UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 20052006 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: 0-7885001-31747
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 Each Class Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Title of Class
Indicate by check mark if the registrant is a well-known seasoned issuer (as
defined in Rule 405 of the Act). Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant: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|[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 other information
statementstatements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|[X]
Indicate by check mark if the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act). Large accelerated filer [ ] Accelerated filer [ ] Non-Accelerated Filer
[X]
Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in
Rule 12b-2 of the Exchange Act.Act). Yes |_|[ ] No |X|[X]
The aggregate market value of the voting stockCommon Stock, $.01 par value, held by
non-affiliates of the registrant asbased on the closing sales price of June 21,the Common
Stock on the American Stock Exchange Stock on September 30, 2005, was
$27,538,947.$28,211,326.
The number of shares of common stock outstanding as of June 21, 200529, 2006 was
1,652,998.1,808,951.
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 20052006 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 15UNIVERSAL SECURITY INSTRUMENTS, INC.
2006 ANNUAL REPORT ON FORM 10-K
Table of Contents
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Page
PART I
Item 1. Business 3
Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 8
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to Vote of Security Holders 10
Executive Officers of the Registrant 10
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 18
Item 9A. Controls and Procedures 18
Item 9B. Other Information 18
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
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management 19
Item 13. Certain Relationships and Related Transactions 19
Item 14. Principal Accountant Fees and Services 19
PART IV
Item 15. Exhibits and Financial Statement Schedules 20
Signatures 22
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%(49.81% and 31.02%40.66% of its
sales during fiscal 20052006 and 20042005 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, 2005,2006, approximately 68%66.4% of our purchases were
imported from the Hong Kong Joint Venture. Our sales for the year ended March
31, 20052006 were $23,465,443$28,894,101 compared to $17,201,116$23,465,443 for the year ended March 31,
2004,2005, an increase of approximately 36.42%23.1%.
We reported net income of $4,600,352 in fiscal 2006 compared to net income
of $3,417,854 in fiscal 2005, compared to net incomean increase of $2,571,026 in fiscal 2004.34.6%. 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.volume.
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, and 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.interrupter (GFCI) units.
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.
-3-
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 majoritySubstantially all 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, television retailers 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%5.1% of total sales in the fiscal year
ended March 31, 2005.2006.
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 912 regional stocking warehouses throughout the United
States which generally 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, 20052006 was
approximately $841,278.$2,996,000. Our backlog as of March 31, 20042005 was approximately
$1,521,784.$841,278. This decreaseincrease in backlog is a function of the timing of orders
received from our customers and our maintaining significantly more inventory,
resultingcustomers. In addition, we have a backlog of orders for ground
fault circuit interrupters in more rapid fulfillmentadvance of customer orders.new regulations affecting these devices
which go into effect July 28, 2006. The new regulations are expected to increase
the unit price of these devices.
Hong Kong Joint Venture
We have a 50% interest in athe 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%2006, 66.4% 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 in a form 8-K filing dated July 7, 2005 that the
Hong Kong Joint Venture was being
positionedfiled for a possible initial public offering (IPO).listing of an IPO on the Main Board of the
Hong Kong Exchange on June 30, 2005. The Hong Kong Joint Venture is proceeding withhas experienced
delays in the applicationlisting process for an IPO and listing on the
Hong Kong Stock Exchange Main Board. Nono assurances can be given that these stepsthe
application process will continue or 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.reduced to thirty-seven and one-half percent. During the fourth
quarter and for the fiscal year ended March 31, 2006, the Hong Kong Joint
Venture established a reserve of approximately $535,000 for costs previously
capitalized associated with the Hong Kong Joint Venture's application for
listing on the Hong Kong Stock Exchange.
-4-
Our purchases from the Hong Kong Joint Venture represented approximately
41%50% of the Hong Kong Joint Venture's total sales during fiscal 2006 and 41% of
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
$12,506,135 in fiscal 2006 and $15,347,017 in fiscal 2005 and $16,633,251 in fiscal
2004.2005. 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
couldwould have a short-term adverse effect on our operations, but replacement
sources for these other suppliers could be developed.
Competition
In fiscal year 2005,2006, sales of safety products accounted for approximately
99.6%substantially
all of our total sales. In the sale of smoke alarms, we compete in all of our
markets with First Alert, Firex and Walter Kidde. In the sale of GFCI units, we
compete in all our markets with Leviton Manufacturing Co., Inc., Pass & Seymour,
Inc., Cooper Wiring Devices and Hubbell, Inc. 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 18As of March 31, 2006, we had 15 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 1A. RISK FACTORS
An investment in our Common Stock is subject to risks inherent to our business.
The material risks and uncertainties that management believes affect the Company
are described below. Additional risks and uncertainties that management is not
aware of or focused on or that management currently deems immaterial may also
impair the Company's business operations.
RISK FACTORS RELATING TO OUR BUSINESS GENERALLY
Our success depends to a very large degree on our relationship with and
the success of our Hong Kong Joint Venture.
During fiscal year 2006, 66.4% 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, and we are currently
pursuing the development of additional products to be manufactured by the Hong
Kong Joint Venture. Our purchases from the Hong Kong Joint Venture represented
approximately 50% of the Hong Kong Joint Venture's total sales during fiscal
2006, with the balance of the Hong Kong Joint Venture's sales being primarily
made in Europe and Australia to unrelated customers. If the Hong Kong Joint
Venture does not maintain profitability, our profitability will be adversely
affected.
-5-
In addition, adverse changes in our relationship with our Hong Kong Joint
Venture partners would unfavorably affect the value of our investment in the
Hong Kong Joint Venture and would have a material adverse effect on our ability
to purchase products for distribution.
Our reliance on the Hong Kong Joint Venture exposes us to uncertainties
and risks from abroad which could negatively affect our operations and sales.
Our relationship with the Hong Kong Joint Venture and our and the Hong
Kong Joint Venture's sales in other countries expose us to particular risks. The
following are among the risks that could negatively affect our imports and our
and the Hong Kong Joint Venture's sales in foreign markets:
o new restrictions on access to markets,
o currency devaluation,
o new tariffs,
o adverse changes in monetary and/or tax policies,
o inflation, and
o governmental instability.
Should any of these risks occur, the value of our investment in the Hong
Kong Joint Venture could be reduced and our results of operations could be
negatively impacted.
The lack of availability of inventory could adversely affect our financial
results.
We source inventory primarily from our Hong Kong Joint Venture, which has
manufacturing facilities in the People's Republic of China. Our purchases of
inventory are subject to being affected by a number of factors, namely,
production capacity, labor unrest and untimely deliveries. 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 could have a material adverse effect on the our ability to
purchase products for distribution.
Our Hong Kong Joint Venture is subject to political and economic factors unique
to China.
The Chinese government has been reforming the Chinese economic system. In
recent years, the government has also begun reforming the government structure.
These reforms have resulted in significant economic growth and social progress.
Although the majority of the production assets in China are still state-owned,
economic reform policies have emphasized autonomous enterprises and the
utilization of market mechanisms. Our Hong Kong Joint Venture currently expects
that the Chinese government will continue its reform by further reducing
governmental intervention in business enterprises and allowing market mechanisms
to allocate resources. Any adverse changes in political, economic or social
conditions in China could have a material adverse effect on the Hong Kong Joint
Venture's operations and our financial results, as well as our ability to
purchase products manufactured by the Hong Kong Joint Venture.
We are subject to risks in connection with the importation of our products from
foreign countries.
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
ourselves from fluctuations in currency exchange rates to the extent possible by
negotiating commitments in U.S. dollars. We are also subject to strikes or other
labor unrest at points of origin and destination, as well as delays and
restrictions which impact shipping and shipping routes.
We rely on our key personnel and the loss of one or more of those personnel
could have a material adverse effect on our business, financial condition and
results of operations.
Our operations and prospects depend in large part on the performance of
our senior management team. There can be no assurance that we would be able to
find qualified replacements for any of these individuals if their services were
no longer available. The loss of the services of one or more members of our
senior management team could have a material adverse effect on our business,
financial condition, and results of operations.
-6-
Our competition is both intense and varied and our failure to effectively
compete could adversely affect our prospects.
In fiscal year 2006, our sales of safety products accounted for virtually
all of our sales. Many of our competitors have greater financial resources and
financial strength than we have. Some of our competitors may be willing to
reduce prices and accept lower profit margins to compete with us. While 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. As a result of this competition, we
could lose market share and suffer losses, which could have a material adverse
effect on our future financial performance.
The security products marketplace is dynamic and challenging because of the
introduction of new products and services.
We must constantly introduce new products, services, and product features
to meet competitive pressures. We may be unable to timely change our existing
merchandise sales mix in order to meet these competitive pressures, which may
result in increased inventory costs or loss of market share.
Adverse changes in national or regional U.S. economic conditions could adversely
affect our financial results.
We market our products nationally to retailers, including wholesale
distributors, chain, discount, and home center stores, catalog and mail order
companies and to other distributors. Overall consumer confidence, consumer
credit availability, recessionary trends, housing starts and prices, mortgage
rates, and consumers' disposable income and spending levels directly impact our
sales. Negative trends, whether national or regional in nature, in any of these
economic conditions could adversely affect our financial results.
Our products must meet specified quality and safety standards to enter and stay
on the market.
Our smoke and carbon monoxide alarms must meet U.S. and various
international standards before they are sold. For example, in the United States,
our products must be certified by Underwriters Laboratories (UL) and similar
certifications must be obtained in each country where we compete for market
share. If our manufacturers' products or manufacturing facilities (including
those of the Hong Kong Joint Venture) fail to pass periodic inspections, the
approval certificates for the relevant products may be suspended until
corrections are made. Loss of UL or other independent certifications could have
a material adverse affect on our sales and financial results.
Our products expose us to the potential of product liability claims.
We do not manufacture any of our own products. All of our products are
manufactured by the Hong Kong Joint Venture or others. Nevertheless, we could be
named as a defendant in an action arising from damages suffered as a result of
one of our products. While we carry products liability insurance, to the extent
we are found liable for damages for which we are uninsured, our profitability
may be adversely affected. Any suit, even if not meritorious or if covered by an
indemnification obligation, could result in the expenditure of a significant
amount of our financial and managerial resources and could create significant
negative publicity for us and our products.
We may be unable to successfully execute our merchandising and marketing
strategic initiatives.
We are focusing our sales and marketing efforts and initiatives 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. If we fail to successfully execute
these initiatives, our business could be adversely affected.
We are and could become subject to litigation regarding intellectual property
rights, which could seriously harm our business.
We design most of our security products and contract with suppliers to
manufacture those products and deliver them to us. We have been the subject of
lawsuits by third parties which assert against us infringement claims or claims
that we have violated a patent or infringed upon a copyright, trademark or other
proprietary right belonging to them. If such infringement by our suppliers or us
were found to exist, we could be subject to monetary damages and an injunction
preventing the use of their intellectual property. If one of our products were
found to infringe, we may attempt to acquire a license or right to use such
technology or intellectual property, which could result in higher manufacturing
costs. Any infringement claim, even if not meritorious and/or covered by an
indemnification obligation, could result in the expenditure of a significant
amount of our financial and managerial resources.
-7-
If governmental regulations change or are applied differently, our business
could suffer.
The sales of our smoke and carbon monoxide alarms are impacted by local
laws and regulations mandating the installation of these security devices in new
and sometimes existing homes and buildings. Changes in these consumer safety
regulations, both in the United States and abroad, could impact our business.
RISK FACTORS RELATING TO OUR ARTICLES OF INCORPORATION AND OUR STOCK
The liability of our directors is limited.
Our Articles of Incorporation limit the liability of directors to the maximum
extent permitted by Maryland law.
It is unlikely that we will issue dividends on our common stock in the
foreseeable future.
We have not declared or paid cash dividends on our common stock in over 20
years and do not intend to pay cash dividends in the foreseeable future. The
payment of dividends in the future will be at the discretion of our board of
directors.
The exercise of outstanding options will dilute the percentage ownership of our
stockholders, and any sales in the public market of shares of our common stock
underlying such options may adversely affect prevailing market prices for our
common stock.
As of March 31, 2006, there are outstanding options to purchase an
aggregate of 242,496 shares of our common stock at per share exercise prices
ranging from $0.98 to $21.45. The exercise of such outstanding options would
dilute the percentage ownership of our existing stockholders, and any sales in
the public market of shares of our common stock underlying such options may
adversely affect prevailing market prices for our common stock.
It may be difficult for a third party to acquire us, which could affect our
stock price.
Our charter and Bylaws contain certain anti-takeover provisions pursuant to the
Maryland General Corporation Law. This means that we may be a less attractive
target to a potential acquirer who otherwise may be willing to pay a premium for
our common stock above its market price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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 wasis 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, with common area
maintenance, approximates $5,531$5,680 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 2006,2009 and is subject to renewal for an additional six
years with increasing rentals at 3% per year.
The monthly rental, with common area maintenance, approximates $2,830$3,016 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 constructingcompleted construction of a new,
approximately 250,000 square-foot manufacturing facility in the Fujian province
of Southern China, which should beChina. Limited manufacturing operations have commenced at the new
facility as the Hong Kong Joint Venture awaits full regulatory and operational
in the September 2005 quarter.
-5-approvals.
-8-
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. ("Leviton") 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)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 itsLeviton's six 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 II also asserted trade dress and unfair competition claims which largely
correspond to the claim in the "Leviton l"Leviton I suit. In May 2006 Leviton and the
Company settled Leviton I and Leviton II, all subject to a confidential
agreement. Under the terms of the settlement, Leviton I has been dismissed, and
the trade dress/deceptive trade practice claims of Leviton II have been
dismissed. The settlement does not cover the patent infringement claims of
Leviton II.
In January 2006, the Company was granted summary judgment on the
infringement claims asserted in Leviton II. Leviton has appealed that judgment
and dismissal. Should Leviton's appeal be successful and the summary judgment of
non-infringement be overturned, then Leviton's infringement claims will be
reinstated. If reinstated, the Company's belief in its strong defenses to
Leviton's claims in that suit remains unchanged. However, in the event of an
unfavorable outcome, including reversal of the lower court's dismissal on appeal
and rejection of the Company's defenses at trial, the amount of any potential
loss to the Company is not determinable at this time.
On July 23, 2003,March 31, 2005, Leviton filed a third lawsuit, Civil Action No.
