Separate financial statements of the Hong Kong Joint Venture
Independent Auditors’ Report | | JV-1 | | | | Report of Independent Registered Public Accounting Firm | | JV-1 | Consolidated Statement of Comprehensive Income | | JV-2 | Consolidated Income Statement of Financial Position | | JV-3 | Consolidated Balance SheetStatement of Financial Position | | JV-4 | Balance Sheet | | JV-5 | Consolidated Statement of Changes in Equity | | JV-6JV-5 | Consolidated Statement of Cash Flow StatementFlows | | JV-7JV-6 | Notes to Financial Statements | | JV-8JV-7 |
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 23, 200928, 2012 | By: | /s/ Harvey B. Grossblatt | | | Harvey B. Grossblatt | | | President and Chief Executive Officer | | | (principal executive officer) |
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 23, 200928, 2012 | Harvey B. Grossblatt | | and Director | | | | | | | | /s/ James B. Huff | | Chief Financial Officer | | June 23, 200928, 2012 | James B. Huff | | (principal financial officer and | | | | | principal accounting officer) | | | | | | | | /s/ Cary Luskin | | Director | | June 23, 200928, 2012 | Cary Luskin | | | | | | | | | | /s/ Ronald A. Seff | | Director | | June 23, 200928, 2012 | Ronald A. Seff | | | | | | | | | | /s/ Ira Bormel | | Director | | June 23, 200928, 2012 | Ira Bormel | | | | |
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. (a Maryland Corporation) and subsidiaries (the Company) as of March 31, 20092012 and 2008,2011, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2009.then ended. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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. 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 provide a reasonable basis for our opinion.
In our opinion, 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, 20092012 and 2008,2011, and the results of their operations and their cash flows for each of the three years in the periodthen ended, March 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTONGrant Thornton LLP
28, 2012UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
| | March 31 | | | | 2009 | | | 2008 | | ASSETS | | | | | | | CURRENT ASSETS | | | | | | | Cash and cash equivalents | | $ | 284,030 | | | $ | 3,863,784 | | Accounts receivable: | | | | | | | | | Trade less allowance for doubtful accounts of $95,927 at March 31, 2009 and $15,000 at March 31, 2008 | | | 55,779 | | | | 146,022 | | Other receivables | | | 97,780 | | | | 282,083 | | Receivable from Hong Kong Joint Venture | | | 312,257 | | | | 115,656 | | | | | 465,816 | | | | 543,761 | | | | | | | | | | | Amount due from factor | | | 4,610,401 | | | | 5,600,408 | | Inventories, net of allowance for obsolete inventory of $204,309 at March 31, 2009 and $40,000 at March 31, 2008 | | | 8,997,231 | | | | 5,357,488 | | Prepaid expenses | | | 255,745 | | | | 206,197 | | Assets held in receivership | | | 202,565 | | | | 2,850,731 | | | | | | | | | | | TOTAL CURRENT ASSETS | | | 14,815,788 | | | | 18,422,369 | | | | | | | | | | | DEFERRED TAX ASSET | | | 2,141,702 | | | | 1,914,136 | | | | | | | | | | | INVESTMENT IN HONG KONG JOINT VENTURE | | | 10,550,373 | | | | 9,986,579 | | | | | | | | | | | PROPERTY AND EQUIPMENT – NET | | | 251,366 | | | | 130,347 | | | | | | | | | | | OTHER ASSETS | | | 18,449 | | | | 15,486 | | | | | | | | | | | TOTAL ASSETS | | $ | 27,777,678 | | | $ | 30,468,917 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | Accounts payable | | $ | 794,365 | | | $ | 777,342 | | Hong Kong Joint Venture accounts payable | | | 1,967,073 | | | | 1,687,950 | | Accrued liabilities: | | | | | | | | | Litigation reserve | | | 401,592 | | | | 401,592 | | Payroll and employee benefits | | | 148,071 | | | | 158,057 | | Commissions and other | | | 202,789 | | | | 105,431 | | Liabilities held in receivership | | | 202,565 | | | | 7,823,450 | | | | | | | | | | | TOTAL CURRENT LIABILITIES | | | 3,716,455 | | | | 10,953,822 | | | | | | | | | | | Long-term obligation - other | | | 95,324 | | | | 91,160 | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | | - | | | | - | | | | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | | | Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding, 2,408,220 shares at March 31, 2009 and 2,487,867 shares at March 31, 2008 | | | 24,083 | | | | 24,879 | | Additional paid-in capital | | | 13,186,436 | | | | 13,453,378 | | Retained earnings | | | 10,755,380 | | | | 5,890,023 | | Other comprehensive income | | | - | | | | 55,655 | | TOTAL SHAREHOLDERS’ EQUITY | | | 23,965,899 | | | | 19,423,935 | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 27,777,678 | | | $ | 30,468,917 | |
| | March 31 | | | | 2012 | | | 2011 | | | | | | | | | ASSETS | | | | | | | | | | | | | | | | | | CURRENT ASSETS | | | | | | | | | Cash and cash equivalents | | $ | 3,186,274 | | | $ | 6,728,593 | | Accounts receivable: | | | | | | | | | Trade less allowance for doubtful accounts of approximately $75,000 at March 31, 2012 and 2011 | | | 229,027 | | | | 276,463 | | Other receivables | | | 68,230 | | | | 69,666 | | Receivable from Hong Kong Joint Venture | | | 584,594 | | | | 301,380 | | | | | 881,851 | | | | 647,509 | | | | | | | | | | | Amount due from factor | | | 1,719,731 | | | | 1,569,126 | | Inventories, net of allowance for obsolete inventory of $70,000 at March 31, 2012 and $100,000 at March 31, 2011 | | | 5,398,540 | | | | 3,534,011 | | Prepaid expenses | | | 599,876 | | | | 519,356 | | | | | | | | | | | TOTAL CURRENT ASSETS | | | 11,786,272 | | | | 12,998,595 | | | | | | | | | | | DEFERRED TAX ASSET | | | 2,394,801 | | | | 2,002,561 | | | | | | | | | | | INVESTMENT IN HONG KONG JOINT VENTURE | | | 13,083,493 | | | | 13,149,614 | | | | | | | | | | | PROPERTY AND EQUIPMENT – NET | | | 176,144 | | | | 203,440 | | | | | | | | | | | INTANGIBLE ASSET - NET | | | 84,962 | | | | 89,434 | | | | | | | | | | | OTHER ASSETS | | | 40,134 | | | | 40,134 | | | | | | | | | | | TOTAL ASSETS | | $ | 27,565,806 | | | $ | 28,483,778 | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | CURRENT LIABILITIES | | | | | | | | | Accounts payable | | $ | 673,524 | | | $ | 794,014 | | Hong Kong Joint Venture accounts payable | | | 449,430 | | | | 453,480 | | Accrued liabilities: | | | | | | | | | Payroll and employee benefits | | | 111,974 | | | | 177,298 | | Commissions and other | | | 58,837 | | | | 33,700 | | | | | | | | | | | TOTAL CURRENT LIABILITIES | | | 1,293,765 | | | | 1,458,492 | | | | | | | | | | | Long-term obligation – other | | | 25,000 | | | | 25,000 | | | | | | | | | | | COMMITMENTS AND CONTINGENCIES | | | - | | | | - | | | | | | | | | | | SHAREHOLDERS’ EQUITY | | | | | | | | | Common stock, $.01 par value per share; 20,000,000 authorized and 2,336,354 shares outstanding at March 31, 2012 and 2,387,887 shares issued and outstanding at March 31, 2011. | | | 23,364 | | | | 23,879 | | Additional paid-in capital | | | 12,885,756 | | | | 13,135,198 | | Retained earnings | | | 13,337,921 | | | | 13,841,209 | | TOTAL SHAREHOLDERS’ EQUITY | | | 26,247,041 | | | | 27,000,286 | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 27,565,806 | | | $ | 28,483,778 | |
The accompanying notes are an integral part of these consolidated financial statements
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS | | Years Ended March 31 | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | | | | | Net sales | | $ | 26,097,596 | | | $ | 33,871,362 | | | $ | 32,934,388 | | Cost of goods sold – acquired from Joint Venture | | | 19,363,886 | | | | 22,530,867 | | | | 14,870,683 | | Cost of goods sold - other | | | 633,740 | | | | 3,470,439 | | | | 7,634,389 | | | | | | | | | | | | | | | GROSS PROFIT | | | 6,099,970 | | | | 7,870,056 | | | | 10,429,316 | | | | | | | | | | | | | | | Research and development expense | | | 435,750 | | | | 364,510 | | | | 296,502 | | Selling, general and administrative expense | | | 5,297,284 | | | | 6,124,213 | | | | 6,546,609 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | | 366,936 | | | | 1,381,333 | | | | 3,586,205 | | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | Interest expense | | | (32,198 | ) | | | (46,349 | ) | | | - | | Interest income | | | 37,228 | | | | 16,155 | | | | 21,991 | | | | | 5,030 | | | | (30,194 | ) | | | 21,991 | | | | | | | | | | | | | | | INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE | | | 371,966 | | | | 1,351,139 | | | | 3,608,196 | | | | | | | | | | | | | | | Equity in earnings of Hong Kong Joint Venture | | | 1,529,752 | | | | 1,985,845 | | | | 3,845,960 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 1,901,718 | | | | 3,336,984 | | | | 7,454,156 | | | | | | | | | | | | | | | Provision for income tax expense | | | (459,382 | ) | | | (512,235 | ) | | | (1,360,790 | ) | | | | | | | | | | | | | | INCOME FROM CONTINUING OPERATIONS | | | 1,442,336 | | | | 2,824,749 | | | | 6,093,366 | | | | | | | | | | | | | | | Discontinued operations | | | | | | | | | | | | | Income (loss) from the discontinued Canadian subsidiary (including impairment loss of $9,013,990 in 2008) | | | 2,481,318 | | | | (10,242,663 | ) | | | (590,139 | ) | | | | | | | | | | | | | | Income tax benefit – discontinued operations | | | 941,703 | | | | 1,849,000 | | | | 30,031 | | | | | | | | | | | | | | | Income (loss) from discontinued operations | | | 3,423,021 | | | | (8,393,663 | ) | | | (560,108 | ) | | | | | | | | | | | | | | NET INCOME (LOSS) | | $ | 4,865,357 | | | $ | (5,568,914 | ) | | $ | 5,533,258 | | | | | | | | | | | | | | | Income (loss) per share: | | | | | | | | | | | | | Basic – from continuing operations | | $ | 0.58 | | | $ | 1.14 | | | $ | 2.54 | | Basic – from discontinued operations | | $ | 1.39 | | | $ | (3.38 | ) | | $ | (0.23 | ) | Basic – net income (loss) | | $ | 1.97 | | | $ | (2.24 | ) | | $ | 2.31 | | Diluted – from continuing operations | | $ | 0.58 | | | $ | 1.13 | | | $ | 2.45 | | Diluted – from discontinued operations | | $ | 1.38 | | | $ | (3.35 | ) | | $ | (0.23 | ) | Diluted – net income (loss) | | $ | 1.96 | | | $ | (2.23 | ) | | $ | 2.23 | | Shares used in computing net income (loss) per share: | | | | | | | | | | | | | Basic | | | 2,466,983 | | | | 2,484,192 | | | | 2,398,284 | | Diluted | | | 2,471,807 | | | | 2,502,017 | | | | 2,484,606 | |
| | Years Ended March 31 | | | | 2012 | | | 2011 | | | | | | | | | Net sales | | $ | 13,304,602 | | | $ | 13,249,604 | | Cost of goods sold – acquired from Joint Venture | | | 9,420,225 | | | | 7,024,044 | | Cost of goods sold - other | | | 373,179 | | | | 2,463,815 | | | | | | | | | | | GROSS PROFIT | | | 3,511,198 | | | | 3,761,745 | | | | | | | | | | | Research and development expense | | | 570,952 | | | | 615,639 | | Selling, general and administrative expense | | | 4,389,818 | | | | 4,375,241 | | | | | | | | | | | Operating loss | | | (1,449,572 | ) | | | (1,229,135 | ) | | | | | | | | | | Other income (expense): | | | | | | | | | Interest expense | | | - | | | | (4,166 | ) | Investment and interest income | | | 56,182 | | | | 213,086 | | | | | 56,182 | | | | 208,920 | | | | | | | | | | | LOSS BEFORE EQUITY IN EARNINGS OF JOINT VENTURE | | | (1,393,390 | ) | | | (1,020,215 | ) | Equity in earnings of Hong Kong Joint Venture | | | 500,502 | | | | 1,691,133 | | | | | | | | | | | (Loss) income from operations before income taxes | | | (892,888 | ) | | | 670,918 | | | | | | | | | | | Income tax benefit | | | (389,600 | ) | | | (146,863 | ) | | | | | | | | | | NET (LOSS) INCOME | | $ | (503,288 | ) | | $ | 817,781 | | | | | | | | | | | (Loss) income per share: | | | | | | | | | Basic | | $ | (0.21 | ) | | $ | 0.34 | | Diluted | | $ | (0.21 | ) | | $ | 0.34 | | | | | | | | | | | Shares used in computing net income per share: | | | | | | | | | Basic | | | 2,374,952 | | | | 2,387,887 | | Diluted | | | 2,374,952 | | | | 2,395,766 | |
The accompanying notes are an integral part of these consolidated financial statements UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| | Common Stock | | | | | | | | | | | | | | | | Shares | | | Amount | | | Additional Paid-In Capital | | | Retained Earnings | | | Other Comprehensive Income | | | Total | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2007 | | | 2,475,612 | | | $ | 24,756 | | | $ | 13,214,025 | | | $ | 11,545,304 | | | $ | (112,204 | ) | | $ | 24,671,881 | | | | | | | | | | | | | | | | | | | | | | | | | | | Recognition of uncertain tax provisions | | | - | | | | - | | | | - | | | | (86,367 | ) | | | - | | | | (86,367 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock from the exercise of employee stock options | | | 12,255 | | | | 123 | | | | 126,555 | | | | - | | | | - | | | | 126,678 | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock based compensation | | | - | | | | - | | | | 19,863 | | | | - | | | | - | | | | 19,863 | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of currency translation | | | - | | | | - | | | | - | | | | - | | | | 167,859 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | (5,568,914 | ) | | | - | | | | (5,401,055 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Tax benefit from exercise of stock options | | | - | | | | - | | | | 92,935 | | | | - | | | | - | | | | 92,935 | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2008 | | | 2,487,867 | | | $ | 24,879 | | | $ | 13,453,378 | | | $ | 5,890,023 | | | $ | 55,655 | | | $ | 19,423,935 | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock based compensation | | | - | | | | - | | | | 11,230 | | | | - | | | | - | | | | 11,230 | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effect of currency translation | | | - | | | | - | | | | - | | | | - | | | | (55,655 | ) | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | - | | | | 4,865,357 | | | | - | | | | 4,809,702 | | | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase of common stock | | | (79,647 | ) | | | (796 | ) | | | (278,172 | ) | | | - | | | | - | | | | (278,968 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2009 | | | 2,408,220 | | | $ | 24,083 | | | $ | 13,186,436 | | | $ | 10,755,380 | | | | - | | | $ | 23,965,899 | |
| | Common Stock | | | Additional Paid-In | | | Retained | | | | | | | Shares | | | Amount | | | Capital | | | Earnings | | | Total | | | | | | | | | | | | | | | | | | Balance at April 1, 2010 | | | 2,387,887 | | | $ | 23,879 | | | $ | 13,135,198 | | | $ | 13,023,428 | | | $ | 26,182,505 | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | - | | | | 817,781 | | | | 817,781 | | | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2011 | | | 2,387,887 | | | $ | 23,879 | | | $ | 13,135,198 | | | $ | 13,841,209 | | | $ | 27,000,286 | | | | | | | | | | | | | | | | | | | | | | | Stock based compensation | | | - | | | | - | | | | 25,939 | | | | - | | | | 25,939 | | | | | | | | | | | | | | | | | | | | | | | Repurchase of common stock | | | (51,533 | ) | | | (515 | ) | | | (275,381 | ) | | | - | | | | (275,896 | ) | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | (503,288 | ) | | | (503,288 | ) | | | | | | | | | | | | | | | | | | | | | | Balance at March 31, 2012 | | | 2,336,354 | | | $ | 23,364 | | | $ | 12,885,756 | | | $ | 13,337,921 | | | $ | 26,247,041 | |
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS | | Years Ended March 31, | | | | 2009 | | | 2008 | | | 2007 | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | OPERATING ACTIVITIES | | | | | | | | | | Net income (loss) | | $ | 4,865,357 | | | $ | (5,568,914 | ) | | $ | 5,533,258 | | Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | | | | | Operations of discontinued subsidiary | | | (3,431,654 | ) | | | 7,904,780 | | | | (167,374 | ) | Depreciation and amortization | | | 49,210 | | | | 46,503 | | | | 39,449 | | Stock based compensation | | | 11,230 | | | | 19,863 | | | | 29,411 | | Increase in deferred taxes | | | (227,566 | ) | | | (1,157,711 | ) | | | (280,040 | ) | Earnings of the Hong Kong Joint Venture | | | (1,529,752 | ) | | | (1,985,845 | ) | | | (3,845,960 | ) | Changes in operating assets and liabilities: | | | | | | | | | | | | | Decrease (increase) in accounts receivable and amounts due from factor | | | 1,067,952 | | | | 2,329,219 | | | | (3,084,166 | ) | (Increase) decrease in inventories | | | (3,639,743 | ) | | | 3,347,828 | | | | (4,643,230 | ) | (Increase) decrease in prepaid expenses | | | (49,548 | ) | | | (64,620 | ) | | | 55,286 | | Increase (decrease) in accounts payable and accrued expenses | | | 383,518 | | | | (2,524,540 | ) | | | 2,994,038 | | (Increase) decrease in other assets | | | (2,963 | ) | | | 3,000 | | | | (3,000 | ) | | | | | | | | | | | | | | NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | | | (2,503,959 | ) | | | 2,349,563 | | | | (3,372,328 | ) | | | | | | | | | | | | | | INVESTING ACTIVITIES: | | | | | | | | | | | | | Cash distributions from Joint Venture | | | 965,958 | | | | 1,071,549 | | | | 1,914,535 | | Purchase of equipment | | | (170,229 | ) | | | (30,778 | ) | | | (123,309 | ) | Activities of discontinued subsidiary | | | 2,590,722 | | | | (1,584,733 | ) | | | (3,194,185 | ) | | | | | | | | | | | | | | NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | | | 3,386,451 | | | | (543,962 | ) | | | (1,402,959 | ) | | | | | | | | | | | | | | FINANCING ACTIVITIES: | | | | | | | | | | | | | Activities of discontinued subsidiary | | | (4,187,444 | ) | | | 4,012,046 | | | | (2,087,661 | ) | Repurchase of common stock | | | (278,968 | ) | | | - | | | | - | | Borrowing from factor | | | - | | | | - | | | | 2,254,966 | | Principal payment of notes payable | | | - | | | | (2,254,966 | ) | | | - | | Proceeds from issuance of common stock from exercise of employee stock options | | | - | | | | 126,678 | | | | 585,658 | | Increase in long-term debt | | | 4,166 | | | | - | | | | - | | Tax benefit from exercise of stock options | | | - | | | | 92,935 | | | | 1,029,189 | | | | | | | | | | | | | | | NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | | (4,462,246 | ) | | | 1,976,693 | | | | 1,782,152 | | | | | | | | | | | | | | | Effects of exchange rate on cash | | | - | | | | 81,490 | | | | (22,356 | ) | | | | | | | | | | | | | | (DECREASE) INCREASE IN CASH | | | (3,579,754 | ) | | | 3,863,784 | | | | (3,015,491 | ) | | | | | | | | | | | | | | Cash at beginning of period | | | 3,863,784 | | | | - | | | | 3,015,491 | | | | | | | | | | | | | | | CASH AT END OF PERIOD | | $ | 284,030 | | | $ | 3,863,784 | | | $ | - | | | | | | | | | | | | | | | Supplemental information: | | | | | | | | | | | | | Interest paid | | $ | 32,198 | | | $ | 46,349 | | | $ | 23,750 | | Income taxes recovered (paid) | | $ | 520,558 | | | $ | (227,000 | ) | | $ | (109,500 | ) | | | | | | | | | | | | | | Non-cash investing transactions: | | | | | | | | | | | | | Offset of trade payables due the Hong Kong Joint Venture in lieu of cash distributions | | $ | - | | | $ | 250,000 | | | $ | 250,000 | |
The accompanying notes are an integral part of these consolidated financial statements
