-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TraEnF3sZ+nqRPghihDnEYYv/TTRl5461gHiZOQMJT4xffHWD/PStv0SYvmGkNgw xodnqhgO9U1PASCjNwkVbA== 0001144204-05-020164.txt : 20050629 0001144204-05-020164.hdr.sgml : 20050629 20050629115536 ACCESSION NUMBER: 0001144204-05-020164 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050629 DATE AS OF CHANGE: 20050629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL SECURITY INSTRUMENTS INC CENTRAL INDEX KEY: 0000102109 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 520898545 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31747 FILM NUMBER: 05923309 BUSINESS ADDRESS: STREET 1: 7-A GWYNNS MILL COURT CITY: OWINGS MILLS STATE: MD ZIP: 21117-3586 BUSINESS PHONE: 4103633000 MAIL ADDRESS: STREET 1: 7-A GWYNNS MILL COURT CITY: OWINGS MILLS STATE: MD ZIP: 21117-3586 10-K 1 v020796_10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31, 2005 or |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________. Commission file number: 0-7885 UNIVERSAL SECURITY INSTRUMENTS, INC. (Exact name of registrant as specified in its charter) MARYLAND 52-0898545 - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7-A Gwynns Mill Court Owings Mills, Maryland 21117 - -------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 363-3000 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Each Exchange on Which Registered - -------------- ------------------------------------------ Common Stock, $0.01 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of Class Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes |_| No |X| The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 21, 2005 was $27,538,947. The number of shares of common stock outstanding as of June 21, 2005 was 1,652,998. DOCUMENTS INCORPORATED BY REFERENCE To the extent specified, Part III of this Form 10-K incorporates information by reference to the Registrant's definitive proxy statement for its 2005 Annual Meeting of Shareholders (to be filed).
UNIVERSAL SECURITY INSTRUMENTS, INC. 2005 ANNUAL REPORT ON FORM 10-K Table of Contents Page PART I Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to Vote of Security Holders 8 Executive Officers of the Registrant 8 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 9 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative And Qualitative Disclosures About Market Risk 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Item 9A. Controls and Procedures 15 PART III Item 10. Directors and Executive Officers of the Registrant 16 Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 Item 14. Principal Accountant Fees and Services 16 PART IV Item 15. Exhibits and Financial Statement Schedules 17 Signatures 19
PART I ITEM 1. BUSINESS General Universal Security Instruments, Inc. ("we" or "the Company") designs and markets a variety of popularly-priced safety products consisting primarily of smoke alarms, carbon monoxide alarms and related products. Most of our products require minimal installation and are designed for easy installation by the consumer without professional assistance, and are sold through retail stores. We also market products to the electrical distribution trade through our wholly-owned subsidiary, USI Electric, Inc. ("USI Electric"). The electrical distribution trade includes electrical and lighting distributors as well as manufactured housing companies. Products sold by USI Electric usually require professional installation. Prior to 2000, we also designed and marketed a variety of telecommunication and video products. Due to the low margins realized on our telecommunications and video products, we have since focused our business primarily on safety products. As a result, we (i) changed our marketing of telecommunications and video products to concentrate virtually exclusively on made-to-order private label sales, and (ii) entered into the electrical distribution market with an enhanced and newly packaged line of smoke alarms as well as our other safety products. In 1989 we formed a limited liability company under the laws of Hong Kong, as a joint venture with a Hong Kong-based partner to manufacture various products in the Peoples Republic of China (the "Hong Kong Joint Venture"). We currently own a 50% interest in the Hong Kong Joint Venture and are a significant customer of the Hong Kong Joint Venture (40.66% and 31.02% of its sales during fiscal 2005 and 2004 respectively), with the balance of its sales made to unrelated customers worldwide. We import all of our products from various foreign suppliers. For the fiscal year ended March 31, 2005, approximately 68% of our purchases were imported from the Hong Kong Joint Venture. Our sales for the year ended March 31, 2005 were $23,465,443 compared to $17,201,116 for the year ended March 31, 2004, an increase of approximately 36.42%. We reported net income of $3,417,854 in fiscal 2005 compared to net income of $2,571,026 in fiscal 2004. The primary reasons for the increase in earnings were higher operating income from sales due to increased volume, higher Hong Kong Joint Venture earnings and the income tax benefit of $281,137 arising principally from the reduction of the deferred tax valuation allowance. The Company was incorporated in Maryland in 1969. Our principal executive office is located at 7-A Gwynns Mill Court, Owings Mills, Maryland 21117, and our telephone number is 410-363-3000. Information about us may be obtained from our website www.universalsecurity.com. Copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, are available free of charge on our website as soon as they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC's EDGAR reporting system. Simply select the "Investor Relations" menu item, then click on the "SEC Filings" link. The SEC's EDGAR reporting system can also be accessed directly at www.sec.gov. Safety Products We market a line of residential smoke alarms under the trade names "USI Electric" and "UNIVERSAL" both of which are manufactured by the Hong Kong Joint Venture. Our line of smoke alarms consists of battery, electrical and electrical with battery backup alarms. Our products contain different types of batteries with different battery lives, and some with alarm silencers. The smoke alarms marketed to the electrical distribution trade also include hearing impaired and heat alarms with a variety of additional features. We also market outdoor floodlights under the name "Lite Aide(TM)," carbon monoxide alarms, door chimes and ground fault circuit interrupters. Our sales of safety products aggregated $23,361,445 or approximately 99.6% of total sales in the fiscal year ended March 31, 2005 and $16,717,427 or approximately 97% of total sales in the fiscal year ended March 31, 2004. This increase in sales volume was due primarily to increased sales volume of ground fault circuit interrupters, smoke and carbon monoxide alarms. We are focusing our sales and marketing efforts to maximize safety product sales, especially smoke alarms and carbon monoxide alarms manufactured by our Hong Kong Joint Venture and marketed to the electrical distribution and retail trade. -3- Other Products Since 2000, our focus has been primarily on sales of safety products and we have placed continuously less emphasis on sales of the other products which had been sold in earlier years. For the fiscal year ended March 31, 2005, our sales of other private label products consisted primarily of audio tape, which aggregated $103,998 or 0.4% of total sales. For the fiscal year ended March 31, 2004, sales of these products were $483,689 or 3% of total sales. The primary reason for the decrease in sales was fewer private label customers. Import Matters We import all of our products. As an importer, we are subject to numerous tariffs which vary depending on types of products and country of origin, changes in economic and political conditions in the country of manufacture, potential trade restrictions and currency fluctuations. We have attempted to protect ourself from fluctuations in currency exchange rates to the extent possible by negotiating commitments in U.S. dollars. Our inventory purchases are also subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated with purchasing products abroad. A majority of our products, including products we purchase from our Hong Kong Joint Venture, are imported from the People's Republic of China. Sales and Marketing; Customers We sell our products to various customers, and our total sales market can be divided generally into two categories; sales by the Company, and sales by our USI Electric subsidiary. The Company markets our products to retailers, including wholesale distributors, chain, discount, and home center stores, catalog and mail order companies and to other distributors ("retailers"). Our products have historically been retailed to "do-it-yourself" consumers by these retailers. We also distribute our products through specialty markets such as premium/incentive and direct mail companies. We do not currently market any significant portion of our products directly to end users. The Company's retail sales are made directly by our employees and by approximately 17 independent sales organizations who are compensated by commissions. Our agreements with these sales organizations are generally cancelable by either party upon 30 days notice. We do not believe that the loss of any one of these organizations would have a material adverse effect upon our business. Sales which are made directly by us are effected by our officers and full-time employees, seven of whom are also engaged in sales, management and training. Sales outside the United States, are made by our officers and through exporters, and amounted to approximately 6.3% of total sales in the fiscal year ended March 31, 2005. Our USI Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies). USI Electric has established a national distribution system with 9 regional stocking warehouses throughout the United States which enables customers to receive their orders the next day without paying for overnight freight charges. USI Electric engages sales personnel from the electrical distribution trade and has engaged 27 independent sales organizations which represent approximately 230 sales representatives, some of which have warehouses where USI Electric products are maintained by our sales representatives for sale. We also market our products through our own sales catalogs and brochures, which are mailed directly to trade customers, and our website. Our customers, in turn, may advertise our products in their own catalogs and brochures and in their ads in newspapers and other media. We also exhibit and sell our products at various trade shows, including the annual National Hardware Show in Las Vegas, Nevada. Our backlog of orders believed to be firm as of March 31, 2005 was approximately $841,278. Our backlog as of March 31, 2004 was approximately $1,521,784. This decrease in backlog is a function of the timing of orders received from our customers and our maintaining significantly more inventory, resulting in more rapid fulfillment of customer orders. Hong Kong Joint Venture We have a 50% interest in a Hong Kong Joint Venture which has manufacturing facilities in the People's Republic of China, for the manufacturing of certain of our electronic and electrical products. -4- We believe that the Hong Kong Joint Venture arrangement will ensure a continuing source of supply for a majority of our safety products at competitive prices. During fiscal year 2005, 68% of our total inventory purchases were made from the Hong Kong Joint Venture. The products produced by the Hong Kong Joint Venture include smoke alarms and carbon monoxide alarms. We are currently pursuing the development of additional products to be manufactured by the Hong Kong Joint Venture, such as additional models of carbon monoxide alarms and a battery operated combination carbon monoxide and smoke alarm unit. Changes in economic and political conditions in China or any other adversity to the Hong Kong Joint Venture will unfavorably affect the value of our investment in the Hong Kong Joint Venture and would have a material adverse effect on the Company's ability to purchase products for distribution. We previously announced that the Hong Kong Joint Venture was being positioned for a possible initial public offering (IPO). The Hong Kong Joint Venture is proceeding with the application process for an IPO and listing on the Hong Kong Stock Exchange Main Board. No assurances can be given that these steps will result in an initial public offering for the Hong Kong Joint Venture. We will report further developments at such time as permitted in accordance with Hong Kong and U.S. regulations. Should the Hong Kong Joint Venture complete its IPO, our ownership of the Hong Kong Joint Venture will be reduced. Our purchases from the Hong Kong Joint Venture represented approximately 41% of the Hong Kong Joint Venture's total sales during fiscal 2005, with the balance of the Hong Kong Joint Venture's sales being primarily made in Europe and Australia, to unrelated customers. The Hong Kong Joint Venture's sales to unrelated customers are $15,347,017 in fiscal 2005 and $16,633,251 in fiscal 2004. Please see Note C of the Financial Statements for a comparison of annual sales and earnings of the Hong Kong Joint Venture. Other Suppliers Certain private label products not manufactured for us by the Hong Kong Joint Venture are manufactured by other foreign suppliers. We believe that our relationships with our suppliers are good. We believe that the loss of our ability to purchase products from the Hong Kong Joint Venture would have a material adverse effect on the Company. The loss of any of our other suppliers could have a short-term adverse effect on our operations, but replacement sources for these other suppliers could be developed. Competition In fiscal year 2005, sales of safety products accounted for approximately 99.6% of our total sales. In the sale of smoke alarms, we compete in all of our markets with First Alert, Firex and Walter Kidde. All of these companies have greater financial resources and financial strength than we have. We believe that our safety products compete favorably with other such products in the market primarily on the basis of styling, features and pricing. The safety industry in general involves changing technology. The success of our products may depend on our ability to improve and update our products in a timely manner and to adapt to new technological advances. Employees We have 18 employees, 12 of whom are engaged in administration and sales, and the balance of whom are engaged in product development and servicing. Our employees are not unionized, and we believe that our relations with our employees are satisfactory. ITEM 2. PROPERTIES Effective December 1999, we entered into an operating lease for a 9,000 square foot office and warehouse located in Baltimore County, Maryland. This lease was due to expire October 2005 but, subsequent to March 31, 2005, we exercised our option to renew the lease until October 2008. The current rental approximates $5,531 per month during the current fiscal