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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, 1997
( ) 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.)
10324 S. Dolfield Road, 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 23, 1997:
Common Stock, $.01 Par Value - $1,825,643
The number of shares outstanding of the issuer's classes of common
stock as of June 23, 1997:
Common Stock, $.01 Par Value - 3,245,587 shares
ITEM 1.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company") was incorporated
in the State of Maryland in 1969. Its principal offices are located at
10324 South Dolfield Road, Owings Mills, MD 21117 and its telephone
number is 410-363-3000.
The Company designs and markets a variety of popularly-priced (i)
security products, (ii) telecommunications products and (iii) video
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.
The Company imports virtually all of its products from various
suppliers overseas. Approximately 57% 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.
The Company's sales for the year ended March 31, 1997 were $15,423,149
compared to $19,507,889 for the year ended March 31, 1996, a decrease
of approximately 21%. The primary reason for this decrease in sales
was due to decreased demand for some of the Company's high volume, low
margin, private label products.
SECURITY PRODUCTS
The Company 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. The Company also markets a smoke
detector under the name "Smoke Signaltm" manufactured by the joint
venture and markets a wireless intercom and a line of speakers.
Sales of the Company's security products aggregated $8,007,748 or
approximately 52% of total sales in the fiscal year ended March 31,
1997 and $9,216,686 or approximately 47% of total sales in the fiscal
year ended March 31, 1996. This decrease in sales volume was due
primarily to the discontinuance of the Company's flexible flashlight.
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TELECOMMUNICATIONS PRODUCTS
The Company markets a variety of telephones with unique styling and
containing multiple features. The Company offers a variety of
popularly-priced multicolored trimline and feature telephones and
telephone answering machines which are produced by the Joint Venture.
Some of the features available on the Company's telephone products
include cordless, handsfree speaker, true hold and conferencing,
high-speed dial function, memory capability, last number redial,
ringer silencer, programmable direct access emergency buttons,
pushbutton operation, and pulse/touchtone switch, making them usable
with all long distance networks. The Company has recently introduced
several models of Caller ID.
For the fiscal year ended March 31, 1997, sales of the Company's
telecommunications products aggregated $3,607,531 or 23% of total
sales. For the fiscal year ended March 31, 1996, sales of these
products were $6,786,584 or 35% of total sales. The primary reason for
the decrease in sales was a reduction in high volume, low margin,
private label products.
VIDEO PRODUCTS
The Company designs and markets blank video cassette tapes and other
video products, including a wireless remote control converter.
For the fiscal year ended March 31, 1997, sales of the Company's video
products and accessories aggregated $3,807,870 or 25% of total sales
for the year. For the fiscal year ended March 31, 1996, sales of these
products were $3,504,619 or 18% of total sales.
FCC REGULATION
The Federal Communications Commission establishes technical standards
for telecommunications equipment and products transmitting signals
over the airways and allocates frequencies for cordless telephones.
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.
IMPORT MATTERS
The Company imports virtually all of its security, telecommunications
and video 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.
- 3 -
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 most likely have a material adverse impact on the
Company's business until competitive alternative sources of supply
were obtained.
SALES AND MARKETING
The Company's products are generally marketed to retailers, wholesale
distributors, service companies, catalog and mail order companies and
to other distributors. Sales are made both by the Company and by
approximately 35 independent sales organizations 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 International Consumer
Electronics Show in Las Vegas, Nevada. The Company's domestic
marketing strategy is designed to attract retailing customers outside
the consumer electronics industry, such as supermarkets, drug stores,
variety stores and home centers.
Sales by the Company are made by officers and full-time employees of
the Company, four 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 25% of total
sales in fiscal 1997. The Company's foreign marketing strategy is to
increase sales of products from the Hong Kong Joint Venture to
overseas markets.
The Company's products are retailed to "do-it-yourself" consumers by
chain and independent department, discount, drug, electrical,
electronic, building supply and hardware stores; as well as through
catalog and mail-order houses. The Company also distributes its
products through special markets such as premium/incentive, direct
mail, catalog and showroom sales. The Company does not currently
market any significant portion of its products directly to end users.
The Company's backlog of orders believed to be firm as of March 31,
1997 was approximately $2,956,500. The Company's backlog as of March
31, 1996, was approximately $2,753,530. The increase in backlog is a
function of the timing of orders received from its customers.
- 4 -
SUPPLIERS - JOINT VENTURE
The Company has a 50% interest in a Joint Venture with a Hong Kong
Corporation (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 Joint Venture arrangement will ensure a continuing
source of supply for each product at competitive prices. At the
present time, the Company buys approximately 57% of its total
purchases from the Hong Kong Joint Venture. The products produced by
the Hong Kong Joint Venture include most of the video tape purchased
by the Company, smoke detectors and certain models of
telecommunications products and Caller ID products. The Company is
currently pursuing the development of additional products to be
produced by the Hong Kong Joint Venture. A loss of China's Most
Favored Nation status with the United States or 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 in Item 8 for a comparison of annual
sales and earnings of the Hong Kong Joint Venture.
SUPPLIERS - OTHERS
Telecommunications, video and security products not manufactured for
the Company by the Hong Kong Joint Venture are manufactured by other
foreign suppliers for the Company. The Company's 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.
CHINA CELLULAR TELEPHONE PROJECT
In the year ended March 31, 1993, the Hong Kong Joint Venture entered
into the Cellular Joint Venture with a People's Republic of China
Company to design and develop a portable cellular telephone for
manufacture and sale in China. The Hong Kong Joint Venture has a 30%
interest in the Cellular Joint Venture. The Cellular Joint Venture has
engaged the Hong Kong Joint Venture to design and develop two versions
of a portable cellular telephone for a fee of $3.5 million. Through
March, 1996, the Hong Kong Joint Venture had received $3,150,000 of
the $3.5 million fee. For the year ended March 31, 1996, the Hong Kong
Joint Venture recorded no profit from the development contract. During
fiscal 1997, the Hong Kong Joint Venture completed the accounting of
its cellular development contract and, additionally, wrote down its
investment in its Cellular Joint Venture. The Hong Kong Joint Venture
recorded a profit of $122,328 on the development contract and a write-
down of $725,745 on its Cellular Joint Venture.
- 5 -
COMPETITION
The market for telephones and telephone products is highly competitive
and subject to sudden shifts in consumer preferences and rapid changes
in technology. Since deregulation of the telephone industry, many
companies have entered the market, competing with lower prices and the
continuous introduction of new products incorporating the most
advanced technology. The Company competes with many other companies
such as AT&T, Southwestern Bell, Bell South, Panasonic, Sony,
Dynascan, Uniden, Unisonic and other major companies competing for the
same markets, almost all of which have much greater financial
resources than the Company. The Company believes, however, that its
products compete favorably with other products in the marketplace
primarily by reason of styling and pricing.
In the video products industry, there are numerous competitors for
each product in the Company's line of video products. Blank VHS video
cassettes are marketed by many companies, including such large
international firms as Polaroid, Sony, Fuji, Maxell and TDK
The Company's channel converter competes with similar products
marketed by such companies as Zenith, General Instrument, Recoton,
Hamlin, Gemini and Panasonic. Virtually all of these competitors have
greater financial resources than the Company. The Company believes,
however, that its products compete favorably with other products in
the marketplace primarily by reason of styling and pricing.
