ITEM 1. BUSINESS
GENERAL AND ORGANIZATION CHART
Man Sang Holdings, Inc. (the "Company"), through its subsidiaries, is primarily engaged in (i) the purchasing, processing, assembling, merchandising, and wholesale distribution of pearls and pearl jewelry products; and (ii) the management and leasing of 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]
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.
During the period from April to July 1996, the Company, in reliance on Regulation S promulgated under the US 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 $6.76 million. All 6,760 shares of Series B Preferred Stock were converted into 5,223,838 shares of Common Stock, of which 5,219,448 shares were issued in fiscal 1997 before a 1-for-4 reverse stock split which the Company effected in October 1996, and the balance of 4,390 shares of Common Stock issuable upon conversion of Series B Preferred Stock were issued as 1,098 shares of Common Stock (post reverse stock split) during fiscal 1998.
On July 30, 1997, Man Sang International Limited ("MSIL") was incorporated as an exempted company under the Companies Act 1981 of Bermuda. On September 8, 1997, Man Sang BVI acquired MSIL and underwent a corporate reorganization. Thereafter, MSIL held directly or indirectly the interests of various operating subsidiaries in Hong Kong and the PRC.
- -------- *Unless otherwise indicated as Hong Kong dollars or HK$, 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, 2002. 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$7.80 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.
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 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 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.
The foundation of the group of companies comprising the Company and its subsidiaries (the "Group") was laid in 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.
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 a 24 building 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). See "Item 1 - Business - Real Estate Leasing Operations" and "Item 2
ITEM 2. PROPERTIES
HONG KONG
The head office of the Group at 21st Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong has a gross floor area of approximately 10,880 square feet. The Company entered into a tenancy agreement for 3 years commencing from July 1, 1999 and ending on June 30, 2002, with another optional renewal term of 3 years upon expiry of the tenancy.
On April 1, 2000, the Company commenced leasing the premises at 27th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong. The premises has a gross floor area of approximately 10,880 square feet for the trading of pearl jewelry and the retailing of jewelry and accessories through its e-commerce website, www.4376zone.com. The lease has a term of 3 years commencing from April 1, 2000 and ending on March 31, 2003, with an option to renew for a further term of 3 years upon expiry of the tenancy.
The Company owns 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. In fiscal 2002, the Company used the property to house its operation in system integration consultancy.
The Company owns Units 14, 15 and 16 on 6th Floor and a car-parking space at No. L30 on the Ground Floor of Block A, Focal Industrial Centre, 21, Man Lok Street, Kowloon, Hong Kong. The floor areas of the units are 2,412 square feet, 2,349 square feet and 1,585 square feet respectively. The Group uses half of Unit 15 as warehouse. The rest of the units are leased out to independent third parties. See "Item 1 - Business - Real Estate Leasing Operations - Leasing and Management" above.
The Company owns a residential flat with a gross floor area of approximately 2,643 square feet on the 17th Floor, and a parking space on 2nd Floor, at Silvercrest, 24 MacDonnell Road, Hong Kong, which it had been using as the Chairman's residence until February 5, 2002, when the Chairman moved to Flat B, 20th Floor, The Mayfair, 1 May Road, Hong Kong (see below). The Company is considering leasing out the property.
The Company owns 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 the Company uses as quarters for PRC employees on business trips to Hong Kong.
The Company owns 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. It was leased to an independent third party. See "Item 1 - Business - Real Estate Leasing Operations - Leasing and Management" above.
The Company owns a residential flat with a gross floor area of approximately 2,838 square feet on Flat B, 20th Floor, The Mayfair, 1 May Road, Hong Kong, which it had used as the Vice-Chairman's residence until January 13, 2002 when the Vice Chairman moved out. The Chairman then moved in on February 6, 2002. The Company currently pays for the Vice Chairman's stay at a hotel.
The Company owns 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 the Company has leased to an independent third party. See "Item 1 - Business - Real Estate Leasing Operations - Leasing and Management" above.
PEOPLE'S REPUBLIC OF CHINA
As noted above, the Company owns 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, 2002, Man Sang Industrial City consisted of 24 buildings encompassing a total gross floor area of approximately 559,356 square feet. The Company presently utilizes most of the units in 5 buildings for pearl processing, administration and staff accommodation. The remaining 19 buildings, amounting to approximately 490,564 square feet of floor space and representing approximately 87.7% of the total gross floor space of Man Sang Industrial City, are leased to independent third parties and industrial users not connected with the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On November 1, 2001, MSJ filed an action in the High Court of Hong Kong against a customer, World Wide Imports, Inc. to claim approximately $119,182 (for which the Company has made full provision) plus interests and costs. Up to May 31, 2002, the Company has recovered $28,800 and the Company estimates that non-recoverable costs in addition to the amount claimed, if any, will be immaterial.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders through the solicitation of proxies or otherwise, during the fourth quarter of the Company's fiscal year ended March 31, 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock has been quoted on the National Association of Securities Dealers, Inc. Electronic Bulletin Board since 1987 and is traded under the symbol "MSHI". However, the market for these securities has historically been extremely limited and sporadic, particularly during the period prior to the Exchange.
The high and low bid prices for the Company's Common Stock for each quarter, and on the last day of each quarter, during the Company's last two fiscal years were as follows:-
The above bid information is provided by Bloomberg LP, and 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 the Company's Common Stock as of May 31, 2002, was approximately 200. This number does not include an indeterminate number of stockholders whose shares are held by brokers in street name.
DIVIDENDS
The Company has not paid any dividends with respect to its Common Stock during the two preceding fiscal years, and does not intend to pay dividends in the foreseeable future.
ITEM 6.
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, 2002, 2001, 2000, 1999 and 1998, 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 Item 7, 7A and 8 respectively, of this Report on Form 10-K.
(Amounts expressed in thousands except share data)
N1: Income before income taxes and net income is from continuing operations.
N2: "Gearing ratio" represents the ratio of the Company's total debts and minority interests to shareholders' equity.
ITEM 7.
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 products 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 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 pearl jewelry products, and in real estate investment, the Company's ability to achieve its
objectives and expectations are derived at least in part from 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 good 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. 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 included elsewhere herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of results of operations and financial condition are based upon the Company's 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. Some of the most significant estimates and assumptions include estimates of sales returns, 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.
The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of the Company's consolidated financial statements:
Sales returns: Sales are recognized at the time products are shipped to customers and collectibility for such sales is reasonably assured. Sales are reported net of returns. The Company maintains a reserve for potential product returns and it records, as a reduction to sales, its provision for estimated product returns, which is based on historical experience.
Allowance for doubtful accounts: The Company maintains an allowance for doubtful accounts based on estimates of the credit-worthiness of the Company's customers. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories write-downs: The Company writes 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: The Company periodically evaluates the carrying value of long-lived assets held or 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 fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying value 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, thereby possibly requiring an impairment charge.
Income taxes: Provisions for deferred income taxes are made using the asset and liability method, under which deferred income taxes are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities, and are 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, or all, of the deferred tax asset will not be realized.
OVERVIEW
Net sales in fiscal 2002 decreased by $3.9 million to $36.2 million, representing a 9.7% drop when compared to net sales of $40.1 million in fiscal 2001. The decrease in sales was mainly attributable to a decrease in demand, which was in turn mainly attributable to a general slow down of the economies of, and weakened business and consumer confidence in, many of the Company's major markets, especially immediately after September 11, 2001. Net sales in the fourth quarter of fiscal 2002, however, was $10.2 million, compared to $8.8 million for the same period in fiscal 2001; such strong rebound was attributable in part to increased marketing efforts of the Company, and in part to improvement in the market sentiments.
Net income for fiscal 2002 was $2.1 million, compared to a net loss of $4.4 million for fiscal 2001. The results in fiscal 2001 were adversely affected by the inventories write-down of $8.4 million, excluding which the net income would have been $4.0 million.
