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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 2001
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ________________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7-A Gwynns Mill Court, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 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
the filing requirements for at least the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2001:
Common Stock, $.01 Par Value - $578,208
The number of shares outstanding of the issuer's classes of common stock as
of June 30, 2001:
Common Stock, $.01 Par Value - 912,270 shares
ITEM 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of the federal securities laws.
These statements can be identified by the use of forward-looking
terminology such as "believes", "expects", "may", "will",
"should", or "anticipates" or similar terminology, or by
discussions of strategy. These statements reflect the reasonable
judgment of our management with respect to future events and are
subject to risk and uncertainties that could cause actual results
to differ materially from those in the forward-looking
statements. We cannot guarantee that our forward-looking
statements will turn out to be correct or that our beliefs or goals
will not change. Our actual results could be very different from, and
worse than, our expectations for various reasons, including factors
that may affect future results discussed in Management's Discussion
and Analysis of Financial Condition and Results of Operations or
Plan of Operations. Under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, an SEC-reporting company
that identifies forward-looking statements and warns investors that
actual results could differ materially from those in the
forward-looking statements, will not be liable for any private action
arising under the Securities Act of 1933 based on such forward-looking
statements.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company" or "USI") was
incorporated in the State of Maryland in 1969. Its principal offices
are located at 7-A Gwynns Mill Court, Owings Mills, MD 21117 and its
telephone number is 410-363-3000.
The Company designs and markets a variety of popularly-priced security
and private label products which currently consist primarily of smoke
alarms and related products. Most of the Company's products either
require minimal installation, or are designed for easy installation by
the consumer without professional assistance and requiring little or
no technical knowledge.
Prior to 2000, the Company also designed and marketed a variety of
telecommunication and video products. Due to the low margins realized
on its telecommunications and video products, the Company has focused
its business primarily on security products. As a result, the Company
(i) changed its marketing of telecommunications and video products to
concentrate virtually exclusively on made-to-order private label
sales, and (ii) entered into the electrical distribution market with
an enhanced and newly packaged line of smoke alarms as well as its
other security products. The electrical distribution trade covers
electrical and lighting distributors as well as manufactured housing
companies.
The Company imports virtually all of its products from various
suppliers overseas. For the fiscal year ended March 31, 2001,
approximately 66% of the Company's purchases are bought from a Joint
Venture with a Hong Kong Corporation (Hong Kong Joint Venture), in
which the Company owns a 50% interest, that has manufacturing
facilities in the People's Republic of China.
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The Company's sales for the year ended March 31, 2001 were $7,731,501
compared to $7,667,530 for the year ended March 31, 2000, an increase
of approximately 1%.
The Company reported a net loss of $758,940 in fiscal 2001 compared to
a net income in fiscal 2000 of $41,056 for its prior fiscal year. The
main reason for the decrease in earnings was higher selling, general
and administrative expenses and interest cost and lower Hong Kong
Joint Venture earnings. Included in fiscal 2000 results was the sale
of the Company's headquarters which resulted in a gain of $804,861,
partially offset by a write-off of obsolete inventory of $495,000.
SECURITY PRODUCTS
The Company markets a complete line of smoke alarms under the
trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signaltm" all
manufactured by the Hong Kong Joint Venture.
The line of smoke alarms consists of battery, electrical and
electrical with battery backup alarms with different types of
batteries and different battery lives and some with alarm silencers.
The alarms marketed to the electrical distribution trade also include
hearing impaired and heat alarms with a variety of additional
features. The Company also markets a line of electronically
advanced outdoor floodlights under the name "Lite Aidetm," whose
features include special sensors that activate automatic lighting
mechanisms and a quartz halogen system, offering the consumer a
variety of dependable outdoor security lighting systems. In addition,
the Company markets carbon monoxide alarms, door chimes and a ground
fault circuit interrupter which was introduced last year.
Sales of the Company's security products aggregated $6,487,456 or
approximately 84% of total sales in the fiscal year ended March 31,
2001 and $6,618,178 or approximately 86% of total sales in the fiscal
year ended March 31, 2000. This decrease in sales volume was due
primarily to lower export sales.
The Company is focusing its sales and marketing efforts to maximize
security product sales, especially smoke alarms manufactured by its
Hong Kong Joint Venture and marketed to the electrical distribution
trade.
OTHER PRODUCTS
The Company markets a variety of private label products on a made-to-
order basis, such as telephones and video products. The majority of
these products are produced by the Hong Kong Joint Venture.
For the fiscal year ended March 31, 2001, sales of the Company's
private label products aggregated $1,244,045 or 16% of total sales.
For the fiscal year ended March 31, 2000, sales of these products were
$1,049,352 or 14% of total sales. The primary reason for the increase
in sales was increased private label customers.
FCC REGULATION
The Federal Communications Commission (FCC) establishes technical
standards for certain of the Company's telecommunications products.
These regulations have had no material effect upon the Company's
business or its products to date, and all products subject to such
regulation comply with the FCC requirements.
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IMPORT MATTERS
The Company imports virtually all of its security and other products.
The Company, as an importer, is subject to numerous tariffs which vary
depending on types of products and country of origin, changes in
economic and political conditions in the country of manufacture,
potential trade restrictions, including loss of Most Favored Nation
status, and currency fluctuations. The Company has attempted to
protect itself from fluctuations in currency exchange rates to the
extent possible by negotiating most commitments in U.S. dollars.
The Company's purchases are subject to delays in delivery due to
problems with shipping and docking facilities, as well as other
problems associated with purchasing products abroad. The Company
imports a majority of its products from the People's Republic of
China. The loss of China's Most Favored Nation status with the United
States would substantially increase tariffs on imports from China and
would most likely have a material adverse impact on the Company's
business until competitive alternative sources of supply could be
obtained.
SALES AND MARKETING
The Company's products are generally marketed to retailers, wholesale
distributors, home centers, catalog and mail order companies and
to other distributors. Sales are made both by the Company and by
approximately 16 independent sales organizations (for Universal
Security Instruments, Inc.) which are compensated by commissions. The
Company has agreements with the sales organizations which are
cancelable by either party upon 30 days notice. The Company does not
believe that the loss of any one of these organizations would have a
material adverse effect upon its business.
The Company also promotes its products through its own sales catalogs
and brochures, which are mailed directly to trade customers. The
Company's customers, in turn, advertise the Company's products in
their own catalogs and brochures and in their ads in newspapers and
other media. The Company also exhibits and sells its products at
various trade shows, including the annual National Hardware Show in
Chicago, Illinois. The Company's domestic marketing strategy is
designed to attract retailing customers outside the consumer
electronics industry, such as variety stores and home centers.
Sales by the Company are also made by officers and full-time employees
of the Company, five of whom are also engaged in sales management and
training. Sales outside the United States, which are made by officers
of the Company and through exporters, were less than 5% of total
sales in fiscal 2001. The Company's foreign marketing strategy is to
increase sales of products to overseas markets through advertising
in trade shows and foreign trade magazines.
The Company's products have historically been retailed to
"do-it-yourself" consumers by chain, discount, electrical, building
supply, electrical distributors and hardware stores, as well as
through catalogs. The Company also distributes its products through
special markets such as premium/incentive and direct mail. The Company
does not currently market any significant portion of its products
directly to end users.
- 4 -
In 1999, the Company formed a new subsidiary, USI ELECTRIC, INC. for
the purpose of selling security products to the electrical
distribution trade and the manufactured home industry manufacturers.
USI ELECTRIC has established a national distribution system with eight
regional stocking warehouses throughout the United States which
enables customers to receive their orders the next day without paying
for overnight freight charges. The subsidiary (USI ELECTRIC) has hired
two sales personnel from the electrical distribution trade and
has engaged 26 independent sales organizations which represent
approximately 200 sales representatives, some of which have warehouses
where USI ELECTRIC products are maintained for sale.
The Company's backlog of orders believed to be firm as of March 31,
2001 was approximately $229,350. The Company's backlog as of March
31, 2000 was approximately $791,000. The decrease in backlog is a
function of the timing of orders received from its customers.
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has a 50% interest in a Hong Kong Joint Venture which has
manufacturing facilities in the People's Republic of China, for the
manufacturing of certain consumer electronic products sold by the
Company.
The Company believes that this Hong Kong Joint Venture arrangement
will ensure a continuing source of supply for a majority of the
Company's security products at competitive prices. At the present
time, the Company buys approximately 66% of its total purchases from
the Hong Kong Joint Venture. The products produced by the Hong Kong
Joint Venture include smoke alarms and certain models of
telecommunications products. The Company is currently pursuing the
development of additional products such as photoelectric smoke
alarms and carbon monoxide alarms to be produced by the Hong Kong
Joint Venture. Changes in economic and political conditions in China
could adversely affect the value of the Company's investment in the
Hong Kong Joint Venture. Refer to Note C of the Financial Statements
for a comparison of annual sales and earnings of the Hong Kong Joint
Venture. In the past two fiscal years, the Hong Kong Joint Venture has
increased its sales to customers other than the Company.
SUPPLIERS - OTHERS
Certain private label products not manufactured for the Company by the
Hong Kong Joint Venture are manufactured by other foreign suppliers
for the Company. The Company believes that its relationships with its
suppliers are good. The Company believes that the loss of any of its
suppliers could have a short-term adverse effect on its operations,
but that replacement sources could be developed.