In the security lighting area, the Company competes with All-Trade,
Regent, Intelectron and Heath-Zenith. In the smoke detector area, the
Company competes with Pittway, BRK, Fyrenetics and Coleman. Many 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. The security industry
in general, however, involves rapidly changing technology, and the
success of the Company's products may depend on the Company's ability
to improve and update the technology of its products in a timely
manner and to adapt to new technological advances.
EMPLOYEES
The Company has approximately 17 employees, approximately 9 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.
- 6 -
ITEM 2.
PROPERTIES
The Company's main facility, located in Baltimore County, Maryland,
contains approximately 32,000 square feet on approximately four acres
and is used for research and development, warehousing and
administrative and executive offices. This facility was completed in
December 1993 and is subject to a mortgage with a balance of
$1,277,616 as of March 31, 1997. The Company has listed this facility
for sale. If the Company is successful in selling its facility, the
Company believes alternative space would be readily available at
reasonable rental.
In addition, 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 Joint Venture and were built on
property leased for a 48 year term.
ITEM 3.
LEGAL PROCEEDINGS
The Company settled its legal proceeding for patent infringement
litigation with Black & Decker (U.S.). The Company recorded a charge
of $450,000 in its June 30, 1996 quarter for settlement of the patent
litigation and related expenses. In conjunction with the settlement
with Black & Decker, the Company agreed to pay the sum of $300,000.
The repayment terms were $100,000 paid in July 1996 and $200,000
payable in 32 equal monthly installments without interest beginning
September 1, 1996. The Company reduced its accrual for legal fees by
$125,000 related to this matter. The Company recovered $77,500 from
its insurance carrier during the fourth quarter in final settlement of
its claim. As a result of the adjustments and recovery, the net charge
for this matter amounted to $247,500.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
- 7 -
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded on the over-the-counter
market. The following table shows the fiscal 1996 and 1997 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, 1996
Bid Prices
High Low
First Quarter 1-3/16 13/16
Second Quarter 1-7/16 7/8
Third Quarter 1-1/2 7/8
Fourth Quarter 1-9/16 15/16
Fiscal year ended March 31, 1997
Bid Prices
High Low
First Quarter 1-5/16 13/16
Second Quarter 7/8 14/32
Third Quarter 29/32 1/2
Fourth Quarter 11/16 1/2
As of June 18, 1997, there were approximately 676 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 operations.
- 8 -
ITEM 6.
SELECTED FINANCIAL DATA
Year Ended March 31,
1997 1996 1995 1994 1993
Operations
Net sales $15,423,149 $19,507,889 $24,841,794 $25,804,715 $23,013,066
Loss before
equity in
earnings
of joint
venture,
income
taxes (1,332,427) (1,316,990) (2,220,460) (1,230,834) (1,326,653)
Net (loss)
income (1,483,438) (1,098,817) (1,296,426) 36,931 (783,720)
Per common
share:
Loss
before
equity in
earnings
of joint
venture,
income
taxes (.41) (.41) (.68) (.37) (.41)
Net (loss)
income (.46) (.34) (.40) .01 (.24)
Weighted
average number
of common
shares
outstanding 3,245,587 3,245,587 3,242,595 3,237,608 3,227,195
Financial
Condition
Total assets 9,557,116 12,676,391 13,732,846 15,864,756 11,767,934
Long-term
debt and
obligations
(non-
current) 1,344,211 1,277,394 497,222 927,500
Working
capital 2,253,553 2,194,108 2,728,405 4,777,650 6,146,506
Current
ratio 1.75 to 1 1.46 to 1 1.50 to 1 1.81 to 1 3.23 to 1
Share-
holders'
equity 5,192,477 6,675,915 7,774,540 9,063,910 9,011,887
Share-
holders'
equity
per share 1.60 2.06 2.40 2.80 2.79
- 9 -
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 1997, sales decreased by $4,084,740 (21%) from the
prior year. This decrease was primarily due to a decreased demand for
certain of the Company's telecommunications products, which amounted
to $3,179,053 and a decrease in security products of $1,208,938,
partially offset by increased video sales of $303,251. Sales of
security products for the fiscal year totaled $8,007,748 (52%), while
sales of telecommunications and video products were $3,607,531 (23%)
and $3,807,870 (25%), respectively.
In fiscal year 1996, sales decreased by $5,333,905 (21%) from the
prior year. This decrease was primarily due to a decreased demand for
certain of the Company's telecommunications products, which amounted
to $3,940,095 and a decrease in video products of $2,814,776,
partially offset by the sale of new security products, which amounted
to $1,420,966. Sales of security products for the fiscal year totaled
$9,216,686 (47%), while sales of telecommunications and video products
were $6,786,584 (35%) and $3,504,619 (18%), respectively.
NET PROFIT AND LOSS
The Company incurred a net loss of $1,483,438 for fiscal year 1997, as
compared to a net loss of $1,098,817 for fiscal year 1996. The primary
reason for the increase was the Company's Joint Venture writing down
its investment by $725,745 in its China Cellular Joint Venture. The
Company's 50% portion of this write-down was $362,873.
The Company incurred a net loss of $1,098,817 for fiscal year 1996 as
compared to a net loss of $1,296,426 for fiscal year 1995. The most
significant reasons for the decrease were reductions in research and
development, and selling, general and administrative expenses,
partially offset by a reduction in equity earnings of the Joint
Venture.
EXPENSES
In fiscal year 1997, research, selling, general and administrative
expenses decreased by approximately $450,000 (12%) from the prior
year. As a percentage of sales, research, selling, general and
administrative expenses were 22% for the fiscal year ended March 31,
1997 and were 20% for the prior year. The primary reason for reduction
in expenses was a reduction in personnel and associated cost.
- 10 -
In fiscal year 1996, research, selling, general and administrative
expenses decreased by approximately $850,000 (18%) from the prior
year. As a percentage of sales, research, selling, general and
administrative expenses were 20% for the fiscal year ended March 31,
1996 and were 19% for the prior year.
INTEREST EXPENSE AND INCOME
Interest expense for fiscal 1997 decreased to $411,541 from $543,352
in 1996 due to a decrease in the average outstanding debt during the
period resulting from decreased inventory levels in the current fiscal
year. Interest income increased to $5,984 from $4,935 in fiscal 1996.
Interest expense for fiscal 1996 decreased to $543,352 from $582,581
in 1995 due to a decrease in the average outstanding debt during the
period resulting from decreased inventory levels in the current fiscal
year. Interest income decreased to $4,935 in fiscal 1996 from $4,970
in fiscal 1995.
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 currently the lower of $7,500,000 or specified
percentages of the Company's accounts receivable and inventory.
Approximately $1,417,000 has been utilized in short-term borrowings
and letter of credit commitments as of March 31, 1997. The amount
available under the line of credit as of March 31, 1997 was
approximately $300,000 based on the specified percentages. 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 the Company's accounts
receivable, inventory and a 1.5 acre parcel of the Company's real
estate. During the year ended March 31, 1997, working capital
increased by $59,445, from $2,194,108 on March 31, 1996 to $2,253,553
on March 31, 1997.
Operating activities provided cash of $1,454,631 for the year ended
March 31, 1997. The increase of $1,247,783 was primarily due to
decreases in inventory of $1,338,874, an increase in accounts payable
of $601,223 and distributions in excess of earnings of the Joint
Venture of $401,393, partially offset by a net loss of $1,483,438. For
the prior fiscal year, operating activities provided cash of $206,748
for the year ended March 31, 1996. This was primarily due to a
decrease in accounts receivable of $1,014,065, an increase in accounts
payable of $231,202 partially offset by the net loss of $1,098,817 and
the undistributed Joint Venture earnings of $218,173.