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, 2002 COMPARED TO YEAR ENDED MARCH 31, 2001
Net Sales and Gross Profit
Net sales in fiscal 2002 decreased by $3.9 million to $36.2 million, representing a 9.7% drop when compared to net sales of $40.1 million in fiscal 2001. The decrease in sales was mainly attributable to a decrease in demand, which was in turn mainly attributable to a general slow down of the economies of, and weakened business and consumer confidence in, many of the Company's major markets, especially immediately after September 11, 2001. Net sales in the fourth quarter of fiscal 2002, however, was $10.2 million, compared to $8.8 million for the same period in fiscal 2001; such strong rebound was attributable in part to increased marketing efforts of the Company, and in part to improvement in the market sentiments.
Gross profit for the fiscal 2002, on the other hand, improved by $10.3 million from $2.1 million for fiscal 2001 to $12.4 million. Gross profit in fiscal 2001 was adversely affected by a write-down of the Company's inventories in the amount of $8.4 million.
Rental Income
Gross rental income increased by $252K**, or 35.3%, from $713K for fiscal 2001 to $965K for fiscal 2002. The increase in gross rental income was mainly attributable to the rental income from 19th Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Hong Kong, acquired in February 2001.
- ----- **As used in this 10-K, the letter "K" appearing immediately after a dollar amount denotes rounding to the nearest $1,000; as an example, $250,499 may be rounded to "$250K".
Selling, General and Administrative Expenses ("SG & A expenses")
SG & A expenses for fiscal 2002 were $9.2 million, consisting of $8.4 million attributable to pearl operations and $0.8 million attributable to real estate operations. This is a decrease of approximately $1.5 million, or 14.0%, from $10.7 million, consisting of $9.9 million attributable to pearl operations and $0.8 million attributable to real estate operations, during fiscal 2001. Included in the SG&A expenses for fiscal 2002 were impairment loss on goodwill of $76K and impairment loss on non-consolidated investments of $385K.
The decrease in SG&A expenses was partly due to a decrease in compensation expenses as no stock options were granted by the Company or MSIL for fiscal 2002 (compared to fiscal 2001 when MSIL granted options to purchase 33,000,000 shares at HK$0.297 per share), and partly due to a decrease in compensation, marketing and other operating expenses under the Company's cost savings program. In addition, the Company's investments in new marketing and distribution channels were fully expensed in fiscal 2001.
As a percentage of net sales, SG & A expenses for pearl operations decreased from 24.8% in fiscal 2001 to 23.3% in fiscal 2002.
Interest Income
Interest income for fiscal 2002 decreased by $391K to $357K from $748K in fiscal 2001. The decrease in interest income was principally due to lower interest rates for fiscal 2002 as compared to interest rates for fiscal 2001 and the withdrawal of bank deposits to pay down the Company's bank debts. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk".
Interest Expenses
Interest expenses for fiscal 2002 decreased by $276K to $626K from $902K in fiscal 2001 as a result of drops in interest rates and the use by the Company of bank deposits to pay down its bank debts.
Income Taxes Expenses (Benefits)
The Company's income taxes expenses for fiscal 2002 were $155K. This is in contrast to income taxes benefits of $428K for fiscal 2001. The income taxes benefits in fiscal 2001 were mainly attributable to a deferred tax asset of $470K which arose from the inventories write-down in fiscal 2001.
Net Income (Loss)
Net income for fiscal 2002 was $2.1 million, compared to a net loss of $4.4 million for fiscal 2001. The net loss of fiscal 2001 was mainly attributable to the inventories write-down of $8.4 million. Excluding inventories write-down, income taxes and minority interests, operating income for fiscal 2002 was $4.1 million, compared to operating income of $1.2 million for fiscal 2001.
YEAR ENDED MARCH 31, 2001 COMPARED TO YEAR ENDED MARCH 31, 2000
Net Sales and Gross Profit
Net sales increased by $4.1 million, or 11.4%, from $36.0 million in fiscal 2000 to $40.1 million in fiscal 2001. The growth was mainly attributable to the increase by 81.6% in the net sales of South Sea and Tahitian pearls as a result of Company's sales efforts and its shift in product mix towards South Sea and Tahitian pearls. South Sea pearls represented 41.5% of net sales in fiscal 2001 as compared to 25.4% of net sales in fiscal 2000.
Gross profit decreased by $9.6 million, or 81.9%, to $2.1 million for fiscal 2001 compared to $11.7 million for fiscal 2000. As a percentage of sales, gross profit decreased from 32.6% to 5.3%. The significant drop in gross profit and gross profit margin was in part due to a write-down of the Company's inventories by $8.4 million, in part due to the shift of the Company's product mix from Chinese freshwater pearls towards higher priced South Sea and Tahitian pearls that yield lower margins, and in part due to the overall drop in margins for all type of pearls.
Rental Income
Gross rental income increased by $117K, or 19.6%, to $713K for fiscal 2001 compared to $596K for fiscal 2000. The increase in gross rental income was attributable to an increase in occupancy rate from 80.3% to 93.4% in the Man Sang Industrial City facility located in the PRC. The rental income from the Hong Kong properties totaled approximately $112K and $81K for fiscal 2001 and 2000, respectively.
SG & A expenses
SG & A expenses for fiscal 2001 were $10.7 million, consisting of $9.9 million attributable to pearl operations and $0.8 million attributable to real estate operations. This is an increase of approximately $1.8 million, or 20.9%, from $8.9 million, consisting of $8.4 million attributable to pearl operations and $0.5 million attributable to real estate operations, during fiscal 2000.
In fiscal 2001, in addition to an increase in compensation expenses, marketing and other operating expenses all increased as net sales increased and the Company continued to develop new product lines (such as jewelry and accessories) and marketing and distribution channels (such as retail sales through e-commerce). Other increases in SG & A expenses were due to increased depreciation and repair and maintenance expenses for certain real estate investments which were previously leasehold land and buildings.
As a percentage of net sales, SG & A expenses for pearl operations increased from 23.2% in fiscal 2000 to 24.8% in fiscal 2001.
Interest Income
Interest income for fiscal 2001 increased by $101K to $748K from $647K in fiscal 2000, principally due to more time deposits placed in banks during fiscal 2001.
Interest Expenses
Interest expenses increased by $201K, or 28.9%, to $902K for fiscal 2001, from $701K for fiscal 2000. The increase in interest expenses was due principally to an increase in short-term bank borrowings by the Company's subsidiaries in PRC to minimize the impact of a possible fluctuation of the Renminbi. The Company's average borrowing rate fell to 6.0% per annum for fiscal 2001 as compared to 6.1% for the prior year.
Income Taxes (Expenses) Benefits
The Company has income taxes benefits of $428K for fiscal 2001. This is in contrast to income taxes expenses of $621K for fiscal 2000. The income taxes benefits were mainly attributable to a deferred tax asset of $470K because of the inventories write-down. The income tax benefits would be used to offset future income tax liabilities.
Net Income (Loss)
The Company has suffered a net loss of $4.4 million for fiscal 2001. This is in contrast to a net income of $2.6 million for fiscal 2000. The loss was mainly attributable to the inventories write-down, the softness of the market price of the pearls and an increase in SG & A expenses for fiscal 2001.
Excluding income taxes and minority interests, the operating loss for fiscal 2001 was $7.2 million, compared to an operating income of $4.3 million for fiscal 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that, among other things, all business combinations entered into subsequent to June 30, 2001, be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives not be amortized, but will be tested for impairment on an annual basis. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 141 during the year ended March 31, 2002 and it did not impact the Company's financial statements. The Company has adopted SFAS No. 142 on April 1, 2002. There was no significant impact on the Company's financial position and results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will be required to adopt this standard on January 1, 2003. Management is assessing, but has not yet determined, the impact that SFAS No. 143 will have on its financial position and results of operations.
