10-Q 1 man10q.htm DECEMBER31, 2005

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2005

 

OR

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to _____________.

 

Commission File Number: 33-10639-NY

 

MAN SANG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

87-0539570

(State or other jurisdiction

 

(I.R.S. Employer Identification No.)

of incorporation or organization)

 

 

 

21/F, Railway Plaza, 39 Chatham Road South, Tsimshatsui, Kowloon, Hong Kong

(Address of principal executive officers)

 

(852) 2317 5300

(Registrant's telephone number)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __

 

Indicate by check mark whether the Registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in (as defined n Rule 12b-2 of the Exchange Act).

 

 

Large accelerated filer         

Accelerated filer           

Non-accelerated filer

X    

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes                  No X          

 

 

As of February 14, 2006, 6,382,582 shares of the Registrant's common stock were outstanding.

 

 



 

 

MAN SANG HOLDINGS, INC.

TABLE OF CONTENTS

 

Page

PART I - FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets as at

 

 

December 31, 2005 and March 31, 2005

F-1

 

 

Condensed Consolidated Statements of Operations and

 

 

Comprehensive Income for the Three and Nine Months Ended

 

 

December 31, 2005 and 2004 (unaudited)

F-3

 

 

Condensed Consolidated Statements of Cash Flows for

 

 

the Nine Months Ended December 31, 2005 and 2004 (unaudited)

F-4

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

F-5

 

ITEM 2.

Management's Discussion and Analysis of

 

 

Financial Condition and Results of Operations

1

 

ITEM 3.

Quantitative and Qualitative Disclosures about

 

 

Market Risk

8

 

ITEM 4.

Controls and Procedures

9

 

PART II - OTHER INFORMATION

 

ITEM 6.

Exhibits

10

 

SIGNATURES

11

 

 

 

 



 

PART 1 - FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

MAN SANG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts expressed in thousands except share data)
 

 

December 31, 2005

 

 

March 31, 2005

 

 

US$

 

 

HK$

 

 

HK$

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

33,650

 

 

262,467

 

 

243,297

 

Marketable securities

1,939

 

 

15,123

 

 

8,422

 

Accounts receivable, net of allowance for doubtful

 

 

 

 

 

 

 

 

accounts of HK$23,903 as of December 31, 2005 and

 

 

 

 

 

 

 

 

HK$22,807 as of March 31, 2005

7,557

 

 

58,943

 

 

47,450

 

Inventories :

 

 

 

 

 

 

 

 

Raw materials

1,654

 

 

12,900

 

 

18,037

 

Work in progress

1,619

 

 

12,632

 

 

14,520

 

Finished goods

7,510

 

 

58,579

 

 

50,148

 

 

10,783

 

 

84,111

 

 

82,705

 

 

 

 

 

 

 

 

 

 

Prepaid expenses

772

 

 

6,022

 

 

4,489

 

Deposits and other receivables, net of allowance for

 

 

 

 

 

 

 

 

doubtful accounts of HK$3,721 as of December 31, 2005

 

 

 

 

 

 

 

 

and March 31, 2005

1,092

 

 

8,515

 

 

5,349

 

Other current assets

19

 

 

146

 

 

382

 

Income tax receivable

76

 

 

589

 

 

684

 

Total current assets

55,888

 

 

435,916

 

 

392,778

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

208

 

 

1,625

 

 

258

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

19,419

 

 

151,465

 

 

163,147

 

Accumulated depreciation

(6,239

)

 

(48,661

)

 

(44,086

)

 

13,180

 

 

102,804

 

 

119,061

 

 

 

 

 

 

 

 

 

 

Real estate investment

9,653

 

 

75,290

 

 

58,117

 

Accumulated depreciation

(1,541

)

 

(12,016

)

 

(10,973

)

 

8,112

 

 

63,274

 

 

47,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

77,388

 

 

603,619

 

 

559,241

 

 

 

F-1



 

 

MAN SANG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS - continued

(Amounts expressed in thousands except share data)

 

 

 

 

 

 

 

 

 

 

December 31, 2005

 

 

March 31, 2005

 

 

US$

 

 

HK$

 

 

HK$

 

 

(Unaudited)

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

1,493

 

 

11,644

 

 

8,588

 

Accrued payroll and employee benefits

1,427

 

 

11,133

 

 

11,958

 

Other accrued liabilities

1,107

 

 

8,631

 

 

10,617

 

Income taxes payable

1,632

 

 

12,732

 

 

4,587

 

Total current liabilities

5,659

 

 

44,140

 

 

35,750

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

226

 

 

1,760

 

 

1,213

 

 

 

 