year, with increasing rentals at 3% per year. Effective March 2003, we entered into an operating lease for an approximately 2,600 square foot office in Naperville, Illinois. This lease, which expires in February 2006, is subject to renewal for an additional six years with increasing rentals at 3% per year. The monthly rental approximates $2,830 per month during the current fiscal year. The Hong Kong Joint Venture currently operates an approximately 100,000 square foot manufacturing facility in the Guangdong province of Southern China. In response to our and the Hong Kong Joint Venture's growth and expanding product lines, the Hong Kong Joint Venture is constructing a new, approximately 250,000 square-foot manufacturing facility in the Fujian province of Southern China, which should be operational in the September 2005 quarter. -5- The Company believes that its current facilities, and those of the Hong Kong Joint Venture, are currently suitable and adequate. ITEM 3. LEGAL PROCEEDINGS In December 2001, Leviton Manufacturing Co., Inc. filed a civil action in the United States District Court for the District of Maryland (Case No. 01cv3855) alleging that the Company's and its USI Electric subsidiary's ground fault circuit interrupter (GFCI) units infringed one of plaintiff's patents and configuration trade dress ("Leviton I"). The plaintiff can no longer obtain injunctive relief under the now expired patent. In February 2004, the Court ruled on various summary judgment motions pursuant to which the Court found that as a matter of law there could be no patent infringement liability prior to December 11, 2001 and permitted Leviton's configuration trade dress claim and USI's patent invalidity defense to proceed to trial. The Court consolidated the trial with "Leviton II" and bifurcated liability from damages. At this time no trial date has been assigned. Due to the still undefined nature of the asserted configuration trade dress, the amount of any loss to the Company from this claim is not yet determinable. Should the Company not prevail on its defenses, any recovery that Leviton may obtain under the patent claims would be limited to some "reasonable royalty" for GFCI sales occurring over a period starting December 11, 2001, for less than one year. The Company and its counsel believe that the Company has meritorious defenses to the claims and continues to aggressively defend against the suit. On June 10, 2003, Leviton Manufacturing Co., Inc. filed a second civil suit against the Company and its USI Electric subsidiary in the United States District Court for the District of Maryland (Case No. 03cv1701), alleging this time that the Company's GFCI units infringe one or more of its more recently issued patents for reset lockout technology related to but not required by UL Standard 943 for ground GFCI units, effective January 2003 ("Leviton II"). Leviton also asserted trade dress and unfair competition claims which largely correspond to the claim in the "Leviton l" suit. On July 23, 2003, the GFCI manufacturer, Shanghai Meihao Electric, Inc., filed an action for Declaratory Judgment of non-infringement, invalidity, and unenforceability of the asserted patents. The Court has bifurcated the action into liability and damage phases, linked the supplier's Declaratory Judgment action with the action against the Company, and consolidated Leviton I with Leviton II. In March 2005, the court dismissed one of the Leviton patents from the suit and in April 2005, issued a claims construction Order that favors the position of the Company. While expert witness discovery is still ongoing, the Company expects to file summary judgment motions based on its meritorious defenses to the patent and trade dress infringement claims as part of its aggressive defense. In the event of an unfavorable outcome, the amount of any potential loss to USI is not yet determinable. On June 11, 2003, Walter Kidde Portable Equipment, Inc. filed a civil suit against the Company in the United States District Court for the Middle District of North Carolina (Case No. 03cv00537), alleging that certain of the Company's AC powered/battery backup smoke detectors infringe on a patent acquired by Kidde. The plaintiff is seeking injunctive relief and damages to be determined at trial. Discovery is now closed (subject to specific remaining open matters) and Kidde has filed a pair of summary judgment motions, which USI will oppose. The case is scheduled for trial in the fall of 2005. The Company and its counsel believe that the Company has significant defenses relating to the patent in suit. In the event of an unfavorable outcome, the amount of any potential loss to USI is not yet determinable. On October 13, 2003, Maple Chase Company filed a civil suit in the United States District Court for the Northern District of Illinois (Case No. 03cv07205), against the Company, its USI Electric subsidiary, and one former and one present Illinois-based sales representative, alleging that certain of the Company's smoke detectors infringe on a patent owned by Maple Chase (US Reissue Patent No. Re: 33290). On February 2, 2004, Maple Chase filed an Amended Complaint. After answering and counterclaiming against Maple Chase, in an effort to bring about a conclusion to the litigation, the Company successfully sought and has now obtained re-examination of the asserted patent in the United States Patent and Trademark Office (USPTO) based on the references cited and analysis presented by the Company. On April 11, 2005, the Court dismissed the case with the right to reinstitute the case pending the outcome of the proceedings in the USPTO. Apart from granting USI's Request for Reexamination in October of 2004, no further communications in the reexamination have been issued to date. The amount of potential loss to the Company, if any, is not yet determinable. The Company believes that the initiation of the reexamination based on the Company's presentation, confirmed the veracity in its legal/equitable defenses. If reinstituted, the Company will vigorously defend the suit and press its pending counterclaims. On March 31, 2005, Leviton filed still another lawsuit in the United States District Court for the District of Maryland (Case No. 05cv0889) against the Company ("Leviton III"). In this latest suit, Leviton accuses the Company of infringement of US Patent 6,864,766. This case is now pending in the same Court and before the same Judge as Leviton I and Leviton II. The Company has filed a counterclaim against Leviton and a Motion to Stay its case in favor of a declaratory judgment action filed by the GFCI manufacturer, Shanghai Meihao Electric, Inc. Leviton has opposed the Motion to Stay and has replied to the Company's counterclaim. The case is in its preliminary stages. The Company believes that it has strong defenses relating to the patent in suit. In the event of an unfavorable outcome, the amount of any potential loss to the Company is not determinable at this time. -6- On April 23, 2004, the Company filed a civil suit against The Hartford Casualty Insurance Company in the United States District Court for the District of Maryland (Case No. 04cv1320), claiming that the insurer is required to indemnify the Company from any damages and legal fees in connection with the two Leviton patent cases. This case has been settled subject to a confidentiality agreement. As previously reported, on September 3, 2003 the Company was advised that Michael Kovens, a then-director, principal stockholder and the former Chairman and chief executive officer of the Company ("Kovens"), had filed an action in Baltimore County Circuit Court (Case No. C-03-9639) against the Company and the other directors seeking: (i) to enjoin the Company from holding its Annual Meeting of Stockholders on September 8, 2003 until Kovens was able to nominate directors for election at the Annual Meeting; (ii) to require the Company to provide Kovens with certain confidential information to which Kovens claims he is entitled under Maryland law; (iii) to enjoin the Company from voting as proxy any shares issued by the Company since Kovens was replaced as Chairman and CEO; (iv) to void the employment agreement between the Company and its president, and to enjoin the Company from enforcing a "Change of Control" provision in the Company's president's employment agreement; (v) to void all issuances by the Company of restricted stock and options from and after October 1, 2001; (vi) to void any Bylaw amendments adopted by the Company from and after October 1, 2001; (vii) to enforce the exercise of an option by Kovens to purchase 20,000 shares of the Company's common stock at $2.25 per share which the Company maintains has expired; (viii) to void the election by the Company, pursuant to the Maryland General Corporation Law, to be governed by certain provisions of Maryland law; and (ix) other unspecified relief. The Court refused to issue a temporary restraining order requested by Kovens to enjoin the Company and the other directors from holding the Annual Meeting, enforcing the "Change of Control" provision in the Company's president's employment agreement, and taking other unspecified actions. On October 2, 2003, the Court granted the parties' joint motion to stay all proceedings in the matter to allow the parties an opportunity to negotiate a resolution of the dispute. On May 28, 2004, Kovens' new counsel filed an amended complaint on behalf of Kovens, which also includes a derivative action brought in the name of the Company against the Company's directors claiming that the actions Kovens alleges to have occurred amount to a breach of their fiduciary duty to the Company. The amended complaint seeks declaratory relief for essentially the same matters requested in the original complaint, and seeks damages from the directors in the amount of $20 million. The Company, in accordance with its charter and bylaws, is providing a defense for the directors named in the amended complaint and, subject to the provisions of applicable law, is obligated to indemnify them for any loss they might ultimately incur. In addition, Kovens is seeking an additional $500,000 from the Company with respect to the exercise of the option for the purchase of 20,000 shares at $2.25 per share (mentioned above) which the Company maintains has expired. Furthermore, Kovens alleges that the Chairman and the President of the Company interfered with certain contractual relationships between Kovens and third parties for which Kovens is seeking damages of $25 million. The Company has been advised by counsel that the action as filed is wholly without merit, and the Company intends to aggressively defend the action. Discovery has been completed and the case is set for trial beginning July 18, 2005. From time to time, the Company is involved in various lawsuits and legal matters. It is the opinion of management, based on the advice of legal counsel, that these matters will not have a material adverse effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS There were no submissions of matters to a vote of security holders during the quarter ended March 31, 2005. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information about the Company's executive officers. -7- NAME AGE POSITIONS ---- --- --------- Harvey B. Grossblatt 58 President, Chief Operating Officer and Chief Executive Officer James B. Huff 53 Chief Financial Officer, Secretary and Treasurer HARVEY B. GROSSBLATT has been President a director of the Company since 1996. He served as Chief Financial Officer from October 1983 through August 2004, Secretary and Treasurer of the Company from September 1988 through August 2004, and Chief Operating Officer from April 2003 through October 2004. Following the passing of Stephen C. Knepper in August 2004, Mr. Grossblatt was appointed Chief Executive Officer in August 2004. JAMES B. HUFF was appointed Chief Financial Officer in August 2004 and Secretary and Treasurer in October 2004. From December 2003 until August 2004, Mr. Huff was controller of Essex Corporation, a Columbia, Maryland based public company which provides intelligence engineering services to federal government agencies. From August 2002 until November 2003, Mr. Huff served as chief financial officer of Computer Temporaries, Inc., Lanham, Maryland; from August 2000 until July 2002, he was chief financial officer of HLM Architects and Engineering, Inc., a Charlotte, North Carolina based public company; and from January 1990 until November 1999, Mr. Huff was chief financial officer of RMF Engineering, Inc., Baltimore, Maryland. -8- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Prior to July 28, 2003, our common stock, $.01 par value (the "Common Stock") traded on the Over-The-Counter (OTC) market under the symbol USEC. On July 28, 2003, the Common Stock began trading on the American Stock Exchange under the symbol UUU. As of June 21, 2005, there were 163 record holders of the Common Stock. The closing price for the Common Stock on that date was $16.66. A four-for-three stock dividend was paid on April 5, 2004 to stockholders of record on March 15, 2004. We have not paid any cash dividends on our common stock, and it is our present intention to retain all earnings for use in future operations. The following table sets forth the high and low prices for the Common Stock for each full quarterly period during the fiscal years indicated. With respect to the first quarter of the fiscal year ended March 31, 2004, the prices reflect the high and low bid prices as available through the OTC market and represent prices between dealers and do not reflect the retailer markups, markdowns or commissions, and may not represent actual transactions. Beginning with the second quarter of the fiscal year ended March 31, 2004, the prices reflect the high and low sales prices as reported by the American Stock Exchange. All prices have been adjusted to reflect the four for three stock dividend paid on April 5, 2004. Fiscal Year Ended March 31, 2005 First Quarter High $17.60 Low $10.75 Second Quarter High $13.30 Low $10.00 Third Quarter High $15.24 Low $10.35 Fourth Quarter High $19.08 Low $13.97 Fiscal Year Ended March 31, 2004 First Quarter High $ 8.55 Low $ 5.62 Second Quarter High $14.81 Low $ 7.69 Third Quarter High $13.35 Low $10.88 Fourth Quarter High $13.49 Low $10.80 Information regarding our equity compensation plans is set forth in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction with the 2004 Annual Meeting of Stockholders (the "Proxy Statement") in the Section entitled "Executive Compensation" and is incorporated herein by reference. -9- ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with, and is qualified by reference to, the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. The Statement of Operations data and the Balance Sheet data for the years ended, and as at, March 31, 2001, 2002, 2003, 2004 and 2005 are derived from our audited consolidated financial statements. All share and per share amounts included in the following financial data have been retroactively adjusted to reflect the 4-for-3 stock dividend paid on April 5, 2004 to shareholders of record on March 15, 2004.