The FASB also recently issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on assets impairment supersede SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and portions of APB Opinion 30 "Reporting the Results of Operations". The statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. The statement also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement dates as presently required. Management is assessing, but has not yet determined, the impact that SFAS No. 144 will have on its financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund accounts receivable and inventories and, to a lesser extent, to expand its business operations. At March 31, 2002, the Company had working capital of $34.5 million, which included a cash balance of $12.6 million (including restricted cash), compared to working capital of $28.4 million, which included a cash balance of $16.8 million, at March 31, 2001. The current ratio was 6.2 to 1 in fiscal 2002 as compared with that of 3.0 to 1 in fiscal 2001. Net cash provided by operating activities was $2.9 million and $2.3 million for fiscal 2002 and fiscal 2001, respectively. The increase in cash and cash equivalents by $2.1 million was mainly generated by operating activities.
Inventories increased by $0.9 million from $14.3 million at March 31, 2001 to $15.2 at March 31, 2002 and the inventory turns in terms of months increased from 6.1 months in
fiscal 2001 to 7.4 months in this fiscal year. Inventories was increased mainly to cater to improved market sentiments as reflected in the growth in sales during the fourth quarter when compared to the same period last year.
Long-term debts (including current portion of long-term debts) decreased from $5.9 million at March 31, 2001 to $3.5 million. The decrease was attributable to repayment of installment loans. The gearing ratio was 0.93 at March 31, 2002, as compared with 0.90 at March 31, 2001. The increase was mainly attributable to the increase in minority interests balance from $14.5 million at March 31, 2001 to $22.0 million at March 31, 2002 following the increase of minority shareholdings in MSIL from 32.58% to 43.34% as a result of MSIL's private placement of 120 million shares in November 2001.
The Company had available working capital facilities of $7.3 million in total with various banks at March 31, 2002. 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 based on prime lending rates, and are subject to periodic review. At March 31, 2002, the Company did not utilize such credit facilities.
The Company believes that funds to be generated from internal operations and the existing banking facilities will enable the Company to meet anticipated future cash flow requirements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In fiscal 2002, the Company made approximately 35.3% of its purchases in RMB, with the remaining amounts mainly settled in Hong Kong dollars, US dollars and Japanese Yen (11.2% of total purchase). The RMB is not a fully convertible currency and the PRC government determines its exchange rate against other currencies. There are conflicting speculations in the foreign exchange market for either a devaluation of the RMB as an attempt of the PRC government to make PRC exports more competitive, or a revaluation of the RMB following the PRC's entry into the World Trade Organization. As the PRC has not declared any intention to either devalue or revalue its currency, the management believes that the imminent risk of a substantial fluctuation of the RMB exchange rate remains low. However, to further minimize any exposure to any RMB fluctuations, the Company borrows most of the cash it needs in the PRC through short-term loans from PRC banks. At March 31, 2002, the Company had short-term RMB bank borrowings of about $3.8 million, the weighted average interest rate was 5.6% per annum.
The Company's policy is to denominate all its sales in either US dollars or Hong Kong dollars. Since the Hong Kong dollar remained "pegged" to the US dollar throughout the period, the Company's sales proceeds have thus far had minimal exposure to foreign exchange fluctuations.
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 2002.
In addition, the Company's interest expense is sensitive to fluctuations in the general level of Hong Kong interest rates determined on the basis of Hong Kong Inter-bank Offer Rate ("HIBOR"). As the Hong Kong dollar is pegged to the US dollar, which in turn correlates Hong Kong interest rates to US interest rates, any movement in US dollar interest rates is expected to have a corresponding bearing on Hong Kong dollar interest rates. Since US interest rates have been falling since June 30, 2000, three-month HIBOR has decreased by 4.2% from 6.5% as at June 30, 2000 to 2.3% as at March 31, 2002, largely in line with changes in US dollar rates. During fiscal 2002, the Company did not expect risks of a material rise in Hong Kong interest rates, and did not enter into derivate contracts or other arrangements to hedge against such risks. At March 31, 2002, the Company had Hong Kong dollar bank borrowings of about $3.5 million, and the weighted average interest rate was 3.3% per annum.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of June 28, 2002, the name and age, position held with the Company and term of office, of each director of the Company and the period or periods during which he or she has served in his or her respective position(s).
TERM OF OFFICE
Each of the directors of the Company serves until his or her successor is duly elected at the next annual meeting of shareholders or until his or her earlier resignation or removal.
INFORMATION REGARDING EXECUTIVE OFFICERS
The following table sets forth the names, ages and offices of the present executive officers of the Company. The periods during which such persons have served in such capacities and information with respect to non-employee directors are indicated in the description of business experience of such persons below.
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
CHENG Chung Hing, Ricky, co-founder of the Group, has served as Chairman of the Board of Directors and President of the Company since January 8, 1996, and of Man Sang BVI since December 1995. He was appointed Chief Executive Officer of the Company on January 2, 1998. He was appointed a member of the Compensation Committee of the Board of Directors on September 8, 1997 and Chief Financial Officer of the Company on February 27, 1999 but resigned from the two offices on September 18, 1998 and August 2, 1999 respectively. He was again appointed Chief Financial Officer on August 2, 2000. Mr. Cheng was appointed Chairman and a Director of MSIL, an indirect subsidiary listed on The Hong Kong Stock Exchange, on August 8, 1997 and August 4, 1997, respectively. Prior to the reorganization of the Group in late 1995, which culminated in the Company's issuance of Common Stock and Series A Preferred Stock in exchange for all the outstanding securities of Man Sang BVI in January 1996 (the "Group Reorganization"), he had served as chairman and president of various companies within the Group. Mr. Cheng has nearly 20 years' experience in the pearl business and is responsible for overall planning, strategic formulation and business development of the Company.
CHENG Tai Po, co-founder of the Group, has served as Vice Chairman of the Company since January 8, 1996 and of Man Sang BVI since December 1995. He was appointed Deputy Chairman and a Director of MSIL on August 8 and August 4, 1997, respectively. Prior to the Group Reorganization, he had served as vice-chairman of various companies within the Group. Mr. Cheng has nearly 20 years' experience in the pearl business and is responsible for purchasing and processing of pearls as well as overall planning, strategic formulation and business development of the Company.
YAN Sau Man, Amy, has served as Vice President and a Director of the Company since January 8, 1996 and of Man Sang BVI since December 1995. She was appointed as a Director of MSIL on August 12, 1997. Ms. Yan joined the Group in 1984 and has been responsible for overall marketing and sales activities of the Company.
LAI Chau Ming, Matthew, has served as a Director of the Company since November 1996. He was appointed a member of the Compensation Committee and a member of the Audit Committee of the Board of Directors on September 8, 1997 and September 18, 1998 respectively. Mr. Lai is currently employed as Sales Associate Director of DBS Vickers (Hong Kong) Limited ("DBS Vickers"). Prior to his joining DBS Vickers in July 1996, Mr. Lai served from 1972 to 1996 as a Senior Manager of Sun Hung Kai Investment Company Limited, one of the biggest investment companies in Hong Kong. Mr. Lai has nearly 30 years' experience in investment. He is experienced in the areas of financial management and planning.
