UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended March 31, 2005 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________.
Commission file number: 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-0898545
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7-A Gwynns Mill Court Owings Mills, Maryland 21117
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(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:
Title of Class Name of Each Exchange on Which Registered
- -------------- ------------------------------------------
Common Stock, $0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 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 statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 21, 2005 was $27,538,947.
The number of shares of common stock outstanding as of June 21, 2005 was
1,652,998.
DOCUMENTS INCORPORATED BY REFERENCE
To the extent specified, Part III of this Form 10-K incorporates information by
reference to the Registrant's definitive proxy statement for its 2005 Annual
Meeting of Shareholders (to be filed).
UNIVERSAL SECURITY INSTRUMENTS, INC.
2005 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to Vote of Security Holders 8
Executive Officers of the Registrant 8
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative And Qualitative Disclosures About Market Risk 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
Item 9A. Controls and Procedures 15
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management 16
Item 13. Certain Relationships and Related Transactions 16
Item 14. Principal Accountant Fees and Services 16
PART IV
Item 15. Exhibits and Financial Statement Schedules 17
Signatures 19
PART I
ITEM 1. BUSINESS
General
Universal Security Instruments, Inc. ("we" or "the Company") designs and
markets a variety of popularly-priced safety products consisting primarily of
smoke alarms, carbon monoxide alarms and related products. Most of our products
require minimal installation and are designed for easy installation by the
consumer without professional assistance, and are sold through retail stores. We
also market products to the electrical distribution trade through our
wholly-owned subsidiary, USI Electric, Inc. ("USI Electric"). The electrical
distribution trade includes electrical and lighting distributors as well as
manufactured housing companies. Products sold by USI Electric usually require
professional installation.
Prior to 2000, we also designed and marketed a variety of
telecommunication and video products. Due to the low margins realized on our
telecommunications and video products, we have since focused our business
primarily on safety products. As a result, we (i) changed our 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 our other safety products.
In 1989 we formed a limited liability company under the laws of Hong Kong,
as a joint venture with a Hong Kong-based partner to manufacture various
products in the Peoples Republic of China (the "Hong Kong Joint Venture"). We
currently own a 50% interest in the Hong Kong Joint Venture and are a
significant customer of the Hong Kong Joint Venture (40.66% and 31.02% of its
sales during fiscal 2005 and 2004 respectively), with the balance of its sales
made to unrelated customers worldwide.
We import all of our products from various foreign suppliers. For the
fiscal year ended March 31, 2005, approximately 68% of our purchases were
imported from the Hong Kong Joint Venture. Our sales for the year ended March
31, 2005 were $23,465,443 compared to $17,201,116 for the year ended March 31,
2004, an increase of approximately 36.42%.
We reported net income of $3,417,854 in fiscal 2005 compared to net income
of $2,571,026 in fiscal 2004. The primary reasons for the increase in earnings
were higher operating income from sales due to increased volume, higher Hong
Kong Joint Venture earnings and the income tax benefit of $281,137 arising
principally from the reduction of the deferred tax valuation allowance.
The Company was incorporated in Maryland in 1969. Our principal executive
office is located at 7-A Gwynns Mill Court, Owings Mills, Maryland 21117, and
our telephone number is 410-363-3000. Information about us may be obtained from
our website www.universalsecurity.com. Copies of our Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, are available free
of charge on our website as soon as they are filed with the Securities and
Exchange Commission (SEC) through a link to the SEC's EDGAR reporting system.
Simply select the "Investor Relations" menu item, then click on the "SEC
Filings" link. The SEC's EDGAR reporting system can also be accessed directly at
www.sec.gov.
Safety Products
We market a line of residential smoke alarms under the trade names "USI
Electric" and "UNIVERSAL" both of which are manufactured by the Hong Kong Joint
Venture.
Our line of smoke alarms consists of battery, electrical and electrical
with battery backup alarms. Our products contain different types of batteries
with different battery lives, and some with alarm silencers. The smoke alarms
marketed to the electrical distribution trade also include hearing impaired and
heat alarms with a variety of additional features. We also market outdoor
floodlights under the name "Lite Aide(TM)," carbon monoxide alarms, door chimes
and ground fault circuit interrupters.
Our sales of safety products aggregated $23,361,445 or approximately 99.6%
of total sales in the fiscal year ended March 31, 2005 and $16,717,427 or
approximately 97% of total sales in the fiscal year ended March 31, 2004. This
increase in sales volume was due primarily to increased sales volume of ground
fault circuit interrupters, smoke and carbon monoxide alarms.
We are focusing our sales and marketing efforts to maximize safety product
sales, especially smoke alarms and carbon monoxide alarms manufactured by our
Hong Kong Joint Venture and marketed to the electrical distribution and retail
trade.
-3-
Other Products
Since 2000, our focus has been primarily on sales of safety products and
we have placed continuously less emphasis on sales of the other products which
had been sold in earlier years. For the fiscal year ended March 31, 2005, our
sales of other private label products consisted primarily of audio tape, which
aggregated $103,998 or 0.4% of total sales. For the fiscal year ended March 31,
2004, sales of these products were $483,689 or 3% of total sales. The primary
reason for the decrease in sales was fewer private label customers.
Import Matters
We import all of our products. As an importer, we are 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 and currency fluctuations. We have attempted to protect
ourself from fluctuations in currency exchange rates to the extent possible by
negotiating commitments in U.S. dollars.
Our inventory purchases are also subject to delays in delivery due to
problems with shipping and docking facilities, as well as other problems
associated with purchasing products abroad. A majority of our products,
including products we purchase from our Hong Kong Joint Venture, are imported
from the People's Republic of China.
Sales and Marketing; Customers
We sell our products to various customers, and our total sales market can
be divided generally into two categories; sales by the Company, and sales by our
USI Electric subsidiary.
The Company markets our products to retailers, including wholesale
distributors, chain, discount, and home center stores, catalog and mail order
companies and to other distributors ("retailers"). Our products have
historically been retailed to "do-it-yourself" consumers by these retailers. We
also distribute our products through specialty markets such as premium/incentive
and direct mail companies. We do not currently market any significant portion of
our products directly to end users.
The Company's retail sales are made directly by our employees and by
approximately 17 independent sales organizations who are compensated by
commissions. Our agreements with these sales organizations are generally
cancelable by either party upon 30 days notice. We do not believe that the loss
of any one of these organizations would have a material adverse effect upon our
business. Sales which are made directly by us are effected by our officers and
full-time employees, seven of whom are also engaged in sales, management and
training. Sales outside the United States, are made by our officers and through
exporters, and amounted to approximately 6.3% of total sales in the fiscal year
ended March 31, 2005.
Our USI Electric subsidiary markets our products to the electrical
distribution trade (primarily electrical and lighting distributors and
manufactured housing companies). USI Electric has established a national
distribution system with 9 regional stocking warehouses throughout the United
States which enables customers to receive their orders the next day without
paying for overnight freight charges. USI Electric engages sales personnel from
the electrical distribution trade and has engaged 27 independent sales
organizations which represent approximately 230 sales representatives, some of
which have warehouses where USI Electric products are maintained by our sales
representatives for sale.
We also market our products through our own sales catalogs and brochures,
which are mailed directly to trade customers, and our website. Our customers, in
turn, may advertise our products in their own catalogs and brochures and in
their ads in newspapers and other media. We also exhibit and sell our products
at various trade shows, including the annual National Hardware Show in Las
Vegas, Nevada.
Our backlog of orders believed to be firm as of March 31, 2005 was
approximately $841,278. Our backlog as of March 31, 2004 was approximately
$1,521,784. This decrease in backlog is a function of the timing of orders
received from our customers and our maintaining significantly more inventory,
resulting in more rapid fulfillment of customer orders.
Hong Kong Joint Venture
We have 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 of our electronic and electrical products.
-4-
We believe that the Hong Kong Joint Venture arrangement will ensure a
continuing source of supply for a majority of our safety products at competitive
prices. During fiscal year 2005, 68% of our total inventory purchases were made
from the Hong Kong Joint Venture. The products produced by the Hong Kong Joint
Venture include smoke alarms and carbon monoxide alarms. We are currently
pursuing the development of additional products to be manufactured by the Hong
Kong Joint Venture, such as additional models of carbon monoxide alarms and a
battery operated combination carbon monoxide and smoke alarm unit. Changes in
economic and political conditions in China or any other adversity to the Hong
Kong Joint Venture will unfavorably affect the value of our investment in the
Hong Kong Joint Venture and would have a material adverse effect on the
Company's ability to purchase products for distribution.
We previously announced that the Hong Kong Joint Venture was being
positioned for a possible initial public offering (IPO). The Hong Kong Joint
Venture is proceeding with the application process for an IPO and listing on the
Hong Kong Stock Exchange Main Board. No assurances can be given that these steps
will result in an initial public offering for the Hong Kong Joint Venture. We
will report further developments at such time as permitted in accordance with
Hong Kong and U.S. regulations. Should the Hong Kong Joint Venture complete its
IPO, our ownership of the Hong Kong Joint Venture will be reduced.
Our purchases from the Hong Kong Joint Venture represented approximately
41% of the Hong Kong Joint Venture's total sales during fiscal 2005, with the
balance of the Hong Kong Joint Venture's sales being primarily made in Europe
and Australia, to unrelated customers. The Hong Kong Joint Venture's sales to
unrelated customers are $15,347,017 in fiscal 2005 and $16,633,251 in fiscal
2004. Please see Note C of the Financial Statements for a comparison of annual
sales and earnings of the Hong Kong Joint Venture.
Other Suppliers
Certain private label products not manufactured for us by the Hong Kong
Joint Venture are manufactured by other foreign suppliers. We believe that our
relationships with our suppliers are good. We believe that the loss of our
ability to purchase products from the Hong Kong Joint Venture would have a
material adverse effect on the Company. The loss of any of our other suppliers
could have a short-term adverse effect on our operations, but replacement
sources for these other suppliers could be developed.
Competition
In fiscal year 2005, sales of safety products accounted for approximately
99.6% of our total sales. In the sale of smoke alarms, we compete in all of our
markets with First Alert, Firex and Walter Kidde. All of these companies have
greater financial resources and financial strength than we have. We believe that
our safety products compete favorably with other such products in the market
primarily on the basis of styling, features and pricing.
The safety industry in general involves changing technology. The success
of our products may depend on our ability to improve and update our products in
a timely manner and to adapt to new technological advances.
Employees
We have 18 employees, 12 of whom are engaged in administration and sales,
and the balance of whom are engaged in product development and servicing. Our
employees are not unionized, and we believe that our relations with our
employees are satisfactory.
ITEM 2. PROPERTIES
Effective December 1999, we entered into an operating lease for a 9,000
square foot office and warehouse located in Baltimore County, Maryland. This
lease was due to expire October 2005 but, subsequent to March 31, 2005, we
exercised our option to renew the lease until October 2008. The current rental
approximates $5,531 per month during the current fiscal year, with increasing
rentals at 3% per year.
Effective March 2003, we entered into an operating lease for an
approximately 2,600 square foot office in Naperville, Illinois. This lease,
which expires in February 2006, is subject to renewal for an additional six
years with increasing rentals at 3% per year. The monthly rental approximates
$2,830 per month during the current fiscal year.
The Hong Kong Joint Venture currently operates an approximately 100,000
square foot manufacturing facility in the Guangdong province of Southern China.
In response to our and the Hong Kong Joint Venture's growth and expanding
product lines, the Hong Kong Joint Venture is constructing a new, approximately
250,000 square-foot manufacturing facility in the Fujian province of Southern
China, which should be operational in the September 2005 quarter.
-5-
The Company believes that its current facilities, and those of the Hong
Kong Joint Venture, are currently suitable and adequate.
ITEM 3. LEGAL PROCEEDINGS
In December 2001, Leviton Manufacturing Co., Inc. filed a civil action in
the United States District Court for the District of Maryland (Case No.
01cv3855) alleging that the Company's and its USI Electric subsidiary's ground
fault circuit interrupter (GFCI) units infringed one of plaintiff's patents and
configuration trade dress ("Leviton I"). The plaintiff can no longer obtain
injunctive relief under the now expired patent. In February 2004, the Court
ruled on various summary judgment motions pursuant to which the Court found that
as a matter of law there could be no patent infringement liability prior to
December 11, 2001 and permitted Leviton's configuration trade dress claim and
USI's patent invalidity defense to proceed to trial. The Court consolidated the
trial with "Leviton II" and bifurcated liability from damages. At this time no
trial date has been assigned. Due to the still undefined nature of the asserted
configuration trade dress, the amount of any loss to the Company from this claim
is not yet determinable. Should the Company not prevail on its defenses, any
recovery that Leviton may obtain under the patent claims would be limited to
some "reasonable royalty" for GFCI sales occurring over a period starting
December 11, 2001, for less than one year. The Company and its counsel believe
that the Company has meritorious defenses to the claims and continues to
aggressively defend against the suit.
On June 10, 2003, Leviton Manufacturing Co., Inc. filed a second civil
suit against the Company and its USI Electric subsidiary in the United States
District Court for the District of Maryland (Case No. 03cv1701), alleging this
time that the Company's GFCI units infringe one or more of its more recently
issued patents for reset lockout technology related to but not required by UL
Standard 943 for ground GFCI units, effective January 2003 ("Leviton II").
Leviton also asserted trade dress and unfair competition claims which largely
correspond to the claim in the "Leviton l" suit. On July 23, 2003, the GFCI
manufacturer, Shanghai Meihao Electric, Inc., filed an action for Declaratory
Judgment of non-infringement, invalidity, and unenforceability of the asserted
patents. The Court has bifurcated the action into liability and damage phases,
linked the supplier's Declaratory Judgment action with the action against the
Company, and consolidated Leviton I with Leviton II. In March 2005, the court
dismissed one of the Leviton patents from the suit and in April 2005, issued a
claims construction Order that favors the position of the Company. While expert
witness discovery is still ongoing, the Company expects to file summary judgment
motions based on its meritorious defenses to the patent and trade dress
infringement claims as part of its aggressive defense. In the event of an
unfavorable outcome, the amount of any potential loss to USI is not yet
determinable.
On June 11, 2003, Walter Kidde Portable Equipment, Inc. filed a civil suit
against the Company in the United States District Court for the Middle District
of North Carolina (Case No. 03cv00537), alleging that certain of the Company's
AC powered/battery backup smoke detectors infringe on a patent acquired by
Kidde. The plaintiff is seeking injunctive relief and damages to be determined
at trial. Discovery is now closed (subject to specific remaining open matters)
and Kidde has filed a pair of summary judgment motions, which USI will oppose.
The case is scheduled for trial in the fall of 2005. The Company and its counsel
believe that the Company has significant defenses relating to the patent in
suit. In the event of an unfavorable outcome, the amount of any potential loss
to USI is not yet determinable.