05cv0889, in the United States District Court for the District of Maryland
against the Company ("Leviton III"). In this suit, Leviton alleges that the
Company's GFCI units infringe US Patent 6,864,766. The Company has filed a
counterclaim against Leviton and the case has been consolidated with a
declaratory judgment action filed by the GFCI manufacturer, Shanghai Meihao
Electric, Inc., filed an action for Declaratory
Judgment of non-infringement, invalidity, and unenforceability of the asserted
patents. Discovery is now ongoing. The CourtCompany believes that it 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 meritoriousstrong
defenses relating to the patent and trade dress
infringement claims as part of its aggressive defense.in suit. In the event of an unfavorable outcome,
the amount of any potential loss to USIthe Company is not yet
determinable.determinable at this
time.
On June 11, 2003, Walter Kidde Portable Equipment, Inc. ("Kidde") 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. DiscoveryOn March 31, 2006, following numerous procedural and
substantive rulings by the judge, Kidde obtained dismissal, without prejudice,
of its suit. On November 28, 2005, prior to the March 31, 2006 dismissal of the
original suit, Kidde filed a second lawsuit based on virtually identical
infringement allegations as the earlier case. Because, the court dismissed the
first case without conditions and without prejudice, the Company has appealed
the dismissal believing that at a minimum, procedurally, conditions should have
been imposed. The second case 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.preliminary pre-discovery motion
stage. The Company's substantive position and its defenses to Kidde's claims are
substantially the same between the first and second Kidde cases. 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 USIthe Company 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 aboutApril 11, 2005, this action was dismissed pending the
outcome of a conclusion to the litigation, the Company successfully sought
and has now obtained re-examination of the asserted patentreexamination in the United States Patent and Trademark Office
(USPTO) based on. In April 2006, 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 outcomeUSPTO rejected most of the proceedingsclaims in the USPTO. Apart from granting USI's Request for Reexaminationpatent.
Maple Chase has not yet filed a substantive response to the USPTO action. While
the Company is confident that the USPTO reexamination and rejection of the
claims indicates that the Company will prevail in October of 2004,this action, no further communications in the reexamination have been issued to date.assurances can
be given. 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--9-
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, 2005.2006.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information about the Company's executive officers.
-7-
NAME AGE POSITIONS
---- --- ---------
Harvey B. Grossblatt 5859 President, Chief Operating Officer and
Chief Executive Officer
James B. Huff 5354 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 OctoberAugust 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--10-
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, ourOur 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 tradingtrades on the
American Stock Exchange under the symbol UUU.
As of June 21, 2005,20, 2006, there were 163151 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.$21.11. 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 endedFiscal 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, 2004.2006
First Quarter High $19.50
Low $12.00
Second Quarter High $19.69
Low $15.00
Third Quarter High $19.00
Low $16.01
Fourth Quarter High $24.16
Low $16.45
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 20042006 Annual Meeting of Stockholders (the "Proxy
Statement") in the Section entitled "Executive Compensation" and is incorporated
herein by reference.
-9--11-
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, 2005 and
20052006 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,
-------------------------------------------------------------------------------------------
2006 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$28,894,101 $23,465,443 $17,201,116 $15,953,883 $10,480,829
Income (loss) before equity in
earnings (loss) of Hong Kong Joint Venture
and income taxes 2,394,258 765,742 429,716 279,615 (976,063)
(799,183)
Net income (loss)4,600,352 3,417,854 2,571,026 2,400,318 261,625 (758,940)
Per common share:
Net income (loss)-
Basic 2.75 2.13 1.69 1.66 0.21
(0.63)
Diluted 2.52 1.94 1.49 1.54 0.21 (0.63)
Weighted average number of common
shares outstanding
Basic 1,671,681 1,602,449 1,516,846 1,443,439 1,251,499
1,216,360
Diluted 1,824,529 1,764,474 1,725,206 1,561,745 1,261,027 1,216,360
Balance Sheet Data:
Total assets 20,358,603 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) 9,911,628 6,317,231 4,200,170 2,377,688 402,425
585,032
Current ratio (1) 4.60:1 3.00:1 3.21:1 2.26:1 1.27:1
1.23:1
Shareholders' equity 17,606,569 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 20052006 and 20042005 are
summarized as follows:
-----------------------------------------------------------------------------------------------------------------------
Quarter Ended
------------------------------------------------------------------------ ----------------- ---------------- -----------
June 30, September 30, December 31, March 31,
-------- ------------- ------------ ---------
20052006
Net sales $4,874,782 $6,622,221 $5,849,144 $6,119,296$6,923,810 $7,119,100 $7,353,597 $7,497,594
Gross profit 1,484,713 2,121,788 1,825,828 1,887,4992,048,954 2,278,838 2,549,300 2,580,060
Net income 766,297 1,043,836 793,569 814,152889,770 1,162,695 1,456,809 1,091,078
Net income per share - basic 0.49 0.66 0.49 0.490.54 0.69 0.87 0.65
Net income per share - diluted 0.44 0.59 0.45 0.46
20040.50 0.64 0.80 0.58
2005
Net sales $4,431,950 $4,998,483 $3,838,192 $3,932,491$4,874,782 $6,622,221 $5,849,144 $6,119,296
Gross profit 1,460,245 1,575,707 1,230,667 1,531,9571,484,713 2,121,788 1,825,828 1,887,499
Net income 852,498 740,446 493,792 484,290766,297 1,043,836 793,569 814,152
Net income per share - basic 0.57 0.49 0.33 0.300.66 0.49 0.49
Net income per share - diluted 0.51 0.43 0.29 0.260.44 0.59 0.45 0.46
-10--12-
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 changesthe
Risk Factors discussed elsewhere in levels of market interest rates, creditthis Annual Report 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, 2006, 2005 2004 and 20032004 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, 2006, 2005 2004 and
20032004
Sales. In fiscal year 2005,2006, our net sales increased by $6,264,327 (36%$5,428,658
(23.13%), from $17,201,116 in fiscal 2004 to $23,465,443 in fiscal 2005. We experienced an
increase of approximately $3,084,0002005 to $28,894,101 in sales to the Company's retail and
wholesale distribution customers over the prior year principally as a result of
increased volume.fiscal 2006. Our
focus on marketing to the electrical distribution trade through our USI Electric
subsidiary generated an increase inaccounted for approximately $4,780,000 of the increased 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)2005 to
approximately $21,260,000 in 2006). The Company also increased its sales to
retail and wholesale customers in the fiscal year ended March 31, 2006. We
anticipate continued revenue growth in all of our markets.
In fiscal year 2004,2005, sales increased by $1,247,233 (8%$6,264,327 (36%) from $15,953,883
in fiscal 2003 to $17,201,116
in fiscal 2004. Our2004 to $23,465,443 in fiscal 2005. The increased sales of GFCI units
and our focus on marketing to retailers, including the wholesale distribution
trades,trade, generated the majority of the increase.
Gross Profit. Gross profit as a percentage of net sales (or "gross
margin") in fiscal 20052006 was 31.2%32.73% compared to 33.7%31.2% and 31.2%33.7% in fiscal 20042005
and 2003,2004, respectively. The decreaseincrease in gross margin in the fiscal year ended
March 31, 2006 reflects variations in the mix of products sold and is a function
of higher sales, since certain fixed costs do not increase at the same rate as
sales. The decrease in gross margin for the year ended March 31, 2005 reflectswhen
compared to 2004 resulted from higher costs and pricing concessions applied to
meet competitive pressures.
The increaseExpenses. Selling, general and administrative expenses for fiscal 2006
increased by $585,663 (9.5%) from $6,191,025 in gross marginfiscal 2005 to $6,776,688 in
fiscal 2006. As a percentage of net sales, these expenses decreased to 23.5% for
the fiscal year ended March 31, 2004 resulted2006 from increased productivity26.4% for the fiscal year ended March
31, 2005. The decrease in selling, general 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 percentageadministrative expense as a
percent of sales increasedis attributable to costs that do not increase proportionately
with the higher sales volume and a reduction in legal expenses from the 2005
period. Our legal expenses decreased by $259,876 in 2006 to $822,477 from
$1,082,353 in fiscal 2005. The reduction in legal expense was partially offset
by an increase of $718,216 in commissions and freight charges, the account
classification which was the most significant factor in this dollar increase,
due to our higher 2006 sales volume. Commissions and freight charges, as a
percentage of sales, increased. Management doeswhile consistent with commissions and freight charges of
the prior year, vary directly with sales volume. Currently, we are a
non-accelerated filer and the Company is not anticipate a
near-term needrequired to increase fixed costs.
Expenses.comply with the
registered public accounting firm attestation provisions of Section 404(a) of
the Sarbanes-Oxley Act of 2002. It is anticipated the Company will be required
to comply with these provisions for the fiscal year commencing April 1, 2007.
The Company expects to incur initial and ongoing costs that, at present, cannot
be quantified in complying with the provisions of Section 404(a) of
Sarbanes-Oxley.
-13-
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 Kovensour litigation discussed under Item 3, "Legal Proceedings,"with a former director and
chief executive officer (since settled) 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-
InInterest Income and Expense. Interest expense for fiscal year 2004, selling, general and administrative expenses
increased by approximately $745,202 (17%),2006 decreased to
$48,999 from $4,265,581$85,521 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
was2005 primarily 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.decreased borrowing.
Interest expense for fiscal 2005 increased to $85,521 from $83,589 in fiscal
2004 primarily due to higher interest rates. Interest
expense forThe majority of the Company's cash
balances are maintained on deposit with the factor and earn interest at the
factor's prime rate of interest minus 3%. During the fiscal 2004 decreasedyear ended March 31,
2006, the Company earned $9,668 on these deposits.
Income Taxes. During the fiscal year ended 2006, the Company offset
$2,151,593 of taxable income by utilizing the remainder of its net operating
loss carryforward deduction. In addition, the Company offset federal taxes of
approximately $115,000 with foreign tax credits available as a result of foreign
taxes paid on the repatriated earnings of the Hong Kong Joint Venture. At March
31, 2006, the Company has no remaining net operating loss carryforwards
available to $83,589 from $153,168 in fiscal 2003
primarily dueoffset future U.S. federal taxable income, and the valuation
allowance previously established to lower interest ratesoffset tax benefits associated with our net
operating loss carryforwards and lower levels of debt.
Income Taxes.other deferred tax assets was fully utilized.
We did not make a provision for federal income taxes in each of the 2005
2004 and 20032004 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 establishedNet Income. We reported net income of $4,600,352 for fiscal year 2006
compared 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$3,417,854 for fiscal year 2005, a $1,182,498
(34.6%) increase. This increase in net income resulted from increased sales
volume and higher gross profit, partially offset by historical results of
operationshigher selling, general and
management believes recent operating results support the
recognition of a portion ofadministrative expenses as described above, and the income tax benefits associated with realizationprovided
by the use of net operating loss carryforwards, foreign tax credits, and otherarising
from the reduction of the 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.allowance.
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,Accordingly, based on specified
percentages of our accounts receivable and inventory and letter of credit
commitments, at March 31, 2005,2006, our maximum borrowing amount was limited to
$4,743,416, all of which was availableavailability under this
Agreement as of March 31,
2005. Theis $7,500,000. Any 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, 2005,2006,
was 5.75%7.75%. TheAny borrowings are collateralized by all our accounts receivable and
inventory. During the year ended March 31, 2005,2006, working capital (computed as
the excess of current assets over current liabilities) increased by $2,117,061,$3,594,397,
from
$4,200,170 on March 31, 2004, to $6,317,231 on March 31, 2005.2005, to $9,911,628 on March 31, 2006.
-14-
Our operating activities usedprovided cash of $1,098,082$1,766,297 for the year ended
March 31, 2005.2006. For the fiscal year ended March 31, 2004,2005, operating activities
used cash of $292,716.$1,098,082. This increase of $805,366$2,864,379 was primarily due to higher
levels
of accounts receivablenet income and undistributed Joint Venture earnings partially offset
by higher net income.a reduction in inventories from the prior period.
Our investing activities provided cash of $704,860$1,091,358 during fiscal 20052006
and provided cash of $329,213$704,860 during fiscal 2004.2005. This increase resulted
primarily from higher distributions from the Joint Venture. During 2005, as in
prior years, the Company offset a portion of 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 recordsdiscloses
these payments as a non-cash transaction in its statement of cash flows.
-12-
Financing activities in 20052006 provided the Company with cash of $264,319,
primarily$98,549,
due to the exercise of employee stock options. Financing activities in 20042005
provided cash of $100,581$264,319 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 2005,2006, sales of the Hong Kong Joint Venture were $25,899,630$24,811,790
compared to $24,114,967$25,899,630 and $23,365,301$24,114,967 in fiscal years 2005 and 2004,
respectively. The decrease in sales for the 2006 period from the 2005 period
primarily was due to lower sales to unrelated third parties, partially offset by
higher sales to the Company. The increase in sales for the 2005 period from the
2004 period primarily was due to higher sales to unrelated third parties and 2003,
respectively.to
the Company.
Net income was $5,005,886$4,160,935 for fiscal year 20052006 compared to net income of
$4,171,334$5,005,886 and $4,755,540$4,171,334 in fiscal years 20042005 and 2003,2004, respectively. The
increasedecrease in the current fiscal year is primarily attributable to higher gross
margins due to price increases institutedthe lower sales, increased legal
expense, and the establishment of a reserve of approximately $535,000 for costs
previously capitalized associated with the Hong Kong Joint Venture's application
for listing on the Hong Kong Stock Exchange during the fourth quarter and for
the fiscal year ended March 31, 2005.2006. The decreaseincrease in income for the year ended
March 31, 20042005 was due primarily to lower gross margins due to competition and higher manufacturing costs.price increases initiated during the year.
Gross margins of the Hong Kong Joint Venture for fiscal 20052006 increased to
33.55%34.7% from 30.6%33.55% in the prior fiscal year. The primary reason for this increase
was price increases instituted during the fiscal year ended March 31, 2005.2006. At
March 31, 2004,2005, the Hong Kong Joint Venture's gross margin decreasedincreased to 30.6%33.55%
from 33.7%30.6% at March 31, 2003.2004. The primary reason for this decreaseincrease was lowerhigher
gross margins attributed to competition and higher costs.price increases initiated during the year.
Selling, general and administrative expenses of the Hong Kong Joint
Venture were $4,269,714, $3,495,678 $2,971,274 and $2,806,412$2,971,274 for fiscal years 2006, 2005
2004
and 2003,2004, respectively. As a percentage of sales, these expenses were 13%17%, 12%13%
and 12% for fiscal years 2006, 2005 2004 and 2003,2004, 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.expense and the establishment of a reserve of
approximately $535,000 for costs previously capitalized associated with the Hong
Kong Joint Venture's application for listing on the Hong Kong Stock Exchange
during the fiscal year ended March 31, 2006.