COMPETITION
In fiscal year 2001, sales of smoke alarms accounted for approximately
84% of total sales. In the sale of smoke alarms, the Company competes
in all of its markets with First Alert, Firex and Walter Kidde. All of
these companies have greater financial resources and financial
strength than the Company. The Company believes that its security
products compete favorably with other such products in the market
primarily on the basis of styling and pricing.
- 5 -
The security industry in general involves changing technology, and the
success of the Company's products may depend on the Company's ability
to improve and update its products in a timely manner and to adapt to
new technological advances.
EMPLOYEES
The Company has 16 employees, 8 of whom are engaged in administration
and sales, and the balance of whom are engaged in product development
and servicing.
The Company's employees are not unionized. The Company believes that
its relations with its employees are satisfactory.
ITEM 2.
PROPERTIES
Effective December 1999, the Company entered into an operating lease
for a 9,000 square foot office and warehouse located in Baltimore
County, Maryland. This lease, which expires in October 2002, is
subject to renewal for an additional six years with increasing rentals
at 3% per year. The monthly rental approximates $4,500 per month
during the initial term.
The Hong Kong Joint Venture's manufacturing facility consists of six
buildings totaling 100,000 square feet. Three of the buildings
(totaling 31,000 square feet) are leased pursuant to a long-term lease
which expires in 2010. The other three buildings (69,000 square feet)
are owned by the Hong Kong Joint Venture and were built on property
leased for a 48 year term.
On June 16, 1999, the Company sold its headquarters facility, located
in Baltimore County, Maryland which became expendable when the Company
reduced the number of its employees.
The property was sold for a price of $2.2 million to KA Real Estate
Associates, LLC. After deducting the mortgage and settlement charges,
the Company received cash of approximately $830,000. The
Company reported, in its quarter ending June 30, 1999, a gain on the
sale of this property of approximately $800,000.
The Company retained ownership of approximately 1-1/2 acres of
undeveloped land adjacent to the Company's former headquarters
property which the Company sold. This property is held as collateral
by the Company's prime lender. Subsequent to year end, the Company
plans to sell this property.
The Company believes that its current facilities, and those of the
Hong Kong Joint Venture, are suitable and adequate.
ITEM 3.
LEGAL PROCEEDINGS
None.
- 6 -
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Over-The-Counter (OTC)
Bulletin Board market through which real-time quote, price and volume
information is a service provided by the NASDAQ Stock Market, Inc.
under the symbol USEC.
Approximately 42% of the Company's 912,270 outstanding shares of
common stock were held in street name by an unknown number of
beneficial owners since it does not reflect persons or entities that
hold our stock in "Street" name or through various brokerage firms.
The following table shows the fiscal 2001 and 2000 quarterly high and
low bid prices for the Company's common stock as reported by NASDAQ.
The bid quotations represent prices between dealers and do not reflect
the retailer markups, markdowns or commissions and may not represent
actual transactions.
Fiscal year ended March 31, 2001
Bid Prices
High Low
First Quarter 3.63 2.13
Second Quarter 4.13 2.25
Third Quarter 3.88 2.00
Fourth Quarter 2.25 1.25
Fiscal year ended March 31, 2000
Bid Prices
High Low
First Quarter 1.63 1.00
Second Quarter 1.63 1.00
Third Quarter 2.00 1.28
Fourth Quarter 4.00 1.63
On June 30, 2001, the closing quotation for our common stock as
reported on the OTC Bulletin Board was $1.20. You should obtain
current market quotations for our common stock because the market
price of our stock may fluctuate greatly. You can obtain these
quotations from various websites or by calling your broker.
As of March 31, 2001, there were approximately 167 holders of record
of the Company's common stock.
The Company has not paid any cash dividends on its common stock in the
last three years. It is the Company's present intention to retain all
earnings for use in its future operations.
- 7 -
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the five years ended
March 31, 2001 have been derived from the audited consolidated financial
statements. The information set forth below in not necessarily indicative
of results of future operations.
Years Ended March 31,
2001 2000 1999 1998 1997
Consolidated Statement of Operations Data:
Net sales $ 7,731,501 $ 7,667,530 $ 9,071,628 $11,566,317 $15,423,149
Loss before
equity in
earnings (loss)
of Hong Kong
Joint Venture
and income
taxes (799,183) (95,925) (1,119,154) (414,351) (1,332,427)
Net (loss) income (758,940) 41,056 (806,552) (445,126) (1,483,438)
Per common share:
Loss before
equity in
earnings (loss)
of Hong Kong
Joint Venture
and income taxes
- basic (1) (.88) (.11) (1.30) (.51) (1.64)
- diluted (1) (.88) (.10) (1.30) (.51) (1.64)
Net (loss) income
- basic (1) (.83) .05 (.93) (.55) (1.83)
- diluted(1) (.83) .04 (.93) (.55) (1.83)
Weighted average number
of common shares
outstanding
- basic(1) 912,270 903,495 863,706 811,397 811,397
- diluted(1) 912,270 938,807 863,706 811,397 811,397
Consolidated Balance Sheet Data:
Total assets 5,907,355 5,476,545 6,402,120 7,705,310 9,557,116
Long-term debt
(non-current) 45,088 60,260 -0- 1,246,861 1,344,211
Working capital 585,032 1,368,513 1,514,425 2,130,408 2,253,553
Current ratio (2) 1.23 to 1 2.01 to 1 1.63 to 1 2.25 to 1 1.75 to 1
Shareholders'
equity 3,303,304 4,062,244 3,987,072 4,747,351 5,192,477
(1) All per share amounts and number of outstanding shares have been restated to
reflect the one-for-four reverse stock split as of February 27, 1998.
(2) The current ratio is calculated by dividing current assets by current
liabilities.
- 8 -
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years 2001 and 2000
are summarized as follows:
Quarter Ended
2001 June 30, September 30, December 31, March 31,
Net sales $2,051,116 $1,740,167 $2,522,377 $1,417,841
Gross profit 560,396 621,451 710,079 186,959
Net earnings
(loss) 32,473 5,490 (196,270) (600,633)
Earnings (loss)
per share
- basic .04 .01 (.22) (.66)
Earnings (loss)
per share
- diluted .03 .01 (.22) (.66)
Quarter Ended
2000 June 30, September 30, December 31, March 31,
Net sales $2,058,352 $1,821,314 $2,391,966 $1,395,898
Gross profit 471,316 (23,921) 626,511 611,310
Net earnings
(loss) 650,869 (663,114) 50,469 2,832
Earnings (loss)
per share
- basic .73 (.73) .06 .00
Earnings (loss)
per share
- diluted .67 (.73) .06 .00
- 9 -
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 2001, sales increased by $63,971 (1%) from the prior
year. While the Company's sales remained relatively constant with the
prior year, the focus on marketing to the electrical distribution
trade through USI ELECTRIC generated an increase in sales to this
market of approximately $4,300,000 from approximately $1,800,000 in
2000. The Company experienced a corresponding decrease in sales from
its retail and wholesale distribution customers. This is consistent
with the Company's change in marketing focus discussed in Item 1.
In fiscal year 2000, sales decreased by $1,404,098 (15%) from the
prior year. This decrease was primarily due to decreased demand for
certain of the Company's private label products, which amounted
to $2,882,357, partially offset by an increase in security products of
$1,478,259.
GROSS PROFIT
The gross profit was 27% and 22% for the fiscal years 2001 and 2000.
The principal cause for the lower gross profit in fiscal year
2000 is due to a $495,000 write-off of abandoned and slow moving
inventory.
EXPENSES
In fiscal year 2001, selling, general and administrative expenses
increased by approximately $214,013 (10%) from the prior year. As a
percentage of sales, selling, general and administrative expenses
were 32% for the fiscal year ended March 31, 2001 and 29% for the
prior year. The increases resulted from higher costs, such as sales
commissions and freight, associated with the Company's subsidiary, USI
ELECTRIC, INC.
In fiscal year 2000, selling, general and administrative expenses
increased by approximately $177,348 (9%) from the prior year. The
increase resulted from higher staffing levels for the Company's
subsidiary, USI ELECTRIC, INC. which was founded in 1999. As a
percentage of sales, selling, general and administrative expenses were
29% for the fiscal year ended March 31, 2000 and 23% for the prior
year.
Management believes that as sales continue to increase that selling,
general and administrative expenses will also continue to increase in
the future.
INTEREST EXPENSE
Interest expense for fiscal 2001 increased to $248,135 from $140,635
in fiscal 2000 due primarily to higher levels of borrowings and higher
interest rates.
- 10 -
Interest expense for fiscal 2000 decreased to $140,635 from $230,625
in fiscal 1999 due primarily to the sale of the Company's headquarters
and payoff of the related mortgage in June 1999.