 

 

 

 

 

 

Minority interests

35,165

 

 

274,285

 

 

257,562

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Series A preferred stock, par value US$0.001

-

 

 

1

 

 

1

 

- authorized, issued and outstanding: 100,000 shares;

 

 

 

 

 

 

 

 

(entitled in liquidation to US$2,500 (HK$19,500))

 

 

 

 

 

 

 

 

Series B convertible preferred stock, par value US$0.001

-

 

 

-

 

 

-

 

- authorized: 100,000 shares; no shares outstanding

 

 

 

 

 

 

 

 

Common stock, par value US$0.001

6

 

 

49

 

 

35

 

- authorized: 31,250,000 shares;

 

 

 

 

 

 

 

 

issued and outstanding: 6,382,582 shares and 5,569,950

 

 

 

 

 

 

 

 

shares as of December 31, 2005 and March 31, 2005

 

 

 

 

 

 

 

 

Additional paid-in capital

8,666

 

 

67,598

 

 

61,660

 

Retained earnings

27,051

 

 

210,993

 

 

199,752

 

Accumulated other comprehensive income

615

 

 

4,793

 

 

3,268

 

Total stockholders' equity

36,338

 

 

283,434

 

 

264,716

 

Total liabilities and stockholders' equity

77,388

 

 

603,619

 

 

559,241

 

 

 

See accompanying notes to condensed consolidated financial statements

 

F-2



MAN SANG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31

(Amounts expressed in thousands except share data)

 

 

Three Months Ended December 31,

 

Nine Months Ended December 31,

 

 

2005

 

2004

 

2005

 

2004

 

 

US$

 

HK$

 

HK$

 

US$

 

HK$

 

HK$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

11,560

 

90,174

 

109,074

 

38,723

 

302,041

 

316,135

 

Cost of goods sold

(8,515

)

(66,423

)

(80,674

)

(28,164

)

(219,683

)

(228,365

)

Gross profit

3,045

 

23,751

 

28,400

 

10,559

 

82,358

 

87,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income, gross

75

 

585

 

831

 

311

 

2,428

 

3,710

 

 

3,120

 

24,336

 

29,231

 

10,870

 

84,786

 

91,480

 

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

- Pearls

(2,356

)

(18,377

)

(20,649

)

(6,847

)

(53,405

)

(62,948

)

- Real estate investment

(147

)

(1,158

)

(3,489

)

(633

)

(4,947

)

(8,828

)

Operating income

617

 

4,801

 

5,093

 

3,390

 

26,434

 

19,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating items

 

 

 

 

 

 

 

 

 

 

 

 

- Interest expense

-

 

-

 

(22

)

-

 

-

 

(100

)

- Interest income

291

 

2,272

 

286

 

616

 

4,802

 

455

 

- Gain on sales of a real estate investment

-

 

-

 

-

 

-

 

-

 

34,248

 

- Other income

50

 

392

 

307

 

155

 

1,213

 

1,142

 

Income before income taxes and minority interests

958

 

7,465

 

5,664

 

4,161

 

32,449

 

55,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

(150

)

(1,174

)

(1,833

)

(775

)

(6,048

)

(6,173

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before minority interests

808

 

6,291

 

3,831

 

3,386

 

26,401

 

49,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interests

(486

)

(3,786

)

(2,509)

 

(1,944

)

(15,160

)

(26,921

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

322

 

2,505

 

1,322

 

1,442

 

11,241

 

22,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of taxes and

 

 

 

 

 

 

 

 

 

 

 

 

minority interests

 

 

 

 

 

 

 

 

 

 

 

 

- Foreign currency translation adjustments

38

287

(13)

 

91

 

710

 

16

 

- Unrealized holding gain on marketable securities

10

 

81

 

493

 

104

 

815

 

550

 

Other comprehensive income (loss), net of taxes and

 

 

 

 

 

 

 

 

 

 

 

 

minority interests

48

368

480

 

195

 

1,525

 

566

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

370

 

2,873

 

1,802

 

1,637

 

12,766

 

22,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

0.05

 

0.41

 

0.24

 

0.24

 

1.89

 

3.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

0.05

 

0.39

 

0.21

 

0.23

 

1.76

 

3.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

 

 

 

of common stock

 

 

 

 

 

 

 

 

 

 

 

 

- for basic earnings per share

6,058,533

 

6,058,533

 

5,507,450

 

5,849,400

 

5,849,400

 

5,507,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- for diluted earnings per share

6,325,762

 

6,325,762

 

6,235,998

 

6,292,956

 

6,292,956

 

6,213,348

 

 

 

 