- 11 -
Investing activities provided cash of $384,588, mainly due to the sale
of an undeveloped parcel of real estate. For the same period last
year, investing activities used $93,924, primarily due to purchases of
equipment.
Financing activities used cash of $1,786,560 mainly due to the
repayment of $1,630,044 in short-term debt and $143,250 in payments on
the legal settlement and, for the same period last year, financing
activities used cash of $188,840 primarily due to the refinancing of
the Company's facilities, offset by the net repayment of short-term
debt and principal payments on long-term debt.
During the fiscal year ended March 31, 1997, the Company received a
distribution of $1,000,000 from the Hong Kong Joint Venture, of which
$750,000 was used to repay its accounts payable to Joint Venture.
The Company believes that its line of credit and its working capital
provide it with sufficient resources to meet its requirements for
liquidity and working capital in the ordinary course of its business
over the next twelve months.
HONG KONG JOINT VENTURE
In fiscal year 1997, sales of the Hong Kong Joint Venture were
$6,644,142 compared to $9,977,272 and $15,260,179 in fiscal years 1996
and 1995, respectively.
Net loss was $302,022 for the year ended March 31, 1997 compared to
net income of $436,345 and $1,848,069 in fiscal years 1996 and 1995,
respectively. The decrease in income for the year ended March 31, 1997
was due primarily to a write-down of its investment in its China
Cellular Joint Venture of $725,745. The decrease in income for the
year ended March 31, 1996 was primarily due to a decrease in sales.
Selling, general and administrative expenses were $1,337,015,
$1,456,591 and $1,672,523 for the fiscal years ended March 31, 1997,
1996 and 1995, respectively. As a percentage of sales, expenses were
20%, 15% and 11% for fiscal 1997, 1996 and 1995, respectively. The
increase in expenses as a percentage of sales in fiscal 1997 and
fiscal 1996 was primarily due to a decrease in sales.
Interest income net of interest expense was $85,414 for the year ended
March 31, 1997, compared to $191,916 and $74,741 in fiscal years
1996 and 1995, respectively. The decrease in net interest income was
primarily due to a distribution of $2,000,000 paid to its shareholders
in April 1996.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During the year ended March 31, 1997,
working capital increased by $935,835 from $712,439 on March 31,
1996 to $1,648,274 on March 31, 1997.
- 12 -
INFLATION
The Company believes that inflation has not had a material effect upon
its results of operations, and liquidity and capital resources for any
of the periods presented.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description Page
Reports of Independent Auditors
Deloitte & Touche LLP 14
Ernst & Young LLP 15
Financial statements
Consolidated balance sheets, March 31, 1997 and 1996 16
Consolidated statements of operations for the years ended
March 31, 1997, 1996 and 1995 18
Consolidated statements of shareholders' equity for the
years ended March 31, 1997, 1996 and 1995 19
Consolidated statements of cash flows for the years ended
March 31, 1997, 1996 and 1995 20
Notes to consolidated financial statements 21
- 13 -
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the accompanying consolidated balance sheets of Universal
Security Instruments, Inc. and subsidiaries as of March 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. 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
Corporation's investment which is accounted for by use of the equity method.
The Corporation's equity of $2,508,957 and $3,660,350 in the Hong Kong Joint
Venture's net assets at March 31, 1997 and 1996, and of $(151,011) and
$218,173 in that company's net (loss) income for the years then ended is
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 such company, is based solely on the
report of such other auditors.
We have conducted our audits in accordance with generally accepted auditing
standards. 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 reports
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of Universal Security Instruments, Inc. at
March 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
1997 and 1996 consolidated financial statements taken as a whole. The 1997
and 1996 supplemental schedules are presented for the purpose of additional
analysis and are not a required part of the basic 1997 and 1996 consolidated
financial statements. The 1997 and 1996 supplemental schedules are the
responsibility of the Company's management. Such 1997 and 1996 supplemental
schedules have been subjected to the auditing procedures applied in our
audits of the basic consolidated financial statements and, in our opinion,
are fairly stated in all material respects when considered in relation to
the basic 1997 and 1996 consolidated financial statements taken as a whole.
Deloitte & Touche LLP
June 30, 1997
Baltimore, Maryland
- 14 -
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the consolidated balance sheet (not presented
separately herein) of Universal Security Instruments, Inc. and
subsidiaries as of March 31, 1995 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the
year then ended. Our audit also included the financial statement
schedule listed in the index at item 14(a). These financial statements
and this schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and this schedule based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Universal Security Instruments, Inc. and
subsidiaries at March 31, 1995 and the consolidated results of their
operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
Ernst & Young LLP
June 21, 1995
Baltimore, Maryland
- 15 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1997 1996
CURRENT ASSETS
Cash $ 150,452 $ 97,793
Time deposits 8,748
Accounts receivable:
Trade (less allowance for doubtful
accounts of $50,000 in 1997 and
$25,771 in 1996) 1,723,979 2,033,092
Officers and employees 1,545 40,678
1,725,524 2,073,770
Inventories:
Finished goods 2,900,910 4,099,907
Raw materials - foreign locations 127,656 152,303
3,028,566 4,252,210
Prepaid expenses 369,439 484,669
TOTAL CURRENT ASSETS 5,273,981 6,917,190
INVESTMENT IN JOINT VENTURE 2,508,957 3,660,350
PROPERTY, PLANT AND EQUIPMENT 1,757,488 1,985,790
OTHER ASSETS 16,690 113,061
TOTAL ASSETS $9,557,116 $12,676,391
See notes to consolidated financial statements.
- 16 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
1997 1996
CURRENT LIABILITIES
Short-term borrowings $1,363,641 $ 2,993,685
Current maturity of long-term debt 89,655 13,488
Accounts payable 1,502,193 858,557
Accounts payable - joint venture 750,000
Accrued liabilities:
Payroll, commissions and
payroll taxes 45,991 71,372
Other 18,948 35,980
TOTAL CURRENT LIABILITIES 3,020,428 4,723,082
LONG-TERM DEBT, less current portion 1,344,211 1,277,394
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
3,245,587 shares in 1997 and 1996 32,456 32,456
Additional paid-in capital 10,429,588 10,429,588
Retained earnings (deficit) (5,269,567) (3,786,129)
TOTAL SHAREHOLDERS' EQUITY 5,192,477 6,675,915
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,557,116 $12,676,391
See notes to consolidated financial statements.
- 17 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
1997 1996 1995
Net sales $15,423,149 $19,507,889 $24,841,794
Cost of goods sold 13,000,896 16,369,364 21,713,689
GROSS PROFIT 2,422,253 3,138,525 3,128,105
Research and development expense 250,751 220,051 446,178
Selling, general and
administrative expense 3,209,962 3,696,740 4,327,921
Operating loss (1,038,460) (778,266) (1,645,994)
Other income (expense):
Interest income 5,984 4,935 4,970
Interest expense (411,541) (543,352) (582,581)
Gain from sale of land 312,625
Legal settlement (247,500)
Other 46,465 (307) 3,145
(293,967) (538,724) (574,466)
LOSS BEFORE EQUITY IN (LOSS)
EARNINGS OF JOINT VENTURE (1,332,427) (1,316,990) (2,220,460)
Equity in (loss) earnings of
joint venture (151,011) 218,173 924,034
NET LOSS $(1,483,438) $(1,098,817) $(1,296,426)
Per common share amounts:
Primary $ (.46) $ (.34) $ (.40)
Fully diluted (.46) (.34) (.40)
Weighted average number of
common shares outstanding:
Primary 3,245,587 3,245,587 3,242,595
Fully diluted 3,245,587 3,245,587 3,242,595
See notes to consolidated financial statements.