INCOME TAX
We did not make any provision for federal or state income taxes in
each of the three years in the period ended March 31, 2001 due to our
operating loss carry forward for income tax purposes. A valuation
allowance has been established and, accordingly, no benefit has been
recognized for our net operating losses and other deferred tax assets.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated from
operations and the Company's line of credit with a financial
institution which supplies both short-term borrowings and letters of
credit to finance foreign inventory purchases. The Company's maximum
line of credit is $7,500,000, however, based on specified by
percentages of the Company's accounts receivable and inventory and
letter of credit commitments, and at March 31, 2001, was limited to
$1,866,000. Of this amount, $1,791,442 had been utilized in short-term
borrowings, leaving $74,902 available under the line of credit as of
March 31, 2001. The outstanding principal balance of the revolving
credit line is payable upon demand. The interest rate on the revolving
credit line is equal to 1-1/2% in excess of the prime rate of interest
charged by the Company's lender. The loan is collateralized by all the
Company's accounts receivable, inventory and a 1.5 acre parcel of land
which is adjacent to the Company's prior headquarters. During the year
ended March 31, 2001, working capital decreased by $783,481, from
$1,368,513 on March 31, 2000 to $585,032 on March 31, 2001.
Operating activities used cash of $1,004,749 for the year ended March
31, 2001. An increase of $133,421 from 2000 was primarily due to
higher levels of accounts receivable and inventory and the funding of
the net loss. For the prior fiscal year, operating activities used
cash of $871,328 for the year ended March 31, 2000, which was offset
by the gain on the sale of the Company's headquarters of $804,861.
Investing activities used cash of $11,182 for fiscal 2001. Investing
activities provided cash of $1,990,941 in 2000, primarily due to the
proceeds from the sale of the Company's headquarters.
Financing activities in 2001 provided cash of $958,556, due to short-
term borrowings used to finance higher levels of accounts receivable
and inventory. Financing activities in 2000 used cash of $1,220,703,
primarily due to the repayment of the mortgage of $1,246,973 on the
Company's headquarters facility which was sold in June 1999.
The Company believes without the sale of real estate it currently owns
which it has listed for sale, or a distribution from its Hong Kong
Joint Venture, which the Company is currently negotiating, that the
Company's planned cash flow from operations, current availability
under its line of credit and working capital may not be sufficient to
- 11 -
continue the Company's current business plan, including continued
expansion into the electrical distribution trade market. The Company,
if necessary, could raise funds by selling other assets, including
inventory, at prices less than market or implementing cost reductions.
The Company believes that it could scale back operations further
without negatively impacting business growth. The Company anticipates
it will sell the real estate during the third or fourth quarter of
fiscal year 2002.
HONG KONG JOINT VENTURE
In fiscal year 2001, sales of the Hong Kong Joint Venture were
$6,053,815 compared to $5,517,170 and $6,440,817 in fiscal years 2000
and 1999, respectively.
Net income was $80,487 for the year ended March 31, 2001 compared to
net income of $273,962 and $635,205 in fiscal years 2000 and 1999,
respectively. The decrease in income for the years ended March 31,
2001 and 2000 was due primarily to higher selling, general and
administrative expense.
Selling, general and administrative expenses were $1,448,320,
$1,176,392 and $1,188,859 for the fiscal years ended March 31, 2001,
2000 and 1999, respectively. As a percentage of sales, expenses were
24%, 21% and 18% for fiscal 2001, 2000 and 1999, respectively. The
increase in expenses as a percentage of sales, in fiscal 2001 was
primarily due to lower sales volume and higher selling, general and
administrative expenses.
Interest income net of interest expense was $158,098 for the year
ended March 31, 2001, compared to $140,425 and $132,591 in fiscal
years 2000 and 1999, respectively.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During the year ended March 31, 2001,
working capital increased by $188,935 from $2,432,197 on March 31,
2000 to $2,621,132 on March 31, 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities," Statement of
Financial Accounting Standard No. 137, "Accounting for Derivative
Instrument and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," Statement of Financial Accounting Standard
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133." These
statements require companies to record derivatives on the balance
sheet as assets or liabilities, with the instruments measured at fair
value. The accounting for changes in fair value and gains or losses
depends on the intended use of the derivative and whether it qualifies
for hedge accounting. SFAS 133 will be effective for the Company's
fiscal year beginning April 1, 2001. The Company does not expect the
adoption of SFAS No. 133 will have a material effect on its
consolidated financial statements.
- 12 -
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description
Page
Report of Independent Certified Public Accountants 14
Financial Statement Schedule:
Consolidated balance sheets, March 31, 2001 and 2000 15
Consolidated statements of operations for the years ended
March 31, 2001, 2000 and 1999 17
Consolidated statements of shareholders' equity for the
years ended March 31, 2001, 2000 and 1999 18
Consolidated statements of cash flows for the years ended
March 31, 2001, 2000 and 1999 19
Notes to consolidated financial statements 20
Schedule II - Valuation and Qualifying Accounts 34
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors of
Universal Security Instruments, Inc.
We have audited the accompanying consolidated balance sheets of
Universal Security Instruments, Inc. and subsidiaries (the Company) as
of March 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three
years in the period ended March 31, 2001. These financial statements
are the responsibility of the Company's management. Our audits also
included the Financial Statement Schedule listed in the index at Item
14. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial
statements of the Hong Kong Joint Venture, the Company's investment,
which is accounted for using the equity method. The Company's
investment of $2,418,010 and $2,377,766 in the Hong Kong Joint
Venture's net assets at March 31, 2001 and 2000, and equity in
earnings of $40,243, $136,981 and $312,602 for each of the three
years in the period ended March 31, 2001 are included in the
accompanying consolidated financial statements. The financial
statements of the Hong Kong Joint Venture were audited by other
auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for the Hong
Kong Joint Venture, is based solely on the report of the other
auditors.
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
and the report of the other auditors provide a reasonable basis for
our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Universal
Security Instruments, Inc. and subsidiaries as of March 31, 2001 and
2000, and the consolidated results of their operations and their
cash flows for each of the three years ended March 31, 2001, in
conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement
schedule referred to above when considered in relation to the basic
consolidated financial statements taken as a whole presents fairly, in
all material respects, the information required to be set forth
therein.
GRANT THORNTON LLP
Baltimore, Maryland
June 8, 2001
- 14 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2001 2000
CURRENT ASSETS
Cash $ 34,642 $ 92,017
Accounts receivable:
Trade (less allowance for doubtful
accounts of $100,000 in 2001 and
2000) 900,841 595,880
Officers and employees 7,048 4,845
907,889 600,725
Inventories:
Finished goods 2,143,793 1,912,987
Raw materials - foreign locations - 25,071
2,143,793 1,938,058
Prepaid expenses 57,671 91,754
TOTAL CURRENT ASSETS 3,143,995 2,722,554
INVESTMENT IN HONG KONG JOINT VENTURE 2,418,010 2,377,766
PROPERTY AND EQUIPMENT, NET 329,243 363,920
OTHER ASSETS 16,107 12,305
TOTAL ASSETS $5,907,355 $5,476,545
See notes to consolidated financial statements.
- 15 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
2001 2000
CURRENT LIABILITIES
Short-term borrowings $ 1,791,442 $ 817,714
Accounts payable 614,280 399,100
Accrued liabilities 137,511 121,497
Current obligations under capital lease 15,730 15,730
TOTAL CURRENT LIABILITIES 2,558,963 1,354,041
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASE 45,088 60,260
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
912,270 shares at both March 31,
2001 and 2000. 9,123 9,123
Additional paid-in capital 10,533,310 10,533,310
Accumulated deficit (7,239,129) (6,480,189)
TOTAL SHAREHOLDERS' EQUITY 3,303,304 4,062,244
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,907,355 $ 5,476,545
See notes to consolidated financial statements.
- 16 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
2001 2000 1999
Net sales $7,731,501 $7,667,530 $9,071,628
Cost of goods sold 5,652,616 5,982,314 7,770,737
GROSS PROFIT 2,078,885 1,685,216 1,300,891
Research and development
expense 176,767 191,651 129,877
Selling, general and
administrative expense 2,453,381 2,239,368 2,062,020
Operating loss (551,263) (745,803) (891,006)
Other income (expense):
Interest income 233 301 2,719
Interest expense (248,135) (140,635) (230,625)
Gain from sale of
building - 804,861 -
Other (18) (14,649) (242)
(247,920) 649,878 (228,148)
LOSS BEFORE EQUITY IN
EARNINGS OF HONG KONG
JOINT VENTURE (799,183) (95,925) (1,119,154)
Equity in earnings of
Hong Kong joint venture 40,243 136,981 312,602
NET (LOSS) INCOME $ (758,940) $ 41,056 $ (806,552)
Net (loss) income per share
Basic $ (.83) $ .05 $ (.93)
Diluted $ (.83) $ .04 $ (.93)
Shares used in computing net
(loss) income per share:
Basic 912,270 903,495 863,706
Diluted 912,270 938,807 863,706
See notes to consolidated financial statements.
- 17 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
Balance at
March 31,
1998 811,584 $8,117 $10,453,927 $(5,714,693) $4,747,351
Common stock
sold to
employee 113,636 1,136 98,864 100,000
Common stock
repur-
chased (37,950) (380) (53,347) (53,727)
Net loss (806,552) (806,552)
Balance at
March 31,
1999 887,270 8,873 10,499,444 (6,521,245) 3,987,072
Common stock
issued to
employee 25,000 250 33,866 34,116
Net income 41,056 41,056
Balance at
March 31,
2000 912,270 9,123 10,533,310 (6,480,189) 4,062,244
Net loss (758,940) (758,940)
Balance at
March 31,
2001 912,270 $9,123 $10,533,310 $(7,239,129) $3,303,304
See notes to consolidated financial statements.