| | Years Ended March 31, | | | | 2012 | | | 2011 | | CASH FLOWS FROM OPERATING ACTIVITIES OPERATING ACTIVITIES | | | | | | | | | Net (loss) income | | $ | (503,288 | ) | | $ | 817,781 | | Adjustments to reconcile net (loss) income to net cash used in operating activities: | | | | | | | | | Depreciation and amortization | | | 41,522 | | | | 61,025 | | Stock based compensation | | | 25,939 | | | | - | | Deferred income taxes | | | (392,240 | ) | | | (125,405 | ) | | | | | | | | | | Earnings of the Hong Kong Joint Venture | | | (500,502 | ) | | | (1,691,133 | ) | Changes in operating assets and liabilities: | | | | | | | | | (Increase) decrease in accounts receivable and amounts due from factor | | | (384,947 | ) | | | 2,157,589 | | (Increase) in inventories | | | (1,864,529 | ) | | | (94,105 | ) | (Increase) in prepaid expenses | | | (80,520 | ) | | | (168,165 | ) | (Decrease) in accounts payable and accrued expenses | | | (164,728 | ) | | | (1,004,757 | ) | (Increase) in other assets | | | - | | | | (19,998 | ) | | | | | | | | | | NET CASH (USED IN) OPERATING ACTIVITIES | | | (3,823,293 | ) | | | (67,168 | ) | | | | | | | | | | INVESTING ACTIVITIES: | | | | | | | | | Proceeds from sale of assets held for investment | | | - | | | | 4,001,890 | | Cash distributions from Joint Venture | | | 566,622 | | | | 694,976 | | Purchase of equipment | | | (9,752 | ) | | | (65,302 | ) | Patent costs capitalized | | | - | | | | (89,434 | ) | | | | | | | | | | NET CASH PROVIDED BY INVESTING ACTIVITIES | | | 556,870 | | | | 4,542,130 | | | | | | | | | | | FINANCING ACTIVITIES: | | | | | | | | | Repurchase of common stock | | | (275,896 | ) | | | - | | | | | | | | | | | NET CASH USED IN FINANCING ACTIVITIES | | | (275,896 | ) | | | - | | | | | | | | | | | (DECREASE) INCREASE IN CASH | | | (3,542,319 | ) | | | 4,474,962 | | | | | | | | | | | Cash at beginning of period | | | 6,728,593 | | | | 2,253,631 | | | | | | | | | | | CASH AT END OF PERIOD | | $ | 3,186,274 | | | $ | 6,728,593 | | | | | | | | | | | Supplemental information: | | | | | | | | | Interest paid | | $ | - | | | $ | 4,166 | | Income taxes recovered (paid) | | $ | - | | | $ | - | |
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Universal Security Instruments, Inc.’s (“the Company”) 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. During the third quarter of fiscal 2007, the Company acquired two Canadian subsidiaries, International Conduit, Inc. (Icon) and Intube, Inc. (Intube), whose primary business is the manufacture and sale of EMT steel conduit to the commercial construction market in Canada and in the United States. On February 11, 2008, the assets of Icon were placed under the direction of a court appointed receiver, the operations of Icon were suspended and the assets of Icon are classified as Assets held for sale in the consolidated balance sheet. Accordingly, the consolidated financial statements and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The assets, liabilities and operations of International Conduits, Ltd (the discontinued subsidiary) held in receivership are not consolidated and are shown in the consolidated financial statements as assets and liabilities held in receivership and as the results from discontinued operations. 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.Cash and Cash Equivalents:
Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase.At times, the Company maintains cash and investment balances in financial institutions, which may exceed federally insured limits. The Company has not experienced any losses relating to such accounts and believes it is not exposed to a significant credit risk on its cash and cash equivalents and investments. The carrying value of cash and cash equivalents approximates their fair value based on their short-term maturities at March 31, 2012 and 2011.Revenue Recognition: We recognize The Company recognizes sales upon shipment of products, when title has passed to the buyer, net of applicable provisions for any discounts or allowances. We recognize revenue when the following criterion are met: evidence of an arrangement, fixed and determinable fee, delivery has taken place, and collectability is reasonably assured. 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, on the safety products, from one to ten years to the non-commercial end user on all products sold. The manufacturers of our safety 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: As of March 31, 2009, under In October 2011, the terms ofstockholders approved the Company’s 2011 Non-Qualified Stock Option Plan as amended, 1,170,369 sharesauthorizing the issuance of our120,000 options to purchase the Company’s common stock are reserved for the granting of stockstock. At March 31, 2012, 97,000 options of which 1,149,638 have been issued at an exercise price of which 72,422 are presently exercisable.Fair Value Determination. Under SFAS No. 123R, we have elected$5.51.We account for share-based payments using the fair value method. We recognize all share-based payments to continueemployees and non-employee directors in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing modelmodel. Compensation expense related to determine fairshare-based awards is recognized on a straight-line basis based on the value of ourshare awards that are expected to vest during the requisite service period on the grant date, of grant. We will reconsider the use of the Black-Scholes modelwhich is revised if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated under this model. actual forfeitures differ materially from original expectations. The following significant assumptions have been used in the Black-Scholes model: a risk-free rate of return of .50 to 4%, an expected term of fourstock options granted was based on the Company’s historical option exercise experience and post-vesting forfeiture experience using the historical expected term from the vesting date. The expected volatility of the options granted was determined using historical volatilities based on stock prices over a look-back period corresponding to five yearsthe expected term. The risk-free interest rate was determined using the yield available for zero-coupon U.S. government issues with a remaining term equal to the expected term of the options. The forfeiture rate was determined using historical pre-vesting forfeiture rates since the inception of the plans. The company has never paid a dividend; and, as such, the dividend yield is zero. Stock Repurchase Program: In October 2011, the Company announced a stock price volatility indexbuyback program under which the Board authorized the purchase of 60up to 65 percent. Stock Option Activity. During100,000 shares of common stock. Shares may be purchased from time to time under this program in the open market, through block trades and/or in negotiated transactions. The program will terminate when 100,000 shares of common stock have been repurchased by the Company pursuant to the program (unless increased or decreased by the Board of Directors).The following table sets forth information with respect to purchases by the Company of its common stock during the fiscal year ended March 31, 2009, 25,000 stock options were granted and no options were granted during the fiscal years ended March 31, 2008 or 2007. Stock Compensation Expense. We have elected to continue straight-line amortization of stock-based compensation expense over the requisite service period. Prior to the adoption of SFAS No. 123R, we recognized the effect of forfeitures in our pro forma disclosures as they occurred. In accordance with the new standard, we have estimated forfeitures and are only recording expense on shares we expect to vest. For the fiscal year ended March 31, 2009, we recorded $11,230 of stock-based compensation cost as general and administrative expense in our statement of operations. No forfeitures have been estimated.
As of March 31, 2009, the unrecognized compensation cost related to share-based compensation arrangements that we expect to vest is $45,628, and will be amortized ratably over two years. The aggregate intrinsic value of currently exercisable options was $108,010 at March 31, 2009.
2012:Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased As Part of Publicly Announced Plans Or Programs | | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | | November 2011 | | | 11,000 | | | $ | 5.35 | | | | 11,000 | | | | 89,000 | | December 2011 | | | 10,039 | | | $ | 5.08 | | | | 10,039 | | | | 78,961 | | January 2012 | | | 20,398 | | | $ | 5.52 | | | | 20,398 | | | | 58,563 | | March 2012 | | | 10,096 | | | $ | 5.42 | | | | 10,096 | | | | 48,467 | | Total | | | 51,533 | | | $ | 5.39 | | | | 51,533 | | | | 48,467 | |
Research and Development: Research and development costs are charged to operations as incurred.
Discontinued Operations: We report discontinued operations in accordance with the guidance of SFAS No. 144, “Accounting for the Impairment or Disposal or Long-Lived Assets.” Accordingly, we report businesses or asset groups as discontinued operations when we commit to a plan to divest the business or asset group and the sales of the business or asset group is deemed probable within the next 12 months.
Discontinued operations include our unconsolidated subsidiary, International Conduits, Ltd. which was placed into receivership in the fourth quarter of 2008. The results of this business, including the loss on impairment, have been presented as discontinued operations for all periods presented.
The consolidated statements of income include the following in discontinued operations:
| | Year ended March 31, | | | | 2009 | | | 2008 | | | 2007 | | Net Sales | | $ | - | | | $ | 9,729,076 | | | $ | 2,889,000 | | Income (loss) before income taxes (including asset impairment loss of $9,013,990 in 2008) | | | 2,481,318 | | | | (10,242,663 | ) | | | (590,139 | ) | Income tax benefit | | | 941,703 | | | | 1,849,000 | | | | 30,031 | | Income (loss) from discontinued operations | | $ | 3,423,021 | | | $ | (8,393,663 | ) | | $ | (560,108 | ) |
The major classes of assets and liabilities held in receivership reported as discontinued operations included in the accompanying consolidated balance sheets are shown below.
| | Year ended March 31, | | | | 2009 | | | 2008 | | | 2007 | | Assets | | | | | | | | | | Cash | | $ | 202,565 | | | $ | 823,550 | | | $ | 240,545 | | Trade receivables, net | | | - | | | | 371,793 | | | | 1,263,177 | | Inventories | | | - | | | | 817,022 | | | | 2,613,418 | | | | | - | | | | | | | | | | Property, plant and equipment, net | | | - | | | | 831,555 | | | | 2,883,988 | | Other assets | | | - | | | | 6,811 | | | | 1,880,793 | | Assets of discontinued operations | | | 202,565 | | | | 2,850,731 | | | | 8,881,921 | | Liabilities: | | | | | | | | | | | | | Accounts payable, trade and other | | | 202,565 | | | | 3,344,624 | | | | 3,522,549 | | Notes payable – bank | | | - | | | | 4,478,826 | | | | - | | Liabilities of discontinued operations | | $ | 202,565 | | | $ | 7,823,450 | | | $ | 3,522,549 | |
The consolidated asset impairment loss included a write down of inventories, trade accounts receivable, and other assets to their net realizable value, in addition to the write down of property, plant and equipment and the write down of goodwill. Specifically, the impairment loss recorded on the books of Icon included the following:
Property plant and equipment | | $ | 3,750,000 | | Goodwill | | | 1,926,696 | | Inventory | | | 1,572,249 | | Accounts receivable | | | 441,831 | | Costs of disposal | | | 1,323,214 | | Total | | $ | 9,013,990 | |
In October 2006, we formed 2113824 Ontario, Inc., an Ontario corporation, as a wholly-owned subsidiary of the Company for the purpose of acquiring a two-thirds interest in two Canadian corporations, International Conduits, Ltd. (Icon) and Intube, Inc. (Intube). Icon and Intube were based in Toronto, Canada and manufactured and distributed electrical mechanical tubing (EMT) steel conduit. Icon also sold home safety products, primarily purchased from the Company, in the Canadian market. The primary purpose of the Icon and Intube acquisition was to expand our product offerings to include EMT steel conduit, and to provide this product and service to the commercial construction market. On April 2, 2007, Icon and Intube were merged under the laws of Ontario to form one corporation.
In June 2007, Icon entered into a credit agreement with CIT Financial, Ltd. to provide a term loan and a line of credit facility. These loans were secured by all of the assets of Icon and by the corporate guarantees of the Company and our USI Electric subsidiary.
At the time of our investment in Icon, we projected that our established U.S. sales network would allow us to increase sales of EMT to U.S. customers. Despite our efforts, Icon suffered continuing losses, and we were not successful in increasing Icon’s sales in the face of competition and a downturn in the housing market. On January 29, 2008, Icon received notice from CIT Financial, Ltd. (CIT Canada), Icon’s principal and secured lender, that Icon was in default under the terms of the Credit Agreement dated June 22, 2007 between Icon and CIT Canada and demanding immediate payment of all of Icon’s obligations to CIT Canada under the Credit Agreement. On February 11, 2008, the assets of Icon were placed under the direction of a court appointed receiver, and the operations of Icon were suspended. Accordingly, the assets and liabilities of Icon are not consolidated in the financial statements of the Company and are classified as assets held in receivership. Our consolidated financial statements and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.
As a result of continuing losses at Icon, we undertook an evaluation of the goodwill from our acquisition of Icon to determine whether the value of the goodwill has been impaired in accordance with FAS No. 142, “Goodwill and Other Intangible Assets”. Based on that evaluation, we determined that the value of the goodwill from our acquisition of Icon was impaired, and we recognized an impairment charge of US$1,926,696 for the goodwill. In addition, as a result of Icon’s receivership and the steps taken to liquidate Icon’s assets, the non-cash assets of Icon were written down to their estimated net realizable value and a further impairment charge of US$7,087,297 was recognized as of March 31, 2008. These impairments have been recorded in discontinued operations in the consolidated statements of operations for the fiscal year ended March 31, 2008.
On September 22, 2008, Icon’s obligations were settled in the receivership action by Ontario Superior Court order. As a result of the settlement of Icon’s obligations, a gain of CAD$5,101,674 (US$4,910,718) was realized by Icon in the quarter ended September 30, 2008. Approximately US$3,000,000 of the gain related to extinguishment of liabilities due to unsecured creditors. The company applied guidance in FAS 140 , Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and determined that a legal release of the liabilities had been achieved to allow recognition of the gain on extinguishment of liabilities. This gain was partially offset in consolidation by the US$1,518,375 after-tax effect loss recognized by the Company in settlement of its guarantee of Icon’s secured debt and other losses attributable to the Icon discontinued operation to arrive at income from discontinued operations of $3,423,021 for the fiscal year ended March 31, 2009.
At March 31, 2009, the remaining assets of Icon held by the receiver consist of cash of $202,565. The liabilities of Icon held by the receiver include a claim by a supplier and other secured amounts payable of $202,565. The total liabilities of Icon at March 31, 2009 are $202,565.
The major classes of assets and liabilities held in receivership reported as discontinued operations included in the accompanying consolidated balance sheets shown below.
| | March 31, 2009 | | | March 31, 2008 | | | | | | | | | Assets | | | | | | | | | Cash | | $ | 202,565 | | | $ | 823,550 | | Trade receivables, net | | | 0 | | | | 371,793 | | Inventories | | | 0 | | | | 817,022 | | Property, plant and equipment – net | | | 0 | | | | 831,555 | | Other assets | | | 0 | | | | 6,811 | | Assets of discontinued operations | | $ | 202,565 | | | $ | 2,850,731 | | | | | | | | | | | Liabilities | | | | | | | | | Accounts payable, trade and other | | $ | 202,565 | | | $ | 3,344,624 | | Notes payable – bank | | | 0 | | | | 4,478,826 | | Liabilities of discontinued operations | | $ | 202,565 | | | $ | 7,823,450 | |
In the accompanying consolidated financial statements, the results of Icon for the fiscal years ended March 31, 2009 and 2008 have been restated and are presented as the results of discontinued operations, and certain other prior year amounts have been reclassified in order to conform with the current year’s presentation.
Business Segments: The electrical and smoke alarm business is operated by management as one segment.
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, theThe Company nets the factored accounts receivable with the corresponding advance from the Factor, showingwith the net amount netreflected in itsthe 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 $149,597, $223,214$56,943 and $279,692$57,161 for the years ended March 31, 2009, 20082012 and 2007,2011, 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.
Financing Receivables. In September 2010, the FASB issued, and the Company adopted, an Accounting Standards Update requiring enhanced disclosure of the credit quality of financing receivables, as defined therein, and the adequacy of allowances for credit losses. Management considers amounts due from the Company’s factor to be “financing receivables”. Trade accounts receivable, other receivables, and receivables from our Hong Kong Joint Venture are not considered to be financing receivables. The Company sells the majority of its short-term receivables arising in the ordinary course of business to our factor. At the time a receivable is sold to our factor the credit risk associated with the credit worthiness of the debtor is assumed by the factor. The Company continues to bear any credit risk associated with delivery or warranty issues related to the products sold. Management assesses the credit risk of both its trade accounts receivable and its financing receivables based on the specific identification of accounts that have exceeded credit terms. An allowance for uncollectible receivables is provided based on that assessment. Changes in the allowance account from one accounting period to the next are charged to operations in the period the change is determined. Amounts ultimately determined to be uncollectible are eliminated from the receivable accounts and from the allowance account in the period that the receivables’ status is determined to be uncollectible. Based on the nature of the factoring agreement and prior experience, no allowance for uncollectible financing receivables has been provided. At March 31, 2012, an allowance of $75,000 has been provided for uncollectible trade accounts receivable. 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 $528,643, $726,660$356,171 and $1,042,899$308,278 in fiscal years 2009, 20082012 and 2007,2011, respectively.
Inventories: Inventories are stated at the lower of cost (first-in, first-out(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 $953,895$571,219 and $452,856$398,397 at March 31, 20092012 and 2008,2011, respectively. Inventories are shown net of an allowance for inventory obsolescence of $204,309$70,000 and $100,000 as of March 31, 20092012 and $40,000 as of March 31, 2008.
2011, respectively.The Company reviews inventory quarterly to identify slow moving products and valuation allowances are adjusted when deemed necessary.
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:
| - | Shorter of term of lease or life of asset | Leasehold improvements | - | Shorter of term of lease or life of asset | Machinery and equipment | - | 5 to 10 years | | - | 5 to 15 years | Computer equipment | - | 5 years |
Impairment of Long-Lived Assets: The Company’s policy is to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”), SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, (“SFAS No. 144”). The Company recognizes an impairment loss when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. The measurement of the impairment losses to be recognized is based upon the difference between the fair value and the carrying amount of the assets. During fiscal 2008, the company recognized impairment losses on property and equipment included in assets of approximately $3,750,000, which is included in the loss from discontinued operations.
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.