On October 13, 2003, Maple Chase Company filed a civil suit in the United
States District Court for the Northern District of Illinois (Case No.
03cv07205), against the Company, its USI Electric subsidiary, and one former and
one present Illinois-based sales representative, alleging that certain of the
Company's smoke detectors infringe on a patent owned by Maple Chase (US Reissue
Patent No. Re: 33290). On February 2, 2004, Maple Chase filed an Amended
Complaint. After answering and counterclaiming against Maple Chase, in an effort
to bring about a conclusion to the litigation, the Company successfully sought
and has now obtained re-examination of the asserted patent in the United States
Patent and Trademark Office (USPTO) based on the references cited and analysis
presented by the Company. On April 11, 2005, the Court dismissed the case with
the right to reinstitute the case pending the outcome of the proceedings in the
USPTO. Apart from granting USI's Request for Reexamination in October of 2004,
no further communications in the reexamination have been issued to date. The
amount of potential loss to the Company, if any, is not yet determinable. The
Company believes that the initiation of the reexamination based on the Company's
presentation, confirmed the veracity in its legal/equitable defenses. If
reinstituted, the Company will vigorously defend the suit and press its pending
counterclaims.
On March 31, 2005, Leviton filed still another lawsuit in the United
States District Court for the District of Maryland (Case No. 05cv0889) against
the Company ("Leviton III"). In this latest suit, Leviton accuses the Company of
infringement of US Patent 6,864,766. This case is now pending in the same Court
and before the same Judge as Leviton I and Leviton II. The Company has filed a
counterclaim against Leviton and a Motion to Stay its case in favor of a
declaratory judgment action filed by the GFCI manufacturer, Shanghai Meihao
Electric, Inc. Leviton has opposed the Motion to Stay and has replied to the
Company's counterclaim. The case is in its preliminary stages. The Company
believes that it has strong defenses relating to the patent in suit. In the
event of an unfavorable outcome, the amount of any potential loss to the Company
is not determinable at this time.
-6-
On April 23, 2004, the Company filed a civil suit against The Hartford
Casualty Insurance Company in the United States District Court for the District
of Maryland (Case No. 04cv1320), claiming that the insurer is required to
indemnify the Company from any damages and legal fees in connection with the two
Leviton patent cases. This case has been settled subject to a confidentiality
agreement.
As previously reported, on September 3, 2003 the Company was advised that
Michael Kovens, a then-director, principal stockholder and the former Chairman
and chief executive officer of the Company ("Kovens"), had filed an action in
Baltimore County Circuit Court (Case No. C-03-9639) against the Company and the
other directors seeking: (i) to enjoin the Company from holding its Annual
Meeting of Stockholders on September 8, 2003 until Kovens was able to nominate
directors for election at the Annual Meeting; (ii) to require the Company to
provide Kovens with certain confidential information to which Kovens claims he
is entitled under Maryland law; (iii) to enjoin the Company from voting as proxy
any shares issued by the Company since Kovens was replaced as Chairman and CEO;
(iv) to void the employment agreement between the Company and its president, and
to enjoin the Company from enforcing a "Change of Control" provision in the
Company's president's employment agreement; (v) to void all issuances by the
Company of restricted stock and options from and after October 1, 2001; (vi) to
void any Bylaw amendments adopted by the Company from and after October 1, 2001;
(vii) to enforce the exercise of an option by Kovens to purchase 20,000 shares
of the Company's common stock at $2.25 per share which the Company maintains has
expired; (viii) to void the election by the Company, pursuant to the Maryland
General Corporation Law, to be governed by certain provisions of Maryland law;
and (ix) other unspecified relief.
The Court refused to issue a temporary restraining order requested by
Kovens to enjoin the Company and the other directors from holding the Annual
Meeting, enforcing the "Change of Control" provision in the Company's
president's employment agreement, and taking other unspecified actions. On
October 2, 2003, the Court granted the parties' joint motion to stay all
proceedings in the matter to allow the parties an opportunity to negotiate a
resolution of the dispute.
On May 28, 2004, Kovens' new counsel filed an amended complaint on behalf
of Kovens, which also includes a derivative action brought in the name of the
Company against the Company's directors claiming that the actions Kovens alleges
to have occurred amount to a breach of their fiduciary duty to the Company. The
amended complaint seeks declaratory relief for essentially the same matters
requested in the original complaint, and seeks damages from the directors in the
amount of $20 million. The Company, in accordance with its charter and bylaws,
is providing a defense for the directors named in the amended complaint and,
subject to the provisions of applicable law, is obligated to indemnify them for
any loss they might ultimately incur. In addition, Kovens is seeking an
additional $500,000 from the Company with respect to the exercise of the option
for the purchase of 20,000 shares at $2.25 per share (mentioned above) which the
Company maintains has expired. Furthermore, Kovens alleges that the Chairman and
the President of the Company interfered with certain contractual relationships
between Kovens and third parties for which Kovens is seeking damages of $25
million. The Company has been advised by counsel that the action as filed is
wholly without merit, and the Company intends to aggressively defend the action.
Discovery has been completed and the case is set for trial beginning July 18,
2005.
From time to time, the Company is involved in various lawsuits and legal
matters. It is the opinion of management, based on the advice of legal counsel,
that these matters will not have a material adverse effect on the Company's
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during
the quarter ended March 31, 2005.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information about the Company's executive officers.
-7-
NAME AGE POSITIONS
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Harvey B. Grossblatt 58 President, Chief Operating Officer
and Chief Executive Officer
James B. Huff 53 Chief Financial Officer, Secretary
and Treasurer
HARVEY B. GROSSBLATT has been President a director of the Company since
1996. He served as Chief Financial Officer from October 1983 through August
2004, Secretary and Treasurer of the Company from September 1988 through August
2004, and Chief Operating Officer from April 2003 through October 2004.
Following the passing of Stephen C. Knepper in August 2004, Mr. Grossblatt was
appointed Chief Executive Officer in August 2004.
JAMES B. HUFF was appointed Chief Financial Officer in August 2004 and
Secretary and Treasurer in October 2004. From December 2003 until August 2004,
Mr. Huff was controller of Essex Corporation, a Columbia, Maryland based public
company which provides intelligence engineering services to federal government
agencies. From August 2002 until November 2003, Mr. Huff served as chief
financial officer of Computer Temporaries, Inc., Lanham, Maryland; from August
2000 until July 2002, he was chief financial officer of HLM Architects and
Engineering, Inc., a Charlotte, North Carolina based public company; and from
January 1990 until November 1999, Mr. Huff was chief financial officer of RMF
Engineering, Inc., Baltimore, Maryland.
-8-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Prior to July 28, 2003, our common stock, $.01 par value (the "Common
Stock") traded on the Over-The-Counter (OTC) market under the symbol USEC. On
July 28, 2003, the Common Stock began trading on the American Stock Exchange
under the symbol UUU.
As of June 21, 2005, there were 163 record holders of the Common Stock.
The closing price for the Common Stock on that date was $16.66. A four-for-three
stock dividend was paid on April 5, 2004 to stockholders of record on March 15,
2004. We have not paid any cash dividends on our common stock, and it is our
present intention to retain all earnings for use in future operations.
The following table sets forth the high and low prices for the Common
Stock for each full quarterly period during the fiscal years indicated. With
respect to the first quarter of the fiscal year ended March 31, 2004, the prices
reflect the high and low bid prices as available through the OTC market and
represent prices between dealers and do not reflect the retailer markups,
markdowns or commissions, and may not represent actual transactions. Beginning
with the second quarter of the fiscal year ended March 31, 2004, the prices
reflect the high and low sales prices as reported by the American Stock
Exchange. All prices have been adjusted to reflect the four for three stock
dividend paid on April 5, 2004.
Fiscal Year Ended March 31, 2005
First Quarter High $17.60
Low $10.75
Second Quarter High $13.30
Low $10.00
Third Quarter High $15.24
Low $10.35
Fourth Quarter High $19.08
Low $13.97
Fiscal Year Ended March 31, 2004
First Quarter High $ 8.55
Low $ 5.62
Second Quarter High $14.81
Low $ 7.69
Third Quarter High $13.35
Low $10.88
Fourth Quarter High $13.49
Low $10.80
Information regarding our equity compensation plans is set forth in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and
issued in conjunction with the 2004 Annual Meeting of Stockholders (the "Proxy
Statement") in the Section entitled "Executive Compensation" and is incorporated
herein by reference.
-9-
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and is qualified by reference to, the consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report on Form 10-K. The Statement of Operations data and the Balance
Sheet data for the years ended, and as at, March 31, 2001, 2002, 2003, 2004 and
2005 are derived from our audited consolidated financial statements. All share
and per share amounts included in the following financial data have been
retroactively adjusted to reflect the 4-for-3 stock dividend paid on April 5,
2004 to shareholders of record on March 15, 2004.
Year Ended March 31,
--------------------
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Net sales $ 23,465,443 $ 17,201,116 $ 15,953,883 $ 10,480,829 $ 7,731,501
Income (loss) before equity in
earnings (loss) of Hong Kong Joint
Venture and income taxes 765,742 429,716 279,615 (976,063) (799,183)
Net income (loss) 3,417,854 2,571,026 2,400,318 261,625 (758,940)
Per common share:
Net income (loss)
Basic 2.13 1.69 1.66 0.21 (0.63)
Diluted 1.94 1.49 1.54 0.21 (0.63)
Weighted average number of common
shares outstanding
Basic 1,602,449 1,516,846 1,443,439 1,251,499 1,216,360
Diluted 1,764,474 1,725,206 1,561,745 1,261,027 1,216,360
Balance Sheet Data:
Total assets 16,049,948 11,098,916 8,382,043 5,182,462 5,945,690
Long-term debt (non-current) -- -- 7,224 22,396 45,088
Working capital (1) 6,317,231 4,200,170 2,377,688 402,425 585,032
Current ratio (1) 3.00:1 3.21:1 2.26:1 1.27:1 1.23:1
Shareholders' equity 12,897,668 9,198,272 6,493,415 3,681,273 3,303,304
(1) Working capital is computed as the excess of current assets over current
liabilities. The current ratio is calculated by dividing current assets by
current liabilities.
Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations for fiscal years 2005 and 2004 are
summarized as follows:
-----------------------------------------------------------
Quarter Ended
-----------------------------------------------------------
June 30, September 30, December 31, March 31,
-------- ------------- ------------ ---------
2005
Net sales $4,874,782 $6,622,221 $5,849,144 $6,119,296
Gross profit 1,484,713 2,121,788 1,825,828 1,887,499
Net income 766,297 1,043,836 793,569 814,152
Net income per share - basic 0.49 0.66 0.49 0.49
Net income per share - diluted 0.44 0.59 0.45 0.46
2004
Net sales $4,431,950 $4,998,483 $3,838,192 $3,932,491
Gross profit 1,460,245 1,575,707 1,230,667 1,531,957
Net income 852,498 740,446 493,792 484,290
Net income per share - basic 0.57 0.49 0.33 0.30
Net income per share - diluted 0.51 0.43 0.29 0.26
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
When used in this discussion and elsewhere in this Annual Report on Form
10-K, the words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. We caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and readers are advised that various factors, including
regional and national economic conditions, unfavorable judicial decisions,
substantial changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory factors
could affect our financial performance and could cause our actual results for
future periods to differ materially from those anticipated or projected. We do
not undertake and specifically disclaim any obligation to update any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
General
We are in the business of marketing and distributing safety and security
products which are primarily manufactured through our 50%-owned Hong Kong Joint
Venture. Our financial statements detail our sales and other operational results
only, and report the financial results of the Hong Kong Joint Venture using the
equity method. Accordingly, the following discussion and analysis of the fiscal
years ended March 31, 2005, 2004 and 2003 relate to the operational results of
the Company only. A discussion and analysis of the Hong Kong Joint Venture's
operational results for these periods is presented below under the heading "Hong
Kong Joint Venture."
Comparison of Results of Operations for the Years Ended March 31, 2005, 2004 and
2003
Sales. In fiscal year 2005, our net sales increased by $6,264,327 (36%),
from $17,201,116 in fiscal 2004 to $23,465,443 in fiscal 2005. We experienced an
increase of approximately $3,084,000 in sales to the Company's retail and
wholesale distribution customers over the prior year principally as a result of
increased volume. Our focus on marketing to the electrical distribution trade
through our USI Electric subsidiary generated an increase in sales, also
principally due to increased volume, to this market of approximately $3,180,000
(from approximately $13,300,000 in 2004 to approximately $16,480,000 in 2005).
We anticipate continued revenue growth in all our markets.
In fiscal year 2004, sales increased by $1,247,233 (8%) from $15,953,883
in fiscal 2003 to $17,201,116 in fiscal 2004. Our focus on marketing to
retailers, including the wholesale distribution trades, generated the majority
of the increase.
Gross Profit. Gross profit as a percentage of net sales (or "gross
margin") in fiscal 2005 was 31.2% compared to 33.7% and 31.2% in fiscal 2004 and
2003, respectively. The decrease in gross margin in the fiscal year ended March
31, 2005 reflects higher costs and pricing concessions applied to meet
competitive pressures. The increase in gross margin for the year ended March 31,
2004 resulted from increased productivity and efficiency. During fiscal 2004 we
were able to increase gross margins by increasing sales. Since fixed costs did
not increase at the same rate as sales, the gross margin percentage as a percent
of sales increased as sales increased. Management does not anticipate a
near-term need to increase fixed costs.
Expenses. Selling, general and administrative expenses for fiscal 2005
increased by $1,180,242 (23.55%) from $5,010,783 in fiscal 2004 to $6,191,025 in
fiscal 2005. As a percentage of net sales, these expenses decreased to 26.4% for
the fiscal year ended March 31, 2005 from 29.1% for the fiscal year ended March
31, 2004. The decrease in selling, general and administrative expense as a
percent of sales is attributable to costs that do not increase proportionately
with the higher sales volume. Various expense categories contributed to the
increased dollar amount of the expense, but the following major account
classifications were significant factors in this dollar increase: (i)
Commissions and freight charges, as a percentage of sales, while consistent with
commissions and freight charges of the prior year, vary directly with sales
volume. Therefore, of the $1,180,242 increase in expenses, $224,165 is
attributable to commissions and freight charges from higher sales volume during
the 2005 period. (ii) Professional fees increased by $558,370 to $1,082,353 for
the fiscal year ended March 31, 2005. Costs associated with the Kovens
litigation discussed under Item 3, "Legal Proceedings," were approximately
$880,000 for the fiscal year ended March 31, 2005, as compared to $79,768 for
the prior fiscal year. Professional fees associated with the patent litigation
decreased by approximately $129,000 to approximately $171,000 for the fiscal
year ended March 31, 2005. Professional fees associated with patent litigation
for the 2005 period were reduced by insurance reimbursements. The Company
believes that professional fees will continue at increased levels until
outstanding litigation matters are resolved.