Year Ended March 31, -------------------- 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ Statement of Operations Data: Net sales $ 23,465,443 $ 17,201,116 $ 15,953,883 $ 10,480,829 $ 7,731,501 Income (loss) before equity in earnings (loss) of Hong Kong Joint Venture and income taxes 765,742 429,716 279,615 (976,063) (799,183) Net income (loss) 3,417,854 2,571,026 2,400,318 261,625 (758,940) Per common share: Net income (loss) Basic 2.13 1.69 1.66 0.21 (0.63) Diluted 1.94 1.49 1.54 0.21 (0.63) Weighted average number of common shares outstanding Basic 1,602,449 1,516,846 1,443,439 1,251,499 1,216,360 Diluted 1,764,474 1,725,206 1,561,745 1,261,027 1,216,360 Balance Sheet Data: Total assets 16,049,948 11,098,916 8,382,043 5,182,462 5,945,690 Long-term debt (non-current) -- -- 7,224 22,396 45,088 Working capital (1) 6,317,231 4,200,170 2,377,688 402,425 585,032 Current ratio (1) 3.00:1 3.21:1 2.26:1 1.27:1 1.23:1 Shareholders' equity 12,897,668 9,198,272 6,493,415 3,681,273 3,303,304
(1) Working capital is computed as the excess of current assets over current liabilities. The current ratio is calculated by dividing current assets by current liabilities. Quarterly Results of Operations (Unaudited) The unaudited quarterly results of operations for fiscal years 2005 and 2004 are summarized as follows:
----------------------------------------------------------- Quarter Ended ----------------------------------------------------------- June 30, September 30, December 31, March 31, -------- ------------- ------------ --------- 2005 Net sales $4,874,782 $6,622,221 $5,849,144 $6,119,296 Gross profit 1,484,713 2,121,788 1,825,828 1,887,499 Net income 766,297 1,043,836 793,569 814,152 Net income per share - basic 0.49 0.66 0.49 0.49 Net income per share - diluted 0.44 0.59 0.45 0.46 2004 Net sales $4,431,950 $4,998,483 $3,838,192 $3,932,491 Gross profit 1,460,245 1,575,707 1,230,667 1,531,957 Net income 852,498 740,446 493,792 484,290 Net income per share - basic 0.57 0.49 0.33 0.30 Net income per share - diluted 0.51 0.43 0.29 0.26
-10- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements When used in this discussion and elsewhere in this Annual Report on Form 10-K, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including regional and national economic conditions, unfavorable judicial decisions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected. We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. General We are in the business of marketing and distributing safety and security products which are primarily manufactured through our 50%-owned Hong Kong Joint Venture. Our financial statements detail our sales and other operational results only, and report the financial results of the Hong Kong Joint Venture using the equity method. Accordingly, the following discussion and analysis of the fiscal years ended March 31, 2005, 2004 and 2003 relate to the operational results of the Company only. A discussion and analysis of the Hong Kong Joint Venture's operational results for these periods is presented below under the heading "Hong Kong Joint Venture." Comparison of Results of Operations for the Years Ended March 31, 2005, 2004 and 2003 Sales. In fiscal year 2005, our net sales increased by $6,264,327 (36%), from $17,201,116 in fiscal 2004 to $23,465,443 in fiscal 2005. We experienced an increase of approximately $3,084,000 in sales to the Company's retail and wholesale distribution customers over the prior year principally as a result of increased volume. Our focus on marketing to the electrical distribution trade through our USI Electric subsidiary generated an increase in sales, also principally due to increased volume, to this market of approximately $3,180,000 (from approximately $13,300,000 in 2004 to approximately $16,480,000 in 2005). We anticipate continued revenue growth in all our markets. In fiscal year 2004, sales increased by $1,247,233 (8%) from $15,953,883 in fiscal 2003 to $17,201,116 in fiscal 2004. Our focus on marketing to retailers, including the wholesale distribution trades, generated the majority of the increase. Gross Profit. Gross profit as a percentage of net sales (or "gross margin") in fiscal 2005 was 31.2% compared to 33.7% and 31.2% in fiscal 2004 and 2003, respectively. The decrease in gross margin in the fiscal year ended March 31, 2005 reflects higher costs and pricing concessions applied to meet competitive pressures. The increase in gross margin for the year ended March 31, 2004 resulted from increased productivity and efficiency. During fiscal 2004 we were able to increase gross margins by increasing sales. Since fixed costs did not increase at the same rate as sales, the gross margin percentage as a percent of sales increased as sales increased. Management does not anticipate a near-term need to increase fixed costs. Expenses. Selling, general and administrative expenses for fiscal 2005 increased by $1,180,242 (23.55%) from $5,010,783 in fiscal 2004 to $6,191,025 in fiscal 2005. As a percentage of net sales, these expenses decreased to 26.4% for the fiscal year ended March 31, 2005 from 29.1% for the fiscal year ended March 31, 2004. The decrease in selling, general and administrative expense as a percent of sales is attributable to costs that do not increase proportionately with the higher sales volume. Various expense categories contributed to the increased dollar amount of the expense, but the following major account classifications were significant factors in this dollar increase: (i) Commissions and freight charges, as a percentage of sales, while consistent with commissions and freight charges of the prior year, vary directly with sales volume. Therefore, of the $1,180,242 increase in expenses, $224,165 is attributable to commissions and freight charges from higher sales volume during the 2005 period. (ii) Professional fees increased by $558,370 to $1,082,353 for the fiscal year ended March 31, 2005. Costs associated with the Kovens litigation discussed under Item 3, "Legal Proceedings," were approximately $880,000 for the fiscal year ended March 31, 2005, as compared to $79,768 for the prior fiscal year. Professional fees associated with the patent litigation decreased by approximately $129,000 to approximately $171,000 for the fiscal year ended March 31, 2005. Professional fees associated with patent litigation for the 2005 period were reduced by insurance reimbursements. The Company believes that professional fees will continue at increased levels until outstanding litigation matters are resolved. -11- In fiscal year 2004, selling, general and administrative expenses increased by approximately $745,202 (17%), from $4,265,581 in fiscal 2003 to $5,010,783 in fiscal 2004. As a percentage of sales, selling, general and administrative expenses were 29% for fiscal 2004 and 27% in fiscal 2003. The increase in selling, general and administrative expense as a percent of sales was due to increased sales commissions and freight, and higher legal costs partly associated with defending the suits described under Item 3, "Legal Proceedings." These increases were partially offset by a net gain of $146,836 from the sale of a 1.5 acre parcel of land during the second quarter of fiscal 2004. Interest Expense. Interest expense for fiscal 2005 increased to $85,521 from $83,589 in fiscal 2004 primarily due to higher interest rates. Interest expense for fiscal 2004 decreased to $83,589 from $153,168 in fiscal 2003 primarily due to lower interest rates and lower levels of debt. Income Taxes. We did not make a provision for federal income taxes in each of the 2005, 2004 and 2003 fiscal years, due to our operating loss carryforward for income tax purposes. However, we made a provision of $5,250 and $24,001 for state income taxes for fiscal year 2005 and 2004, respectively. The valuation allowance previously established to offset tax benefits associated with our net operating loss carryforwards and other deferred tax assets was reduced during the fourth quarter by $286,387 resulting in a net income tax benefit of $281,137. The valuation allowance is heavily influenced by historical results of operations and management believes recent operating results support the recognition of a portion of the income tax benefits associated with realization of net operating loss carryforwards and other deferred tax assets. We will continue to monitor the remaining valuation allowance of $776,523 which offsets future tax benefits associated with net operating loss carryforwards and other deferred tax assets until circumstances indicate the allowance is no longer required. Net Income. We reported net income of $3,417,854 for fiscal year 2005 compared to a net income of $2,571,026 for fiscal year 2004, a $846,828 (33%) increase. This increase in net income resulted from both higher gross profit, partially offset by higher selling, general and administrative expenses as described above, and higher Hong Kong Joint Venture earnings and the income tax benefit of $281,137 arising principally from the reduction of the deferred tax valuation allowance. We reported net income of $2,571,026 for fiscal year 2004 compared to a net income of $2,400,318 for fiscal year 2003, a $170,708 (7%) increase. This increase in net income resulted from both higher Hong Kong Joint Venture earnings and higher gross profit, partially offset by higher selling, general and administrative expenses as described above. Financial Condition, Liquidity and Capital Resources Our cash needs are currently met by funds generated from operations and from our Factoring Agreement, which supplies both short-term borrowings and letters of credit to finance foreign inventory purchases. The maximum we may borrow under this Agreement is $7,500,000. However, based on specified percentages of our accounts receivable and inventory and letter of credit commitments, at March 31, 2005, our maximum borrowing amount was limited to $4,743,416, all of which was available under this Agreement as of March 31, 2005. The outstanding principal balance under this Agreement is payable upon demand. The interest rate on the Factoring Agreement, on the uncollected factored accounts receivable and any additional borrowings is equal to the prime rate of interest charged by the factor which, as of March 31, 2005, was 5.75%. The borrowings are collateralized by all our accounts receivable and inventory. During the year ended March 31, 2005, working capital (computed as the excess of current assets over current liabilities) increased by $2,117,061, from $4,200,170 on March 31, 2004, to $6,317,231 on March 31, 2005. Our operating activities used cash of $1,098,082 for the year ended March 31, 2005. For the fiscal year ended March 31, 2004, operating activities used cash of $292,716. This increase of $805,366 was primarily due to higher levels of accounts receivable and undistributed Joint Venture earnings partially offset by higher net income. Our investing activities provided cash of $704,860 during fiscal 2005 and provided cash of $329,213 during fiscal 2004. This increase resulted primarily from higher distributions from the Joint Venture. During 2005, as in prior years, the Company offset its distributions from the Hong Kong Joint Venture with amounts due by the Company to the Hong Kong Joint Venture for the purchase of safety products. The Company offset $458,940 during fiscal 2005 and $1,164,608 during fiscal 2004 of trade amounts due by it to the Hong Kong Joint Venture in lieu of cash distributions. The Company records these payments as a non-cash transaction in its statement of cash flows. -12- Financing activities in 2005 provided the Company with cash of $264,319, primarily due to the exercise of employee stock options. Financing activities in 2004 provided cash of $100,581 which was also primarily from the exercise of employee stock options. Hong Kong Joint Venture The financial statements of the Hong Kong Joint Venture are included in this Form 10-K beginning on page JV-1. The reader should refer to these financial statements for additional information. There are no material Hong Kong - -- U.S. GAAP differences in the Hong Kong Joint Venture's accounting policies. In fiscal year 2005, sales of the Hong Kong Joint Venture were $25,899,630 compared to $24,114,967 and $23,365,301 in fiscal years 2004 and 2003, respectively. Net income was $5,005,886 for fiscal year 2005 compared to net income of $4,171,334 and $4,755,540 in fiscal years 2004 and 2003, respectively. The increase in the current fiscal year is primarily attributable to higher gross margins due to price increases instituted during the fiscal year ended March 31, 2005. The decrease in income for the year ended March 31, 2004 was due primarily to lower gross margins due to competition and higher manufacturing costs. Gross margins of the Hong Kong Joint Venture for fiscal 2005 increased to 33.55% from 30.6% in the prior fiscal year. The primary reason for this increase was price increases instituted during the fiscal year ended March 31, 2005. At March 31, 2004, the Hong Kong Joint Venture's gross margin decreased to 30.6% from 33.7% at March 31, 2003. The primary reason for this decrease was lower gross margins attributed to competition and higher costs. Selling, general and administrative expenses of the Hong Kong Joint Venture were $3,495,678, $2,971,274 and $2,806,412 for fiscal years 2005, 2004 and 2003, respectively. As a percentage of sales, these expenses were 13%, 12% and 12% for fiscal years 2005, 2004 and 2003, respectively. The increase in dollars of selling, general and administrative expenses each year was due partially to higher costs and partially due to higher sales volume as well as increased legal expense. Interest income net of interest expense was $30,666 for fiscal year 2005, compared to $45,795 and $2,315 in fiscal years 2004 and 2003, respectively. The decrease in interest income for 2005 was due to a reduction in investments in bonds, and the increase in interest income for 2004 was due to returns on investments in higher yielding bonds. Cash needs of the Hong Kong Joint Venture are currently met by funds generated from operations. During fiscal year 2005, working capital increased by $275,110 from $1,318,657 on March 31, 2004 to $1,593,767 on March 31, 2005. We are not in a position to quantify any funds which may be available to the Hong Kong Joint Venture from any IPO proceeds, if an IPO by the Hong Kong Joint Venture is completed (as previously discussed). Contractual Obligations and Commitments The following table presents, as of March 31, 2005, our significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in Note E to the consolidated financial statements. Subsequent to March 31, 2005, the Company exercised its option to extend the operating lease on its corporate offices until October 2008.
Payment due by period Less than 1-3 3-5 More than Total 1 year years years 5 years Operating Lease Obligations $281,141 $98,333 $182,808 -- -- ======== ======= ======== = =
Critical Accounting Policies Management's discussion and analysis of our consolidated financial statements and results of operations are based upon our Consolidated Financial Statement included as part of this document. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories, income taxes, and contingencies and litigation. We base these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. -13- We believe that the following critical accounting policies affect management's more significant judgments and estimates used in the preparation of its consolidated financial statements. For a detailed discussion on the application on these and other accounting policies see Note A to the consolidated financial statements included in this Annual Report. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include: Our revenue recognition policies are in compliance with Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" issued by the Securities and Exchange Commission. Revenue is recognized at the time product is shipped and title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed and collectibility of the related receivable is reasonably assured. We established allowances to cover anticipated doubtful accounts based upon historical experience. Inventories are valued at the lower of market or cost. Cost is determined on the first-in first-out method. We have recorded a reserve for obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Management reviews the reserve quarterly. We currently have significant deferred tax assets resulting from tax credit carryforwards, net operating loss carryforwards and deductible temporary differences, which will reduce taxable income in future periods. We have provided a valuation allowance on future tax benefits such as foreign tax credits, foreign net operating losses, capital losses and net operating losses. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses and losses in recent years. Cumulative losses weigh heavily in the overall assessment. As a result of management's assessment, the valuation allowance was reduced by $286,387, resulting in a net income tax benefit of $281,137, recognized in the fourth quarter and for the year ended March 31, 2005. As a result, an allowance of $776,523 continues to be provided to offset tax benefits associated with net operating loss carryforwards and other deferred tax assets at March 31, 2005. We are subject to lawsuits and other claims, related to patents and other matters. Management is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is based on a careful analysis of each individual issue with the assistance of outside legal counsel. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. Recently Issued Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued FAS 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for the classification of certain financial instruments as a liability (or an asset in some circumstances) whereas many of those instruments were previously classified as equity. The provisions of FAS 150 are generally effective for such instruments entered into or modified after May 31, 2003. For the fiscal years ended March 31, 2003, 2004 and 2005, we have not issued any financial instruments which have the characteristics within the scope of or that are within the requirements of FAS 150. In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 123R, "Share-Based Payment," which requires companies to expense the value of employee stock options and similar awards. The effective date of FASB 123R is for interim and annual periods beginning after June 15, 2005. Subsequently, the Securities and Exchange Commission (SEC) approved a rule which delays the effective date of FAS 123R for certain public companies. Under the SEC's rule, FAS 123R is now effective for the Company's annual period beginning April 1, 2006. We have elected to defer adoption of the change to the fair value based method of accounting for stock-based employee compensation and the recordation of such amounts as charges to operating expense until the annual period beginning April 1, 2006. -14- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our principal financial instrument is our Factoring Agreement which provides for interest at the factor's prime rate (5.75% at March 31, 2005). We are affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by us under our Factoring Agreement. A significant rise in the prime rate could materially adversely affect our business, financial condition and results of operations. At March 31, 2005, we had $483,416 principal outstanding under the facility. If principal amounts outstanding under our Factoring Agreement remained at this year-end level for an entire year and the prime rate increased or decreased, respectively, by 0.5%, we would pay or save, respectively, an additional $2,417 in interest in that year. We do not utilize derivative financial instruments to hedge against changes in interest rates or for any other purpose. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 are included in the Company's Consolidated Financial Statements and set forth in the pages indicated in Item 15(a) of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this annual report, and believe that the system is effective. There have been no changes in our internal control over financial reporting during the most recent fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation are insignificant and the potential benefits of adding employees to clearly segregate duties do not justify the expenses associated with such increases. Management will periodically review this situation. -15- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the identity and business experience of the directors of the Company and their remuneration set forth in the section captioned "Election of Directors" in the Proxy Statement is incorporated herein by reference. The information with respect to the identity and business experience of executive officers of the Company is set forth in Part I of this Form 10-K. The information with respect to the Company's Audit Committee is incorporated herein by reference to the section captioned "Meetings and Committees of the Board of Directors" in the Proxy Statement. The information with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned "Compliance With Section 16(a) of the Exchange Act" in the Proxy Statement. The information with respect to the Company's Code of Ethics is incorporated herein by reference to the section captioned "Code of Ethics" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the sections captioned "Director Compensation" and "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the sections captioned "Beneficial Ownership" and "Information Regarding Share Ownership of Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section captioned "Transactions with Management" in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated herein by reference to the section captioned "Independent Registered Public Accountants" in the Proxy Statement. -16- PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements.