In July 2006,whenever it is more likely than not that a deferred tax asset will not be realized. The Company follows the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertaintyfinancial pronouncement that gives guidance related to the financial statement of recognition and measurement of a tax position taken or expected to be taken in Income Taxes — An Interpretation of FASB Statement No. 109” , which clarifies the accounting for uncertainty ina tax positions. FIN 48return and requires that the Companywe recognize in our financial statements the impact of a tax position, in the Company’s financial statements if that position is more likely than not to be sustained on audit,upon an examination, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, measurement, classification, interestInterest and penalties accounting in interim periods, disclosure, and transition. The provisions of FIN 48related to income tax matters are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. income tax expenses,See Note F,Income Taxes.
Recently Issued Accounting Pronouncements:
Business Combinations: In December 2007,Changes to accounting principles generally accepted in the United States of America (US. GAAP) are established by the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), “Business Combinations,” (“SFAS No. 141(R)”),which replaces SFAS No. 141 and issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS No. 160”), an amendment of Accounting Research Bulletin No. 51. These two new standards will change the accounting for and the reporting for business combination transactions and noncontrolling (minority) interests(FASB) in the consolidated financial statements, respectively. SFAS No. 141(R) will change how business acquisitions are accounted for and will impact financial statements both onform of accounting standards updated (ASU’s) to the acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be re-characterized as noncontrolling interests and classified as a component of equity. These two standards will be effective for the Company for financial statements issued for fiscal years beginning after December 31, 2008. SFAS 141(R) applies prospectively to business combinations from which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. FASB’s Accounting Standards Codification.The Company is requiredconsiders the applicability and impact of all ASU’s. Recently issued ASU’s were evaluated and determined to record and disclose business combinations following existing GAAP until April 2009. SFAS 141R will have an impact on our accounting for business combinations once adopted, but the effect on our consolidated results of operations and financial position will be dependent upon the acquisitions, if any, that we make oneither not applicable or after April 1, 2009.
Fair Value Measurements: In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (“SFAS No. 157”). SFAS No. 157 establishes a formal framework for measuring fair value under generally accepted accounting principles. Although SFAS No. 157 applies (amends) the provisions of existing FASB and other accounting pronouncements, it doesare not require any new fair value measurements nor does it establish valuation standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-1 (“FSP 157-1”) which excludes SFAS No. 13, Accounting for Leases, and its related pronouncements that address leasing transactions from the scope of SFAS No. 157. Also in February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP 157-2”) which delays the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those items recognized or disclosed at fair value on a recurring basis (at least annually). FSP 157-2 defers the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities for financial statements issued for fiscal years beginning after November 15, 2008. The FASB has issued a proposed FASB Staff Position No. 157-c, (“FSP 157-c)”, that would provide guidance on measuring liabilities under SFAS No. 157. SFAS No. 157 does notexpected to have a material impact on the Company’sour consolidated financial position or results of operations.
statements.Foreign currency: The Fair Value Option for Financial Assetsactivity and Financial Liabilities : In February 2008, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statements No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. This accounting standard was effective for our fiscal year beginning April 1, 2008. The Company did not elect the fair value option under SFAS No. 159 for anyaccounts of the financial instruments upon adoption.
Subsequent Events: FASB Statement 165, Subsequent Events, incorporates the accountingHong Kong Joint Venture are denominated in Hong Kong dollars and disclosure requirements for subsequent events into U.S. GAAP. Statement 165 introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and disclose events or transactions occurring after the balance-sheet date. Statement 165 is effective prospectively for interim or annual reporting periods ending after June 15, 2009. As Statement 165 is effective for interim periods, the Company will needare translated to provide the new required disclosures beginning with the June 30, 2009 interim financial statements. The Company does not anticipate the adoption of this new standard will have a material impact on its disclosures.
Foreign currency:US dollars in consolidation. The Company translates the accounts of its subsidiaries denominated in foreign currenciesthe Hong Kong Joint Venture at the applicable exchange rate in effect at the year end date for balance sheet purposes and at the average exchange rate for the reporting period for statement of incomeoperation purposes. The related translation adjustments in accumulated other comprehensive income in shareholder’s equity are reported in accumulated other comprehensive income in shareholders’ equity. Transaction gains and losses arising from transactions denominated in foreign currencies are included in the results of operations. The Company maintainscurrently does not maintain cash in foreign banks of $1,590 to support its operations in Hong Kong.
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-averageweighted 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, | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | | | | | Weighted average number of common shares outstanding for basic EPS | | | 2,466,983 | | | | 2,484,192 | | | | 2,398,284 | | | | | | | | | | | | | | | Shares issued upon assumed exercise of outstanding stock options | | | 4,824 | | | | 17,825 | | | | 86,322 | | | | | | | | | | | | | | | Weighted average number of common and common equivalent shares outstanding for diluted EPS | | | 2,471,807 | | | | 2,502,017 | | | | 2,484,606 | |
Goodwill: Goodwill represents Diluted loss per common share for the excessyear ended March 31, 2012 excludes the effect of all stock options, as their effect is antidilutive. As a result, the purchase price aboveweighted average number of common shares outstanding is identical for the fair value of the net assets acquired. Goodwill is evaluatedyear ended March 31, 2012 for impairment annually or when events or circumstances occur indicating that goodwill might be impaired. In accordance with FAS No. 142, “Goodwillboth basic and Other Intangible Assets,” the evaluation is a two-step process that begins with an estimation of the fair value of the reporting units. The first step assesses potential impairment and the second step measures that impairment. The measurement of possible impairment is based on the comparison of the fair value of each reporting unit with the book value of its assets.
During the third quarter ended December 31, 2007, the Company conducted an evaluation of goodwill acquired with the acquisition of the Canadian subsidiary (Icon) in accordance with FAS No. 142 “Goodwill and Other Intangible Assets.” Based on the trend of lower than forecast sales of mechanical tubing products in the U.S. and Canadian markets, and continuing operation and cash flow losses, the Company recorded an impairment loss of $1,926,696, reducing goodwill recorded by our Canadian subsidiary to zero at December 31, 2007. The impairment loss was recorded in loss from discontinued operations on the consolidated statement of operations.
diluted shares. | | March 31, | | | | 2012 | | | 2011 | | | | | | | | | Weighted average number of common shares outstanding for basic EPS | | | 2,374,952 | | | | 2,387,887 | | | | | | | | | | | Shares issued upon assumed exercise of outstanding stock options | | | - | | | | 7,879 | | | | | | | | | | | Weighted average number of common and common equivalent shares outstanding for diluted EPS | | | 2,374,952 | | | | 2,395,766 | |
NOTE B -– 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 | - | Shorter of term of lease or useful life of asset | | Machinery and equipment | - | 5 to 10 years | | Furniture and fixtures | - | 5 to 15 years | | Computer equipment | - | 5 years |
Property and equipment consist of the following:
| | March 31, | | | | 2009 | | | 2008 | | Leasehold improvements | | $ | 166,147 | | | $ | 73,535 | | Machinery and equipment | | | 163,106 | | | | 163,106 | | Furniture and fixtures | | | 251,611 | | | | 244,994 | | Computer equipment | | | 198,637 | | | | 196,246 | | | | | 779,501 | | | | 677,881 | | | | | | | | | | | Less accumulated depreciation and amortization | | | (528,135 | ) | | | (547,534 | ) | | | $ | 251,366 | | | $ | 130,347 | |
Deprecation | | March 31, | | | | 2012 | | | 2011 | | Leasehold improvements | | $ | 166,772 | | | $ | 166,772 | | Machinery and equipment | | | 190,400 | | | | 189,276 | | Furniture and fixtures | | | 256,558 | | | | 251,611 | | Computer equipment | | | 245,944 | | | | 242,003 | | | | | 859,674 | | | | 849,662 | | Less accumulated depreciation | | | (683,530 | ) | | | (646,222 | ) | | | $ | 176,144 | | | $ | 203,440 | |
Depreciation and amortization expense totaled $49,210, $46,503$41,522 and $39,449$61,025 for fiscal years ended March 31, 2009, 20082012 and 2007,2011, respectively.
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, 2009,2012, the Company has an investment balance of $10,550,373$13,083,493 for its 50% interest in the Hong Kong Joint Venture. There are no material Hong Kong – US GAAP differences between the generally accepted accounting principles (GAAP) used in the Hong Kong Joint Venture’s accounting policies.
policies when compared to US GAAP.The following represents summarized financial information derived from the audited financial statements of the Hong Kong Joint Venture as of March 31, 20092012 and 2008 and for the years ended March 31, 2009, 2008 and 2007.
| | March 31, | | | | 2009 | | | 2008 | | Current assets | | $ | 14,299,857 | | | $ | 14,169,626 | | Property and other assets | | | 13,003,698 | | | | 10,334,906 | | | | | | | | | | | Total | | $ | 27,303,555 | | | $ | 24,504,532 | | | | | | | | | | | Current liabilities | | $ | 5,148,658 | | | $ | 5,215,755 | | Non-current liabilities | | | 51,400 | | | | 82,314 | | | | | | | | | | | Equity | | | 22,103,497 | | | | 19,206,463 | | | | | | | | | | | Total | | $ | 27,303,555 | | | $ | 24,504,532 | |
| | For the Year Ended March 31, | | | | 2009 | | | 2008 | | | 2007 | | | | | | | | | | | | Net sales | | $ | 36,161,337 | | | $ | 30,144,148 | | | $ | 41,151,055 | | Gross profit | | | 9,594,405 | | | | 7,555,705 | | | | 13,753,123 | | Net income | | | 4,011,404 | | | | 3,270,926 | | | | 8,377,365 | |
2011. | | March 31, | | | | 2012 | | | 2011 | | Current assets | | $ | 14,753,305 | | | $ | 14,127,686 | | Property and other assets | | | 17,791,497 | | | | 17,208,266 | | | | | | | | | | | Total | | $ | 32,544,802 | | | $ | 31,335,952 | | | | | | | | | | | Current liabilities | | $ | 4,320,954 | | | $ | 3,837,140 | | Non-current liabilities | | | 6,014 | | | | 24,116 | | | | | | | | | | | Equity | | | 28,217,834 | | | | 27,474,696 | | | | | | | | | | | Total | | $ | 32,544,802 | | | $ | 31,335,952 | |
| | For the Year Ended March 31, | | | | 2012 | | | 2011 | | | | | | | | | Net sales | | $ | 22,160,107 | | | $ | 24,231,557 | | Gross profit | | | 5,011,795 | | | | 6,444,936 | | Net income | | | 1,259,210 | | | | 3,339,499 | |
During the years ended March 31, 2009, 20082012 and 2007,2011, the Company purchased $22,861,649, $20,765,906,$10,152,081 and $19,085,353,$8,130,109, respectively, of finished product from the Hong Kong Joint Venture, which represents 97.3%, 79.9%96.2% and 46%85.6%, respectively, of the Company’s total finished product purchases for the years ended at March 31, 2009, 20082012 and 2007.2011. Amounts due the Hong Kong Joint Venture included in Accounts Payable totaled $1,967,073$449,430 and $1,687,950$453,480 at March 31, 20092012 and 2008,2011, respectively. Amounts due from the Hong Kong Joint Venture included in Accounts Receivable totaled $312,257$584,594 and $115,656$301,380 at March 31, 20092012 and 2008,2011, respectively.
The Company incurred interest costs charged by the Hong Kong Joint Venture of $0, $16,964 and $25,000 during the years ended March 31, 2009, 2008 and 2007, respectively, related to its purchases. The Company’s investment in the Hong Kong Joint Venture as recorded oon the Company’s Consolidated Balance sheets has been adjusted by the intercompany profit of the Hong Kong Joint Venture in the Inventory of the Company.
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$1,000,000 with the amount available at any one time based on 85%cash on deposit, 90% of uncollected non-recourse receivables sold to the factor, and 45%50% of qualifying inventory. Financing of approximately $7,000,000$1,000,000 is available at March 31, 2009.2012. 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 3.25% at March 31, 2009.2012. 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, 2009.
2012.Under this Factoring Agreement, the Company sold receivables of approximately $24,601,177$9,979,020 and $34,350,844$10,360,042 during the years ended March 31, 20092012 and 2008,2011, 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 $4,610,401$1,719,731 and $5,600,408$1,569,126 at March 31, 20092012 and 2008.2011. The amount of the uncollected balance of non-recourse receivables borrowed by the Company as of March 31, 20092012 and 20082011 is $0 and $0, respectively. Collected cash maintained on deposit with the factor earns interest at the factor’s prime rate of interest less three percentage points (effective rate of 0.25% and 3.0%) at March 31, 20092012 and 2008, respectively.
During January 2009, the Company entered into an operating lease for its office and warehouse location in Owings Mills, Maryland which expires in March 2019. This lease is subject to increasing rentals at 3% per year.In June 2009, we amended this lease to include an additional 3,000 square feet of warehouse.The Company has the right to terminate the lease after five years for a one-time payment of $42,000. In February 2004, the Company entered into an operating lease for an approximately 2,600 square foot office in Naperville, Illinois. ThisDuring fiscal 2012, the lease expires inwas expanded to approximately 3,400 square feet and the lease was extended to February 20122015 with rentals increasing rentals at 3% per year.
Each of the operating leases for real estate has renewal options with terms and conditions similar to the original lease. Rent expense, including common area maintenance, totaled $119,565, $113,357and $107,852$176,575 and $171,080 for the years ended March 31, 2009, 20082012 and 2007,2011, respectively.
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | Future minimum lease payments are as follows: | | $ | 146,754 | | | $ | 146,783 | | | $ | 147,782 | | | $ | 111,435 | | | $ | 111,704 | | | $ | 599,756 | |
| | 2013 | | | 2014 | | | 2015 | | | 2016 | | Future minimum lease payments are as follows: | | | 192,534 | | | | 204,558 | | | | 53,781 | | | | 2,997 | |
NOTE GF – INCOME TAXES
The Company provides for Income Taxesfiles its income tax returns in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Accordingly, deferredthe U.S. federal jurisdiction, and various state jurisdictions. Deferred income tax assets and liabilities are computed and recognized for those differences that have future tax consequences and 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 USIthe Company result primarily from tax credit carryforwards, reserves inventories,and accrued liabilities For the fiscal year ended March 31, 2012, the Company has an accumulated net operating loss carryover of approximately $1,578,107 that the Company may carry-forward to offset future taxable income. The Company generated no foreign tax credits for the period. At March 31, 2012, the Company has $1,522,886 of foreign tax and changes in$82,778 of research and development credit carry-forward available to offset future federal income taxes. For the unremitted earningsfiscal year ended March 31, 2011, the Company has an accumulated net operating loss of approximately $812,651 that the Hong Kong Joint Venture.
Company may carryforward to offset future taxable income. The Company generated $113,136 of foreign tax credits for the period. At March 31, 2011, the Company has $1,522,886 of foreign tax credit carryforward and $48,186 of research and development credit available to offset future federal income taxes.At March 31, 2012, the Company has net operating loss carryforwards and tax benefit carryforwards of $1,578,107 and $1,605,664, respectively, which expire at various dates from 2013 through 2030. There are certain limitations to the use and application of these deferred tax assets. Management reviews net operating loss carryforwards and income tax credit carryforwards to evaluate if those amounts are recoverable. Based on historical results and projections of future operations and taxable income, the recoverability of these deferred tax assets is determined to be more likely than not; and, accordingly, no valuation allowance is deemed necessary at March 31, 2012. The components of income tax expense (benefit) from continuing operations for the Company are as follows: | | 2012 | | | 2011 | | Current benefit | | | | | | | | | U.S. Federal | | $ | - | | | $ | (21,459 | ) | U.S. State | | | - | | | | - | | | | | - | | | | (21,459 | ) | Deferred benefit | | | (389,600 | ) | | | (125,404 | ) | Total income tax benefit | | $ | (389,600 | ) | | $ | (146,863 | ) |
| | March 31, | | | | 2012 | | | 2011 | | Deferred tax assets: | | | | | | | | | Financial statement accruals and allowances | | $ | 68,765 | | | $ | 54,340 | | Inventory uniform capitalization | | | 83,098 | | | | 72,412 | | Net operating loss carryforward | | | 637,274 | | | | 304,737 | | Foreign tax credit carryforward | | | 1,522,886 | | | | 1,522,886 | | Research and development tax credit carryforward | | | 82,778 | | | | 48,186 | | Net deferred tax asset | | $ | 2,394,801 | | | $ | 2,002,561 | |
The reconciliation between the statutory federal income tax provision and the actual effective tax provision for continuing operations is as follows: | | Years ended March 31, | | | | 2012 | | | 2011 | | Federal tax (benefit) expense at statutory rate (34%) before loss carry-forward | | $ | (303,582 | ) | | $ | 225,374 | | Non-repatriated earnings of Hong Kong Joint Venture | | | (18,758 | ) | | | (338,693 | ) | Foreign tax credit | | | - | | | | (74,670 | ) | Research and development credit | | | - | | | | (17,361 | ) | State income tax expense, net of federal tax effect | | | - | | | | (5,277 | ) | Reduction in uncertain tax position liability | | | - | | | | (21,459 | ) | Permanent differences | | | 14,551 | | | | 14,955 | | True-up adjustments and other | | | (81,811 | ) | | | 70,268 | | Income tax benefit | | $ | (389,600 | ) | | $ | (146,863 | ) |
The Company adopted the provisions of FIN 48new income tax guidance regarding uncertain tax positions on April 1, 2007. As a result of the implementation, of FIN 48, the Company recognized aan $86,000 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction of the April 1, 2007 retained earnings balance. The total amount of unrecognized tax benefitsattributes as of the date of the adoption was approximately $86,000 and includes both income taxes, tax penalties and tax penalties. In years prior to fiscal 2008, interestimputed interest. Interest and penalties related to adjustments to income taxes as filed, have not been significant. The Company intends to includeincludes any such interest and penalties in its tax provision.
For During the fiscal year ended March 31, 2009,2011, the Company has an accumulated net operating loss of approximately $1,440,114 that the Company will carryforward to offset future taxable income. The Company generated $157,249 of foreign tax credits for the period. In addition, $694,792 in foreign tax credits became available to carryforward as a resultamount of the carryback of net operating losses to prior tax years. Accordingly, at March 31, 2009, the Company has $1,240,239 of foreign tax credit carryforward available to offset future federal income taxes.
For the fiscal year ended March 31, 2008, the Company generated a net operating loss of approximately $3,320,000 that the Company elected to carryback to offset prior taxable income. In addition, the Company generated $132,439 of foreign tax credits for the period. Accordingly, at March 31, 2008, the Company had $388,744 of foreign tax credit carryforward available to offset future federal income taxes.
At March 31, 2007, the Company had foreign tax credit carryforwards of $685,654 available as a result of foreign taxes paid on the repatriated earnings of the Hong Kong Joint Venture. In addition, the Company generated $236,628 of foreign tax credits during the fiscal year ended March 31, 2007. Approximately $534,084 of foreign tax credits were used to offset federal taxes at March 31, 2007, resulting in a remaining foreign tax credit carryforward available to offset future taxes of $388,198.