See accompanying notes to condensed consolidated financial statements

 

F-3



 

MAN SANG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED DECEMBER 31

(Amounts expressed in thousands)

 

 

Nine Months Ended December 31,

 

 

2005

 

2004

 

 

US$

 

HK$

 

HK$

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

1,442

 

11,241

 

22,355

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

Provision for doubtful debts

192

 

1,500

 

9,228

 

Inventory write down

2,436

 

19,000

 

23,200

 

Impairment loss on property, plant and equipment

-

 

-

 

2,617

 

Impairment loss on long term investment

-

 

-

 

856

 

Compensation expense

-

 

-

 

90

 

Depreciation and amortization

720

 

5,613

 

6,377

 

Gain on disposal of property, plant and equipment

-

 

-

 

(136

)

Gain on disposal of real estate investment

-

 

-

 

(34,248

)

Minority interests

1,944

 

15,160

 

26,921

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

(1,627

)

(12,688

)

527

 

Inventories

(2,557

)

(19,945

)

(20,874

)

Prepaid expenses

(196

)

(1,531

)

(1,241

)

Deposits and other receivables

(401

)

(3,130

)

4,474

 

Other current assets

30

 

236

 

5,419

 

Income taxes receivable

12

 

95

 

(88

)

Deferred tax assets

(175

)

(1,367

)

174

 

Accounts payable

382

 

2,981

 

(2,620

)

Accrued payroll and employee benefits

(107

)

(838

)

2,820

 

Other accrued liabilities

(263

)

(2,049

)

574

 

Deferred tax liabilities

70

 

547

 

(346

)

Income taxes payable

1,044

 

8,145

 

6,577

 

Net cash provided by operating activities

2,946

 

22,970

 

52,656

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property, plant and equipment

(745

)

(5,811

)

(8,597

)

Purchase of marketable securities

(648

)

(5,051

)

-

 

Proceeds from disposal of property, plant and equipment

117

 

914

 

320

 

Proceeds from disposal of real estate investment

-

 

-

 

64,450

 

Net cash (used in) provided by investing activities

(1,276

)

(9,948

)

56,173

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Repayment of long-term debts

-

 

-

 

(11,591

)

Net proceeds from issuance of common stock

763

 

5,952

 

-

 

Net cash provided by (used in) financing activities

763

 

5,952

 

(11,591

)

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

2,433

 

18,974

 

97,238

 

Cash and cash equivalents at beginning of period

31,192

 

243,297

 

104,907

 

Exchange adjustments

25

 

196

 

6

 

Cash and cash equivalents at end of period

33,650

 

262,467

 

202,151

 

 

 

 

 

 

 

 

Supplementary disclosures of cash flow information

 

 

 

 

 

 

Cash (refunded) paid during the period for:

 

 

 

 

 

 

Interest and financing charges

-

 

-

 

108

 

Net income taxes (refunded) paid

(1

)

(7

)

163

 

 

 

See accompanying notes to condensed consolidated financial statements

 

F-4



 

Man Sang Holdings, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

December 31, 2005

(Unaudited)

 

1. Interim Financial Presentation

 

The interim financial statements are prepared pursuant to the requirements for reporting on Form 10-Q. The March 31, 2005 balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the annual report of Man Sang Holdings, Inc. (the "Company") on Form 10-K for the fiscal year ended March 31, 2005. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for the interim periods presented. Operating results and cash flows for interim periods are not necessarily indicative of results of the entire year.

 

2. Currency Presentations and Foreign Currency Translation

 

Assets and liabilities of foreign subsidiaries are translated from their functional currency to the reporting currency, at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. Adjustments arising from such translation are reported as a separate component of stockholders' equity. Gains or losses from foreign currency transactions are included in the Statement of Operations. Aggregate net foreign currency gains or losses were immaterial for all periods presented in this report.

 

The consolidated 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 United States dollars are for convenience only and have been made at the rate of HK$7.8 to US$1, the approximate free rate of exchange as of December 31, 2005. Such translations should not be construed as representations that Hong Kong dollar amounts could be converted into United States dollars at that rate or any other rate.

 

3. Recent Accounting Pronouncements

 

 

F-5

 



 

There are no new accounting pronouncements for which adoption is expected to have a material effect on the Company's financial statements.

 

4. Earnings Per Share ("EPS")

 

On July 22, 2005, the Company's Board of Directors approved a five-for-four stock split of the Company's common stock, par value US$0.001, effected in the form of a stock dividend for stockholders of record on July 22, 2005. In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin Topic 4C, "Equity Accounts and Change in Capital Structure", and SFAS No. 128, Earnings Per Share, the Company restated all the share and per share data in these condensed consolidated financial statements for the quarter ended December 31, 2005, to reflect the capital structure subsequent to the five-for-four stock split, which became effective on August 5, 2005.