- 18 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
Balance at
March 31,
1994 3,239,835 $32,398 $10,422,398 $(1,390,886) $9,063,910
Net loss
for 1995 (1,296,426) (1,296,426)
Common stock
issued to
employees
through
employee
stock
purchase
plan 547 6 800 806
Common stock
issued to
employees
as compen-
sation 5,000 50 6,200 6,250
Balance at
March 31,
1995 3,245,382 32,454 10,429,398 (2,687,312) 7,774,540
Net loss
for 1996 (1,098,817) (1,098,817)
Common stock
issued to
employees
through
employee
stock
purchase
plan 205 2 190 192
Balance at
March 31,
1996 3,245,587 32,456 10,429,588 (3,786,129) 6,675,915
Net loss
for 1997 (1,483,438) (1,483,438)
Balance at
March 31,
1997 3,245,587 $32,456 $10,429,588 $(5,269,567) $5,192,477
See notes to consolidated financial statements.
- 19 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
1997 1996 1995
OPERATING ACTIVITIES
Net loss $(1,483,438) $(1,098,817) $(1,296,426)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 165,096 181,781 200,166
Provision for losses on
accounts receivable 24,229 27,330
Legal settlement 300,000
Distributions in excess of
(undistributed) earnings of
joint venture 401,393 (218,173) (424,034)
Gain on sale of property, plant
and equipment (312,635) (7,200)
Changes in operating assets and
liabilities:
Decrease in accounts receivable
trade 284,884 1,014,065 921,324
Decrease in inventories and
prepaid expenses 1,338,874 107,418 1,411,789
Increase in accounts payable and
accrued liabilities 601,223 231,202 746,286
Decrease (increase) in
other assets 135,005 (10,728) (3,829)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,454,631 206,748 1,575,406
INVESTING ACTIVITIES
Purchases of property, plant
and equipment (7,589) (93,498) (110,755)
Decrease (increase) in time deposits 8,748 (426) (265)
Proceeds from sale of property, plant
and equipment 383,429 16,055
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 384,588 (93,924) (94,965)
FINANCING ACTIVITIES
Net repayment of short-term debt (1,630,044) (876,026) (1,195,214)
Proceeds from issuance of
long term-debt 1,300,000 110,000
Principal payments on long-term debt (13,266) (613,006) (503,612)
Payment on legal settlement (143,250)
Proceeds from issuance of
common stock 192 7,056
NET CASH USED IN FINANCING ACTIVITIES (1,786,560) (188,840) (1,581,770)
INCREASE (DECREASE) IN CASH 52,659 (76,016) (101,329)
CASH AT BEGINNING OF YEAR 97,793 173,809 275,138
CASH AT END OF YEAR $ 150,452 $ 97,793 $ 173,809
Supplemental information:
Interest paid $ 411,541 $ 543,352 $ 582,581
Income taxes paid - - -
See notes to consolidated financial statements.
- 20 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Research and Development: Research and development costs are charged
to operations as incurred.
Accounts Receivable: The Company provides allowances for doubtful
receivables by a charge against income in amounts equal to the
estimated losses that will be incurred in collection of all
receivables. The estimated losses are based on historical collection
experience and a review of the current status of the existing
receivables. Customer accounts are written off against the allowance
for doubtful accounts when an account is determined to be
uncollectible.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment is
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
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Income Taxes: The Company accounts for income taxes using SFAS No.
109, "Accounting for Income Taxes." For further information (see Note
F).
Net Loss per Share: Primary and fully diluted net loss per share are
computed by dividing net loss by the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares
include the dilutive effect of outstanding stock options calculated
under the treasury stock method. Stock options are antidilutive for the
fiscal years 1997, 1996 and 1995.
- 21 -
New Accounting Pronouncement: The Company is required to adopt SFAS
No. 128, "Earnings per Share" effective April 1, 1998. The standard
specifies the computation, presentation and disclosure requirements
for earnings per share. The Company does not believe this statement
will have a material effect on earnings per share.
NOTE B - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31,
1997 1996
Land and improvements $ 234,284 $ 305,079
Building and improvements 1,412,271 1,412,271
Machinery and equipment 812,171 810,172
Furniture and fixtures 244,250 241,366
Computer equipment 49,085 46,379
2,752,061 2,815,267
Less accumulated depreciation
and amortization 994,573 829,477
$1,757,488 $1,985,790
NOTE C - INVESTMENT IN JOINT VENTURE
The Company maintains 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,
1997, the Company has invested approximately $2,508,957 for their 50%
interest in the Joint Venture. The investment has been accounted for
using the equity method of accounting. Included in the Company's
accounts receivable and accounts payable are $171,123 and $149,018,
due from and due to the Joint Venture, respectively.
During fiscal 1997, the Joint Venture completed the accounting of its
development contract and recorded a write-down of its investment in
its Cellular Joint Venture. The Joint Venture recorded a profit of
$122,328 on the development contract and a write-down of $725,745 on
its Cellular Joint Venture investment.
- 22 -
The following represents summarized financial information from the
financial statements of the Joint Venture as of March 31, 1997 and
1996 and for the years ended March 31, 1997, 1996 and 1995.
Year Ended March 31,
1997 1996 1995
Current assets $2,712,051 $4,807,113
Property and other assets 3,456,418 4,694,364
Total $6,168,469 $9,501,477
Current liabilities $1,063,777 $4,094,674
Non-current liabilities 141,296 141,384
Shareholders' equity $4,963,396 5,265,419
Total $6,168,469 $9,501,477
Net sales $6,644,142 $9,977,272 $15,260,179
Gross profit 1,792,877 1,640,186 3,308,602
Net (loss) income (302,023) 436,345 1,848,069
As of and for the years ended March 31, 1997, 1996 and 1995, the
period ending exchange rate and the weighted average exchange rates
are approximately 7.75 Hong Kong dollars to each U.S. dollar.
Current liabilities at March 31, 1996 include $2,000,000 in dividends
payable to shareholders which were distributed in April 1996.
During the years ended March 31, 1997, 1996 and 1995, the Company
purchased $5,824,622, $9,206,000 and $13,832,000, respectively, of
finished product from the Joint Venture, which represents 57%, 53% and
81%, respectively, of the Company's total finished product purchases.
NOTE D - DEBT
Debt consisted of the following:
March 31,
1997 1996
Short-term borrowings $1,363,641 $2,993,685
Promissory notes - long-term 1,433,866 1,290,882
2,797,507 4,284,567
Less current maturities 1,453,296 3,007,173
$1,344,211 $1,277,394
- 23 -
The short-term borrowings relate to the Company's agreement with a
financial institution to provide a maximum line of credit of the lower
of $7,500,000 or specified percentages of the Company's accounts
receivable and inventory consisting of a revolving line of credit and
letter of credit. The outstanding principal balance of the revolving
credit line ($1,363,641 at March 31, 1997) 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 (10% at March 31, 1997). As of March 31,
1997, the amount available for borrowings under the line was
approximately $300,000 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 agreement does not
contain any provision for compliance with financial covenants. The
weighted average interest rate on outstanding short-term borrowings
for the years ended March 31, 1997, 1996 and 1995 was 9.4%, 11.0% and
9.0%, respectively.