The components of income tax expense (benefit) from continuing operations for the Company are as follows:
| | March 31, | | | | 2009 | | | 2008 | | | 2007 | | Current expense (benefit) | | | | | | | | | | U.S. Federal | | $ | 608,794 | | | $ | 581,300 | | | $ | 1,425,522 | | U.S. State | | | 64,943 | | | | 62,300 | | | | 215,308 | | | | | 673,737 | | | | 643,600 | | | | 1,640,830 | | Deferred expense (benefit) | | | (214,355 | ) | | | (131,365 | ) | | | (280,040 | ) | Total income tax expense (benefit) | | $ | 459,382 | | | $ | 512,235 | | | $ | 1,360,790 | |
Significant components of USI’s deferred tax assets and liabilities are as follows:
| | March 31, | | | | 2009 | | | 2008 | | Deferred tax assets: | | | | | | | Financial statement accruals and allowances | | $ | 230,646 | | | $ | 210,297 | | Inventory uniform capitalization | | | 123,298 | | | | 63,052 | | Stock option compensation | | | 7,477 | | | | 7,477 | | Net operating loss carryforward | | | 540,043 | | | | 1,245,112 | | Foreign tax credit carryforward | | | 1,240,239 | | | | 388,198 | | Net deferred tax asset | | $ | 2,141,703 | | | $ | 1,914,136 | |
The reconciliation between the statutory federal income tax provision and the actual effective tax provision for continuing operations is as follows:
| | Years ended March 31, | | | | 2009 | | | 2008 | | | 2007 | | Federal tax (benefit) expense at statutory rate (34%) before loss carryforward | | $ | 646,584 | | | $ | 1,134,575 | | | $ | 2,534,402 | | Non-patriated earnings of Hong Kong Joint Venture | | | (114,275 | ) | | | (282,251 | ) | | | (635,549 | ) | Foreign tax credit net of gross up for US portion of foreign taxes | | | (157,249 | ) | | | (197,311 | ) | | | (922,282 | ) | Reversal of Canadian net operating loss benefit | | | - | | | | - | | | | 40,410 | | State income tax (benefit) expense, net of federal tax effect | | | 64,943 | | | | 62,568 | | | | 195,852 | | Permanent differences | | | 19,379 | | | | 13,419 | | | | 14,543 | | Change in temporary differences | | | - | | | | (218,765 | ) | | | 133,414 | | Provision for income tax expense (benefit) | | $ | 459,382 | | | $ | 512,235 | | | $ | 1,360,790 | |
The Company files its income tax returns in the U.S. federal jurisdiction, and various state jurisdictions.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on April 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized approximately a $86,000 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the April 1, 2007, balance of retained earnings. A reconciliation of the beginningattributes were reduced by $21,459, including deemed interest and ending amount of unrecognized tax benefits is as follows:
Balance at April 1, 2008 | | $ | 236,000 | | | | | | | Additions based on tax positions related to the current year | | | - | | Additions for tax positions of prior years | | | - | | Reductions for tax positions of prior years | | | - | | Settlements | | | - | | | | | | | Balance at March 31, 2009 | | $ | 236,000 | |
The total liability for unrecognized tax benefits, as of March 31, 2009, was $245,324.penalties. That amount, if ultimately recognized, would reduce the Company’s annual effective tax rate. NOTE G - SHAREHOLDERS’ EQUITY Stock Repurchase Program –The Company has concluded that nonefollowing table sets forth information with respect to purchases of this amount will be paid within the next 12 months.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expense. Cumulatively, at March 31, 2009,common stock by the Company has accrued and recognized approximately $9,324 in interest and penalties, of which 4,164 is accrued foror any affiliated purchasers during the fiscal year ended March 31, 2009.
NOTE H - SHAREHOLDERS’ EQUITY
Common Stock2012: - During the year ended March 31, 2008, the Company issued 12,255 shares of its common stock, all of which were issued on the exercise of employee stock options for total proceeds of $126,678.
Stock Repurchase Program – Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased As Part of Publicly Announced Plans Or Programs | | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | | November 2011 | | | 11,000 | | | $ | 5.35 | | | | 11,000 | | | | 89,000 | | December 2011 | | | 10,039 | | | $ | 5.08 | | | | 10,039 | | | | 78,961 | | January 2012 | | | 20,398 | | | $ | 5.52 | | | | 20,398 | | | | 58,563 | | March 2012 | | | 10,096 | | | $ | 5.42 | | | | 10,096 | | | | 48,467 | | Total | | | 51,533 | | | $ | 5.39 | | | | 51,533 | | | | 48,467 | |
In July 2008,October 2011, the Company announced a stock buyback program and authorized the purchase of up to 100,000 shares of common stock. Shares may be purchased from time to time under this program in the open market, through block trades and/or in negotiated transactions. Unless extended by the Company’s Board of Directors, theThe program will terminate when 100,000 shares of common stock have been repurchased by the Company pursuant to the program (unless increased or decreased by the Board of Directors).
DuringStock Options – Under the fiscal year endedterms of the Company’s 2011 Non-Qualified Stock Option Plan, 120,000 shares of common stock were reserved for the granting of stock options, of which 97,000 options have been issued as of March 31, 2009, 78,847 shares were repurchased under this program. Subsequent to March 31, 2009, an additional 21,133 shares were repurchased, resulting in a total of 99,980 shares repurchased at an average price of $3.71 per share.
Stock Options - 2012.Under the terms of the Company’s now expired 1978 Non-Qualified Stock Option Plan, as amended, 1,170,369 shares of common stock arewere reserved for the granting of stock options, of which 1,149,638 shares haveoptions had been issued as of March 31, 2009. Under provisions ofThere are no options outstanding under 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.
1978 Non-Qualified Stock Option Plan.In March 2009, 25,000 options were issued at $3.25 for restricted shares of the Company’s common stock. These options will bewere not issued under the now expired 1978 Non-Qualified Stock Option Plan and became fully vested after one year with a right to exercise until March 2014.
The following tables summarize the status of outstandingexercisable stock options at March 31, 20092012 and option transactions for the three years then ended:
Status as of March 31, 2009 | | Number of Shares | | Presently exercisable | | | 72,422 | | Exercisable in future years | | | 25,000 | | | | | | | Total outstanding | | | 97,422 | | | | | | | Outstanding options: | | | | | Number of holders | | | 16 | | Average exercise price per share | | $ | 10.47 | | Expiration dates | | April 2009 to March 2014 | |
Transactions for the Three Years Ended March 31, 2009: | | Number of Shares | | | Weighted Average Exercise Price | | Outstanding at March 31, 2007 | | | 101,176 | | | | | Granted | | | 0 | | | | 0.00 | | Canceled | | | 0 | | | | 0.00 | | Exercised | | | (12,255 | ) | | | 10.40 | | | | | | | | | | | Outstanding at March 31, 2008 | | | 88,921 | | | | | | Granted | | | 25,000 | | | | 3.25 | | Canceled | | | (16,499 | ) | | | 0.00 | | Exercised | | | - | | | | 0.00 | | | | | | | | | | | Outstanding at March 31, 2009 | | | 97,422 | | | | | |
Status as of March 31, 2012 | | Number of Shares | | | | | | Presently exercisable | | | 25,000 | | | | | | | Outstanding options by grant | | | | | Number of holders – grant 1 | | | 1 | | Average exercise price per share | | $ | 3.25 | | Expiration date: | | | March 2014 | | | | | | | Number of holders – grant 2 | | | 19 | | Average exercise price per share | | $ | 5.51 | | Expiration date: | | | December 2013 | |
Transactions for the Year Ended March 31, 2012: | | Number of Shares | | | Weighted Average Exercise Price | | Outstanding at April 1, 2011 | | | 25,000 | | | | 3.25 | | Granted | | | 97,000 | | | | 5.51 | | Outstanding at March 31, 2012 | | | 122,000 | | | | 5.05 | |
The following table summarizes information about stock options outstanding at March 31, 2009:
| | Options Outstanding | | | | | | Options Exercisable | | Range of Exercise Price | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Contract Life (Yrs) | | | Number of Shares | | | Weighted Average Exercise Price | | | | | | | | | | | | | | | | | | $3.25 | | | 25,000 | | | | 3.25 | | | | 5.00 | | | | 0 | | | | 3.25 | | $7.68 to $9.99 | | | 4,666 | | | | 8.27 | | | | 0.31 | | | | 4,666 | | | | 8.27 | | $10.00 to $12.99 | | | 39,329 | | | | 11.27 | | | | 1.00 | | | | 39,329 | | | | 11.27 | | $13.00 to $16.09 | | | 28,427 | | | | 16.09 | | | | 2.00 | | | | 28,427 | | | | 16.09 | | | | | 97,422 | | | | | | | | | | | | 72,422 | | | | | |
2011: | | | Options Outstanding | | | | | | Options Exercisable | | Range of Exercise Price | | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Contract Life (Yrs) | | | Number of Shares | | | Weighted Average Exercise Price | | $ | 3.25 | | | | 25,000 | | | | 3.25 | | | | 5.00 | | | | 25,000 | | | | 3.25 | | $ | 5.51 | | | | 97,000 | | | | 5.51 | | | | 2.00 | | | | 97,000 | | | | 5.51 | |
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; no annual dividends, expected volatility of 64.05%57.73%, risk-free interest rate of 0.5%0.3% and expected lives of five years.two years used for options granted in fiscal 2012. There were no options granted in fiscal 2011. The weighted-average fair value of the stock options granted in 2006 was $8.29 per share.
fiscal 2012 approximates $170,000. Fifty percent of the options vest one year after issuance, with the remaining fifty percent vesting twenty-three months after issuance.As of March 31, 2012, the unrecognized compensation cost related to share-based compensation arrangements that we expect to vest is $144,519. The Black-Scholes option valuation model was developed for use in estimating the fairaggregate intrinsic value of tradedcurrently exercisable 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.
was $53,250 at March 31, 2012.NOTE IH - COMMITMENTS AND CONTINGENCIES
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.
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 a patent acquired by Kidde (US 4,972,181). Kidde was seeking injunctive relief and damages to be determined at trial. On March 31, 2006, following numerous procedural and substantive rulings which the Company believes were favorable to the Company, 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 in the same court (Case No. 05cv1031) based on virtually identical infringement allegations as the earlier case. Discovery is now closed in this second case. Although the asserted patent is now expired, prior to its expiration, the Company sought and has now successfully obtained re-examination of the asserted patent in the United States Patent and Trademark Office (USPTO) largely based on the references cited and analysis presented by the Company which correspond to defenses raised in the litigation. In September, the USPTO rejected all of the claims asserted against the Company based on the references. Kidde responded to the rejection to which further action by the USPTO is pending. Kidde also filed for and the Court granted a stay of the litigation pending the conclusion of the reexamination. The USPTO action fully supports the Company’s substantive position and its defenses to Kidde. The Company and its counsel believe that regardless of the outcome of the reexamination, 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 the Company is not yet determinable.
On June 25, 2008, Maple Chase Company which was acquired in January 2008 by United Technologies Corporation (which also owns Walter Kidde Portable Equipment, Inc.), filed a civil suit against the Company in the United States District Court for the Northern District of Illinois (Case No. 08cv3641) for patent infringement of Re 33920, a patent that expired in March of 2007. On January 13, 2009, the Court granted permission to substitute Kidde for Maple Chase as the party plaintiff. This action involves the same patent that formed the basis of the suit filed by Maple Chase against the Company in February 2004 (Case No. 03cv07205). In that case, the Company successfully sought and obtained reexamination of the asserted patent in the USPTO based on the references cited and analysis presented by the Company. In April 2005, the Court dismissed the earlier case subject to the outcome of the reexamination. After pending for more than three years and after the expiration of the patent, a Reexamination Certificate was granted confirming patentability of many of the claims and canceling the remaining claims. The 2008 case asserts infringement of the claims emerging out of reexamination and is in its preliminary stages where discovery has just commenced. The Company believes that it has meritorious and substantial technical defenses to the action and that it is entitled to a number of legal/equitable defenses due to the long period of inaction and acquiescence by Kidde/Maple Chase and its predecessors. The amount, if any, of potential loss to the Company is not yet determinable. The Company intends to vigorously defend the suit and press its pending counterclaims.
On August 21, 2008, Kidde again filed a civil suit against the Company for patent infringement (Case No. 08cv2202) but this time in the United States District Court for the District of Maryland. Kidde accuses the Company of infringement of US patent 6,791,453 by communication protocols for interconnected hazardous condition (smoke, heat and Carbon monoxide) alarms sold by the Company. The Company believes that it has meritorious and substantial technical defenses to the action. The amount, if any, of potential loss to the Company is not yet determinable. The Company intends to vigorously defend the suit and press its pending counter and third party claims.
On September 25, 2008, the Company with its Answer and Counterclaims to Kidde filed a third-party Complaint against United Technologies Corporation in the United States District Court for the District of Maryland in Case No. 08cv2202 for the predatory litigation campaign by the defendant and its subsidiary, Kidde. On December 17, 2008, the Company filed a motion to amend its Answer and Counterclaims seeking injunctive and antitrust damages which was unsuccessfully opposed by both Kidde and UTC. On March 31, 2009, Kidde filed a defective request for reexamination of the ‘453 patent. On April 9, 2009, after Kidde filed corrected papers, the re-examination request was formalized and is currently pending determination by the USPTO. Kidde has also recently filed a motion to stay the litigation pending the outcome of the Re-examination. The Company is opposing that pending motion. In April, the Court also issued a schedule requiring the parties to define, present and argue their respective patent claim interpretations over the summer and into the fall of 2009. Otherwise, the case is in the initial discovery phase. The Company intends to vigorously prosecute its claims.
NOTE JI - MAJOR CUSTOMERS
The Company is primarily a distributor of safety products for use in home and business under both its tradenamestrade names and private labels for other companies. As described in Note C, the Company’sCompany purchased a majority of its products from its 50% owned Hong Kong Joint Venture.
TheFor the fiscal year ended March 31, 2012, the Company hashad one customer, The Home Depot, whichFacilities Maintenance, that represented 46.6%, 37.0% and 11.09%12.3% of the Company’s product sales during the periods ended March 31, 2009, 2008 and 2007, respectively.
sales.NOTE KJ - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years 20092012 and 20082011 are summarized as follows: | | Quarter Ended | | | | June 30, | | | September 30, | | | December 31, | | | March 31, | | | | | | | | | | | | | | | 2012 | | | | | | | | | | | | | | | | | Net sales | | $ | 3,201,302 | | | $ | 3,307,514 | | | $ | 3,186,197 | | | $ | 3,609,589 | | Gross profit | | | 872,938 | | | | 1,000,659 | | | | 818,527 | | | | 819,074 | | Net income (loss) | | | 581 | | | | (309,941 | ) | | | 67,226 | | | | (261,154 | ) | Net income (loss) per share: | | | | | | | | | | | | | | | | | Basic | | | 0.00 | | | | (0.13 | ) | | | 0.03 | | | | (0.11 | ) | Diluted | | | 0.00 | | | | (0.13 | ) | | | 0.03 | | | | (0.11 | ) | | | | | | | | | | | | | | | | | | 2011 | | | | | | | | | | | | | | | | | Net sales | | $ | 3,681,421 | | | $ | 3,714,378 | | | $ | 2,475,511 | | | $ | 3,378,294 | | Gross profit | | | 1,111,242 | | | | 1,064,144 | | | | 751,580 | | | | 834,779 | | Net income | | | 281,867 | | | | 268,376 | | | | 19,545 | | | | 247,993 | | Net income per share: | | | | | | | | | | | | | | | | | Basic | | | 0.12 | | | | 0.11 | | | | 0.01 | | | | 0.10 | | Diluted | | | 0.12 | | | | 0.11 | | | | 0.01 | | | | 0.10 | |
| | Quarter Ended | | | | June 30, | | | September 30, | | | December 31, | | | March 31, | | 2009 | | | | | | | | | | | | | Net sales | | $ | 6,192,801 | | | $ | 8,381,379 | | | $ | 5,595,049 | | | $ | 5,928,367 | | Gross profit | | | 1,577,066 | | | | 1,891,273 | | | | 1,337,785 | | | | 1,293,846 | | Income from continuing operations | | | 457,139 | | | | 656,301 | | | | 292,513 | | | | 36,383 | | Income (loss) from discontinued operations | | | (53,659 | ) | | | 3,434,913 | | | | - | | | | 41,767 | | Income per share from continuing operations: | | | | | | | | | | | | | | | | | Basic | | | 0.18 | | | | 0.26 | | | | 0.12 | | | | 0.02 | | Diluted | | | 0.18 | | | | 0.26 | | | | 0.12 | | | | 0.02 | | Income (loss) per share from Discontinued operations: | | | | | | | | | | | | | | | | | Basic | | | (0.02 | ) | | | 1.38 | | | | - | | | | 0.02 | | Diluted | | | (0.02 | ) | | | 1.38 | | | | - | | | | 0.02 | | Net income – basic | | | 0.16 | | | | 1.64 | | | | 0.12 | | | | 0.03 | | Net income - diluted | | | 0.16 | | | | 1.64 | | | | 0.12 | | | | 0.03 | | | | | | | | | | | | | | | | | | | 2008 | | | | | | | | | | | | | | | | | Net sales | | | 10,449,343 | | | | 8,967,740 | | | | 7,776,986 | | | | 6,677,293 | | Gross profit | | | 2,715,334 | | | | 1,942,354 | | | | 1,825,486 | | | | 1,386,882 | | Income (loss) from continuing operations | | | 1,204,844 | | | | 802,107 | | | | 780,207 | | | | 37,591 | | (Loss) from discontinued operations | | | (413,842 | ) | | | (483,977 | ) | | | (2,415,996 | ) | | | (5,079,848 | ) | Income per share from continuing operations: | | | | | | | | | | | | | | | | | Basic | | | 0.49 | | | | 0.32 | | | | 0.31 | | | | 0.02 | | Diluted | | | 0.48 | | | | 0.32 | | | | 0.31 | | | | 0.02 | | (Loss) per share from discontinued operations: | | | | | | | | | | | | | | | | | Basic | | | (0.17 | ) | | | (0.19 | ) | | | (0.97 | ) | | | (2.04 | ) | Diluted | | | (0.17 | ) | | | (0.19 | ) | | | (0.97 | ) | | | (2.04 | ) | Net income (loss) – basic | | | 0.32 | | | | 0.13 | | | | (0.66 | ) | | | (2.02 | ) | Net income (loss) – diluted | | | 0.31 | | | | 0.13 | | | | (0.66 | ) | | | (2.02 | ) |
NOTE LK – RETIREMENT PLAN
The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code. All full-time employees who have completed 12 months of service are eligible to participate. Employees are permitted to contribute up to the amounts prescribed by law. The Company may provide contributions to the plan consisting of a matching amount equal to a percentage of the employee’s contribution, not to exceed four percent (4%). Employer contributions were $55,059$62,769 and $61,485$55,029 for the year’syears ended March 31, 20092012 and 2008.