 

EPS is calculated in accordance with SFAS No. 128 by application of the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. Per share data is calculated using the weighted average number of shares of common stock outstanding during the period.

 

 

 

 

For the Quarter Ended December 31, 2004

 

 

For the Nine Months Ended December 31, 2004

 

 

 

HK$'000

 

 

HK$'000

 

Net income

 

1,322

 

 

22,355

 

Allocation of undistributed earnings to participating securities (Series A preferred stock)

 

(23

)

 

(399

)

Undistributed earnings to common stock, adjusted

 

1,299

 

 

21,956

 

 

 

 

 

 

 

 

 

 

No. of shares

 

 

No. of shares

 

Weighted average-shares outstanding

 

5,507,450

 

 

5,507,450

 

Effect of dilutive securities stock options granted
by the Company

 

728,548

 

 

705,898

 

Adjusted weighted average-shares outstanding

 

6,235,998

 

 

6,213,348

 

 

 

 

 

 

 

 

 

 

HK$

 

 

HK$

 

Net earnings per share

 

 

 

 

 

 

Basic

 

0.24

 

 

3.99

 

Diluted

 

0.21

 

 

3.53

 

 

 

 

 

 

 

 

 

 

 

F-6

 



 

 

 

 

For the Quarter Ended December 31, 2005

 

 

For the Nine Months Ended December 31, 2005

 

 

 

HK$'000

 

 

HK$'000

 

Net income

 

2,505

 

 

11,241

 

Allocation of undistributed earnings to participating securities (Series A preferred stock)

 

(41

)

 

(189

)

Undistributed earnings to common stock, adjusted

 

2,464

 

 

11,052

 

 

 

 

 

 

 

 

 

 

No. of shares

 

 

No. of shares

 

Weighted average-shares outstanding

 

6,058,533

 

 

5,849,400

 

Effect of dilutive securities-stock options granted
by the Company

 

267,229

 

 

443,556

 

Adjusted weighted average-shares outstanding

 

6,325,762

 

 

6,292,956

 

 

 

 

 

 

 

 

 

 

HK$

 

 

HK$

 

Net earnings per share

 

 

 

 

 

 

Basic

 

0.41

 

 

1.89

 

Diluted

 

0.39

 

 

1.76

 

 

 

 

 

 

 

 

 

5. Disclosure of Geographic Information

 

All of the Company's sales of pearls are coordinated through its Hong Kong subsidiaries. The following is an analysis by destination:

 

 

For the Quarter Ended December 31

 

 

For the Nine Months Ended December 31

 

 

2005

 

 

2004

 

 

2005

 

 

2004

 

 

HK$'000

 

 

HK$'000

 

 

HK$'000

 

 

HK$'000

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

Hong Kong *

9,110

 

 

10,118

 

 

29,824

 

 

35,543

 

 

 

 

 

 

 

 

 

 

 

 

 

Export:

 

 

 

 

 

 

 

 

 

 

 

North America

26,131

 

 

40,674

 

 

89,249

 

 

111,622

 

Europe (excluding Germany)

13,522

 

 

3,418

 

 

42,247

 

 

36,100

 

Germany

25,231

 

 

33,148

 

 

66,678

 

 

56,645

 

Japan

8,860

 

 

15,110

 

 

34,291

 

 

39,553

 

Other Asian countries

4,124

 

 

3,423

 

 

25,193

 

 

25,257

 

Others

3,196

 

 

3,183

 

 

14,559

 

 

11,415

 

 

90,174

 

 

109,074

 

 

302,041

 

 

316,135

 

 

*

A majority of sales (by dollar amount) in Hong Kong are for re-export to North America and Europe.

 

 

F-7

 



 

 

The Company operates primarily in one geographic area: Hong Kong and other regions of the People's Republic of China (the "PRC"). The locations of the Company's identifiable assets are as follows:

 

 

 

December 31, 2005

 

 

March 31, 2005

 

 

 

HK$'000

 

 

HK$'000

 

 

 

 

 

 

 

 

Hong Kong

 

505,229

 

 

469,158

 

PRC

 

98,390

 

 

90,083

 

 

 

603,619

 

 

559,241

 

 

6. Disclosure of Major Customers

 

During the three months ended December 31, 2005, one customer accounted for 16.3% of total sales. During the nine months ended December 31, 2005, two customers accounted for 10.8% each of total sales. During the three months ended December 31, 2004, two customers accounted for 12.8% and 10.5% of total sales, respectively. During the nine months ended December 31, 2004, one customer accounted for 11.6% of total sales. Generally, a substantial percentage of the Company's sales has been made to a small number of customers and is typically on an open account basis.