YUEN Ka Lok, Ernest, has served as a Director of the Company since November 1996. He was appointed Chairman of the Compensation Committee and a member of the Audit Committee of the Board of Directors on September 8, 1997 and September 18, 1998 respectively. Mr. Yuen was also appointed a Director of MSIL on August 12, 1997. Mr. Yuen is a solicitor and is currently a Partner in the law firm of Messrs. Yuen & Partners. Mr. Yuen joined Messrs. Ivan Tang & Co. ("ITC") as a Consultant in August 1994 and became a Partner in January 1996. Mr. Yuen retired from ITC as partner and started his own practice in the name of Yuen & Partners in August 1997. Prior to his joining ITC, from March 1992 to August 1994, Mr. Yuen was employed as Assistant Solicitor at Messrs. Van Langenbery & Lau ("VLL") and Messrs. AB Nasir, respectively. Prior to his joining VLL, Mr. Yuen was an Articled Clerk at Messrs. Robin Bridge & John Liu. From 1985 to 1987, Mr. Yuen was an audit trainee at Price Waterhouse (now known as PriceWaterhouse Coopers), an international accounting firm. Mr. Yuen is experienced in civil and criminal litigations as well as general commercial transactions.
HO Suk Han, Sophia, has served as Secretary of the Company since January 1998. Miss Ho has over 10 years' experience in company secretarial work in an international accounting firm and several listed companies in Hong Kong. She is an associate of The Hong Kong Institute of Company Secretaries and The Institute of Chartered Secretaries and Administrators in Hong Kong Limited.
FAMILY RELATIONSHIPS
Cheng Chung Hing, Ricky and Cheng Tai Po are brothers. Other than the foregoing, there are no family relationships among the above-named directors and executive officers of the Company.
COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT
Based solely on a review of copies of the forms provided to the Company, or written representations that no other filing of forms was required, the Company has found that: (i) Cafoong Limited became the beneficial owner of more than 10% of the Common Stock on January 8, 1996 and such company filed Form 3 in respect thereof in February 1997; (ii) Cheng Chung Hing, Ricky and Cheng Tai Po became the indirect beneficial owners of more than 10% of the Company's Common Stock on January 8, 1996 by virtue of their respective holding of 60% and 40% of all the issued and outstanding stock of Cafoong Limited and such individuals filed Forms 3 in respect thereof on February 20, 1997; (iii) Cheng Chung Hing, Ricky; Cheng Tai Po and Yan Sau Man, Amy were granted non-qualified stock options to
purchase Common Stock on September 16, 1997 and such individuals filed Forms 4 in respect thereof on April 9, 1998. See "Item 11
ITEM 11. EXECUTIVE COMPENSATION
OVERVIEW; AND THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
While for convenience of reference this annual report on Form 10-K has used "the Company" when referring to the overall business of the Group, the Company itself actually has no employees. The employee directors of the Company have entered into Services Agreement with MSIL. See "Item 11 - Executive Compensation - Employment Agreements". Other executive officers in the management team were employed by a subsidiary of MSIL.
In the 2001 Annual General Meeting of MSIL held in August 2001, the shareholders of MSIL passed a resolution to authorize its Board of Directors to fix remuneration of all directors (which for MSIL would include all its executives) for the year. The MSIL Board determined that the compensation packages of its directors were generally competitive. Hence, the compensation packages remained unchanged for fiscal 2002.
As at June 28, 2002, the Company via its subsidiary, Man Sang BVI, holds 426,000,000 shares, or 56.66% of the issued capital, of MSIL. Since the overall compensation of the executive officers of the Company is determined by the Board of Directors of MSIL, the Company's Compensation Committee takes up a monitoring function. The Committee reviews the decisions of the MSIL Board in relation to this issue. Should the Committee disagree with the decisions of the MSIL Board, the Committee may advise the Company's Board of Directors to vote in any general meeting of MSIL against authorizing the MSIL Board to fix compensation for MSIL's directors and executives.
For fiscal 2002, all executive officers received their salaries from MSIL and each of Cheng Chung Hing, Ricky and Cheng Tai Po received a bonus from the Company.
With respect to the Chairman and the Vice Chairman, the Compensation Committee members acknowledged that they have brought to the Company not only their expertise and personal relationships in the pearl industry, but also their vision, foresight and efforts to steer the Company towards more profitable and diversified business in the past year. The Committee members also took into account the need to retain such highly qualified officers by providing competitive compensation packages, and granted a bonus to each of Cheng Chung Hing, Ricky, Chairman of the Board and Cheng Tai Po, Vice Chairman.
EXECUTIVE COMPENSATION
During fiscal 2002, other than its Chief Executive Officer, the Company had two executive officers whose annual compensation exceeded $100,000. The following table sets forth information concerning cash and non-cash compensation paid to such persons during fiscal 2002.
(1) Each of Cheng Chung Hing, Ricky and Cheng Tai Po received a bonus of $128,205 and $129,032 from the Company for fiscal 2002 and 2001 respectively. MSIL paid no bonus in fiscal 2002 and 2001.
(2) Each of Cheng Chung Hing, Ricky and Cheng Tai Po received a bonus of $129,032 and $161,290 from each of the Company and MSIL respectively for fiscal 2000.
(3) Yan Sau Man, Amy received a bonus of $10,753 and $25,806 from MSIL for fiscal 2001 and 2000 respectively.
(4) Although the officers receive certain perquisites such as company provided life insurance, medical insurance and mandatory provident fund, the value of such perquisites did not exceed the lesser of $50,000 or 10% of the officer's salary and bonus.
(5) In addition to the amounts referred to in note (1) and (2) above, Cheng Chung Hing, Ricky is provided the right to use a leasehold property of the Company at no cost as his personal residence. The estimated fair rental value of such leasehold property was $87,840, $66,968 and $76,469 for fiscal 2002, 2001 and 2000 respectively. The estimated fair rental value is based on the "rateable value" assessed by the Rating and Valuation Department of The Government of Hong Kong Special Administrative Region. According to the Hong Kong Rating Ordinance (Cap. 116), rateable value is an estimate of the annual rental of the relevant premises at a designated valuation reference date. When assessing a rateable value, all factors which would affect rental value, such as age and size of the premises, quality of finishes, location, transport facilities, amenities and open market rents, are considered.
(6) In addition to the amounts referred to in note (1) and (2) above, Cheng Tai Po is provided the right to use a leasehold property of the Company at no cost as his personal residence till January 13, 2002. The estimated fair rental value of such leasehold property was $135,351, $152,981 and $156,185 for fiscal 2002, 2001 and 2000 respectively. The estimated fair rental value is based on the "rateable value" assessed by the Rating and Valuation Department of The Government of Hong Kong Special Administrative Region. According to the Hong Kong Rating Ordinance (Cap. 116), rateable value is an estimate of the annual rental of the relevant premises at a designated valuation reference date. When assessing a rateable value, all factors which would affect rental value, such as age and size of the premises, quality of finishes, location, transport facilities, amenities and open market rents, are considered. From January 14, 2002, Cheng Tai Po stays in a hotel
when he is in Hong Kong at the Company's expenses. The hotel charge for fiscal 2002 was $3,583.
(7) Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy each received options from MSIL in fiscal 2001 and 2000.
OPTION GRANTS IN FISCAL 2002
In fiscal 2002, neither the Company nor MSIL granted any option to any of its directors or executive officers.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 2002 AND FISCAL YEAR-END OPTION/SAR VALUES
No executive officer exercised his/her options to purchase Common Stock of the Company or shares of MSIL in fiscal 2002.
PERFORMANCE GRAPH
The following graph summarizes cumulative total shareholder return (assuming reinvestment of dividends) on the Common Stock of the Company and IWI Holding Limited ("IWI"), a peer issuer selected by the Company. The Company's Common Stock was first registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, on June 17, 1996. As there was no trading of the Company's Common Stock on June 17 and June 18, 1996, the trading price of the Common Stock of the Company was not available. Therefore, the measurement period hereto commenced on June 19, 1996 and ended on March 31, 2002, the Company's 2002 fiscal year end date. The graph assumes that $100 was invested on June 19, 1996.
The comparisons in this graph are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of future stock price performance or the financial performance of the Company. Shareholders are encouraged to review the Financial Statements of the Company contained in the accompanying annual report on Form 10-K for the fiscal year ended March 31, 2002.