2011, respectively.NOTE M – INTANGIBLE ASSETS Intangible assets consist of legal expenses of $89,434 incurred in obtaining and perfecting patents on newly developed detector technology and are capitalized for financial statement purposes. Upon issuance, patents are amortized over twenty years on a straight-line basis. The estimated useful lives for financial reporting purposes are as follows: | Intangible patent costs | - | 20 years |
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 2009, 20082012 AND 2007
| | Balance at beginning of year | | | Charged to cost and expenses | | | Deductions | | | Balance at end of year | | | | | | | | | | | | | | | Year ended March 31, 2009 | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 15,000 | | | $ | 80,927 | | | $ | 0 | | | $ | 95,927 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2008 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 15,000 | | | $ | 0 | | | $ | 0 | | | $ | 15,000 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2007 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 15,000 | | | $ | 0 | | | $ | 0 | | | $ | 15,000 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2009 | | | | | | | | | | | | | | | | | Allowance for inventory reserve | | $ | 40,000 | | | $ | 164,309 | | | $ | 0 | | | $ | 204,309 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2008 | | | | | | | | | | | | | | | | | Allowance for inventory reserve | | $ | 40,000 | | | $ | 0 | | | $ | 0 | | | $ | 40,000 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2007 | | | | | | | | | | | | | | | | | Allowance for inventory reserve | | $ | 40,000 | | | $ | 0 | | | $ | 0 | | | $ | 40,000 | |
Report and Financial Statements
Eyston Company Limited
For the year ended 31 March 2009
Contents 2011 | | Balance at beginning of year | | | Charged to cost and expenses | | | Deductions | | | Balance at end of year | | | | | | | | | | | | | | | Year ended March 31, 2012 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 75,000 | | | $ | 0 | | | $ | 0 | | | $ | 75,000 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2011 | | | | | | | | | | | | | | | | | Allowance for doubtful accounts | | $ | 87,851 | | | $ | 0 | | | $ | 12,851 | | | $ | 75,000 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2012 | | | | | | | | | | | | | | | | | Allowance for inventory reserve | | | 100,000 | | | $ | 0 | | | $ | 30,000 | | | $ | 70,000 | | | | | | | | | | | | | | | | | | | Year ended March 31, 2011 | | | | | | | | | | | | | | | | | Allowance for inventory reserve | | $ | 100,000 | | | $ | 0 | | | $ | 0 | | | $ | 100,000 | |
| | Page | | | | Report of Independent Registered Public Accounting Firm | | JV-1 | | | | Consolidated Income Statement | | JV-2 | | | | Consolidated Balance Sheet | | JV-3 | | | | Balance Sheet | | JV-4 | | | | Consolidated Statement of Changes in Equity | | JV-5 | | | | Consolidated Cash Flow Statement | | JV-6 | | | | Notes to the Financial Statements | | JV-7S-1 |
Expressed in Hong Kong dollars ("HK$")
Report of independent registered
public accounting firm
To the Board of Directors of Eyston Company Limited
We have audited the accompanying consolidated balance sheets of Eyston Company Limited and subsidiaries ("the Company"), as of March 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years in the period ended March 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2009 and 2008, and the consolidated results of its income and its cash flows for each of the three years in the period ended March 31, 2009, in accordance with Hong Kong Financial Reporting Standards.
Grant Thornton
Certified Public Accountants
13th Floor, Gloucester Tower
The Landmark
15 Queen's Road Central
Hong Kong
15 June 2009
Consolidated income statement
for the year ended 31 March
| | Notes | | | 2009 | | | 2008 | | | 2007 | | | | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | Turnover | | | 5 | | | | 281,284,464 | | | | 235,060,421 | | | | 320,142,022 | | | | | | | | | | | | | | | | | | | Cost of sales | | | | | | | (206,656,292 | ) | | | (176,141,949 | ) | | | (213,147,126 | ) | | | | | | | | | | | | | | | | | | Gross profit | | | | | | | 74,628,172 | | | | 58,918,472 | | | | 106,994,896 | | | | | | | | | | | | | | | | | | | Other income | | | 6 | | | | 2,612,487 | | | | 5,350,795 | | | | 4,693,192 | | | | | | | | | | | | | | | | | | | Administrative expenses | | | | | | | (41,204,939 | ) | | | (34,379,717 | ) | | | (37,260,187 | ) | | | | | | | | | | | | | | | | | | Profit from operations | | | | | | | 36,035,720 | | | | 29,889,550 | | | | 74,427,901 | | | | | | | | | | | | | | | | | | | Finance costs | | | 7 | | | | (112,823 | ) | | | (210,016 | ) | | | (405,953 | ) | | | | | | | | | | | | | | | | | | Profit before income tax | | | 8 | | | | 35,922,897 | | | | 29,679,534 | | | | 74,021,948 | | | | | | | | | | | | | | | | | | | Income tax expense | | | 9 | | | | (4,541,928 | ) | | | (4,173,251 | ) | | | (8,848,735 | ) | | | | | | | | | | | | | | | | | | Profit for the year | | | 10 | | | | 31,380,969 | | | | 25,506,283 | | | | 65,173,213 | | | | | | | | | | | | | | | | | | | Dividends | | | 11 | | | | 15,068,948 | | | | 16,716,167 | | | | 29,866,722 | |
Consolidated balance sheet
as at 31 March
| | Notes | | | 2009 | | | 2008 | | | | | | | HK$ | | | HK$ | | | | | | | | | | | | ASSETS AND LIABILITIES | | | | | | | | | | | | | | | | | | | | Non-current assets | | | | | | | | | | Property, plant and equipment | | | 12 | | | | 64,214,954 | | | | 59,767,941 | | Advanced lease payments | | | 13 | | | | 14,353,995 | | | | 14,023,266 | | Available-for-sale financial assets | | | 14 | | | | 21,667,859 | | | | 7,902,216 | | Pledged bank balances | | | 19 | | �� | | 567,050 | | | | - | | | | | | | | | 100,803,858 | | | | 81,693,423 | | Current assets | | | | | | | | | | | | | Inventories | | | 16 | | | | 27,845,689 | | | | 28,354,497 | | Available-for-sale financial assets | | | 14 | | | | - | | | | 15,633,540 | | Trade and other receivables | | | 17 | | | | 5,184,715 | | | | 5,674,634 | | Amount due from a shareholder | | | 20 | | | | 13,940,881 | | | | 9,392,116 | | Cash and cash equivalents | | | 19 | | | | 63,880,318 | | | | 50,687,596 | | | | | | | | | 110,851,603 | | | | 109,742,383 | | Current liabilities | | | | | | | | | | | | | Trade and other payables | | | | | | | 17,231,889 | | | | 21,499,786 | | Obligations under finance lease | | | | | | | 21,000 | | | | 21,000 | | Amount due to a related company | | | 20 | | | | 3,381,063 | | | | 2,329,153 | | Dividend payable | | | 21 | | | | 11,700,000 | | | | 11,700,000 | | Loans from shareholders | | | 22 | | | | 2,868,954 | | | | 2,868,954 | | Collateralised bank advances | | | 23 | | | | 341,250 | | | | 971,312 | | Provision for taxation | | | | | | | 4,196,701 | | | | 1,199,326 | | | | | | | | | 39,740,857 | | | | 40,589,531 | | Net current assets | | | | | | | 71,110,746 | | | | 69,152,852 | | | | | | | | | | | | | | | Non-current liabilities | | | | | | | | | | | | | Obligations under finance lease | | | | | | | 31,700 | | | | 52,700 | | Deferred tax liabilities | | | 24 | | | | 366,752 | | | | 587,877 | | Net assets | | | | | | | 171,516,152 | | | | 150,205,698 | | | | | | | | | | | | | | | EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | Share capital | | | 25 | | | | 200 | | | | 200 | | Reserves | | | 26 | | | | 171,515,952 | | | | 150,205,498 | | | | | | | | | 171,516,152 | | | | 150,205,698 | |
Balance sheet
as at 31 March
| | Notes | | | 2009 | | | 2008 | | | | | | | HK$ | | | HK$ | | ASSETS AND LIABILITIES | | | | | | | | | | | | | | | | | | | | Non-current assets | | | | | | | | | | Property, plant and equipment | | | 12 | | | | 7,353,332 | | | | 10,169,509 | | Advanced lease payments | | | 13 | | | | 407,310 | | | | 668,775 | | Available-for-sale financial assets | | | 14 | | | | 21,667,859 | | | | 7,902,216 | | Interests in subsidiaries | | | 15 | | | | 106,690,967 | | | | 94,990,967 | | Pledged bank balances | | | 19 | | | | 567,050 | | | | - | | | | | | | | | 136,686,518 | | | | 113,731,467 | | Current assets | | | | | | | | | | | | | Inventories | | | 16 | | | | 27,845,689 | | | | 28,354,497 | | Available-for-sale financial assets | | | 14 | | | | - | | | | 15,633,540 | | Other receivables | | | | | | | 1,612,623 | | | | 1,033,057 | | Amounts due from subsidiaries | | | 18 | | | | 28,278,839 | | | | 22,846,582 | | Tax prepaid | | | | | | | - | | | | 1,083,171 | | Cash and cash equivalents | | | 19 | | | | 47,574,236 | | | | 31,612,771 | | | | | | | | | 105,311,387 | | | | 100,563,618 | | Current liabilities | | | | | | | | | | | | | Trade and other payables | | | | | | | 12,437,284 | | | | 17,513,855 | | Obligations under finance lease | | | | | | | 21,000 | | | | 21,000 | | Amount due to a related company | | | 20 | | | | 3,381,063 | | | | 2,329,153 | | Dividend payable | | | 21 | | | | 11,700,000 | | | | 11,700,000 | | Loans from shareholders | | | 22 | | | | 2,868,954 | | | | 2,868,954 | | Provision for taxation | | | | | | | 1,889,364 | | | | - | | | | | | | | | 32,297,665 | | | | 34,432,962 | | Net current assets | | | | | | | 73,013,722 | | | | 66,130,656 | | | | | | | | | | | | | | | Non-current liabilities | | | | | | | | | | | | | Obligations under finance lease | | | | | | | 31,700 | | | | 52,700 | | Deferred tax liabilities | | | 24 | | | | 366,752 | | | | 587,877 | | Net assets | | | | | | | 209,301,788 | | | | 179,221,546 | | | | | | | | | | | | | | | EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | Share capital | | | 25 | | | | 200 | | | | 200 | | Reserves | | | 26 | | | | 209,301,588 | | | | 179,221,346 | | | | | | | | | 209,301,788 | | | | 179,221,546 | |
Consolidated statement of changes in equity
| | Share capital | | | Exchange reserve | | | Fair value reserve | | | Retained profits | | | Total | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | | | | Balance at 1 April 2006 | | | 200 | | | | 649,522 | | | | (750,629 | ) | | | 98,664,880 | | | | 98,563,973 | | | | | | | | | | | | | | | | | | | | | | | Change in fair value of available-for-sale financial assets | | | - | | | | - | | | | 292,456 | | | | - | | | | 292,456 | | Exchange differences arising on translation of a subsidiary | | | - | | | | 2,538,341 | | | | - | | | | - | | | | 2,538,341 | | Profit for the year | | | - | | | | - | | | | - | | | | 65,173,213 | | | | 65,173,213 | | Total recognised income and expense for the year | | | - | | | | 2,538,341 | | | | 292,456 | | | | 65,173,213 | | | | 68,004,010 | | Dividends | | | - | | | | - | | | | - | | | | (29,866,722 | ) | | | (29,866,722 | ) | Balance at 31 March 2007 and 1 April 2007 | | | 200 | | | | 3,187,863 | | | | (458,173 | ) | | | 133,971,371 | | | | 136,701,261 | | | | | | | | | | | | | | | | | | | | | | | Change in fair value of available-for-sale financial assets | | | - | | | | - | | | | 577,549 | | | | - | | | | 577,549 | | Exchange differences arising on translation of a subsidiary | | | - | | | | 4,136,772 | | | | - | | | | - | | | | 4,136,772 | | Profit for the year | | | - | | | | - | | | | - | | | | 25,506,283 | | | | 25,506,283 | | Total recognised income and expense for the year | | | - | | | | 4,136,772 | | | | 577,549 | | | | 25,506,283 | | | | 30,220,604 | | Dividends | | | - | | | | - | | | | - | | | | (16,716,167 | ) | | | (16,716,167 | ) | Balance at 31 March 2008 and 1 April 2008 | | | 200 | | | | 7,324,635 | | | | 119,376 | | | | 142,761,487 | | | | 150,205,698 | | | | | | | | | | | | | | | | | | | | | | | Change in fair value of available-for-sale financial assets | | | - | | | | - | | | | (44,862 | ) | | | - | | | | (44,862 | ) | Exchange differences arising on translation of a subsidiary | | | - | | | | 5,043,295 | | | | - | | | | - | | | | 5,043,295 | | Profit for the year | | | - | | | | - | | | | - | | | | 31,380,969 | | | | 31,380,969 | | Total recognised income and expense for the year | | | - | | | | 5,043,295 | | | | (44,862 | ) | | | 31,380,969 | | | | 36,379,402 | | Dividends | | | - | | | | - | | | | - | | | | (15,068,948 | ) | | | (15,068,948 | ) | Balance at 31 March 2009 | | | 200 | | | | 12,367,930 | * | | | 74,514 | * | | | 159,073,508 | * | | | 171,516,152 | |
| *These reserve accounts comprise the consolidated reserves of HK$171,515,952 (2008: HK$150,205,498) in the consolidated balance sheet.
|
Consolidated cash flow statement
for the year ended 31 March
| | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | Cash flows from operating activities | | | | | | | | | | Profit before income tax | | | 35,922,897 | | | | 29,679,534 | | | | 74,021,948 | | Adjustments for : | | | | | | | | | | | | | Amortisation of advanced lease payments | | | 581,797 | | | | 427,392 | | | | 424,328 | | Depreciation of property, plant and equipment | | | 8,721,931 | | | | 10,166,942 | | | | 5,752,971 | | Exchange loss on available-for-sale financial assets | | | 420,648 | | | | - | | | | - | | (Profit)/Loss on disposal of available-for-sale financial assets | | | (61,620 | ) | | | 34,344 | | | | 87,565 | | Loss/(Gain) on disposal of property, plant and equipment | | | 42,989 | | | | (94 | ) | | | (347,500 | ) | Interest expense | | | 112,823 | | | | 210,016 | | | | 405,953 | | Interest income | | | (1,413,626 | ) | | | (2,384,538 | ) | | | (2,289,039 | ) | Operating profit before working capital changes | | | 44,327,839 | | | | 38,133,596 | | | | 78,056,226 | | (Increase)/Decrease in amount due from a shareholder | | | (10,380,402 | ) | | | 8,427,746 | | | | (26,272,135 | ) | Decrease/(Increase) in inventories | | | 508,808 | | | | 2,086,586 | | | | (11,518,178 | ) | Decrease/(Increase) in trade and other receivables | | | 489,919 | | | | 3,534,879 | | | | (928,730 | ) | Increase in pledged bank balances | | | (567,050 | ) | | | - | | | | - | | Decrease in loan to a shareholder | | | - | | | | 1,950,000 | | | | 1,950,000 | | Increase /(Decrease) in amount due to a related company | | | 1,051,910 | | | | (953,842 | ) | | | 4,199,312 | | (Decrease)/Increase in obligations under finance lease | | | (21,000 | ) | | | (21,000 | ) | | | 94,700 | | (Decrease)/Increase in amount due to director | | | - | | | | (200,000 | ) | | | 200,000 | | Decrease in collateralised bank advances | | | (630,062 | ) | | | (1,881,850 | ) | | | (581,960 | ) | (Decrease)/Increase in trade and other payables | | | (4,338,444 | ) | | | (1,186,388 | ) | | | 1,841,637 | | Cash generated from operations | | | 30,441,518 | | | | 49,889,727 | | | | 47,040,872 | | Interest received | | | 1,413,626 | | | | 2,384,538 | | | | 2,289,039 | | Interest paid | | | (112,823 | ) | | | (210,016 | ) | | | (405,953 | ) | Dividends paid | | | (9,237,311 | ) | | | (14,191,182 | ) | | | (24,349,341 | ) | Hong Kong profits tax paid | | | (1,782,192 | ) | | | (8,523,843 | ) | | | (4,025,500 | ) | Net cash generated from operating activities | | | 20,722,818 | | | | 29,349,224 | | | | 20,549,117 | | | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | | | Purchase of property, plant and equipment | | | (9,724,320 | ) | | | (11,715,474 | ) | | | (18,006,982 | ) | Addition of land use rights | | | - | | | | (3,938,000 | ) | | | (990,000 | ) | Purchase of available-for-sale financial assets | | | (22,013,993 | ) | | | - | | | | - | | Proceeds from disposal of available-for-sale financial assets | | | 23,478,000 | | | | - | | | | 7,659,776 | | Proceeds from disposal of property, plant and equipment | | | - | | | | 36,500 | | | | 363,865 | | Net cash used in investing activities | | | (8,260,313 | ) | | | (15,616,974 | ) | | | (10,973,341 | ) | Net increase in cash and cash equivalents | | | 12,462,505 | | | | 13,732,250 | | | | 9,575,776 | | | | | | | | | | | | | | | Cash and cash equivalents at beginning of the year | | | 50,687,596 | | | | 36,853,474 | | | | 26,322,005 | | | | | | | | | | | | | | | Effect of foreign exchange rate changes, net | | | 730,217 | | | | 101,872 | | | | 955,693 | | | | | | | | | | | | | | | Cash and cash equivalents at end of the year | | | 63,880,318 | | | | 50,687,596 | | | | 36,853,474 | |
Notes to the financial statements
for the year ended 31 March 2009
The company is a limited liability company incorporated and domiciled in Hong Kong. The address of the company's registered office and principal place of business is B2, 3/F., Fortune Factory Building, 40 Lee Chung Street, Chai Wan, Hong Kong.
The principal activities of the company and its subsidiaries (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 15 to the financial statements.
The financial statements on pages 2 to 39 have been prepared in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA") and the requirements of the Hong Kong Companies Ordinance.
The financial statements for the year ended 31 March 2009 were approved for issue by the board of directors on 15 June 2009.
2. | ADOPTION OF NEW AND AMENDED HKFRSs |
| 2.1 | Impact of new and amended HKFRSs which are effective during the year |
In the current year, the group has applied, for the first time, the following new standards, amendments and interpretations (the "new HKFRSs") issued by the HKICPA, which are relevant to and effective for the group's financial statements for the annual period beginning on 1 April 2008:
HK (IFRIC) – Int 11 | | HKFRS 2: Group and Treasury Share Transactions | HKAS 39 & HKFRS 7
(Amendments) | | Reclassification of Financial Assets |
The new HKFRSs had no material effect on how the results and financial position for the current and prior periods have been prepared and presented. Accordingly, no prior period adjustment is required.
2. | ADOPTION OF NEW AND AMENDED HKFRSs (Continued) |
| 2.2 | Impact of new and amended HKFRSs which are issued but not yet effective |
At the date of authorisation of these financial statements, the following new and amended HKFRSs have been published but are not yet effective, and have not been adopted early by the group.