- 18 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
CASH FLOWS FROM 2001 2000 1999
OPERATING ACTIVITIES
Net (loss) income $ (758,940) $ 41,056 $(806,552)
Adjustments to reconcile net
(loss) income to net cash
(used in)provided by
operating activities:
Depreciation and
amortization 45,858 31,736 141,161
Undistributed earnings
of Hong Kong
Joint Venture (40,243) (136,981) (12,603)
Gain on sale of building - (804,861) -
Issuance of common stock to
employee for services - 34,116 -
Inventory write-down - 495,000 -
Changes in operating assets
and liabilities:
(Increase) decrease in
accounts receivable (307,164) (51,255) 704,068
(Increase) decrease in
inventories and
prepaid expenses (171,652) (612,840) 542,619
Increase (decrease) in
accounts payable and
accrued expenses 231,194 139,006 (268,991)
(Increase) decrease in
other assets (3,802) (6,305) 16,400
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (1,004,749) (871,328) 316,102
INVESTING ACTIVITIES
Proceeds from sale of
building - 2,079,785 -
Purchases of property
and equipment (11,182) (88,844) (28,725)
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (11,182) 1,990,941 (28,725)
FINANCING ACTIVITIES
Net borrowings (repayment)
of short-term debt 973,728 31,230 (182,842)
Principal payments of
capital lease obligations (15,172) (4,960) (16,078)
Payment on legal settlement - - (75,000)
Payment of debt related to the
sale of the building - (1,246,973) -
Sale of common stock to
employee - - 100,000
Purchase of common stock - - (53,727)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 958,556 (1,220,703) (227,647)
NET (DECREASE) INCREASE
IN CASH (57,375) (101,090) 59,730
CASH AT BEGINNING OF YEAR 92,017 193,107 133,377
CASH AT END OF YEAR $ 34,642 $ 92,017 $ 193,107
Supplemental information:
Interest paid $ 248,135 $ 140,635 $ 230,625
Income taxes paid - - -
Non-cash investing and financing activity:
The Company acquired equipment under capital lease obligations
totaling $80,950 during the year ended March 31, 2000.
See notes to consolidated financial statements.
- 19 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Company's primary business is the sale of
security products to retailers, wholesale distributors and to the
electrical distribution trade which includes electrical and lighting
distributors as well as manufactured housing companies. The Company
imports virtually all of its security and other products. The Company,
as an importer, is subject to numerous tariffs which vary depending on
types of products and country of origin, changes in economic and
political conditions in the country of manufacture, potential trade
restrictions, including loss of Most Favored Nation status, and
currency fluctuations.
The Company has had several consecutive years of operating losses and
uses of cash from operations. Management believes that its change in
business focus, availability under the line of credit, potential
proceeds from the sale of its real estate, potential cash distribution
from the Hong Kong Joint Venture and certain other cost reduction
strategies will provide sufficient resources to meet the Company's
operating cash flow requirements. However, there are no assurances
that these events will occur.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Actual results could
differ from those estimates.
Revenue Recognition: The Company recognizes sales upon the shipment of
its products net of applicable provisions for discounts and
allowances.
Research and Development: Research and development costs are charged
to operations as incurred.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Included as a component of finished goods inventory are additional
non-material costs. These costs include freight, import duty and
inspection fees as follows:
Year Ended March 31,
2001 2000
Materials $1,854,672 $1,748,687
Non-Materials 289,121 189,371
$2,143,793 $1,938,058
The Company reviews inventory periodically to identify slow moving
product lines. In relocating to its new space in December 1999,
management wrote-off abandoned and slow-moving product line inventory
totaling $495,000 in the year ended March 31, 2000.
- 20 -
Property and Equipment: Property and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation and
amortization is provided by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes.
The estimated useful lives for financial reporting purposes are as
follows:
Building - 40 years
Leasehold improvements - Term of lease
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Accounting for Hong Kong Joint Venture: The Company has a joint
investment in a Hong Kong manufacturing facility. The investment is
accounted for using the equity method.
Income Taxes: The Company recognizes a liability or asset for the
deferred tax consequences of temporary differences between the tax
bases of assets or liabilities and their reported amounts in the
financial statements. These temporary differences will result in
taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered or settled. The
deferred tax assets are reviewed periodically for recoverability and
valuation allowances are provided, as necessary.
Net Income (Loss) per Share: The Company reports basic and diluted
earnings per share. Basic earnings per share exclude dilution and are
computed by dividing net income (loss) by the weighted-average number
of common shares outstanding for the period. Diluted earnings per
share is computed by dividing net income (loss), adjusted by the
assumed conversion of any potential common share equivalents,
including stock options, by the weighted number of common shares and
common share equivalents (unless their effect is anti-dilutive)
outstanding. Common stock equivalents totaling 912,270 and 867,706 at
March 31, 2001 and 1999, respectively, were not included in the
computation of diluted loss per share, because to do so would have
been anti-dilutive.
Recently Issued Accounting Standards: In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," the Statement of
Financial Accounting Standard No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," and the Statement of Financial Accounting
Standard No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment of FASB Statement No. 133."
These statements require companies to recognize all derivatives as
either assets or liabilities, with the instruments measured at fair
value. The accounting for changes in fair value and gains or losses
depends on the intended use of the derivative and its resulting
designation. The statement was originally effective for fiscal years
beginning after June 15, 1999. In July 1999, FASB delayed
implementation of this standard for one year, to June 30, 2000. The
Company will adopt SFAS 133 in the first quarter of fiscal year 2002.
The Company does not expect the adoption of SFAS No. 133 will have a
material effect on its consolidated financial statements.
- 21 -
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
2001 2000
Land and improvements $174,034 $174,034
Leasehold improvements 71,885 69,573
Machinery and equipment 157,626 151,686
Furniture and fixtures 154,533 154,004
Computer equipment 64,254 61,853
Equipment held under capital lease 80,950 80,950
703,282 692,100
Less accumulated depreciation
and amortization 374,039 328,180
$329,243 $363,920
Universal Security Instruments, Inc. sold its headquarters facility in
Owings Mills, MD, on June 16, 1999 for $2.2 million to KA Real Estate
Associates, LLC, and recognized a gain of $804,861.
NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE
The Company holds a 50% interest in a Joint Venture with a Hong Kong
Corporation, which has manufacturing facilities in the People's
Republic of China, for the manufacturing of consumer electronic
products. As of March 31, 2001, the Company has an investment balance
of $2,418,010 for their 50% interest in the Hong Kong Joint Venture.
The following represents summarized financial information from the
financial statements of the Hong Kong Joint Venture as of March 31,
2001 and 2000 and for the years ended March 31, 2001, 2000 and 1999.
This information was audited by other accountants and their report
is included at March 31, 2001 and 2000. Amounts due the Hong Kong
Joint
Venture included in accounts payable totaled $368,511 and $127,719,
respectively. The Company incurred interest cash charged by the Hong
Kong Joint Venture of $26,762, $7,301 and $1,765 during the years
ended
March 31, 2001, 2000 and 1999, respectively, related to its purchases.
As of the
years ended March 31,
2001 2000 1999
Current assets $3,683,048 $3,343,848
Property and other assets 2,205,082 2,301,452
Total $5,888,130 $5,645,300
Current liabilities $1,061,915 $ 922,963
Non-current liabilities 43,047 38,520
Shareholders' equity 4,783,168 $4,683,817
Total $5,888,130 $5,645,300
Net sales $6,053,815 $5,517,170 $6,440,817
Gross profit 1,305,164 1,248,979 1,537,855
Net income (loss) 80,487 273,962 625,205
- 22 -
During the years ended March 31, 2001, 2000 and 1999, the Company
purchased $3,841,325, $4,567,052 and $4,365,481, respectively, of
finished product from the Hong Kong Joint Venture, which represents
66%, 79% and 81%, respectively, of the Company's total finished
product
purchases at March 31, 2001 and 2000. Amounts due the Hong Kong Joint
Venture included in Accounts Payable totaled $368,511, $127,719 and
$49,285, respectively. The Company incurred interest costs charged by
the Hong Kong Joint Venture of $26,762, $7,301 and $1,765 during the
years ended March 31, 2001, 2000 and 1999, respectively related to its
purchases.
NOTE D - DEBT
Debt consisted of the following:
Year Ended March 31,
2001 2000
Short-term borrowings $1,791,442 $817,714
The short-term borrowings relate to the Company's agreement with a
financial institution to provide a maximum line of credit based on the
of the lower of $7,500,000 or specified percentages of the Company's
accounts receivable and inventory. The agreement with the financial
institution constitutes a factoring relationship wherein the Company
pays a 1% fee for all receivables accepted by the financial
institution. However, the Company has not met all the sale criteria
under SFAS 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" and therefore the
transaction is accounted for as a financing. The short-term
borrowings
consist of a revolving line of credit and letters of credit. The
outstanding principal balance of the revolving credit line is payable
on demand. The interest rate on the revolving credit line is equal to
1-1/2% in excess of the prime rate of interest (9%) at March 31,
2001).
