at March 31, 2003 100,000 1 - - 4,815,960 37 60,633 196,491 185 257,347 Repurchase of common stock - - - - (410,000) (3) - (4,794) - (4,797) Stock compensation expense - - - - - - 418 - - 418 Translation adjustment - - - - - - - - 29 29 Unrealized holding gain on marketable securities - - - - - - - - 1,507 1,507 Other than temporary decline in fair value of marketable securities - - - - - - - - 1,222 1,222 Deemed distribution to shareholders (note 1) - - - - - - - (21,853) - (21,853) Net income - - - - - - - 2,992 - 2,992 ---------- -------- -------- -------- --------- -------- -------- -------- -------- -------- Balance at March 31, 2004 100,000 1 - - 4,405,960 34 61,051 172,836 2,943 236,865 Issuance of common stock upon exercise of stock options - - - - 50,000 1 475 - - 476 Stock compensation expense - - - - - - 134 - - 134 Translation adjustment - - - - - - - - 6 6 Unrealized holding gain on marketable securities - - - - - - - - 319 319 Net income - - - - - - - 26,916 - 26,916 ---------- -------- -------- -------- --------- -------- -------- -------- -------- -------- Balance at March 31, 2005 100,000 1 - - 4,455,960 35 61,660 199,752 3,268 264,716 ========== ======== ======== ======== ========= ======== ======== ======== ======== ======== - - US$4 US$7,905 US$25,609 US$420 US$33,938 ======== ======== ======== ========= ========= ======== =========
As of March 31, 2005, 2004 and 2003, retained earnings in the amounts of HK$4,867, HK$4,867 and HK$5,454, respectively, have been reserved by the subsidiaries in the People's Republic China (the "PRC") in accordance with the relevant PRC regulations, this reserve is only distributable in the event of liquidation of these PRC subsidiaries. See accompany notes to consolidated financial statements. F-6
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share data) Year ended March 31, ------------------------------------------------------------- 2005 2005 2004 2003 US$ HK$ HK$ HK$ Cash flow from operating activities Net income 3,451 26,916 2,992 8,921 Adjustments to reconcile net income to net cash provided by operating activities: Bad debt provision 1,161 9,057 9,530 440 Inventory write down 4,141 32,300 14,273 - Provision for impairment loss of long-term investments 110 856 1,730 - Other than temporary decline in fair value of marketable securities - - 2,474 5,921 Depreciation and amortization 1,046 8,157 9,427 9,296 Impairment loss on property, plant and equipment 336 2,617 389 - Impairment loss on real estate investment - - 1,762 - (Gain) loss on sale of real estate investment (4,391) (34,248) 1,965 - (Gain) loss on sale of property, plant and equipment (17) (136) 685 603 Minority interest 4,204 32,792 11,266 9,943 Realized gain on sale of marketable securities - - (991) - Stock compensation expense 17 134 418 4 Equity in loss of an affiliate - - - 60 Loss on disposal of subsidiaries - - - 438 Changes in operating assets and liabilities, net of effects from sale of subsidiaries: Accounts receivable 946 7,384 1,611 (10,559) Inventories 39 303 4,774 (15,700) Prepaid expenses (169) (1,319) 3,171 (3,998) Deposits and other receivables 198 1,540 (6,676) 8,382 Other current assets 179 1,395 3 7,152 Income taxes receivable (29) (223) (3) (458) Deferred tax assets (11) (84) (174) 2,188 Accounts payable (596) (4,649) 7,657 2,238 Accrued payroll and employee benefits 440 3,435 1,335 2,655 Other accrued liabilities 82 636 (1,518) 176 Deposit on sale of real estate investment - - 7,160 - Income taxes payable 41 323 2,040 1,851 Deferred tax liabilities 50 392 821 - -------------- -------------- -------------- -------------- Net cash provided by operating activities 11,228 87,578 76,121 29,553 -------------- -------------- -------------- -------------- Cash flow from investing activities Decrease in restricted cash - - - 16,169 Proceeds from disposal of long-term investments - - - 900 Proceeds from sale of property, plant and equipment 41 320 1,062 452 Proceeds from sale of real estate investment 9,181 71,610 5,196 - Proceeds from disposal of subsidiaries - - - 341 Purchase of property, plant and equipment (1,283) (10,009) (23,058) (6,137) Acquisition of a business - - 373 (5,200) Acquisition of an affiliate - - - (300) Purchase of long-term investments - - - (156) Purchase of marketable securities - - (27) - Purchase of real estate investment - - (38,222) - Proceeds from sale of marketable securities - - 5,972 - -------------- -------------- -------------- -------------- Net cash provided by (used in) investing activities 7,939 61,921 (48,704) 6,069 -------------- -------------- -------------- --------------
F-7
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - continued - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share data) Year ended March 31, ---------------------------------------------------------------- 2005 2005 2004 2003 US$ HK$ HK$ HK$ Cash flow from financing activities Increase in short-term borrowings - - - 942 Proceeds from partial disposal of a subsidiary - - 8,940 - Repayment of short-term borrowings - - - (29,377) Repayment of long-term debts (1,486) (11,591) (10,416) (5,575) Repurchase of common stock - - (4,797) - Net proceeds from issuance of common stock 61 476 - - -------------- -------------- -------------- -------------- Net cash used in financing activities (1,425) (11,115) (6,273) (34,010) -------------- -------------- -------------- -------------- Net increase in cash and cash equivalents 17,742 138,384 21,144 1,612 Cash and cash equivalents at beginning of year 13,450 104,907 83,766 82,152 Exchange adjustments - 6 (3) 2 -------------- -------------- -------------- -------------- Cash and cash equivalents at end of year 31,192 243,297 104,907 83,766 ============== ============== ============== ============== Supplementary disclosures of cash flow information Cash paid during the year for: Interest and finance charges 14 108 396 1,670 Income taxes paid 727 5,672 5,012 2,676 ============== ============== ============== ============== Non-cash investing and financing activities: Consideration for purchase of a business settled through accounts receivable - - 190 - Issuance of common shares to consultants as consideration for their services - - - 2,174 ============== ============== ============== ============== Disposal of subsidiaries: Assets disposed of, including interest in an affiliate of HK$240 - - - (7,571) Liabilities disposed of - - - 1,850 Minority interests - - - 1,720 -------------- -------------- -------------- -------------- Net assets disposed of - - - (4,001) Cash consideration received - - - 2,307 Inventories received - - - 1,256 -------------- -------------- -------------- -------------- Loss on disposal of subsidiaries - - - (438) ============== ============== ============== ============== Net cash proceeds from disposal of subsidiaries: Cash consideration received - - - 2,307 Cash and cash equivalents disposed of - - - (1,966) - - - 341 ============== ============== ============== ==============