 

 

F-8

 



 

7. Segment Information

Reportable segment profit or loss, and segment assets are disclosed as follows:

 

Reportable Segment Profit or Loss, and Segment Assets

 

 

For the quarter ended,

December 31

 

 

For the nine months ended,

December 31

 

 

 

2005

 

 

2004

 

 

2005

 

 

2004

 

 

 

HK$'000

 

 

HK$'000

 

 

HK$'000

 

 

HK$'000

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

Pearls

 

90,174

 

 

109,074

 

 

302,041

 

 

316,135

 

Real estate investment

 

585

 

 

831

 

 

2,428

 

 

3,710

 

 

 

90,759

 

 

109,905

 

 

304,469

 

 

319,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Pearls

 

5,374

 

 

7,751

 

 

28,953

 

 

24,822

 

Real estate investment

 

(573

)

 

(2,658

)

 

(2,519

)

 

(5,118

)

 

 

4,801

 

 

5,093

 

 

26,434

 

 

19,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Pearls

 

-

 

 

9

 

 

-

 

 

33

 

Real estate investment

 

-

 

 

3

 

 

-

 

 

18

 

Corporate assets

 

-

 

 

10

 

 

-

 

 

49

 

 

 

-

 

 

22

 

 

-

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Pearls

 

1,344

 

 

1,473

 

 

3,992

 

 

4,364

 

Real estate investment

 

332

 

 

314

 

 

932

 

 

1,324

 

Corporate assets

 

230

 

 

230

 

 

689

 

 

689

 

 

 

1,906

 

 

2,017

 

 

5,613

 

 

6,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditure for segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

Pearls

 

3,670

 

 

2,011

 

 

5,811

 

 

8,597

 

Real estate investment

 

-

 

 

-

 

 

-

 

 

-

 

 

 

3,670

 

 

2,011

 

 

5,811

 

 

8,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2005

 

 

As of

March

31, 2005

 

 

 

 

 

 

 

 

 

HK$'000

 

 

HK$'000

 

Segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

Pearls

 

 

 

 

 

 

 

482,033

 

 

449,219

 

Real estate investment

 

 

 

 

 

 

 

63,274

 

 

62,232

 

Corporate assets

 

 

 

 

 

 

 

58,312

 

 

47,790

 

 

 

 

 

 

 

 

 

603,619

 

 

559,241

 

 

 

 

F-9

 



 

8. Common Stock

 

For the three months ended December 31, 2005, 250,000 and 312,500 stock options were exercised on November 22, 2005 at the exercise price of US$0.976 per share and US$0.88 per share, respectively. A total of 562,500 common shares, par value of US$0.001 were issued accordingly.

 

 

 

F-10

 



 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This section and other parts of this Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are, by their nature, subject to risks and uncertainties. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Form 10-Q are forward looking. Words such as "anticipates," "believes," "expects," "future" and "intends" and similar expressions may identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to: our future performance, our expansion efforts, demand for our products; the state of economic conditions and our markets; currency and exchange rate fluctuations; and our ability to meet our liquidity requirements. These forward-looking statements are based on assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe to be appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depend 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 our 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, our ability to achieve our objectives and expectations are derived at least in part from assumptions regarding economic conditions, consumer tastes, and developments in our competitive environment. The following assumptions, among others, could materially affect the likelihood that we will achieve our objectives and expectations communicated through these forward-looking statements: (i) that low or negative growth in the economies or the financial markets of our customers, particularly in the United States and in Europe, will not occur and reduce discretionary spending on goods that might be perceived as "luxuries"; (ii) that the Hong Kong dollar will remain pegged to the U.S. dollar at US$1 to HK$7.8; (iii) that customer's choice of pearls vis-à-vis other precious stones and metals will not change adversely; (iv) that we will continue to obtain a stable supply of pearls in the quantities, of the quality and on terms we require; (v) that there will not be a substantial adverse change in the exchange relationship between the renminbi ("RMB") and the Hong

 

1

 



 

Kong or U.S. dollar; (vi) that there will not be a substantial increase in the tax burdens of our subsidiaries operating in the PRC; (vii) that there will not be a substantial change in climate and environmental conditions at the source regions of pearls that could have a material adverse effect on the supply and pricing of pearls; and (viii) that there will not be a substantial adverse change in the real estate market conditions in the PRC and in Hong Kong. The following discussion of our results of operation, and liquidity and capital resources should be read in conjunction with the financial statements and the notes thereto included elsewhere in this Form 10-Q and with our annual report on Form 10-K for the year ended March 31, 2005, which contains a further description of risks and uncertainties related to forward-looking statements, as well as other aspects of our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We will not publicly release any revisions to these forward-looking statements after the date hereof. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission.