[LINE GRAPH]
As there is no broad equity market index for the OTC Bulletin Board where the Company's Common Stock is traded and there is no published industry or line-of-business index for the pearl or jewelry business in which the Company is engaged, the Company has selected IWI as a peer issuer for comparison. IWI is engaged primarily in the design, assembly, merchandising and wholesale distribution of jewelry.
EMPLOYMENT AGREEMENTS
The Company itself has no employment agreement with any of its officers or employees but in fiscal 2002, the Company paid bonus of $128,205 to each Cheng Chung Hing, Ricky and Cheng Tai Po. Moreover, MSIL entered into Service Agreements with each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy on September 8, 1997 and September 1, 2000. The major terms of these agreements are as follows:-
- - the service agreement of each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy is for an initial term of 3 years commencing on September 1, 1997 and renewed for another term of 3 years commencing on September 1, 2000. Each service agreement may be terminated by either party by giving the other written notice of not less than 3 months;
- - the annual basic salary payable to each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy shall be HK$3 million, HK$3 million and HK$1.2 million respectively, subject to annual review by the Board of MSIL every year; and
- - each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy is also entitled to a discretionary bonus in respect of each financial year. The amount of such discretionary bonuses shall be determined by the MSIL Board each year, provided that the aggregate of all discretionary bonuses payable by MSIL to its executive directors in any financial year shall not exceed 10% of the net income (after tax and after extraordinary items) of MSIL for such year as shown in its audited accounts.
COMPENSATION OF DIRECTORS
No employee of the Company receives any compensation for his or her service as a Director. The Company paid each of Lai Chau Ming, Matthew and Yuen Ka Lok, Ernest $12,821 for their services as non-employee directors of the Company in fiscal 2002. MSIL paid $12,281 and $25,641 to Yuen Ka Lok, Ernest and Alexander Reid Hamilton (who is not a director of the Company) respectively for their services as a director of MSIL. No additional compensation of any nature was paid to any non-employee director of the Company for their services as directors.
An amount of $500 is paid to each non-employee director and to Alexander Reid Hamilton for his participation in each Audit Committee meeting. In fiscal 2002, the Audit Committee members were compensated as follows:-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are not executives of the Company or any of its subsidiaries, save as disclosed in "Item 13 - Certain Relationships and Related Transactions".
Except as described herein, no executive officer of the Company, (i) served as a member of the compensation committee (or other board committee performing similar functions or, in the absence of any such committee, the board of directors) of another entity outside the Group, one of whose executive officers served on the Company's Compensation Committee, (ii) served as a director of another entity outside the Group, one of whose executive officers served on the Company's Compensation Committee, or (iii) served as a member of the compensation committee (or other board committee performing similar functions or, in the absence of any such committee, the board of directors) of another entity outside the Group, one of whose executive officers served as a director of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The information furnished in the following table indicates beneficial ownership of shares of the Company's Common Stock, as of June 28, 2002, by (i) each shareholder of the Company who is known by the Company to be beneficial owner of more than 5% of the Company's Common Stock, (ii) each director, nominee for director and officer of the Company, individually, and (iii) all officers and directors of the Company as a group.
- ------------- * Less than 1%
(1) This disclosure is made pursuant to certain rules and regulations promulgated by the Securities and Exchange Commission and the number of shares shown as beneficially owned by any person may not be deemed to be beneficially owned for other purposes. Unless otherwise indicated in these footnotes, each named individual has sole voting and investment power with respect to such shares of Common Stock, subject to community property laws, where applicable.
(2) Cafoong Limited owns directly 1,357,875 shares of Common Stock of the Company. Cafoong Limited also owns indirectly 1,392,125 shares of Common Stock of the Company by virtue of holding all issued and outstanding shares of certain British Virgin Islands companies which own such shares of Common Stock of the Company. Because Cheng Chung Hing, Ricky and Cheng Tai Po own 60% and 40%, respectively, of all issued and outstanding stock, and are directors, of Cafoong Limited, they may be deemed to be the beneficial owners of the shares of Common Stock of the Company which are owned, directly or indirectly, by Cafoong Limited.
(3) Each of Cheng Chung Hing, Ricky, Cheng Tai Po and Yan Sau Man, Amy has the right, within 60 days, to exercise non-qualified options granted under the 1996 Stock Option Plan to purchase 100,000 shares of Common Stock of the Company.
(4) Address is 21st Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong.
PREFERRED STOCK
The following table is furnished as of June 28, 2002, to indicate beneficial ownership of the Company's Series A Preferred Shares by each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company's Series A Preferred Shares.
- -----------
(1) Cheng Chung Hing, Ricky and Cheng Tai Po own 60% and 40%, respectively, of all issued and outstanding stock, and are directors, of Cafoong Limited and, accordingly, are deemed to be the beneficial owners of the shares of Series A Preferred Stock of the Company owned by Cafoong Limited.
(2) Address is 21st Floor, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong.
CHANGES IN CONTROL
To the knowledge of management, there are no present arrangements or pledges of securities of the Company which may result in a change in control of the Company.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth (i) the number of securities to be issued upon exercise of outstanding options, (ii) the weighted average of exercise price of such outstanding options, and (iii) the number of securities remaining available for future issuance, under (a) equity compensation plans that have been approved by security holders and (b) equity compensation plans that have not been approved by security holders of the Company.
(1) Shares indicated are those issuable upon exercise of options granted or to be granted under the Company's 1996 Stock Option Plan.
(2) Shares indicated are those issuable upon exercise of options granted or to be granted under MSIL's share option scheme adopted on September 8, 1997 (the "Share Option Scheme"). The Share Option Scheme has been approved by the shareholders of MSIL, but not the shareholders of the Company.
Under the Share Option Scheme, the MSIL Board of Directors may grant options to executive directors, officers and employees of MSIL or its subsidiaries (the "Group") to purchase MSIL shares, the per share exercise price of which must be the greater of (i) 80% of the average per share closing prices of MSIL shares on The Hong Kong Stock Exchange for the five trading days immediately preceding the date of offer of the relevant options or (ii) HK$0.10.
The maximum number of shares in respect of which options may be granted (together with options exercised and options then outstanding) under the Share Option Scheme will not, when aggregated with any shares subject to any other schemes or plans involving the issue or grant of options over shares or other securities of MSIL to, or for the benefit of, directors, executives and/or employees of the Group, exceed such number of shares as shall represent 10% of the issued share capital of MSIL from time to time excluding any shares issued upon the exercise of options granted pursuant to the Share Option Scheme and any other schemes or plans involving the issue or grant of options over shares or other securities of MSIL. The number of shares subject to options and to the Share Option Scheme may be adjusted, in such manner as the independent accountants shall certify in writing to the MSIL Board of Directors to be fair and reasonable, in the event of any alteration in the capital structure of MSIL whether by way of capitalization of profits or reserves, rights issue, consolidation, subdivision or reduction of the share capital of MSIL provided that no such adjustment shall be made in the event of an issuance of shares as consideration in respect of a transaction to which MSIL is a party.
The Share Option Scheme is administered by the MSIL Board of Directors, whose decisions are final and binding on all parties. The Compensation Committee of the Company takes up a monitoring function.
(3) The "securities remaining available for future issuance" under each of the Company's 1996 Stock Option Plan and MSIL's Share Option Scheme are shares of each respective company issuable upon the exercise of authorized options under each respective plan that have not been granted.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past three years, the Company has loaned funds to Cheng Chung Hing, Ricky and Cheng Tai Po, the founders and principal shareholders of the Company. The maximum amount advanced to Cheng Chung Hing, Ricky and Cheng Tai Po during the past three years was $70,091 and $53,792 respectively. During fiscal 2002, the Company advanced $56,153 to Cheng Chung Hing, Ricky and $42,594 to Cheng Tai Po respectively. Both of them repaid the amount before March 31, 2002. All such advances were made on an interest free basis
and without definitive repayment terms. The Company has not received advances from any director, executive officer or shareholder of the Company who is known by the Company to be beneficial owner of more than 5% of the Company's Common Stock. Cheng Chung Hing, Ricky has utilized a leasehold property of the Company as his personal residence at no cost to him. Cheng Tai Po had also utilized a leasehold property of the Company as his personal residence at no cost to him from October 11, 1998 to January 13, 2002. See "Executive Compensation".