Page ---- Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of March 31, 2005 and 2004 F-2 Consolidated Statements of Income for the Years Ended March 31, 2005, 2004 and 2003 F-3 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2005, 2004 and 2003 F-4 Consolidated Statements of Cash Flows for the Years Ended March 31, 2005, 2004 and 2003 F-5 Notes to Consolidated Financial Statements F-6 (a) 2. Financial Statement Schedules. Schedule II - Valuation of Qualifying Accounts S-1
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K. Exhibit No. 3.1 Articles of Incorporation (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1988, File No. 0-7885) 3.2 Articles Supplementary, filed October 14, 2003 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed October 31, 2002, file No. 0-7885) 3.3 Bylaws, as amended (incorporated by reference to Exhibit 3 to the Company's Form 8-A/A filed July 24, 2003) 10.1 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2003, File No. 0-7885) 10.2 Hong Kong Joint Venture Agreement, as amended (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended March 31, 2003, File No. 0-7885) 10.3 Amended Factoring Agreement with CIT Group (successor to Congress Talcott, Inc.) dated November 14, 1999 (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended March 31, 2003, File No. 0-7885) 10.4 Amendment to Factoring Agreement with CIT Group (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2002, File No. 0-7885) 10.5 Amendment to Factoring Agreement with CIT Group dated September 28, 2004 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004, File No. 0-7885) 10.6 Lease between Universal Security Instruments, Inc. and National Instruments Company dated October 21, 1999 for its office and warehouse located at 7-A Gwynns Mill Court, Owings Mills, Maryland 21117 (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the Fiscal Year Ended March 31, 2000, File No. 0-7885) 10.7 Amended and Restated Employment Agreement dated April 1, 2003 between the Company and Harvey B. Grossblatt (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended March 31, 2003, File No. 0-7885) 14 Code of Ethics (incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended March 31, 2004, File No. 0-7885) 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended March 31, 2004, File No. 0-7885) 23.1 Consent of Grant Thornton LLP* 23.2 Consent of Grant Thornton LLP (Hong Kong)* 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer* 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer* 32.1 Section 1350 Certifications* 99.1 Press Release dated June 29, 2005* *Filed herewith -17- (d) Financial Statements Required by Regulation S-X. Separate financial statements of the Hong Kong Joint Venture Independent Auditors' Report JV-1 Report of Independent Registered Public Accounting Firm JV-2 Consolidated Income Statement JV-3 Consolidated Balance Sheet JV-4 Balance Sheet JV-5 Consolidated Statement of Changes in Equity JV-6 Consolidated Cash Flow Statement JV-7 Notes to Financial Statements JV-8 -18- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNIVERSAL SECURITY INSTRUMENTS, INC. June 29, 2005 By: /s/ Harvey B. Grossblatt ---------------------------------------- Harvey B. Grossblatt President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Harvey B. Grossblatt President, Chief Executive Officer June 29, 2005 - ------------------------------------ and Director Harvey B. Grossblatt /s/ James B. Huff Chief Financial Officer June 29, 2005 - ------------------------------------ James B. Huff /s/ Cary Luskin Director June 29, 2005 - ------------------------------------- Cary Luskin /s/ Ronald A. Seff, M.D. Director June 29, 2005 - ------------------------------------- Ronald A. Seff /s/ Howard Silverman, Ph.D. Director June 29, 2005 - ------------------------------------- Howard Silverman, Ph.D.
-19- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Universal Security Instruments, Inc. We have audited the accompanying consolidated balance sheets of Universal Security Instruments, Inc. and subsidiaries (the Company) as of March 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the Hong Kong Joint Venture which is accounted for using the equity method for the year ended March 31 2003. The Company's equity in earnings of $2,120,703 for the year ended March 31, 2003 is included in the accompanying consolidated financial statements. The financial statements of the Hong Kong Joint Venture were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Hong Kong Joint Venture, is based on the report of the other auditors for the year ended March 31, 2003. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of Universal Security Instruments, Inc. and subsidiaries as of March 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II for each of the three years in the period ended March 31, 2005. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required therein. /s/ GRANT THORNTON LLP Baltimore, Maryland June 17, 2005 F-1
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31 -------- 2005 2004 ------------ ------------ CURRENT ASSETS Cash $ 59,287 $ 188,190 Accounts receivable: Trade less allowance for doubtful accounts of $15,000 at March 31, 2005 and 2004 1,014,757 90,852 Employees 21,503 23,770 ------------ ------------ 1,036,260 114,622 Amount due from factor 3,394,084 2,823,300 Inventories, net 4,834,486 2,867,650 Prepaid expenses 145,394 107,052 ------------ ------------ TOTAL CURRENT ASSETS 9,469,511 6,100,814 DEFERRED TAX ASSET 351,780 56,899 INVESTMENT IN HONG KONG JOINT VENTURE 6,131,481 4,832,286 PROPERTY AND EQUIPMENT - NET 81,690 93,431 OTHER ASSETS 15,486 15,486 ------------ ------------ TOTAL ASSETS $ 16,049,948 $ 11,098,916 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,725,402 $ 1,229,602 Accrued liabilities: Litigation reserve 806,679 237,546 Payroll, commissions and other 620,199 426,272 Current obligations under capital lease -- 7,224 ------------ ------------ TOTAL CURRENT LIABILITIES 3,152,280 1,900,644 ------------ ------------ LONG-TERM CAPITAL LEASE OBLIGATIONS -- -- COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 1,652,998 and 1,552,896 shares at March 31, 2005 and March 31, 2004, respectively 16,530 15,529 Additional paid-in capital 11,469,444 11,188,903 Retained earnings (accumulated deficit) 1,411,694 (2,006,160) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 12,897,668 9,198,272 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,049,948 $ 11,098,916 ============ ============
See notes to consolidated financial statements F-2 UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31 2005 2004 2003 ------------ ------------ ------------ Net sales $ 23,465,443 $ 17,201,116 $ 15,953,883 Cost of goods sold 16,145,615 11,402,540 10,980,067 ------------ ------------ ------------ GROSS PROFIT 7,319,828 5,798,576 4,973,816 Research and development expense 277,540 270,164 284,552 Selling, general and administrative expense 6,191,025 5,010,783 4,265,581 ------------ ------------ ------------ Operating income 851,263 517,629 423,683 ------------ ------------ ------------ Other income (expense): Interest expense (85,521) (83,589) (153,168) Other -- (4,324) 9,100 ------------ ------------ ------------ (85,521) (87,913) (144,068) ------------ ------------ ------------ INCOME BEFORE EQUITY IN EARNINGS OF HONG KONG JOINT VENTURE AND INCOME TAXES 765,742 429,716 279,615 Earnings from Hong Kong Joint Venture: Equity in earnings of Hong Kong Joint Venture 2,370,975 2,165,311 2,120,703 ------------ ------------ ------------ Net income before income taxes 3,136,717 2,595,027 2,400,318 Provision for income tax (benefit) expense (281,137) 24,001 -- ------------ ------------ ------------ NET INCOME $ 3,417,854 $ 2,571,026 $ 2,400,318 ============ ============ ============ Net income per share: Basic $ 2.13 $ 1.69 $ 1.66 Diluted $ 1.94 $ 1.49 $ 1.54 Shares used in computing net income per share: Basic 1,602,449 1,516,846 1,443,439 Diluted 1,764,474 1,725,206 1,561,745
See notes to consolidated financial statements. F-3 UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Retained Shares Amount Paid-In Capital Earnings Total ------------ ------------ --------------- ------------ ------------ Balance at March 31, 2002 1,346,360 $ 13,464 $ 10,645,313 $ (6,977,504) $ 3,681,273 Issuance of common stock from the exercise of employee stock options 54,333 543 92,082 -- 92,625 Issuance of common stock 68,000 680 249,320 -- 250,000 Stock issued in lieu of directors fees 9,299 93 29,907 -- 30,000 Stock issued in satisfaction of accrued compensation 17,984 180 39,019 -- 39,199 Net income -- -- -- 2,400,318 2,400,318 ------------ ------------ ------------ ------------ ------------ Balance at March 31, 2003 1,495,976 $ 14,960 $ 11,055,641 $ (4,577,186) $ 6,493,415 Issuance of common stock from the exercise of employee stock options 56,297 563 124,692 -- 125,255 Stock issued in lieu of directors fees 756 7 9,993 -- 10,000 Retired stock (133) (1) (1,423) -- (1,424) Net income -- -- -- 2,571,026 2,571,026 ------------ ------------ ------------ ------------ ------------ Balance at March 31, 2004 1,552,896 $ 15,529 $ 11,188,903 ($ 2,006,160) $ 9,198,272 Fractional shares unissued from 4-for-3 split (129) (1) -- -- (1) Issuance of common stock from the exercise of employee stock options 99,281 992 270,551 -- 271,543 Stock issued in lieu of directors fees 950 10 9,990 -- 10,000 Net income -- -- -- 3,417,854 3,417,854 ------------ ------------ ------------ ------------ ------------ Balance at March 31, 2005 1,652,998 $ 16,530 $ 11,469,444 $ 1,411,694 $ 12,897,668 ============ ============ ============ ============ ============
See notes to consolidated financial statements F-4
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, CASH FLOWS FROM OPERATING ACTIVITIES 2005 2004 2003 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 3,417,854 $ 2,571,026 $ 2,400,318 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 34,048 33,218 38,077 Stock issued to directors in lieu of fees 10,000 10,000 30,000 Change in allowance for doubtful accounts -- 5,000 (58,358) Inventory reserve write-down -- 1,741 (10,000) Gain on sale of land -- (175,965) -- Earnings of the Hong Kong Joint Venture (2,485,302) (2,165,311) (2,120,703) Changes in operating assets and liabilities: Increase in accounts receivable and amounts due from factor (1,204,719) (2,095,514) (594,447) (Increase) decrease in inventories (1,966,836) 354,838 (1,656,235) (Increase) decrease in prepaid expenses (38,342) 29,291 (27,105) Increase in accounts payable and accrued expenses 1,430,096 1,199,873 1,937,957 (Increase) in other assets -- (4,014) (1,377) (Increase) in deferred taxes (294,881) (56,899) -- ----------- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (1,098,082) (292,716) (61,873) INVESTING ACTIVITIES: Cash distributions from Joint Venture 727,167 -- -- Purchase of equipment (22,307) (20,787) (16,892) Gross proceeds from sale of land -- 350,000 -- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 704,860 329,213 (16,892) ----------- ----------- ----------- FINANCING ACTIVITIES: Net (repayments) borrowings of short-term debt -- -- (216,959) Principal payments of capital lease obligations (7,224) (23,250) (15,172) Proceeds from issuance of common stock from exercise of employee stock options 271,543 125,255 92,625 Proceeds from issuance of common stock -- -- 250,000 Retirement of common stock -- (1,424) -- ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 264,319 100,581 110,494 ----------- ----------- ----------- (DECREASE) INCREASE IN CASH (128,903) 137,078 31,729 Cash at beginning of period 188,190 51,112 19,383 ----------- ----------- ----------- CASH AT END OF PERIOD $ 59,287 $ 188,190 $ 51,112 =========== =========== =========== Supplemental information: Interest paid $ 85,521 $ 83,589 $ 153,168 Income taxes paid $ 17,000 $ 24,001 $ -- Non-cash investing transactions: Issuance of 950 shares in 2005, 756 shares in 2004 and 6,974 shares in 2003 in lieu of directors fees and accrued compensation 10,000 10,000 30,000 Issuance of 13,488 shares of common stock in satisfaction of accrued compensation $ -- $ -- $ 39,199 Repayment of trade payables due the Hong Kong Joint Venture in lieu of cash distributions $ 458,940 $ 1,164,608 $ 1,279,187
See notes to consolidated financial statements F-5 UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business: The Company's primary business is the sale of smoke alarms and other safety products to retailers, wholesale distributors and to the electrical distribution trade which includes electrical and lighting distributors as well as manufactured housing companies. The Company imports all of its safety and other products from foreign manufacturers. The Company, as an importer, is subject to numerous tariffs which vary depending on types of products and country of origin, changes in economic and political conditions in the country of manufacture, potential trade restrictions and currency fluctuations. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We believe that our 50% ownership interest in the Hong Kong Joint Venture allows us to significantly influence the operations of the Hong Kong Joint Venture. As such, we account for our interest in the Hong Kong Joint Venture using the equity method of accounting. We have included our investment balance as a non-current asset and have included our share of the Hong Kong Joint Venture's income in our consolidated statement of operations. The investment and earnings are adjusted to eliminate intercompany profits. Use of Estimates: In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition: We recognize sales upon shipment of products net of applicable provisions for any discounts or allowances. We believe that the shipping date from our warehouse is the appropriate point of revenue recognition since upon shipment we have substantially completed our obligations which entitle us to receive the benefits represented by the revenues, and the shipping date provides a consistent point upon which to measure revenue. Customers may not return, exchange or refuse acceptance of goods without our approval. We have established allowances to cover anticipated doubtful accounts based upon historical experience. Warranties: We generally provide warranties from one to ten years to the non-commercial end user on all products sold. The manufacturers of our products provide us with a one-year warranty on all products we purchase for resale. Claims for warranty replacement of products beyond the one-year warranty period covered by the manufacturers have not been historically material and we do not record estimated warranty expense or a contingent liability for warranty claims. Stock-Based Compensation: We account for stock-based employee compensation using the intrinsic value method, which calculates compensation expense based on the difference, if any, on the date of the grant, between the fair value of our stock and the option exercise price. US GAAP requires companies who choose to account for stock option grants using the intrinsic value method to also determine the fair value of option grants using an option pricing models, such as the Black-Scholes models, and to disclose the impact of fair value accounting in a note to the financial statements. In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 123R, "Share-Based Payment," which requires companies to expense the value of employee stock options and similar awards. The effective date of FASB 123R is for interim and annual periods beginning after June 15, 2005. Subsequently, the Securities and Exchange Commission (SEC) approved a rule which delays the effective date of FAS 123R for certain public companies. Under the SEC's rule, FAS 123R is now effective for the Company's annual period beginning April 1, 2006. We have elected to defer adoption of the change to the fair value based method of accounting for stock-based employee compensation and the recordation of such amounts as charges to operating expense until the annual period beginning April 1, 2006. F-6 The following table illustrates the effect on net income and net income per share had compensation costs for the stock-based compensation plan been determined based on the grant date fair values of awards.