During the year ended March 31, 1996, the Company refinanced its
mortgage on its corporate headquarters. The terms of the mortgage are
a $1,300,000 loan repayable in 60 equal monthly installments of
principal and interest based on a 25 year amortization schedule, with
an interest rate of 10%. The full outstanding balance is due at the
end of the 60 month period. At March 31, 1997 and 1996, the
outstanding principal balances were $1,277,616 and $1,290,882,
respectively.
Included in debt is a note payable of $156,250, payable to Black &
Decker, as a result of the legal settlement. This note is non-interest
bearing and payable at $6,250 per month for 25 months.
The annual maturities for all debt outstanding at March 31, 1997 are:
1998, $1,453,296; 1999, $91,190; 2000, $1,253,021.
NOTE E - LEASES
There were no operating leases for either of the years ended March 31,
1997 or March 31, 1996.
NOTE F - INCOME TAXES
At March 31, 1997, the Company has net operating loss carryforwards in
the United States of approximately $4,463,000 for income tax purposes
that expire in years 1999 through 2011 and tax credit carryforwards of
approximately $36,000 in the United States. From 1996 to 1997, the
deferred tax asset valuation allowance decreased by $1,025,421, due to
IRS Audit adjustments and establishing a deferred tax liability for
the unremitted earnings of the Joint Venture which was offset somewhat
by losses generated during 1997. From 1995 to 1996, the deferred tax
asset valuation allowance increased by $339,555. This net increase is
mainly due to allowances provided from domestic loss carryforwards
generated during 1995.
- 24 -
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:
March 31,
1997 1996
Deferred tax liabilities:
Deferred gain on involuntary conversion $ -0- $ 71,092
Unremitted joint venture earnings not
considered permanently reinvested 777,868 380,000
Gross deferred tax liabilities 777,868 451,092
Deferred tax assets:
Other accruals and reserves 90,782 43,993
Other 35,355 33,419
NOL carryforwards and tax credits 1,732,386 2,479,756
Gross deferred tax assets 1,858,523 2,557,168
Valuation allowance (1,080,655) (2,106,076)
Net deferred tax assets $ -0- $ -0-
The reconciliation of the income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
3/31/97 3/31/96 3/31/95
Federal tax benefit at
statutory rate on loss (34%) $(504,369) $(373,598) $(440,785)
Equity in loss (earnings) from
joint venture 51,344 (80,023) (314,172)
Dividends received from joint venture
for which net deferred taxes were not
previously provided (301,891) 170,000
Effect of net operating
loss carryforwards 701,642 394,629 585,960
Other 53,274 58,992 (1,003)
$ -0- $ -0- $ -0-
Investment and other tax credits are accounted for by the flow-through
method.
- 25 -
NOTE G - COMMON STOCK
Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as
amended, 975,000 shares of common stock are authorized for the granting of
stock options, of which 46,075 shares have been issued as of March 31,
1997, leaving 928,925 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.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 1997 and option transactions
for the two years then ended:
Status as of March 31, 1997 Number of Shares
Presently exercisable 516,625
Exercisable in future years 135,875
Total outstanding 652,500
Available for future grants 276,425
Shares of common stock reserved 928,925
Outstanding options:
Number of holders 21
Average price per share $1.61
Expiration dates April 1997 to December 2001
Transactions for the Two Years Ended March 31, 1997:
Weighted Average
Number of Per Share Total
Shares Option Price Option Price
Outstanding at
March 31, 1995 589,500 $1.94 $1,143,225
Granted 12,500 2.28 28,450
Canceled (60,500) 2.09 (168,825)
Outstanding at
March 31, 1996 541,500 1.85 1,002,850
Granted 301,000 1.28 384,250
Canceled (190,000) 1.77 (336,200)
Outstanding at
March 31, 1997 652,500 $1.61 $1,050,900
- 26 -
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 100,000 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,
1997, approximately 65,000 shares remain reserved for issuance under
this Plan.
During the year ended March 31, 1996, 715,000 outstanding warrants
expired.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the 1978 Non-Qualified Stock Plan. Accordingly, no
compensation has been recognized for the 1978 Stock Plan. Had
compensation costs for the 1978 Stock Plan been determined based on
fair value at the grant date forward under that Plan consistent with
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
net loss would not have been affected on a pro forma basis. No
adjustment to the Company's net loss is required for the year ended
March 31, 1997 and 1996.
NOTE H - BENEFIT PLAN
The Company maintains a 401(k) defined contribution plan for its
employees. For calendar years 1997, 1996 and 1995, the Company has
elected to contribute 2% of each eligible employee's salary to the
Plan. Additionally, the Company has elected to match 20% of employee
contributions, up to a maximum of $200, and to provide an aggregate
contribution of 3% of corporate net income to be allocated among Plan
participants. The Company contributions were terminated as of March
3, 1997. The 401(k) expense for the years ended March 31, 1997, 1996
and 1995 was $23,674, $32,486 and $41,305, respectively.
NOTE I - COMMITMENTS
The Company has employment agreements with two of its officers, both
expiring on March 31, 1998. The fixed aggregate annual remuneration
under these agreements approximates $300,000 per year. In addition,
the agreements provide incentive compensation to these officers based
on the Company's achievement of certain levels of earnings.
Outstanding letter of credit commitments which are used solely for
short-term inventory financing totaled $53,770 at March 31, 1997.
- 27 -
NOTE J - BUSINESS AND SALES INFORMATION
The Company is a manufacturer and wholesaler of a variety of products,
principally of security, video and telecommunications devices and
systems, for use in homes and businesses.
Approximately 15% and 11% of the Company's total sales were to a
single customer in 1997 and 1996, respectively. Approximately 19% of
the Company's total sales were to a different customer in 1995.
NOTE K - LITIGATION
The Company settled its legal proceeding for patent infringement
litigation with Black & Decker (U.S.). The Company recorded a charge
of $450,000 in its June 30, 1996 quarter for settlement of the patent
litigation and related expenses. In conjunction with the settlement
with Black & Decker, the Company agreed to pay the sum of $300,000.
The repayment terms were $100,000 paid in July 1996 and $200,000
payable in 32 equal monthly installments without interest beginning
September 1, 1996. The Company reduced its accrual for legal fees by
$125,000 related to this matter. The Company recovered $77,500 from
its insurance carrier during the fourth quarter in final settlement of
its claim. As a result of the adjustments and recovery, the net charge
for this matter amounted to $247,500.
- 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, and individuals currently serving as executive officers
of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper.....53 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......54 Director; Chairman of the Board 1970
of the Company since September
1996; President of the Company
from 1970 to September 1996.
Harvey Grossblatt...50 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
April 1997; Executive Vice
President of the Company since
December 1986; 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(1)
Stephen
C.
Knepper 1997 $183,328 - - - 70,000 - $3,200
Vice
Chairman
of the 1996 250,000 - - - - - 2,700
the Board 1995 237,500 - - - 95,000 - 3,250
1994 250,000 - - - 50,000 - 5,014
Michael
Kovens 1997 $300,000 - - - 70,000 - $3,200
Chairman
of the
Board 1996 250,000 - - - - - 3,200
1995 237,500 - - - 95,000 - 3,200
1994 250,000 - - - 50,000 - 4,619
Harvey
Gross-
blatt 1997 $142,923 - - - 71,000 - $2,857
President,
Secretary 1996 143,675 - - - - - 3,918
and
Treasurer 1995 143,269 - - - - - 2,840
1994 136,738 - - - 25,000 - 3,771
(1)Consists of Company contributions under its 401(k) plan.