As of March 31, 2001, the amount available for borrowings under the
line was $74,902 based on the specified percentages. The loan is
collateralized by the Company's accounts receivable, inventory and a
1.5 acre parcel of the Company's real estate. The weighted average
interest rate on outstanding short-term borrowings for the years ended
March 31, 2001, 2000 and 1999 was 9.29%, 9.71% and 9.62%,
respectively.
NOTE E - LEASES
The Company entered into capital lease agreements for various
equipment, with an outstanding balance of $60,818 as of March 31,
2001.
The leases have imputed interest rates ranging from 7.6% to 10%, with
monthly payments aggregating to $1,810 per month.
- 23 -
Maturities of long term capital lease obligations for the four years
following March 31, 2001 are as follows:
Year Ended March 31,
2001 2000
Obligations under capital lease $60,818 $75,990
Less current maturities 15,730 15,730
$45,088 $60,260
Year Capital Lease Obligation
2002 $21,719
2003 21,719
2004 18,193
2005 7,435
Total 69,066
Less amounts representing interest 8,248
Obligations under capital lease $60,818
During December 1999, the Company entered into an operating lease for
its office and warehouse expiring in October 2002, subject to renewal.
Rental expenses recognized under the lease totaled $51,369 and $16,866
for the years ended March 31, 2001 and 2000. Future obligations under
this lease are as follows:
Fiscal
Year - End Amount
2002 $53,875
2003 31,970
$85,845
NOTE F - INCOME TAXES
No provision for US federal or state income taxes have been recorded
in any period presented, as the Company had incurred operating losses
in all such periods.
Realization of deferred tax assets is dependent upon future earnings,
if any. The Company has recorded a full valuation allowance against
its deferred tax assets since management believes it is more likely
than not that these asset will not be realized. No income tax benefit
has been recorded for all periods presented because of the valuation
allowance.
At March 31, 2001, the Company has net operating loss (NOL)
carryforwards in the United States of America of approximately
$6,870,000 for income tax purposes that expire in years 2009 through
2020.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows.
- 24 -
March 31,
2001 2000
Deferred tax liabilities:
Unremitted Hong Kong
Joint Venture earnings not considered
permanently reinvested $ 836,800 $ 818,920
Gross deferred tax liabilities 836,800 818,920
Deferred tax assets:
Financial statement accruals and
allowances 75,070 102,313
Inventory uniform capitalization 72,200 72,200
Other 39,650 34,361
NOL carryforwards and tax credits 2,611,908 2,295,812
Gross deferred tax assets 2,798,828 2,504,686
Valuation allowance (1,962,028) (1,685,766)
Net deferred tax assets $ -0- $ -0-
The reconciliation of the income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
3/31/01 3/31/00 3/31/99
Federal tax expense (benefit) at
statutory rate on income (loss) (34%) $(271,722) $(32,615) $(380,512)
State Tax Expense (Benefit) (30,357) 1,642 ( 32,262)
Equity in (earnings) loss from
Hong Kong Joint Venture 13,683 46,894 106,285
Change in valuation allowance 276,262 (22,831) 283,694
Other 12,134 6,910 22,795
$ -0- $ -0- $ -0-
NOTE G - SHAREHOLDERS' EQUITY
Common Stock - On September 2, 1998, the Company sold 113,636 shares of common
stock to the Chairman of the Board of the Company at a price of $0.88 cents per
share (the mean between the closing bid and asked prices on NASDAQ) for an
aggregate of $100,000. On November 12, 1998, the Board of Directors authorized
the Company to purchase up to 100,000 shares of the Company's common stock.
During the year ended March 31, 1999, pursuant to the stock purchase program,
the Company repurchased 37,950 shares at a cost of $53,727. During the year
ended March 31, 2000, the Company issued 25,000 shares of its common stock to a
new employee. As part of the issuance, the Company recognized $34,116 of
compensation expense.
- 25 -
Employee Stock Purchase Plan - Under the terms of the Company's 1988 Employee
Stock Purchase Plan, eligible employees can purchase shares of the Company's
common stock through payroll deductions at a price equal to 90% of the asked
price of the shares. The Company has reserved 25,000 shares of common stock for
issuance under the Plan. No member of the Board of Directors who is not an
employee of the Company, and no member of the committee administering the Plan,
can participate in the Plan. At March 31, 2001, approximately 16,250 shares
remain reserved for issuance under this Plan.
Stock Options - Under terms of the Company's 1978 Non-Qualified Stock Option
Plan, as amended, 493,750 shares of common stock are authorized for the granting
of stock options, of which 11,519 shares have been issued as of March 31,
2001, leaving 482,231 available for issuance upon exercise of options granted,
or available for future grants to employees and directors. Under provisions of
the Plan, a committee of the Board of Directors determines the option price and
the dates exercisable. All options expire five years from the date of grant and
have an exercise price at least equal to the market price at the date of grant.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 2001 and option transactions
for the three years then ended:
Status as of March 31, 2001 Number of Shares
Presently exercisable 193,625
Exercisable in future years 44,750
Total outstanding 238,375
Available for future grants 243,856
Shares of common stock reserved 482,231
Outstanding options:
Number of holders 15
Average price per share $2.61
Expiration dates April 2001 to May 2005
Transactions for the Three Years Ended March 31, 2001:
Weighted Average
Number of Per Share
Shares Option Price
Outstanding at
March 31, 1998 188,125
Granted 82,250 2.11
Canceled (45,875) 6.89
Outstanding at
March 31, 1999 224,500
Granted 73,500 1.79
Canceled (60,125) 7.55
Outstanding at
March 31, 2000 237,875
Granted 5,000 4.50
Canceled (4,500) 2.56
Outstanding at
March 31,2001 238,375
- 26 -
The following table summarizes information about stock options outstanding at
March 31, 2001:
Options Outstanding Options Exercisable
Weighted
Weighted Weighted Average
Average Average Exercise
Range of Exercise Number of Exercise Contract Number of Price
Price Shares Price Life (Yrs) Shares Exercise
$1.30 to $2.99 230,375 2.29 4.00 230,375 2.29
$3.00 to $3.99 3,000 3.50 3.96 3,000 3.50
$4.00 to $5.99 5,000 4.50 3.86 5,000 4.50
The Company accounts for stock options granted to employees in accordance with
APB 25. Under APB 25, when the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The Company has provided additional pro
forma disclosures as required by SFAS No. 123, "Accounting for Stock-Based
Compensation."
For disclosure purposes, the fair value of each stock option is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for stock options and rights to receive stock
in 2001, 2000 and 1999; no annual dividends, expected volatility of 80%, 85%
and 85%, respectively, risk-free interest rate ranging of 6.50% and expected
life of five years. The weighted-average fair values of the stock options
granted in 2001, 2000 and 1999 were $1.44, $1.01 and $0.77, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of normal publicly traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
Had compensation cost been based upon the fair value of the option on the date
of grant, as prescribed by SFAS No. 123, the Company's pro forma net
(loss)/income and net (loss)/income per share for the years ended March 31,
2001, 2000 and 1999 using the Black-Scholes option pricing model would have been
$(782,574) and $(.86), $18,527 and $0.02, and $(817,718) and $(.95),
respectively.
NOTE H - COMMITMENTS
The Company entered into a three year employment agreement with the President of
its USI ELECTRIC, INC. subsidiary with fixed annual remuneration amounts for
three years which was extended in April, 2001. In addition, the agreement
provides incentive compensation based on the Company achieving certain levels of
sales. The agreement expires in December, 2003.
- 27 -
NOTE I - MAJOR CUSTOMERS
The Company is primarily a distributor of security products for use in home
and business under both its tradenames and private labels for other companies.
The Company's 50% owned Hong Kong Joint Venture manufactures the majority of the
Company's products.
Customers that represented in excess of 10% of the Company's product sales are
as follows:
March 31, 2001 March 31 2000 March 31, 1999
Customer A - 17% 24%
Customer B - 15% -
Customer C - - 19%
NOTE J - OPERATIONS AND LIQUIDITY
As shown in the accompanying financial statements, the Company has incurred
operating losses during the last three years and has accumulated a deficit of
$7,239,129 at March 31, 2001. Management believes that its change in marketing
focus with an emphasis on selling to the electrical distribution trade, a market
from which the Company received a higher gross margin, will have a positive
impact on the Company's operations and operating cash flow.
Management believes that its cash on hand, availability under its line of
credit, arrangements with the Hong Kong Joint Venture that it holds a 50% equity
interest in, future proceeds from sale of real estate that the Company has
listed for sale, planned cash flow from operations and potential cost reductions
will provide the Company with sufficient capital for the Company to meet its
operating needs through March 31, 2002. However, there are no assurances that
these events will occur.
ITEM 9.
Changes in and disagreements with Accountants on Accounting and Financial
Disclosures.
None.
- 28 -
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of three directors. The
following is a list of individuals currently serving as directors of
the Company until the Company's next annual stockholders meeting and
individuals currently serving as executive officers of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper.....57 Director; Vice Chairman of the 1970
Board of the Company since
September 1996; Chairman of the
Board of the Company from 1970
to September 1996.
Michael Kovens......58 Director; Chairman of the Board 1970
of the Company since September
1996; President of the Company
from 1970 to September 1996.
Harvey Grossblatt...54 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
April 1997; Vice President
of the Company from December
1986 to June 1996; Secretary and
Treasurer of the Company since
September, 1988; Vice President
and Chief Financial Officer of
the Company from October 1983
through May 1995.