Year Ended March 31 2005 2004 2003 ------------- ------------- ------------- Net income, as reported $ 3,417,854 $ 2,571,026 $ 2,400,318 Stock-based employee compensation costs, net of income tax, included in net income 10,000 10,000 30,000 Deduct: Total stock-based employee compensation expense determined under fair value, net of related tax effects (144,672) (91,111) (113,939) ------------- ------------- ------------- Pro forma net income $ 3,283,182 $ 2,489,915 $ 2,316,379 ============= ============= ============= Earnings per share: Basic - as reported 2.13 1.69 1.66 Basic - pro forma 2.05 1.64 1.60 Diluted - as reported 1.94 1.49 1.54 Diluted - pro forma 1.86 1.44 1.48
Research and Development: Research and development costs are charged to operations as incurred. Accounts Receivable: In September, 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 140), which is effective for transfers of financial assets occurring after March 31, 2001. In fiscal year 2002, the Company achieved the sales criteria of SFAS No. 140, and, as such, amounts transferred under the Company's Factoring Agreement are treated as sales. Beginning in fiscal year 2002, with the achievement of SFAS 140 sales criteria, the Company nets the factored accounts receivable with the corresponding advance from the Factor, showing the amount net in its consolidated balance sheet. The Company sells trade receivables on a pre-approved non-recourse basis to the Factor under the Factoring Agreement on an ongoing basis. Factoring charges recognized on sales of receivables are included in selling, general and administrative expenses in the consolidated statements of income and amounted to $208,913, $167,561 and $160,125 for the years ended March 31, 2005, 2004 and 2003, respectively. The Agreement for the sale of accounts receivable provides for continuation of the program on a revolving basis until terminated by one of the parties to the Agreement. Shipping and Handling Fees and Costs: The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are included in cost of goods sold. Shipping and handling costs associated with outbound freight are included in selling, general and administrative expenses and totaled $702,779, $521,556 and $498,179 in fiscal years 2005, 2004 and 2003, respectively. Inventories: Inventories (consisting primarily of finished goods) are stated at the lower of cost (first-in, first-out method) or market. Included as a component of finished goods inventory are additional non-material costs. These costs include overhead costs, freight, import duty and inspection fees of $514,373 and $171,524 at March 31, 2005 and 2004, respectively. Inventories are shown net of an allowance for inventory obsolescence of $100,000 for the fiscal years ending March 31, 2005 and 2004, respectively. The Company reviews inventory quarterly to identify slow moving products and valuation allowances are provided when deemed necessary. F-7 Property and Equipment: Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided by using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives for financial reporting purposes are as follows: Leasehold improvements - Term of lease Machinery and equipment - 5 to 10 years Furniture and fixtures - 5 to 15 years Computer equipment - 5 years Income Taxes: The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary. Net Income per Share: The Company reports basic and diluted earnings per share. Basic earnings per share is computed by dividing net income for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income for the period by the weighted number of common shares and common share equivalents outstanding (unless their effect is anti-dilutive) for the period. All common share equivalents are comprised of exercisable stock options.
March 31, 2005 2004 2003 --------- --------- --------- Common shares outstanding for basic EPS 1,602,449 1,516,846 1,443,439 Shares issued upon assumed exercise of outstanding stock options 162,025 208,360 118,306 --------- --------- --------- Weighted average number of common and common equivalent shares outstanding for diluted EPS 1,764,474 1,725,206 1,561,745 ========= ========= =========
Recently Issued Accounting Standards: In May 2003, the Financial Accounting Standards Board (FASB) issued FAS 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for the classification of certain financial instruments as a liability (or an asset in some circumstances) whereas many of those instruments were previously classified as equity. The provisions of FAS 150 are generally effective for such instruments entered into or modified after May 31, 2003. For the fiscal years ended March 31, 2003, 2004 and 2005, we have not issued any financial instruments which have the characteristics within the scope of or that are within the requirements of FAS 150. In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 123R, "Share-Based Payment," which requires companies to expense the value of employee stock options and similar awards. The effective date of FASB 123R is for interim and annual periods beginning after June 15, 2005. Subsequently, the Securities and Exchange Commission (SEC) approved a rule which delays the effective date of FAS 123R for certain public companies. Under the SEC's rule, FAS 123R is now effective for the Company's annual period beginning April 1, 2006. We have elected to defer adoption of the change to the fair value based method of accounting for stock-based employee compensation and the recordation of such amounts as charges to operating expense until the annual period beginning April 1, 2006. Reclassifications: Certain prior year amounts have been reclassified in order to conform with current year presentation. F-8 NOTE B - PROPERTY AND EQUIPMENT Property and equipment consist of the following: March 31, 2005 2004 -------- -------- Leasehold improvements $ 73,535 $ 71,885 Machinery and equipment 158,696 158,696 Furniture and fixtures 195,873 181,889 Computer equipment 81,855 75,072 -------- -------- 509,959 487,542 Less accumulated depreciation and amortization 428,269 394,111 -------- -------- $ 81,690 $ 93,431 ======== ======== NOTE C - INVESTMENT IN THE HONG KONG JOINT VENTURE The Company holds a 50% interest in a Joint Venture with a Hong Kong Corporation, which has manufacturing facilities in the People's Republic of China, for the manufacturing of consumer electronic products. As of March 31, 2005, the Company has an investment balance of $6,159,034 for its 50% interest in the Hong Kong Joint Venture. There are no material Hong Kong -- U.S. GAAP differences in the Hong Kong Joint Venture's accounting policies. The following represents summarized financial information derived from the audited financial statements of the Hong Kong Joint Venture as of March 31, 2005 and 2004 and for the years ended March 31, 2005, 2004 and 2003. March 31, 2005 2004 ----------- ----------- Current assets $ 6,131,539 $ 5,128,208 Property and other assets 9,112,863 7,111,679 ----------- ----------- Total $15,244,402 $12,239,887 =========== =========== Current liabilities $ 4,537,772 $ 3,809,551 Non-current liabilities 24,750 9,623 ----------- ----------- Equity 10,681,880 8,420,713 ----------- ----------- Total $15,244,402 $12,239,887 =========== =========== For the Year Ended March 31, 2005 2004 2003 ----------- ----------- ----------- Net sales $25,899,630 $24,114,967 $23,365,301 Gross profit 8,689,538 7,375,113 7,870,436 Net income 5,005,886 4,171,334 4,755,540 During the years ended March 31, 2005, 2004 and 2003, the Company purchased $10,513,800, $7,481,716, and $7,329,221, respectively, of finished product from the Hong Kong Joint Venture, which represents 68%, 73% and 66%, respectively, of the Company's total finished product purchases for the years ended at March 31, 2005, 2004 and 2003. Amounts due the Hong Kong Joint Venture included in Accounts Payable totaled $549,527 and $494,711 at March 31, 2005 and 2004, respectively. Amounts due from the Hong Kong Joint Venture included in Accounts Receivable totaled $84,330 and $174,935 at March 31, 2005 and 2004, respectively. The Company incurred interest costs charged by the Hong Kong Joint Venture of $17,581, $25,482 and $16,585 during the years ended March 31, 2005, 2004 and 2003, respectively, related to its purchases. F-9 NOTE D - AMOUNTS DUE FROM FACTOR The Company sells certain of its trade receivables on a pre-approved, non-recourse basis to a Factor. Since these are sold on a non-recourse basis, the factored trade receivables and related repayment obligations are not separately recorded in the Company's consolidated balance sheets. The Agreement provides for financing of up to a maximum of $7,500,000 with the amount available at any one time based on 85% of uncollected non-recourse receivables sold to the factor and 45% of qualifying inventory, which at March 31, 2005 was $4,743,416. Any outstanding amounts due to the factor are payable upon demand and bear interest at the prime rate of interest charged by the factor, which is 5.75% at March 31, 2005. Any amount due to the factor is also secured by the Company's inventory. Under this Factoring Agreement, the Company sold receivables of approximately $20,954,000 and $15,560,000 during the years ended March 31, 2005 and 2004, respectively. Gains and losses recognized on the sale of factored receivables include the fair value of the limited recourse obligation. The uncollected balance of non-recourse receivables held by the factor amounted to $3,399,130 and $2,695,465 at March 31, 2005 and 2004. The amount of the uncollected balance of non-recourse receivables borrowed by the Company as of March 31, 2005 and 2004 is $483,416 and $0, respectively. Amounts due from the factor to the Company amounted to $3,394,084 and $2,823,300 at March 31, 2005 and 2004, respectively. NOTE E - LEASES The Company entered into capital lease agreements for various pieces of equipment, with an outstanding balance of $0, and $7,224 as of March 31, 2005 and 2004, respectively. The leases had imputed interest rates ranging from 7.6% to 10%, with monthly payments aggregating $929 per month. Year Ended March 31, 2005 2004 ------ ------ Obligations under capital lease $ -- $7,224 Less current maturities -- -- ------ ------ $ -- $7,224 ====== ====== There are no amounts due as long term capital lease obligations as of March 31, 2005. During December 1999, the Company entered into an operating lease for its office and warehouse which expires in October 2005. This lease is subject to renewal for an additional three years and has increasing rentals at 3% per year. Subsequent to March 31, 2005, the option to renew this operating lease was exercised until October 2008. In February 2004, the Company entered into an operating lease for an approximately 2,600 square foot office in Naperville, Illinois. This lease, which expires in February 2006, is subject to renewal for an additional six years with increasing rentals at 3% per year. Rent expense totaled $97,011, $92,063 and $67,886 for the years ended March 31, 2005, 2004 and 2003, respectively. Future obligations, including the lease renewal option exercised subsequent to March 31 2005, for the years ended March 31, under these non-cancelable operating leases are as follows: Year Ended March 31, 2006 $ 98,333 2007 69,214 2008 71,290 2009 42,304 ---------- $ 281,141 ========== F-10 NOTE F - INCOME TAXES Universal Security Instruments, Inc. ("USI") provides for Income Taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, deferred income tax assets and liabilities are computed and recognized for those differences that have future tax consequences of temporary differences that will result in net taxable or deductible amounts in future periods. Deferred tax expense or benefit is the result of changes in the net asset or liability for deferred taxes. The deferred tax liabilities and assets for USI result primarily from the use of accelerated methods of depreciation of equipment for tax purposes, reserves, inventories, accrued liabilities and change in the unremitted earnings of the Hong Kong joint venture. Beginning 2004, USI will no longer recognize the deferred tax liability related to the unremitted earnings of the Hong Kong joint venture. There is no longer a plan to repatriate the unremitted earnings in the future, other than a possible $850,000 payment. USI had a net operating loss carryforward as of FYE March 31, 2004 of $4,005,008, of which $1,194,802 was utilized in FYE March 31, 2005. This leaves a net operating loss carryforward as of March 31, 2005 in the amount of $2,810,388. The components of income tax expense (benefit) for USI are as follows: March 31, 2005 2004 --------- --------- Current Federal $ 21,000 $ 56,899 State 5,250 24,001 --------- --------- 26,250 80,900 Deferred (benefit) (307,387) (56,899) --------- --------- Total income tax (benefit) expense $(281,137) $ 24,001 ========= ========= Significant components of USI's deferred tax assets and liabilities are as follows:
March 31, 2005 2004 2003 ----------- ----------- ----------- Deferred tax liabilities - unremitted earnings from Hong Kong Joint Venture: $ -- $ 637,279 $ 1,465,270 ----------- ----------- ----------- Deferred tax assets: Financial statement accruals and allowances 220,602 250,032 232,167 Inventory uniform capitalization 56,727 89,628 72,200 Other 14,953 40,346 41,983 AMT tax credit carryforward 21,621 21,621 0 NOL carryforwards and tax credits 814,400 1,307,866 2,031,616 ----------- ----------- ----------- Gross deferred tax assets 1,128,303 1,709,493 2,377,966 Valuation allowance (776,523) (1,015,315) (912,696) ----------- ----------- ----------- Net deferred tax liability (asset) $ 351,780 $ (56.899) $ 0 =========== =========== ===========
F-11 The reconciliation between the statutory federal income tax provision and the actual effective tax provision is as follows:
Years ended March 31, 2005 2004 2003 ----------- ----------- ----------- Federal tax expense at statutory rate on domestic income (34%) before loss carryforward $ 479,200 $ 202,627 $ 95,056 Reduction in income taxes arising from carryforward of prior years' operating losses (458,200) -- -- State income tax expense 5,250 103,582 96,013 Equity in earnings from Hong Kong Joint Venture -- 677,819 721,039 Change in valuation allowance (238,791) 102,619 (935,758) Change in deferred tax liability of unremitted earnings from the Hong Kong Joint Venture -- (1,142,270) -- Change in deferred tax assets (8,494) -- -- Other (60,102) 79,624 23,650 ----------- ----------- ----------- Provision for income tax (benefit) expense $ (281,137) $ 24,001 $ 0 =========== =========== ===========