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
Stephen C. Knepper - - 215,000/-0- -0- /-0-
Michael Kovens - - 215,000/-0- -0- /-0-
Harvey Grossblatt - - 69,500/26,500 -0- /-0-
EMPLOYMENT CONTRACTS
Stephen Knepper and Michael Kovens each have employment agreements with the
Company which expire March 31, 1998. Both agreements prohibit competition with
the Company during their term and for one year thereafter. Each employee is
entitled to Base Compensation of $250,000 a year plus Incentive Compensation
equal to specified percentages of the amount by which the Company's
consolidated annual pre-tax profits in each fiscal year exceed the amount the
Company would have received if the shareholders' equity (as defined in the
agreements) in the Company were invested in United States Treasury Bills. The
specified percentage is 5% of the first $1,000,000, 3-3/4% of the second
$1,000,000, 2-1/2% of the third 1,000,000 and 1% of everything over
$3,000,000. The employment agreements further provide that each employee is
entitled to (i) certain life insurance and medical reimbursement benefits,
(ii) upon death or disability, 75% of the Base Compensation for a period of 60
months (including Incentive Compensation for that year if death or disability
occurs after the first three months of the fiscal year), (iii) deferred
compensation upon termination of their employment in the amount of three
times the annual Base Compensation, payable within 30 days after termination,
and (iv) the continuation of certain life insurance and medical reimbursement
benefits for a period of three years after termination. However, in September
1996, one of the officers voluntarily elected to a non-reimbursable reduction
in remuneration of $200,000.
- 30 -
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 23, 1997, 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 745,408(2) 21.5%
10324 South Dolfield Rd.
Owings Mills, MD 21117
Stephen Knepper 343,493(3) 9.9%
10324 South Dolfield Rd.
Owings Mills, MD 21117
Bruce Paul 184,000 5.7%
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 June 23, 1997 are deemed to be
outstanding.
(2) Includes 20,178 shares held by Mr. Kovens' adult children and
215,000 shares which Mr. Kovens presently has the right to
acquire through the exercise of stock options.
(3) Includes 215,000 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options.
- 31 -
As of June 23, 1997, 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 745,408(2) 21.5%
Stephen Knepper 343,493(3) 9.9%
Harvey Grossblatt 98,590(4) 3.0%
All directors and officers as
a group (6 persons included) 1,207,491 32.2%
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Includes 69,500 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. The following consolidated financial statements are
included in Part II, Item 8.
Reports of independent auditors
Financial statements
Consolidated balance sheets, March 31, 1997 and 1996
Consolidated statements of operations for the years ended
March 31, 1997, 1996 and 1995.
Consolidated statements of shareholders' equity for the
years ended March 31, 1997, 1996 and 1995.
Consolidated statements of cash flows for the years
ended March 31, 1997, 1996 and 1995.
Notes to consolidated financial statements.
2. The following financial statement schedule for the
years ended March 31, 1997, 1996 and 1995 are submitted
herewith:
Page
Schedule II - Valuation account 35
All other schedules are omitted because they are not
applicable, not required, or because the required information is
included in the financial statements or notes thereto.
- 33 -
3. Exhibits required by Item 601 of Regulation S-K.
The following exhibit is incorporated by reference to the
exhibit to Form 10-K for the fiscal year ended March 31, 1994, filed
by the Company with the Securities and Exchange Commission (SEC).
10.15 Joint Venture Agreement (confidential
treatment of name requested and filed
separately with the SEC).
The following exhibits are attached hereto:
10.16 Discount factoring agreement letter dated
January 2, 1997
24.1 Consent of Deloitte & Touche LLP, Independent
Auditors.
24.2 Consent of Ernst & Young LLP, Independent
Auditors.
(d) 1. Separate financial statements of The Joint Venture
(name withheld and filed separately with the SEC).
Page
Report of the auditors JV-1
Consolidated profit and loss account,
March 31, 1997 and 1996 JV-2
Consolidated balance sheets, March 31, 1997 and 1996 JV-3
Cash flow statement, March 31, 1997, 1996 and 1995 JV-4
Notes to consolidated financial statements JV-5
- 34 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions(1) of year
Year ended
March 31, 1997
Allowance for
doubtful accounts $25,771 $24,229 $-0- $ -0- $50,000
Year ended
March 31, 1996
Allowance for
doubtful accounts $50,000 $ -0- $-0- $24,229 $25,771
Year ended
March 31, 1995
Allowance for
doubtful accounts $45,000 $27,330 $-0- $22,330 $50,000
(1)Write-off of uncollectible accounts, net of recoveries.
- 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 10, 1997 By: Stephen Knepper
Stephen Knepper
Vice Chairman of the Board, Director
Date: July 10, 1997 By: Michael Kovens
Michael Kovens
Chairman of the Board, Director
Date: July 10, 1997 By: Harvey Grossblatt
Harvey Grossblatt,
President, Secretary, Treasurer, CFO
- 36 -
REPORT OF THE AUDITORS
To the members
The Joint Venture (name withheld and filed separately
with the Securities and Exchange Commission)
We have audited the financial statements on pages 2 to 17 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,
in all material respects, of the state of affairs of the Company
and the Group as at 31 March 1997 and of the loss and cash flows
of the Group for the year then ended and have been properly
prepared in accordance with the Companies Ordinance.
Hong Kong
6 June 1997
JV-1
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 March 1997
Notes 1997 1996
HK$ HK$
TURNOVER 3 57,585,355 77,343,193
PROFIT BEFORE EXCEPTIONAL ITEMS 4 5,333,906 4,379,377
Exceptional items 5 (5,625,929) -
PROFIT/(LOSS) BEFORE TAXATION (292,023) 4,379,377
Taxation 7 (2,049,242) (996,854)
NET PROFIT/(LOSS) ATTRIBUTABLE TO
SHAREHOLDERS 8 (2,341,265) 3,382,523
Retained profits at beginning of year 34,078,046 46,155,523
Dividends 9 - (15,460,000)
RETAINED PROFITS AT END OF YEAR 31,736,781 34,078,046
JV-2
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
31 March 1997
Notes 1997 1996
HK$ HK$
ASSETS
CURRENT ASSETS
Cash and bank balances 10 8,681,244 21,279,916
Bills receivable 135,450 192,430
Inventories 11 6,897,070 8,134,909
Prepayments, deposits and
other receivables 209,031 614,656
Due from a shareholder 2 5,100,859 6,849,317
TOTAL CURRENT ASSETS 21,023,654 37,071,228
INTERESTS IN AN ASSOCIATED COMPANY 13 2,616,066 10,945,324
FIXED ASSETS 14 24,177,874 25,638,308
TOTAL ASSETS 47,817,594 73,654,860
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bills payable - 435,117
Accounts payable 3,570,499 4,459,490
Other payables and accrued liabilities 2,447,850 1,059,993
Due to an associated company 15 - 10,113,460
Current portion of loan from a
related company 2 164,004 -
Taxation 2,063,977 213,600
Dividend payable - 15,460,000
TOTAL CURRENT LIABILITIES 8,246,330 31,741,660
DEFERRED TAXATION 16 576,000 1,096,000
LOANS FROM SHAREHOLDERS 17 6,738,954 6,738,954
LONG TERM PORTION OF LOAN FROM
A RELATED COMPANY 2 519,329 -
TOTAL LIABILITIES 16,080,613 39,576,614
SHAREHOLDERS' EQUITY
Share capital 18 200 200
Retained profits 31,736,781 34,078,046
31,736,981 34,078,246
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 47,817,594 73,654,860
JV-3
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 March 1997
Notes 1997 1996
HK$ HK$
NET CASH INFLOW FROM OPERATING
ACTIVITIES 19(a) 4,370,287 11,487,214
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 676,510 1,498,463
Interest paid (14,385) (10,742)
Dividend paid (15,460,000) -
Net cash inflow/(outflow) from
returns on investments
and servicing of finance (14,797,875) 1,487,721
TAXATION
Hong Kong profits tax paid (718,865) (514,556)
INVESTING ACTIVITIES
Purchases of fixed assets (2,139,552) (1,926,285)
Addition to interests in an
associated company - (115,868)
Sales proceeds from disposal
of fixed assets 4,000 -
Net cash outflow from
investing activities (2,135,552) (2,042,153)
NET CASH (OUTFLOW)/INFLOW BEFORE
FINANCING ACTIVITIES (13,282,005) 10,418,226
FINANCING ACTIVITIES 19(b)
Loan from a related company 820,000 -
Repayment of the loan from
a related company (136,667) -
Net cash inflow from financing
activities 683,333 -
INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (12,598,672) 10,418,226
Cash and cash equivalents at
beginning of year 21,279,916 10,861,690
CASH AND CASH EQUIVALENTS
AT END OF YEAR 8,681,244 21,279,916
ANALYSIS OF THE BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances 8,681,244 21,279,916