Yuen Ka Lok, Ernest, a director of both the Company and MSIL, the Chairman of the Compensation Committee and a member of the Audit Committee of the Board of Directors of the Company, is a partner of Messrs. Yuen & Partners, one of the legal advisors to the Company. Messrs. Yuen & Partners receives its standard professional fees in the provision of legal services to the Company.
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 Sales Associate Director at DBS Vickers. MSIL holds certain securities that are quoted on The Hong Kong Stock Exchange, and maintains a securities account with DBS Vickers. Mr. Lai is in charge of such account. MSIL pays standard brokerage fees to DBS Vickers when transaction occurs. Mr. Lai has advised the Company that he receives basic monthly salary and a year end performance bonus from DBS Vickers, that he receives no commission from MSIL's securities transactions, and that his performance on MSIL account is insignificant towards the calculation of his year end performance bonus.
Alexander Reid Hamilton, Chairman of the Audit Committee of the Board of Directors of the Company, is a director of MSIL.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) ITEMS FILED 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 14(c) are filed as part of this Form 10-K.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated September 12, 1997, and a Current Report on Form 8-K/A, were filed by the Registrant with the Securities and Exchange Commission to report under Item 5 thereof the initial public offering of Man Sang International Limited.
(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)
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)
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 44)
99.1 Share Option Scheme of Man Sang International Limited, a subsidiary of the Company (6)
- ----------
(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,
(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,
(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,
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 28th day of June, 2002.
MAN SANG HOLDINGS, INC.
By: /s/ CHENG Chung Hing, Ricky ____________________________ CHENG Chung Hing, Ricky Chairman of the Board, President, Chief Executive Officer and Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cheng Chung Hing, Ricky, 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:
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 2002; 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 2002, a copy of any such annual report or proxy materials shall be forwarded to the 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)
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 44)
99.1 Share Option Scheme of Man Sang International Limited, a subsidiary of the Company (6)
- ----------
(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,
(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,
(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,
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAN SANG HOLDINGS, INC.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of Man Sang Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Man Sang Holdings, Inc. and its subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2002, 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 audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 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 Man Sang Holdings, Inc. and its subsidiaries as of March 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
Our audits 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.
/s/ DELOITTE TOUCHE TOHMATSU
DELOITTE TOUCHE TOHMATSU Hong Kong June 28, 2002
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Dollars in thousands except share data)
See accompanying notes to consolidated financial statements.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
ASSETS
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - continued (Dollars in thousands except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands except share data)
See accompanying notes to consolidated financial statements.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued (Dollars in thousands)
See accompanying notes to consolidated financial statements.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
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 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 majority held publicly traded subsidiary, Man Sang International Limited ("MSIL").
The Company has also made a number of investments in companies that supply the Company or distribute its products. On November 8, 1997, the Company made an investment of Renminbi 5.1 million (HK$4.7 million) 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.
On November 6, 1999 a wholly owned subsidiary of MSIL acquired for cash of HK$900 an 18% equity interest in Gold Treasure International Jewellery Company Limited ("GTI"). The principal business of GTI is the production of accessories in gold, silver and/or other gems.
In April, 2000, MSIL acquired all the issued share capital of Intimex Business Solutions Company Limited ("IBS") at a consideration of HK$2,100 which was satisfied by an issue 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. The principal business of IBS is the provision of computer consultancy services.
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 has been recorded as goodwill which is being amortized on a straight-line basis over three years. In view of the unsatisfactory financial performance of IBS, the remaining unamortized amount of HK$591 has been fully provided for impairment loss in 2002 accordingly.
MAN SANG INTERNATIONAL LIMITED ("MSIL")
On September 26, 1997, MSIL, an indirectly owned subsidiary of the Company and a company incorporated in Bermuda, completed a public offering of new shares and warrants and listed its shares and warrants to purchase shares of MSIL (in the proportion of one warrant for every five shares) on The Stock Exchange of Hong Kong Limited. Each warrant entitled the holder to subscribe for one share in MSIL at an exercise price of HK$1.30 each. On March 31, 1999, the warrants expired.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
On completion of the initial public offering, the Company's holding was reduced from 100% to 73.02% of the capital stock of MSIL. In connection with the initial public offering, net proceeds of approximately HK$123,400 were raised by MSIL and a fee of approximately HK$11,391 was received by the Company. The Company has not recognized any gain arising on the amount in excess of the Company's carrying value of its interest in MSIL and such an amount has been included in the stockholders' equity as part of the additional paid-in capital.
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, to be settled by way of allotment of fully paid shares in the capital of MSIL with a cash option. The Company elected to receive part of its final dividend in cash and part of it in shares. As some MSIL shareholders elected to receive cash dividend and some elected shares, the Company's holding increased to approximately 73.28% of MSIL's issued share capital.
On August 2, 1999, at the 1999 annual general meeting of MSIL, MSIL's shareholders approved, among other matters, a "bonus issue of warrants" to MSIL's shareholders on the basis of one bonus warrant for every five shares of MSIL held on August 2, 1999. Each bonus warrant entitles the holder 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.
In August 1999, MSIL issued 40,000,000 shares for a cash consideration of HK$13,200 representing approximately 7.63% of MSIL's issued and outstanding shares after the issue to an unrelated party. As a consequence, the Company's holding in MSIL was reduced to 67.69%. The difference between the issue price and the Company's carrying value per share after completion of the issuance amounted to HK$11,598 and has been deducted from additional paid-in capital in accordance with policy adopted by the Company. At March 31, 2000, the Company held approximately 67.68% of the issued share capital of MSIL.
During the year ended March 31, 2000, the Company sold part of its holding in the warrants issued by MSIL resulting in a gain of $2,629. At March 31, 2000, the exercise by minority shareholders in MSIL of warrants outstanding at that date would have the effect of reducing the Company's holding in MSIL from 67.68% to 61.32%
During the year ended March 31, 2001, MSIL issued 105,312,000 shares of HK$0.10 each as a result of the bonus issue of shares in MSIL on the basis of one bonus share for every five shares held on August 2, 2000. At March 31, 2001, the Company held approximately 67.42% of the issued share capital of MSIL.
In November 2001, MSIL issued 120,000,000 shares for a cash consideration of HK$14,400 representing approximately 15.96% of MSIL's issued and outstanding shares after the issue to unrelated parties. As a consequence, the Company's holding in MSIL was reduced to 56.66%. The difference between the issue price and the Company's carrying value per share after completion of the issuance amounted to HK$29,603 and has been deducted from additional paid-in capital in accordance with policy adopted by the Company. At March 31, 2002, the Company held approximately 56.66% of the issued share capital of MSIL.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
BUSINESS RISKS
During the three years ended March 31, 2002, over 88% of the Company's purchases were pearls. As a pearl is a commodity and its value is subject to prevailing market conditions, it is a customary practice in the pearl market that buyers and sellers of pearls do not normally enter into any long-term contracts. The Company currently does not have any fixed term purchase contracts with any pearl farmers or suppliers. The Company also considers that any adverse change in climate and environmental conditions at the source regions of pearls may have an adverse effect on pearl harvesting and hence the supply of pearls. The Company has developed relationships with a network of suppliers to ensure a continuous supply of different types of pearls.