Interest income net of interest expense was $30,666$34,130 for fiscal year 2005,2006,
compared to $45,795$30,666 and $2,315$45,795 in fiscal years 20042005 and 2003,2004, respectively. The
decrease in interest income for 2005 was due to a reduction in investments in
bonds, and the
increase in interest income for 20042006 was due to returns on investments in higher
yielding bonds. The decrease from 2004 to 2005 is due to a reduction in
investments in bonds during that fiscal period.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During fiscal year 2005,2006, working capital increased by
$275,110$232,989 from $1,318,657 on March 31, 2004 to $1,593,767 on March 31, 2005.2005 to $1,826,756 on March 31, 2006. 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 any, if an IPO by the Hong Kong Joint
Venture is completed (as previously discussed).
-15-
Contractual Obligations and Commitments
The following table presents, as of March 31, 2005,2006, 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 -- --$291,005 $105,479 $185,526 - -
======== ======= ======== = ========= ======== ========
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 and sales returns 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 significanta foreign tax credit carryforward and 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 havehad previously provided a valuation
allowance on the deferred tax assets associated with the 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 bepreviously provided to offset tax
benefits associated with net operating loss carryforwards and other deferred tax
assets at March 31, 2005.2006 has been reduced to zero.
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.
-16-
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,("FASB") issued
FASB Statement No. 123R, "Share-Basedof Financial Accounting Standards ("Statement") 123 (revised 2004),
Share Based Payment," which is a revision of Statement 123. Statement 123(R)
requires companiesall share-based payments to expense the valueemployees, including grants of employee
stock options, and similar awards. Theto be recognized in operating results based on their fair values.
Statement 123(R) will be effective for the Company on April 1, 2006, the
beginning of the Company's fiscal 2007.
Statement 123(R) permits public companies to adopt its requirements using
one of two methods: (1) a "modified prospective" method in which compensation
cost is recognized beginning with the effective date (a) based on the
requirements of FASB 123R isStatement 123(R) for interimall share-based payments granted after the
effective date and annual periods beginning after June 15,
2005. Subsequently,(b) based on the Securities and Exchange Commission (SEC) approved a rule
which delaysrequirements of Statement 123 for all awards
granted to employees prior to the effective date of FAS 123RStatement 123(R) that remain
unvested on the effective date, or (2) a "modified retrospective" method which
includes the requirements of the modified prospective method described above,
but also permits entities to restate based on the amounts previously recognized
under Statement 123 for certain public companies. Underpurposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the SEC's rule, FAS 123Ryear of adoption. The
Company plans to use the modified prospective method to adopt the provisions of
Statement 123(R).
As permitted by Statement 123, the Company currently accounts for
share-based payments to employees using APB Opinion No. 25's intrinsic value
method and, as such, recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have an
impact on the Company's operating results. The impact of adoption of Statement
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
Statement 123(R) in prior periods, the Company believes the impact would have
approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share in Note 1. Statement 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods
for such excess tax deductions has not been significant.
In May 2005, the FASB issued Statement 154, Accounting for Changes and
Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and
Statement 3, Reporting Accounting Changes in Interim Financial Statements, and
provides guidance on the accounting for and reporting of accounting changes and
error corrections. Statement 154 applies to all voluntary changes in accounting
principle and requires retrospective application (a term defined by the
statement) to prior periods' financial statements, unless it is nowimpracticable to
determine the effect of a change. It also applies to changes required by an
accounting pronouncement that does not include specific transition provisions.
In addition, Statement 154 redefines restatement as the revising of previously
issued financial statements to reflect the correction of an error. The statement
is effective for the Company's annual periodaccounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company will adopt Statement 154
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%(7.75% at March 31, 2005)2006). 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. AtHowever, at March 31,
2005,2006 and during the fiscal year then ended, we had $483,416no material principal amount
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.
-17-
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-ITEM 9B. OTHER INFORMATION
Not applicable.
-18-
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--19-
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, 20052006 and 20042005 F-2
Consolidated Statements of Income for the Years Ended March 31, 2006, 2005 2004 and 20032004 F-3
Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2006, 2005 2004 and 20032004 F-4
Consolidated Statements of Cash Flows for the Years Ended March 31, 2006, 2005 2004 and 20032004 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)1-31747)
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)1-31747)
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)1-31747)
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)1-31747)
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)1-31747)
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)1-31747)
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)1-31747)
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)1-31747)
10.7 Amended and Restated Employment Agreement dated April 1, 2003July 18, 2005 between the
Company and Harvey B. Grossblatt (incorporated by reference to Exhibit
10.810.7 to the Company's AnnualQuarterly Report on Form 10-K10-Q for the yearperiod ended
March 31, 2003,September 30, 2005, File No. 0-7885)1-31747)
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)1-31747)
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)1-31747)
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*2006*
*Filed herewith
-17--20-
(d)(c) 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-2JV-1
Consolidated Income Statement JV-3JV-2
Consolidated Balance Sheet JV-4JV-3
Balance Sheet JV-5JV-4
Consolidated Statement of Changes in Equity JV-6JV-5
Consolidated Cash Flow Statement JV-7JV-6
Notes to Financial Statements JV-8
-18-JV-7
-21-
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, 20052006 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
- -------------------------------------Signature Title Date
/s/ Harvey B. Grossblatt President, Chief Executive June 29, 2006
- --------------------------- Officer and Director
Harvey B. Grossblatt
/s/ James B. Huff Chief Financial Officer June 29, 2006
- ---------------------------
James B. Huff
/s/ Cary Luskin Director June 29, 2006
- ---------------------------
Cary Luskin
/s/ Ronald A. Seff, M.D. Director June 29, 2006
- ---------------------------
Ronald A. Seff
/s/ Howard Silverman, Ph.D. Director June 29, 2005
- ------------------------------------- Howard Silverman, Ph.D.
-19-Director June 29, 2006
- ---------------------------
Howard Silverman, Ph.D.
-22-
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, 20052006
and 2004,2005, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
2005.2006. 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
referred to above present fairly, in all material respects, the financial
position of Universal Security Instruments, Inc. and subsidiaries as of March
31, 20052006 and 2004,2005, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 2005,2006, 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, 2005.2006. 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, 200523, 2006
F-1
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS March 31
--------
2006 2005
2004
------------ ----------------------- -----------
CURRENT ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,015,491 $ 59,287 $ 188,190
Accounts receivable:
Trade less allowance for doubtful accounts of $15,000 at March
31, 2006 and 2005 and 20041,106,435 1,014,757 90,852
Employees 21,503 23,770
------------ ------------23,656
----------- -----------
1,130,091 1,036,260 114,622
Amount due from factor 4,259,131 3,394,084 2,823,300
Inventories, net of allowance for obsolete inventory of $40,000 for 4,062,086 4,834,486
2,867,6502006 and $100,000 for 2005
Prepaid expenses 145,394 107,052
------------ ------------196,863
----------- -----------
TOTAL CURRENT ASSETS 12,663,662 9,469,511 6,100,814
DEFERRED TAX ASSET 476,384 351,780 56,899
INVESTMENT IN HONG KONG JOINT VENTURE 7,140,859 6,131,481 4,832,286
PROPERTY AND EQUIPMENT - NET 62,212 81,690 93,431
OTHER ASSETS 15,486 15,486
------------ ----------------------- -----------
TOTAL ASSETS $ 16,049,948 $ 11,098,916
============ ============$20,358,603 $16,049,948
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,725,4021,604,845 $ 1,229,6021,725,402
Accrued liabilities:
Litigation reserve 556,787 806,679 237,546
Payroll, commissions and other 590,402 620,199
426,272
Current obligations under capital lease -- 7,224
------------ ----------------------- -----------
TOTAL CURRENT LIABILITIES 2,752,034 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 1,652,9981,693,952 and 1,552,8961,652,998 shares at March
31, 20052006 and March 31, 2004,2005, respectively 16,940 16,530 15,529
Additional paid-in capital 11,577,583 11,469,444 11,188,903
Retained earnings (accumulated deficit)6,012,046 1,411,694
(2,006,160)
------------ ----------------------- -----------
TOTAL SHAREHOLDERS' EQUITY 17,606,569 12,897,668
9,198,272
------------ ----------------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,049,948 $ 11,098,916
============ ============$20,358,603 $16,049,948
=========== ===========
See notes to consolidated financial statements
F-2
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31
2006 2005 2004 2003
------------ ------------ ------------
Net sales $ 28,894,101 $ 23,465,443 $ 17,201,116 $ 15,953,883
Cost of goods sold 19,436,949 16,145,615 11,402,540 10,980,067
------------ ------------ ------------
GROSS PROFIT 9,457,152 7,319,828 5,798,576 4,973,816
Research and development expense 246,875 277,540 270,164 284,552
Selling, general and administrative expense 6,776,688 6,191,025 5,010,783 4,265,581
------------ ------------ ------------
Operating income 2,433,589 851,263 517,629 423,683
------------ ------------ ------------
Other income (expense):
Interest expense (48,999) (85,521) (83,589)
(153,168)Interest income 9,668 -- --
Other expense -- -- (4,324) 9,100
------------ ------------ ------------
(39,331) (85,521) (87,913) (144,068)
------------ ------------ ------------
INCOME BEFORE EQUITY IN EARNINGS OF HONG KONG
JOINT VENTURE AND INCOME TAXES
2,394,258 765,742 429,716 279,615
Earnings from Hong Kong Joint Venture:
Equity in earnings of Hong Kong Joint Venture 2,109,594 2,370,975 2,165,311 2,120,703
------------ ------------ ------------
Net income before income taxes 4,503,852 3,136,717 2,595,027 2,400,318
Provision for income tax (benefit) expense (96,500) (281,137) 24,001 --
------------ ------------ ------------
NET INCOME $ 4,600,352 $ 3,417,854 $ 2,571,026 $ 2,400,318
============ ============ ============
Net income per share:
Basic $ 2.75 $ 2.13 $ 1.69
Diluted $ 1.66
Diluted2.52 $ 1.94 $ 1.49 $ 1.54
Shares used in computing net income per share:
Basic 1,671,681 1,602,449 1,516,846
1,443,439
Diluted 1,824,529 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
$ 15,529
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
Issuance of common stock from the
exercise of employee stock options 40,499 405 98,144 -- 98,549
Stock issued in lieu of directors fees 455 5 9,995 -- 10,000
Net income -- -- -- 4,600,352 4,600,352
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2006 1,693,952 $ 16,940 11,577,583 $ 6,012,046 $ 17,606,569
============ ============ ============ ============ ============
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 2006 2005 2004 2003
----------- ----------- -----------
OPERATING ACTIVITIES
OPERATING ACTIVITIES
Net income $ 4,600,352 $ 3,417,854 $ 2,571,026 $ 2,400,318
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 28,338 34,048 33,218 38,077
Stock issued to directors in lieu of fees 10,000 10,000 30,00010,000
Change in allowance for doubtful accounts -- -- 5,000
(58,358)
Inventory reserve write-downallowance -- -- 1,741 (10,000)
Gain on sale of land -- -- (175,965)
--Decrease in deferred taxes (124,604) (294,881) (56,899)
Earnings of the Hong Kong Joint Venture (2,109,594) (2,485,302) (2,165,311) (2,120,703)
Changes in operating assets and liabilities:
Increase in accounts receivable and amounts due from factor (958,878) (1,204,719) (2,095,514)
(594,447)
(Increase) decreaseDecrease (increase) in inventories 772,400 (1,966,836) 354,838 (1,656,235)
(Increase) decrease in prepaid expenses (51,469) (38,342) 29,291
(27,105)
Increase(Decrease) increase in accounts payable and accrued expenses (400,248) 1,430,096 1,199,873
1,937,957
(Increase)Increase in other assets -- -- (4,014) (1,377)
(Increase) in deferred taxes (294,881) (56,899) --
----------- ----------- -----------
NET CASH USED INPROVIDED BY (USED IN) OPERATING ACTIVITIES 1,766,297 (1,098,082) (292,716) (61,873)
INVESTING ACTIVITIES:
Cash distributions from Joint Venture 1,100,216 727,167 -- --
Purchase of equipment (8,858) (22,307) (20,787) (16,892)
Gross proceeds from sale of land -- -- 350,000
------------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,091,358 704,860 329,213
(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 98,549 271,543 125,255
92,625
Proceeds from issuance----------- ----------- -----------
Retirement of common stock -- -- 250,000
Retirement of common stock -- (1,424) --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 98,549 264,319 100,581 110,494
----------- ----------- -----------
INCREASE (DECREASE) INCREASE IN CASH 2,956,204 (128,903) 137,078 31,729
Cash at beginning of period 59,287 188,190 51,112 19,383
----------- ----------- -----------
CASH AT END OF PERIOD $ 3,015,491 $ 59,287 $ 188,190 $ 51,112
=========== =========== ===========
Supplemental information:
Interest paid $ 48,999 $ 85,521 $ 83,589 $ 153,168
Income taxes paid $ 50,320 $ 17,000 $ 24,001 $ --
Non-cash investing transactions:
Issuance of 455 shares in 2006, 950 shares in 2005, and 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 $ -- $ -- $ 39,19910,000
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.
Stock issued to directors in lieu of directors' fees is valued at market price
on the day of issuance.
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
2006 2005 2004
2003
------------- ------------- ----------------- ---- ----
Net income, as reported $ 3,417,854 $ 2,571,026 $ 2,400,318$4,600,352 $3,417,854 $2,571,026
Stock-based employee compensation costs, net of
income tax, included in net income 10,000 10,000 30,00010,000
Deduct: Total stock-based employee compensation
expense determined under fair value, net of
related tax effects (138,846) (144,672) (91,111)
(113,939)
------------- ------------- ----------------------- ---------- ----------
Pro forma net income $ 3,283,182 $ 2,489,915 $ 2,316,379
============= ============= =============$4,471,506 $3,283,182 $2,489,915
========== ========== ==========
Earnings per share:
Basic - as reported $ 2.75 $ 2.13 $ 1.69 1.66
Basic - pro forma 2.67 2.05 1.64 1.60
Diluted - as reported 2.52 1.94 1.49 1.54
Diluted - pro forma 2.45 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
$262,670, $208,913 $167,561 and $160,125$167,561 for the years ended March 31, 2006, 2005 2004 and
2003,2004, 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 $966,981, $702,779 $521,556 and $498,179$521,556 in fiscal
years 2006, 2005 2004 and 2003,2004, 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$370,419 and $171,524$514,373 at March 31, 20052006 and 2004,2005, respectively. Inventories are
shown net of an allowance for inventory obsolescence of $40,000 for the fiscal
year ended March 31, 2006 and $100,000 for the fiscal years ending March 31, 2005 and 2004, respectively.ended 2005.