- 29 -
ITEM 11.
EXECUTIVE COMPENSATION
Table I. Summary Compensation Table
The following table reflects the aggregate amount paid or accrued by the Company
in its three most recent fiscal years, for each executive officer whose
compensation exceeded $100,000 in that year.
Long-Term Compensation
Name and Awards Payouts
Principal Annual Compensation Stock LTIP All Other
Position Year Salary Bonus Other Awards Options Payouts Compensation
Michael
Kovens 2001 $175,000 - - - - - $ -0-
Chairman
of the
Board 2000 175,000 75,000 - - 23,750 - -0-
1999 175,000 - - - 12,500 - -0-
Harvey
Gross-
blatt 2001 $122,500 - - - 5,000 - $ -0-
Presi-
dent,
Secre-
tary 2000 122,500 10,000 - - - - -0-
and
Treas-
urer 1999 122,500 - - - 6,250 - -0-
Table II. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
Value
Number of Unexercised
of Unexercised In-The-Money
Shares Options at FY-End Options at FY-End
Acquired Value Exerci-/Unexerci- Exerci-/Unexerci-
Name In Exercise Realized sable/sable sable/sable
Michael Kovens - - 7,375/-0- -0-/-0-
Harvey Grossblatt - - 3,687/-0- -0-/-0-
- 30 -
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 25, 2001, the following persons were "beneficial owners"
(as that term is defined under Rule 13d-3 promulgated by the
Securities and Exchange Commission) of more than five percent of the
Company's common stock.
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 328,295(2) 33.5%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Stephen Knepper 102,873(3) 10.5%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Bruce Paul 129,400 14.0%
One Hampton Road
Purchase, NY 10577
(1) For the purpose of determining the percentages of stock
beneficially owned, shares of stock subject to options
exercisable within 60 days of May 25, 2001 are deemed to be
outstanding.
(2) Includes 68,750 shares which Mr. Kovens presently has the right
to acquire through the exercise of stock options.
(3) Includes 68,750 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options and
2,000 shares held by a trust in which Mr. Knepper has voting
control.
- 31 -
As of May 25, 2001, the shares of the Company's common stock owned
beneficially by each director, by each executive officer and by all
directors and officers as a group were as follows:
Shares Percent
Name of beneficial owner Beneficially Owned(1) of class
Michael Kovens 328,295(2) 33.5%
Stephen Knepper 102,873(3) 10.5%
Harvey Grossblatt 31,272(4) 3.3%
All directors and officers as 516,690 47.1%
a group (4 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Includes 24,000 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
- 32 -
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in
Part II, Item 8.
Consolidated balance sheets, March 31, 2001 and 2000
Consolidated statements of operations for the years ended
March 31, 2001, 2000 and 1999.
Consolidated statements of shareholders' equity for the
years ended March 31, 2001, 2000 and 1999.
Consolidated statements of cash flows for the years
ended March 31, 2001, 2000 and 1999.
Notes to consolidated financial statements.
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, are
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibit No.
3.(i) Articles of Incorporation, as amended (incorporated by
by reference to USI's Annual Report on Form 10-K for the year
ended March 31, 1998)
(ii) Bylaws, as amended (incorporated by reference to Exhibit 3.5
to USI's Annual Report on Form 10-K for the year ended March
31, 1994)
10.1 Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to USI's Annual Report on Form 10-K
for the year ended March 31, 1997)
10.2 Hong Kong Joint Venture Agreement (confidential treatment of
Name requested and filed separately with the Commission)
(incorporated by reference to Exhibit 10.2 to USI's Annual
Report on Form 10-K for the year ended March 31, 1995)
10.16 Discount Factoring Agreement with Congress Talcott, Inc.
dated February 28, 1995 (incorporated by reference to Exhibit
10.16 to USI's Annual Report on Form 10-K for the year ended
March 31, 1997)
- 33 -
10.19 Lease between Universal Security Instruments, Inc. and National
Instruments Company dated October 21, 1999 for its office and
warehouse located at 7-A Gwynns Mill Court, Owings Mills, MD
21117 (incorporated by reference to Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for the Fiscal Year
Ended March 31, 2000, File No. 0-7885).
10.2 Hong Kong Joint Venture Agreement (confidential treatment of
Name requested and filed separately with the Commission)
(Incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the Fiscal Year
Ended March 31, 1994, File No. 0-7885)
21.1 Subsidiary of the Company
USI ELECTRIC, INC. (100% owned)
USI Oberlin, Ltd. (100% owned)
(b) Reports on Form 8-K
None
(d) Financial Statements Required by Regulation S-X
Separate financial statements of the Hong Kong Joint Venture
(confidential treatment of name requested and filed separately
with the Commission.
Page
Independent auditor's report 37
Consolidated profit and loss account, 38
March 31, 2001 and 2000
Consolidated balance sheets, March 31, 2001 and 2000 39
Consolidated cash flow statements, March 31, 2001 41
and 2000
Notes to consolidated financial statements 45
- 34 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 2001, 2000 and 1999
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions of year
Year ended
March 31, 2001
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 2000
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 1999
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
- 35 -
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.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By: Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: July 13, 2001 By: Michael Kovens
Michael Kovens
Chairman of the Board, Director
Date: July 13, 2001 By: Stephen Knepper
Stephen Knepper
Vice Chairman of the Board, Director
Date: July 13, 2001 By: Harvey Grossblatt
Harvey Grossblatt, President,
Director, Chief Accounting Officer
- 36 -
REPORT OF THE AUDITORS
To the members
The Joint Venture (Name withheld and filed separately
with the Securities and Exchange Commission)
(Incorporated in Hong Kong with limited liability)
We have audited the financial statements on pages 4 to 23 which have
been prepared in accordance with accounting principles generally
accepted in Hong Kong.
Respective responsibilities of directors and auditors
The Companies Ordinance requires the directors to prepare financial
statements which give a true and fair view. In preparing financial
statements which give a true and fair view it is fundamental that
appropriate accounting policies are selected and applied
consistently. It is our responsibility to form an independent
opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Statements of Auditing
Standards issued by the Hong Kong Society of Accountants. An audit
includes an examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements. It also
includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the
Company's and the Group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance
as to whether the financial statements are free from material
misstatement. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial
statements. We believe that our audit provides a reasonable basis
for our opinion.
Opinion
In our opinion the financial statements give a true and fair view of
the state of affairs of the Company and of the Group as at 31 March
2001 and of the profit and cash flows of the Group for the year then
ended and have been properly prepared in accordance with the
Companies Ordinance.
Hong Kong
21 May 2001
- 37 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 March 2001
Notes 2001 2000
HK$ HK$
TURNOVER 3 46,928,800 42,855,134
Cost of sales (36,811,248) (33,127,883)
Gross profit 10,117,552 9,727,251
Other revenue 1,785,529 1,672,198
Administrative and operating
expenses (11,227,285) (9,119,320)
PROFIT FROM OPERATING ACTIVITIES 4 675,796 2,280,129
Finance costs 5 (49,055) (33,951)
PROFIT BEFORE TAX 626,741 2,246,178
Tax 6 (2,814) (122,441)
NET PROFIT ATTRIBUTABLE
TO SHAREHOLDERS 7 623,927 2,123,737
Retained profits at
beginning of year 33,585,737 31,462,000
RETAINED PROFITS AT END OF YEAR 34,209,664 33,585,737
Other than the net profit attributable to shareholders, the Group had
no recognized gains or losses. Accordingly, a Consolidated Statement
of Recognized Gains and Losses is not presented in the financial
statements.