See accompany notes to consolidated financial statements. F-8 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 1. ORGANIZATION AND ACQUISITION AND DIVESTITURE Activities and organization Man Sang Holdings, Inc. (the "Company") was incorporated in the State of Nevada, the United States of America on November 14, 1986. The principal activities of the Company comprise the processing and sale of South Sea, fresh water and cultured pearls and pearl jewelry products. The selling and administrative activities are performed in the Hong Kong Special Administrative Region of the People's Republic of China ("Hong Kong") and the processing activities are conducted by subsidiaries operating in Guangdong Province, the People's Republic of China ("the PRC"). The Company also derives rental income from real estate located at its pearl processing facility in the PRC and from offices in Hong Kong. The Company's activities are principally conducted by its subsidiary, Man Sang International Limited ("MSIL"), a Bermuda incorporated company which is listed on The Stock Exchange of Hong Kong Limited. On October 6, 2003, Messrs. Cheng Chung Hing and Cheng Tai Po, major beneficial shareholders and directors of the Company purchased a 7.2% equity interest in MSIL from Man Sang International (B.V.I.) Limited, which is a wholly-owned subsidiary of the Company and through which the Company holds all of its equity interest in MSIL. The aggregate consideration was HK$8,940, and the purchase price per share was the arithmetic average of the closing price of MSIL shares for each of five trading days immediately preceding and including October 6, 2003. In connection with this transaction between parties under common control, the Company has recorded the amount by which value of the net assets in MSIL attributable to the shares of MSIL sold (as represented by the 60 million MSIL shares sold) exceeded the consideration, in the amount of HK$21,852, as a distribution to shareholders. As a result of this transaction the Company's equity interest in MSIL, was reduced to 49.4%. The Company continues to account for MSIL as a consolidated subsidiary because it continues to have control over the operating and financial decision of MSIL. As of March 31, 2005 and 2004, the Company had an equity interest of 49.4% in MSIL. Acquisition and divestiture The Company has also made a number of investments in companies that supply the Company or distribute its products. The Company has an investment of Renminbi 5,100 (HK$4,730) for a 19.5% stake in a pearl farm located in Nan'ao County in Guangdong Province in the PRC through a cooperative joint venture which has a duration of 11 years. In case of termination or liquidation of the joint venture, the Company is entitled to receive 19.5% of the net assets of the joint venture. As a result of the poor operating performance of the pearl farm, the Company recognized impairment losses of HK$3,000 in 2002 and HK$1,730 in 2004. In April 2000, MSIL acquired all the issued share capital of Intimex Business Solutions Company Limited ("IBS") for a consideration of HK$2,100 which was satisfied by the issuance of 42,000,000 new shares of HK$0.05 each in Cyber Bizport Limited, a wholly owned subsidiary of MSIL, representing 21% of the enlarged issued share capital of Cyber Bizport Limited. As a result, MSIL holds a 79% equity interest in Cyber Bizport Limited which in turn holds the entire equity interest in IBS. The principal business of IBS is the provision of computer consulting services. F-9 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 1. ORGANIZATION AND ACQUISITION AND DIVESTITURE (CONTINUED) Acquisition and divestiture (Continued) The acquisition was accounted for as a purchase and the results of IBS and its subsidiary have been included in the accompanying consolidated financial statements since the date of acquisition. The excess of the purchase consideration over the fair value of the net assets acquired was HK$1,179 and was recorded as goodwill which was initially amortized on a straight-line basis over three years. In view of the unsatisfactory financial performance of IBS, the Company recorded an impairment loss for the entire unamortized amount of goodwill, totaling HK$591 in 2002. On March 31, 2003, the Company acquired the remaining 21% equity interest of Cyber Bizport Limited in exchange for its entire 79% indirect equity interest in MSIL. The Company has accounted for this transaction under the purchase method of accounting. Accordingly, the fair value of the Company's equity interest in IBS, totaling HK$341 was treated as the purchase price for accounting purpose. There was no significant goodwill as a result of this acquisition. In July 2002, a wholly-owned subsidiary of the Company acquired a 30% equity interest of China South City Holdings Limited for HK$300, which was accounted for using the equity method in the accompanying financial statements. There was no significant goodwill as a result of this acquisition. In December 2002, the Company disposed of its entire equity interest in that subsidiary to Messrs. Cheng Chung Hing and Cheng Tai Po for a consideration of HK$300. On October 17, 2002, the Company disposed of its entire 18% equity interest in Gold Treasure International Jewellery Company Limited ("GTI") for a consideration of HK$900. The principal business of GTI was the production of accessories in gold, silver and/or other gems. On December 1, 2002, a wholly owned subsidiary of MSIL acquired a business by acquiring property, plant and equipment, inventories and customer information from a jewelry company for a total consideration of HK$7,200. The acquisition was accounted for as a purchase and HK$5,046 of the purchase price was allocated to property, plant and equipment and HK$2,154 to inventories based on their respective fair values at the date of acquisition. The fair value of the customer information acquired is considered to be insignificant by the Company's management. The results of the acquired business have been included in the consolidated financial statements since the date of acquisition. On February 1, 2004, a wholly owned subsidiary of MSIL acquired all of the assets and liabilities including customer information of a jewelry factory for a total consideration of HK$190 which was settled by an offset of a receivable from the vendor. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired based on the estimated fair values at the date of acquisition. The operating results of this business have been included in the consolidated financial statements since the date of acquisition. F-10 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 1. ORGANIZATION AND ACQUISITION AND DIVESTITURE (CONTINUED) The following table presents the allocation of the purchase price to the assets and liabilities acquired: HK$ --- Property, plant and equipment 1,020 Inventories 164 Accounts receivable 370 Other current assets 208 Cash and cash equivalents 373 Accounts payable (23) Other accrued liabilities (1,922) ---------------- 190 ================ The fair value of the customer information acquired is considered to be insignificant by the Company's management. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America ("US GAAP"). Principles of consolidation - The consolidated financial statements include the assets, liabilities, revenues and expenses of Man Sang Holdings, Inc. and all of its subsidiaries. All material intra-group transactions and balances have been eliminated. An affiliate over which the Company has the ability to exert significant influence, but does not have a controlling interest (generally 20% to 50% owned), is accounted for using the equity method. The Company's share of earnings of the affiliate is included in the accompanying consolidated statements of income and comprehensive income. Goodwill - The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. Prior to April 1, 2002, goodwill was amortized on a straight-line basis over its estimated useful life of three years. Amortization expense was HK$195 in 2002. Management determined that goodwill was impaired, and therefore recognized an impairment loss of HK$591 during the year ended March 31, 2002. F-11 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Starting from April 1, 2002, the Company has adopted Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" which requires that upon adoption, amortization of goodwill and other intangible assets with indefinite lives will cease and instead, the carrying value of these intangible assets will be evaluated for impairment on an annual basis. Identifiable intangible assets with definitive lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". There was no effect on the consolidated financial statements of the Company upon the adoption of SFAS No. 142. Reported net income and earnings per share assuming non-amortization of goodwill for 2002 under SFAS No. 142 would not be significantly different from the actual amounts. Cash and cash equivalents - Cash and cash equivalents include cash on hand, demand deposits, interest bearing savings accounts, and time certificates of deposit with a maturity of three months or less when purchased. Inventories - Inventories are stated at the lower of cost determined by the weighted average method, or market value. Finished goods inventories consist of raw materials, direct labor and overhead associated with the processing of pearls. Marketable securities - The Company classifies its marketable securities as available-for-sale and carries them at market value with a corresponding recognition of net unrealized holding gain or loss (net of tax) as a separate component of stockholders' equity until realized. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary. Gains and losses on sales of securities are computed on a specific identification basis. Marketable securities comprise:
March 31, 2005 March 31, 2004 HK$ HK$ Publicly traded corporate equity securities listed in Hong Kong: Gross unrealized gains net of minority interests, included in accumulated other comprehensive income 1,042 723 ================ ================= Fair value of marketable securities 8,422 7,776 ================ =================
During the years ended March 31, 2004 and 2003, the Company recognized losses of HK$2,474 and HK$5,921, respectively, on its marketable securities due to declines in fair values that were determined by management to be other than temporary. Long-lived assets - The Company periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets through March 31, 2002, whenever events and circumstances indicate that the carrying value of the asset may no longer be recoverable. An impairment loss, measured based on the fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying amount of the assets. F-12 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property, plant and equipment - Property, plant and equipment is stated at cost. Depreciation is provided using the straight-line method based on the estimated useful lives of the assets as follows:
Leasehold land and buildings 50 years, or less if the lease period is shorter Plant and machinery 4 to 5 years Furniture and equipment 4 years Motor vehicles 4 years
Assets under construction are not depreciated until construction is complete and the assets are ready for their intended use. No interest was capitalized in the three years ended March 31, 2005. Real estate investment - Leasehold land and buildings held for investment are stated at cost. Cost includes the cost of the purchase of the land and construction costs, including finance costs incurred during the construction period. Depreciation of land and buildings is computed using the straight-line method over the term of the underlying lease of the land on which the buildings are located up to a maximum of 50 years. Long-term investments - The Company's long-term investments are accounted for under the cost method. The Company periodically evaluates the carrying value of long-term investments held, whenever events and circumstances indicate that the carrying value of the investment may no longer be recoverable. The Company recognizes impairment losses based on the estimated fair value of the investments. Revenue recognition - The Company recognizes revenue at the time products are shipped to customers and collectibility for such sales is reasonably assured. Property rental income is recognized on a straight-line basis over the term of the lease, and is stated at the gross amount. Income taxes - Deferred income taxes are provided using the asset and liability method. Under this method, deferred income taxes are recognized for all significant temporary differences and classified as current or non-current based upon the classification of the related asset or liability in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all, the deferred tax asset will not be realized. Net earnings per share ("EPS") - Basic EPS excludes dilution and is computed by dividing net income attributable to common shareholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (warrants to purchase common stock and common stock options) were exercised or converted into common shares. EPS for all periods presented have been computed in accordance with SFAS No. 128 "Earnings Per Share" issued by the Financial Accounting Standards Board ("FASB"). F-13 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In March 2004, the Emerging Issue Task Force ("EITF") reached its consensus on Issue No. 03-6 "Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share". EITF No. 03-6 addresses how to determine whether a security should be considered a "participating security" for purposes of computing EPS and how to allocate earnings to a participating security when using the two-class method for computing basic EPS. EITF No. 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported EPS. The issued and outstanding shares of Series A preferred stock of the Company, which are entitled to participate in any dividends paid ratably with the holders of common stock, are participating securities under EITF No. 03-6. According to EITF No. 03-6 and SFAS No. 128, the undistributed earnings should be allocated between the common stock and the participating securities based on the contractual participation rights of the participating securities to share in current earnings as if all earnings were distributed ratably, but separate income statement presentation of the per share amounts attributable to the participating securities, other than common stock, is not required. However, the amount of earnings allocable to participating securities should be disclosed, as a reconciling item, in the basic EPS calculation. No losses were allocated to the Series A preferred stock because its contractual terms provide no obligation of its holders to share in the Company's losses. Reconciliation of the basic and diluted EPS is as follows:
For the year ended March 31, 2005 For the year ended March 31, 2004 For the year ended March 31, 2003 Earnings Shares EPS Earnings Shares EPS Earnings Shares EPS ----------- --------- --------- ----------- --------- --------- ----------- --------- --------- HK$'000 HK$ HK$'000 HK$ HK$'000 HK$ Basic EPS: Net income 26,916 2,992 8,921 Allocated to Series A preferred stock (597) (66) (184) ----------- ----------- ----------- Net income available to common stockholders, adjusted 26,319 4,407,878 5.97 2,926 4,451,889 0.66 8,737 4,740,700 1.84 ========= ========= ========= Effect of dilutive securities Stock options granted by the Company - 577,445 - 403,810 - - ----------- --------- ----------- --------- ----------- --------- Diluted EPS: Net income available to common stockholders, including conversion 26,319 4,985,323 5.28 2,926 4,855,699 0.60 8,737 4,740,700 1.84 ========== ========= ========= ========== ========= ========= =========== ========= =========