-11-
In fiscal year 2004, selling, general and administrative expenses
increased by approximately $745,202 (17%), from $4,265,581 in fiscal 2003 to
$5,010,783 in fiscal 2004. As a percentage of sales, selling, general and
administrative expenses were 29% for fiscal 2004 and 27% in fiscal 2003. The
increase in selling, general and administrative expense as a percent of sales
was due to increased sales commissions and freight, and higher legal costs
partly associated with defending the suits described under Item 3, "Legal
Proceedings." These increases were partially offset by a net gain of $146,836
from the sale of a 1.5 acre parcel of land during the second quarter of fiscal
2004.
Interest Expense. Interest expense for fiscal 2005 increased to $85,521
from $83,589 in fiscal 2004 primarily due to higher interest rates. Interest
expense for fiscal 2004 decreased to $83,589 from $153,168 in fiscal 2003
primarily due to lower interest rates and lower levels of debt.
Income Taxes. We did not make a provision for federal income taxes in each
of the 2005, 2004 and 2003 fiscal years, due to our operating loss carryforward
for income tax purposes. However, we made a provision of $5,250 and $24,001 for
state income taxes for fiscal year 2005 and 2004, respectively. The valuation
allowance previously established to offset tax benefits associated with our net
operating loss carryforwards and other deferred tax assets was reduced during
the fourth quarter by $286,387 resulting in a net income tax benefit of
$281,137. The valuation allowance is heavily influenced by historical results of
operations and management believes recent operating results support the
recognition of a portion of the income tax benefits associated with realization
of net operating loss carryforwards and other deferred tax assets. We will
continue to monitor the remaining valuation allowance of $776,523 which offsets
future tax benefits associated with net operating loss carryforwards and other
deferred tax assets until circumstances indicate the allowance is no longer
required.
Net Income. We reported net income of $3,417,854 for fiscal year 2005
compared to a net income of $2,571,026 for fiscal year 2004, a $846,828 (33%)
increase. This increase in net income resulted from both higher gross profit,
partially offset by higher selling, general and administrative expenses as
described above, and higher Hong Kong Joint Venture earnings and the income tax
benefit of $281,137 arising principally from the reduction of the deferred tax
valuation allowance.
We reported net income of $2,571,026 for fiscal year 2004 compared to a
net income of $2,400,318 for fiscal year 2003, a $170,708 (7%) increase. This
increase in net income resulted from both higher Hong Kong Joint Venture
earnings and higher gross profit, partially offset by higher selling, general
and administrative expenses as described above.
Financial Condition, Liquidity and Capital Resources
Our cash needs are currently met by funds generated from operations and
from our Factoring Agreement, which supplies both short-term borrowings and
letters of credit to finance foreign inventory purchases. The maximum we may
borrow under this Agreement is $7,500,000. However, based on specified
percentages of our accounts receivable and inventory and letter of credit
commitments, at March 31, 2005, our maximum borrowing amount was limited to
$4,743,416, all of which was available under this Agreement as of March 31,
2005. The outstanding principal balance under this Agreement is payable upon
demand. The interest rate on the Factoring Agreement, on the uncollected
factored accounts receivable and any additional borrowings is equal to the prime
rate of interest charged by the factor which, as of March 31, 2005, was 5.75%.
The borrowings are collateralized by all our accounts receivable and inventory.
During the year ended March 31, 2005, working capital (computed as the excess of
current assets over current liabilities) increased by $2,117,061, from
$4,200,170 on March 31, 2004, to $6,317,231 on March 31, 2005.
Our operating activities used cash of $1,098,082 for the year ended March
31, 2005. For the fiscal year ended March 31, 2004, operating activities used
cash of $292,716. This increase of $805,366 was primarily due to higher levels
of accounts receivable and undistributed Joint Venture earnings partially offset
by higher net income.
Our investing activities provided cash of $704,860 during fiscal 2005 and
provided cash of $329,213 during fiscal 2004. This increase resulted primarily
from higher distributions from the Joint Venture. During 2005, as in prior
years, the Company offset its distributions from the Hong Kong Joint Venture
with amounts due by the Company to the Hong Kong Joint Venture for the purchase
of safety products. The Company offset $458,940 during fiscal 2005 and
$1,164,608 during fiscal 2004 of trade amounts due by it to the Hong Kong Joint
Venture in lieu of cash distributions. The Company records these payments as a
non-cash transaction in its statement of cash flows.
-12-
Financing activities in 2005 provided the Company with cash of $264,319,
primarily due to the exercise of employee stock options. Financing activities in
2004 provided cash of $100,581 which was also primarily from the exercise of
employee stock options.
Hong Kong Joint Venture
The financial statements of the Hong Kong Joint Venture are included in
this Form 10-K beginning on page JV-1. The reader should refer to these
financial statements for additional information. There are no material Hong Kong
- -- U.S. GAAP differences in the Hong Kong Joint Venture's accounting policies.
In fiscal year 2005, sales of the Hong Kong Joint Venture were $25,899,630
compared to $24,114,967 and $23,365,301 in fiscal years 2004 and 2003,
respectively.
Net income was $5,005,886 for fiscal year 2005 compared to net income of
$4,171,334 and $4,755,540 in fiscal years 2004 and 2003, respectively. The
increase in the current fiscal year is primarily attributable to higher gross
margins due to price increases instituted during the fiscal year ended March 31,
2005. The decrease in income for the year ended March 31, 2004 was due primarily
to lower gross margins due to competition and higher manufacturing costs.
Gross margins of the Hong Kong Joint Venture for fiscal 2005 increased to
33.55% from 30.6% in the prior fiscal year. The primary reason for this increase
was price increases instituted during the fiscal year ended March 31, 2005. At
March 31, 2004, the Hong Kong Joint Venture's gross margin decreased to 30.6%
from 33.7% at March 31, 2003. The primary reason for this decrease was lower
gross margins attributed to competition and higher costs.
Selling, general and administrative expenses of the Hong Kong Joint
Venture were $3,495,678, $2,971,274 and $2,806,412 for fiscal years 2005, 2004
and 2003, respectively. As a percentage of sales, these expenses were 13%, 12%
and 12% for fiscal years 2005, 2004 and 2003, respectively. The increase in
dollars of selling, general and administrative expenses each year was due
partially to higher costs and partially due to higher sales volume as well as
increased legal expense.
Interest income net of interest expense was $30,666 for fiscal year 2005,
compared to $45,795 and $2,315 in fiscal years 2004 and 2003, respectively. The
decrease in interest income for 2005 was due to a reduction in investments in
bonds, and the increase in interest income for 2004 was due to returns on
investments in higher yielding bonds.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During fiscal year 2005, working capital increased by
$275,110 from $1,318,657 on March 31, 2004 to $1,593,767 on March 31, 2005. We
are not in a position to quantify any funds which may be available to the Hong
Kong Joint Venture from any IPO proceeds, if an IPO by the Hong Kong Joint
Venture is completed (as previously discussed).
Contractual Obligations and Commitments
The following table presents, as of March 31, 2005, our significant fixed
and determinable contractual obligations to third parties by payment date.
Further discussion of the nature of each obligation is included in Note E to the
consolidated financial statements. Subsequent to March 31, 2005, the Company
exercised its option to extend the operating lease on its corporate offices
until October 2008.
Payment due by period
Less than 1-3 3-5 More than
Total 1 year years years 5 years
Operating Lease Obligations $281,141 $98,333 $182,808 -- --
======== ======= ======== = =
Critical Accounting Policies
Management's discussion and analysis of our consolidated financial
statements and results of operations are based upon our Consolidated Financial
Statement included as part of this document. The preparation of these
consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate these estimates, including those related to bad
debts, inventories, income taxes, and contingencies and litigation. We base
these estimates on historical experiences and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily available from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
-13-
We believe that the following critical accounting policies affect
management's more significant judgments and estimates used in the preparation of
its consolidated financial statements. For a detailed discussion on the
application on these and other accounting policies see Note A to the
consolidated financial statements included in this Annual Report. Certain of our
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty and actual results could differ from these estimates. These
judgments are based on our historical experience, terms of existing contracts,
current economic trends in the industry, information provided by our customers,
and information available from outside sources, as appropriate. Our critical
accounting policies include:
Our revenue recognition policies are in compliance with Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements" issued by the
Securities and Exchange Commission. Revenue is recognized at the time product is
shipped and title passes pursuant to the terms of the agreement with the
customer, the amount due from the customer is fixed and collectibility of the
related receivable is reasonably assured. We established allowances to cover
anticipated doubtful accounts based upon historical experience.
Inventories are valued at the lower of market or cost. Cost is determined
on the first-in first-out method. We have recorded a reserve for obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. Management reviews the reserve quarterly.
We currently have significant deferred tax assets resulting from tax
credit carryforwards, net operating loss carryforwards and deductible temporary
differences, which will reduce taxable income in future periods. We have
provided a valuation allowance on future tax benefits such as foreign tax
credits, foreign net operating losses, capital losses and net operating losses.
A valuation allowance is required when it is more likely than not that all or a
portion of a deferred tax asset will not be realized. Forming a conclusion that
a valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses and losses in recent years. Cumulative losses weigh
heavily in the overall assessment. As a result of management's assessment, the
valuation allowance was reduced by $286,387, resulting in a net income tax
benefit of $281,137, recognized in the fourth quarter and for the year ended
March 31, 2005. As a result, an allowance of $776,523 continues to be provided
to offset tax benefits associated with net operating loss carryforwards and
other deferred tax assets at March 31, 2005.
We are subject to lawsuits and other claims, related to patents and other
matters. Management is required to assess the likelihood of any adverse
judgments or outcomes to these matters, as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies is based on a careful analysis of each individual issue with the
assistance of outside legal counsel. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued FAS
150 "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity," which establishes standards for the classification of
certain financial instruments as a liability (or an asset in some circumstances)
whereas many of those instruments were previously classified as equity. The
provisions of FAS 150 are generally effective for such instruments entered into
or modified after May 31, 2003. For the fiscal years ended March 31, 2003, 2004
and 2005, we have not issued any financial instruments which have the
characteristics within the scope of or that are within the requirements of FAS
150.
In December 2004, the Financial Accounting Standards Board, or FASB,
issued FASB Statement No. 123R, "Share-Based Payment," which requires companies
to expense the value of employee stock options and similar awards. The effective
date of FASB 123R is for interim and annual periods beginning after June 15,
2005. Subsequently, the Securities and Exchange Commission (SEC) approved a rule
which delays the effective date of FAS 123R for certain public companies. Under
the SEC's rule, FAS 123R is now effective for the Company's annual period
beginning April 1, 2006. We have elected to defer adoption of the change to the
fair value based method of accounting for stock-based employee compensation and
the recordation of such amounts as charges to operating expense until the annual
period beginning April 1, 2006.
-14-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal financial instrument is our Factoring Agreement which
provides for interest at the factor's prime rate (5.75% at March 31, 2005). We
are affected by market risk exposure primarily through the effect of changes in
interest rates on amounts payable by us under our Factoring Agreement. A
significant rise in the prime rate could materially adversely affect our
business, financial condition and results of operations. At March 31, 2005, we
had $483,416 principal outstanding under the facility. If principal amounts
outstanding under our Factoring Agreement remained at this year-end level for an
entire year and the prime rate increased or decreased, respectively, by 0.5%, we
would pay or save, respectively, an additional $2,417 in interest in that year.
We do not utilize derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8
are included in the Company's Consolidated Financial Statements and set forth in
the pages indicated in Item 15(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by us in the reports that we file or submit under the Securities
and Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and is accumulated and communicated to
management in a timely manner. Our Chief Executive Officer and Chief Financial
Officer have evaluated this system of disclosure controls and procedures as of
the end of the period covered by this annual report, and believe that the system
is effective. There have been no changes in our internal control over financial
reporting during the most recent fiscal year that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Management is aware that there is a lack of segregation of duties at the
Company due to the small number of employees dealing with general administrative
and financial matters. However, at this time management has decided that
considering the employees involved and the control procedures in place, the
risks associated with such lack of segregation are insignificant and the
potential benefits of adding employees to clearly segregate duties do not
justify the expenses associated with such increases. Management will
periodically review this situation.
-15-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the identity and business experience of
the directors of the Company and their remuneration set forth in the section
captioned "Election of Directors" in the Proxy Statement is incorporated herein
by reference. The information with respect to the identity and business
experience of executive officers of the Company is set forth in Part I of this
Form 10-K. The information with respect to the Company's Audit Committee is
incorporated herein by reference to the section captioned "Meetings and
Committees of the Board of Directors" in the Proxy Statement. The information
with respect to compliance with Section 16(a) of the Exchange Act is
incorporated herein by reference to the section captioned "Compliance With
Section 16(a) of the Exchange Act" in the Proxy Statement. The information with
respect to the Company's Code of Ethics is incorporated herein by reference to
the section captioned "Code of Ethics" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the sections captioned "Director Compensation" and "Executive Compensation"
in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference
to the sections captioned "Beneficial Ownership" and "Information Regarding
Share Ownership of Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference
to the section captioned "Independent Registered Public Accountants" in the
Proxy Statement.
-16-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements.
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of March 31, 2005 and 2004 F-2
Consolidated Statements of Income for the Years Ended March 31, 2005,
2004 and 2003 F-3
Consolidated Statements of Shareholders' Equity for the Years Ended March 31,
2005, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the Years Ended March 31, 2005,
2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6
(a) 2. Financial Statement Schedules.
Schedule II - Valuation of Qualifying Accounts S-1
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K.
Exhibit No.
3.1 Articles of Incorporation (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1988,
File No. 0-7885)
3.2 Articles Supplementary, filed October 14, 2003 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K
filed October 31, 2002, file No. 0-7885)
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3 to the
Company's Form 8-A/A filed July 24, 2003)
10.1 Non-Qualified Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2003, File No. 0-7885)
10.2 Hong Kong Joint Venture Agreement, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year ended March 31, 2003, File No. 0-7885)
10.3 Amended Factoring Agreement with CIT Group (successor to Congress
Talcott, Inc.) dated November 14, 1999 (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 0-7885)
10.4 Amendment to Factoring Agreement with CIT Group (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 0-7885)
10.5 Amendment to Factoring Agreement with CIT Group dated September 28,
2004 (incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 2004,
File No. 0-7885)
10.6 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, Maryland
21117 (incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended March 31, 2000,
File No. 0-7885)
10.7 Amended and Restated Employment Agreement dated April 1, 2003 between
the Company and Harvey B. Grossblatt (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 0-7885)
14 Code of Ethics (incorporated by reference to Exhibit 14 to the
Company's Annual Report on Form 10-K for the year ended March 31,
2004, File No. 0-7885)
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit
14 to the Company's Annual Report on Form 10-K for the year ended
March 31, 2004, File No. 0-7885)
23.1 Consent of Grant Thornton LLP*
23.2 Consent of Grant Thornton LLP (Hong Kong)*
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1 Section 1350 Certifications*
99.1 Press Release dated June 29, 2005*
*Filed herewith
-17-
(d) Financial Statements Required by Regulation S-X.