- 38 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET
31 March 2001
Notes 2001 2000
HK$ HK$
ASSETS
Non-current assets:
Fixed assets 8 17,093,660 17,927,978
Long term investment 9 - -
17,093,660 17,927,978
Current assets:
Due from a shareholder 1 3,990,870 1,661,636
Inventories 11 6,658,344 5,498,125
Prepayments, deposits
and other receivables 654,146 236,252
Pledged time deposit 12 1,631,932 1,570,039
Cash and cash equivalents 15,615,466 17,076,376
28,550,758 26,042,428
TOTAL ASSETS 45,644,418 43,970,406
EQUITY AND LIABILITIES
Current liabilities:
Current portion of loan
from a related company 1 27,329 164,004
Tax payable 2,332,003 2,256,337
Other payables and accruals 2,479,027 2,858,529
Trade payables 3,393,541 1,909,316
8,231,900 7,188,186
Non-current liabilities:
Loans from shareholders 1 2,868,954 2,868,954
Long term portion of loan
from a related company 1 - 27,329
Deferred tax 14 333,700 300,000
3,202,654 3,196,283
TOTAL LIABILITIES - page 40 11,434,554 10,384,469
- 39 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET (continued)
31 March 2001
Notes 2001 2000
HK$ HK$
TOTAL LIABILITIES - page 39 11,434,554 10,384,469
Capital and reserve:
Share capital 15 200 200
Retained profits 34,209,664 33,585,737
34,209,864 33,585,937
TOTAL EQUITY AND LIABILITIES 45,644,418 43,970,406
- 40 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 March 2001
Notes 2001 2000
HK$ HK$
NET CASH INFLOW/(OUTFLOW)
FROM OPERATING ACTIVITIES 16(a) (534,489) 1,596,234
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 1,274,622 1,122,513
Interest paid (49,055) (33,951)
Net cash inflow from returns on
investments and servicing
of finance 1,225,567 1,088,562
TAX
Hong Kong profits tax
refunded/(paid) 106,552 (475,589)
INVESTING ACTIVITIES
Purchases of fixed assets (2,040,643) (2,040,017)
Proceeds from disposal of
fixed assets 8,000 -
Increase in pledged
time deposit (61,893) (82,400)
Net cash outflow from
investing activities (2,094,536) (2,122,417)
NET CASH INFLOW/(OUTFLOW)
BEFORE FINANCING ACTIVITY (1,296,906) 86,790
FINANCING ACTIVITY 16(b)
Repayment of loan from
a related company (164,004) (164,000)
Net cash outflow from
financing activity (164,004) (164,000)
- 41 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 March 2001
Notes 2001 2000
HK$ HK$
DECREASE IN CASH AND
CASH EQUIVALENTS (1,460,910) (77,210)
Cash and cash equivalents
at beginning of year 17,076,376 17,153,586
CASH AND CASH EQUIVALENTS
AT END OF YEAR 15,615,466 17,076,376
ANALYSIS OF THE BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances 15,615,466 17,076,376
- 42 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
BALANCE SHEET
Year ended 31 March 2001
Notes 2001 2000
HK$ HK$
ASSETS
Non-current assets:
Fixed assets 8 17,093,660 17,927,978
Interests in subsidiaries 10 116,462 100,612
17,210,122 18,028,590
Current assets:
Due from a shareholder 1 3,990,870 1,661,636
Tax recoverable 86,914 162,580
Inventories 11 6,658,344 5,498,125
Prepayments, deposits and
other receivables 654,146 236,252
Pledged time deposit 12 1,631,932 1,570,039
Cash and cash equivalents 15,532,694 16,981,395
28,554,900 26,110,027
TOTAL ASSETS 45,765,022 44,138,617
EQUITY AND LIABILITIES
Current liabilities:
Current portion of loan
from a related company 1 27,329 164,004
Other payables and accruals 1,239,352 1,618,854
Trade payables 3,393,541 1,909,316
4,660,222 3,692,174
Non-current liabilities:
Due to a subsidiary 10 16,533,809 16,541,609
Loans from shareholders 13 2,868,954 2,868,954
Long term portion of loan
from a related company 1 - 27,329
Deferred tax 14 333,700 300,000
19,736,463 19,737,892
TOTAL LIABILITIES - page 44 24,396,685 23,430,066
- 43 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
BALANCE SHEET (continued)
Year ended 31 March 2001
Notes 2001 2000
HK$ HK$
TOTAL LIABILITIES - page 43 24,396,685 23,430,066
Capital and reserve:
Share capital 5 200 200
Retained profits 21,368,137 20,708,351
21,368,337 20,708,551
TOTAL EQUITY AND LIABILITIES 45,765,022 44,138,617
- 44 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
1. CORPORATE INFORMATION
The Company was incorporated under the laws of Hong Kong on 7
July 1989. It operates under a joint venture agreement entered
into on 23 October 1989 between Universal Security Instruments,
Inc.("USI"), a company incorporated in the United States, and The
Original Joint Venture Owner (name withheld and filed separately
with the SEC) which is incorporated in Hong Kong. The Company is
economically dependent on USI with which it transacts most of its
business and the financial statements reflect the effect of these
transactions which are conducted on bases determined between the
parties.
During the year, the following significant related party
transactions were recorded:
Group
Notes 2001 2000
HK$ HK$
Sales made to USI (i) 29,777,716 35,475,009
Purchases from USI (i) 1,996,268 949,947
Rentals paid to:
An Affiliate of the Company
(name withheld and filed
separately with the SEC) (ii) 840,000 840,000
A Manager of the Company
(name withheld and filed
separately with the SEC) (ii) 240,000 240,000
Management fee paid to
An Affiliate of the Company
(name withheld and filed
separately with the SEC) (iii) 1,440,000 1,440,000
Interest income from USI (iv) 238,359 108,837
Purchase of a fixed asset
from An Affiliate of
the Company (name
withheld and filed
separately with the SEC) (v) 400,000 -
- 45 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
1. CORPORATE INFORMATION (continued)
notes:
(i) Sales and purchases were made according to the
published prices and conditions similar to those
offered to other customers or by other suppliers of
the Group.
(ii) Rental expenses were charged for the offices owned
by An Affiliate of the Company (name withheld and
filed separately with the SEC) and A Manager of the
Company (name withheld and filed separately with
the SEC) in Hong Kong and the People's Republic of
China (the "PRC") based on the prevailing market
rate and area occupied by the Group.
(iii) Management fee was charged at HK$120,000 per month
for the provision of management services rendered
in planning, execution and operation of electronics
manufacturing plant in the PRC.
(iv) Interest income from USI was charged at 12% per
annum (2000: 12% per annum) of the trading balance
overdue for 30 days during the year.
(v) Fixed asset was purchased on negotiated price
agreed between the Company and An Affiliate of the
Company (name withheld and filed separately with
the SEC).
An Affiliate of the Company (name withheld and
filed separately with the SEC) is a company of
which Two Managers of the Company (names withheld
and filed separately with the SEC), directors of
the Company, are also directors. Loan from An
Affiliate of the Company (name withheld and filed
separately with the SEC) is unsecured, bearing
interest at 0.49% per annum, and repayable by
2 (2000: 14) equal monthly installments in the next
year.
An Affiliate of the Company (name withheld and filed separately
with the SEC) is a company of which Two Managers of the Company
(names withheld and filed separately with the SEC), directors of
the Company, are also directors.
- 46 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
1. CORPORATE INFORMATION (continued)
notes:
Except for the trading balance of HK$2,930,354 (2000: HK$992,377)
with USI included in due from a shareholder of HK$3,990,870
(2000: HK$1,661,636) under current assets as at 31 March 2001
which is interest-bearing at 12% per annum (2000: 12% per annum),
the remaining balance with USI is unsecured, interest-free, and
has no fixed terms of repayment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance with
Hong Kong Statements of Standard Accounting Practice, accounting
principles generally accepted in Hong Kong and the disclosure
requirements of the Hong Kong Companies Ordinance. They have been
prepared under the historical cost convention.
Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries for the year ended
31 March 2001. The results of subsidiaries acquired or disposed
of during the year are consolidated from or to their effective
dates of acquisition or disposal, respectively. All significant
intercompany transactions and balances within the Group are
eliminated on consolidation.
Goodwill
Goodwill arising on consolidation of subsidiaries represents the
excess purchase consideration paid for subsidiaries over the fair
values ascribed to the net underlying assets acquired and is
written off to the profit and loss account in the year of
acquisition.
Subsidiaries
A subsidiary is a company in which the Company, directly or
indirectly, controls more than half of its voting power or issued
share capital or controls the composition of its board of
directors.
- 47 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Interests in subsidiaries are stated at cost unless, in the
opinion of the directors, there have been permanent diminutions
in value, when they are written down to values determined by the
directors.
Long term investment
Investment held on a long term basis is stated at cost less
provision for any permanent diminution in value deemed necessary
by the directors, on an individual basis.
Related parties
Parties are considered to be related if one party has the
ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making
financial and operating decisions. Parties are also considered
to be related if they are subject to common control or common
significant influence. Related parties may be individuals or
corporate entities.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation.
The cost of an asset comprises its purchase price and any
directly attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditure
incurred after fixed assets have been put into operation, such as
repairs and maintenance, is normally charged to the profit and
loss account in the period in which it is incurred. In situations
where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected
to be obtained from the use of the fixed asset, the expenditure
is capitalized as an additional cost of that asset.
Depreciation is calculated on the straight-line basis to write
off the cost of each asset over its estimated useful life. The
principal annual rates used for this purpose are as follows:
Land held on medium term leases Over the lease terms
Buildings 5%
Leasehold improvements 20%
Plant and machinery 10%
Furniture and fixtures 20%
Motor vehicles 20%
- 48 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The gain or loss on disposal or retirement of a fixed asset
recognized in the profit and loss account is the difference
between the sales proceeds and the carrying amount of the
relevant asset.
Inventories
Inventories are stated at the lower of cost and net realizable
value. Cost is determined on the first-in, first-out basis and in
the case of work in progress and finished goods, comprises direct
materials, direct labor and an appropriate proportion of
overheads. Net realizable value is based on the estimated selling
prices less any estimated costs to be incurred to completion and
disposal.
Cash equivalents
For the purpose of the cash flow statement, cash equivalents
represent short term highly liquid investments which are readily
convertible into known amounts of cash and which were within
three months of maturity when acquired. For the purpose of
balance sheet classification, cash equivalents represent assets
similar in nature to cash which are not restricted as to use.
Revenue recognition
Revenue is recognized when it is probable that the economic
benefits will flow to the Group and when the revenue can be
measured reliably, on the following bases:
(a) on the sales of goods, when the significant risks and
rewards of ownership have been transferred to the buyer;
(b) rental income, on the straight-line basis over the lease
term;
(c) management fee income, when the services are rendered; and
(d) interest, on a time proportion basis, taking into account
the principal outstanding and the effective interest rate
applicable.
