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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 pur