JV-4
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the audited financial
statements of the Company and its subsidiaries for the year ended
31 March 1997. 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.
Subsidiaries
Investments in subsidiaries are stated at cost unless, in the
opinion of the directors, there have been permanent diminutions in
values, when they are written down to values determined by the
directors.
Associated companies
An associated company is a company, not being a subsidiary, in
which the Group has a long term interest of not less than 20% of
the equity voting rights and over which it exerts significant
influence.
The Group's share of the post-acquisition results and reserves of
associated companies is included in the consolidated profit and
loss account and consolidated reserves, respectively. The Group's
investments in associated companies are stated in the consolidated
balance sheet at the Group's share of net assets under the equity
method of accounting.
Goodwill
Goodwill arising on consolidation of subsidiaries and on
acquisition of associated companies represents the excess purchase
consideration paid for subsidiaries/associates 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.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation.
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%
JV-5
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The gain or loss on disposal or retirement of fixed assets
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
comprises direct materials, direct labor and an appropriate
proportion of overheads.
Net realizable value is based on estimated selling prices less
further costs expected to be incurred to completion and disposal.
Long term contracts
Long term contract work in progress is stated at cost plus
attributable profits less foreseeable losses and progress payments
received and receivable. The excess of progress payments received
and receivable over costs of individual contract plus attributable
profits recognized to date is included under current liabilities in
the balance sheet. Cost comprises materials, direct labor and an
appropriate proportion of overheads.
Where losses are currently estimated to arise over the duration of
the contracts, allowance is made for such losses. In determining
this, account is taken of the anticipated final contract
settlement.
Attributable profit is calculated and included in long term
contract work in progress on a percentage of completion basis where
the contract's ultimate outcome can be foreseen and assessed with
reasonable certainty.
The percentage of completion is measured by reference to the
percentage of contract costs incurred for work performed to date to
the estimated total contracted costs.
Revenue recognition
Income received from the sales of goods is recognized upon the time
the goods are delivered to customers. Attributable profit arising
from long term contracts is recognized on the percentage of
completion basis where the contracts' ultimate outcome can be
foreseen and assessed with reasonable certainty.
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.
JV-6
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currency transactions
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.
Deferred taxation
Deferred taxation 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.
Related company
Related company is a company in which a shareholder or director has
a direct or indirect interest, either as a shareholder or director
of that company, and is in a position to exert significant
influence over the related company.
2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS
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., which
is 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 Universal Security Instruments, Inc. 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.
JV-7
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND
SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS (continued)
During the year, the following significant related party transactions were
recorded:
Group
1997 1996
HK$ HK$
Sales made to: Universal Security Instruments, Inc. 45,152,112 71,364,067
Sundry income received from:
Universal Security Instruments, Inc. 400,139 717,392
Management fee received from: USI Oberlin Limited 139,320 139,320
Purchases of inventories from:
Universal Security Instruments, Inc. 838,680 553,559
An Affiliate of The Company (name withheld
and filed separately with the SEC) - 314,816
License fees paid to: An Affiliate of The Company
(name withheld and filed separately with the SEC) 268,695 292,742
Rentals paid to: An Affiliate of The Company (name
withheld and filed separately with the SEC) 840,000 1,080,000
A Manager (name withheld and filed separately
with the SEC) 240,000 480,000
Management fee paid to: An Affiliate of The Company
(name withheld and filed separately with the SEC) 1,440,000 1,440,000
Interest received from:
Universal Security Instruments, Inc. 57,964 -
Interest paid to: An Affiliate of The Company (name
withheld and filed separately with the SEC) 3,330 -
The amount due from a shareholder is unsecured, interest-free, and has no
fixed terms of repayment.
The amount due to a related company, (name withheld and filed separately
with the SEC), is unsecured, bears interest at 0.49% per annum and is
repayable by 50 equal installments.
The balances with subsidiaries are unsecured, interest-free and have no
fixed terms of repayment.
3. TURNOVER
Turnover represents the invoiced value of goods sold, net of discounts and
returns and attributable profit of long term contracts.
JV-8
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
4. PROFIT BEFORE EXCEPTIONAL ITEMS
Profit before exceptional items is arrived at after
charging/(crediting):
Group
1997 1996
HK$ HK$
Depreciation 3,591,058 5,464,145
Auditors' remuneration 168,000 168,000
Interest on bank overdrafts and loans
wholly repayable within five years 14,385 10,742
Operating lease rentals for land
and buildings 1,107,918 1,587,918
Loss on disposal of fixed assets 4,928 18,622
Exchange gains, net (161,323) (466,732)
Interest income (676,510) (1,498,463)
Rental income (284,640) -
5. EXCEPTIONAL ITEMS
Group
1997 1996
HK$ HK$
Provision for permanent diminution in
value of the Group's interest in an
associated company - note 13 1,561,029 -
Provision against amount due from
an associated company - note 13 4,064,900 -
5,625,929 -
6. DIRECTORS' REMUNERATION
Group
1997 1996
HK$ HK$
Fees - -
Other emoluments -
- -
JV-9
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
7. TAXATION
Hong Kong profits tax has been provided at the rate of 16.5% (1996:
16.5%) on the estimated assessable profits arising in Hong Kong
during the year. Taxes on profits assessable elsewhere have been
calculated at the rates of taxation prevailing in the countries in
which the group operates.
Group
1997 1996
HK$ HK$
Provision for the year 2,530,917 342,300
Underprovision in prior years 38,325 384,554
Deferred tax charge/(credit) - note 15 (520,000) 270,000
Taxation charge/(credit) for the year 2,049,242 996,854
8. NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS
The net loss for the year dealt with in the financial statements of
the Company is HK$824,803 (1996: net profit of HK$3,383,065).
9. DIVIDENDS
1997 1996
HK$ HK$
Proposed final - Nil (1996: HK$7,730,000)
per ordinary share - 15,460,000
10. CASH AND BANK BALANCES
These included time deposits amounting to HK$1,298,086 (1996:
HK$1,240,842) which were pledged to banks for credit facilities of
HK$3,329,000 (1996: HK$3,329,000) granted to the Company.