 

Overview

 

For the nine months ended December 31, 2005, sales decreased approximately by 4.5% to HK$ 302.0 million. This decrease in sales is primarily due to the decline in demand of South Sea pearls of our U.S. customers and partly due to strong upward swing of bullion prices in 2005 which has negatively impacted the sales of our assembled jewelry products. Despite the decrease of total sales as compared to the same quarter of last fiscal year, South Sea pearls remain the Company's major sales contributor. In addition, the European market shows a healthy growth while the North American market has dropped in its performance during this quarter. Although total net sales have declined, the gross profit margin still remains comparable to last year's level, reflecting a slight drop of only 0.5%.

 

With increasing bank interest rates, the Company benefits from the higher interest income on fixed deposits when compared to same period last year. In addition, lower selling, general and administrative expenses due to lower bad debt provision made in this fiscal year also accounts for the higher net income when compared to last fiscal year without taking into account the one-time gain on the sale of our real estate investment that occurred in the last fiscal year.

 

Future Trends

 

We will continue to explore new markets and new business opportunities to expand our business while maintaining our high quality of service to our existing customers. We will apply the right strategies to adapt to the change in market conditions. We expect that our continuing

 

2

 



 

efforts at effective cost control measures will help achieve better results.

 

Despite the expected industry slowdown in sales this year, the strong upward swing in bullion price may cause gold, platinum and silver jewelry products retailers to rely less on such precious metals and to incorporate more pearls into its jewelry products. As a result, we expect that the market demand in pearls for jewelry products will increase. Looking forward, we will be working hard to achieve a promising result in the coming quarter.

 

Results of Operations

 

For the Nine-Month Period Ended December 31, 2005 compared to Nine-Month Period Ended December 31, 2004.

 

Sales and Gross Profit

 

Net sales for the nine months ended December 31, 2005 decreased by HK$14.1 million, or 4.5% to HK$302.0 million, compared to net sales of HK$316.1 million for the nine months ended December 31, 2004. This decrease in sales is primarily due to the decline in demand of South Sea pearls of our U.S. customers and partly due to strong upward swing of bullion prices in 2005 which has negatively impacted the sales of our assembled jewelry products.

 

Gross profit for the nine months ended December 31, 2005 decreased by HK$5.4 million, or 6.2%, to HK$82.4 million from HK$87.8 million for the nine months ended December 31, 2004. As a percentage of net sales, gross profit margin decreased 0.5% to 27.3% for the nine months ended December 31, 2005 from 27.8% for the nine months ended December 31, 2004. Although total net sales has declined, the gross profit margin still remains comparable to last year's level, reflecting a slight drop of only 0.5%.

 

Rental Income

 

Gross rental income for the nine months ended December 31, 2005 was HK$2.4 million compared to HK$3.7 million for the nine months ended December 31, 2004, representing a decrease of HK$1.3 million, or 34.6%.  The decrease in gross rental income was mainly attributable to the reduction in rental income as a result of the disposal of 8th Floor, Harcourt House, No. 39 Gloucester Road, Wanchai, Hong Kong and lower rental income received from our Man Sang Industrial City located in Shenzhen, PRC.

 

Selling, General and Administrative Expense ("SG&A expense")

 

 

3

 



 

SG&A expense for the nine months ended December 31, 2005 was HK$58.4 million, consisting of HK$53.4 million attributable to pearl operations and HK$5.0 million attributable to real estate operations. SG&A expense for the nine months ended December 31, 2005, decreased approximately HK$13.4 million, or 18.7%, from HK$71.8 million for the nine months ended December 31, 2004, which consisted of HK$63.0 million attributable to pearl operations and HK$8.8 million attributable to real estate operations. The lower SG&A expense attributable to pearl operations was mainly due to lower provisions for doubtful accounts and the lack of an impairment loss on property, plant and equipment that occurred in the same period during the last fiscal year. The lower SG&A expense attributable to real estate operations was mainly due to the lack of a one-time write-off of a receivable related to a vacancy in one of our properties in Man Sang Industrial City in Shenzhen, which occurred during the same period in fiscal 2005.

 

As a percentage of net sales, SG&A expense attributable to pearl operations decreased 2.2% to 17.7% for the nine months ended December 31, 2005, from 19.9% for the nine months ended December 31, 2004.