The Company reviews inventory quarterly to identify slow moving products and
valuation allowances are providedadjusted 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 - TermShorter of term of lease or life of asset
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,
2006 2005 2004 2003
--------- --------- ---------
Common shares outstanding for basic EPS 1,671,681 1,602,449 1,516,846 1,443,439
Shares issued upon assumed exercise of outstanding
stock options 152,848 162,025 208,360 118,306
--------- --------- ---------
Weighted average number of common and common
equivalent shares outstanding for diluted EPS 1,824,529 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,
2006 2005 2004
-------- --------
Leasehold improvements $ 73,535 $ 71,88573,535
Machinery and equipment 158,696 158,696
Furniture and fixtures 197,482 195,873 181,889
Computer equipment 88,736 81,855 75,072
-------- --------
518,449 509,959 487,542
Less accumulated depreciation and amortization 456,237 428,269 394,111
-------- --------
$ 81,69062,212 $ 93,43181,690
======== ========
F-8
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,
2005,2006, the Company has an investment balance of $6,159,034$7,140,859 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, 20052006
and 20042005 and for the years ended March 31, 2006, 2005 2004 and 2003.2004.
March 31,
2006 2005 2004
----------- -----------
Current assets $ 6,131,5397,402,171 $ 5,128,2086,131,539
Property and other assets 10,911,009 9,112,863 7,111,679
----------- -----------
Total $18,313,180 $15,244,402 $12,239,887
=========== ===========
Current liabilities $ 4,537,7725,575,415 $ 3,809,5514,537,772
Non-current liabilities 32,870 24,750
9,623
----------- -----------
Equity 12,740,895 10,681,880 8,420,713
----------- -----------
Total $18,313,180 $15,244,402 $12,239,887
=========== ===========
For the Year Ended March 31,
2006 2005 2004
2003
----------- ----------- --------------- ---- ----
Net sales $24,811,790 $25,899,630 $24,114,967
$23,365,301
Gross profit 8,608,220 8,689,538 7,375,113
7,870,436
Net income 4,160,935 5,005,886 4,171,334 4,755,540
During the years ended March 31, 2006, 2005 2004 and 2003,2004, the Company purchased
$12,321,401, $10,513,800 $7,481,716, and $7,329,221,$7,481,716, respectively, of finished product from
the Hong Kong Joint Venture, which represents 68%66%, 73%68% and 66%73%, respectively, of
the Company's total finished product purchases for the years ended at March 31,
2006, 2005 2004 and 2003.2004. Amounts due the Hong Kong Joint Venture included in
Accounts Payable totaled $549,527$500,000 and $494,711$549,527 at March 31, 20052006 and 2004,2005,
respectively. Amounts due from the Hong Kong Joint Venture included in Accounts
Receivable totaled $84,330$48,205 and $174,935$84,330 at March 31, 20052006 and 2004,2005, respectively.
The Company incurred interest costs charged by the Hong Kong Joint Venture of
$37,389, $17,581 $25,482 and $16,585$25,482 during the years ended March 31, 2006, 2005 2004 and
2003,2004, 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, whichinventory. Financing of $7,500,000 is
available at March 31, 2005 was
$4,743,416.2006. 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%7.75% at March 31, 2005.2006. Any amount due to the factor is
also secured by the Company's inventory. There were no borrowings outstanding
under this agreement at March 31, 2006.
F-9
Under this Factoring Agreement, the Company sold receivables of approximately
$20,954,000$26,713,439 and $15,560,000$20,954,000 during the years ended March 31, 20052006 and 2004,2005,
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$4,414,654
and $2,695,465$3,399,130 at March 31, 20052006 and 2004.2005. The amount of the uncollected balance
of non-recourse receivables borrowed by the Company as of March 31, 2006 and
2005 and
2004 is $483,416$0 and $0, respectively. Amounts due from the factor to the Company
amounted to $3,394,084 and $2,823,300$7,136,282 at March 31, 20052006, of which $2,877,151 represents
collected cash due the Company and 2004,
respectively.maintained on deposit with the factor for
investment. Collected cash maintained on deposit with the factor earns interest
at the factor's prime rate of interest less three percentage points (4.75%) at
March 31, 2006. Amounts due from the factor amounted to $3,394,084 at March 31,
2005.
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 2005.2008. 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 years2009 with increasing rentals at 3% per year.
Rent expense totaled $102,589, $97,011 $92,063 and $67,886$92,063 for the years ended March 31,
2006, 2005 2004 and 2003,2004, respectively. Future obligations, including the lease
renewal option exercised subsequent to March 31 2005,2006, 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$105,479
2008 71,290108,429
2009 42,304
----------
$ 281,141
==========
F-10
77,097
--------
$291,005
========
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 thatand 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 changechanges in the
unremitted earnings of the Hong Kong joint
venture.Joint Venture.
Beginning in 2004, USI will no longer recognize the deferred tax liability
related to the unremitted earnings of the Hong Kong joint venture.Joint Venture. There is no
longer a plan to repatriate the unremitted earnings in the future, other than a
possible $850,000 payment. USI hadThe Company has foreign tax credits available as a
net operating loss carryforward asresult of FYEforeign taxes paid on the repatriated earnings of the Hong Kong Joint
Venture. Approximately $115,000 of foreign tax credits were used to offset
federal taxes at March 31, 2004 of
$4,005,008, of which $1,194,802 was utilized in FYE March 31, 2005. This leaves2006.
USI had a net operating loss carryforward as of March 31, 2005 inof $2,151,593, of
which $2,151,593 was utilized during the amountyear ended March 31, 2006. Therefore,
the net operating loss carryforward has been fully utilized as of $2,810,388.March 31,
2006.
F-10
The components of income tax expense (benefit) for USI are as follows:
March 31,
2006 2005
2004
--------- ------------------- -----------
Current
Federal $ 17,651 $ 21,000
$ 56,899
State 10,453 5,250
24,001
--------- ------------------- -----------
28,104 26,250 80,900
Deferred (benefit) (124,604) (307,387)
(56,899)
--------- ------------------- -----------
Total income tax (benefit) expense $(281,137) $ 24,001
========= =========(96,500) $ (281,137)
========== ===========
Significant components of USI's deferred tax assets and liabilities are as follows:
March 31,
2006 2005 2004 2003
----------- ----------- -----------
Deferred tax liabilities - unremitted earnings from Hong Kong
Joint Venture: $ -- $ 637,279-- $ 1,465,270637,279
----------- ----------- -----------
Deferred tax assets:
Financial statement accruals and allowances 360,022 220,602 250,032 232,167
Inventory uniform capitalization 94,741 56,727 89,628
72,200
Other -- 14,953 40,346 41,983
AMT tax credit carryforward 21,621 21,621 021,621
NOL carryforwards and tax credits 0 814,400 1,307,866 2,031,616
----------- ----------- -----------
Gross deferred tax assets 476,384 1,128,303 1,709,493
2,377,966
Valuation allowance 0 (776,523) (1,015,315) (912,696)
----------- ----------- -----------
Net deferred tax liability (asset) $ 476,384 $ 351,780 $ (56.899) $ 0(56,899)
=========== =========== ===========
F-11
The reconciliation between the statutory federal income tax provision and the
actual effective tax provision is as follows:
Years ended March 31,
2006 2005 2004 2003
----------- ----------- -----------
Federal tax expense at statutory rate on domestic income
(34%) before loss
carryforward $ 479,2001,577,074 $ 202,6271,066,484 $ 95,056882,309
Reduction in income taxes arising from carryforward of prior
years' operating losses -- (458,200) (679,682)
Non-patriated earnings of Hong Kong Joint Venture (356,143) (402,855) (464,451)
Employment expense of employee stock options (224,592) (333,879) --
Foreign tax credit net of gross up for US portion of foreign
taxes (69,210) -- --
Change in rates for deferreds (264,630) -- --
State income tax expense 10,453 5,250 103,582 96,013
Equity in earnings from Hong Kong Joint Venture -- 677,819 721,039
Change in valuation allowance (776,523) (238,791) 102,619
(935,758)
Change in deferred tax liability of unremitted earnings from
the Hong Kong Joint VenturePermanent differences 10,108 80,854 79,624
Other (3,037) -- (1,142,270) --
Change in deferred tax assets (8,494) -- --
Other (60,102) 79,624 23,650
----------- ----------- -----------
Provision for income tax (benefit) expense $ (96,500) $ (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, 2005,2006, the Company issued 100,23240,954
shares of its common stock, of which 99,28240,499 were issued on the exercise of
employee stock options for total proceeds of $271,543$98,549, and 950455 shares were issued
to directorsa director in lieu of a 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.fee.
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 609,658657,158 shares have been issued as of March 31, 2005,2006,
leaving 48,6751,175 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, 20052006 and option transactions for the three years
then ended:
Status as of March 31, 20052006 Number of Shares
--------------------------- ----------------
Presently exercisable 212,914231,788
Exercisable in future years 22,582
-------10,708
----------------
Total outstanding 235,496242,496
Available for future grants 48,6751,175
Shares of common stock reserved 284,171243,671
Outstanding options:
Number of holders 1819
Average exercise price per share $ 5.737.31
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 235,4962011
Weighted Average
Transactions for the Three Years Ended March 31, 2006: Number of Shares Exercise Price
- ------------------------------------------------------ ---------------- --------------
Outstanding at March 31, 2003 348,667
Granted 10,666 10.53
Canceled (2,924) 1.98
Exercised (56,297) 2.21
----------
Outstanding at March 31, 2004 300,112
Granted 55,000 14.30
Canceled (334) 2.63
Exercised (99,282) 2.74
----------
Outstanding at March 31, 2005 255,496
Granted 27,500 13.37
Canceled 0 0.00
Exercised (40,500) 2.43
-----------
Outstanding at March 31, 2006 242,496
The following table summarizes information about stock options outstanding at
March 31, 2005:2006:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Range of Number Weighted Average Weighted Range of Number Average Contract Number Average
Exercise Price of Shares Exercise Price Contract Life (Yrs) of Shares Exercise Price
-------------- --------- -------------- ----------------------------- --------- --------------
$0.98 to $2.99 117,830 $1.83 1.69 110,748 $ 1.8099,331 $1.75 0.80 99,331 $1.75
$3.00 to $3.99 26,666 3.38 2.001.00 26,666 3.38
$4.00 to $5.99 25,333 5.40 2.431.43 25,333 5.40
$6.00 to $15.02 65,667 13.55 4.65 50,167 14.7863,666 12.28 3.70 52,958 14.77
$15.03 to $21.45 27,500 21.45 5.00 27,500 21.45
------- -------
235,496 212,914242,496 231,788
======= =======
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 2006, 2005 2004 and 2003;2004; no annual dividends, expected volatility of
45%36%, 53%45% and 80%53%, 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 2006, 2005 and 2004 were $8.29, $6.47 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. ("Leviton") 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)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 itsLeviton's six 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 II
also asserted trade dress and unfair competition claims which largely correspond
to the claim in the "Leviton l"Leviton I suit. In May 2006 Leviton and the Company settled
Leviton I and Leviton II, all subject to a confidential agreement. Under the
terms of the settlement, Leviton I has been dismissed, and the trade
dress/deceptive trade practice claims of Leviton II have been dismissed. The
settlement does not cover the patent infringement claims of Leviton II.
In January 2006, the Company was granted summary judgment on the infringement
claims asserted in Leviton II. Leviton has appealed that judgment and dismissal.
Should Leviton's appeal be successful and the summary judgment of
non-infringement be overturned, then Leviton's infringement claims will be
reinstated. If reinstated, the Company's belief in its strong defenses to
Leviton's claims in that suit remains unchanged. However, in the event of an
unfavorable outcome, including reversal of the lower court's dismissal on appeal
and rejection of the Company's defenses at trial, the amount of any potential
loss to the Company is not determinable at this time.
On July 23, 2003,March 31, 2005, Leviton filed a third lawsuit, Civil Action No. 05cv0889, in
the United States District Court for the District of Maryland against the
Company ("Leviton III"). In this suit, Leviton alleges that the Company's GFCI
units infringe US Patent 6,864,766. The Company has filed a counterclaim against
Leviton and the case has been consolidated with a declaratory judgment action
filed by the GFCI manufacturer, Shanghai Meihao Electric, Inc., filed an action for Declaratory
Judgment of non-infringement, invalidity, and unenforceability of the asserted
patents. Discovery is now
ongoing. The CourtCompany believes that it 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 meritoriousstrong defenses relating to the patent
and trade dress
infringement claims as part of its aggressive defense.in suit. In the event of an unfavorable outcome, the amount of any potential
loss to USIthe Company is not yet
determinable.determinable at this time.