The Company has adopted a policy of diversification of sources under which pearls are purchased from different suppliers in different countries or regions so that the Company is less susceptible to changes in raw materials supply due to the changes in climate and environmental conditions at any particular source region. The Company negotiates the purchases of pearls on an as needed basis at prevailing market prices. The prices of pearls fluctuate according to demand and supply conditions in the market. Any significant increase in the prices of pearls may affect the profitability of the Company. The Company has expanded its product range in recent years in order to reduce the impact of price fluctuations of any one type of pearl. However, there can be no assurance that pearls will be available from its suppliers in the quantities, of the quality and on the terms required by the Company. For each of the three years ended March 31, 2002 the largest supplier of the Company accounted for approximately 9.5%, 12.1% and 10.5% of the Company's total purchases, respectively.
Of the Company's purchases, approximately 35% in 2002, 39% in 2001 and 52% in 2000 was settled in Renminbi ("RMB"), the currency of the PRC. Accordingly, the Company has a direct exposure to the risk of any adverse exchange rate fluctuation in RMB. Nevertheless, the Company has not recorded any material foreign currency gain or loss or experienced any difficulties in obtaining sufficient RMB during the past three years.
Since January 1, 1994, the government of the PRC has adopted a unified floating exchange rate system to allow the exchange rate of RMB to be largely determined by market supply and demand and promulgated a series of rules and policy to provide a platform for full convertibility of RMB. Even though the prevailing exchange rate for RMB to Hong Kong dollars is relatively stable under the current regime as a result of the above system, there can be no assurance that such exchange rate will not become volatile or that there will be no deterioration of the macroeconomic environment in either the PRC or Hong Kong which may lead to a fluctuation in the exchange rate for RMB to Hong Kong dollars. In the case of a significant appreciation in RMB, the costs of purchases of the Company may increase significantly, which will have an adverse effect on the profitability of the Company.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS - continued
BASIS OF PREPARATION
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which differ from those used in the statutory accounts of its subsidiaries. The principal adjustments made by the Company to conform the statutory accounts of the subsidiaries to U.S. GAAP relate to the amortization of properties held for real estate investment, which is not amortized for local statutory reporting, the restatement of properties included in real estate investment and property, plant and equipment at cost, which is stated at open market value estimated by external professional valuers for local statutory reporting, the recognition of compensation cost over the vesting period for the stock options granted by the Company and MSIL, which is not required for local statutory reporting and the recognition of deferred tax asset, which is not recognized for local statutory reporting unless its recoverability is assured beyond reasonable doubt. At March 31, 2002, there was no material difference between the retained earnings computed under U.S. GAAP and the retained earnings available for distribution prepared in accordance with the accounting principles used in the preparation of the statutory accounts of the subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements include the assets, liabilities, revenues and expenses of Man Sang Holdings, Inc. and all its subsidiaries. All material intra-group transactions and balances have been eliminated.
Goodwill - The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. Goodwill is amortized to expense on a straight-line basis over three years. Amortization expense was HK$195 in 2002. Periodically, the Company reviews the recoverability of goodwill. The measurement of possible impairment is based primarily on the ability to recover the balance of the goodwill from expected future operating cash flows on an undiscounted basis. In management's opinion, there has been an impairment on goodwill and an impairment loss of HK$591 has been recognized during the year ended March 31, 2002.
Cash and cash equivalents - Cash and cash equivalents include cash on hand, demand deposits, interest bearing savings accounts, and time certificates of deposit with an original maturity of three months or less.
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.
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
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. Gains and losses on sales of securities are computed on a specific identification basis. Marketable securities comprise:
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:
Long-term investments - The Company's long-term investments are accounted for under the cost method.
Real estate investment - Leasehold land and buildings held for investment is 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 lease involved up to a maximum of 50 years.
Valuation of 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, 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. In managements' opinion, there has been an impairment on long-term investments and an impairment loss of HK$3,000 has been recognized during the year ended March 21, 2002.
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
Revenue recognition - The Company recognizes revenue at the time products are shipped to customers and collectibility for such sales is reasonably assured. Property rental 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 Statement of Financial Accounting Standard ("SFAS") No. 128 "Earnings Per Share" issued by the Financial Accounting Standards Board ("FASB").
Reconciliation of the basic and diluted EPS is as follows:
In 2001 and 2002, the effect on consolidated EPS of both warrants and options issued by MSIL and options issued by the Company were not included in the computation of diluted earnings per share because it would have resulted in antidilutive effect.
Foreign currency translation - Assets and liabilities of foreign subsidiaries are translated 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 income.
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
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 staff 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 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, 2002. 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.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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 loss on marketable securities and is included in the stockholders' equity section of the balance sheet.
Reclassification - Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year's presentation. These reclassifications had no effect on the net income or financial position for any year presented.
Derivative instruments - Starting from April 1, 2001, the Company has adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. There was no effect on the consolidated financial statements of the Company upon the adoption of SFAS No. 133.
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 standards - In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These statements, establish accounting and reporting for business combinations. SFAS No. 141 requires that, among other things, all business combinations entered into subsequent to June 30, 2001, be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives not be amortized, but will be tested for impairment on an annual basis. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 141 during the year ended March 31, 2002 and it did not impact the Company's financial statements. The Company has adopted SFAS No. 142 on April 1, 2002. There was no significant impact on the Company's financial position and results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will be required to adopt this standard on January 1, 2003. Management is assessing, but has not yet determined, the impact that SFAS No 143 will have, if any, on its financial position and results of operations.
The FASB also recently issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and portions of APB Opinion No. 30, "Reporting the Results for Operations". The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. The statements also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. Management is assessing, but has not yet determined, the impact that SFAS No. 144 will have, if any, on its financial position and results of operations.
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MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
3. OTHER INCOME
Other income consists of the following:
4. INCOME TAXES
Income is subject to taxation in the various countries in which the Company and its subsidiaries operate.
The components of income (loss) before income taxes and minority interests are as follows:
Certain activities conducted by the Company's subsidiaries may result in current income recognition, for U.S. tax purposes, 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.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
4. INCOME TAXES - continued
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 three 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 profit-making year, followed by a 50% exemption for the next three years. The exemptions applicable to one of these companies expire in calendar year 2002 and other two subsidiaries' exemption expired on December 31, 2000 and 1999, respectively. These exemptions do not apply to rental income.
The provision for income taxes consists of the following:
Had the tax holidays and concessions detailed above not been available, the tax charge would have been increased by HK$385 in 2002, HK$928 in 2001 and HK$2,258 in 2000. Basic earnings per share in 2002 and 2000 would have been reduced by HK$0.09 and HK$0.52, respectively, and basic loss per share in 2001 would have been increased by HK$0.21. Diluted earnings per share in 2002 and 2000 would have been reduced by HK$0.09 and HK$0.47, respectively, and diluted loss per share in 2001 would have been increased by HK$0.21.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
4. INCOME TAXES - continued
A reconciliation between the provision for income taxes computed by applying the United States statutory tax rate to income (loss) before income taxes and minority interests and the actual provision for income taxes is as follows:
Details of deferred tax assets are as follows:
At March 31, 2002, subsidiaries of the Company had tax loss carryforwards for Hong Kong tax purposes, subject to the agreement of the Hong Kong Inland Revenue Department, amounting to approximately HK$61,325, which have no expiration date. The loss carryforwards can only be utilized by the subsidiaries generating the losses.
Due to the uncertainty of the realization of certain operating loss carryforwards, the Company has established a valuation allowance against these carryforward benefits in the amount of HK$7,624. Except to the extent that valuation allowances have been established, the Company believes the carryforward benefits will be realized within two years from March 31, 2002.
U.S. deferred tax liabilities have not been provided on approximately HK$250,806 in undistributed earnings of foreign subsidiaries because the Company intends to reinvest those earnings permanently. If such earnings were paid as dividends to the Company in a single distribution, the estimated U.S. income tax, net of foreign tax credits, if allowable, would be approximately HK$85,274.