Separate financial statements of the Hong Kong Joint Venture
Independent Auditors' Report JV-1
Report of Independent Registered Public Accounting Firm JV-2
Consolidated Income Statement JV-3
Consolidated Balance Sheet JV-4
Balance Sheet JV-5
Consolidated Statement of Changes in Equity JV-6
Consolidated Cash Flow Statement JV-7
Notes to Financial Statements JV-8
-18-
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.
June 29, 2005 By: /s/ Harvey B. Grossblatt
----------------------------------------
Harvey B. Grossblatt
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Harvey B. Grossblatt President, Chief Executive Officer June 29, 2005
- ------------------------------------ and Director
Harvey B. Grossblatt
/s/ James B. Huff Chief Financial Officer June 29, 2005
- ------------------------------------
James B. Huff
/s/ Cary Luskin Director June 29, 2005
- -------------------------------------
Cary Luskin
/s/ Ronald A. Seff, M.D. Director June 29, 2005
- -------------------------------------
Ronald A. Seff
/s/ Howard Silverman, Ph.D. Director June 29, 2005
- -------------------------------------
Howard Silverman, Ph.D.
-19-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the 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, 2005
and 2004, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of the
Hong Kong Joint Venture which is accounted for using the equity method for the
year ended March 31 2003. The Company's equity in earnings of $2,120,703 for the
year ended March 31, 2003 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 the Hong Kong Joint Venture,
is based on the report of the other auditors for the year ended March 31, 2003.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, 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
financial position of Universal Security Instruments, Inc. and subsidiaries as
of March 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited Schedule II for each of the three years in the period ended
March 31, 2005. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required therein.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
June 17, 2005
F-1
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS March 31
--------
2005 2004
------------ ------------
CURRENT ASSETS
Cash $ 59,287 $ 188,190
Accounts receivable:
Trade less allowance for doubtful accounts of $15,000 at
March 31, 2005 and 2004 1,014,757 90,852
Employees 21,503 23,770
------------ ------------
1,036,260 114,622
Amount due from factor 3,394,084 2,823,300
Inventories, net 4,834,486 2,867,650
Prepaid expenses 145,394 107,052
------------ ------------
TOTAL CURRENT ASSETS 9,469,511 6,100,814
DEFERRED TAX ASSET 351,780 56,899
INVESTMENT IN HONG KONG JOINT VENTURE 6,131,481 4,832,286
PROPERTY AND EQUIPMENT - NET 81,690 93,431
OTHER ASSETS 15,486 15,486
------------ ------------
TOTAL ASSETS $ 16,049,948 $ 11,098,916
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,725,402 $ 1,229,602
Accrued liabilities:
Litigation reserve 806,679 237,546
Payroll, commissions and other 620,199 426,272
Current obligations under capital lease -- 7,224
------------ ------------
TOTAL CURRENT LIABILITIES 3,152,280 1,900,644
------------ ------------
LONG-TERM CAPITAL LEASE OBLIGATIONS -- --
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized 20,000,000 shares;
issued and outstanding 1,652,998 and 1,552,896 shares at March 31, 2005
and March 31, 2004, respectively 16,530 15,529
Additional paid-in capital 11,469,444 11,188,903
Retained earnings (accumulated deficit) 1,411,694 (2,006,160)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 12,897,668 9,198,272
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,049,948 $ 11,098,916
============ ============
See notes to consolidated financial statements
F-2
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31
2005 2004 2003
------------ ------------ ------------
Net sales $ 23,465,443 $ 17,201,116 $ 15,953,883
Cost of goods sold 16,145,615 11,402,540 10,980,067
------------ ------------ ------------
GROSS PROFIT 7,319,828 5,798,576 4,973,816
Research and development expense 277,540 270,164 284,552
Selling, general and administrative expense 6,191,025 5,010,783 4,265,581
------------ ------------ ------------
Operating income 851,263 517,629 423,683
------------ ------------ ------------
Other income (expense):
Interest expense (85,521) (83,589) (153,168)
Other -- (4,324) 9,100
------------ ------------ ------------
(85,521) (87,913) (144,068)
------------ ------------ ------------
INCOME BEFORE EQUITY IN EARNINGS OF
HONG KONG JOINT VENTURE AND
INCOME TAXES 765,742 429,716 279,615
Earnings from Hong Kong Joint Venture:
Equity in earnings of Hong Kong Joint Venture 2,370,975 2,165,311 2,120,703
------------ ------------ ------------
Net income before income taxes 3,136,717 2,595,027 2,400,318
Provision for income tax (benefit) expense (281,137) 24,001 --
------------ ------------ ------------
NET INCOME $ 3,417,854 $ 2,571,026 $ 2,400,318
============ ============ ============
Net income per share:
Basic $ 2.13 $ 1.69 $ 1.66
Diluted $ 1.94 $ 1.49 $ 1.54
Shares used in computing net income per share:
Basic 1,602,449 1,516,846 1,443,439
Diluted 1,764,474 1,725,206 1,561,745
See notes to consolidated financial statements.
F-3
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Retained
Shares Amount Paid-In Capital Earnings Total
------------ ------------ --------------- ------------ ------------
Balance at March 31, 2002 1,346,360 $ 13,464 $ 10,645,313 $ (6,977,504) $ 3,681,273
Issuance of common stock from the
exercise of employee stock options 54,333 543 92,082 -- 92,625
Issuance of common stock 68,000 680 249,320 -- 250,000
Stock issued in lieu of directors fees 9,299 93 29,907 -- 30,000
Stock issued in satisfaction of accrued
compensation 17,984 180 39,019 -- 39,199
Net income -- -- -- 2,400,318 2,400,318
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2003 1,495,976 $ 14,960 $ 11,055,641 $ (4,577,186) $ 6,493,415
Issuance of common stock from the
exercise of employee stock options 56,297 563 124,692 -- 125,255
Stock issued in lieu of directors fees 756 7 9,993 -- 10,000
Retired stock (133) (1) (1,423) -- (1,424)
Net income -- -- -- 2,571,026 2,571,026
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2004 1,552,896 $ 15,529 $ 11,188,903 ($ 2,006,160) $ 9,198,272
Fractional shares unissued from 4-for-3 split (129) (1) -- -- (1)
Issuance of common stock from the
exercise of employee stock options 99,281 992 270,551 -- 271,543
Stock issued in lieu of directors fees 950 10 9,990 -- 10,000
Net income -- -- -- 3,417,854 3,417,854
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2005 1,652,998 $ 16,530 $ 11,469,444 $ 1,411,694 $ 12,897,668
============ ============ ============ ============ ============
See notes to consolidated financial statements
F-4
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES 2005 2004 2003
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 3,417,854 $ 2,571,026 $ 2,400,318
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 34,048 33,218 38,077
Stock issued to directors in lieu of fees 10,000 10,000 30,000
Change in allowance for doubtful accounts -- 5,000 (58,358)
Inventory reserve write-down -- 1,741 (10,000)
Gain on sale of land -- (175,965) --
Earnings of the Hong Kong Joint Venture (2,485,302) (2,165,311) (2,120,703)
Changes in operating assets and liabilities:
Increase in accounts receivable and amounts due from factor (1,204,719) (2,095,514) (594,447)
(Increase) decrease in inventories (1,966,836) 354,838 (1,656,235)
(Increase) decrease in prepaid expenses (38,342) 29,291 (27,105)
Increase in accounts payable and accrued expenses 1,430,096 1,199,873 1,937,957
(Increase) in other assets -- (4,014) (1,377)
(Increase) in deferred taxes (294,881) (56,899) --
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,098,082) (292,716) (61,873)
INVESTING ACTIVITIES:
Cash distributions from Joint Venture 727,167 -- --
Purchase of equipment (22,307) (20,787) (16,892)
Gross proceeds from sale of land -- 350,000 --
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 704,860 329,213 (16,892)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net (repayments) borrowings of short-term debt -- -- (216,959)
Principal payments of capital lease obligations (7,224) (23,250) (15,172)
Proceeds from issuance of common stock from exercise
of employee stock options 271,543 125,255 92,625
Proceeds from issuance of common stock -- -- 250,000
Retirement of common stock -- (1,424) --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 264,319 100,581 110,494
----------- ----------- -----------
(DECREASE) INCREASE IN CASH (128,903) 137,078 31,729
Cash at beginning of period 188,190 51,112 19,383
----------- ----------- -----------
CASH AT END OF PERIOD $ 59,287 $ 188,190 $ 51,112
=========== =========== ===========
Supplemental information:
Interest paid $ 85,521 $ 83,589 $ 153,168
Income taxes paid $ 17,000 $ 24,001 $ --
Non-cash investing transactions:
Issuance of 950 shares in 2005, 756 shares in 2004 and 6,974 shares
in 2003 in lieu of directors fees and accrued compensation 10,000 10,000 30,000
Issuance of 13,488 shares of common stock in satisfaction
of accrued compensation $ -- $ -- $ 39,199
Repayment of trade payables due the Hong Kong Joint Venture
in lieu of cash distributions $ 458,940 $ 1,164,608 $ 1,279,187
See notes to consolidated financial statements
F-5
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 smoke alarms
and other safety 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 all
of its safety and other products from foreign manufacturers. 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 and currency
fluctuations.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation. We
believe that our 50% ownership interest in the Hong Kong Joint Venture allows us
to significantly influence the operations of the Hong Kong Joint Venture. As
such, we account for our interest in the Hong Kong Joint Venture using the
equity method of accounting. We have included our investment balance as a
non-current asset and have included our share of the Hong Kong Joint Venture's
income in our consolidated statement of operations. The investment and earnings
are adjusted to eliminate intercompany profits.
Use of Estimates: In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America (US
GAAP), management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the 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.
Revenue Recognition: We recognize sales upon shipment of products net of
applicable provisions for any discounts or allowances. We believe that the
shipping date from our warehouse is the appropriate point of revenue recognition
since upon shipment we have substantially completed our obligations which
entitle us to receive the benefits represented by the revenues, and the shipping
date provides a consistent point upon which to measure revenue. Customers may
not return, exchange or refuse acceptance of goods without our approval. We have
established allowances to cover anticipated doubtful accounts based upon
historical experience.
Warranties: We generally provide warranties from one to ten years to the
non-commercial end user on all products sold. The manufacturers of our products
provide us with a one-year warranty on all products we purchase for resale.
Claims for warranty replacement of products beyond the one-year warranty period
covered by the manufacturers have not been historically material and we do not
record estimated warranty expense or a contingent liability for warranty claims.
Stock-Based Compensation: We account for stock-based employee compensation using
the intrinsic value method, which calculates compensation expense based on the
difference, if any, on the date of the grant, between the fair value of our
stock and the option exercise price. US GAAP requires companies who choose to
account for stock option grants using the intrinsic value method to also
determine the fair value of option grants using an option pricing models, such
as the Black-Scholes models, and to disclose the impact of fair value accounting
in a note to the financial statements. In December 2004, the Financial
Accounting Standards Board, or FASB, issued FASB Statement No. 123R,
"Share-Based Payment," which requires companies to expense the value of employee
stock options and similar awards. The effective date of FASB 123R is for interim
and annual periods beginning after June 15, 2005. Subsequently, the Securities
and Exchange Commission (SEC) approved a rule which delays the effective date of
FAS 123R for certain public companies. Under the SEC's rule, FAS 123R is now
effective for the Company's annual period beginning April 1, 2006. We have
elected to defer adoption of the change to the fair value based method of
accounting for stock-based employee compensation and the recordation of such
amounts as charges to operating expense until the annual period beginning April
1, 2006.
F-6
The following table illustrates the effect on net income and net income per
share had compensation costs for the stock-based compensation plan been
determined based on the grant date fair values of awards.
Year Ended March 31
2005 2004 2003
------------- ------------- -------------
Net income, as reported $ 3,417,854 $ 2,571,026 $ 2,400,318
Stock-based employee compensation costs, net of
income tax, included in net income 10,000 10,000 30,000
Deduct: Total stock-based employee compensation
expense determined under fair value, net of
related tax effects (144,672) (91,111) (113,939)
------------- ------------- -------------
Pro forma net income $ 3,283,182 $ 2,489,915 $ 2,316,379
============= ============= =============
Earnings per share:
Basic - as reported 2.13 1.69 1.66
Basic - pro forma 2.05 1.64 1.60
Diluted - as reported 1.94 1.49 1.54
Diluted - pro forma 1.86 1.44 1.48
Research and Development: Research and development costs are charged to
operations as incurred.
Accounts Receivable: In September, 2000, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS No. 140), which is effective for transfers of financial
assets occurring after March 31, 2001.
In fiscal year 2002, the Company achieved the sales criteria of SFAS No. 140,
and, as such, amounts transferred under the Company's Factoring Agreement are
treated as sales.
Beginning in fiscal year 2002, with the achievement of SFAS 140 sales criteria,
the Company nets the factored accounts receivable with the corresponding advance
from the Factor, showing the amount net in its consolidated balance sheet.
The Company sells trade receivables on a pre-approved non-recourse basis to the
Factor under the Factoring Agreement on an ongoing basis. Factoring charges
recognized on sales of receivables are included in selling, general and
administrative expenses in the consolidated statements of income and amounted to
$208,913, $167,561 and $160,125 for the years ended March 31, 2005, 2004 and
2003, respectively. The Agreement for the sale of accounts receivable provides
for continuation of the program on a revolving basis until terminated by one of
the parties to the Agreement.
Shipping and Handling Fees and Costs: The Company includes shipping and handling
fees billed to customers in net sales. Shipping and handling costs associated
with inbound freight are included in cost of goods sold. Shipping and handling
costs associated with outbound freight are included in selling, general and
administrative expenses and totaled $702,779, $521,556 and $498,179 in fiscal
years 2005, 2004 and 2003, respectively.
Inventories: Inventories (consisting primarily of finished goods) 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 overhead costs, freight, import duty and inspection fees of
$514,373 and $171,524 at March 31, 2005 and 2004, respectively. Inventories are
shown net of an allowance for inventory obsolescence of $100,000 for the fiscal
years ending March 31, 2005 and 2004, respectively.
The Company reviews inventory quarterly to identify slow moving products and
valuation allowances are provided when deemed necessary.
F-7
Property and Equipment: Property and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
provided by using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. The estimated useful lives for
financial reporting purposes are as follows:
Leasehold improvements - Term of lease
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Income Taxes: The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax basis 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 per Share: The Company reports basic and diluted earnings per share.