JV-10
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
11. INVENTORIES
Group and Company
1997 1996
HK$ HK$
Raw materials 4,959,689 6,213,308
Work in progress 976,428 1,114,347
Finished goods 960,953 807,254
6,897,070 8,134,909
12. INVESTMENTS IN SUBSIDIARIES
Company
1997 1996
HK$ HK$
Unlisted shares, at cost 210,008 210,008
Particulars of the subsidiaries, all of which are wholly-owned by
the Company are as follows:
Nominal value
Place of of issued
incorporation ordinary Principal
Name and operation share capital activities
A Subsidiary of The Incorporated US$1 Provision of
Company (name in the British assistance in
withheld and Virgin Islands development and
filed separately and operates in manufacture
with the SEC) the People's of cellular
Republic hand-held
of China phones
A Subsidiary of The Hong Kong HK$200,000 Investment
Company (name holding
withheld and
filed separately
with the SEC)
A Subsidiary of The Hong Kong HK$10,000 Dormant
Company (name
withheld and
filed separately
with the SEC)
JV-11
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
13. INTERESTS IN AN ASSOCIATED COMPANY
Group
1997 1997
HK$ HK$
Share of net assets, other than goodwill 3,887,426 9,305,588
Due from an associated company 4,354,569 1,639,736
8,241,995 10,945,324
Less: Provision for permanent
diminution - note 5 (1,561,029) -
Provision against amount due from
an associated company - note 5 (4,064,900) -
2,616,066 10,945,324
The amount due from the associated company is unsecured, interest-
free and has no fixed terms of repayment.
Particulars of the associated company are as follows:
Percentage
of equity
Counmtry of Nominal value attributable
registration of registered to the Group Principal
Name and operation capital 1997 1996 activities
An Associate The People's US$4,000,000 30 30 Manufacture
of the Company Republic of of cellular
(name withheld China hand-held
and filed phones
separately with
the SEC)
The Associated Company (name withheld and filed separately with the SEC) was
registered under the laws of the People's Republic of China as a sino-foreign
equity joint venture on 20 June 1992 and has a tenure of 15 years. The tenure
of the joint venture can be extended by the board of directors of The Associated
Company (name withheld and filed separately with the SEC) with the approval of
the relevant government authorities. The Associated Company (name withheld and
filed separately with the SEC) has not commenced its operation at the balance
sheet date.
JV-12
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
14. FIXED ASSETS
Group and Company
Leasehold Leasehold Furniture
land and improve- Plant and and Motor
buildings ments machinery fixtures vehicles Total
HK$ HK$ HK$ HK$ HK$ HK$
Cost:
At begin-
ning
of
year 15,814,592 5,557,946 26,897,646 2,495,549 627,161 51,392,894
Addi-
tions - 926,473 1,128,489 84,590 - 2,139,552
Dis-
pos-
als - - (150,000) - - (150,000)
At 31
March
1997 15,814,592 6,484,419 27,876,135 2,580,139 627,161 53,382,446
Accumulated depreciation:
At begin-
ning
of
year 1,820,360 3,105,850 18,668,750 1,658,218 501,408 25,754,586
Pro-
vided
during
the
year 729,401 986,213 1,424,998 381,014 69,432 3,591,058
Dispo-
sals - - (141,072) - - (141,072)
At 31
March
1997 2,549,761 4,092,063 19,952,676 2,039,232 570,840 29,204,572
Net book value:
At 31
March
1997 13,264,831 2,392,356 7,923,459 540,907 56,321 24,177,874
At 31
March
1996 13,994,232 2,452,096 8,228,896 837,331 125,753 25,638,308
The leasehold land and buildings, which represent the factory site and
facilities, are situated in the People's Republic of China under
medium-term leases.
During the year, the estimated useful life of plant and machinery
changed from 7 years to 10 years. The effect of such change has
decreased the depreciation charge for the year from HK$3,118,650 to
HK$1,424,998.
JV-13
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
15. DUE TO AN ASSOCIATED COMPANY
The balance in last year represented long term contract work in
progress reflected as a current liability at the balance sheet date
and was analyzed as follows:
Group
1997 1996
HK$ HK$
Progress payments received - 24,433,500
Less: Costs incurred on an incomplete contract - (7,758,040)
Estimated attributable profits - (6,562,000)
- 10,113,460
Long term contract work in progress arose as a result of the
provision of assistance in the development and manufacture of
cellular hand-held phones by a subsidiary, (name withheld and
filed separately with the SEC), to an associated company, (name
withheld and filed separately with the SEC), at a contract value
of US$3,500,000 (HK$27,055,000). The long term contract work
in progress was completed in the current year.
16. DEFERRED TAXATION
Group and Company
1997 1996
HK$ HK$
Balance at beginning of year 1,096,000 826,000
Charge/(credit) for the year - note 7 (520,000) 270,000
Balance at end of year 576,000 1,096,000
The principal components of the Group's deferred tax liability
comprises accelerated depreciation allowances.
JV-14
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
17. LOANS FROM SHAREHOLDERS
Group and Company
1997 1996
HK$ HK$
Universal Security Instruments, Inc. 3,369,477 3,369,477
An Affiliate of The Company (name
withheld and filed separately with
the SEC) 3,369,477 3,369,477
6,738,954 6,738,954
The loans are unsecured, interest-free and repayable on demand by
the respective shareholder with the consent of the other. The
directors of the Company consider that these liabilities are non-
current.
18. SHARE CAPITAL
Company
1997 1996
HK$ HK$
Authorized:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
JV-15
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
19. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of profit/(loss) before taxation to net cash
inflow from operating activities:
1997 1996
HK$ HK$
Profit/(loss) before taxation (292,023) 4,379,377
Provision for permanent diminution 1,561,029 -
Provision against amount due from
an associated company 4,064,900 -
Unrealized profit in pre-operating
expenses of an associated company 5,418,162 -
Interest income (676,510) (1,498,463)
Interest expense 14,385 10,742
Depreciation 3,591,058 5,464,147
Loss on disposal of fixed assets 4,928 18,622
Decrease/(increase) in bills
receivable 56,980 (192,430)
Decrease in inventories 1,237,839 10,970,718
Decrease/(increase) in prepayments,
deposits and other receivables 405,625 (225,615)
Decrease in amount due from a
shareholder 1,748,458 354,986
Increase/(decrease) in bills payable (435,117) 435,117
Decrease in accounts payable (888,991) (3,678,916)
Increase/(decrease) in other payables
and accrued liabilities 1,387,857 (67,840)
Decrease in amount due to an
associated company (12,828,293) (637,646)
Increase/(decrease) in amount due
to a related company - (3,845,585)
Net cash inflow from operating
activities 4,370,287 11,487,214
(b) Analysis of changes in financing during the year
Loan from a
related company
HK$
Balance at 1 April -
Cash inflow from financing 820,000
Repayment (136,667)
Balance at 31 March 683,333
JV-16
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1997
20. COMMITMENTS
Group and Company
1997 1996
HK$ HK$
Capital commitments contracted for 303,115 348,400
Commitments payable in the following
year under operating leases in
respect of land and buildings
expiring within one year 1,080,000 1,560,000
21. CONTINGENT LIABILITIES
Group and Company
1997 1996
HK$ HK$
Bills discounted 565,771 -
22. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with
the current year's presentation.
23. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved by the board of directors on
6 June 1997.
JV-17