On June 11, 2003, Walter Kidde Portable Equipment, Inc. ("Kidde") 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. DiscoveryOn March 31, 2006, following numerous procedural and
substantive rulings by the judge, Kidde obtained dismissal, without prejudice,
of its suit. On November 28, 2005, prior to the March 31, 2006 dismissal of the
original suit, Kidde filed a second lawsuit based on virtually identical
infringement allegations as the earlier case. Because, the court dismissed the
first case without conditions and without prejudice, the Company has appealed
the dismissal believing that at a minimum, procedurally, conditions should have
been imposed. The second case 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.preliminary pre-discovery motion
stage. The Company's substantive position and its defenses to Kidde's claims are
substantially the same between the first and second Kidde cases. 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 USIthe Company 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 aboutApril 11, 2005, this action was dismissed pending the outcome of
a conclusion to the litigation, the Company successfully sought and has now
obtained re-examination of the asserted patentreexamination in the United States Patent and Trademark Office (USPTO) based on. In
April 2006, 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 outcomeUSPTO rejected most of the proceedingsclaims in the USPTO. Apart
from granting USI's Request for Reexaminationpatent. Maple Chase has
not yet filed a substantive response to the USPTO action. While the Company is
confident that the USPTO reexamination and rejection of the claims indicates
that the Company will prevail in October of 2004,this action, no further
communications in the reexamination have been issued to date.assurances can be given. 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-15F-14
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 anyno customers that represented in excess of 10% of the Company's
product sales during the three years in the period ended March 31, 2005.2006.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years 20052006 and 20042005 are
summarized as follows:
Quarter Ended
20052006 June 30, September 30, December 31, March 31,
- ---- -------- ------------- ------------ ---------
Net sales $4,874,782 $6,622,221 $5,849,144 $6,119,296$6,923,810 $7,119,100 $7,353,597 $7,497,594
Gross profit 1,484,713 2,121,778 1,825,828 1,887,4992,048,954 2,278,838 2,549,300 2,580,060
Net income 766,297 1,043,836 793,569 814,152889,770 1,162,695 1,456,809 1,091,078
Net income per share - basic 0.49 0.66 0.49 0.490.54 0.69 0.87 .65
Net income per share - diluted 0.44 0.59 0.45 0.46
2004
- ----0.50 0.64 0.80 .58
2005
Net sales $4,431,950 $4,988,483 $3,838,192 $3,932,491$4,874,782 $6,622,221 $5,849,144 $6,119,296
Gross profit 1,460,245 1,575,707 1,230,667 1,531,9571,484,713 2,121,778 1,825,828 1,887,499
Net income 852,498 740,446 493,792 484,290766,297 1,043,836 793,569 814,152
Net income per share - basic 0.57 0.49 0.33 .300.66 0.49 0.49
Net income per share - diluted 0.51 0.43 0.29 .260.44 0.59 0.45 0.46
F-16F-15
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED March 31, 2006, 2005 and 2004
Balance at Charged to Charged to
beginning cost and other Balance at
of year expenses accounts Deductions end of year
---------- ---------- ---------- ---------- -----------
Year ended March 31, 2006
Allowance for doubtful accounts $ 15,000 $ 0 $ 0 $ 0 $ 15,000
Year ended March 31, 2005
Allowance for doubtful accounts $ 10,000 $ 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, 2006
Allowance for inventory reserve $ 100,000 $ 0 $ 0 $ 60,000 $ 40,000
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, 2006
Valuation allowance $ 776,523 $ 0 $ 0 $ 776,523 $ 0
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 $1,015,315
S-1
REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDEDThe Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
Reports and Financial Statements
For the year ended 31 MARCH 2005
CONTENTS PAGE(S)
AUDITOR'S REPORTMarch 2006
Contents
Auditors' Report JV-1
CONSOLIDATED INCOME STATEMENTConsolidated Income Statement JV-2
CONSOLIDATED BALANCE SHEETConsolidated Balance Sheet JV-3
BALANCE SHEETBalance Sheet JV-4
CONSOLIDATED STATEMENT OF CHANGES IN EQUITYConsolidated Statement of Changes in Equity JV-5
CONSOLIDATED CASH FLOW STATEMENTConsolidated Cash Flow Statement JV-6
NOTES TO THE FINANCIAL STATEMENTSNotes to the Financial Statements JV-7
Expressed in Hong Kong Dollarsdollars ("HK$")
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) and subsidiaries ("the Company"), as of March 31, 20052006 and 2004,2005, 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, 2005.2006. 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, 20052006 and 2004,2005, and the consolidated results of its
income and its cash flows for each of the two years in the period ended March
31, 2005,2006, in conformity with accounting principles generally accepted in Hong
Kong.
Grant Thornton
Certified Public Accountants
Hong Kong
June 24, 200523, 2006
JV-1
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDEDCommission
Consolidated income statement for the year ended 31 MARCHMarch 2006
Notes 2006 2005
Notes 2005 2004
HK$ HK$
Turnover 35 192,697,968 201,851,572 187,606,721
Cost of sales (125,843,197) (134,128,970)
(130,230,706)
-------------- --------------- -------------------------------------------------------------------------------
Gross profit 66,854,771 67,722,602
57,376,015
Other revenueincome 6 2,798,681 2,550,272 1,987,172
Administrative expenses (33,160,250) (27,242,707)
(23,115,557)
-------------- --------------- -------------------------------------------------------------------------------
Profit from operations 36,493,202 43,030,167 36,247,630
Finance costs 47 (265,063) (239,239)
(353,940)
-------------- --------------- -------------------------------------------------------------------------------
Profit before taxation 5income tax 8 36,228,139 42,790,928
35,893,690
Taxation 6Income tax expense 9 (3,912,698) (3,776,352)
(3,442,047)
-------------- --------------- -------------------------------------------------------------------------------
Profit for the year 10 32,315,441 39,014,576
32,451,643
============== ==============- -------------------------------------------------------------------------------
Dividends 711 17,163,365 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 ATCommission
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
=========== ============March 2006
(Restated)
Notes 2006 2005
HK$ HK$
ASSETS AND LIABILITIES
Non-current assets
Property, plant and equipment 12 41,660,661 35,042,071
Advanced lease payments 13 8,708,432 8,971,370
Available-for-sale financial assets/Other investments 14 34,277,991 27,047,797
- ------------------------------------------------------------------------------------------------------
84,647,084 71,061,238
Current assets
Inventories 16 18,922,905 18,298,036
Trade and other receivables 17 8,280,783 6,146,091
Loan to a shareholder 19 3,900,000 3,900,000
Cash and cash equivalents 26,322,005 19,468,905
- ------------------------------------------------------------------------------------------------------
57,425,693 47,813,032
Current liabilities
Trade and other payables 20,844,537 15,573,010
Amount due to a related company 20 2,914,238 3,612,866
Dividend payable 21 11,700,000 11,700,000
Amount due to a shareholder 20 409,907 250,995
Loans from shareholders 22 2,868,954 2,868,954
Collateralised bank advances 23 3,435,122 -
Provision for taxation 1,081,046 1,379,231
- ------------------------------------------------------------------------------------------------------
43,253,804 35,385,056
- ------------------------------------------------------------------------------------------------------
Net current assets 14,171,889 12,427,976
- ------------------------------------------------------------------------------------------------------
Total assets less current liabilities 98,818,973 83,489,214
Non-current liabilities
Provision for deferred taxation 24 255,000 193,000
- ------------------------------------------------------------------------------------------------------
Net assets 98,563,973 83,296,214
- ------------------------------------------------------------------------------------------------------
EQUITY
Share capital 25 200 200
Reserves 26 98,563,773 83,296,014
- ------------------------------------------------------------------------------------------------------
98,563,973 83,296,214
- ------------------------------------------------------------------------------------------------------
JV-3
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
BALANCE SHEET
AS ATCommission
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
=========== ===========March 2006
(Restated)
Notes 2006 2005
HK$ HK$
ASSETS AND LIABILITIES
Non-current assets
Property, plant and equipment 12 5,024,417 4,802,684
Advanced lease payments 13 1,191,701 1,451,292
Available-for-sale financial assets/Other investments 14 34,277,991 27,047,797
Interests in subsidiaries 15 39,793,122 50,752,225
- ------------------------------------------------------------------------------------------------------
80,287,231 84,053,998
Current assets
Inventories 16 18,922,905 18,001,256
Other receivables 904,638 2,563,000
Amounts due from subsidiaries 18 26,647,470 8,414,502
Cash and cash equivalents 20,200,914 10,362,598
- ------------------------------------------------------------------------------------------------------
66,675,927 39,341,356
Current liabilities
Trade and other payables 16,817,998 13,986,626
Amount due to a related company 20 2,914,238 3,612,866
Dividend payable 21 11,700,000 11,700,000
Loans from shareholders 22 2,868,954 2,868,954
Provision for taxation 1,081,046 1,379,231
- ------------------------------------------------------------------------------------------------------
35,382,236 33,547,677
- ------------------------------------------------------------------------------------------------------
Net current assets 31,293,691 5,793,679
- ------------------------------------------------------------------------------------------------------
Total assets less current liabilities 111,580,922 89,847,677
Non-current liabilities
Provision for deferred taxation 24 255,000 193,000
- ------------------------------------------------------------------------------------------------------
Net assets 111,325,922 89,654,677
- ------------------------------------------------------------------------------------------------------
EQUITY
Share capital 25 200 200
Reserves 26 111,325,722 89,654,477
- ------------------------------------------------------------------------------------------------------
111,325,922 89,654,677
- ------------------------------------------------------------------------------------------------------
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 ENDEDCommission
Consolidated statement of changes in equity for the year ended 31 MARCH 2005March 2006
Share Exchange Fair value Retained
Share
capital reserve reserve profits Total
HK$ 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
=========== =========== =========== ===========- -----------------------------------------------------------------------------------------------------------
Balance at 1 April 2005 - prior to
opening adjustment 200 34,233 - 83,261,781 83,296,214
Opening adjustment on adoption of
HKAS 39 (note 2.2) - - (251,023) 251,023 -
- -----------------------------------------------------------------------------------------------------------
Adjusted balance at 1 April 2005 200 34,233 (251,023) 83,512,804 83,296,214
Change in fair value of
available-for-sale financial
assets - - (499,606) - (499,606)
Exchange differences arising on
translation of a subsidiary - 615,289 - - 615,289
Profit for the year - - - 32,315,441 32,315,441
Dividends - - - (17,163,365) (17,163,365)
- -----------------------------------------------------------------------------------------------------------
Balance at 31 March 2006 200 649,522 (750,629) 98,664,880 98,563,973
- -----------------------------------------------------------------------------------------------------------
JV-5
JV-5
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDEDCommission
Consolidated cash flow statement for the year ended 31 MARCH 2005March 2006
(Restated)
2006 2005 2004
HK$ HK$
Cash flows from operating activities
Profit before taxationincome tax 36,228,139 42,790,928 35,893,690
Adjustments for :
Amortisation of advanced lease payment 415,454 235,133
Bad debts written off - 138,614 --
Depreciation of property, plant and equipment 4,090,952 3,999,1744,414,388 3,855,819
Gain on disposal of other securitiesinvestments - (42,686)
(53,820)
GainLoss/(Gain) on disposal of property, plant and
equipment 9,985 (343,779) --
Interest expense 265,063 239,239 353,940
Interest income (1,761,425) (1,301,047) (710,203)
Provision for doubtful debts -- 95,641
Provision for inventories -- 132,787
Unrealised holding loss / (gain) on other securitiesinvestments - 843,964
(592,941)
----------- ------------ ------------------------------------------------------------------------------------------------------
Operating profit before working capital changes 39,571,604 46,416,185 39,118,268
Decrease in amount due to a shareholder (3,845,777) (541,886)
(7,659,679)
(Increase)/Decrease / (Increase) in inventories (624,869) 2,117,483
(5,426,165)
Decrease / (Increase) in trade and other receivables 1,300,430 33,661 (1,323,849)
Increase in loan to a shareholder - (3,900,000)
--
(Decrease)/Increase / (Decrease) in amount due to a related
company (698,628) 430,083
(252,552)
Increase / (Decrease) in trade and other payables 5,271,527 763,264
(925,388)
----------- ------------ ------------------------------------------------------------------------------------------------------
Cash generated from operations 40,974,287 45,318,790 23,530,635
Interest received 1,761,425 1,301,047 484,121
Interest paid (265,063) (239,239) (353,940)
Dividends paid (13,158,676) (14,926,185) (9,075,253)
Hong Kong profits tax paid (4,148,883) (1,864,407)
(6,178,559)
----------- ------------ ------------------------------------------------------------------------------------------------------
Net cash generated from operating activities 25,163,090 29,590,006
8,407,004
----------- ------------ ------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property, plant and equipment (10,630,878) (16,671,896) (15,931,858)
Purchase of available-for-sale financial assets/other
securtiesinvestments (7,729,800) (7,782,840) (31,293,580)
Proceeds from disposal of available-for-sale
financial assets/other securitiesinvestments - 3,925,126 7,948,980
Proceeds from disposal of property, plant and
equipment 5,919 350,000
--
----------- ------------ ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,354,759) (20,179,610)
(39,276,458)
----------- ------------ ------------------------------------------------------------------------------------------------------
Net increase/(decrease)increase in cash and cash equivalents 6,808,331 9,410,396 (30,869,454)
Cash and cash equivalents at beginning of the year 19,468,905 10,032,654 40,893,730
Effect of foreign exchange rate changes, net 44,769 25,855
8,378
----------- ------------ ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year 26,322,005 19,468,905
10,032,654
=========== ===========- ------------------------------------------------------------------------------------------------------
JV-6
JV-6
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR
ENDEDCommission
Notes to the financial statements for the year ended 31 MARCH 2005March 2006
1. GENERAL INFORMATION
The company wasis a limited liability company incorporated and domiciled in
Hong Kong with limited liability.Kong. 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 1215 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 arehave been prepared in accordance with and comply
with all applicable Hong Kong
Financial Reporting Standards ("HKFRS") as issued by the Hong Kong
Institute of Certified Public Accountants ("HKICPA").and the Hong Kong Companies
Ordinance.
The financial statements for the year ended 31 March 2006 were approved by
the board of directors on 23 June 2006.
2. ADOPTION OF NEW OR REVISED HKFRS
From 1 April 2005, the group has adopted, for the first time, the new or
revised standards and interpretations of HKFRS, which are relevant to its
operations. This includes the following new, revised and renamed
standards:
HKAS 1 Presentation of Financial Statements
HKAS 2 Inventories
HKAS 7 Cash Flow Statements
HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10 Events after the Balance Sheet Date
HKAS 12 Income Taxes
HKAS 16 Property, Plant and Equipment
HKAS 17 Leases
HKAS 18 Revenue
HKAS 19 Employee Benefits
HKAS 21 The Effects of Changes in Foreign Exchange Rates
HKAS 24 Related Party Disclosures
HKAS 27 Consolidated and Separate Financial Statements
HKAS 32 Financial Instruments : Disclosure and Presentation
HKAS 36 Impairment of Assets
HKAS 37 Provisions, Contingent Liabilities and Contingent Assets
HKAS 39 Financial Instruments : Recognition and Measurement
HK(SIC)-Int 15 Operating leases - Incentives
JV-7
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
2. ADOPTION OF NEW OR REVISED HKFRS (Continued)
All the standards have been applied retrospectively except where specific
transitional provisions require a different treatment and accordingly the
2005 financial statements and their presentation have been amended in
accordance with HKAS 8. Due to the change in accounting policies, the 2005
comparatives contained in these financial statements differ from those
published in the financial statements for the year ended 31 March 2005.
Significant effects on current, prior or future periods arising from the
first-time application of the standards listed above in respect to
presentation, recognition and measurement of accounts are described in the
following notes :
2.1 Adoption of HKAS 17
The adoption of HKAS 17 has resulted in a change in the accounting
policy relating to the reclassification of leasehold land and land
use rights from property, plant and equipment to operating leases.