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:
During the year ended March 31, 2001, the Company made a write-down of inventories, amounting to HK$65,000. No provision for write-down of inventories was made for the year ended March 31, 2002.
6. STAFF RETIREMENT PLAN
According to the Mandatory Provident Fund ("MPF") legislation regulated by the Mandatory Provident Fund Scheme Authority in Hong Kong, with effect from December 1, 2000, the Company is required to participate in an MPF scheme operated by approved trustees in Hong Kong and to make contributions for its eligible employees. The contributions borne by the Company are calculated at 5% of the salaries and wages (monthly contribution is limited to 5% of HK$20 for each eligible employee) as calculated under the MPF legislation. The contributions made for the year ended March 31, 2002 and 2001 amounted to HK$622, and HK$248, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
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MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
7. PROPERTY, PLANT AND EQUIPMENT - continued
Included in property, plant and equipment are assets acquired under capital leases with the following net book values:
Amortization of capital lease assets, which is included in depreciation expenses in the accompanying consolidated statements of income, was HK$117 in 2002, HK$217 in 2001 and HK$218 in 2000.
8. REAL ESTATE INVESTMENT
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 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.
Rental income relating to such operating leases is included in gross rental income in the consolidated statements of income and amounted to HK$7,526 in 2002, HK$5,526 in 2001 and HK$4,620 in 2000.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
9. SHORT-TERM BORROWINGS
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 Company's short-term borrowings.
At March 31, 2002, leasehold land and buildings with a net book value of HK$38,747, real estate investments with a net book value of HK$71,841 and cash of HK$16,169 were pledged as collateral for the above facilities and long-term debts described in note 11. Other than the cash pledged, there is no restriction on the use of the assets pledged for such facilities and bank loans.
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
11. LONG-TERM DEBTS
Maturities of long-term debts as of March 31, 2002 are as follows:
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.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
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$4,678 in 2002, HK$4,916 in 2001 and HK$2,315 in 2000.
As at March 31, 2002, the Company and its subsidiaries were obligated under non-cancelable operating leases requiring minimum rentals as follows:
At March 31, 2002, the Company had commitments of HK$188 relating to the acquisition of property, plant and equipment.
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.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
13. CAPITAL STOCK - continued
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 are convertible into common stock commencing on or after 45 days following the sale of such shares. Each of the Series B preferred shares is convertible into the number of shares of common stock determined by dividing US$1 by an amount equal to the lesser of (1) the market price of the common stock on the closing date of the sale of such shares or (2) 70% of the average closing bid price of the common stock for the five trading days preceding the conversion. The right of the holders of Series B preferred shares to convert such shares into common stock expired on December 31, 1997. 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, 2002, no shares of Series B preferred stock were outstanding.
14. STOCK OPTION PLANS
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 antidilution 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.
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).
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
Option activity of the Holding Company Options is as follows:
Total number of options exercisable were 450,000 and 500,000 as of March 31, 2002 and 2001, respectively, at the weighted average exercise price of US$1.22.
Additional information on options outstanding at March 31, 2002 is as follows:
At March 31, 2002 and 2001, 1,450,000 and 1,400,000 options, respectively, were available for future grant under the Plan.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
MSIL OPTIONS
On September 8, 1997, MSIL adopted a share option scheme (the "Scheme") to grant options to purchase MSIL ordinary shares (the "MSIL Options") to any full-time employee of MSIL or any of MSIL's subsidiaries (an "MSIL Employee"). Pursuant to the Scheme, MSIL may, at any time until the end of the day on September 7, 2007, and from time to time, grant MSIL Options to any MSIL Employee, at an exercise price of not less than 80% of the average of the closing prices of MSIL ordinary shares on The Stock Exchange of Hong Kong Limited for the five trading days immediately preceding the date of grant or the nominal value of MSIL ordinary shares of HK$0.10 per share, whichever is higher. The maximum number of shares in respect of which MSIL Options may be granted under the Scheme may not exceed such number of shares as shall represent 10% of the issued share capital of MSIL from time to time excluding any shares issued upon the exercise of MSIL Options granted pursuant to the Scheme.
Pursuant to the Scheme, the MSIL Options may be exercised by the grantee at any time during the two-year option period commencing on the expiry of six months after the date on which such MSIL Option is accepted and expiring on the last day of the two-year period or the end of the day on September 7, 2007, whichever is earlier.
Option activity of the MSIL options is as follows:
Note: MSIL issued bonus shares to its shareholders on August 3, 2000; the number and the exercise prices of the MSIL options in issue were adjusted accordingly pursuant to the Scheme.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands except share data)
14. STOCK OPTION PLANS - continued
Total number of options exercisable were 43,261,319 and 47,701,450 as of March 31, 2002 and 2001, respectively, at the weighted average price of HK$0.2408.
Additional information on options outstanding at March 31, 2002 is as follows:
At March 31, 2002 and 2001, 29,670,774 and 13,230,643 options, respectively, were available for future grant under the Scheme.
COMPENSATION EXPENSES
The Company has elected to account for the Holding Company Options and the MSIL Options using the fair value method. The fair values of each Holding Company Option granted on February 1, 1999 and September 16, 1997 and of each MSIL Option granted on October 16, 1997, December 3, 1997, November 16, 1999 and April 28, 2000 were calculated to be US$0.32, US$0.63, HK$0.13, HK$0.19 and HK$0.07 and HK$0.14, respectively, using the Black-Scholes option pricing model, with the following assumptions:
The total compensation expenses of the Holding Company Options and the MSIL Options recognized in the consolidated statements of income for the years ended March 31, 2001 and 2000, net of minority interests' share of HK$1,499 and HK$264, was HK$3,121 and HK$863, respectively.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
15. RELATED PARTY TRANSACTIONS
During the periods presented, leasehold properties were provided free of charge to Mr. C.H. Cheng and Mr. T.P. Cheng, directors of the Company, for their residential use.
In addition, the Company advanced HK$770 in 2002, HK$938 in 2001 and HK$897 in 2000 to certain directors on an interest-free basis without specific repayment terms. All amounts were repaid during each year.
The Company also had purchases of HK$5,415 and HK$3,512 in 2001 and 2000, respectively, from GTI, in which the Company holds an equity interest of 18%.
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. In no period did sales to any one customer account for 10% or more of total sales.
Details of the amounts receivable from the five customers with the largest receivable balances at March 31, 2002 and 2001 are as follows:
The Company is not aware of any financial difficulties being experienced by its major customers. Bad debt provisions were HK$5,054 in 2002, HK$364 in 2001 and HK$278 in 2000. The deductions from the allowance for doubtful accounts which represented write-offs of bad debts were HK$214 in 2002 and HK$150 in 2001.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No.107, "Disclosures about Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange.
The carrying amounts of cash, marketable securities, accounts receivable, accounts payable, short-term borrowings and long-term debt are reasonable estimates of their fair values. The interest rates on the Company's short-term borrowings and long-term debts approximate those which would have been available at March 31, 2002 for debts of the same remaining maturities.
All the financial instruments are for trade purposes.
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
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.
Contributions of the major activities, profitability information and asset information are summarized below:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
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:
The Company operates in only one geographic area. The location of the Company's identifiable assets is as follows:
MAN SANG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Dollars in thousands)
19. QUARTERLY DATA (UNAUDITED)
Note: Per share amounts do not add to the total for the above years and are independently calculated.
20. SUBSEQUENT EVENTS
Effective June 1, 2002, the Company entered into agreements with two business consultants. Under the terms of the agreements, the consultants will provide service for two years in return for either cash of HK$270 or 410,000 shares of common stock of the Company.
On June 7, 2002, the Company issued in aggregate 410,000 shares of common stock, $0.001 par value per share to the consultants pursuant to the business consulting agreements.