Foreign currency translation - Assets and liabilities of foreign subsidiaries are translated from their functional currency to Hong Kong Dollars at year end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Adjustments arising from translating foreign currency financial statements are reported as a separate component of stockholders' equity. Gains or losses from foreign currency transactions are included in the statement of income. F-14 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign currency risk - The Renminbi ("RMB") is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People's Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The cash and cash equivalents of the Company included aggregate amounts of HK$10,309 at March 31, 2005 and HK$12,448 at March 31, 2004, which are denominated in RMB. The PRC subsidiaries conduct their business substantially in the PRC, and their financial performance and position are measured in terms of RMB. Any devaluation of the RMB against the United States dollar would consequently have an adverse effect on the financial performance and asset values of the Company when measured in terms of United States dollars. Stock-based compensation - The Company has elected to account for its stock option plan using the fair value method in accordance with SFAS No.123 "Accounting for Stock-Based Compensation". Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the vesting period. Staff retirement plan costs - The Company's costs related to the defined contribution retirement plans are charged to the consolidated statement of income as incurred. Translation into United States Dollars - The 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 U.S. dollars are for the convenience of readers in the United States of America only and have been made at the rate of HK$7.8 to US$1, the approximate free rate of exchange at March 31, 2005. Such translations should not be construed as representations that the Hong Kong dollar amounts could be converted into U.S. dollars at that rate or any other rate. Advertising and promotion costs - Advertising and promotion expenses are expensed when incurred. Advertising costs included in selling, general and administrative expenses were HK$821, HK$1,587 and HK$868 for the years ended March 31, 2005, 2004 and 2003, respectively. Use of estimates - The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive income - The Company reports comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income". Accumulated other comprehensive income represents translation adjustments and unrealized holding losses on marketable securities and is included in the stockholders' equity section of the balance sheet. F-15 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent changes in accounting pronouncements - In November 2003 meeting, the EITF reached a consensus on disclosure guidance previously discussed under EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". The consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. We adopted the disclosure requirements during the fiscal year ended March 31, 2005 (see note 2 - marketable securities above). In March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF Issue No. 03-1. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In September 2004, the EITF delayed the effective date to apply the measurement and recognition provisions relating to debt and equity securities until the FASB issues additional guidance. We believe that this consensus on the recognition and measurement guidance will not have a material impact on our financial position, results of operations, or cash flows. In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4". This statement amends Accounting Research Bulletin No. 43, Chapter 4 to clarify that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" and that fixed production overhead costs should be allocated to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, however, earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The provisions of SFAS No. 151 should be applied prospectively. There was no significant impact on the Company's financial position and results of operations as a result of the adoption of SFAS No. 151. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment". This statement provides investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". Public entities (other than those filing as small business issuers) will be required to apply this statement as of the first interim or annual reporting period that begins after June 15, 2005. In March 2005, the SEC published Staff Accounting Bulletin No. 107 "Share-Based Payment", ("SAB 107") to give public entities guidance in applying the provisions of SFAS No. 123(R), and to users of financial statements in analyzing the information provided under that Statement. The SAB is to be applied upon the adoption of Statement No. 123(R). The Company believes that SFAS No. 123(R) and SAB 107 will not have significant impact on its financial statements when it is adopted. F-16 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions", and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005, and is required to be adopted by the Company effective January 1, 2006. The Company does not expect SFAS No. 153 will have a material impact on the consolidated results of operations or financial condition. In March 2005, the FASB issued Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement Obligations" to clarify that an entity must recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application of interim financial information is permitted but is not required. Early adoption of this Interpretation is encouraged. The adoption of FIN 47 will not have a material impact on the Company's consolidated financial statements. 3. OTHER INCOME
Year ended March 31, ------------------------------------------ 2005 2004 2003 Other income consists of the following: HK$ HK$ HK$ Gain on sale of marketable securities - 991 - Foreign currency exchange gain, net - - 452 Other 1,617 1,898 4,033 ------------ ------------ ----------- 1,617 2,889 4,485 ============ ============ ===========
F-17 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 4. INCOME TAXES Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The components of income before income taxes and minority interests are as follows:
Year ended March 31, ------------------------------------------ 2005 2004 2003 HK$ HK$ HK$ Hong Kong 81,960 25,954 17,564 Other regions in the PRC (11,617) 692 11,246 Corporate expense, net (4,506) (5,361) (6,227) ------------ ------------ ----------- 65,837 21,285 22,583 ============ ============ ===========
Certain activities conducted by the Company's subsidiaries may result in current income recognition, for U.S. tax purpose, by the Company even though no actual distribution is received by the Company from the subsidiaries. However, such income, when distributed, would generally be considered previously taxed income to the Company and thus would not be subject to U.S. federal income tax again. Hong Kong companies are subject to Hong Kong taxation on their activities conducted in Hong Kong. Under the current Hong Kong laws, dividends and capital gains arising from the realization of investments are not subject to income taxes and no withholding tax is imposed on payments of dividends by the Hong Kong incorporated subsidiaries to the Company. The Company has subsidiaries which are incorporated in Guangdong Province, China and operate in the special economic zone of Shenzhen. These companies are subject to PRC income taxes at the applicable tax rate (currently 15%) on taxable income based on income tax laws applicable to foreign enterprises. Pursuant to the same income tax laws, the subsidiaries are fully exempt from PRC income tax on their manufacturing operations for two years starting from the first profitable year, followed by a 50% exemption for the next three years. The exemptions applicable to all the subsidiaries expired on or before December 31, 2002. These exemptions do not apply to rental income. F-18 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 4. INCOME TAXES (CONTINUED) The provision for income tax expense (benefit) consists of the follows:
Year ended March 31, ------------------------------------------- 2005 2004 2003 HK$ HK$ HK$ Current tax Subsidiaries operating in: Hong Kong 6,254 7,301 (88) Other regions (482) (921) 1,619 ------------ ------------ ----------- 5,772 6,380 1,531 Deferred tax Subsidiaries operating in Hong Kong 357 647 2,188 ------------ ------------ ----------- Total 6,129 7,027 3,719 ============ ============ ===========
A reconciliation between the provision for income tax expense computed by applying the United States statutory tax rate to income before income taxes and minority interests and the actual provision for income tax expenses is as follows:
Year ended March 31, ------------------------------------------- 2005 2004 2003 HK$ HK$ HK$ Applicable U.S. federal tax rate 34% 34% 34% ============ ============ =========== Provision of income taxes at the applicable U.S. federal tax rate on income for the year 22,385 7,237 7,678 Non-deductible expenses 2,463 6,899 4,099 Non-taxable income (6,610) (693) (218) Changes in valuation allowance 66 (2,312) (1,491) International rate difference (11,443) (5,895) (6,197) Tax on sales of shares of MSIL (note 1) - 2,700 - Others (732) (909) (152) ------------ ------------ ----------- 6,129 7,027 3,719 ============ ============ ===========
F-19 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 4. INCOME TAXES (CONTINUED) Temporary differences and operating loss carry forwards that give rise to deferred tax assets and liabilities are as follows: March 31, -------------------------- 2005 2004 HK$ HK$ Deferred tax assets: Operating loss carry forwards 4,302 5,019 Valuation allowance (3,887) (3,821) ------------ ------------- Net deferred tax assets 415 1,198 Deferred tax liabilities: Property, plant and equipment (1,370) (1,845) ------------ ------------- (955) (647) ============ ============= The deferred tax balances are classified in the consolidated balance sheet as follows: Year ended March 31, -------------------------- 2005 2004 HK$ HK$ Non-current assets 258 174 Non-current liabilities (1,213) (821) ------------ ------------- (955) (647) ============ ============= As of March 31, 2005, subsidiaries of the Company had total losses available for carry forward for Hong Kong tax purposes, subject to the agreement of the Hong Kong Inland Revenue Department, amounting to approximately HK$24,502, which have no expiration date. The tax loss carry forwards can only be utilized by the subsidiaries generating the losses. Due to the uncertainty of the ability of the subsidiaries to realize the resultant deferred tax asset of HK$4,302, the Company has established a valuation allowance in the amount of HK$3,887. U.S. deferred tax liabilities have not been provided on approximately HK$372,000 of undistributed earnings of foreign subsidiaries because the Company intends to reinvest those earnings permanently. It is not practicable to estimate the amount of additional taxes that might be payable upon distribution of such earnings. F-20 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 5. INVENTORIES Inventories by major categories are summarized as follows: Year ended March 31, -------------------------- 2005 2004 HK$ HK$ Raw materials 18,037 14,676 Work in progress 14,520 19,659 Finished goods 50,148 80,962 ------------ ------------- 82,705 115,297 ============ ============= During the years ended March 31, 2005 and 2004, the Company made a write-down of inventories, amounting to HK$32,300 and HK$14,273, respectively. No similar write-down of inventories was made for the year ended March 31, 2003. 6. STAFF RETIREMENT PLANS The Company participates in a Mandatory Provident Fund Scheme ("MPF Scheme") for all qualifying employees in Hong Kong with effect from December 1, 2000. The assets of the MPF Scheme are held separately from those of the Company in funds under the control of an independent trustee. The Company contributes 5% of relevant payroll costs (monthly contribution is limited to 5% of HK$20 for each eligible employee) to the MPF Scheme, which contribution is matched by employees. The employees of the Company's subsidiaries in the PRC are members of a state-managed retirement benefits scheme operated by the local PRC government. The subsidiaries are required to contribute 8% of the average basic salary to the retirement benefit scheme to fund the benefits. The only obligation of the Company with respect to the retirement benefit scheme is to make the specified contributions. The total contributions made for the years ended March 31, 2005, 2004 and 2003 amounted to HK$993, HK$820 and HK$737, respectively. F-21 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: Year ended March 31, -------------------------- 2005 2004 HK$ HK$ Leasehold land and buildings 119,194 106,959 Construction in progress 15,088 21,925 Plant and machinery 11,049 12,706 Furniture and equipment 12,761 11,360 Motor vehicles 5,055 4,578 ------------ ------------- 163,147 157,528 Less: Accumulated depreciation (44,086) (41,737) ------------ ------------- Net book value 119,061 115,791 ============ ============= 8. REAL ESTATE INVESTMENT Year ended March 31, -------------------------- 2005 2004 HK$ HK$ At cost: Leasehold land and buildings - Hong Kong 36,280 74,502 - Other regions of the PRC 21,837 25,106 ------------ ------------- 58,117 99,608 Less: Accumulated depreciation (10,973) (10,935) ------------ ------------- Net book value 47,144 88,673 ============ ============= The real estate investment in other regions of the PRC represents the Company's interest in an industrial complex known as Man Sang Industrial City located in Gong Ming Zhen, Shenzhen. Part of the industrial complex is used by the Company and is included in property, plant and equipment. The remaining leasehold land and buildings are classified as real estate investment and are leased to unaffiliated third parties under non-cancelable operating lease agreements. The real estate investment in Hong Kong principally represents office premises leased to unaffiliated third parties under non-cancelable operating lease agreements. Leases are negotiated for an average term of one to three years and rentals are fixed during the relevant lease period. F-22 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 8. REAL ESTATE INVESTMENT (CONTINUED) Rental income relating to such operating leases is included in gross rental income in the consolidated statements of income and amounted to HK$4,646, HK$6,220 and HK$7,455 for the years ended March 31, 2005, 2004 and 2003, respectively. The future aggregate minimum rental receivables under non-cancelable operating leases are as follows: As of March 31, 2005 HK$ Year ending March 31, 2006 3,282 2007 2,027 2008 960 2009 366 2010 306 Thereafter 509 ------------- 7,450 ============= In March 2004, the Group entered into a sales and purchase agreement to dispose of a real estate investment to a third party at a consideration of HK$71,600. Included in other current assets as of March 31, 2004 was a stakeholder's deposit of HK$7,160 held by a solicitor firm, Messrs. Yuen & Partners in respect of the disposal. The transaction was completed on September 15, 2004. 9. SHORT-TERM BORROWINGS The Company has obtained bank credit facilities relating to short term borrowings in the amount of HK$47,000 and HK$95,450 at March 31, 2005 and 2004, respectively. The facilities were unused as of March 31, 2005 and 2004. Interest rates are generally based on the banks' prime lending rates and the credit lines are normally subject to periodic review. There are no significant covenants or other financial restrictions relating to the credit lines. As of March 31, 2005, leasehold land and buildings with a net book value of HK$69,864 and real estate investment with a net book value of HK$13,552 were pledged as collateral for the above facilities and the long-term debts described in note 11. There is no restriction on the use of the assets pledged for such facilities and bank loans. F-23 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 10. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: Year ended March 31, -------------------------- 2005 2004 HK$ HK$ Accrued expenses 4,153 3,126 Deposits received 1,760 1,767 Value-added tax payable 1,056 1,830 Purchase consideration for a business 1,000 1,000 Sundry payables 947 951 Others 1,701 1,305 ------------ ------------- 10,617 9,979 ============ ============= 11. LONG-TERM DEBTS
Year ended March 31, ----------------------------- 2005 2004 HK$ HK$ Long-term debts consist of: Bank loan bearing interest at Hong Kong Inter-Bank Offered Rate ("HIBOR") (0.174% at March 31, 2004) plus 1.25%, repayable by monthly installments of HK$156 through 2007 - 4,375 Bank loan bearing interest at HIBOR plus 1.1%, repayable by quarterly installments of HK$625 through 2007 - 5,416 Bank loan bearing interest at HIBOR plus 1.5%, repayable by quarterly installments of HK$300 through 2006 - 1,800 ------------ --------------- Total - 11,591 Current portion of long-term debts - (5,575) ------------ --------------- Long-term debts, less current portion - 6,016 ============ ===============