 

Interest Expense

 

Interest expense decreased from HK$100K( for the nine months ended December 31, 2004 to nil for the nine months ended December 31, 2005 as we have fully repaid all bank borrowings.

 

Interest Income

 

Interest income increased by HK$4.3 million, or 955.4%, to HK$4.8 million for the nine months ended December 31, 2005 from HK$455K for the nine months ended December 31, 2004. The increase was principally due to higher interest rates and higher cash balances during the nine months ended December 31, 2005.

 

Income Tax Expense

 

Income tax expense for the nine months ended December 31, 2005 was HK$6.0 million, compared to the HK$6.2 million during the nine months ended December 31, 2004.

 

Net Income

_________________________

( As used in this report, the letter "K" appearing immediately after a Hong Kong dollar amount denotes rounding to the nearest HK$1,000; as an example, HK$250,499 may be rounded to "HK$250K."

 

4

 



 

Net income for the nine months ended December 31, 2005 was HK$11.2 million, compared to net income of HK$22.4 million for the nine months ended December 31, 2004. The decrease was mainly attributable to a gain on the disposal of real estate during the same period last fiscal year which did not recur in this fiscal period.

 

Results of Operations

 

For the Three-Month Period Ended December 31, 2005 compared to Three-Month Period Ended December 31, 2004.

 

Sales and Gross Profit

 

Net sales for the three months ended December 31, 2005 decreased by HK$18.9 million, or 17.3% to HK$90.2 million, compared to net sales of HK$109.1 million during the three months ended December 31, 2004. The decrease in sales was mainly attributable to the drop in South Sea pearls and partly due to the decrease in assembled jewelry products. This decrease in sales is primarily due to the decline in demand of South Sea pearls of our U.S. customers and partly due to strong upward swing of bullion prices in 2005 which has negatively impacted the sales of our assembled jewelry products.

 

Gross profit for the three months ended December 31, 2005 decreased by HK$4.6 million, or 16.4%, to HK$23.8 million from HK$28.4 million in the three months ended December 31, 2004. As a percentage of net sales, gross profit margin increased 0.3% to 26.3% for the three months ended December 31, 2005 from 26.0% for the three months ended December 31, 2004. In spite of the drop in sales, the gross profit margin remains robust to sustain at last years' level reflecting a slight increase of 0.3% indicating that the decrease in gross profit is mainly due to the decrease in net sales performance.

 

Rental Income

 

Gross rental income for the three months ended December 31, 2005 was approximately HK$0.6 million representing a decrease of approximately HK$0.2 million, or 29.6%, as compared to HK$0.8 million for the three months ended December 31, 2004. The decrease in gross rental income was mainly attributable to lower rental income received from Man Sang Industrial City.

 

Selling, General and Administrative Expense ("SG&A expense")

 

5

 



 

SG&A expense was HK$19.5 million for the three months ended December 31, 2005, consisting of HK$18.4 million attributable to pearl operations and HK$1.1 million attributable to real estate operations. SG&A expense for the three months ended December 31, 2005, decreased approximately HK$4.6 million, or 19.1%, from HK$24.1 million for the three months ended December 31, 2004, which consisted of HK$20.6 million attributable to pearl operations and HK$3.5 million attributable to real estate operations. The decrease in SG&A expense attributable to pearl operations was mainly due to lower provisions for doubtful accounts and the lack of an impairment loss on property, plant and equipment that occurred in the same period during the last fiscal year. The decrease in SG&A expense attributable to the real estate operations was mainly due to lower provision for doubtful accounts, and the decreased repair and maintenance expenses for refurbishing some of the buildings located in Man Sang Industrial City in Shenzhen.

 

As a percentage of net sales, SG&A expense attributable to pearl operations increased 1.5% to 20.4% for the three months ended December 31, 2005 from 18.9% for the three months ended December 31, 2004.

 

Interest Expense

 

Interest expense decreased from HK$22K for the three months ended December 31, 2004 to nil for the three months ended December 31, 2005 as we have fully repaid all bank borrowings.

 

Interest Income

 

Interest income increased by HK$2.0 million, or 694.4%, to HK$2.3 million for the three months ended December 31, 2005 from HK$286K for the three months ended December 31, 2004. The increase was principally due to higher interest rates and higher cash balances during the three months ended December 31, 2005.

 

Income Tax Expense

 

Income tax expense for the three months ended December 31, 2005 was HK$1.2 million, compared to HK$1.8 million for the three months ended December 31, 2004. The decrease was due to lower taxable income generated during the three months ended December 31, 2005.