Basic earnings per share is computed by dividing net income for the period by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income for the period by
the weighted number of common shares and common share equivalents outstanding
(unless their effect is anti-dilutive) for the period. All common share
equivalents are comprised of exercisable stock options.
March 31,
2005 2004 2003
--------- --------- ---------
Common shares outstanding for basic EPS 1,602,449 1,516,846 1,443,439
Shares issued upon assumed exercise
of outstanding stock options 162,025 208,360 118,306
--------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
for diluted EPS 1,764,474 1,725,206 1,561,745
========= ========= =========
Recently Issued Accounting Standards: In May 2003, the Financial Accounting
Standards Board (FASB) issued FAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for the classification of certain financial instruments as
a liability (or an asset in some circumstances) whereas many of those
instruments were previously classified as equity. The provisions of FAS 150 are
generally effective for such instruments entered into or modified after May 31,
2003. For the fiscal years ended March 31, 2003, 2004 and 2005, we have not
issued any financial instruments which have the characteristics within the scope
of or that are within the requirements of FAS 150.
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB
Statement No. 123R, "Share-Based Payment," which requires companies to expense
the value of employee stock options and similar awards. The effective date of
FASB 123R is for interim and annual periods beginning after June 15, 2005.
Subsequently, the Securities and Exchange Commission (SEC) approved a rule which
delays the effective date of FAS 123R for certain public companies. Under the
SEC's rule, FAS 123R is now effective for the Company's annual period beginning
April 1, 2006. We have elected to defer adoption of the change to the fair value
based method of accounting for stock-based employee compensation and the
recordation of such amounts as charges to operating expense until the annual
period beginning April 1, 2006.
Reclassifications: Certain prior year amounts have been reclassified in order to
conform with current year presentation.
F-8
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
2005 2004
-------- --------
Leasehold improvements $ 73,535 $ 71,885
Machinery and equipment 158,696 158,696
Furniture and fixtures 195,873 181,889
Computer equipment 81,855 75,072
-------- --------
509,959 487,542
Less accumulated depreciation and amortization 428,269 394,111
-------- --------
$ 81,690 $ 93,431
======== ========
NOTE C - INVESTMENT IN THE 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,
2005, the Company has an investment balance of $6,159,034 for its 50% interest
in the Hong Kong Joint Venture. There are no material Hong Kong -- U.S. GAAP
differences in the Hong Kong Joint Venture's accounting policies.
The following represents summarized financial information derived from the
audited financial statements of the Hong Kong Joint Venture as of March 31, 2005
and 2004 and for the years ended March 31, 2005, 2004 and 2003.
March 31,
2005 2004
----------- -----------
Current assets $ 6,131,539 $ 5,128,208
Property and other assets 9,112,863 7,111,679
----------- -----------
Total $15,244,402 $12,239,887
=========== ===========
Current liabilities $ 4,537,772 $ 3,809,551
Non-current liabilities 24,750 9,623
----------- -----------
Equity 10,681,880 8,420,713
----------- -----------
Total $15,244,402 $12,239,887
=========== ===========
For the Year Ended March 31,
2005 2004 2003
----------- ----------- -----------
Net sales $25,899,630 $24,114,967 $23,365,301
Gross profit 8,689,538 7,375,113 7,870,436
Net income 5,005,886 4,171,334 4,755,540
During the years ended March 31, 2005, 2004 and 2003, the Company purchased
$10,513,800, $7,481,716, and $7,329,221, respectively, of finished product from
the Hong Kong Joint Venture, which represents 68%, 73% and 66%, respectively, of
the Company's total finished product purchases for the years ended at March 31,
2005, 2004 and 2003. Amounts due the Hong Kong Joint Venture included in
Accounts Payable totaled $549,527 and $494,711 at March 31, 2005 and 2004,
respectively. Amounts due from the Hong Kong Joint Venture included in Accounts
Receivable totaled $84,330 and $174,935 at March 31, 2005 and 2004,
respectively.
The Company incurred interest costs charged by the Hong Kong Joint Venture of
$17,581, $25,482 and $16,585 during the years ended March 31, 2005, 2004 and
2003, respectively, related to its purchases.
F-9
NOTE D - AMOUNTS DUE FROM FACTOR
The Company sells certain of its trade receivables on a pre-approved,
non-recourse basis to a Factor. Since these are sold on a non-recourse basis,
the factored trade receivables and related repayment obligations are not
separately recorded in the Company's consolidated balance sheets. The Agreement
provides for financing of up to a maximum of $7,500,000 with the amount
available at any one time based on 85% of uncollected non-recourse receivables
sold to the factor and 45% of qualifying inventory, which at March 31, 2005 was
$4,743,416. Any outstanding amounts due to the factor are payable upon demand
and bear interest at the prime rate of interest charged by the factor, which is
5.75% at March 31, 2005. Any amount due to the factor is also secured by the
Company's inventory.
Under this Factoring Agreement, the Company sold receivables of approximately
$20,954,000 and $15,560,000 during the years ended March 31, 2005 and 2004,
respectively. Gains and losses recognized on the sale of factored receivables
include the fair value of the limited recourse obligation. The uncollected
balance of non-recourse receivables held by the factor amounted to $3,399,130
and $2,695,465 at March 31, 2005 and 2004. The amount of the uncollected balance
of non-recourse receivables borrowed by the Company as of March 31, 2005 and
2004 is $483,416 and $0, respectively. Amounts due from the factor to the
Company amounted to $3,394,084 and $2,823,300 at March 31, 2005 and 2004,
respectively.
NOTE E - LEASES
The Company entered into capital lease agreements for various pieces of
equipment, with an outstanding balance of $0, and $7,224 as of March 31, 2005
and 2004, respectively. The leases had imputed interest rates ranging from 7.6%
to 10%, with monthly payments aggregating $929 per month.
Year Ended March 31,
2005 2004
------ ------
Obligations under capital lease $ -- $7,224
Less current maturities -- --
------ ------
$ -- $7,224
====== ======
There are no amounts due as long term capital lease obligations as of March 31,
2005.
During December 1999, the Company entered into an operating lease for its office
and warehouse which expires in October 2005. This lease is subject to renewal
for an additional three years and has increasing rentals at 3% per year.
Subsequent to March 31, 2005, the option to renew this operating lease was
exercised until October 2008. In February 2004, the Company entered into an
operating lease for an approximately 2,600 square foot office in Naperville,
Illinois. This lease, which expires in February 2006, is subject to renewal for
an additional six years with increasing rentals at 3% per year.
Rent expense totaled $97,011, $92,063 and $67,886 for the years ended March 31,
2005, 2004 and 2003, respectively. Future obligations, including the lease
renewal option exercised subsequent to March 31 2005, for the years ended March
31, under these non-cancelable operating leases are as follows:
Year Ended March 31,
2006 $ 98,333
2007 69,214
2008 71,290
2009 42,304
----------
$ 281,141
==========
F-10
NOTE F - INCOME TAXES
Universal Security Instruments, Inc. ("USI") provides for Income Taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Accordingly, deferred income tax assets and liabilities are
computed and recognized for those differences that have future tax consequences
of temporary differences that will result in net taxable or deductible amounts
in future periods. Deferred tax expense or benefit is the result of changes in
the net asset or liability for deferred taxes. The deferred tax liabilities and
assets for USI result primarily from the use of accelerated methods of
depreciation of equipment for tax purposes, reserves, inventories, accrued
liabilities and change in the unremitted earnings of the Hong Kong joint
venture.
Beginning 2004, USI will no longer recognize the deferred tax liability related
to the unremitted earnings of the Hong Kong joint venture. There is no longer a
plan to repatriate the unremitted earnings in the future, other than a possible
$850,000 payment.
USI had a net operating loss carryforward as of FYE March 31, 2004 of
$4,005,008, of which $1,194,802 was utilized in FYE March 31, 2005. This leaves
a net operating loss carryforward as of March 31, 2005 in the amount of
$2,810,388.
The components of income tax expense (benefit) for USI are as follows:
March 31,
2005 2004
--------- ---------
Current
Federal $ 21,000 $ 56,899
State 5,250 24,001
--------- ---------
26,250 80,900
Deferred (benefit) (307,387) (56,899)
--------- ---------
Total income tax (benefit) expense $(281,137) $ 24,001
========= =========
Significant components of USI's deferred tax assets and liabilities are as
follows:
March 31,
2005 2004 2003
----------- ----------- -----------
Deferred tax liabilities - unremitted earnings from Hong
Kong Joint Venture: $ -- $ 637,279 $ 1,465,270
----------- ----------- -----------
Deferred tax assets:
Financial statement accruals and allowances 220,602 250,032 232,167
Inventory uniform capitalization 56,727 89,628 72,200
Other 14,953 40,346 41,983
AMT tax credit carryforward 21,621 21,621 0
NOL carryforwards and tax credits 814,400 1,307,866 2,031,616
----------- ----------- -----------
Gross deferred tax assets 1,128,303 1,709,493 2,377,966
Valuation allowance (776,523) (1,015,315) (912,696)
----------- ----------- -----------
Net deferred tax liability (asset) $ 351,780 $ (56.899) $ 0
=========== =========== ===========
F-11
The reconciliation between the statutory federal income tax provision and the
actual effective tax provision is as follows:
Years ended March 31,
2005 2004 2003
----------- ----------- -----------
Federal tax expense at statutory rate on domestic income
(34%) before loss carryforward $ 479,200 $ 202,627 $ 95,056
Reduction in income taxes arising from carryforward of prior
years' operating losses (458,200) -- --
State income tax expense 5,250 103,582 96,013
Equity in earnings from Hong Kong Joint Venture -- 677,819 721,039
Change in valuation allowance (238,791) 102,619 (935,758)
Change in deferred tax liability of unremitted earnings from
the Hong Kong Joint Venture -- (1,142,270) --
Change in deferred tax assets (8,494) -- --
Other (60,102) 79,624 23,650
----------- ----------- -----------
Provision for income tax (benefit) expense $ (281,137) $ 24,001 $ 0
=========== =========== ===========
NOTE G - SHAREHOLDERS' EQUITY
All share and per share amounts included in the consolidated financial
statements have been retroactively adjusted to reflect the 4-for-3 stock
dividend paid on April 5, 2004 to shareholders of record on March 15, 2004.
Common Stock - During the year ended March 31, 2005, the Company issued 100,232
shares of its common stock of which 99,282 were issued on the exercise of
employee stock options for total proceeds of $271,543 and 950 shares were issued
to directors in lieu of directors fees.
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 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, 2005, the 21,667 shares remain reserved for issuance under
this Plan.
Stock Options - Under terms of the Company's 1978 Non-Qualified Stock Option
Plan, as amended, 658,333 shares of common stock are reserved for the granting
of stock options, of which 609,658 shares have been issued as of March 31, 2005,
leaving 48,675 available for issuance upon exercise of options granted, or
available for future grants to employees and directors. Of the 48,675 shares
available, 20,000 shares are further reserved pending the results of litigation
as discussed in Note H. 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 options usually vest at 25%
a year over four years. Share amounts have been retroactively adjusted to
reflect the 4-for-3 stock dividend paid on April 5, 2004 to shareholders of
record on March 15, 2004.
F-12
The following tables summarize the status of options under the Non-Qualified
Stock Option Plan at March 31, 2005 and option transactions for the three years
then ended:
Status as of March 31, 2005 Number of Shares
--------------------------- ----------------
Presently exercisable 212,914
Exercisable in future years 22,582
-------
Total outstanding 235,496
Available for future grants 48,675
Shares of common stock reserved 284,171
Outstanding options:
Number of holders 18
Average exercise price per share $ 5.73
Expiration dates June 2006 to
March 2010
Transactions for the Three Years Weighted Average
Ended March 31, 2005: Number of Shares Exercise Price
- --------------------------------------- ---------------- --------------
Outstanding at March 31, 2002 305,666
Granted 118,667 3.72
Canceled (41,333) 2.27
Exercised (54,333) 1.63
--------
Outstanding at March 31, 2003 328,667
Granted 10,666 10.53
Canceled (2,924) 1.98
Exercised (56,297) 2.21
--------
Outstanding at March 31, 2004 280,112
Granted 55,000 14.30
Canceled (334) 2.63
Exercised (99,282) 2.74
--------
Outstanding at March 31, 2005 235,496
The following table summarizes information about stock options outstanding at
March 31, 2005:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Average Weighted
Range of Number Average Contract Number Average
Exercise Price of Shares Exercise Price Life (Yrs) of Shares Exercise Price
-------------- --------- -------------- ---------- --------- --------------
$0.98 to $2.99 117,830 $1.83 1.69 110,748 $ 1.80
$3.00 to $3.99 26,666 3.38 2.00 26,666 3.38
$4.00 to $5.99 25,333 5.40 2.43 25,333 5.40
$6.00 to $15.02 65,667 13.55 4.65 50,167 14.78
------- -------
235,496 212,914
======= =======
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 in 2005, 2004 and 2003; no annual dividends, expected volatility of
45%, 53% and 80%, respectively, risk-free interest rate ranging from 4.0% to
6.5% and expected lives of five years. The weighted-average fair values of the
stock options granted in 2005, 2004 and 2003 were $6.47, $6.95 and $5.00 per
share, respectively.
F-13
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.
NOTE H - COMMITMENTS AND CONTINGENCIES
In December 2001, Leviton Manufacturing Co., Inc. filed a civil action in the
United States District Court for the District of Maryland (Case No. 01cv3855)
alleging that the Company's and its USI Electric subsidiary's ground fault
circuit interrupter (GFCI) units infringed one of plaintiff's patents and
configuration trade dress ("Leviton I"). The plaintiff can no longer obtain
injunctive relief under the now expired patent. In February 2004, the Court
ruled on various summary judgment motions pursuant to which the Court found that
as a matter of law there could be no patent infringement liability prior to
December 11, 2001 and permitted Leviton's configuration trade dress claim and
USI's patent invalidity defense to proceed to trial. The Court consolidated the
trial with "Leviton II" and bifurcated liability from damages. At this time no
trial date has been assigned. Due to the still undefined nature of the asserted
configuration trade dress, the amount of any loss to the Company from this claim
is not yet determinable. Should the Company not prevail on its defenses, any
recovery that Leviton may obtain under the patent claims would be limited to
some "reasonable royalty" for GFCI sales occurring over a period starting
December 11, 2001, for less than one year. The Company and its counsel believe
that the Company has meritorious defenses to the claims and continues to
aggressively defend against the suit.
On June 10, 2003, Leviton Manufacturing Co., Inc. filed a second civil suit
against the Company and its USI Electric subsidiary in the United States
District Court for the District of Maryland (Case No. 03cv1701), alleging this
time that the Company's GFCI units infringe one or more of its more recently
issued patents for reset lockout technology related to but not required by UL
Standard 943 for ground GFCI units, effective January 2003 ("Leviton II").