The up-front prepayments made for the leasehold land and land use
rights are charged to the income statement on a straight-line basis
over the period of the lease. In prior years, leasehold land and
buildings were not separated. Leasehold land and buildings and land
use rights were classified under property, plant and equipment and
carried at cost less accumulated depreciation and accumulated
impairment losses. The reclassification does not give rise to any
adjustment to prior year's profit.
2.2 Adoption of HKAS 32 and HKAS 39
Prior to the adoption of HKAS 39, investments of the group were
classified into unlisted equity securities and listed debt
securities, which were stated in the balance sheet at cost less any
impairment losses and at fair value, respectively. Any impairment
losses on unlisted equity securities and changes in fair value of
listed debt securities were recognised in the income statement in
the period in which they arose.
On the adoption of HKAS 39, the listed debt securities as at 31
March 2005 were redesignated into available-for-sale financial
assets on 1 April 2005. After initial recognition,
available-for-sale financial assets are measured at fair value with
gains or losses being recognised as a separate component of equity
until the investment is sold, collected or otherwise disposed of or
until the investment is determined to be impaired at which time the
aggregate gain or loss previously reported in equity is included in
the income statement.
JV-8
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
2. ADOPTION OF NEW OR REVISED HKFRS (Continued)
2.2 Adoption of HKAS 32 and HKAS 39 (Continued)
In accordance with the transitional provisions of HKAS 39, the
recognition, derecognition and measurement of financial assets and
liabilities on a retrospective basis is not permitted. Accordingly,
an adjustment has been made to restate the aggregate changes in fair
value of the group's listed debt securities of HK$251,023 from
retained profits to fair value reserve at 1 April 2005.
According to the relevant transitional provisions of HKAS 39, the
group's bills discounted with full recourse, which were derecognised
and treated as contingent liabilities (note 29) until 31 March 2005,
have been accounted for as collateralised bank advances (note 23)
and bills receivable (note 17) prospectively on or after 1 April
2005 as the financial assets derecognition conditions as stipulated
in HKAS 39 have not been fulfilled.
2.3 Other standards adopted
All other standards did not result in significant changes to the
group's accounting policies. The specific transitional provisions
contained in some of these standards were considered. The adoption
of these standards and interpretations did not result in any
significant changes to the amounts or disclosures in these financial
statements.
JV-9
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
2. ADOPTION OF NEW OR REVISED HKFRS (Continued)
2.4 New standards or interpretations that have been issued but are not
yet effective.
The group has not early adopted the following standards or
interpretations that have been issued but are not yet effective. The
directors of the company anticipate that the adoption of such
standards and interpretations will not result in substantial changes
to the group's accounting policies.
HKAS 1 (Amendment) Capital Disclosures (1)
HKAS 19 (Amendment) Employee Benefits - Actuarial Gains and Losses, Group Plans
and Disclosures (2)
HKAS 21 (Amendment) The Effects of Changes in Foreign Exchange Rates - Net
Investment in a Foreign Operation(2)
HKAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup
Transactions (2)
HKAS 39 (Amendment) The Fair Value Options (2)
HKAS 39 & HKFRS 4 Financial Instruments : Recognition and Measurement and
(Amendment) Insurance Contracts - Financial Guarantee Contracts (2)
HKFRS 1& HKFRS 6 First-time Adoption of Hong Kong Financial Reporting
(Amendments) Standards and Exploration for and Evaluation of Mineral
Resources (2)
HKFRS 6 Exploration for and Evaluation of Mineral Resources (2)
HKFRS 7 Financial Instruments - Disclosures (1)
HK(IFRIC) - Int 4 Determining whether an Arrangement contains a Lease(2)
HK(IFRIC) - Int 5 Rights to Interests Arising from Decommissioning, Restoration
and Environmental Rehabilitation Funds (2)
HK(IFRIC) - Int 6 Liabilities Arising from Participating in a Specific Market -
Waste Electrical and Electronic Equipment (3)
HK(IFRIC) - Int 7 Applying the Restatement Approach under HKAS 29 Financial
Reporting in Hyperinflationary Economies (4)
HK(IFRIC) - Int 8 Scope of HKFRS 2 (5)
HK(IFRIC) - Int 9 Reassessment of embedded derivatives (6)
(1) Effective for annual periods beginning on or after 1 January 2007
(2) Effective for annual periods beginning on or after 1 January 2006
(3) Effective for annual periods beginning on or after 1 December 2005
(4) Effective for annual periods beginning on or after 1 March 2006
(5) Effective for annual periods beginning on or after 1 May 2006
(5) Effective for annual periods beginning on or after 1 June 2006
JV-10
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3.1 Basis of preparation
The significant accounting policies that have been used in the
preparation of these financial statements are summarised below.
The financial statements have been prepared underon the historical cost
convention as modified bybasis except for the revaluation of certain investments as explainedfinancial assets and
liabilities. The measurement bases are fully described in note 2(e)the
accounting policies below.
(b)It should be noted that accounting estimates and assumptions are
used in preparation of the financial statements. Although these
estimates are based on management's best knowledge of current events
and actions, actual results may ultimately differ from those
estimates.
3.2 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)3.3 Subsidiaries
Subsidiaries are those enterprisesentities 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 fully consolidated from the date on
which control is transferred to the group. They are de-consolidated
from date that control ceases.
Inter-company transactions, balances and unrealised gains on
transactions between group companies are eliminated. Unrealised
losses are also eliminated unless the transaction provides evidence
of an impairment of the asset transferred.
In the company's balance sheet, subsidiaries are carried at cost
less any impairment loss. (d)The results of the subsidiaries are
accounted for by the company on the basis of dividends received and
receivable at the balance sheet date.
JV-11
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.4 Property, plant and equipment
(i) DepreciationProperty, plant and equipment are stated at acquisition cost less
accumulated depreciation and impairment losses.
Subsequent costs are included in the asset's carrying amount or
recognised as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will
flow to the group and company and the cost of the item can be
measured reliably. All other repairs and maintenance are charged to
the income statement during the period in which they are incurred.
Depreciation is provided to write off the cost of property, plant
and equipment less their residual values 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 expectedThe asset's residual values and useful lives of the
land held on medium term leases in Dongguanare reviewed, and
buildings constructed thereonadjusted if appropriate, at cost of HK$2,102,686
and HK$10,882,174 respectively, taking into
consideration that the existingeach balance sheet date.
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 theirarising on the disposal beingis determined as the
difference between the net
disposalsales proceeds and the carrying amount of the
assets,asset and is includedrecognised 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-8JV-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)
2. PRINCIPALCommission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f)(Continued)
3.5 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) Impairment3.6 Financial assets
The financial assets include available-for-sale financial assets,
trade and other receivables, bills receivable, and amounts due from
group companies.
In previous years, the group classified its investments in debt
securities as other investments. Other investments which were held
for non-trading purpose were stated at fair value at the balance
sheet date. Changes in fair value of other investments were
recognised in the income statement as they arose. Gains or losses on
disposal of other investments, representing the difference between
the net sales proceeds and the carrying amounts, were recognised in
the income statement as they arose.
From 1 April 2005 onwards, the group classifies its financial assets
into loans and receivables and available-for-sale financial assets.
Management determines the classification of its financial assets at
initial recognition depending on the purpose for which the financial
assets were acquired and where allowed and appropriate, re-evaluates
this designation at every reporting date.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
Loans and receivables are initially recognised at fair value and
subsequently measured at amortised cost using the effective interest
method less any impairment. Any changes in their value are
recognised in income statement.
JV-13
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.6 Financial assets (Continued)
Loans and receivables (Continued)
Loans and receivables are provided against when objective evidence
is received that the group will not be able to collect all amounts
due to it in accordance with the original terms of the group'sreceivables.
The amount of the impairment is the difference between the asset's
carrying amount and the company'spresent value of expected cash flows,
discounted at the effective interest rate.
Available-for-sale financial assets
Available-for-sale financial assets include non-derivative financial
assets that are reviewedeither designated to this category or do not qualify
for inclusion in any of the other categories of financial assets.
All financial assets within this category are subsequently measured
at fair value, with changes in value recognised in equity (i.e. fair
value reserve). Upon disposal, the cumulative gain or loss
previously recognised in equity is transferred to the income
statement. When a decline in the fair value of an available-for-sale
financial asset has been recognised directly in equity and there is
objective evidence that the asset is impaired, the cumulative loss
that had been recognised directly in equity is removed from equity
and recognised in the income statement even though the financial
asset has not been derecognised. Impairment losses previously
recognised in the income statement on equity instruments will not
reverse in subsequent periods. Impairment losses previously
recognised in income statement are subsequently reversed if an
increase in the fair value of the investment can be objectively
related to an event occurring after the recognition of the
impairment loss.
Derecognition of financial assets occurs when the rights to receive
cash flows from the investments expire or are transferred and
substantially all of the risks and rewards of ownership have been
transferred. An assessment for impairment is undertaken at least at
each balance sheet date to determine whether or not there is any indicationobjective evidence
that a financial asset or a group of impairment. If any such indication exists,financial assets is impaired.
3.7 Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand.
JV-14
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.8 Impairment of assets
Property, plant and equipment are subject to impairment testing.
For the asset's recoverablepurposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows
(cash-generating units). As a result, some assets are tested
individually for impairment and some are tested at cash-generating
unit level.
All individual assets or cash-generating units are tested for
impairment whenever events or changes in circumstances indicate that
the carrying amount is estimated.may not be recoverable.
An impairment loss is recognised wheneverfor the amount by which the asset's
or cash-generating unit's 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 greaterhigher of its net
selling pricefair value,
reflecting market conditions less costs to sell and value in use. In assessing value in use,
the
estimated futurebased on an internal discounted 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
specificflow evaluation. Any impairment
loss is charged pro rata to the asset. For an asset that does not generate
largely independentassets in the cash inflows, the recoverable amount is
determined for the cash-generating unit to which the asset
belongs.
(ii) Reversals of impairmentgenerating unit.
An impairment loss is reversed if there has been a change in the
estimates used to determine the asset's recoverable amount. An
impairment loss is reversedamount and 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 current3.9 Financial liabilities
The financial liabilities include trade 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,other payables, amounts
due to group 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 assetsrelated companies 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 taxborrowings.
Financial liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries, except wherewhen the group is ableor the company
becomes a party to control the reversalcontractual agreements of the temporary differences
and it is probable that the temporary difference will not reverseinstrument. All
interest related charges are recognised as an expense in the foreseeable future.
JV-9income
statement.
Trade and other payables and amounts due to group and related
companies are recognised initially at their fair value and
subsequently measured at amortised cost, using the effective
interest method.
Borrowings are recognised initially at fair value, net of
transaction costs incurred. Borrowings are subsequently stated at
amortised cost; any difference between the proceeds (net of
transaction costs) and the redemption value is recognised in the
income statement over the period of the borrowings using the
effective interest method.
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)
2. PRINCIPALCommission
3. SUMMARY OF SIGNIFICANT 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)3.10 Employee benefits
Retirement benefitbenefits 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$1,000 per month, and are
charged to the income statement as they become payable in accordance
with the rules of the MPF Scheme. The assets of the MPF Scheme are
held separately from those of the company in an independently
administered fund. The company's employer contributions vest fully
with the employees when contributed into the MPF Scheme.
(j) Operating leases3.11 Equity
Ordinary shares are classified as equity. Share capital is
determined using the nominal value of shares that have been issued.
The transaction costs of an equity transaction are accounted for as
deduction from equity (net of any related income tax benefits) to
the extent they are incremental cost directly attributable to the
equity transaction that otherwise would have been avoided. The cost
of an equity transaction that is abandoned are recognised as an
expense.
3.12 Foreign currencies
The financial statements are presented in Hong Kong Dollars (HK$),
which is also the functional currency of the company.
In the separate financial statements of the consolidated entities,
foreign currency transactions are translated into the functional
currency of the individual entity using the exchange rates
prevailing at the dates of the transactions. Foreign exchange gains
and losses resulting from the settlement of such transactions and
from the translation of monetary assets and liabilities denominated
in foreign currencies at year-end exchange rates are recognised in
the income statement. Non-monetary items that are measured in terms
of historical cost in a foreign currency are not retranslated.
JV-16
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.12 Foreign currencies (Continued)
In the consolidated financial statements, all separate financial
statements of subsidiaries, originally presented in a currency
different from the group's presentation currency, have been
converted into Hong Kong dollars. Assets and liabilities have been
translated into Hong Kong dollars at the closing rate at the balance
sheet date. Income and expenses have been converted into Hong Kong
dollars at the average rates over the reporting period. Any
differences arising from this procedure have been dealt with in the
exchange reserve in equity.
3.13 Accounting for income taxes
Income tax comprises current tax and deferred tax.
Current income tax assets and/or liabilities comprise those
obligations to, or claims from, tax authorities relating to the
current or prior reporting period, that are unpaid at the balance
sheet date. They are calculated according to the tax rates and tax
laws applicable to the periods to which they relate, based on the
taxable profit for the year. All changes to current tax assets or
liabilities are recognised as a component of income tax expense in
the income statement.
Deferred tax is calculated using the liability method on temporary
differences at the balance sheet date between the carrying amounts
of assets and liabilities in the financial statements with their
respective tax bases. Deferred tax liabilities are generally
recognised for all taxable temporary differences. Deferred tax
assets are recognised for all deductible temporary differences, tax
losses available to be carried forward as well as other unused tax
credits, to the extent that it is probable that taxable profit will
be available against which the deductible temporary differences,
unused tax losses and unused tax credits can be utilised.
Deferred tax is calculated, without discounting, at tax rates that
are expected to apply in the period the liability is settled or the
asset realised, provided they are enacted or substantively enacted
at the balance sheet date.
Changes in deferred tax assets or liabilities are recognised in the
income statement, or in equity if they relate to items that are
charged or credited directly to equity.
JV-17
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.14 Leases
Leases where substantially all the risks and rewards of ownership of
assets remain with the lessor are accounted for as operating leases.
AnnualOperating lease payments are recognised as an expense on a
straight-line basis. Affiliated costs, such as maintenance and
insurance, are expensed as incurred. Contingent 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 expressedaccounting period in foreign currencieswhich they 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)incurred.