 

Net Income

 

 

6

 



 

 

Net income for the three months ended December 31, 2005 was HK$2.5 million, compared to net income of HK$1.3 million during the three months ended December 31, 2004. The increase was mainly attributable to higher interest income generated during the three months ended December 31, 2005.

 

Liquidity and Capital Resources

 

Our primary liquidity needs are funded by the collection of accounts receivable and sales of inventory. As of December 31, 2005, we had working capital of HK$391.8 million, which included a cash balance of HK$262.5 million. The current ratio was 9.9 to 1 as of December 31, 2005. Net cash provided by operating activities was approximately HK$23.0 million for the nine months ended December 31, 2005. Net cash used in investing activities for the nine months ended December 31, 2005 was HK$10.0 million and net cash provided by financing activities was HK$6.0 million.

 

Inventories were HK$84.1 million as of December 31, 2005. The inventory turnover period was 3.4 months as of December 31, 2005.

 

Accounts receivable were HK$58.9 million as of December 31, 2005. Debtors' turnover period was 53.4 days as of December 31, 2005.

 

All of our long-term debt (including the current portion of long-term debt) was fully repaid and the gearing ratio was zero as of December 31, 2005.

 

We had available working capital facilities of HK$47.0 million with various banks at December 31, 2005. Such banking facilities include letter of credit arrangements, import loans, overdraft and other facilities commonly used in the jewelry business. All such banking facilities bear interest at floating rates generally offered by banks in Hong Kong and are subject to periodic review. As of December 31, 2005, we had a zero balance on each of these credit facilities.

 

We believe that our existing cash, cash equivalents, banking facilities and funds to be generated from internal operations will be sufficient to meet its anticipated future liquidity requirements.

 

 

 

7

 



 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of December 31, 2005, we had no derivative contracts, such as forward contracts and options to hedge against foreign exchange fluctuations.

 

During the nine months ended December 31, 2005, we made approximately 24.6% of our purchases in U.S. dollars, 21.4% in Hong Kong dollars, 28.9% in Japanese Yen and 11.9% in RMB.

 

We denominate our sales in either U.S. dollars or Hong Kong dollars. Since the Hong Kong Dollar remained "pegged" to the U.S. dollar at a consistent rate, we feel that the exposure of our sales proceeds to foreign exchange fluctuations is minimal. On the other hand, the potential revaluation of the RMB will not be considered significant to our operations as we believe that the risk of a substantial fluctuation of the RMB exchange rate remains low. At December 31, 2005, we have no short-term RMB bank borrowings. In addition, the transaction settled in Japanese Yen is due to a non-recurring purchase made during this fiscal period and therefore the risk of foreign currency exposure on Japanese Yen remains low.

 

Because most of our purchases are made in currencies that we believe we have a low risk of appreciation or devaluation and our sales are made in U.S. dollars, we have determined that our currency risk in the foreseeable future should not be material, and that no derivative contracts, such as forward contracts and options to hedge against foreign exchange fluctuations, were necessary during this quarter.

 

 

8

 



 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in our reports under the Securities and Exchange Act of 1934. In accordance with Rule 14a-15(b) of the Securities and Exchange Act of 1934, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2005 to ensure that material information relating to the company was made known to them by others within the company, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared. No significant change was made in our internal control over financial reporting during the fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

 

 

9

 



 

PART II     OTHER INFORMATION

 

ITEM 6.

EXHIBITS

 

(A)

Exhibits

 

3.1

Articles of Incorporation, as amended, including the Certificate of Designation of Series A Preferred Stock. (1)

 

3.2

Certificate of Designation of the Series B Preferred Stock. (1)

 

3.3

Amended and Restated Bylaws. (2)

 

3.4

Certificate of Amendment to Certificate of Designation of the Series A Preferred Stock. (3)

 

31.1

Rule 13a-14(a) Certification of Chief Executive Officer.

 

31.2

Rule 13a-14(a) Certification of Chief Financial Officer.

 

32.1

Section 1350 Certification of Chief Executive Officer.

 

32.2

Section 1350 Certification of Chief Financial Officer.

 

(1)

Incorporated by reference to the Company's registration statement on Form 8-A dated June 17, 1996.

(2)

Incorporated by reference to the Company's quarterly report on Form 10-Q dated August 11, 2005.

(3)

Incorporated by reference to the Company's current report on Form 8-K dated November 23, 2005.

 

 

10

 



 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MAN SANG HOLDINGS, INC.

 

Date: February 14, 2006

 

 

 

 

 

 

By:


/s/ CHENG Chung Hing, Ricky

 

 

 

CHENG Chung Hing, Ricky
Chairman of the Board, President,

Chief Executive Officer

 

 

 

 

 

11