NOTE G - SHAREHOLDERS' EQUITY All share and per share amounts included in the consolidated financial statements have been retroactively adjusted to reflect the 4-for-3 stock dividend paid on April 5, 2004 to shareholders of record on March 15, 2004. Common Stock - During the year ended March 31, 2005, the Company issued 100,232 shares of its common stock of which 99,282 were issued on the exercise of employee stock options for total proceeds of $271,543 and 950 shares were issued to directors in lieu of directors fees. Employee Stock Purchase Plan - Under the terms of the Company's 1988 Employee Stock Purchase Plan, eligible employees can purchase shares of the Company's common stock through payroll deductions at a price equal to 90% of the price of the shares. The Company has reserved 25,000 shares of common stock for issuance under the Plan. No member of the Board of Directors who is not an employee of the Company, and no member of the committee administering the Plan, can participate in the Plan. At March 31, 2005, the 21,667 shares remain reserved for issuance under this Plan. Stock Options - Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as amended, 658,333 shares of common stock are reserved for the granting of stock options, of which 609,658 shares have been issued as of March 31, 2005, leaving 48,675 available for issuance upon exercise of options granted, or available for future grants to employees and directors. Of the 48,675 shares available, 20,000 shares are further reserved pending the results of litigation as discussed in Note H. Under provisions of the Plan, a committee of the Board of Directors determines the option price and the dates exercisable. All options expire five years from the date of grant and have an exercise price at least equal to the market price at the date of grant. The options usually vest at 25% a year over four years. Share amounts have been retroactively adjusted to reflect the 4-for-3 stock dividend paid on April 5, 2004 to shareholders of record on March 15, 2004. F-12 The following tables summarize the status of options under the Non-Qualified Stock Option Plan at March 31, 2005 and option transactions for the three years then ended: Status as of March 31, 2005 Number of Shares --------------------------- ---------------- Presently exercisable 212,914 Exercisable in future years 22,582 ------- Total outstanding 235,496 Available for future grants 48,675 Shares of common stock reserved 284,171 Outstanding options: Number of holders 18 Average exercise price per share $ 5.73 Expiration dates June 2006 to March 2010 Transactions for the Three Years Weighted Average Ended March 31, 2005: Number of Shares Exercise Price - --------------------------------------- ---------------- -------------- Outstanding at March 31, 2002 305,666 Granted 118,667 3.72 Canceled (41,333) 2.27 Exercised (54,333) 1.63 -------- Outstanding at March 31, 2003 328,667 Granted 10,666 10.53 Canceled (2,924) 1.98 Exercised (56,297) 2.21 -------- Outstanding at March 31, 2004 280,112 Granted 55,000 14.30 Canceled (334) 2.63 Exercised (99,282) 2.74 -------- Outstanding at March 31, 2005 235,496 The following table summarizes information about stock options outstanding at March 31, 2005:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Weighted Average Weighted Range of Number Average Contract Number Average Exercise Price of Shares Exercise Price Life (Yrs) of Shares Exercise Price -------------- --------- -------------- ---------- --------- -------------- $0.98 to $2.99 117,830 $1.83 1.69 110,748 $ 1.80 $3.00 to $3.99 26,666 3.38 2.00 26,666 3.38 $4.00 to $5.99 25,333 5.40 2.43 25,333 5.40 $6.00 to $15.02 65,667 13.55 4.65 50,167 14.78 ------- ------- 235,496 212,914 ======= =======
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions in 2005, 2004 and 2003; no annual dividends, expected volatility of 45%, 53% and 80%, respectively, risk-free interest rate ranging from 4.0% to 6.5% and expected lives of five years. The weighted-average fair values of the stock options granted in 2005, 2004 and 2003 were $6.47, $6.95 and $5.00 per share, respectively. F-13 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of normal publicly traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. NOTE H - COMMITMENTS AND CONTINGENCIES In December 2001, Leviton Manufacturing Co., Inc. filed a civil action in the United States District Court for the District of Maryland (Case No. 01cv3855) alleging that the Company's and its USI Electric subsidiary's ground fault circuit interrupter (GFCI) units infringed one of plaintiff's patents and configuration trade dress ("Leviton I"). The plaintiff can no longer obtain injunctive relief under the now expired patent. In February 2004, the Court ruled on various summary judgment motions pursuant to which the Court found that as a matter of law there could be no patent infringement liability prior to December 11, 2001 and permitted Leviton's configuration trade dress claim and USI's patent invalidity defense to proceed to trial. The Court consolidated the trial with "Leviton II" and bifurcated liability from damages. At this time no trial date has been assigned. Due to the still undefined nature of the asserted configuration trade dress, the amount of any loss to the Company from this claim is not yet determinable. Should the Company not prevail on its defenses, any recovery that Leviton may obtain under the patent claims would be limited to some "reasonable royalty" for GFCI sales occurring over a period starting December 11, 2001, for less than one year. The Company and its counsel believe that the Company has meritorious defenses to the claims and continues to aggressively defend against the suit. On June 10, 2003, Leviton Manufacturing Co., Inc. filed a second civil suit against the Company and its USI Electric subsidiary in the United States District Court for the District of Maryland (Case No. 03cv1701), alleging this time that the Company's GFCI units infringe one or more of its more recently issued patents for reset lockout technology related to but not required by UL Standard 943 for ground GFCI units, effective January 2003 ("Leviton II"). Leviton also asserted trade dress and unfair competition claims which largely correspond to the claim in the "Leviton l" suit. On July 23, 2003, the GFCI manufacturer, Shanghai Meihao Electric, Inc., filed an action for Declaratory Judgment of non-infringement, invalidity, and unenforceability of the asserted patents. The Court has bifurcated the action into liability and damage phases, linked the supplier's Declaratory Judgment action with the action against the Company, and consolidated Leviton I with Leviton II. In March 2005, the court dismissed one of the Leviton patents from the suit and in April 2005, issued a claims construction Order that favors the position of the Company. While expert witness discovery is still ongoing, the Company expects to file summary judgment motions based on its meritorious defenses to the patent and trade dress infringement claims as part of its aggressive defense. In the event of an unfavorable outcome, the amount of any potential loss to USI is not yet determinable. On June 11, 2003, Walter Kidde Portable Equipment, Inc. filed a civil suit against the Company in the United States District Court for the Middle District of North Carolina (Case No. 03cv00537), alleging that certain of the Company's AC powered/battery backup smoke detectors infringe on a patent acquired by Kidde. The plaintiff is seeking injunctive relief and damages to be determined at trial. Discovery is now closed (subject to specific remaining open matters) and Kidde has filed a pair of summary judgment motions, which USI will oppose. The case is scheduled for trial in the Fall of 2005. The Company and its counsel believe that the Company has significant defenses relating to the patent in suit. In the event of an unfavorable outcome, the amount of any potential loss to USI is not yet determinable. On October 13, 2003, Maple Chase Company filed a civil suit in the United States District Court for the Northern District of Illinois (Case No. 03cv07205), against the Company, its USI Electric subsidiary, and one former and one present Illinois-based sales representative, alleging that certain of the Company's smoke detectors infringe on a patent owned by Maple Chase (US Reissue Patent No. Re: 33290). On February 2, 2004, Maple Chase filed an Amended Complaint. After answering and counterclaiming against Maple Chase, in an effort to bring about a conclusion to the litigation, the Company successfully sought and has now obtained re-examination of the asserted patent in the United States Patent and Trademark Office (USPTO) based on the references cited and analysis presented by the Company. On April 11, 2005, the Court dismissed the case with the right to reinstitute the case pending the outcome of the proceedings in the USPTO. Apart from granting USI's Request for Reexamination in October of 2004, no further communications in the reexamination have been issued to date. The amount of potential loss to the Company, if any, is not yet determinable. The Company believes that the initiation of the reexamination based on the Company's presentation, confirmed the veracity in its legal/equitable defenses. If reinstituted, the Company will vigorously defend the suit and press its pending counterclaims. F-14 On March 31, 2005, Leviton filed still another lawsuit in the United States District Court for the District of Maryland (Case No. 05cv0889) against the Company ("Leviton III"). In this latest suit, Leviton accuses the Company of infringement of US Patent 6,864,766. This case is now pending in the same Court and before the same Judge as Leviton I and Leviton II. The Company has filed a counterclaim against Leviton and a Motion to Stay its case in favor of a declaratory judgment action filed by the GFCI manufacturer, Shanghai Meihao Electric, Inc. Leviton has opposed the Motion to Stay and has replied to the Company's counterclaim. The case is in its preliminary stages. The Company believes that it has strong defenses relating to the patent in suit. In the event of an unfavorable outcome, the amount of any potential loss to the Company is not determinable at this time. On April 23, 2004, the Company filed a civil suit against The Hartford Casualty Insurance Company in the United States District Court for the District of Maryland (Case No. 04cv1320), claiming that the insurer is required to indemnify the Company from any damages and legal fees in connection with the two Leviton patent cases. This case has been settled subject to a confidentiality agreement. As previously reported, on September 3, 2003 the Company was advised that Michael Kovens, a then-director, principal stockholder and the former Chairman and chief executive officer of the Company ("Kovens"), had filed an action in Baltimore County Circuit Court (Case No. C-03-9639) against the Company and the other directors seeking: (i) to enjoin the Company from holding its Annual Meeting of Stockholders on September 8, 2003 until Kovens was able to nominate directors for election at the Annual Meeting; (ii) to require the Company to provide Kovens with certain confidential information to which Kovens claims he is entitled under Maryland law; (iii) to enjoin the Company from voting as proxy any shares issued by the Company since Kovens was replaced as Chairman and CEO; (iv) to void the employment agreement between the Company and its president, and to enjoin the Company from enforcing a "Change of Control" provision in the Company's president's employment agreement; (v) to void all issuances by the Company of restricted stock and options from and after October 1, 2001; (vi) to void any Bylaw amendments adopted by the Company from and after October 1, 2001; (vii) to enforce the exercise of an option by Kovens to purchase 20,000 shares of the Company's common stock at $2.25 per share which the Company maintains has expired; (viii) to void the election by the Company, pursuant to the Maryland General Corporation Law, to be governed by certain provisions of Maryland law; and (ix) other unspecified relief. The Court refused to issue a temporary restraining order requested by Kovens to enjoin the Company and the other directors from holding the Annual Meeting, enforcing the "Change of Control" provision in the Company's president's employment agreement, and taking other unspecified actions. On October 2, 2003, the Court granted the parties' joint motion to stay all proceedings in the matter to allow the parties an opportunity to negotiate a resolution of the dispute. On May 28, 2004, Kovens' new counsel filed an amended complaint on behalf of Kovens, which also includes a derivative action brought in the name of the Company against the Company's directors claiming that the actions Kovens alleges to have occurred amount to a breach of their fiduciary duty to the Company. The amended complaint seeks declaratory relief for essentially the same matters requested in the original complaint, and seeks damages from the directors in the amount of $20 million. The Company, in accordance with its charter and bylaws, is providing a defense for the directors named in the amended complaint and, subject to the provisions of applicable law, is obligated to indemnify them for any loss they might ultimately incur. In addition, Kovens is seeking an additional $500,000 from the Company with respect to the exercise of the option for the purchase of 20,000 shares at $2.25 per share (mentioned above) which the Company maintains has expired. Furthermore, Kovens alleges that the Chairman and the President of the Company interfered with certain contractual relationships between Kovens and third parties for which Kovens is seeking damages of $25 million. The Company has been advised by counsel that the action as filed is wholly without merit, and the Company intends to aggressively defend the action. Discovery has been completed and the case is set for trial beginning July 18, 2005. From time to time, the Company is involved in various lawsuits and legal matters. It is the opinion of management, based on the advice of legal counsel, that these matters will not have a material adverse effect on the Company's financial statements. F-15 NOTE I - MAJOR CUSTOMERS The Company is primarily a distributor of safety products for use in home and business under both its tradenames and private labels for other companies. As described in Note C, the Company's purchased a majority of its products from its 50% owned Hong Kong Joint Venture. There were not any customers that represented in excess of 10% of the Company's product sales during the three years in the period ended March 31, 2005. NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly Results of Operations (Unaudited): The unaudited quarterly results of operations for fiscal years 2005 and 2004 are summarized as follows:
Quarter Ended 2005 June 30, September 30, December 31, March 31, - ---- -------- ------------- ------------ --------- Net sales $4,874,782 $6,622,221 $5,849,144 $6,119,296 Gross profit 1,484,713 2,121,778 1,825,828 1,887,499 Net income 766,297 1,043,836 793,569 814,152 Net income per share - basic 0.49 0.66 0.49 0.49 Net income per share - diluted 0.44 0.59 0.45 0.46 2004 - ---- Net sales $4,431,950 $4,988,483 $3,838,192 $3,932,491 Gross profit 1,460,245 1,575,707 1,230,667 1,531,957 Net income 852,498 740,446 493,792 484,290 Net income per share - basic 0.57 0.49 0.33 .30 Net income per share - diluted 0.51 0.43 0.29 .26