All of the Company's long-term debts were fully repaid during the year. There are no significant covenants or other financial restrictions relating to the Company's long-term debts. Details of assets pledged by the Company as collateral for the above bank loans are described in note 9. F-24 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 12. COMMITMENTS AND CONTINGENCIES The Company leases premises under various operating leases which do not contain any escalation clauses and all of the leases contain a renewal option. Rental expense under operating leases was HK$1,793, HK$3,693 and HK$3,974 for the years ended March 31, 2005, 2004 and 2003, respectively. As of March 31, 2005, the Company and its subsidiaries were obligated under non-cancelable operating leases requiring minimum rentals as follows: Operating leases HK$ Year ending March 31, 2006 1,773 2007 431 ---------- 2,204 ========== As of March 31, 2005, the Company had commitments of HK$3,568 relating to the acquisition of property, plant and equipment. On December 2, 2003, Arcadia Jewellery Limited ("Arcadia"), a subsidiary of the Company, filed a lawsuit in Hong Kong against its former general manager and certain other parties (the "Defendants") for breach of a business transfer agreement and an employment agreement and a consultancy agreement ("Case 1"). Arcadia is claiming against the Defendants for, inter alia, account and inquiry; repayment of monies of at least HK$832; damages; interest; a declaration that the consultancy agreement is null and void and Arcadia is entitled to rescind the same; a declaration that Arcadia is entitled to exercise its rights under the business transfer agreement (i.e. not to pay the balance of the purchase consideration of HK$1,000); return of the purported consultancy fees or earnest money, the amount of which is to be assessed; costs and further or other relief. On December 22, 2003, this former general manager filed a lawsuit in Hong Kong against Arcadia in respect of the aforesaid employment agreement for monetary claim of approximately HK$395 and also a declaration that the restraint of trade covenants under the aforesaid employment agreement are void and unenforceable. Afterwards, this former general manager agreed to transfer his monetary claim to the Labour Tribunal in Hong Kong and consolidate the rest of his case into Case 1. Although it is not possible to predict with certainty at the moment the outcome of these unresolved legal actions or pending claim or the range of possible loss or recovery, the Company does not believe that the resolution of these matters will have a material adverse effect on the Company's financial position or operating results. F-25 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 13. CAPITAL STOCK The Company's capital stock consists of common stock and Series A preferred stock and Series B convertible preferred stock. The voting rights of the holders of common stock are subject to the rights of the outstanding Series A preferred shares which, as a class, is entitled to one-third voting control of the Company. Accordingly, the holders of common stock and Series A preferred shares hold, in the aggregate, more than fifty percent of the total voting rights and they can elect all of the directors of the Company. Holders of the 100,000 issued and outstanding shares of Series A preferred stock (the "Series A preferred shares") are entitled, as a class, to one-third voting control of the Company in all matters voted on by stockholders and a liquidation preference of US$25 per share. Except for the foregoing, the holders of the Series A preferred shares have no preferences or rights in excess of those generally available to the holders of common stock. The holders of Series A preferred shares are entitled to participate in any dividends paid ratably with the holders of common stock. The directors have authorized a series of preferred stock designated as Series B convertible preferred stock (the "Series B preferred shares"). A total of 100,000 Series B preferred shares were authorized. Except to the extent declared by the directors from time to time, if ever, no dividends are payable with respect to the Series B preferred shares. Additionally, the Series B preferred shares have no voting rights except that the approval of holders of a majority of such shares is required to (1) authorize, create or issue any shares of any class or series ranking senior to the Series B preferred shares as to liquidation preference, (2) amend, alter or repeal, by any means, the Company's certificate of incorporation if the powers, preferences, or special rights of the Series B preferred shares would be adversely affected, or (3) become subject to any restriction on the Series B preferred shares, other than restrictions arising solely under Nevada law or existing under the certificate of incorporation as in effect on December 31, 1995. The Series B preferred shares have a liquidation preference of US$1,000 per share and are subject, at the election of the Company, to redemption or conversion at such price after December 31, 1997. At March 31, 2005, no shares of Series B preferred stock were outstanding. On June 7, 2002, the Company issued in aggregate 410,000 shares of common stock of par value US$0.001 per share to two business consultants pursuant to two separate business consulting agreements dated June 1, 2002. The amount of the relevant compensation expenses of approximately HK$2,174, being the fair value of the shares issued, is being recognized over the service period of the contracts. Approximately HK$181, HK$1,087 and HK$906 was charged to the statement of income during the years ended March 31, 2005, 2004 and 2003, respectively. On April 30, 2003, the Company repurchased 410,000 shares of common stock, par value US$0.001 per share at a price of US$1.5 per share. These shares were cancelled on May 2, 2003. During the year ended March 31, 2005, 50,000 stock options were exercised at a price of US$1.22 per share. A total of 50,000 shares of common stock, par value of US$0.001 was issued accordingly. F-26 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 14. STOCK OPTION PLANS MSIL options On August 2, 2002, MSIL adopted a new share option scheme (the "2002 Scheme") and terminated the one adopted on September 8, 1997 (the "1997 Scheme"). In accordance with the 2002 Scheme, MSIL may grant options to any person being an employee, officer, agent, or consultant of group headed by MSIL ("MSIL Group") including executive or non-executive directors of MSIL Group to subscribe for shares in MSIL at a price determined by the board of directors of MSIL being at least the highest of (a) the closing price of the shares on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") on the date of grant of the option, which must be a trading day; (b) the average closing price of the shares on the Stock Exchange for the five trading days immediately preceding the date of grant of the option; and (c) the nominal value of the shares. The purpose of the 2002 Scheme is to provide incentives to the people who were granted options to contribute to MSIL Group and to enable MSIL Group to recruit high-caliber employees and attract resources that are valuable to MSIL Group. The total number of shares which may be issued upon exercise of all options to be granted, together with all options to be granted under any other share option scheme(s) of MSIL and/or any of its subsidiaries, must not represent more than 10% of the nominal amount of all the issued shares of MSIL as at August 2, 2002. The 2002 Scheme is valid and effective for a period of 10 years commencing August 2, 2002. At March 31, 2004, 75,187,093 options were available for future grant under the 2002 Scheme. No options have been granted as of March 31, 2005 