HKAS 1 (Revised) | | Presentation of Financial Statements 1
| HKAS 23 (Revised) | | Borrowing Costs 1
| HKAS 27 (Revised) | | Consolidated and Separate Financial Statements 2
| HKAS 32 & HKAS 1 (Amendments) | | Puttable Financial Instruments and Obligations Arising on Liquidation 1
| HKAS 39 (Amendment) | | Eligible Hedged Items 2
| HKFRS 1 (Revised) | | First-time Adoption of Hong Kong Financial Reporting Standards 2
| HKFRS 1 & HKAS 27 (Amendments) | | Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate 1
| HKFRS 2 (Amendment) | | Share-based Payment – Vesting Conditions and Cancellations 1
| HKFRS 3 (Revised) | | Business Combinations 2
| HKFRS 7 (Amendment) | | Financial Instruments: Disclosures – Improving Disclosures about Financial Instruments 1
| HKFRS 8 | | Operating Segments 1
| HK(IFRIC) – Int 9 & HKAS 39 (Amendments) | | Reassessment of Embedded Derivatives and Financial Instruments: Recognition and Measurement – Embedded Derivatives 5
| HK(IFRIC) – Int 13 | | Customer Loyalty Programmes 3
| HK(IFRIC) – Int 15 | | Agreements for the Construction of Real Estate 1
| HK(IFRIC) – Int 16 | | Hedges of a Net Investment in a Foreign Operation 4
| HK(IFRIC) – Int 17 | | Distributions of Non-cash Assets to Owners 2
| HK(IFRIC) – Int 18 | | Transfers of Assets from Customers 2
| Various | | Annual Improvements to HKFRSs 2008 6
|
| 1 | Effective for annual periods beginning on or after 1 January 2009 |
| 2 | Effective for annual periods beginning on or after 1 July 2009 |
| 3 | Effective for annual periods beginning on or after 1 July 2008 |
| 4 | Effective for annual periods beginning on or after 1 October 2008 |
| 5 | Effective for annual periods ending on or after 30 June 2009 |
| 6 | Generally effective for annual periods beginning on or after 1 January 2009 unless otherwise stated in the specific HKFRS |
The directors anticipate that all of the pronouncements will be adopted in the group's accounting policy for the first period beginning after the effective date of the pronouncements.
Among these new standards and interpretations, HKAS 1 (Revised) Presentation of Financial Statements is expected to materially change the presentation of the group’s financial statements. The amendments affect the presentation of owner changes in equity and introduce a statement of comprehensive income. The group will have the option of presenting items of income and expenses and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). The amendment does not affect the financial position or results of the group but will give rise to additional disclosures.
2. | ADOPTION OF NEW AND AMENDED HKFRSs (Continued) |
| 2.2 | Impact of new and amended HKFRSs which are issued but not yet effective (Continued) |
The directors are currently assessing the impact of other new and amended HKFRSs upon initial application. So far, the directors have preliminary concluded that the initial application of these HKFRSs is unlikely to have a significant impact on the group's results and financial position.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The significant accounting policies that have been used in the preparation of these consolidated financial statements are summarised below. These policies have been consistently applied to all the years presented unless otherwise stated.
The financial statements have been prepared on an historical cost basis except for the revaluation of certain financial assets and liabilities. The measurement bases are fully described in the accounting policies below.
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 and judgment of current events and actions, actual results may ultimately differ from those estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 4.
| 3.2 | Basis of consolidation |
The consolidated financial statements include the financial statements of the company and its subsidiaries made up to 31 March each year.
Subsidiaries are those entities (including special purpose entities) over which the group has the power to control the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are excluded from consolidation from the date that control ceases.
Business combinations (other than for combining entities under common control) are accounted for by applying the purchase method. This involves the estimation of fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at their fair values, which are also used as the bases for subsequent measurement in accordance with the group's accounting policies.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.3 | Subsidiaries (Continued) |
Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated in preparing the consolidated financial statements. 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. The results of the subsidiaries are accounted for by the company on the basis of dividends received and receivable at the balance sheet date.
| 3.4 | Property, plant and equipment |
Property, plant and equipment are stated at acquisition cost less accumulated depreciation and accumulated 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 over their estimated useful lives, using the straight line method, at the following rates per annum :
Buildings | 5% or where shorter over 16 - 19 years
| Leasehold improvements | 20% | Plant and machinery | 20% | Furniture and fixtures | 20% | Motor vehicles | 20% | Computer equipment and software | 50% |
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.
The assets' residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
The gain or loss arising on the retirement or disposal is determined as the difference between the sales proceeds and the carrying amount of the assets and is recognised in the consolidated income statement.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.4 | Property, plant and equipment (Continued) |
Subsequent costs are included in the assets' carrying amounts or recognized as separate assets, as appropriate, only when it is probable that future economic benefits associated with the items will flow to the group and the cost of the items can be measured reliably. All other costs, such as repairs and maintenance, are expensed in the consolidated income statement during the period in which they are incurred.
Inventories are stated at the lower of cost and net realisable value. Cost is determined using first-in, first-out method and, in case of work in progress and finished goods, comprise direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is the estimated selling price in the ordinary course of business less estimated cost of completion and applicable selling expenses.
The group's accounting policies for financial assets other than investments in subsidiaries are set out below.
Classification of financial assets
Financial assets other than hedging instruments are classified into the following categories: (i) loans and receivables, and (ii) available-for-sale financial assets.
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 subsequently measured at amortised cost using the effective interest method, less any impairment losses. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction cost.
| (ii) | Available-for-sale financial assets |
Available-for-sale financial assets include non-derivative financial assets that 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. Gain or loss arising from a change in the fair value excluding any dividend and interest income is recognised directly in equity, except for impairment losses and foreign exchange gains and losses on monetary assets, until the financial asset is derecognised, at which time the cumulative gain or loss previously recognised in equity would be recycled to income statement. Upon disposal, the cumulative gain or loss previously recognised in equity is transferred to the income statement.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.6 | Financial assets (Continued) |
| (ii) | Available-for-sale financial assets (Continued) |
The fair value of available-for-sale monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the reporting date. The change in fair value attributable to translation differences that result from a change in amortised cost of the asset is recognised in profit or loss, and other changes are recognised in equity.
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.
Recognition and derecognition of financial assets
All financial assets are recognised when, any only when, the group becomes a party to the contractual provisions of the instrument. Regular way purchases of financial assets are recognised on trade date. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.
Derecognition of financial assets occurs when the rights to receive cash flows from the financial assets expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. At each balance sheet date, financial assets are reviewed to assess whether there is objective evidence of impairment. If any such evidence exists, impairment loss is determined and recognised based on the classification of the financial asset.
Impairment of financial assets
At each balance sheet date, financial assets other than at fair value through profit or loss are reviewed to determine whether there is any objective evidence of impairment.
Objective evidence of impairment of individual financial assets includes observable data that comes to the attention of the group about one or more of the following loss events:
| - | significant financial difficulty of the debtor; |
| - | a breach of contract, such as a default or delinquency in interest or principal payments; |
| - | it becoming probable that the debtor will enter bankruptcy or other financial reorganisation; |
| - | significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and |
| - | a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost. |
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.6 | Financial assets (Continued) |
Impairment of financial assets (Continued)
Loss events in respect of a group of financial assets include observable data indicating that there is a measurable decrease in the estimated future cash flows from the group of financial assets. Such observable data includes but not limited to adverse changes in the payment status of debtors in the group and, national or local economic conditions that correlate with defaults on the assets in the group.
If any such evidence exists, the impairment loss is measured and recognised as follows:
(i) Loans and receivables
If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (i.e. the effective interest rate computed at initial recognition). The amount of the loss is recognised in the income statement of the period in which the impairment occurs.
If, in subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent that it does not result in a carrying amount of the financial asset exceeding what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal is recognised in income statement of the period in which the reversal occurs.
(ii) Available-for-sale financial assets
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, an amount is removed from equity and recognised in the income statement as impairment loss. That amount is measured as the difference between the asset's acquisition cost (net of any principal repayment and amortisation) and current fair value, less any impairment loss on that asset previously recognised in the income statement.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.6 | Financial assets (Continued) |
Impairment of financial assets (Continued)
| (ii) | Available-for-sale financial assets (Continued) |
Reversals in respect of investment in equity instruments classified as available-for-sale are not recognised in the income statement. The subsequent increase in fair value is recognised directly in equity. Impairment losses in respect of debt securities are reversed if the subsequent increase in fair value can be objectively related to an event occurring after the impairment loss were recognised. Reversal of impairment losses in such circumstances are recognised in the income statement.
Where the recovery of trade receivables is considered doubtful but not remote, the impairment losses for doubtful receivables are recorded using an allowance account. When the group is satisfied that recovery of trade receivables is remote, the amount considered irrecoverable is written off against trade receivables directly and any amounts held in the allowance account in respect of that receivable are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in income statement.
Impairment losses recognised in an interim period in respect of available for sale equity securities and unquoted equity securities carried at cost are not reversed in a subsequent period.
| 3.7 | Cash and cash equivalents |
Cash and cash equivalents include cash at bank and in hand, demand deposits with bank or financial institutions and short-terms highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of change in value, having been within three months of maturity at acquisition.
| 3.8 | Impairment of non-financial assets |
The group's property, plant and equipment and the company's investments in subsidiaries are subject to impairment testing.
An impairment loss is recognised as an expense immediately for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessment of the time value of money and the risk specific to the asset.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.8 | Impairment of non-financial assets (Continued) |
For the purposes of assessing impairment, where an asset does not generate cash inflows largely independent from those from other assets, the recoverable amount is determined for the smallest group of assets that generate cash inflow independently (i.e. cash-generating units). As a result, some assets are tested individually for impairment and some are tested at the cash-generating unit level.
Impairment losses is charged pro rata to the assets in the cash generating unit, except that the carrying value of an asset will not be reduced below its individual fair value less cost to sell, or value in use, if determinable.
An impairment loss is reversed if there has been a favourable change in the estimates used to determine the asset's recoverable amount 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 or amortisation, if no impairment had been recognised.
The financial liabilities include trade and other payables, amounts due to group and related companies and borrowings.
Financial liabilities are recognised when the group becomes a party to the contractual agreements of the instrument. All interest related charges are recognised as an expense in the income statement.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognised in the income statement.
Finance lease liabilities
Finance lease liabilities are measured at initial value less the capital element of lease repayments (see note 3.14).
Borrowings
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. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.9 | Financial liabilities (Continued) |
Trade and other payables
Trade and other payables are recognised initially at their fair value and subsequently measured at amortised cost, using the effective interest method.
Retirement benefits 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$1,000 per month, and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the company in an independently administered fund. The company's employer contributions vest fully with the employees when contributed into the MPF Scheme. The employees of the group's subsidiary which operates in Mainland China are required to participate in a central pension scheme operated by the local municipal government. The subsidiary is required to contribute certain percentage of its payroll costs to the central pension scheme. The contributions are charged to the income statement as they become payable in accordance with the rules of the central pension scheme.
Short-term employee benefits
Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date. Non-accumulating compensated absences such as sick leave and maternity leave are not recognised until the time of leave.
Ordinary shares are classified as equity. Share capital is determined using the nominal value of shares that have been issued.
Any transaction costs associated with the issuing of shares are deducted from equity (net of any related income tax benefits) to the extent they are incremental cost directly attributable to the equity transaction that otherwise would have been avoided. The cost of an equity transaction that is abandoned are recognised as an expense.
| 3.12 | Foreign currency translation |
The consolidated financial statements are presented in Hong Kong Dollars (HK$), which is also the functional currency of the company.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.12 | Foreign currency translation (Continued) |
In the individual 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. At the balance sheet date, monetary assets are liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the balance sheet date retranslation of monetary assets and liabilities are recognised in the income statement.
Non-monetary items are carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined and are reported as part of the fair value gain or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are not re-translated.
In the consolidated financial statements, all individual financial statements of foreign operations, 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 exchange rates ruling at the transaction dates, or at the average rates over the reporting period, provided that the exchange rates do not fluctuate significantly. Any differences arising from this procedure have been dealt with separately in the exchange reserve in equity.
Other exchange differences arising from the translation of the net investment in foreign entities and of borrowings are taken to shareholders' equity. When a foreign operation is sold, such exchange differences are recognized in the income statement as part of the gain or loss on the sale.
| 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.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.13 | Accounting for income taxes (Continued) |
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 and 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.
An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.
| (i) | Classification of assets leased to the group |
Assets that are held by the group under leases which transfer to the group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the group are classified as operating leases.
| (ii) | Assets acquired under finance leases |
Where the group acquires the use of assets under finance leases, the amounts representing the fair value of the leased assets, or, if lower, the present value of the minimum lease payments, of such assets are included in property, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligation under finance leases.
Subsequent accounting for assets held under finance lease agreements corresponds to those applied to comparable acquired assets. The corresponding finance lease liability is reduced by lease payments less finance charges.
Finance charges implicit in the lease payments are charged to income statement over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| (iii) | Operating lease charges as the lessee |
Where the group has the right to use of assets held under operating leases, payments made under the leases are charged to the income statement on a straight-line basis over the lease terms except where an alternative basis is more representative of the pattern of benefits to be derived from the leased assets.
Revenue comprises the fair value for the sale of goods, rendering of services and the use by others of the group's assets yielding interest, net of rebates and discounts. Provided it is probable that the economic benefits will flow to the group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised as follows :
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have been transferred to customers. This is usually taken as the time when the goods are delivered and the customer has accepted the goods.
Rental income from properties letting under operating leases is recognised on a straight line basis over the lease terms.
Interest income is recognised on a time proportion basis using the effective interest rate method.
For the purposes of these financial statements, a party is considered to be related to the group if:
| (i) | the party has the ability, directly or indirectly through one or more intermediaries, to control the group or exercise significant influence over the group in making financial and operating policy decisions, or has joint control over the group; |
| (ii) | the group and the party are subject to common control; |
| (iii) | the party is an associate of the group or a joint venture in which the group is a venturer; |
| (iv) | the party is a member of key management personnel of the group or the group's parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals; |
| (v) | the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or |
| (vi) | the party is a post-employment benefit plan which is for the benefit of employees of the group or of any entity that is a related party of the group. |
3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
| 3.16 | Related parties (Continued) |
Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.
| 3.17 | Provisions and contingent liabilities |
Provisions are recognised when the group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation. All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.
Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future uncertain events not wholly within the control of the group are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.
Contingent liabilities are recognised in the course of the allocation of purchase price to the assets and liabilities acquired in a business combination. They are initially measured at fair value at the date of acquisition unless the fair value cannot be measured reliably, and subsequently measured at the higher of the amount that would be recognised in a comparable provision as described above and the amount initially recognised less any accumulated amortisation, if appropriate.
4. | CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS |
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below :
Depreciation and amortisation
The group and company depreciates the property, plant and equipment on a straight-line basis over the estimated useful lives, starting from the date on which the assets are placed into productive use. The estimated useful lives reflect the directors' estimate of the periods that the group intends to derive future economic benefits from the use of the group's and company's property, plant and equipment.
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 changes in market condition. Management reassesses these estimations at each 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.
Revenue, which is also the group's turnover, represents total invoiced value of goods supplied, less discounts and returns.
| | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | Gain on disposal of available-for-sale financial assets | | | 61,620 | | | | - | | | | - | | Gain on disposal of property, plant and equipment | | | - | | | | 94 | | | | 347,500 | | Interest income | | | 1,413,626 | | | | 2,384,538 | | | | 2,289,039 | | Rental income, less outgoings | | | 271,985 | | | | 268,800 | | | | 268,800 | | Sundry income | | | 865,256 | | | | 2,697,363 | | | | 1,787,853 | | | | | 2,612,487 | | | | 5,350,795 | | | | 4,693,192 | |
| | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | Interest charges on : | | | | | | | | | | - Discounted bills | | | 112,823 | | | | 210,016 | | | | 405,953 | |
8. | PROFIT BEFORE INCOME TAX |
| | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | Profit before income tax is arrived at after charging/(crediting) : | | | | | | | | | | Amortisation of advanced lease payments | | | 581,797 | | | | 427,392 | | | | 424,328 | | Auditors' remuneration | | | 306,505 | | | | 285,000 | | | | 270,000 | | Cost of inventories recognised as expenses | | | 206,656,292 | | | | 176,141,949 | | | | 213,147,126 | | Depreciation of property, plant and equipment | | | 8,721,931 | | | | 10,166,942 | | | | 5,752,971 | | Exchange loss/(gain), net | | | 5,010,006 | | | | (203,865 | ) | | | 1,141,163 | | (Gain)/loss on disposal of available-for-sale financial assets | | | (61,620 | ) | | | 34,344 | | | | 87,565 | | Loss/(Gain) on disposal of property, plant and equipment | | | 42,989 | | | | (94 | ) | | | (347,500 | ) | Operating lease charges in respect of land and buildings | | | 3,169,108 | | | | 1,861,592 | | | | 1,343,100 | | Retirement benefits scheme contributions | | | 1,723,997 | | | | 970,426 | # | | | 563,150 | # | Staff costs (excluding retirement benefits scheme contributions) | | | 27,101,257 | | | | 23,882,056 | | | | 23,430,733 | |
# Comparative figures have been reclassified to conform with the current year's presentation.
| | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | The tax charge comprises : | | | | | | | | | | Hong Kong profits tax | | | | | | | | | | - current year | | | 4,649,786 | | | | 3,908,368 | | | | 6,480,183 | | - under provision in prior years | | | 101,589 | | | | 16,512 | | | | 1,549 | | | | | | | | | | | | | | | PRC Foreign Enterprise Income Tax | | | | | | | | | | | | | - current year | | | 11,678 | | | | 459,206 | | | | 1,100,442 | | - (over)/under provision in prior years | | | - | | | | (10,000 | ) | | | 732,849 | | | | | 4,763,053 | | | | 4,374,086 | | | | 8,315,023 | | | | | | | | | | | | | | | Deferred tax (Note 24) | | | | | | | | | | | | | - current year | | | (187,543 | ) | | | (200,835 | ) | | | 533,712 | | - attributable to reduction in tax rate | | | (33,582 | ) | | | - | | | | - | | | | | (221,125 | ) | | | (200,835 | ) | | | 533,712 | | Total income tax expense | | | 4,541,928 | | | | 4,173,251 | | | | 8,848,735 | |
Hong Kong profits tax has been provided at the rate of 16.5% (2008 : 17.5% and 2007 : 17.5%) on the group's estimated assessable profits arising in Hong Kong for the year.
The Hong Kong SAR Government enacted a reduction in the Profits Tax Rate from 17.5% to 16.5% with effect from the year of assessment 2008 / 2009. Accordingly, the relevant current and deferred tax liabilities have been calculated using the new tax rate of 16.5%.
9. | INCOME TAX EXPENSE (Continued) |
The PRC enterprise income tax ("EIT") is computed according to the relevant laws and regulations in the PRC. The applicable income tax rate was 25% for the year (2008: 33% and 25% and 2007: 33%). Pursuant to the tax law passed by the Tenth National People's Congress on 16 March 2007, the new EIT rates for domestic and foreign enterprises in Mainland China are unified at 25% with effective from 1 January 2008.