F-16 REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 CONTENTS PAGE(S) AUDITOR'S REPORT JV-1 CONSOLIDATED INCOME STATEMENT JV-2 CONSOLIDATED BALANCE SHEET JV-3 BALANCE SHEET JV-4 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY JV-5 CONSOLIDATED CASH FLOW STATEMENT JV-6 NOTES TO THE FINANCIAL STATEMENTS JV-7 Expressed in Hong Kong Dollars ("HK$") Report of Independent Registered Public Accounting Firm To the Board of Directors of The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) : We have audited the accompanying consolidated balance sheets of The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) ("the Company"), as of March 31, 2005 and 2004, and the related consolidated statements of income, changes in equity, and cash flows for each of the two years in the period ended March 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2005 and 2004, and the consolidated results of its income and its cash flows for each of the two years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in Hong Kong. Grant Thornton Certified Public Accountants Hong Kong June 24, 2005 JV-1 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2005 Notes 2005 2004 HK$ HK$ Turnover 3 201,851,572 187,606,721 Cost of sales (134,128,970) (130,230,706) -------------- -------------- Gross profit 67,722,602 57,376,015 Other revenue 2,550,272 1,987,172 Administrative expenses (27,242,707) (23,115,557) -------------- -------------- Profit from operations 43,030,167 36,247,630 Finance costs 4 (239,239) (353,940) -------------- -------------- Profit before taxation 5 42,790,928 35,893,690 Taxation 6 (3,776,352) (3,442,047) -------------- -------------- Profit for the year 39,014,576 32,451,643 ============== ============== Dividends 7 18,508,258 29,850,506 ============== ============== JV-2 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) CONSOLIDATED BALANCE SHEET AS AT 31 MARCH 2005 2005 2004 Notes HK$ HK$ ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 9 44,013,441 31,438,718 Investments 10 27,047,797 23,991,361 Amount due from an investee company 11 -- -- ----------- ------------ 71,061,238 55,430,079 Current assets Inventories 13 18,298,036 20,415,519 Trade and other receivables 6,146,091 6,318,366 Tax recoverable -- 414,714 Amount due from a shareholder 15 -- 2,789,192 Loan to a shareholder 16 3,900,000 -- Cash and bank balances 19,468,905 10,032,654 ----------- ------------ 47,813,032 39,970,445 Current liabilities Trade and other payables 15,573,010 14,809,746 Amount due to a related company 17 3,612,866 3,182,783 Dividend payable 18 11,700,000 11,700,000 Amount due to a shareholder 17 250,995 -- Loans from shareholders 19 2,868,954 2,868,954 Provision for taxation 1,379,231 -- ----------- ------------ 35,385,056 32,561,483 Net current assets 12,427,976 7,408,962 ----------- ------------ Total assets less current liabilities 83,489,214 62,839,041 Non-current liabilities Provision for deferred taxation 20 193,000 75,000 ----------- ------------ Net assets 83,296,214 62,764,041 =========== ============ CAPITAL AND RESERVES Share capital 21 200 200 Reserves 22 83,296,014 62,763,841 ----------- ------------ Shareholders' funds 83,296,214 62,764,014 =========== ============ JV-3 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) BALANCE SHEET AS AT 31 MARCH 2005 (Restated) 2005 2004 Notes HK$ HK$ ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 9 6,253,976 4,540,786 Investments 10 27,047,797 23,991,361 Interests in subsidiaries 12 50,752,225 31,042,496 ----------- ----------- 84,053,998 59,574,643 Current assets Inventories 13 18,001,256 20,415,519 Other receivables 2,563,000 2,089,465 Tax recoverable -- 414,714 Amount due from a subsidiary 14 8,414,502 7,262,385 Cash and bank balances 10,362,598 7,258,898 ----------- ----------- 39,341,356 37,440,981 Current liabilities Trade and other payables 13,986,626 13,568,375 Amount due to a related company 17 3,612,866 3,182,783 Dividend payable 18 11,700,000 11,700,000 Loans from shareholders 19 2,868,954 2,868,954 Provision for taxation 1,379,231 -- ----------- ----------- 33,547,677 31,320,112 Net current assets 5,793,679 6,120,869 ----------- ----------- Total assets less current liabilities 89,847,677 65,695,512 Non-current liabilities Provision for deferred taxation 20 193,000 75,000 =========== =========== Net assets 89,654,677 65,620,512 =========== =========== CAPITAL AND RESERVES Share capital 21 200 200 Reserves 22 89,654,477 65,620,312 ----------- ----------- Shareholders' funds 89,654,677 65,620,512 =========== =========== JV-4 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2005
Exchange Retained Share capital reserve profits Total HK$ HK$ HK$ HK$ Balance at 1 April 2003 200 -- 60,154,326 60,154,526 Exchange differences arising on translation of a subsidiary -- 8,378 -- 8,378 Profit for the year -- -- 32,451,643 32,451,643 Dividends -- -- (29,850,506) (29,850,506) ----------- ----------- ----------- ----------- Balance at 31 March 2004 and 1 April 2004 200 8,378 62,755,463 62,764,041 Exchange differences arising on translation of a subsidiary -- 25,855 -- 25,855 Profit for the year -- -- 39,014,576 39,014,576 Dividends -- -- (18,508,258) (18,508,258) ----------- ----------- ----------- ----------- Balance at 31 March 2005 200 34,233 83,261,781 83,296,214 =========== =========== =========== ===========
JV-5 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2005
2005 2004 HK$ HK$ Cash flows from operating activities Profit before taxation 42,790,928 35,893,690 Adjustments for : Bad debts written off 138,614 -- Depreciation of property, plant and equipment 4,090,952 3,999,174 Gain on disposal of other securities (42,686) (53,820) Gain on disposal of property, plant and equipment (343,779) -- Interest expense 239,239 353,940 Interest income (1,301,047) (710,203) Provision for doubtful debts -- 95,641 Provision for inventories -- 132,787 Unrealised holding loss / (gain) on other securities 843,964 (592,941) ----------- ----------- Operating profit before working capital changes 46,416,185 39,118,268 Decrease in amount due to a shareholder (541,886) (7,659,679) Decrease / (Increase) in inventories 2,117,483 (5,426,165) Decrease / (Increase) in trade and other receivables 33,661 (1,323,849) Increase in loan to a shareholder (3,900,000) -- Increase / (Decrease) in amount due to a related company 430,083 (252,552) Increase / (Decrease) in trade and other payables 763,264 (925,388) ----------- ----------- Cash generated from operations 45,318,790 23,530,635 Interest received 1,301,047 484,121 Interest paid (239,239) (353,940) Dividends paid (14,926,185) (9,075,253) Hong Kong profits tax paid (1,864,407) (6,178,559) ----------- ----------- Net cash generated from operating activities 29,590,006 8,407,004 ----------- ----------- Cash flows from investing activities Purchase of property, plant and equipment (16,671,896) (15,931,858) Purchase of other securties (7,782,840) (31,293,580) Proceeds from disposal of other securities 3,925,126 7,948,980 Proceeds from disposal of property, plant and equipment 350,000 -- ----------- ----------- Net cash used in investing activities (20,179,610) (39,276,458) ----------- ----------- Net increase/(decrease) in cash and cash equivalents 9,410,396 (30,869,454) Cash and cash equivalents at beginning of the year 10,032,654 40,893,730 Effect of foreign exchange rate changes, net 25,855 8,378 ----------- ----------- Cash and cash equivalents at end of the year 19,468,905 10,032,654 =========== ===========
JV-6 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 1. GENERAL INFORMATION The company was incorporated in Hong Kong with limited liability. The principal activities of the company and the group are manufacturing and trading of consumer electronic products including smoke, fire and carbon monoxide alarms and other home safety products. Details of the company's subsidiaries are set out in note 12 to the financial statements. 2. PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below : (a) Basis of preparation The financial statements are prepared in accordance with and comply with all applicable Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"). The financial statements are prepared under the historical cost convention as modified by the revaluation of certain investments as explained in note 2(e) below. (b) Basis of consolidation The consolidated financial statements incorporate the financial statements of the company and its subsidiaries made up to 31 March each year. All material intra-group transactions and balances within the group are eliminated on consolidation. (c) Subsidiaries Subsidiaries are those enterprises in which the company controls more than half of the voting power, or holds more than half of the issued share capital, or controls the composition of the board of directors. Subsidiaries are carried at cost less any impairment loss. (d) Property, plant and equipment (i) Depreciation Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives, using the straight line method, at the following rates per annum :
Land use right Over the period of the right Land held on medium term leases Over 20 years * Buildings 5% or where shorter over 16 - 19 years * Leasehold improvements 20% Plant and machinery 10% Furniture and fixtures 20% Motor vehicles 20% Computer equipment and software 50%
JV-7 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (d) Property, plant and equipment (Continued) (i) Depreciation (Continued) Construction in progress represents costs incurred in the construction of buildings. These costs are not depreciated until such time as the relevant assets are completed and put into use, at which time the relevant costs are transferred to the appropriate category of property, plant and equipment. * In January 2005, the directors of the company took a comprehensive review of the expected useful lives of the land held on medium term leases in Dongguan and buildings constructed thereon at cost of HK$2,102,686 and HK$10,882,174 respectively, taking into consideration that the existing The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) Processing Agreement will expire on 31 December 2010. As a result of this review, the directors of the company have revised the duration of the depreciation periods of these land and buildings to no later than 31 December 2010. In this connection, the depreciation periods of these land and buildings have been revised from 50 years to 20 years and from 20 years to between 16 and 19 years, respectively, with effect from 1 January 2005. The change had the effect of increasing the group's depreciation expense and reducing the group's profit attributable to shareholders by approximately HK$127,000 for the three month period ended 31 March 2005. The change is expected to increase depreciation expense of the group by approximately HK$506,000 for each of the subsequent years until the land and buildings are fully depreciated or disposed of. (ii) Measurement bases Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to the working condition and location for its intended use. Subsequent expenditure relating to property, plant and equipment is added to the carrying amount of the assets if it can be demonstrated that such expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets. When assets are sold or retired, any gain or loss resulting from their disposal, being the difference between the net disposal proceeds and the carrying amount of the assets, is included in the income statement. (e) Investments Investment securities are securities which are interested to be held on a continuity basis for an identified long-term purpose. Investment securities are stated in the balance sheet at cost less any provision for impairment losses. Provisions are made when the fair value of such securities has declined below the carrying amounts, unless there is evidence that the decline is temporary. The amount of the reduction is recognised as an expense in the income statement. All other securities, whenever held for trading for otherwise, are stated in the balance sheet at fair value. Changes in fair value are recognised in the income statement as they arise. JV-8 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (f) Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials computed using first-in, first-out method and, where applicable, direct labour and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value is calculated as the actual or estimated selling price less all further costs of completion and estimated costs necessary to make the sale. (g) Impairment The carrying amounts of the group's and the company's assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. (i) Calculation of recoverable amount The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. (ii) Reversals of impairment An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. (h) Income tax Income tax for the year comprises current and deferred taxes. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the group is able to control the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future. JV-9 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (h) Income tax (Continued) The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profit will be available. Deferred tax assets and liabilities are not discounted. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. (i) Employee benefits Retirement benefit costs The company operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the "MPF Scheme") under the Mandatory Provident Fund Schemes Ordinance, for all of its employees in Hong Kong. The MPF Scheme became effective on 1 December 2000. Contributions are made based on a percentage of the employees' basic salaries, limited to a maximum of HK$1,000 per month, and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the company in an independently administered fund. The company's employer contributions vest fully with the employees when contributed into the MPF Scheme. (j) Operating leases Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Annual rentals applicable to such operating leases are charged to the income statement on a straight line basis over the lease terms. (k) Foreign currencies Transactions in foreign currencies are translated into Hong Kong dollars at the rates of exchange ruling at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into Hong Kong dollars at the rates of exchange ruling at that date. Gains and losses arising on exchange are dealt with in the income statement. The balance sheets of subsidiaries expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date and the income statements are translated at an average rate for the year. Gains and losses arising on exchange are dealt with as movements in reserve. (l) Recognition of revenue Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have been transferred to customers. Rental income from properties letting under operating leases is recognised on the straight line basis over the lease terms. Interest income is recognised on a time proportion basis. JV-10 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED) (m) Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (n) Cash and cash equivalents Cash comprises cash on hand and demand deposits repayable on demand with any bank or other financial institution. Cash includes deposits denominated in foreign currencies. Cash equivalents represent short-term, highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. (o) Recently issued accounting standards The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (collectively referred as the "new HKFRSs") which are effective for accounting periods beginning on or after 1 January 2005. The group has not early adopted these new HKFRSs in the financial statements for the year ended 31 March 2005. The group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position. 3. TURNOVER Turnover represents total invoiced value of goods supplied, less discounts and returns. 4. FINANCE COSTS 2005 2004 HK$ HK$ Interest charges on : - - Discounted bills 192,281 309,292 - - Others 46,958 44,648 ------- ------- 239,239 353,940 ======= ======= JV-11 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 5. PROFIT BEFORE TAXATION
2005 2004 HK$ HK$ Charging : Auditors' remuneration - - current year Auditors' remuneration - - current year 200,000 200,000 - - underprovision in prior year -- 25,500 Bad debts written off 138,614 -- Cost of inventories recognised as expenses 134,128,970 130,230,706 Depreciation of property, plant and equipment 4,090,952 3,999,174 Operating lease charges in respect of land and buildings 1,284,926 1,274,857 Provision for doubtful debts -- 95,641 Provision for inventories -- 132,787 Retirement benefits scheme contributions 190,984 180,971 Staff costs (excluding retirement benefits scheme contributions) 11,576,614 10,695,463 Unrealised holding loss on other securities 843,964 -- and crediting : Bank interest income 101,655 195,147 Exchange gain, net 49,278 57,670 Gain on disposal of property, plant and equipment 343,779 -- Gain on disposal of other securities 42,686 53,820 Interest income from a shareholder 229,550 198,245 Interest income from other securities 969,842 316,811 Rental income less outgoings 268,800 273,067 Unrealised holding gain on other securities -- 592,941 6. TAXATION The tax charge comprises : 2005 2004 HK$ HK$ Hong Kong profits tax - current year 3,860,000 3,509,340 - overprovision in prior years (201,648) (112,293) ---------- ---------- 3,658,352 3,397,047 Deferred taxation (Note 20) - current year 118,000 45,000 ---------- ---------- Total income tax expense 3,776,352 3,442,047 ========== ==========