3.15 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-103.16 Related parties
Parties are considered to be related to the group if :
(i) directly, or indirectly through one or more intermediaries,
the party : -controls, is controlled by, or is under common
control with, the group; -has an interest in the group that
gives it significant influence over the group; -has joint
control over the group;
(ii) the party is a jointly-controlled entity;
(iii) the party is an associate;
(iv) the party is a member of the key management personnel of the
group or its parent;
(v) the party is a close member of the family of any individual
referred to in (i) or (iv);
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)
2. PRINCIPALCommission
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m)(Continued)
3.16 Related parties Parties are considered to be related if one(Continued)
(vi) the party has the ability,is an entity that is controlled, jointly-controlled
or significantly influenced by or for which significant voting
power in such entity resides with, directly or indirectly, any
individual referred to in (iv) or (v); or
(vii) the party is a post-employment benefit plan for the benefit of
employees of the group, or of any entity that is a related
party of the group.
3.17 Contingent liabilities
A contingent liability is a possible obligation that arises from
past events and whose existence will only be confirmed by the
occurrence or non-occurrence of one or more uncertain future events
not wholly within the control of the group. It can also be a present
obligation arising from past events that is not recognised because
it is not probable that outflow of economic resources will be
required or the amount of obligation cannot be measured reliably.
A contingent liability is not recognised but is disclosed in the
notes to the financial statements. When a change in the probability
of an outflow occurs so that the outflow is probable, it will then
be recognised as a provision.
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based on
historical experience and other party or exercise
significant influence over the other party in making financial and
operating decisions. Partiesfactors, including expectations of future
events that are also consideredbelieved 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 asreasonable under the "new HKFRSs") which are effective for
accounting periods beginning on or after 1 January 2005.circumstances.
The group has not early adopted these new HKFRSs inmakes estimates and assumptions concerning the financial
statements forfuture. The
resulting accounting estimates will, by definition, seldom equal the
year ended 31 March 2005.related actual results. 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 wouldestimates and assumptions that have a
significant impact on its resultsrisk of operationscausing a material adjustment to the carrying amounts
of assets and liabilities within the next 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 onyear are discussed
below :
- - Discounted bills 192,281 309,292
- - Others 46,958 44,648
------- -------
239,239 353,940
======= =======
JV-11JV-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)
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 atCommission
Depreciation and amortisation
The group and company depreciated the rate of 17.5% (2004 : 17.5%)property, plant and equipment on a
straight-line basis over the estimated assessable profits arising in Hong Kong foruseful lives, starting from the
year.
No provision for Mainland China Enterprise Income Tax has been made asdate on which the assets are placed into productive use. The estimated
useful lives reflect the directors' estimate of the periods that the group
has no assessable profit in Mainland China (2004 : Nil).
JV-12intends to derive future economic benefits from the use of the group's and
company's property, plant and equipment.
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)Commission
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
Impairment of receivables
The policy for the impairment of receivables of the group is based on the
evaluation of collectibility and ageing analysis of accounts and on the
management's judgement. A considerable amount of judgement is required in
assessing the ultimate realisation of these receivables, including the
current creditworthiness and the past collection history of each debtor.
Net realisable value of inventories
Net realisable value of inventories is the actual or estimated selling
price in the ordinary course of business, less further costs of completion
and the estimated costs necessary to make the sale. These estimates are
based on the current market condition and the historical experience of
selling products of similar nature. It could change significantly as a
result of competitor actions in response to the changes in market
condition. Management reassess these estimations at the balance sheet
date.
Current taxation and deferred taxation
The group is subject to income taxes in Hong Kong and the People's
Republic of China ("PRC"). Significant judgement is required in
determining the amount of the provision of taxation and the timing of
payment of the related taxations. There are many transactions and
calculations for which the ultimate tax determination is uncertain during
the ordinary course of business. Where the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income tax and deferred tax provisions in the
period in which such determination is made.
5. TURNOVER
Revenue, which is also the group's turnover, represents total invoiced
value of goods supplied, less discounts and returns.
JV-21
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
6. TAXATION (CONTINUED)OTHER INCOME
2006 2005
HK$ HK$
Exchange gain, net - 49,278
Gain on disposal of property, plant and equipment 150 343,779
Interest income 1,761,425 1,301,047
Rental income, less outgoings 268,800 268,800
Sundry income 768,306 587,368
----------------------------------------------------------------------------------------------
2,798,681 2,550,272
----------------------------------------------------------------------------------------------
7. FINANCE COSTS
2006 2005
HK$ HK$
Interest charges on :
- Discounted bills 265,063 192,281
- Others - 46,958
----------------------------------------------------------------------------------------------
265,063 239,239
----------------------------------------------------------------------------------------------
8. PROFIT BEFORE INCOME TAX
(Restated)
2006 2005
HK$ HK$
Profit before income tax is arrived at after
charging :
Amortisation of advanced lease payments 415,454 235,133
Auditors' remuneration 187,020 200,000
Bad debts written off - 138,614
Cost of inventories recognised as expenses 125,843,197 134,128,970
Depreciation of property, plant and equipment 4,414,388 3,855,819
Exchange loss, net 598,754 -
Loss on disposal of property, plant and equipment 9,178 -
Operating lease charges in respect of land and
buildings 1,334,433 1,284,926
Retirement benefits scheme contributions 226,818 190,984
Staff costs (excluding retirement benefits scheme
contributions) 14,213,294 11,576,614
Unrealised holding loss on other investments - 843,964
----------------------------------------------------------------------------------------------
JV-22
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
9. INCOME TAX EXPENSE
2006 2005
HK$ HK$
The tax charge comprises :
Hong Kong profits tax
- current year 3,922,325 3,860,000
- overprovision in prior years (71,627) (201,648)
----------------------------------------------------------------------------------------------
3,850,698 3,658,352
----------------------------------------------------------------------------------------------
Deferred taxation (Note 24)
- current year 62,000 118,000
----------------------------------------------------------------------------------------------
Total income tax expense 3,912,698 3,776,352
----------------------------------------------------------------------------------------------
Hong Kong profits tax has been provided at the rate of 17.5% (2005 :
17.5%) on the group's estimated assessable profits arising in Hong Kong
for the year.
No provision for PRC Enterprise Income Tax has been made as the group
has no assessable profit in Mainland China (2005 : Nil).
Reconciliation between tax expense and accounting profit at applicable tax rates :
(Restated)2006 2005 2004
HK$ HK$
Profit before taxationincome tax 36,228,139 42,790,928
35,893,690----------------------------------------------------------------------------------------------
Notional tax on profit before taxation,income tax, calculated
at the rates applicable to profits in the tax
jurisdictions concerned 6,028,317 7,293,735 6,265,004
Tax effect of non-deductible expenses 1,105,380 379,463 74,776
Tax effect of non-taxable revenue (4,248,502) (4,202,248) (3,386,684)
Tax effect on temporary differences not recognised 478,546 393,086 565,900
Tax effect on unrecognised tax losses 620,584 113,964 8,372
Overprovision in prior years (71,627) (201,648)
(112,293)
Others -- 26,972
----------- ---------------------------------------------------------------------------------------------------------
Actual tax expense 3,912,698 3,776,352
3,442,047
=========== ===========----------------------------------------------------------------------------------------------
7.JV-23
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
10. PROFIT FOR THE YEAR
Of the consolidated profit attributable to shareholders of
HK$39,014,576
(200432,315,441 (2005 : HK$32,451,643)39,014,576), HK$42,542,423 (200439,334,216 (2005 :
HK$51,446,922 (Restated))42,542,423) has been dealt with in the financial statements of the
company.
Details of
the prior year adjustments are set out in note 29 to the financial
statements.
8.11. DIVIDENDS
2006 2005 2004
HK$ HK$
Dividends attributable to the year :
First interim dividend of HK$1,168,350 (20041,667,865 (2005 :
HK$2,130,692)1,168,350) per share 3,335,730 2,336,700 4,261,384
Second interim dividend of HK$2,413,723 (20042,336,824 (2005 :
HK$2,488,371)2,413,723) per share 4,673,649 4,827,446 4,976,742
Third interim dividend of HK$2,580,752 (20042,014,406 (2005 :
HK$2,205,190)2,580,752) per share 4,028,813 5,161,504 4,410,380
Fourth interim dividend of HK$3,091,304 (20042,562,586 (2005 :
HK$2,251,000)3,091,304) per share 5,125,173 6,182,608
4,502,000
Final dividend of HK$Nil (2004 : HK$5,850,000) per share -- 11,700,000
----------- ---------------------------------------------------------------------------------------------------------
17,163,365 18,508,258
29,850,506
=========== ===========----------------------------------------------------------------------------------------------
JV-13JV-24
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
9.Commission
12. PROPERTY, PLANT AND EQUIPMENT
Group
Land held on Furniture
medium term Land useComputer
Leasehold Construction Plant and and
Group leases rightFurniture Motor equipment
Buildings improvements in progress machinery and fixtures - -----vehicles and software Total
HK$ HK$ HK$ HK$ HK$ HK$ HK$ CostHK$
(Restated)
At 1 April 2004
At 1 April 2004 2,102,686 7,673,722
Cost 13,711,906 10,384,240 5,693,589 31,745,665 3,974,371 3,997,766 1,462,240 70,969,777
Accumulated depreciation (7,092,955) (8,141,900) - (27,214,851) (3,358,584) (1,814,806) (1,114,466) (48,737,562)
- ------------------------------------------------------------------------------------------------------------------------------------
Net book amount 6,618,951 2,242,340 5,693,589 4,530,814 615,787 2,182,960 347,774 22,232,215
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2005
Opening net book amount 6,618,951 2,242,340 5,693,589 4,530,814 615,787 2,182,960 347,774 22,232,215
Additions -- -- --- 429,650 12,560,638 2,122,395 296,239 976,974 286,000 16,671,896
Disposals -- -- -- -- -- (4,699,822) (269,293)
----------- ----------- ----------- ----------- ----------- ----------- ------------ - - (5,075) - - (1,146) (6,221)
Depreciation (760,043) (772,782) - (955,096) (262,873) (732,644) (372,381) (3,855,819)
Exchange differences - - - - - - - -
Reclassifications - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Closing net book amount 5,858,908 1,899,208 18,254,227 5,693,038 649,153 2,427,290 260,247 35,042,071
- ------------------------------------------------------------------------------------------------------------------------------------
At 31 March 2005
2,102,686 7,673,722Cost 13,711,906 10,813,890 18,254,227 29,168,238 4,001,317 ----------- ----------- ----------- ----------- ----------- ----------- -----------4,802,240 1,731,260 82,483,078
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
----------- ----------- ----------- ----------- ----------- ----------- -----------(7,852,998) (8,914,682) - (23,475,200) (3,352,164) (2,374,950) (1,471,013) (47,441,007)
- ------------------------------------------------------------------------------------------------------------------------------------
Net book value
At 31 March 2005 1,451,292 7,520,078amount 5,858,908 1,899,208 18,254,227 5,693,038 649,153 =========== =========== =========== =========== =========== =========== ===========2,427,290 260,247 35,042,071
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2006
Opening net book amount 5,858,908 1,899,208 18,254,227 5,693,038 649,153 2,427,290 260,247 35,042,071
Additions 71,154 43,319 6,332,090 2,828,123 991,463 183,182 181,547 10,630,878
Disposals - (11,083) - (1,733) (2,280) - (808) (15,904)
Depreciation (1,271,697) (769,939) - (1,026,319) (304,012) (767,634) (274,787) (4,414,388)
Exchange differences - - 395,175 - 2,513 19,476 840 418,004
Reclassifications 22,971,168 - (24,981,492) 2,010,324 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Closing net book amount 27,629,533 1,161,505 - 9,503,433 1,336,837 1,862,314 167,039 41,660,661
- ------------------------------------------------------------------------------------------------------------------------------------
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 TotalDecember 2005
Cost 36,754,228 10,822,209 - ----- 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
----------- ----------- -----------33,801,485 4,976,520 5,016,736 1,896,641 93,267,819
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
----------- ----------- -----------9,124,695 9,660,704 - 24,298,052 3,639,683 3,154,422 1,729,602 51,607,158
- ------------------------------------------------------------------------------------------------------------------------------------
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
=========== =========== ===========amount 27,629,533 1,161,505 - 9,503,433 1,336,837 1,862,314 167,039 41,660,661
- ------------------------------------------------------------------------------------------------------------------------------------
JV-25
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.Commission
12. PROPERTY, PLANT AND EQUIPMENT
(CONTINUED)Company
Land held Furniture
on mediumComputer
Leasehold Construction Plant and andFurniture Motor Company term leasesequipment
Buildings improvementsImprovements in progress machinery and fixtures vehicles - -------and software Total
HK$ HK$ HK$ HK$ HK$ HK$ CostHK$ HK$
(Restated)
At 1 April 2004
At 1 April 2004 2,102,686
Cost 2,829,732 2,354,287 - 449,414 1,404,622 2,116,733 776,779 9,931,567
Accumulated depreciation 1,806,262 2,007,883 - 24,912 1,143,839 1,450,543 490,123 6,923,562
- -----------------------------------------------------------------------------------------------------------------------------------
Net book amount 1,023,470 346,404 - 424,502 260,783 666,190 286,656 3,008,005
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2005
Opening net book amount 1,023,470 346,404 - 424,502 260,783 666,190 286,656 3,008,005
Additions -- --- 429,650 - 2,122,395 171,754 --- 263,149 2,986,948
Disposals -- -- -- -- -- (172,500)
----------- ----------- ----------- ----------- ----------- ------------ - - - - - (1,147) (1,147)
Depreciation (141,486) (152,141) - (146,517) (115,793) (328,847) (306,338) (1,191,122)
Exchange differences - - - - - - - -
Reclassifications - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Closing net book amount 881,984 623,913 - 2,400,380 316,744 337,343 242,320 4,802,684
- -----------------------------------------------------------------------------------------------------------------------------------
At 31 March 2005
2,102,686Cost 2,829,732 2,783,937 - 2,571,809 1,576,376 1,944,233 ----------- ----------- ----------- ----------- ----------- -----------1,022,948 12,729,035
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 ----------- ----------- ----------- ----------- ----------- -----------780,628 7,926,351
- -----------------------------------------------------------------------------------------------------------------------------------
Net book value
At 31 March 2005 1,451,292amount 881,984 623,913 - 2,400,380 316,744 337,343 =========== =========== =========== =========== =========== ===========242,330 4,802,684
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2006
Opening net book amount 881,984 623,913 - 2,400,380 316,744 337,343 242,320 4,802,684
Additions - 6,800 - 1,230,371 20,990 - 119,074 1,377,235
Disposals - - - - - - - -
Depreciation (141,486) (191,471) - (301,321) (105,894) (181,717) (233,613) (1,155,502)
Exchange differences - - - - - - - -
Reclassifications - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Closing net book amount 740,498 439,242 - 3,329,430 231,840 155,626 127,781 5,024,417
- -----------------------------------------------------------------------------------------------------------------------------------
At 31 March 2004 1,532,781 1,023,470 346,404 424,502 260,783 666,190
=========== =========== =========== =========== =========== ===========
Computer
equipment
Company and software TotalDecember 2005
Cost 2,829,732 2,790,737 - ------- 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
----------- -----------3,802,180 1,593,416 1,944,233 1,125,032 14,085,330
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
----------- -----------2,089,234 2,351,495 - 472,750 1,361,576 1,788,607 997,251 9,060,913
- -----------------------------------------------------------------------------------------------------------------------------------
Net book value
At 31 March 2005 242,320 6,253,976
=========== ===========
At 31 March 2004 286,656 4,540,786
=========== ===========amount 740,498 439,242 - 3,329,430 231,840 155,626 127,781 5,024,417
- -----------------------------------------------------------------------------------------------------------------------------------
JV-15JV-26
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. INVESTMENTSCommission
13. ADVANCED LEASE PAYMENTS
Group Company
-------------------------- --------------------------(Restated) (Restated)
2006 2005 20042006 2005 2004
HK$ HK$ HK$ HK$
Investment securities :
UnlistedLand use rights 7,516,731 7,520,078 - -
Advanced lease payments, net 1,191,701 1,451,292 1,191,701 1,451,292
------------------------------------------------------------------------------------------------
8,708,432 8,971,370 1,191,701 1,451,292
------------------------------------------------------------------------------------------------
14. AVAILABLE-FOR-SALE FINANCIAL ASSETS/ OTHER INVESTMENTS
Group Company
2006 2005 2006 2005
HK$ HK$ HK$ HK$
Available-for-sale financial assets:
Listed outside Hong Kong, at
cost -- 9,305,588 -- --
Less : Provision for impairment -- (9,305,588) -- --
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
-- -- --
Othermarket value 34,277,991 - 34,277,991 -
Debt securities :
Listed outside Hong Kong, at
market value - 27,047,797 23,991,361- 27,047,797
23,991,361
----------- ----------- ----------- -----------------------------------------------------------------------------------------------------------
34,277,991 27,047,797 23,991,36134,277,991 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-16JV-27
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.Commission
15. INTERESTS IN SUBSIDIARIES
(CONTINUED)
The amountsCompany
2006 2005
HK$ HK$
Unlisted shares, at cost 39,993,130 32,658,008
Less : Impairment (200,000) (200,000)
-----------------------------------------------------------------------
39,793,130 32,458,008
Amounts due from / (to) subsidiaries are- 19,079,609
Less : Impairment - (785,384)
-----------------------------------------------------------------------
- 18,294,225
Amount due to a subsidiary (8) (8)
-----------------------------------------------------------------------
39,793,122 50,752,225
-----------------------------------------------------------------------
At 31 March 2006, the amount due to a subsidiary is unsecured,
interest-free and havehas no fixed terms of repayment and the amounts due
from subsidiaries are repayable on demand and accordingly, are
classified as current assets (note 18).