Reconciliation between tax expense and accounting profit at applicable tax rates :
| | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | Profit before income tax | | | 35,922,897 | | | | 29,679,534 | | | | 74,021,948 | | | | | | | | | | | | | | | Tax on profit before income tax, calculated at the rates applicable to profits in the tax jurisdictions concerned | | | 4,728,140 | | | | 4,649,735 | | | | 12,867,002 | | Tax effect of non-deductible expenses | | | 841,220 | | | | 324,620 | | | | 440,037 | | Tax effect of non-taxable revenue | | | (4,888,010 | ) | | | (4,110,784 | ) | | | (6,390,922 | ) | Tax effect on temporary differences not recognised | | | 287,661 | | | | 715,642 | | | | (160,409 | ) | Tax effect on unrecognised tax losses | | | 3,504,910 | | | | 2,587,526 | | | | 1,358,629 | | Underprovision in prior years | | | 101,589 | | | | 6,512 | | | | 734,398 | | Effect on opening deferred tax balances resulting from a reduction in tax rate during the year | | | (33,582 | ) | | | - | | | | - | | Actual tax expense | | | 4,541,928 | | | | 4,173,251 | | | | 8,848,735 | |
10. | PROFIT ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE COMPANY |
Of the consolidated profit attributable to the equity holders of the company of HK$31,380,969, HK$25,506,283 and HK$65,173,213 in 2009, 2008 and 2007 respectively, HK$45,194,052, HK$39,423,630 and HK$74,184,878 in 2009, 2008 and 2007 respectively have been dealt with in the financial statements of the company.
| | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | Dividends attributable to the year : | | | | | | | | | | | | | | | | | | | | First interim dividend of HK$543,472 (2008 : HK$2,524,985 and 2007 : HK$ HK$1,165,043) per share | | | 1,086,944 | | | | 5,049,970 | | | | 2,330,086 | | Second interim dividend of HK$1,146,153 (2008 : HK$5,833,098 and 2007 : HK$4,352,339) per share | | | 2,292,306 | | | | 11,666,197 | | | | 8,704,677 | | Third interim dividend of HK$3,375,558.50 (2008 : Nil and 2007 : HK$4,421,894) per share | | | 6,751,117 | | | | - | | | | 8,843,788 | | Fourth interim dividend of HK$2,469,290.50 (2008 : Nil and 2007 : HK$4,994,086) per share | | | 4,938,581 | | | | - | | | | 9,988,171 | | | | | 15,068,948 | | | | 16,716,167 | | | | 29,866,722 | |
12. | PROPERTY, PLANT AND EQUIPMENT |
Group
| | Buildings | | | Leasehold improvements | | | Construction in progress | | | Plant and machinery | | | Furniture and fixtures | | | Motor vehicles | | | Computer equipment and software | | | Total | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | At 1 April 2007 | | | | | | | | | | | | | | | | | | | | | | | | | Cost | | | 38,684,246 | | | | 10,630,874 | | | | 609,886 | | | | 48,310,888 | | | | 5,204,128 | | | | 5,589,456 | | | | 2,130,013 | | | | 111,159,491 | | Accumulated depreciation | | | (11,297,192 | ) | | | (9,517,837 | ) | | | - | | | | (25,594,456 | ) | | | (3,979,251 | ) | | | (3,680,666 | ) | | | (1,919,905 | ) | | | (55,989,307 | ) | Net book amount | | | 27,387,054 | | | | 1,113,037 | | | | 609,886 | | | | 22,716,432 | | | | 1,224,877 | | | | 1,908,790 | | | | 210,108 | | | | 55,170,184 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended 31 March 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Opening net book amount | | | 27,387,054 | | | | 1,113,037 | | | | 609,886 | | | | 22,716,432 | | | | 1,224,877 | | | | 1,908,790 | | | | 210,108 | | | | 55,170,184 | | Additions | | | - | | | | - | | | | 6,780,946 | | | | 3,958,891 | | | | 73,740 | | | | 790,251 | | | | 111,646 | | | | 11,715,474 | | Disposals | | | - | | | | - | | | | - | | | | (34,300 | ) | | | - | | | | (2,106 | ) | | | - | | | | (36,406 | ) | Depreciation | | | (2,256,840 | ) | | | (463,581 | ) | | | - | | | | (5,907,397 | ) | | | (443,656 | ) | | | (904,600 | ) | | | (190,868 | ) | | | (10,166,942 | ) | Exchange differences | | | 1,878,883 | | | | - | | | | 345,123 | | | | 679,609 | | | | 79,145 | | | | 100,412 | | | | 2,459 | | | | 3,085,631 | | Reclassifications | | | 427,081 | | | | - | | | | (628,941 | ) | | | 194,000 | | | | 7,860 | | | | - | | | | - | | | | - | | Closing net book amount | | | 27,436,178 | | | | 649,456 | | | | 7,107,014 | | | | 21,607,235 | | | | 941,966 | | | | 1,892,747 | | | | 133,345 | | | | 59,767,941 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 March 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost | | | 40,995,158 | | | | 10,630,874 | | | | 7,107,014 | | | | 53,262,896 | | | | 5,407,450 | | | | 6,609,833 | | | | 2,249,796 | | | | 126,263,021 | | Accumulated depreciation | | | (13,558,980 | ) | | | (9,981,418 | ) | | | - | | | | (31,655,661 | ) | | | (4,465,484 | ) | | | (4,717,086 | ) | | | (2,116,451 | ) | | | (66,495,080 | ) | Net book amount | | | 27,436,178 | | | | 649,456 | | | | 7,107,014 | | | | 21,607,235 | | | | 941,966 | | | | 1,892,747 | | | | 133,345 | | | | 59,767,941 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended 31 March 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Opening net book amount | | | 27,436,178 | | | | 649,456 | | | | 7,107,014 | | | | 21,607,235 | | | | 941,966 | | | | 1,892,747 | | | | 133,345 | | | | 59,767,941 | | Additions | | | - | | | | 167,723 | | | | 7,781,535 | | | | 1,713,093 | | | | 7,579 | | | | 47,660 | | | | 6,730 | | | | 9,724,320 | | Disposals | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (42,989 | ) | | | (42,989 | ) | Depreciation | | | (2,379,031 | ) | | | (266,935 | ) | | | - | | | | (4,876,238 | ) | | | (439,574 | ) | | | (677,036 | ) | | | (83,117 | ) | | | (8,721,931 | ) | Exchange differences | | | 1,848,918 | | | | - | | | | 725,095 | | | | 780,320 | | | | 61,157 | | | | 69,941 | | | | 2,182 | | | | 3,487,613 | | Reclassifications | | | 63,793 | | | | - | | | | (1,245,354 | ) | | | 1,181,561 | | | | (2,736 | ) | | | - | | | | 2,736 | | | | - | | Closing net book amount | | | 26,969,858 | | | | 550,244 | | | | 14,368,290 | | | | 20,405,971 | | | | 568,392 | | | | 1,333,312 | | | | 18,887 | | | | 64,214,954 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 March 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost | | | 42,915,495 | | | | 10,798,597 | | | | 14,368,290 | | | | 56,169,704 | | | | 5,528,247 | | | | 6,893,273 | | | | 2,214,668 | | | | 138,888,274 | | Accumulated depreciation | | | (15,945,637 | ) | | | (10,248,353 | ) | | | - | | | | (35,763,733 | ) | | | (4,959,855 | ) | | | (5,559,961 | ) | | | (2,195,781 | ) | | | (74,673,320 | ) | Net book amount | | | 26,969,858 | | | | 550,244 | | | | 14,368,290 | | | | 20,405,971 | | | | 568,392 | | | | 1,333,312 | | | | 18,887 | | | | 64,214,954 | |
12. | PROPERTY, PLANT AND EQUIPMENT (Continued) |
Company
| | Buildings | | | Leasehold improvements | | | Plant and machinery | | | Furniture and fixtures | | | Motor vehicles | | | Computer equipment and software | | | Total | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | At 1 April 2007 | | | | | | | | | | | | | | | | | | | | | | Cost | | | 2,829,732 | | | | 2,599,402 | | | | 12,627,898 | | | | 1,689,183 | | | | 1,944,233 | | | | 1,324,164 | | | | 23,014,612 | | Accumulated depreciation | | | (2,230,721 | ) | | | (1,677,075 | ) | | | (1,195,227 | ) | | | (1,401,327 | ) | | | (1,896,528 | ) | | | (1,147,988 | ) | | | (9,548,866 | ) | Net book amount | | | 599,011 | | | | 922,327 | | | | 11,432,671 | | | | 287,856 | | | | 47,705 | | | | 176,176 | | | | 13,465,746 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended 31 March 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Opening net book amount | | | 599,011 | | | | 922,327 | | | | 11,432,671 | | | | 287,856 | | | | 47,705 | | | | 176,176 | | | | 13,465,746 | | Additions | | | - | | | | - | | | | 421,454 | | | | - | | | | - | | | | 80,551 | | | | 502,005 | | Disposals | | | - | | | | - | | | | (34,300 | ) | | | - | | | | - | | | | - | | | | (34,300 | ) | Depreciation | | | (141,487 | ) | | | (276,861 | ) | | | (3,036,258 | ) | | | (107,531 | ) | | | (47,705 | ) | | | (154,100 | ) | | | (3,763,942 | ) | Closing net book amount | | | 457,524 | | | | 645,466 | | | | 8,783,567 | | | | 180,325 | | | | - | | | | 102,627 | | | | 10,169,509 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 March 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost | | | 2,829,732 | | | | 2,599,402 | | | | 13,015,052 | | | | 1,689,183 | | | | 1,944,233 | | | | 1,399,675 | | | | 23,477,277 | | Accumulated depreciation | | | (2,372,208 | ) | | | (1,953,936 | ) | | | (4,231,485 | ) | | | (1,508,858 | ) | | | (1,944,233 | ) | | | (1,297,048 | ) | | | (13,307,768 | ) | Net book amount | | | 457,524 | | | | 645,466 | | | | 8,783,567 | | | | 180,325 | | | | - | | | | 102,627 | | | | 10,169,509 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended 31 March 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Opening net book amount | | | 457,524 | | | | 645,466 | | | | 8,783,567 | | | | 180,325 | | | | - | | | | 102,627 | | | | 10,169,509 | | Additions | | | - | | | | 167,724 | | | | 575,295 | | | | - | | | | - | | | | - | | | | 743,019 | | Disposals | | | - | | | | - | | | | - | | | | - | | | | - | | | | (42,989 | ) | | | (42,989 | ) | Depreciation | | | (141,487 | ) | | | (262,945 | ) | | | (2,976,067 | ) | | | (79,541 | ) | | | - | | | | (56,167 | ) | | | (3,516,207 | ) | Closing net book amount | | | 316,037 | | | | 550,245 | | | | 6,382,795 | | | | 100,784 | | | | - | | | | 3,471 | | | | 7,353,332 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 March 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost | | | 2,829,732 | | | | 2,767,126 | | | | 13,590,347 | | | | 1,683,983 | | | | 1,944,233 | | | | 1,340,756 | | | | 24,156,177 | | Accumulated depreciation | | | (2,513,695 | ) | | | (2,216,881 | ) | | | (7,207,552 | ) | | | (1,583,199 | ) | | | (1,944,233 | ) | | | (1,337,285 | ) | | | (16,802,845 | ) | Net book amount | | | 316,037 | | | | 550,245 | | | | 6,382,795 | | | | 100,784 | | | | - | | | | 3,471 | | | | 7,353,332 | |
13. | ADVANCED LEASE PAYMENTS |
The group's advanced lease payments represent up-front payments to acquire long term interests in the usage of land held in Mainland China on leases of between 10 to 50 years.
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | Land use rights | | | 13,946,685 | | | | 13,354,491 | | | | - | | | | - | | Advanced lease payments, net | | | 407,310 | | | | 668,775 | | | | 407,310 | | | | 668,775 | | | | | 14,353,995 | | | | 14,023,266 | | | | 407,310 | | | | 668,775 | |
14. | AVAILABLE-FOR-SALE FINANCIAL ASSETS |
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | Available-for-sale financial assets : | | | | | | | | | | | | | Listed outside Hong Kong, at market value | | | 21,667,859 | | | | 23,535,756 | | | | 21,667,859 | | | | 23,535,756 | | Less: Portion included in current assets | | | - | | | | (15,633,540 | ) | | | - | | | | (15,633,540 | ) | Portion included in non-current assets | | | 21,667,859 | | | | 7,902,216 | | | | 21,667,859 | | | | 7,902,216 | |
15. | INTERESTS IN SUBSIDIARIES |
Company
| | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | | | | | | | Unlisted shares, at cost | | | 106,890,975 | | | | 95,190,975 | | Less : Impairment | | | (200,000 | ) | | | (200,000 | ) | | | | 106,690,975 | | | | 94,990,975 | | | | | | | | | | | Amount due to a subsidiary | | | (8 | ) | | | (8 | ) | | | | 106,690,967 | | | | 94,990,967 | |
At 31 March 2009 and 31 March 2008, the amount due to a subsidiary is unsecured, interest-free and has no fixed terms of repayment and the amounts due from subsidiaries are repayable on demand and accordingly, are classified as current assets (note 18).
15. | INTERESTS IN SUBSIDIARIES (Continued) |
Details of the subsidiaries as at 31 March 2009 are as follows :
Name | | Place of
incorporation/
establishment | | Nominal value of
issued capital/
registered capital | | Percentage of
issued capital
held by the
company directly | | Principal activities | | | | | | | | | | Fujian Taisun Electronics Technologies Co., Ltd. | | The PRC | | US$15,000,000 | | 100% | | Manufacture of consumer electronic products | | | | | | | | | | Fujian Taisun Fire Safety Technologies Co., Ltd. | | The PRC | | US$5,000,000 | | 100% | | Manufacture of consumer electronic products (operations not commenced yet) | | | | | | | | | | Sound Well (Hong Kong) Co. Limited | | Hong Kong | | HK$200,000 | | 100% | | Trading of consumer electronic products and investment holding | | | | | | | | | | Kimbager International Limited | | British Virgin Islands | | US$1 | | 100% | | Trading of machinery and equipment | | | | | | | | | | Kimbager Limited | | Hong Kong | | HK$10,000 | | 100% | | Dormant |
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | Raw materials | | | 19,361,203 | | | | 18,488,454 | | | | 19,361,203 | | | | 18,488,454 | | Work in progress | | | 4,130,713 | | | | 3,074,264 | | | | 4,130,713 | | | | 3,074,264 | | Finished goods | | | 4,353,773 | | | | 6,791,779 | | | | 4,353,773 | | | | 6,791,779 | | | | | 27,845,689 | | | | 28,354,497 | | | | 27,845,689 | | | | 28,354,497 | |
17. | TRADE AND OTHER RECEIVABLES |
| | Group | | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | | | | | | | Accounts receivable | | | 2,888,368 | | | | 2,428,718 | | Bills receivable | | | 341,250 | | | | 971,312 | | Deposits, prepayments and other receivables | | | 1,955,097 | | | | 2,274,604 | | | | | 5,184,715 | | | | 5,674,634 | |
17. | TRADE AND OTHER RECEIVABLES (Continued) |
At each of the balance sheet dates, the group’s trade receivables were individually determined to be impaired. The group encountered difficulties in collection of certain trade receivables and appropriate provision for impairment has been made against these trade receivables. The individually impaired receivables are recognised based on the credit history of the customers, such as financial difficulties or default in payments, and current market conditions. Consequently, specific impairment provision was recognised. The group does not hold any collateral over these balances.
Ageing analysis of trade receivables (including accounts receivables and bills receivables) that are past due but not impaired is as follows:
| | Group | | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | | | | | | | Neither past due nor impaired | | | 707,850 | | | | 1,861,234 | | 0 – 30 days past due | | | 2,521,768 | | | | 1,538,796 | | | | | 3,229,618 | | | | 3,400,030 | |
Trade receivables that were past due but not impaired relate to a number of independent customers that had a good track record with the group.
Based on past experience, the management believe that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The group does not hold any collateral or other credit enhancements over these balances.
18. | AMOUNTS DUE FROM SUBSIDIARIES |
| | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | | | | | | | Trade * | | | 16,511,520 | | | | 11,320,559 | | Non-trade ** | | | 13,404,310 | | | | 12,501,170 | | | | | 29,915,830 | | | | 23,821,729 | | Less : Provision for impairment | | | (1,636,991 | ) | | | (975,147 | ) | | | | 28,278,839 | | | | 22,846,582 | |
| * | The amount is unsecured and arises from trading activities of which the settlement period is in accordance with normal commercial terms. |
| ** | The amount is unsecured, interest-free and repayable on demand. |
19. | CASH AND CASH EQUIVALENTS |
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | Bank and cash balances | | | 57,930,200 | | | | 35,944,286 | | | | 41,624,118 | | | | 16,869,461 | | Short-term deposits | | | 5,950,118 | | | | 14,743,310 | | | | 5,950,118 | | | | 14,743,310 | | Long-term deposit | | | 567,050 | | | | - | | | | 567,050 | | | | - | | | | | 64,447,368 | | | | 50,687,596 | | | | 48,141,286 | | | | 31,612,771 | | | | | | | | | | | | | | | | | | | Less: Long-term pledged deposit-guarantee for electricity supply | | | (567,050 | ) | | | - | | | | (567,050 | ) | | | - | | | | | 63,880,318 | | | | 50,687,596 | | | | 47,574,236 | | | | 31,612,771 | |
The effective interest rates of short-term bank deposits of the group ranged from 0.8% to 3.6% (2008: from 5.47% to 7.09%). These deposits have maturity periods 31 days (2008: 31 days) on inception and are eligible for immediate cancellation without penalty but any interest for the last deposit period would be forfeited. The effective interest rate of long-term deposit of the group was 1.71%. The long-term deposit was denominated in RMB and deposited with bank in Mainland China as at 31 March 2009 (2008: Nil) to guarantee for the electricity supply of its manufacturing plant.
Deposits with banks earn interest at floating rates based on daily bank deposit rates.
At 31 March 2009, the group had cash and cash equivalents denominated in Reminbi ("RMB") amounting to approximately HK$6,797,444 (2008: HK$12,107,794), representing deposits placed with banks in Mainland China.
Renminbi is not freely convertible into foreign currencies. Under the PRC's Foreign Exchange Control Regulations and Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, the group is permitted to exchange RMB for foreign currencies through banks which are authorised to conduct foreign exchange business.
20. | AMOUNT DUE FROM/(TO) A SHAREHOLDER / A RELATED COMPANY |
The amount is unsecured, interest-free and repayable on demand.
At a board meeting held on 7 February 2004, the directors declared a final dividend of HK$5,850,000 per share, totalling HK$11,700,000, which was expected to be payable to the shareholders upon successful initial listing of the company's shares on the Main Board of The Stock Exchange of Hong Kong Limited ("the HKEX").
22. | LOANS FROM SHAREHOLDERS |
The loans are unsecured, interest-free and repayable on demand by the respective shareholders with the consent of each other and upon successful initial listing of the company's shares on the Main Board of HKEX, whichever is earlier.
23. | COLLATERALISED BANK ADVANCES |
This amount represents the recognition of the bills discounted with recourse at 31 March 2009.