under the 2002 Scheme. During the year ended March 31, 2003, all options granted under the 1997 Scheme lapsed and no options were exercisable under the 2002 Scheme as of March 31, 2005. Company options In October of 1996, the Company approved the establishment of the Man Sang Holdings, Inc. 1996 Stock Option Plan (the "Plan"), under which stock options awards ("Holding Company Options") may be made to employees, directors and consultants of the Company. The Plan will remain effective until October 2006 unless terminated earlier by the Board of Directors. The maximum number of shares of common stock which may be issued or delivered and as to which awards may be granted under the Plan was 1,000,000 shares, which was subsequently revised to 2,000,000 shares, as adjusted by the anti dilution provisions contained in the Plan. The exercise price for a stock option must be at least equal to 100% (110% with respect to incentive stock options granted to persons holding ten percent or more of the outstanding common stock) of the fair market value of the common stock on the date of grant of such stock option for incentive stock options, which are available only to employees of the Company, and 85% of the fair market value of the common stock on the date of grant of such stock option for other stock options. F-27 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 14. STOCK OPTION PLANS (CONTINUED) Company options (Continued) The duration of each option will be determined by the Compensation Committee, but no option will be exercisable more than ten years from the date of grant (or, with respect to incentive stock options granted to persons holding ten percent or more of the outstanding common stock not more than five years from the date of grant). Unless otherwise determined by the Compensation Committee and provided in the applicable option agreement, options will be exercisable within three months of any termination of employment, including termination due to disability, death or normal retirement (but no later than the expiration date of the option). Option activity of the Holding Company Options is as follows:
Number of Exercise price with the Holding Company weighted average exercise Options price in parenthesis Outstanding at March 31, 2003 and 2004 700,000 US$1.22 and US$1.10 (US$1.1771) Exercised (note 13) (50,000) US$1.22 --------------- Outstanding at March 31, 2005 650,000 US$1.22 and US$1.10 (US$1.1738) ===============
The total number of options exercisable was 650,000 and 575,000 as of March 31, 2005 and 2004, respectively, at the weighted average exercise prices of US$1.1738 and US$1.1939, respectively. Additional information on options outstanding as of March 31, 2005 is as follows:
Options outstanding and exercisable as of March 31, 2005 ---------------------------------------------------- Weighted average Exercise price Date of grant Number outstanding remaining contractual and exercisable life (years) US$ 1.10 March 26, 2003 250,000 8.00 1.22 September 16, 1997 400,000 2.55 ----------------------- --------------------------- 650,000 4.65 ======================= ===========================
F-28 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 14. STOCK OPTION PLANS (CONTINUED) Company options (Continued) For stock options granted on September 16, 1997, the holders can subscribe for the shares of common stock at a subscription price of US$1.22 per share. 50% of the granted stock options vested and became exercisable on September 16, 1998 and the remainder vested and became exercisable on September 16, 1999. The options expire on September 15, 2007. The total fair value of stock option granted to employees on March 26, 2003 was HK$556. The holders can subscribe for the shares of common stock at a subscription price of US$1.10 per share, 50% of which vested and became exercisable on March 26, 2004, and the remainder will vest and become exercisable on March 26, 2005. The options will expire on March 25, 2013. As of March 31, 2005 and 2004, 1,200,000 options were available for future grant under the Plan. Compensation expenses The Company has elected to account for the Holding Company Options using the fair value method The fair value of each Holding Company Option granted on March 26, 2003 was calculated to be US$0.28, using the Black-Scholes option pricing model, with the following assumptions: Risk-free interest rate per annum 1.25% Expected life 2 years Expected volatility 45% Expected dividend yield Nil The total compensation expense of the Holding Company Options recognized in the consolidated statements of income for the years ended March 31, 2005, 2004 and 2003 were HK$134, HK$418 and HK$4, respectively. 15. RELATED PARTY TRANSACTIONS During the periods presented, certain leasehold properties were provided free of charge to Messrs. Cheng Chung Hing and Cheng Tai Po for their residential use. In December 2002, the Company disposed of its entire equity interest of a wholly owned subsidiary which held a 30% equity interest of China South City Holdings Limited, for a consideration of HK$300 to Messrs. Cheng Chung Hing and Cheng Tai Po. The carrying value of the net assets disposed of amounted to approximately HK$240. The Company paid professional fees of HK$237, HK$375 and HK$301 for the years ended March 31, 2005, 2004 and 2003, respectively to Messrs. Yuen & Partners for the provision of legal and professional services to the Company. Mr. Yuen Ka Lok, Ernest, a director of the Company and MSIL (resigned as a director of MSIL during the year), the Chairman of the Compensation Committee and the Audit Committee of the Board of Directors of the Company, is a partner of Messrs. Yuen & Partners. F-29 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 15. RELATED PARTY TRANSACTIONS (CONTINUED) The Company paid standard brokerage fees to DBS Vickers (Hong Kong) Limited ("DBS Vickers") for holding certain securities on behalf of the Company and maintains a securities account with DBS Vickers. Mr. Lai Chau Ming, Matthew, a director of the Company, a member of the Compensation Committee and the Audit Committee of the Board of Directors of the Company, is a Sales Associate Director of DBS Vickers. The amounts of brokerage fees paid to DBS Vickers during the periods presented were considered insignificant by the management. During the year ended March 31, 2004, the Company sold a 7.2% equity interest in MSIL to Messrs. Cheng Chung Hing and Cheng Tai Po through Man Sang International (B.V.I.) Limited (see note 1 for details). During the years ended March 31, 2005 and 2004, the Company sold jewelry products amounting to HK$636 and HK$298, respectively, to China South International Industrial Materials City (Shenzhen) Co., Ltd. ("CSII"), a company in which Messrs. Cheng Chung Hing and Cheng Tai Po have beneficial interests. In addition, a reimbursement amounting to HK$554 was received from CSII for the salaries of staff who had provided services to CSII during the year. 16. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS A substantial percentage of the Company's sales is made to a small number of customers and is typically on an open account basis. For the years ended March 31, 2004 and 2003, no customer accounted for 10% or more of total sales. During the year ended March 31, 2005, only one of our customers accounted for more than 10% of our sales (approximately 10.3%). Details of the amounts receivable from the five customers with the largest receivable balances at March 31, 2005 and 2004 are as follows: Percentage of accounts receivable March 31, -------------------------- 2005 2004 Five largest receivable balances 57.21% 39.91% F-30 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 16. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED) An analysis of the allowance for doubtful accounts for trade receivables for each of the three years in the period ended March 31, 2005 is as follows:
Year ended March 31, ------------------------------------------------ 2005 2004 2003 HK$ HK$ HK$ Balance at beginning of year 14,728 9,216 10,054 Addition of allowance charged to statement of income 8,105 5,590 440 Direct write-off charged against allowance (26) (78) (1,278) --------------- --------------- ---------------- Balance at end of year 22,807 14,728 9,216 =============== =============== ================
17. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable and accounts payable approximate their fair values because of the short-term nature of these amounts. The carrying amounts of long-term debts approximate their fair values as their interest rates approximate those which would have been available as of the balance sheet date for debts of the same remaining maturities. 18. SEGMENT INFORMATION The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for enterprise business segments and related disclosures about its 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. The Company's chief operating decision maker evaluates segment performance and allocates resources based on several factors of which the primary financial measures are revenues from external customers and operating income. F-31 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 18. SEGMENT INFORMATION (CONTINUED) Contributions of the major activities, profitability information and asset information are summarized below:
Year ended March 31, --------------------------------- 2005 2004 2003 HK$ HK$ HK$ Revenues from external customers: Pearls 412,262 382,123 323,082 Real estate investment 4,646 6,220 7,455 ---------- ------------ --------- 416,908 388,343 330,537 ========== ============ ========= Operating income: Pearls 35,386 24,309 24,843 Real estate investment (6,381) (3,338) 175 ---------- ------------ --------- 29,005 20,971 25,018 ========== ============ ========= Interest expense: Pearls 33 134 859 Real estate investment 18 111 503 Corporate assets 49 135 267 ---------- ------------ --------- 100 380 1,629 ========== ============ =========
F-32 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 18. SEGMENT INFORMATION (CONTINUED)
Year ended March 31, --------------------------------- 2005 2004 2003 HK$ HK$ HK$ Depreciation and amortization: Pearls 5,602 6,620 6,051 Real estate investment 1,637 1,889 2,013 Corporate assets 918 918 1,232 ---------- ------------ --------- 8,157 9,427 9,296 ========== ============ ========= Capital expenditure for segment assets: Pearls 8,536 24,078 8,963 Real estate investment 1,473 38,222 2,053 Corporate assets - - 167 ---------- ------------ --------- 10,009 62,300 11,183 ========== ============ ========= Segment assets: Pearls 449,219 372,671 334,251 Real estate investment 62,232 95,833 96,447 Corporate assets 47,790 48,370 53,046 ---------- ------------ --------- 559,241 516,874 483,744 ========== ============ ========= Long-lived assets: Pearls 65,557 77,228 28,353 Real estate investment 62,232 88,673 96,447 Corporate assets 38,674 39,593 40,511 ---------- ------------ --------- 166,463 205,494 165,311 ========== ============ =========
The operating income of the pearl segment for the year ended March 31, 2004 has been arrived at after an impairment charge of HK$1,730, recognized in respect of the Company's 19.5% stake in a pearl farm (see note 2). Corporate assets consist principally of marketable securities and leasehold land and buildings held as quarters used by certain directors and employees of the Company. F-33 MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - -------------------------------------------------------------------------------- (Dollars in thousands except share data) 18. SEGMENT INFORMATION (CONTINUED) All of the Company's sales of pearls are coordinated through the Hong Kong subsidiaries and an analysis by destination is as follows:
Year ended March 31, ------------------------------------ 2005 2004 2003 HK$ HK$ HK$ Net sales: Hong Kong 44,854 50,584 51,515 Export: North America 145,099 117,524 92,830 Europe 122,674 112,214 69,269 Japan 46,145 37,489 39,923 Asian countries, other than Japan 38,216 47,822 58,932 Others 15,274 16,490 10,613 ----------- ----------- ------------ 412,262 382,123 323,082 =========== =========== ============
The Company operates in only one geographic area. The location of the Company's identifiable assets is as follows:
Year ended March 31, ------------------------------------ 2005 2004 2003 HK$ HK$ HK$ Hong Kong 469,158 427,092 399,628 Other regions of the PRC 90,083 89,782 84,116 ----------- ----------- ------------ 559,241 516,874 483,744 =========== =========== ============
The Company derived operating revenue from the following customer, which accounted for over 10% of operating revenue:
Year ended March 31, --------------------------------------------------------------- 2005 2004 2003 --------------------- ------------------- --------------------- HK$ % HK$ % HK$ % Customer A 42,255 10 32,851 9 29,345 9 =========== ========= ========== ======== =========== ==========
Accounts receivable related to this customer were HK$12,385 and HK$13,078, as of March 31, 2005 and 2004, respectively. F-34
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands except share data) 19. QUARTERLY DATA (UNAUDITED) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter HK$ HK$ HK$ HK$ 2005 Net sales 99,078 107,983 109,074 96,127 Gross profit 27,485 31,885 28,400 29,478 Operating income 10,298 4,313 5,093 9,301 Net income 3,753 17,280 1,322 4,561 Basic earnings per common share 0.83 3.83 0.29 1.01 Diluted earnings per common share 0.76 3.49 0.26 0.89 2004 Net sales 66,888 101,508 106,540 107,187 Gross profit 17,042 28,075 23,827 35,203 Operating (loss) income (1,955) 8,667 6,243 8,016 Net (loss) income (1,895) 2,949 (718) 2,656 Basic (loss) earnings per common share, restated (0.41) 0.65 (0.16) 0.59 Diluted (loss) earnings per common share, restated (0.41) 0.61 (0.16) 0.54
F-35 EX-21 2 ex21-1.txt EX. 21.1: SUBSIDIARIES OF THE COMPANY Exhibit 21.1 SUBSIDIARIES OF MAN SANG HOLDINGS, INC. 4376zone.com Limited Arcadia Jewellery Limited Asean Gold Limited Cyber Bizport Limited Damei Pearls Jewellery Goods (Shenzhen) Co. Ltd. Excel Access Limited Hong Kong Man Sang Investments Limited M.S. Collections Limited M.S. Electronic Emporium Limited Man Hing Industry Development (Shenzhen) Co., Ltd. Man Sang Development Company Limited Man Sang Enterprise Ltd. Man Sang Innovations Limited Man Sang International (B.V.I.) Limited Man Sang International Limited Man Sang Jewellery Company Limited Market Leader Technology Limited Peking Pearls Company Limited Swift Millions Limited EX-31 3 ex31-1.txt EX. 31.1: CEO CERTIFICATION Exhibit 31.1 I, CHENG Chung Hing, Ricky, certify that: I have reviewed this annual report of Man Sang Holdings, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 28, 2005 /s/CHENG Chung Hing, Ricky -------------------------- CHENG Chung Hing, Ricky Chairman of the Board, President, Chief Executive Officer EX-31 4 ex31-2.txt EX. 31.2: CFO CERTIFICATION Exhibit 31.2 I, AU Moon Ying, Henry, certify that: I have reviewed this annual report of Man Sang Holdings, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 28, 2005 /s/AU Moon Ying, Henry ---------------------- AU Moon Ying, Henry Chief Financial Officer EX-32 5 ex32-1.txt EX. 32.1: SECTION 1350 CEO CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Man Sang Holdings, Inc. (the "Company") on Form 10-K for the year ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Cheng Chung Hing, Ricky, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ CHENG Chung Hing, Ricky - --------------------------- CHENG Chung Hing, Ricky Chief Executive Officer EX-32 6 ex32-2.txt EX. 32.2: SECTION 1350 CFO CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Man Sang Holdings, Inc. (the "Company") on Form 10-K for the year ended March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, AU Moon Ying, Henry, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ AU Moon Ying, Henry - ----------------------- AU Moon Ying, Henry Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----