At 31 March 2005, the amounts due from/(to) subsidiaries were
unsecured, interest-free and had no fixed terms of repayment. In the
opinion of the directors, no part of amounts would be repayable within
one year from the balance sheet date and the balances were therefore
shown as non-current assets.
JV-28
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
15. INTERESTS IN SUBSIDIARIES (Continued)
Details of the subsidiaries as at 31 March 20052006 are as follows :
Percentage of
Nominal value of issued
Place of issued capital held
incorporation/ Nominal value heldcapital/registered by the Principal
Name of company establishment of issued capital company activities
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 commenced yet)
Exchange Commission)
The Joint Venture (name The PRC US$5,000,000 100% Manufacture of consumer
withheld and filed electronic products
separately with The (operations not
Securities and commenced 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 and investment holding
Securities and
Exchange Commission)
The Joint Venture (name British Virgin US$1 100% Trading of machinery
and
(name withheld and filed Islands and 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$Nil (2004 :
Nil).
JV-17JV-29
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCHCommission
16. INVENTORIES
Group Company
2006 2005 2006 2005
HK$ HK$ HK$ HK$
Raw materials 10,583,470 12,704,515 10,583,470 12,704,515
Work in progress 3,420,355 2,051,929 3,420,355 2,051,929
Finished goods 4,919,080 3,541,592 4,919,080 3,244,812
----------------------------------------------------------------------------------
18,922,905 18,298,036 18,922,905 18,001,256
----------------------------------------------------------------------------------
JV-30
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
17. TRADE AND OTHER RECEIVABLES
Group
2006 2005
(CONTINUED)
14. AMOUNTHK$ HK$
Accounts receivable 3,511,654 3,133,328
Bills receivable (note 2.2) 3,435,122 -
Deposits, prepayments and other receivables 1,334,007 3,012,763
------------------------------------------------------------------------
8,280,783 6,146,091
------------------------------------------------------------------------
18. AMOUNTS DUE FROM A SUBSIDIARYSUBSIDIARIES
2006 2005
HK$ HK$
Trade * 7,371,509 8,414,502
Non-trade ** 20,251,108 -
------------------------------------------------------------------------
27,622,617 8,414,502
Less : Impairment (975,147) -
------------------------------------------------------------------------
26,647,470 8,414,502
------------------------------------------------------------------------
* 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 wasis 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 SHAREHOLDERat 6% per annum.
** The amount is unsecured, interest bearing at 6% per annum of the overdue
trading balanceinterest-free and has no fixed terms of repayment.
16.repayable on demand.
JV-31
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
19. 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.is repayable on demand.
20. AMOUNT DUE TO A RELATED COMPANY/A SHAREHOLDER
The amount is unsecured, interest-free and has no fixed terms of
repayment.
18.repayable on demand.
21. 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$11,700,000, which is
expected to be payable to the shareholders upon successful initial listing
of the company's shares on the Main Board of The Stock Exchange of Hong
Kong Limited ("the HKEX").
19.22. LOANS FROM SHAREHOLDERS
The loans are unsecured, interest-free and repayable on demand by the
respective shareholders with the consent of each other and upon successful
initial listing of the company's shares on the Main Board of the HKEX,
whichever is earlier.
JV-1823. COLLATERALISED BANK ADVANCES
As described in note 2.2 to the financial statements, this amount
represents the recognition of the bills discounted with recourse at 31
March 2006.
JV-32
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
20.Commission
24. DEFERRED TAXATION
The following areAt 31 March 2006, the major deferred tax liabilities recognised in the
balance sheetsheets and the movements during the current and prior years :
Group and Company
Accelerated tax
depreciation
HK$
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 and 1 April 2005 193,000
=======
20. DEFERRED TAXATION (CONTINUED)Charge to income statement (Note 9) 62,000
255,000
----------------------------------------------------------------------
Balance at 31 March 2006
----------------------------------------------------------------------
2006 2005 2004
HK$ HK$
Deferred tax liabilities recognised in the
balance sheets of the group and company 255,000 193,000
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 (20041,524,303 (2005 :
HK$414,000)1,074,000) as it is not probablecertain that future taxable profits will be
available against which this deductible temporary difference can be
utilised.
21.25. SHARE CAPITAL
2006 2005 2004
HK$ HK$
Authorised :
100 ordinary shares of HK$100 each 10,000 10,000
========== ==========-----------------------------------------------------------------------
Issued and fully paid :
2 ordinary shares of HK$100 each 200 200
========== ==========
JV-19-----------------------------------------------------------------------
JV-33
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
22.Commission
26. RESERVES
Group
2006 2005 2004
HK$ HK$
Exchange reserve 649,522 34,233
8,378Fair value reserve (750,629) -
Retained profits 98,664,880 83,261,781
62,755,463
------------ -----------------------------------------------------------------------------------
98,563,773 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 5.6.
Company
Retained Fair value
profits reserve Total
HK$ HK$ 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 65,620,312 - 65,620,312
Profit for the year 42,542,423 - 42,542,423
Dividends (18,508,258) - (18,508,258)
----------------------------------------------------------------------------------
Balance at 31 March 2005 89,654,477 - 89,654,477
----------------------------------------------------------------------------------
Balance at 1 April 2005 - prior to
opening adjustment 89,654,477 - 89,654,477
Opening adjustment on adoption of
HKAS 39 (note 2.2) 251,023 (251,023) -
----------------------------------------------------------------------------------
Adjusted balance at 1 April 2005 89,905,500 (251,023) 89,654,477
Profit for the year 39,334,216 - 39,334,216
Change in fair value of
available-for-sale financial
assets - (499,606) (499,606)
Dividends (17,163,365) - (17,163,365)
----------------------------------------------------------------------------------
Balance at 31 March 2006 112,076,351 (750,629) 111,325,722
----------------------------------------------------------------------------------
JV-34
The Joint Venture (name withheld 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.filed separately with The Securities and
Exchange Commission
27. OPERATING LEASE COMMITMENTSARRANGEMENTS
At 31 March 2005,2006, the total future minimum rental receivable under
non-cancellable operating leases in respect of land and buildings are as
follows :
Group and Company
------------------------2006 2005 2004
HK$ HK$
Within one year 76,80053,265 76,800
In the second to fifth years - 53,265
130,133
----------- -----------------------------------------------------------------------------------
53,265 130,065
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 2005,2006, the total future minimum lease payments under
non-cancelablenon-cancellable 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
========= ========= ========= =========
Group Company
2006 2005 2006 2005
HK$ HK$ HK$ HK$
Within one year 1,160,600 1,202,000 1,000,000 996,000
In the second to fifth years 140,000 1,054,516 140,000 980,000
-------------------------------------------------------------------------------------
1,300,600 2,256,516 1,140,000 1,976,000
-------------------------------------------------------------------------------------
The group and the company lease office premisesland and buildings 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.JV-35
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission
28. CAPITAL COMMITMENTS
Group Company
-------------------------- ---------------------------2006 2005 20042006 2005 2004
HK$ HK$ HK$ HK$
Contracted but not provided for the
purchase of property, plant and
equipment 3,853,794 3,548,800 --6,100,930 9,779,740 --
Contracted but not provided for
the construction of the factory
premises in the PRC 2,780,697 5,462,297 7,891,988 -- --- -
Capital contributions payable to
a
PRC wholly-owned subsidiary -- --subsidiaries - - 116,216,878 84,552,000
107,640,000
----------- ----------- ----------- ---------------------------------------------------------------------------------------------------------
6,634,491 9,011,097 7,891,988122,317,808 94,331,740
107,640,000
=========== =========== =========== ===========----------------------------------------------------------------------------------------------
JV-2129. CONTINGENT LIABILITIES
The current and prior years' tax provisions have been prepared on the
basis that the management fees and bonuses are deductible in the
determination of the assessable profits of the company and the company is
entitled to the offshore claims. During the year ended 31 March 2006, the
company received enquiries from the Hong Kong Inland Revenue Department
regarding these deductions and offshore claims. The directors have
assessed the circumstances as at the date of approval of these financial
statements, no additional tax provision being suggested since the outcome
is uncertain. The total contingent tax exposures to the group and company
in respect of the deductions and offshore claims are estimated to be
approximately HK$2.8 million and HK$8.3 million, respectively.
At 31 March 2005, the group has a contingent liability of HK$3,906,240 in
respect of the bills discounted with recourse.
Save as disclosed above, the group and company have no contingent
liabilities at 31 March 2006.
JV-36
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
26. CONTINGENT LIABILITESCommission
30. DIRECTORS' REMUNERATION
Remuneration of the directors of the company disclosed pursuant to section
161 of the Hong Kong Companies Ordinance is as follows :
Group Company
--------------------- ---------------------2006 2005 20042006 2005 2004
HK$ HK$ HK$ HK$
Discounted bills with recourse 3,906,240 537,807 -- --
--------- --------- --------- ---------
3,906,240 537,807 -- --
========= ========= ========= =========
27.Fees - - - -
Other emoluments - - - -
------------------------------------------------------------------------
31. RELATED PARTY TRANSACTIONS
During the year, the following transactions were carried out with related
parties :
Group
---------------------------2006 2005 2004
HK$ HK$
Transactions with a related company
Rental expense 840,000 840,000
Management fee expense 4,434,600 3,281,2504,434,600
Management bonus expense 2,914,238 3,337,730 3,182,783
Purchase of a PRC land use right -- 7,616,054
Transactions with a shareholder
Sales 95,570,482 82,241,295
58,205,352
Purchases 5,713,786 2,410,042 3,977,932
Sales commission expense 605,942 1,111,515 678,373
Interest income 234,000 229,550 198,245
Interest expenses - 46,957 44,648
Transaction with a director
Rental expenses 240,000 240,000
28.------------------------------------------------------------------------
32. MAJOR NON-CASH TRANSACTION
During the year ended 31 March 2006, HK$3,582,073 (20044,004,689 (2005 : HK$9,075,253)3,582,073) of
the dividends for the year was settled through the current account with a
shareholder.
JV-22JV-37
The Joint Venture (name withheld and filed separately with The Securities and
Exchange Commission)
NOTES TO THECommission
33. FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED)
29. PRIOR YEAR ADJUSTMENTS
For the year ended 31 March 2004, a dividend incomeRISK MANAGEMENT OBJECTIVES AND POLICIES
The group's major financial assets and liabilities include bank balances
and cash, available-for-sale financial assets, trade receivables and
payables. Details of HK$22,035,000 from
and a facility usage fee of HK$26,941,652 to a subsidiary were recordedthese financial instruments are disclosed 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 complyrespective notes. The risks associated 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 thethese financial statements of the company
for the year ended 31 March 2005. As a result, the retained earningsinstruments
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 6policies on how to the financial statements, there is no tax
attributable tomitigate 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 whichrisks are set out below. The
management manages and monitors these exposures to ensure appropriate
measures are implemented on a timely and effective manner.
(a) Interest rate risk
The group does not have any significant exposure to interest rate
risk as the group currently has no financial assets and liabilities
with floating interest rates.
(b) Foreign currency risk
The group's exposure to risk resulting from changes in note 29foreign
currency exchange rates is minimal.
(c) Credit risks
The company's bank balances are all deposited with major banks in
Hong Kong and the PRC.
The carrying amount of trade and other receivables represent the
group's maximum exposure to credit risk in relation to its financial
assets. No other financial assets carry a significant exposure to
credit risk. The group has no significant concentration of credit
risk.
(d) Fair values
The fair values of the group's current financial statements.
31. APPROVAL OF THE FINANCIAL STATEMENTS
Theassets and
liabilities are not materially different from their carrying amounts
because of the immediate or short term maturity of these 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-1instruments.
JV-38