Leviton also asserted trade dress and unfair competition claims which largely
correspond to the claim in the "Leviton l" suit. On July 23, 2003, the GFCI
manufacturer, Shanghai Meihao Electric, Inc., filed an action for Declaratory
Judgment of non-infringement, invalidity, and unenforceability of the asserted
patents. The Court has bifurcated the action into liability and damage phases,
linked the supplier's Declaratory Judgment action with the action against the
Company, and consolidated Leviton I with Leviton II. In March 2005, the court
dismissed one of the Leviton patents from the suit and in April 2005, issued a
claims construction Order that favors the position of the Company. While expert
witness discovery is still ongoing, the Company expects to file summary judgment
motions based on its meritorious defenses to the patent and trade dress
infringement claims as part of its aggressive defense. In the event of an
unfavorable outcome, the amount of any potential loss to USI is not yet
determinable.
On June 11, 2003, Walter Kidde Portable Equipment, Inc. filed a civil suit
against the Company in the United States District Court for the Middle District
of North Carolina (Case No. 03cv00537), alleging that certain of the Company's
AC powered/battery backup smoke detectors infringe on a patent acquired by
Kidde. The plaintiff is seeking injunctive relief and damages to be determined
at trial. Discovery is now closed (subject to specific remaining open matters)
and Kidde has filed a pair of summary judgment motions, which USI will oppose.
The case is scheduled for trial in the Fall of 2005. The Company and its counsel
believe that the Company has significant defenses relating to the patent in
suit. In the event of an unfavorable outcome, the amount of any potential loss
to USI is not yet determinable.
On October 13, 2003, Maple Chase Company filed a civil suit in the United States
District Court for the Northern District of Illinois (Case No. 03cv07205),
against the Company, its USI Electric subsidiary, and one former and one present
Illinois-based sales representative, alleging that certain of the Company's
smoke detectors infringe on a patent owned by Maple Chase (US Reissue Patent No.
Re: 33290). On February 2, 2004, Maple Chase filed an Amended Complaint. After
answering and counterclaiming against Maple Chase, in an effort to bring about a
conclusion to the litigation, the Company successfully sought and has now
obtained re-examination of the asserted patent in the United States Patent and
Trademark Office (USPTO) based on the references cited and analysis presented by
the Company. On April 11, 2005, the Court dismissed the case with the right to
reinstitute the case pending the outcome of the proceedings in the USPTO. Apart
from granting USI's Request for Reexamination in October of 2004, no further
communications in the reexamination have been issued to date. The amount of
potential loss to the Company, if any, is not yet determinable. The Company
believes that the initiation of the reexamination based on the Company's
presentation, confirmed the veracity in its legal/equitable defenses. If
reinstituted, the Company will vigorously defend the suit and press its pending
counterclaims.
F-14
On March 31, 2005, Leviton filed still another lawsuit in the United States
District Court for the District of Maryland (Case No. 05cv0889) against the
Company ("Leviton III"). In this latest suit, Leviton accuses the Company of
infringement of US Patent 6,864,766. This case is now pending in the same Court
and before the same Judge as Leviton I and Leviton II. The Company has filed a
counterclaim against Leviton and a Motion to Stay its case in favor of a
declaratory judgment action filed by the GFCI manufacturer, Shanghai Meihao
Electric, Inc. Leviton has opposed the Motion to Stay and has replied to the
Company's counterclaim. The case is in its preliminary stages. The Company
believes that it has strong defenses relating to the patent in suit. In the
event of an unfavorable outcome, the amount of any potential loss to the Company
is not determinable at this time.
On April 23, 2004, the Company filed a civil suit against The Hartford Casualty
Insurance Company in the United States District Court for the District of
Maryland (Case No. 04cv1320), claiming that the insurer is required to indemnify
the Company from any damages and legal fees in connection with the two Leviton
patent cases. This case has been settled subject to a confidentiality agreement.
As previously reported, on September 3, 2003 the Company was advised that
Michael Kovens, a then-director, principal stockholder and the former Chairman
and chief executive officer of the Company ("Kovens"), had filed an action in
Baltimore County Circuit Court (Case No. C-03-9639) against the Company and the
other directors seeking: (i) to enjoin the Company from holding its Annual
Meeting of Stockholders on September 8, 2003 until Kovens was able to nominate
directors for election at the Annual Meeting; (ii) to require the Company to
provide Kovens with certain confidential information to which Kovens claims he
is entitled under Maryland law; (iii) to enjoin the Company from voting as proxy
any shares issued by the Company since Kovens was replaced as Chairman and CEO;
(iv) to void the employment agreement between the Company and its president, and
to enjoin the Company from enforcing a "Change of Control" provision in the
Company's president's employment agreement; (v) to void all issuances by the
Company of restricted stock and options from and after October 1, 2001; (vi) to
void any Bylaw amendments adopted by the Company from and after October 1, 2001;
(vii) to enforce the exercise of an option by Kovens to purchase 20,000 shares
of the Company's common stock at $2.25 per share which the Company maintains has
expired; (viii) to void the election by the Company, pursuant to the Maryland
General Corporation Law, to be governed by certain provisions of Maryland law;
and (ix) other unspecified relief.
The Court refused to issue a temporary restraining order requested by Kovens to
enjoin the Company and the other directors from holding the Annual Meeting,
enforcing the "Change of Control" provision in the Company's president's
employment agreement, and taking other unspecified actions. On October 2, 2003,
the Court granted the parties' joint motion to stay all proceedings in the
matter to allow the parties an opportunity to negotiate a resolution of the
dispute.
On May 28, 2004, Kovens' new counsel filed an amended complaint on behalf of
Kovens, which also includes a derivative action brought in the name of the
Company against the Company's directors claiming that the actions Kovens alleges
to have occurred amount to a breach of their fiduciary duty to the Company. The
amended complaint seeks declaratory relief for essentially the same matters
requested in the original complaint, and seeks damages from the directors in the
amount of $20 million. The Company, in accordance with its charter and bylaws,
is providing a defense for the directors named in the amended complaint and,
subject to the provisions of applicable law, is obligated to indemnify them for
any loss they might ultimately incur. In addition, Kovens is seeking an
additional $500,000 from the Company with respect to the exercise of the option
for the purchase of 20,000 shares at $2.25 per share (mentioned above) which the
Company maintains has expired. Furthermore, Kovens alleges that the Chairman and
the President of the Company interfered with certain contractual relationships
between Kovens and third parties for which Kovens is seeking damages of $25
million. The Company has been advised by counsel that the action as filed is
wholly without merit, and the Company intends to aggressively defend the action.
Discovery has been completed and the case is set for trial beginning July 18,
2005.
From time to time, the Company is involved in various lawsuits and legal
matters. It is the opinion of management, based on the advice of legal counsel,
that these matters will not have a material adverse effect on the Company's
financial statements.
F-15
NOTE I - MAJOR CUSTOMERS
The Company is primarily a distributor of safety products for use in home and
business under both its tradenames and private labels for other companies. As
described in Note C, the Company's purchased a majority of its products from its
50% owned Hong Kong Joint Venture.
There were not any customers that represented in excess of 10% of the Company's
product sales during the three years in the period ended March 31, 2005.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years 2005 and 2004 are
summarized as follows:
Quarter Ended
2005 June 30, September 30, December 31, March 31,
- ---- -------- ------------- ------------ ---------
Net sales $4,874,782 $6,622,221 $5,849,144 $6,119,296
Gross profit 1,484,713 2,121,778 1,825,828 1,887,499
Net income 766,297 1,043,836 793,569 814,152
Net income per share - basic 0.49 0.66 0.49 0.49
Net income per share - diluted 0.44 0.59 0.45 0.46
2004
- ----
Net sales $4,431,950 $4,988,483 $3,838,192 $3,932,491
Gross profit 1,460,245 1,575,707 1,230,667 1,531,957
Net income 852,498 740,446 493,792 484,290
Net income per share - basic 0.57 0.49 0.33 .30
Net income per share - diluted 0.51 0.43 0.29 .26
F-16
REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005
CONTENTS PAGE(S)
AUDITOR'S REPORT JV-1
CONSOLIDATED INCOME STATEMENT JV-2
CONSOLIDATED BALANCE SHEET JV-3
BALANCE SHEET JV-4
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY JV-5
CONSOLIDATED CASH FLOW STATEMENT JV-6
NOTES TO THE FINANCIAL STATEMENTS JV-7
Expressed in Hong Kong Dollars ("HK$")
Report of Independent Registered Public Accounting Firm
To the Board of Directors of The Joint Venture (name withheld and filed
separately with The Securities and Exchange Commission) : We have audited the
accompanying consolidated balance sheets of The Joint Venture (name withheld and
filed separately with The Securities and Exchange Commission) ("the Company"),
as of March 31, 2005 and 2004, and the related consolidated statements of
income, changes in equity, and cash flows for each of the two years in the
period ended March 31, 2005. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of March 31, 2005 and 2004, and the consolidated results of its
income and its cash flows for each of the two years in the period ended March
31, 2005, in conformity with accounting principles generally accepted in Hong
Kong.
Grant Thornton
Certified Public Accountants
Hong Kong
June 24, 2005
JV-1
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2005
Notes 2005 2004
HK$ HK$
Turnover 3 201,851,572 187,606,721
Cost of sales (134,128,970) (130,230,706)
-------------- --------------
Gross profit 67,722,602 57,376,015
Other revenue 2,550,272 1,987,172
Administrative expenses (27,242,707) (23,115,557)
-------------- --------------
Profit from operations 43,030,167 36,247,630
Finance costs 4 (239,239) (353,940)
-------------- --------------
Profit before taxation 5 42,790,928 35,893,690
Taxation 6 (3,776,352) (3,442,047)
-------------- --------------
Profit for the year 39,014,576 32,451,643
============== ==============
Dividends 7 18,508,258 29,850,506
============== ==============
JV-2
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
CONSOLIDATED BALANCE SHEET
AS AT 31 MARCH 2005
2005 2004
Notes HK$ HK$
ASSETS AND LIABILITIES
Non-current assets
Property, plant and equipment 9 44,013,441 31,438,718
Investments 10 27,047,797 23,991,361
Amount due from an investee company 11 -- --
----------- ------------
71,061,238 55,430,079
Current assets
Inventories 13 18,298,036 20,415,519
Trade and other receivables 6,146,091 6,318,366
Tax recoverable -- 414,714
Amount due from a shareholder 15 -- 2,789,192
Loan to a shareholder 16 3,900,000 --
Cash and bank balances 19,468,905 10,032,654
----------- ------------
47,813,032 39,970,445
Current liabilities
Trade and other payables 15,573,010 14,809,746
Amount due to a related company 17 3,612,866 3,182,783
Dividend payable 18 11,700,000 11,700,000
Amount due to a shareholder 17 250,995 --
Loans from shareholders 19 2,868,954 2,868,954
Provision for taxation 1,379,231 --
----------- ------------
35,385,056 32,561,483
Net current assets 12,427,976 7,408,962
----------- ------------
Total assets less current liabilities 83,489,214 62,839,041
Non-current liabilities
Provision for deferred taxation 20 193,000 75,000
----------- ------------
Net assets 83,296,214 62,764,041
=========== ============
CAPITAL AND RESERVES
Share capital 21 200 200
Reserves 22 83,296,014 62,763,841
----------- ------------
Shareholders' funds 83,296,214 62,764,014
=========== ============
JV-3
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
BALANCE SHEET
AS AT 31 MARCH 2005
(Restated)
2005 2004
Notes HK$ HK$
ASSETS AND LIABILITIES
Non-current assets
Property, plant and equipment 9 6,253,976 4,540,786
Investments 10 27,047,797 23,991,361
Interests in subsidiaries 12 50,752,225 31,042,496
----------- -----------
84,053,998 59,574,643
Current assets
Inventories 13 18,001,256 20,415,519
Other receivables 2,563,000 2,089,465
Tax recoverable -- 414,714
Amount due from a subsidiary 14 8,414,502 7,262,385
Cash and bank balances 10,362,598 7,258,898
----------- -----------
39,341,356 37,440,981
Current liabilities
Trade and other payables 13,986,626 13,568,375
Amount due to a related company 17 3,612,866 3,182,783
Dividend payable 18 11,700,000 11,700,000
Loans from shareholders 19 2,868,954 2,868,954
Provision for taxation 1,379,231 --
----------- -----------
33,547,677 31,320,112
Net current assets 5,793,679 6,120,869
----------- -----------
Total assets less current liabilities 89,847,677 65,695,512
Non-current liabilities
Provision for deferred taxation 20 193,000 75,000
=========== ===========
Net assets 89,654,677 65,620,512
=========== ===========
CAPITAL AND RESERVES
Share capital 21 200 200
Reserves 22 89,654,477 65,620,312
----------- -----------
Shareholders' funds 89,654,677 65,620,512
=========== ===========
JV-4
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2005
Exchange Retained
Share capital reserve profits Total
HK$ HK$ HK$ HK$
Balance at 1 April 2003 200 -- 60,154,326 60,154,526
Exchange differences arising on
translation of a subsidiary -- 8,378 -- 8,378
Profit for the year -- -- 32,451,643 32,451,643
Dividends -- -- (29,850,506) (29,850,506)
----------- ----------- ----------- -----------
Balance at 31 March 2004 and
1 April 2004 200 8,378 62,755,463 62,764,041
Exchange differences arising on
translation of a subsidiary -- 25,855 -- 25,855
Profit for the year -- -- 39,014,576 39,014,576
Dividends -- -- (18,508,258) (18,508,258)
----------- ----------- ----------- -----------
Balance at 31 March 2005 200 34,233 83,261,781 83,296,214
=========== =========== =========== ===========
JV-5
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2005
2005 2004
HK$ HK$
Cash flows from operating activities
Profit before taxation 42,790,928 35,893,690
Adjustments for :
Bad debts written off 138,614 --
Depreciation of property, plant and equipment 4,090,952 3,999,174
Gain on disposal of other securities (42,686) (53,820)
Gain on disposal of property, plant and equipment (343,779) --
Interest expense 239,239 353,940
Interest income (1,301,047) (710,203)
Provision for doubtful debts -- 95,641
Provision for inventories -- 132,787
Unrealised holding loss / (gain) on other securities 843,964 (592,941)
----------- -----------
Operating profit before working capital changes 46,416,185 39,118,268
Decrease in amount due to a shareholder (541,886) (7,659,679)
Decrease / (Increase) in inventories 2,117,483 (5,426,165)
Decrease / (Increase) in trade and other receivables 33,661 (1,323,849)
Increase in loan to a shareholder (3,900,000) --
Increase / (Decrease) in amount due to a related company 430,083 (252,552)
Increase / (Decrease) in trade and other payables 763,264 (925,388)
----------- -----------
Cash generated from operations 45,318,790 23,530,635
Interest received 1,301,047 484,121
Interest paid (239,239) (353,940)
Dividends paid (14,926,185) (9,075,253)
Hong Kong profits tax paid (1,864,407) (6,178,559)
----------- -----------
Net cash generated from operating activities 29,590,006 8,407,004
----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (16,671,896) (15,931,858)
Purchase of other securties (7,782,840) (31,293,580)
Proceeds from disposal of other securities 3,925,126 7,948,980
Proceeds from disposal of property, plant and equipment 350,000 --
----------- -----------
Net cash used in investing activities (20,179,610) (39,276,458)
----------- -----------
Net increase/(decrease) in cash and cash equivalents 9,410,396 (30,869,454)
Cash and cash equivalents at beginning of the year 10,032,654 40,893,730
Effect of foreign exchange rate changes, net 25,855 8,378
----------- -----------
Cash and cash equivalents at end of the year 19,468,905 10,032,654
=========== ===========
JV-6
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 MARCH 2005
1. GENERAL INFORMATION
The company was incorporated in Hong Kong with limited liability. The
principal activities of the company and the group are manufacturing and
trading of consumer electronic products including smoke, fire and carbon
monoxide alarms and other home safety products. Details of the company's
subsidiaries are set out in note 12 to the financial statements.
2. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these
financial statements are set out below :
(a) Basis of preparation
The financial statements are prepared in accordance with and comply
with all applicable Hong Kong Financial Reporting Standards issued
by the Hong Kong Institute of Certified Public Accountants
("HKICPA"). The financial statements are prepared under the
historical cost convention as modified by the revaluation of certain
investments as explained in note 2(e) below.
(b) Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the company and its subsidiaries made up to 31 March
each year. All material intra-group transactions and balances within
the group are eliminated on consolidation.
(c) Subsidiaries
Subsidiaries are those enterprises in which the company controls
more than half of the voting power, or holds more than half of the
issued share capital, or controls the composition of the board of
directors.
Subsidiaries are carried at cost less any impairment loss.
(d) Property, plant and equipment
(i) Depreciation
Depreciation is provided to write off the cost of property,
plant and equipment over their estimated useful lives, using
the straight line method, at the following rates per annum :
Land use right Over the period of the right
Land held on medium term leases Over 20 years *
Buildings 5% or where shorter over 16 - 19 years *
Leasehold improvements 20%
Plant and machinery 10%
Furniture and fixtures 20%
Motor vehicles 20%
Computer equipment and software 50%
JV-7
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(d) Property, plant and equipment (Continued)
(i) Depreciation (Continued)
Construction in progress represents costs incurred in the
construction of buildings. These costs are not depreciated
until such time as the relevant assets are completed and put
into use, at which time the relevant costs are transferred to
the appropriate category of property, plant and equipment.
* In January 2005, the directors of the company took a
comprehensive review of the expected useful lives of the
land held on medium term leases in Dongguan and
buildings constructed thereon at cost of HK$2,102,686
and HK$10,882,174 respectively, taking into
consideration that the existing The Joint Venture (name
withheld and filed separately with The Securities and
Exchange Commission) Processing Agreement will expire on
31 December 2010. As a result of this review, the
directors of the company have revised the duration of
the depreciation periods of these land and buildings to
no later than 31 December 2010. In this connection, the
depreciation periods of these land and buildings have
been revised from 50 years to 20 years and from 20 years
to between 16 and 19 years, respectively, with effect
from 1 January 2005.
The change had the effect of increasing the group's
depreciation expense and reducing the group's profit
attributable to shareholders by approximately HK$127,000
for the three month period ended 31 March 2005. The
change is expected to increase depreciation expense of
the group by approximately HK$506,000 for each of the
subsequent years until the land and buildings are fully
depreciated or disposed of.
(ii) Measurement bases
Property, plant and equipment are stated at cost less
accumulated depreciation and impairment losses. The cost of an
asset comprises its purchase price and any directly
attributable costs of bringing the asset to the working
condition and location for its intended use. Subsequent
expenditure relating to property, plant and equipment is added
to the carrying amount of the assets if it can be demonstrated
that such expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use
of the assets.
When assets are sold or retired, any gain or loss resulting
from their disposal, being the difference between the net
disposal proceeds and the carrying amount of the assets, is
included in the income statement.
(e) Investments
Investment securities are securities which are interested to be held
on a continuity basis for an identified long-term purpose.
Investment securities are stated in the balance sheet at cost less
any provision for impairment losses. Provisions are made when the
fair value of such securities has declined below the carrying
amounts, unless there is evidence that the decline is temporary. The
amount of the reduction is recognised as an expense in the income
statement.
All other securities, whenever held for trading for otherwise, are
stated in the balance sheet at fair value. Changes in fair value are
recognised in the income statement as they arise.
JV-8
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(f) Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost comprises direct materials computed using first-in,
first-out method and, where applicable, direct labour and those
overheads that have been incurred in bringing the inventories to
their present location and condition. Net realisable value is
calculated as the actual or estimated selling price less all further
costs of completion and estimated costs necessary to make the sale.
(g) Impairment
The carrying amounts of the group's and the company's assets are
reviewed at each balance sheet date to determine whether there is
any indication of impairment. If any such indication exists, the
asset's recoverable amount is estimated. An impairment loss is
recognised whenever the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. Impairment
losses are recognised in the income statement.
(i) Calculation of recoverable amount
The recoverable amount of an asset is the greater of its net
selling price and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks
specific to the asset. For an asset that does not generate
largely independent cash inflows, the recoverable amount is
determined for the cash-generating unit to which the asset
belongs.
(ii) Reversals of impairment
An impairment loss is reversed if there has been a change in
the estimates used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the
asset's carrying amount does not exceed the carrying amount
that would have been determined, net of depreciation, if no
impairment loss had been recognised.
(h) Income tax
Income tax for the year comprises current and deferred taxes.
Current tax is the expected tax payable on the taxable income for
the year using tax rates enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are
generally recognised for all taxable temporary differences, and
deferred tax assets are recognised to the extent that it is probable
that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and liabilities
are not recognised if the temporary difference arises from a
transaction that affects neither the tax profit nor the accounting
profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries, except where the
group is able to control the reversal of the temporary differences
and it is probable that the temporary difference will not reverse in
the foreseeable future.
JV-9
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(h) Income tax (Continued)
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered. Any such reduction is
reversed to the extent that it becomes probable that sufficient
taxable profit will be available.
Deferred tax assets and liabilities are not discounted. Deferred tax
is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised.
Deferred tax is charged or credited to the income statement, except
when it relates to items charged or credited directly to equity, in
which case the deferred tax is also dealt with in equity.
(i) Employee benefits
Retirement benefit costs
The company operates a defined contribution Mandatory Provident Fund
retirement benefits scheme (the "MPF Scheme") under the Mandatory
Provident Fund Schemes Ordinance, for all of its employees in Hong
Kong. The MPF Scheme became effective on 1 December 2000.
Contributions are made based on a percentage of the employees' basic
salaries, limited to a maximum of HK$1,000 per month, and are
charged to the income statement as they become payable in accordance
with the rules of the MPF Scheme. The assets of the MPF Scheme are
held separately from those of the company in an independently
administered fund. The company's employer contributions vest fully
with the employees when contributed into the MPF Scheme.
(j) Operating leases
Leases where substantially all the risks and rewards of ownership of
assets remain with the lessor are accounted for as operating leases.
Annual rentals applicable to such operating leases are charged to
the income statement on a straight line basis over the lease terms.
(k) Foreign currencies
Transactions in foreign currencies are translated into Hong Kong
dollars at the rates of exchange ruling at the dates of
transactions. Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated into Hong Kong
dollars at the rates of exchange ruling at that date. Gains and
losses arising on exchange are dealt with in the income statement.
The balance sheets of subsidiaries expressed in foreign currencies
are translated at the rates of exchange ruling at the balance sheet
date and the income statements are translated at an average rate for
the year. Gains and losses arising on exchange are dealt with as
movements in reserve.
(l) Recognition of revenue
Revenue from the sale of goods is recognised when the significant
risks and rewards of ownership of the goods have been transferred to
customers.
Rental income from properties letting under operating leases is
recognised on the straight line basis over the lease terms.
Interest income is recognised on a time proportion basis.
JV-10
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
(m) 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.
(n) Cash and cash equivalents
Cash comprises cash on hand and demand deposits repayable on demand
with any bank or other financial institution. Cash includes deposits
denominated in foreign currencies.
Cash equivalents represent short-term, highly liquid investments
which are readily convertible into known amounts of cash and which
are subject to an insignificant risk of changes in value.
(o) Recently issued accounting standards
The HKICPA has issued a number of new and revised Hong Kong
Financial Reporting Standards and Hong Kong Accounting Standards
(collectively referred as the "new HKFRSs") which are effective for
accounting periods beginning on or after 1 January 2005.
The group has not early adopted these new HKFRSs in the financial
statements for the year ended 31 March 2005. The group has already
commenced an assessment of the impact of these new HKFRSs but is not
yet in a position to state whether these new HKFRSs would have a
significant impact on its results of operations and financial
position.
3. TURNOVER
Turnover represents total invoiced value of goods supplied, less discounts
and returns.
4. FINANCE COSTS
2005 2004
HK$ HK$
Interest charges on :
- - Discounted bills 192,281 309,292
- - Others 46,958 44,648
------- -------
239,239 353,940
======= =======
JV-11
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
5. PROFIT BEFORE TAXATION
2005 2004
HK$ HK$
Charging :
Auditors' remuneration
- - current year
Auditors' remuneration
- - current year 200,000 200,000
- - underprovision in prior year -- 25,500
Bad debts written off 138,614 --
Cost of inventories recognised as expenses 134,128,970 130,230,706
Depreciation of property, plant and equipment 4,090,952 3,999,174
Operating lease charges in respect of land and buildings 1,284,926 1,274,857
Provision for doubtful debts -- 95,641
Provision for inventories -- 132,787
Retirement benefits scheme contributions 190,984 180,971
Staff costs (excluding retirement benefits
scheme contributions) 11,576,614 10,695,463
Unrealised holding loss on other securities 843,964 --
and crediting :
Bank interest income 101,655 195,147
Exchange gain, net 49,278 57,670
Gain on disposal of property, plant and equipment 343,779 --
Gain on disposal of other securities 42,686 53,820
Interest income from a shareholder 229,550 198,245
Interest income from other securities 969,842 316,811
Rental income less outgoings 268,800 273,067
Unrealised holding gain on other securities -- 592,941
6. TAXATION
The tax charge comprises :
2005 2004
HK$ HK$
Hong Kong profits tax
- current year 3,860,000 3,509,340
- overprovision in prior years (201,648) (112,293)
---------- ----------
3,658,352 3,397,047
Deferred taxation (Note 20)
- current year 118,000 45,000
---------- ----------
Total income tax expense 3,776,352 3,442,047
========== ==========
Hong Kong profits tax is provided at the rate of 17.5% (2004 : 17.5%) on
the estimated assessable profits arising in Hong Kong for the year.
No provision for Mainland China Enterprise Income Tax has been made as the
group has no assessable profit in Mainland China (2004 : Nil).
JV-12
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
6. TAXATION (CONTINUED)
Reconciliation between tax expense and accounting profit at applicable tax
rates :
(Restated)
2005 2004
HK$ HK$
Profit before taxation 42,790,928 35,893,690
Notional tax on profit before taxation, calculated at the rates
applicable to profits in the tax jurisdictions concerned 7,293,735 6,265,004
Tax effect of non-deductible expenses 379,463 74,776
Tax effect of non-taxable revenue (4,202,248) (3,386,684)
Tax effect on temporary differences not recognised 393,086 565,900
Tax effect on unrecognised tax losses 113,964 8,372
Overprovision in prior years (201,648) (112,293)
Others -- 26,972
----------- -----------
Actual tax expense 3,776,352 3,442,047
=========== ===========
7. PROFIT FOR THE YEAR
Of the consolidated profit attributable to shareholders of HK$39,014,576
(2004 : HK$32,451,643), HK$42,542,423 (2004 : HK$51,446,922 (Restated))
has been dealt with in the financial statements of the company. Details of
the prior year adjustments are set out in note 29 to the financial
statements.