- 49 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are accounted
for as operating leases. Rentals applicable to such operating
leases are charged to the profit and loss account on the
straight-line basis over the lease terms.
Deferred tax
Deferred tax is provided, using the liability method, on all
significant timing differences to the extent it is probable that
the liability will crystallize in the foreseeable future. A
deferred tax asset is not recognized until its realization is
assured beyond reasonable doubt.
Foreign currencies
Foreign currency transactions are recorded at the applicable
rates of exchange ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign currencies at the
balance sheet date are translated at the applicable rates of
exchange ruling at that date. Exchange differences are dealt
with in the profit and loss account.
- 50 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
3. TURNOVER AND REVENUE
Turnover represents the invoiced value of goods sold, net of
discounts and returns. An analysis of turnover and revenue is as
follows:
2001 2000
HK$ HK$
Turnover 46,928,800 42,855,134
Exchange gains, net 114,611 140,522
Rental income 325,200 290,800
Management fee income 84,177 102,285
Interest income 1,274,622 1,122,513
Sundry income 101,530 156,600
Revenue 1,900,140 1,812,720
TURNOVER AND REVENUE 48,828,940 44,667,854
4. PROFIT FROM OPERATING ACTIVITIES
The Group's profit from operating activities is arrived at after
charging (crediting):
2001 2000
HK$ HK$
Depreciation 2,860,969 2,889,640
Less: Amount included in cost of sales (2,521,311) (2,687,601)
339,658 202,039
Auditors' remuneration 168,000 168,000
Staff costs:
Wages and salaries 6,172,919 5,554,236
Provident fund 48,190 -
6,221,109 5,554,236
- 51 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
4. PROFIT FROM OPERATING ACTIVITIES (continued)
Group
2001 2000
HK$ HK$
Less: Amount included in
cost of sales (2,834,393) (2,494,647)
3,386,716 3,059,589
Directors' remuneration - 1
Operating lease rentals for
land and buildings 1,095,420 1,098,347
Inventories written off 701,919 146,537
Gross and net rental income (325,200) (290,800)
Exchange gains, net (114,611) (140,522)
Interest income (1,274,622) (1,122,513)
5. FINANCE COSTS
2001 2000
HK$ HK$
Interest on inward bills 25,358 27,630
Interest to An Affiliate of the
Company (name withheld and filed
separately with the SEC) 4,000 4,000
Others 19,697 2,321
Total finance costs 49,055 33,951
- 52 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
6. TAX
Hong Kong profits tax has been provided at the rate of 16%
(2000: 16%) on the estimated assessable profits arising in Hong
Kong during the year. Taxes on profits assessable elsewhere have
been calculated at the rates of tax prevailing in the countries
in which the Group operates.
Group
2001 2000
HK$ HK$
Provision for the year 8,100 134,000
Overprovision in prior years (38,986) (11,559)
Provision for deferred tax - note 14 33,700 -
Tax charge for the year 2,814 122,441
7. NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The net profit attributable to shareholders dealt with in the
financial statements of the Company is HK$659,786
(2000:HK$2,186,072).
8. FIXED ASSETS
Group and Company
Leasehold Leasehold Furniture
land and improve- Plant and and Motor
buildings ments machinery fixtures vehicles Total
HK$ HK$ HK$ HK$ HK$ HK$
Cost:
At begin-
ning of
year 15,814,592 6,879,539 30,083,889 2,985,619 572,500 56,336,139
Addi-
tions - 435,683 236,273 364,057 1,004,630 2,040,643
Dispo-
sals - (10,610) - (25,154) - (35,764)
At 31
March
2001 15,814,592 7,304,612 30,320,162 3,324,522 1,577,130 58,341,018
- 53 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
8. FIXED ASSETS (continued)
Group and Company
Leasehold Leasehold Furniture
land and improve- Plant and and Motor
buildings ments machinery fixtures vehicles Total
HK$ HK$ HK$ HK$ HK$ HK$
Accumu-
lated
depre-
cia-
tion:
At begin-
ning of
year 4,737,965 6,289,707 24,506,221 2,641,768 232,500 38,408,161
Provided
during
the
year 729,401 459,130 1,332,780 132,528 207,130 2,860,969
Dispo-
sals - (6,720) - (15,052) - (21,772)
At 31
March
2001 5,467,366 6,742,117 25,839,001 2,759,244 439,630 41,247,358
Net book
value:
At 31
March
2001 10,347,226 562,495 4,481,161 565,278 1,137,500 17,093,660
At 31
March
2000 11,076,627 589,832 5,577,668 343,851 340,000 17,927,978
The leasehold land and buildings are situated in the PRC under
medium-term leases.
9. LONG TERM INVESTMENT
Group
2001 2000
HK$ HK$
Unlisted investment, at cost 9,305,588 9,305,588
Amount due from investee company 1,158,675 1,158,675
10,464,263 10,464,263
Less: Provision for permanent
diminution in value (9,305,588) (9,305,588)
Provision against amount
due from investee
company (1,158,675) (1,158,675)
- -
- 54 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
9. LONG TERM INVESTMENT (continued)
Particulars of investee company are as follows:
Percentage
Country of Nominal value of equity
registration of registered attributable Principal
Name and operation capital to the Group activity
2001 2000
An Associate of the The PRC US$4,000,000 30 30 Dormant
Company (name
withheld and filed
separately with the
SEC)
The Group does not have significant influence on the financial
and operating policy decisions of investee company and,
accordingly, the investment is classified as long term investment.
The amount due from the investee company is unsecured, interest-
free and has no fixed terms of repayment.
10. INTERESTS IN SUBSIDIARIES
Group
2001 2000
HK$ HK$
Unlisted shares, at cost 210,008 210,008
Due from a subsidiary 106,454 90,604
316,462 300,612
Less: Provision for permanent
diminution (200,000) (200,000)
116,462 100,612
Balances with subsidiaries are unsecured, interest-free and not
repayable within one year.
- 55 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
10. INTERESTS IN SUBSIDIARIES (continued)
Particulars of the wholly-owned subsidiaries are as follows:
Nominal value
of issued
Place of ordinary Principal
Name incorporation share capital activity
A Subsidiary of The Hong Kong HK$200,000 Investment
Company (name holding
withheld and
filed separately
with the SEC)
A Subsidiary of The British US$1 Dormant
Company (name Virgin
withheld and Islands
filed separately
with the SEC)
A Subsidiary of The Hong Kong HK$100,000 Dormant
Company (name
withheld and
filed separately
with the SEC)
11. INVENTORIES
Group and Company
2001 2000
HK$ HK$
Raw materials 3,721,912 3,836,437
Work in progress 830,782 914,409
Finished goods 2,105,650 747,279
6,658,344 5,498,125
- 56 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
12. BANKING FACILITIES
Time deposit of HK$1,631,932 (2000: HK$1,570,039) is pledged to
a bank for credit facilities of HK$3,329,000 (2000: HK$3,329,000)
granted to the Company. The banking facilities of the Company
are also secured by personal guarantees of A Manager of the
Company (name withheld and filed separately with the SEC), a
director of the Company. The facilities were not utilized at the
balance sheet date.
13. LOANS FROM SHAREHOLDERS
Group and Company
2001 2000
HK$ HK$
USI 1,434,477 1,434,477
The Original Joint Venture
Owner (name withheld and filed
separately with the SEC) 1,434,477 1,434,477
2,868,954 2,868,954
The loans are unsecured, interest-free and repayable on demand
by the respective shareholders with the consent of the other.
The directors of the Company consider that these liabilities are
non-current.
14. DEFERRED TAX
Group and Company
2001 2000
HK$ HK$
Balance at beginning of year 300,000 300,000
Charge for the year - note 6 33,700 -
Balance at end of year 333,700 300,000
The principal component of the Group and Company's deferred tax
liability calculated at 16% of the cumulative timing differences
comprises accelerated depreciation allowances at the balance
sheet date.
- 57 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
15. SHARE CAPITAL
Company
2001 2000
HK$ HK$
Authorized:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
16. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of profit from operating activities to net
cash inflow/(outflow) from operating activities:
2001 2000
HK$ HK$
Profit from operating activities 675,796 2,280,129
Interest income (1,274,622) (1,122,513)
Depreciation 2,860,969 2,889,640
Loss on disposal of fixed assets 5,992 -
Increase in amount due from a
shareholder (2,329,234) (1,100,628)
Increase in inventories (1,160,219) (1,175,900)
Increase in prepayments,
deposits and other receivables (417,894) (91,701)
Decrease in amount due to a
related company - (217,943)
Increase/(decrease) in other
payables and accrued liabilities (379,502) 623,653
Increase/(decrease) in trade
payables 1,484,225 (488,503)
Net cash inflow/(outflow) from
operating activities (534,489) 1,596,234
- 58 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2001
16. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)
(b) Analysis of changes in financing during the year
Loan from a
related company
HK$
Balance at 1 April 1999 355,333
Repayment (164,000)
Balance at 31 March 2000 and 1 April 2000 191,333
Repayment (164,004)
Balance at 31 March 2001 27,329
17. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform
with the current year's presentation.
18. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved by the board of directors
on 21 May 2001.
- 59 -