At 31 March 2009, the major deferred tax liabilities recognised in the balance sheets and the movements during the current and prior years :
Group and Company
| | Accelerated tax
depreciation
| | | | HK$ | | | | | | Balance at 31 March 2007 | | | 788,712 | | Credit to income statement (Note 9) | | | (200,835 | ) | Balance at 31 March 2008 | | | 587,877 | | Credit to income statement (Note 9) | | | (221,125 | ) | Balance at 31 March 2009 | | | 366,752 | |
| | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | | | | | | | Deferred tax liabilities recognised in the balance sheets of the group and company | | | 366,752 | | | | 587,877 | |
At the balance sheet date, the major components of the deferred tax asset that has not been recognised is the temporary differences in respect of the tax loss and pre-operating expenses incurred by Fujian Taisun Electronics Technologies Co., Ltd. and Fujian Taisun Fire Safety Technologies Co., Ltd, the PRC subsidiaries of the company, of approximately HK$8,696,145 (2008: HK$5,198,144) and HK$378,689 (2008: HK$278,014), respectively, as it is not certain that future taxable profits will be available against which these deductible temporary difference may be utilised.
| | 2009 | | | 2007 | | | | HK$ | | | HK$ | | | | | | | | | Authorised : | | | | | | | 100 ordinary shares of HK$100 each | | | 10,000 | | | | 10,000 | | | | | | | | | | | Issued and fully paid : | | | | | | | | | 2 ordinary shares of HK$100 each | | | 200 | | | | 200 | |
The amounts of the group's reserves and the movements therein for the current and prior years are presented in consolidated statement of changes in equity on page 5 of the financial statements.
| | Retained profits | | | Fair value reserve | | | Total | | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | Balance at 1 April 2006 | | | 112,076,351 | | | | (750,629 | ) | | | 111,325,722 | | | | | | | | | | | | | | | Profit for the year | | | 74,184,878 | | | | - | | | | 74,184,878 | | Change in fair value of available-for-sale financial assets | | | - | | | | 292,456 | | | | 292,456 | | Dividends | | | (29,866,722 | ) | | | - | | | | (29,866,722 | ) | Balance at 31 March 2007 and 1 April 2007 | | | 156,394,507 | | | | (458,173 | ) | | | 155,936,334 | | | | | | | | | | | | | | | Profit for the year | | | 39,423,630 | | | | - | | | | 39,423,630 | | Change in fair value of available-for-sale financial assets | | | - | | | | 577,549 | | | | 577,549 | | Dividends | | | (16,716,167 | ) | | | - | | | | (16,716,167 | ) | Balance at 31 March 2008 and 1 April 2008 | | | 179,101,970 | | | | 119,376 | | | | 179,221,346 | | | | | | | | | | | | | | | Profit for the year | | | 45,194,052 | | | | - | | | | 45,194,052 | | Change in fair value of available-for-sale financial assets | | | - | | | | (44,862 | ) | | | (44,862 | ) | Dividends | | | (15,068,948 | ) | | | - | | | | (15,068,948 | ) | Balance at 31 March 2009 | | | 209,227,074 | | | | 74,514 | | | | 209,301,588 | |
27. | OPERATING LEASE ARRANGEMENTS |
At 31 March 2009, the total future minimum rental receivable under non-cancellable operating leases in respect of land and buildings are as follows :
| | Group and Company | | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | | | | | | | Within one year | | | 77,701 | | | | 82,581 | | In the second to fifth years | | | 90,115 | | | | 61,935 | | | | | 167,816 | | | | 144,516 | |
27. | OPERATING LEASE ARRANGEMENTS (Continued) |
At 31 March 2009, the total future minimum lease payments under non-cancellable operating leases in respect of land and buildings are payable as follows :
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | Within one year | | | 1,312,200 | | | | 1,160,600 | | | | 991,200 | | | | 966,000 | | In the second to fifth years | | | 2,219,000 | | | | 3,059,000 | | | | 2,093,000 | | | | 3,059,000 | | | | | 3,531,200 | | | | 4,219,600 | | | | 3,084,200 | | | | 4,025,000 | |
The group and the company lease land and buildings under operating leases. The leases run for an initial period of one to five years, with an option to renew the leases at the expiry dates. None of the leases includes contingent rentals.
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | Contracted but not provided for the construction of the factory premises in the PRC | | | 3,067,505 | | | | 5,575,352 | | | | - | | | | - | | Capital contributions payable to PRC wholly-owned subsidiaries | | | - | | | | - | | | | 49,309,580 | | | | 61,009,580 | | | | | 3,067,505 | | | | 5,575,352 | | | | 49,309,580 | | | | 61,009,580 | |
29. | 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. As at the date of approval of these financial statements, the outcome of the enquiries is uncertain. In the opinion of the directors, no provision for additional taxes is required. The total contingent tax exposures to the group and company in respect of the deductions and offshore claims are estimated to be approximately HK$5.0 million and HK$23.3 million, respectively.
Except as disclosed above, the group and company have no contingent liabilities at 31 March 2009.
30. | DIRECTORS' REMUNERATION |
Remuneration of the directors of the company disclosed pursuant to section 161 of the Hong Kong Companies Ordinance is as follows :
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | | | | | | | Fees | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Other emoluments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
31. | RELATED PARTY TRANSACTIONS |
In addition to the transactions and balances disclosed elsewhere in the financial statements, during the year, the group had the following transactions with related parties :
| | | | Group | | | | | | 2009 | | | 2008 | | | 2007 | | | | Note | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | Transactions with a related company | | (i) | | | | | | | | | | Rental expense | | | | | 2,864,308 | | | | 1,581,655 | | | | 1,080,000 | | Management fee expense | | | | | 4,434,600 | | | | 4,434,600 | | | | 4,434,600 | | Management bonus expense | | | | | 3,381,063 | | | | 2,329,153 | | | | 7,113,550 | | Purchase of motor vehicles | | | | | - | | | | 788,051 | | | | - | | | | | | | | | | | | | | | | | Transactions with a shareholder | | | | | | | | | | | | | | | Sales | | | | | 177,267,419 | | | | 152,324,873 | | | | 148,477,931 | | Purchases | | | | | 10,733,357 | | | | 4,508,889 | | | | 8,451,104 | | Sales commission expense | | | | | 6,901,737 | | | | 4,791,769 | | | | 2,250,179 | | Interest income | | | | | - | | | | 103,997 | | | | 195,000 | |
Note:
| (i) | The group entered into those transactions with Taisun Magnetics Limited, in which Mr. Lam Wai Shuen, Shiman and Dr. Lam Wai Wing, Malcolm, directors of the company, had interests. |
32. | MAJOR NON-CASH TRANSACTION |
During the year ended 31 March 2009, HK$5,831,637 (2008: HK$2,524,985 and 2007: HK$5,517,381) of the dividends for the year was settled through the current account with a shareholder.
During the year ended 31 March 2009, amount due to a related company of HK$Nil (2008: HK$3,830,555) was settled by the transfer of the available-for-sales financial assets at fair value.
33. | FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES |
The group's major financial assets and liabilities include bank balances and cash, available-for-sale financial assets, trade receivables and payables, other payables and amounts due from/to related parties. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.
Interest rate risk
The group is exposed to interest rate risk through the impact of interest rate changes on cash and cash equivalents. The interest rates of cash and cash equivalent of the group are disclosed in note 19. The group currently does not have an interest rate hedging policy. However, the directors monitor interest rate change exposure and will consider hedging significant interest rate exchange exposure should the need arises.
Interest rate sensitivity
At 31 March 2009, the group was exposed to changes in market interest rates through cash and cash equivalent, which are subject to variable interest rates. The following table illustrates the sensitivity of the profit after tax for the year and retained earnings to a change in interest rates of +1% and -1% (2008: +1% and -1%), with effect from the beginning of the year. The calculations are based on the group's and the company's bank balance held at each balance sheet date. All other variables are held constant.
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | If interest rates were 1% (2008: 1%) higher | | | | | | | | | | | | | Net profit for the year | | | 644,473 | | | | 506,868 | | | | 481,413 | | | | 316,128 | | | | | | | | | | | | | | | | | | | If interest rates were 1% (2008: 1%) lower | | | | | | | | | | | | | | | | | Net profit for the year | | | (644,473 | ) | | | (506,868 | ) | | | (481,413 | ) | | | (316,128 | ) |
33. | FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) |
Price risk
The group is exposed to equity price risk through its investment in listed securities which are classified as available-for-sale financial assets. The management manages this exposure by maintaining a portfolio of investments with different risk and return profiles and will consider hedging the risk exposure should the need arise. The group is not exposed to commodity price risk.
At 31 March 2009, if securities prices had increased/decreased by 1% and all other variables were held constant, fair value reserve would increase/decrease by approximately HK$216,679 (2008: fair value reserve would increase/decrease by approximately HK$235,358). This is mainly due to the changes in available-for-sale financial assets. This sensitivity analysis has been determined assuming that the price change had occurred at the balance sheet date and had been applied to the group's investment on that date.
Foreign currency risk
The group mainly operates in the Asia Pacific Region and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, RMB, AUD and GBP. The HK dollar is pegged to the US dollar at an exchange rate of approximately 7.8, the foreign exchange exposure between US dollar and HK dollar is therefore minimal. The group's exposure to RMB is minimal as majority of the subsidiaries of the group operates in the PRC with most of the transactions denominated and settled in Renminbi. The group holds foreign currency time deposits which are exposed to foreign currency risk. To mitigate the group's exposure to foreign currency risk, the group manages its foreign exchange risk by actively monitoring its foreign currency translations.
| (a) | Exposure to currency risk |
The following table details the group's and the company's exposure at the balance sheet date to currency risk arising from recognized assets or liabilities denominated in a currency other than the group's functional currency.
| | 2009 | | | 2008 | | | | HK$ | | | HK$ | | Group and Company | | | | | | | Net financial assets/(liabilities) | | | | | | | AUD | | | 5,705,970 | | | | 6,711,953 | | GBP | | | 5,950,118 | | | | 8,033,244 | |
33. | FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) |
Foreign currency risk (Continued)
The sensitivity analysis has been determined assuming that the reasonably possible change in foreign exchange rates had occurred at the balance sheet date and had been applied to the group's exposure to currency risk for financial instruments in existence at that date, and that all other variables, in particular interest rates, remain constant. The stated changes represent management's assessment of reasonably possible changes in foreign exchange rates over the period until the next annual balance sheet date. A 1% strengthening/(weakening) of HK$ against AUD and GBP at the balance sheet date would increase/(decrease) the group's and the company's profit after tax and retained profits by the amount shown below. Other components of equity would not be affected by changes in the foreign exchange rates.
| | 2009 | | 2008 | | | | Changes in foreign exchange rates | | | Effect on profit after tax and retained profits | | Changes in Foreign Exchange rates | | | Effect on profit after tax and retained profits | | | | | | | HK$ | | | | | HK$ | | Group and Company | | | | | | | | | | | | AUD | | | +1%/-1 | % | | | 54,129/(54,129 | ) | | +1%/-1 | % | | 72,766/(72,766 | ) | GBP | | | +1%/-1 | % | | | 58,821/(58,821 | ) | | +1%/-1 | % | | 78,674/(78,674 | ) |
Credit risks
Credit risk arises from the possibility that the counterparty to a transaction is unwilling or unable to fulfill its obligation with the results that the group thereby suffers financial loss. The carrying amounts of trade and other receivables and cash and cash equivalents included in the consolidated balance sheet represent the group's maximum exposure to credit risk in relation to financial assets. No other financial assets carry a significant exposure to credit risk. The group monitors the trade and other receivables on an ongoing basis and only trades with creditworthy third parties. In addition, all the group's cash and cash equivalents are deposited with major banks located in Hong Kong and the PRC. Accordingly, the group has no significant concentrations of credit risk.
Fair values
The fair values of the group's current financial assets and liabilities are not materially different from their carrying amounts because of the immediate or short term maturity of these financial instruments.
Liquidity risks
As at 31 March 2009, the group had net current assets of HK$71,110,746 (2008: HK$69,152,852) and net assets of HK$171,516,152 (2008: HK$150,205,698). The management considered the liquidity risk to be minimal.
The group exercised liquidity risk management policy by maintaining sufficient cash and cash equivalents level deemed adequate to finance the group's operations, investment opportunities and expected expansion.
33. | FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) |
Liquidity risks (Continued)
Individual operating entities within the group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the parent company's board when the borrowings exceed certain predetermined levels of authority. The group's policy is to regularly monitor its liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.
The following table details the remaining contractual maturities at the balance sheet dates of the group's and the company's non-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payment computed using contractual rate or, if floating, based on rates current at the balance sheet date) and the earliest date the group and the company can be required to pay :
Group
| | Carrying amount | | | Total contractual undiscounted cash flow | | | On demand or within 1 year | | | More than 1 year but less than 2 years | | | More than 2 years but less than 5 years | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | | | | At 31 March 2009 | | | | | | | | | | | | | | | | Trade and other payables | | | 17,231,889 | | | | 17,231,889 | | | | 17,231,889 | | | | - | | | | - | | Obligations under finance lease | | | 52,700 | | | | 52,700 | | | | 21,000 | | | | 21,000 | | | | 10,700 | | Amount due to a related company | | | 3,381,063 | | | | 3,381,063 | | | | 3,381,063 | | | | - | | | | - | | Dividend payable | | | 11,700,000 | | | | 11,700,000 | | | | 11,700,000 | | | | - | | | | - | | Loans from shareholders | | | 2,868,954 | | | | 2,868,954 | | | | 2,868,954 | | | | - | | | | - | | Collateralised bank advances | | | 341,250 | | | | 341,250 | | | | 341,250 | | | | - | | | | - | | | | | 35,575,856 | | | | 35,575,856 | | | | 35,544,156 | | | | 21,000 | | | | 10,700 | |
33. | FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) |
Liquidity risks (Continued)
Group
| | Carrying amount | | | Total contractual undiscounted cash flow | | | On demand or within 1 year | | | More than 1 year but less than 2 years | | | More than 2 years but less than 5 years | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | | | | At 31 March 2008 | | | | | | | | | | | | | | | | Trade and other payables | | | 21,499,786 | | | | 21,499,786 | | | | 21,499,786 | | | | - | | | | - | | Obligations under finance lease | | | 73,700 | | | | 73,700 | | | | 21,000 | | | | 21,000 | | | | 31,700 | | Amount due to a related company | | | 2,329,153 | | | | 2,329,153 | | | | 2,329,153 | | | | - | | | | - | | Dividend payable | | | 11,700,000 | | | | 11,700,000 | | | | 11,700,000 | | | | - | | | | - | | Loans from shareholders | | | 2,868,954 | | | | 2,868,954 | | | | 2,868,954 | | | | - | | | | - | | Collateralised bank advances | | | 971,312 | | | | 971,312 | | | | 971,312 | | | | - | | | | - | | | | | 39,442,905 | | | | 39,442,905 | | | | 39,390,205 | | | | 21,000 | | | | 31,700 | |
Company
| | Carrying amount | | | Total contractual undiscounted cash flow | | | On demand or within 1 year | | | More than 1 year but less than 2 years | | | More than 2 years but less than 5 years | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | | | | | | | | | | | | | | | | | At 31 March 2009 | | | | | | | | | | | | | | | | Trade and other payables | | | 12,437,284 | | | | 12,437,284 | | | | 12,437,284 | | | | - | | | | - | | Obligations under finance lease | | | 52,700 | | | | 52,700 | | | | 21,000 | | | | 21,000 | | | | 10,700 | | Amount due to a related company | | | 3,381,063 | | | | 3,381,063 | | | | 3,381,063 | | | | - | | | | - | | Dividend payable | | | 11,700,000 | | | | 11,700,000 | | | | 11,700,000 | | | | - | | | | - | | Loans from shareholders | | | 2,868,954 | | | | 2,868,954 | | | | 2,868,954 | | | | - | | | | - | | | | | 30,440,001 | | | | 30,440,001 | | | | 30,408,301 | | | | 21,000 | | | | 10,700 | | | | | | | | | | | | | | | | | | | | | | | At 31 March 2008 | | | | | | | | | | | | | | | | | | | | | Trade and other payables | | | 17,513,855 | | | | 17,513,855 | | | | 17,513,855 | | | | - | | | | - | | Obligations under finance lease | | | 73,700 | | | | 73,700 | | | | 21,000 | | | | 21,000 | | | | 31,700 | | Amount due to a related company | | | 2,329,153 | | | | 2,329,153 | | | | 2,329,153 | | | | - | | | | - | | Dividend payable | | | 11,700,000 | | | | 11,700,000 | | | | 11,700,000 | | | | - | | | | - | | Loans from shareholders | | | 2,868,954 | | | | 2,868,954 | | | | 2,868,954 | | | | - | | | | - | | | | | 34,485,662 | | | | 34,485,662 | | | | 34,432,962 | | | | 21,000 | | | | 31,700 | |
33. | FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) |
Summary of financial assets and liabilities by category
The carrying amounts of the group's and the company's financial assets and liabilities as recognised at balance sheet dates may be categorised as follows. See notes 3.6 and 3.9 for explanations about how the category of financial instruments affects their subsequent measurement.
| | Group | | | Company | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | | HK$ | | | HK$ | | | HK$ | | | HK$ | | Financial assets | | | | | | | | | | | | | Pledged bank balances | | | 567,050 | | | | - | | | | 567,050 | | | | - | | Available-for-sale financial assets | | | 21,667,859 | | | | 23,535,756 | | | | 21,667,859 | | | | 23,535,756 | | Loans and receivables: | | | | | | | | | | | | | | | | | Trade and other receivables | | | 3,345,818 | | | | 3,400,030 | | | | 116,200 | | | | - | | Amount due from shareholder | | | 13,940,881 | | | | 9,392,116 | | | | - | | | | - | | Amount due from subsidiaries | | | - | | | | - | | | | 28,278,839 | | | | 22,846,582 | | Cash and cash equivalents | | | 63,880,318 | | | | 50,687,596 | | | | 47,574,236 | | | | 31,612,771 | | | | | 103,401,926 | | | | 87,015,498 | | | | 98,204,184 | | | | 77,995,109 | | | | | | | | | | | | | | | | | | | Financial liabilities | | | | | | | | | | | | | | | | | Financial liabilities measured at amortised cost: | | | | | | | | | | | | | | | | | Trade and other payables | | | 17,231,889 | | | | 21,499,786 | | | | 12,437,284 | | | | 17,513,855 | | Obligations under finance lease | | | 52,700 | | | | 73,700 | | | | 52,700 | | | | 73,700 | | Amount due to a related company | | | 3,381,063 | | | | 2,329,153 | | | | 3,381,063 | | | | 2,329,153 | | Dividend payable | | | 11,700,000 | | | | 11,700,000 | | | | 11,700,000 | | | | 11,700,000 | | Loans from shareholders | | | 2,868,954 | | | | 2,868,954 | | | | 2,868,954 | | | | 2,868,954 | | Collateralised bank advances | | | 341,250 | | | | 971,312 | | | | - | | | | - | | | | | 35,575,856 | | | | 39,442,905 | | | | 30,440,001 | | | | 34,485,662 | |
34. | CAPITAL MANAGEMENT POLICIES AND PROCEDURES |
The group's objectives when managing capital are:
| (a) | To safeguard the group's ability to continue as a going concern, so that it continues to provide returns and benefits for its stakeholders; |
| (b) | To support the group's stability and growth; and |
| (c) | To provide capital for the purpose of strengthening the group's risk management capability. |
The group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns, taking into consideration the future capital requirements of the group and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities. To maintain or adjust the capital structure, the group may adjust the dividend payables to shareholders, issue new shares or raise and repay debts. The group's capital management objectives, policies or processes were unchanged during the year ended 31 March 2009 and 31 March 2008. Management regards total equity of HK$171,516,152 (2008: HK$150,205,698) as capital, for capital management purpose.
|