8. DIVIDENDS
2005 2004
HK$ HK$
Dividends attributable to the year :
First interim dividend of HK$1,168,350 (2004 : HK$2,130,692)
per share 2,336,700 4,261,384
Second interim dividend of HK$2,413,723 (2004 : HK$2,488,371)
per share 4,827,446 4,976,742
Third interim dividend of HK$2,580,752 (2004 : HK$2,205,190)
per share 5,161,504 4,410,380
Fourth interim dividend of HK$3,091,304 (2004 : HK$2,251,000)
per share 6,182,608 4,502,000
Final dividend of HK$Nil (2004 : HK$5,850,000) per share -- 11,700,000
----------- -----------
18,508,258 29,850,506
=========== ===========
JV-13
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT
Land held on Furniture
medium term Land use Leasehold Construction Plant and and
Group leases right Buildings improvements in progress machinery fixtures
- ----- HK$ HK$ HK$ HK$ HK$ HK$ HK$
Cost
At 1 April 2004 2,102,686 7,673,722 13,711,906 10,384,240 5,693,589 31,745,665 3,974,371
Additions -- -- -- 429,650 12,560,638 2,122,395 296,239
Disposals -- -- -- -- -- (4,699,822) (269,293)
----------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 March 2005 2,102,686 7,673,722 13,711,906 10,813,890 18,254,227 29,168,238 4,001,317
----------- ----------- ----------- ----------- ----------- ----------- -----------
Accumulated depreciation
At 1 April 2004 569,905 -- 7,092,955 8,141,900 -- 27,214,851 3,358,584
Charge for the 81,489 153,644 760,043 772,782 -- 955,096 262,873
year
Disposals -- -- -- -- -- (4,694,747) (269,293)
----------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 March 2005 651,394 153,644 7,852,998 8,914,682 -- 23,475,200 3,352,164
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net book value
At 31 March 2005 1,451,292 7,520,078 5,858,908 1,899,208 18,254,227 5,693,038 649,153
=========== =========== =========== =========== =========== =========== ===========
At 31 March 2004 1,532,781 7,673,722 6,618,951 2,242,340 5,693,589 4,530,814 615,787
=========== =========== =========== =========== =========== =========== ===========
Computer
Motor equipment
Group vehicles and software Total
- ----- HK$ HK$ HK$
Cost
At 1 April 2004 3,997,766 1,462,240 80,746,185
Additions 976,974 286,000 16,671,896
Disposals (172,500) (16,980) (5,158,595)
----------- ----------- -----------
At 31 March 2005 4,802,240 1,731,260 92,259,486
----------- ----------- -----------
Accumulated depreciation
At 1 April 2004 1,814,806 1,114,466 49,307,467
Charge for the 732,644 372,381 4,090,952
year
Disposals (172,500) (15,834) (5,152,374)
----------- ----------- -----------
At 31 March 2005 2,374,950 1,471,013 48,246,045
----------- ----------- -----------
Net book value
At 31 March 2005 2,427,290 260,247 44,013,441
=========== =========== ===========
At 31 March 2004 2,182,960 347,774 31,438,718
=========== =========== ===========
JV-14
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Land held Furniture
on medium Leasehold Plant and and Motor
Company term leases Buildings improvements machinery fixtures vehicles
- ------- HK$ HK$ HK$ HK$ HK$ HK$
Cost
At 1 April 2004 2,102,686 2,829,732 2,354,287 449,414 1,404,622 2,116,733
Additions -- -- 429,650 2,122,395 171,754 --
Disposals -- -- -- -- -- (172,500)
----------- ----------- ----------- ----------- ----------- -----------
At 31 March 2005 2,102,686 2,829,732 2,783,937 2,571,809 1,576,376 1,944,233
----------- ----------- ----------- ----------- ----------- -----------
Accumulated depreciation
At 1 April 2004 569,905 1,806,262 2,007,883 24,912 1,143,839 1,450,543
Charge for the year 81,489 141,486 152,141 146,517 115,793 328,847
Disposals -- -- -- -- -- (172,500)
----------- ----------- ----------- ----------- ----------- -----------
At 31 March 2005 651,394 1,947,748 2,160,024 171,429 1,259,632 1,606,890
----------- ----------- ----------- ----------- ----------- -----------
Net book value
At 31 March 2005 1,451,292 881,984 623,913 2,400,380 316,744 337,343
=========== =========== =========== =========== =========== ===========
At 31 March 2004 1,532,781 1,023,470 346,404 424,502 260,783 666,190
=========== =========== =========== =========== =========== ===========
Computer
equipment
Company and software Total
- ------- HK$ HK$
Cost
At 1 April 2004 776,779 12,034,253
Additions 263,149 2,986,948
Disposals (16,980) (189,480)
----------- -----------
At 31 March 2005 1,022,948 14,831,721
----------- -----------
Accumulated depreciation
At 1 April 2004 490,123 7,493,467
Charge for the year 306,338 1,272,611
Disposals (15,833) (188,333)
----------- -----------
At 31 March 2005 780,628 8,577,745
----------- -----------
Net book value
At 31 March 2005 242,320 6,253,976
=========== ===========
At 31 March 2004 286,656 4,540,786
=========== ===========
JV-15
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
10. INVESTMENTS
Group Company
-------------------------- --------------------------
2005 2004 2005 2004
HK$ HK$ HK$ HK$
Investment securities :
Unlisted outside Hong Kong, at cost -- 9,305,588 -- --
Less : Provision for impairment -- (9,305,588) -- --
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
-- -- --
Other securities :
Listed outside Hong Kong, at market
value 27,047,797 23,991,361 27,047,797 23,991,361
----------- ----------- ----------- -----------
27,047,797 23,991,361 27,047,797 23,991,361
=========== =========== =========== ===========
11. AMOUNT DUE FROM AN INVESTEE COMPANY
Group 2005 2004
HK$ HK$
Amount due from an investee company -- 1,158,675
Less : Provision for doubtful debts -- (1,158,675)
---------- ----------
-- --
========== ==========
The amount due from an investee company was unsecured, interest-free and had no
fixed terms of repayment.
12. INTERESTS IN SUBSIDIARIES
(Restated)
Company 2005 2004
HK$ HK$
Unlisted shares, at cost 32,658,008 9,570,008
Less : Provision for impairment (200,000) (200,000)
----------- -------------
32,458,008 9,370,008
----------- -------------
Amounts due from subsidiaries 19,079,609 22,448,775
Less : Provision for doubtful debts (785,384) (776,279)
------------ --------------
18,294,225 21,672,496
----------- -------------
Amount due to a subsidiary ( 8) ( 8)
----------- -------------
50,752,225 31,042,496
=========== =============
JV-16
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
12. INTERESTS IN SUBSIDIARIES (CONTINUED)
The amounts due from / (to) subsidiaries are unsecured, interest-free and
have no fixed terms of repayment.
Details of the subsidiaries as at 31 March 2005 are as follows :
Percentage of
Place of issued capital
incorporation/ Nominal value held by the
Name of company establishment of issued capital company directly Principal activities
- --------------- ------------- ----------------- ---------------- --------------------
The Joint Venture (name The PRC US$15,000,000 100% Manufacture of consumer
withheld and filed electronic products
separately with The (operations not commenced
Securities and yet)
Exchange Commission)
The Joint Venture (name Hong Kong HK$200,000 100% Trading of consumer
withheld and filed electronic products and
separately with The investment holding
Securities and
Exchange Commission)
The Joint Venture British Virgin US$1 100% Trading of machinery and
(name withheld and Islands equipment (business not
filed separately with commenced yet)
The Securities and
Exchange Commission)
The Joint Venture (name Hong Kong HK$10,000 100% Dormant
withheld and filed
separately with The
Securities and Exchange
Commission)
13. INVENTORIES
Group Company
--------------------------- ---------------------------
2005 2004 2005 2004
HK$ HK$ HK$ HK$
Raw materials 12,704,515 12,850,606 12,704,515 12,850,606
Work in progress 2,051,929 1,699,740 2,051,929 1,699,740
Finished goods 3,541,592 5,865,173 3,244,812 5,865,173
----------- ----------- ----------- -----------
18,298,036 20,415,519 18,001,256 20,415,519
=========== =========== =========== ===========
The amounts above include inventories at net realisable value of HK$Nil (2004 :
Nil).
JV-17
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
14. AMOUNT DUE FROM A SUBSIDIARY
The amount is unsecured and arises from trading activities of which the
settlement period is in accordance with normal commercial terms.
Interest was charged on the overdue portion of the balance at 6% per annum
from 1 April 2003 to 30 September 2004. Interest was charged on the
overdue portion over HK$3,900,000 (equivalent to US$500,000) from 1
October 2004 to 31 March 2005.
15. AMOUNT DUE FROM A SHAREHOLDER
The amount is unsecured, interest bearing at 6% per annum of the overdue
trading balance and has no fixed terms of repayment.
16. LOAN TO A SHAREHOLDER
The loan to a shareholder is unsecured, interest bearing at 6% per annum
and has no fixed terms of repayment.
17. AMOUNT DUE TO A RELATED COMPANY/A SHAREHOLDER
The amount is unsecured, interest-free and has no fixed terms of
repayment.
18. DIVIDEND PAYABLE
At a board meeting held on 7 February 2004, the directors declared a final
dividend of HK$5,850,000 per share, totalling HK$11,700,000, which is
expected to be payable to the shareholders upon successful initial listing
of the company's shares on the Main Board of The Stock Exchange of Hong
Kong Limited ("the HKEX").
19. LOANS FROM SHAREHOLDERS
The loans are unsecured, interest-free and repayable on demand by the
respective shareholders with the consent of each other and upon successful
initial listing of the company's shares on the Main Board of the HKEX,
whichever is earlier.
JV-18
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
20. DEFERRED TAXATION
The following are the major deferred tax liabilities recognised in the
balance sheet and the movements during the current and prior years :
Group and Company
Accelerated
tax
depreciation
HK$
Balance at 1 April 2003 30,000
Charge to income statement 45,000
-------
Balance at 31 March 2004 and 1 April 2004 75,000
Charge to income statement 118,000
-------
Balance at 31 March 2005 193,000
=======
20. DEFERRED TAXATION (CONTINUED)
2005 2004
HK$ HK$
Deferred tax liabilities recognised in the balance
sheets of the group and company 193,000 75,000
========== ==========
At the balance sheet date, the major component of the deferred tax assets has
not been recognised is the temporary difference in respect of the pre-operating
expenses incurred by The Joint Venture (name withheld and filed separately with
The Securities and Exchange Commission), the PRC subsidiary of the company, of
approximately HK$1,074,000 (2004 : HK$414,000) as it is not probable that future
taxable profits will be available against which this deductible temporary
difference can be utilised.
21. SHARE CAPITAL
2005 2004
HK$ HK$
Authorised :
100 ordinary shares of HK$100 each 10,000 10,000
========== ==========
Issued and fully paid :
2 ordinary shares of HK$100 each 200 200
========== ==========
JV-19
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
22. RESERVES
Group 2005 2004
HK$ HK$
Exchange reserve 34,233 8,378
Retained profits 83,261,781 62,755,463
------------ -----------
83,296,014 62,763,841
============ ===========
Details of the movements in the above reserves during the year are set out
in the consolidated statement of changes in equity on page 5.
Company Retained profits
HK$
Balance at 1 April 2003 44,023,896
Profit for the year (Restated) 51,446,922
Dividends (29,850,506)
------------
Restated balance at 31 March 2004 and 1 April 2004 65,620,312
------------
Balance at 1 April 2004 as previously reported 60,713,660
Prior year adjustments (Note 29) 4,906,652
------------
Profit for the year 42,542,423
Dividends (18,508,258)
------------
Balance at 31 March 2005 89,654,477
============
23. OPERATING LEASE COMMITMENTS
At 31 March 2005, the total future minimum rental receivable under
non-cancellable operating leases in respect of land and buildings are as
follows :
Group and Company
------------------------
2005 2004
HK$ HK$
Within one year 76,800 76,800
In the second to fifth years 53,265 130,133
----------- ----------
130,065 206,933
=========== ==========
JV-20
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
At 31 March 2005, the total future minimum lease payments under
non-cancelable operating leases in respect of land and buildings are
payable as follows :
Group Company
--------------------- ----------------------
2005 2004 2005 2004
HK$ HK$ HK$ HK$
Within one year 1,202,000 915,000 996,000 845,000
In the second to fifth years 1,054,516 1,820,000 980,000 1,820,000
--------- --------- --------- ---------
2,256,516 2,735,000 1,976,000 2,665,000
========= ========= ========= =========
The group and the company lease office premises under operating leases.
The leases run for an initial period of one to two years, with an option
to renew the leases at the expiry dates. None of the leases includes
contingent rentals.
24. DIRECTORS' REMUNERATION
Remuneration of the directors disclosed pursuant to section 161 of the
Hong Kong Companies Ordinance is as follows :
Group Company
----------------------- -------------------------
2005 2004 2005 2004
HK$ HK$ HK$ HK$
Fees -- -- -- --
Other emoluments -- -- -- --
========== ========== ========== ==========
25. CAPITAL COMMITMENTS
Group Company
-------------------------- ---------------------------
2005 2004 2005 2004
HK$ HK$ HK$ HK$
Contracted but not provided for
the purchase of property, plant
and equipment 3,548,800 -- 9,779,740 --
Contracted but not provided for the
construction of the factory
premises in the PRC 5,462,297 7,891,988 -- --
Capital contributions payable to a
PRC wholly-owned subsidiary -- -- 84,552,000 107,640,000
----------- ----------- ----------- -----------
9,011,097 7,891,988 94,331,740 107,640,000
=========== =========== =========== ===========
JV-21
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
26. CONTINGENT LIABILITES
Group Company
--------------------- ---------------------
2005 2004 2005 2004
HK$ HK$ HK$ HK$
Discounted bills with recourse 3,906,240 537,807 -- --
--------- --------- --------- ---------
3,906,240 537,807 -- --
========= ========= ========= =========
27. RELATED PARTY TRANSACTIONS
During the year, the following transactions were carried out with related
parties :
Group
---------------------------
2005 2004
HK$ HK$
Transactions with a related company
Rental expense 840,000 840,000
Management fee expense 4,434,600 3,281,250
Management bonus expense 3,337,730 3,182,783
Purchase of a PRC land use right -- 7,616,054
Transactions with a shareholder
Sales 82,241,295 58,205,352
Purchases 2,410,042 3,977,932
Sales commission expense 1,111,515 678,373
Interest income 229,550 198,245
Interest expenses 46,957 44,648
Transaction with a director
Rental expenses 240,000 240,000
28. MAJOR NON-CASH TRANSACTION
During the year, HK$3,582,073 (2004 : HK$9,075,253) of the dividends for
the year was settled through the current account with a shareholder.
JV-22
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
29. PRIOR YEAR ADJUSTMENTS
For the year ended 31 March 2004, a dividend income of HK$22,035,000 from
and a facility usage fee of HK$26,941,652 to a subsidiary were recorded in
the books of the company. During the process of preparing for listing of
the company's shares on the Main Board of the HKEX in 2004, it was found
out that such facility usage fee should be reversed in order to comply
with the relevant PRC regulations and accordingly, the dividend from the
subsidiary to the company has also been reversed.
The directors consider it appropriate to effect the above reversals
through prior year adjustments in the financial statements of the company
for the year ended 31 March 2005. As a result, the retained earnings and
the amount due from a subsidiary as at 31 March 2004 and the net profit
for the year then ended of the company have been increased by HK$4,906,652
individually.
Except for reclassification of certain tax reconciling items of the group
as set out in note 6 to the financial statements, there is no tax
attributable to these prior year adjustments to the company and the group.
30. COMPARATIVE FIGURES
Certain comparative figures have been adjusted as a result of the prior
year adjustments, details of which are set out in note 29 to the financial
statements.
31. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved by the board of directors on 24
June 2005.
JV-23
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED March 31, 2005, 2004 and 2003
Balance at Charged to Charged to
beginning cost and other Balance at
of year expenses accounts Deductions end of year
Year ended March 31, 2005 ---------- ---------- ---------- ----------- -----------
Allowance for doubtful accounts $ 15,000 $ 0 $ 0 $ 0 $ 15,000
Year ended March 31, 2004
Allowance for doubtful accounts $ 10,000 $ 64,537 $ 0 $ 59,537 $ 15,000
Year ended March 31, 2003
Allowance for doubtful accounts $ 68,358 $ 10,000 $ 0 $ 68,358 $ 10,000
Year ended March 31, 2005
Allowance for inventory reserve $ 100,000 $ 0 $ 0 $ 0 $ 100,000
Year ended March 31, 2004
Allowance for inventory reserve $ 101,741 $ 0 $ 0 $ 1,741 $ 100,000
Year ended March 31, 2003
Allowance for inventory reserve $ 111,741 $ 0 $ 0 $ 10,000 $ 101,741
Year ended March 31, 2005
Valuation allowance $1,015,315 $ 0 $ 47,595 $ 286,387 $ 776,523
Year ended March 31, 2004
Valuation allowance $ 912,696 $ 0 $ 102,619 $ 0 $1,015,315
Year ended March 31, 2003
Valuation allowance $1,848,455 $ 0 $ 0 $ 935,759 $ 912,696
S-1