Hong Kong profits tax is provided at the rate of 17.5% (2004 : 17.5%) on the estimated assessable profits arising in Hong Kong for the year. No provision for Mainland China Enterprise Income Tax has been made as the group has no assessable profit in Mainland China (2004 : Nil). JV-12 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 6. TAXATION (CONTINUED) Reconciliation between tax expense and accounting profit at applicable tax rates :
(Restated) 2005 2004 HK$ HK$ Profit before taxation 42,790,928 35,893,690 Notional tax on profit before taxation, calculated at the rates applicable to profits in the tax jurisdictions concerned 7,293,735 6,265,004 Tax effect of non-deductible expenses 379,463 74,776 Tax effect of non-taxable revenue (4,202,248) (3,386,684) Tax effect on temporary differences not recognised 393,086 565,900 Tax effect on unrecognised tax losses 113,964 8,372 Overprovision in prior years (201,648) (112,293) Others -- 26,972 ----------- ----------- Actual tax expense 3,776,352 3,442,047 =========== ===========
7. PROFIT FOR THE YEAR Of the consolidated profit attributable to shareholders of HK$39,014,576 (2004 : HK$32,451,643), HK$42,542,423 (2004 : HK$51,446,922 (Restated)) has been dealt with in the financial statements of the company. Details of the prior year adjustments are set out in note 29 to the financial statements. 8. DIVIDENDS
2005 2004 HK$ HK$ Dividends attributable to the year : First interim dividend of HK$1,168,350 (2004 : HK$2,130,692) per share 2,336,700 4,261,384 Second interim dividend of HK$2,413,723 (2004 : HK$2,488,371) per share 4,827,446 4,976,742 Third interim dividend of HK$2,580,752 (2004 : HK$2,205,190) per share 5,161,504 4,410,380 Fourth interim dividend of HK$3,091,304 (2004 : HK$2,251,000) per share 6,182,608 4,502,000 Final dividend of HK$Nil (2004 : HK$5,850,000) per share -- 11,700,000 ----------- ----------- 18,508,258 29,850,506 =========== ===========
JV-13 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 9. PROPERTY, PLANT AND EQUIPMENT
Land held on Furniture medium term Land use Leasehold Construction Plant and and Group leases right Buildings improvements in progress machinery fixtures - ----- HK$ HK$ HK$ HK$ HK$ HK$ HK$ Cost At 1 April 2004 2,102,686 7,673,722 13,711,906 10,384,240 5,693,589 31,745,665 3,974,371 Additions -- -- -- 429,650 12,560,638 2,122,395 296,239 Disposals -- -- -- -- -- (4,699,822) (269,293) ----------- ----------- ----------- ----------- ----------- ----------- ----------- At 31 March 2005 2,102,686 7,673,722 13,711,906 10,813,890 18,254,227 29,168,238 4,001,317 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Accumulated depreciation At 1 April 2004 569,905 -- 7,092,955 8,141,900 -- 27,214,851 3,358,584 Charge for the 81,489 153,644 760,043 772,782 -- 955,096 262,873 year Disposals -- -- -- -- -- (4,694,747) (269,293) ----------- ----------- ----------- ----------- ----------- ----------- ----------- At 31 March 2005 651,394 153,644 7,852,998 8,914,682 -- 23,475,200 3,352,164 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net book value At 31 March 2005 1,451,292 7,520,078 5,858,908 1,899,208 18,254,227 5,693,038 649,153 =========== =========== =========== =========== =========== =========== =========== At 31 March 2004 1,532,781 7,673,722 6,618,951 2,242,340 5,693,589 4,530,814 615,787 =========== =========== =========== =========== =========== =========== =========== Computer Motor equipment Group vehicles and software Total - ----- HK$ HK$ HK$ Cost At 1 April 2004 3,997,766 1,462,240 80,746,185 Additions 976,974 286,000 16,671,896 Disposals (172,500) (16,980) (5,158,595) ----------- ----------- ----------- At 31 March 2005 4,802,240 1,731,260 92,259,486 ----------- ----------- ----------- Accumulated depreciation At 1 April 2004 1,814,806 1,114,466 49,307,467 Charge for the 732,644 372,381 4,090,952 year Disposals (172,500) (15,834) (5,152,374) ----------- ----------- ----------- At 31 March 2005 2,374,950 1,471,013 48,246,045 ----------- ----------- ----------- Net book value At 31 March 2005 2,427,290 260,247 44,013,441 =========== =========== =========== At 31 March 2004 2,182,960 347,774 31,438,718 =========== =========== ===========
JV-14 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 9. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Land held Furniture on medium Leasehold Plant and and Motor Company term leases Buildings improvements machinery fixtures vehicles - ------- HK$ HK$ HK$ HK$ HK$ HK$ Cost At 1 April 2004 2,102,686 2,829,732 2,354,287 449,414 1,404,622 2,116,733 Additions -- -- 429,650 2,122,395 171,754 -- Disposals -- -- -- -- -- (172,500) ----------- ----------- ----------- ----------- ----------- ----------- At 31 March 2005 2,102,686 2,829,732 2,783,937 2,571,809 1,576,376 1,944,233 ----------- ----------- ----------- ----------- ----------- ----------- Accumulated depreciation At 1 April 2004 569,905 1,806,262 2,007,883 24,912 1,143,839 1,450,543 Charge for the year 81,489 141,486 152,141 146,517 115,793 328,847 Disposals -- -- -- -- -- (172,500) ----------- ----------- ----------- ----------- ----------- ----------- At 31 March 2005 651,394 1,947,748 2,160,024 171,429 1,259,632 1,606,890 ----------- ----------- ----------- ----------- ----------- ----------- Net book value At 31 March 2005 1,451,292 881,984 623,913 2,400,380 316,744 337,343 =========== =========== =========== =========== =========== =========== At 31 March 2004 1,532,781 1,023,470 346,404 424,502 260,783 666,190 =========== =========== =========== =========== =========== =========== Computer equipment Company and software Total - ------- HK$ HK$ Cost At 1 April 2004 776,779 12,034,253 Additions 263,149 2,986,948 Disposals (16,980) (189,480) ----------- ----------- At 31 March 2005 1,022,948 14,831,721 ----------- ----------- Accumulated depreciation At 1 April 2004 490,123 7,493,467 Charge for the year 306,338 1,272,611 Disposals (15,833) (188,333) ----------- ----------- At 31 March 2005 780,628 8,577,745 ----------- ----------- Net book value At 31 March 2005 242,320 6,253,976 =========== =========== At 31 March 2004 286,656 4,540,786 =========== ===========
JV-15 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 10. INVESTMENTS
Group Company -------------------------- -------------------------- 2005 2004 2005 2004 HK$ HK$ HK$ HK$ Investment securities : Unlisted outside Hong Kong, at cost -- 9,305,588 -- -- Less : Provision for impairment -- (9,305,588) -- -- ----------- ----------- ----------- ----------- -- -- -- -- ----------- ----------- ----------- ----------- -- -- -- Other securities : Listed outside Hong Kong, at market value 27,047,797 23,991,361 27,047,797 23,991,361 ----------- ----------- ----------- ----------- 27,047,797 23,991,361 27,047,797 23,991,361 =========== =========== =========== =========== 11. AMOUNT DUE FROM AN INVESTEE COMPANY Group 2005 2004 HK$ HK$ Amount due from an investee company -- 1,158,675 Less : Provision for doubtful debts -- (1,158,675) ---------- ---------- -- -- ========== ==========
The amount due from an investee company was unsecured, interest-free and had no fixed terms of repayment. 12. INTERESTS IN SUBSIDIARIES
(Restated) Company 2005 2004 HK$ HK$ Unlisted shares, at cost 32,658,008 9,570,008 Less : Provision for impairment (200,000) (200,000) ----------- ------------- 32,458,008 9,370,008 ----------- ------------- Amounts due from subsidiaries 19,079,609 22,448,775 Less : Provision for doubtful debts (785,384) (776,279) ------------ -------------- 18,294,225 21,672,496 ----------- ------------- Amount due to a subsidiary ( 8) ( 8) ----------- ------------- 50,752,225 31,042,496 =========== =============
JV-16 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 12. INTERESTS IN SUBSIDIARIES (CONTINUED) The amounts due from / (to) subsidiaries are unsecured, interest-free and have no fixed terms of repayment. Details of the subsidiaries as at 31 March 2005 are as follows :
Percentage of Place of issued capital incorporation/ Nominal value held by the Name of company establishment of issued capital company directly Principal activities - --------------- ------------- ----------------- ---------------- -------------------- The Joint Venture (name The PRC US$15,000,000 100% Manufacture of consumer withheld and filed electronic products separately with The (operations not commenced Securities and yet) Exchange Commission) The Joint Venture (name Hong Kong HK$200,000 100% Trading of consumer withheld and filed electronic products and separately with The investment holding Securities and Exchange Commission) The Joint Venture British Virgin US$1 100% Trading of machinery and (name withheld and Islands equipment (business not filed separately with commenced yet) The Securities and Exchange Commission) The Joint Venture (name Hong Kong HK$10,000 100% Dormant withheld and filed separately with The Securities and Exchange Commission)
13. INVENTORIES
Group Company --------------------------- --------------------------- 2005 2004 2005 2004 HK$ HK$ HK$ HK$ Raw materials 12,704,515 12,850,606 12,704,515 12,850,606 Work in progress 2,051,929 1,699,740 2,051,929 1,699,740 Finished goods 3,541,592 5,865,173 3,244,812 5,865,173 ----------- ----------- ----------- ----------- 18,298,036 20,415,519 18,001,256 20,415,519 =========== =========== =========== ===========
The amounts above include inventories at net realisable value of HK$Nil (2004 : Nil). JV-17 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 14. AMOUNT DUE FROM A SUBSIDIARY The amount is unsecured and arises from trading activities of which the settlement period is in accordance with normal commercial terms. Interest was charged on the overdue portion of the balance at 6% per annum from 1 April 2003 to 30 September 2004. Interest was charged on the overdue portion over HK$3,900,000 (equivalent to US$500,000) from 1 October 2004 to 31 March 2005. 15. AMOUNT DUE FROM A SHAREHOLDER The amount is unsecured, interest bearing at 6% per annum of the overdue trading balance and has no fixed terms of repayment. 16. LOAN TO A SHAREHOLDER The loan to a shareholder is unsecured, interest bearing at 6% per annum and has no fixed terms of repayment. 17. AMOUNT DUE TO A RELATED COMPANY/A SHAREHOLDER The amount is unsecured, interest-free and has no fixed terms of repayment. 18. DIVIDEND PAYABLE At a board meeting held on 7 February 2004, the directors declared a final dividend of HK$5,850,000 per share, totalling HK$11,700,000, which is expected to be payable to the shareholders upon successful initial listing of the company's shares on the Main Board of The Stock Exchange of Hong Kong Limited ("the HKEX"). 19. LOANS FROM SHAREHOLDERS The loans are unsecured, interest-free and repayable on demand by the respective shareholders with the consent of each other and upon successful initial listing of the company's shares on the Main Board of the HKEX, whichever is earlier. JV-18 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 20. DEFERRED TAXATION The following are the major deferred tax liabilities recognised in the balance sheet and the movements during the current and prior years : Group and Company Accelerated tax depreciation HK$ Balance at 1 April 2003 30,000 Charge to income statement 45,000 ------- Balance at 31 March 2004 and 1 April 2004 75,000 Charge to income statement 118,000 ------- Balance at 31 March 2005 193,000 ======= 20. DEFERRED TAXATION (CONTINUED) 2005 2004 HK$ HK$ Deferred tax liabilities recognised in the balance sheets of the group and company 193,000 75,000 ========== ========== At the balance sheet date, the major component of the deferred tax assets has not been recognised is the temporary difference in respect of the pre-operating expenses incurred by The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission), the PRC subsidiary of the company, of approximately HK$1,074,000 (2004 : HK$414,000) as it is not probable that future taxable profits will be available against which this deductible temporary difference can be utilised. 21. SHARE CAPITAL 2005 2004 HK$ HK$ Authorised : 100 ordinary shares of HK$100 each 10,000 10,000 ========== ========== Issued and fully paid : 2 ordinary shares of HK$100 each 200 200 ========== ========== JV-19 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 22. RESERVES Group 2005 2004 HK$ HK$ Exchange reserve 34,233 8,378 Retained profits 83,261,781 62,755,463 ------------ ----------- 83,296,014 62,763,841 ============ =========== Details of the movements in the above reserves during the year are set out in the consolidated statement of changes in equity on page 5. Company Retained profits HK$ Balance at 1 April 2003 44,023,896 Profit for the year (Restated) 51,446,922 Dividends (29,850,506) ------------ Restated balance at 31 March 2004 and 1 April 2004 65,620,312 ------------ Balance at 1 April 2004 as previously reported 60,713,660 Prior year adjustments (Note 29) 4,906,652 ------------ Profit for the year 42,542,423 Dividends (18,508,258) ------------ Balance at 31 March 2005 89,654,477 ============ 23. OPERATING LEASE COMMITMENTS At 31 March 2005, the total future minimum rental receivable under non-cancellable operating leases in respect of land and buildings are as follows : Group and Company ------------------------ 2005 2004 HK$ HK$ Within one year 76,800 76,800 In the second to fifth years 53,265 130,133 ----------- ---------- 130,065 206,933 =========== ========== JV-20 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) At 31 March 2005, the total future minimum lease payments under non-cancelable operating leases in respect of land and buildings are payable as follows : Group Company --------------------- ---------------------- 2005 2004 2005 2004 HK$ HK$ HK$ HK$ Within one year 1,202,000 915,000 996,000 845,000 In the second to fifth years 1,054,516 1,820,000 980,000 1,820,000 --------- --------- --------- --------- 2,256,516 2,735,000 1,976,000 2,665,000 ========= ========= ========= ========= The group and the company lease office premises under operating leases. The leases run for an initial period of one to two years, with an option to renew the leases at the expiry dates. None of the leases includes contingent rentals. 24. DIRECTORS' REMUNERATION Remuneration of the directors disclosed pursuant to section 161 of the Hong Kong Companies Ordinance is as follows : Group Company ----------------------- ------------------------- 2005 2004 2005 2004 HK$ HK$ HK$ HK$ Fees -- -- -- -- Other emoluments -- -- -- -- ========== ========== ========== ========== 25. CAPITAL COMMITMENTS
Group Company -------------------------- --------------------------- 2005 2004 2005 2004 HK$ HK$ HK$ HK$ Contracted but not provided for the purchase of property, plant and equipment 3,548,800 -- 9,779,740 -- Contracted but not provided for the construction of the factory premises in the PRC 5,462,297 7,891,988 -- -- Capital contributions payable to a PRC wholly-owned subsidiary -- -- 84,552,000 107,640,000 ----------- ----------- ----------- ----------- 9,011,097 7,891,988 94,331,740 107,640,000 =========== =========== =========== ===========
JV-21 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 26. CONTINGENT LIABILITES Group Company --------------------- --------------------- 2005 2004 2005 2004 HK$ HK$ HK$ HK$ Discounted bills with recourse 3,906,240 537,807 -- -- --------- --------- --------- --------- 3,906,240 537,807 -- -- ========= ========= ========= ========= 27. RELATED PARTY TRANSACTIONS During the year, the following transactions were carried out with related parties : Group --------------------------- 2005 2004 HK$ HK$ Transactions with a related company Rental expense 840,000 840,000 Management fee expense 4,434,600 3,281,250 Management bonus expense 3,337,730 3,182,783 Purchase of a PRC land use right -- 7,616,054 Transactions with a shareholder Sales 82,241,295 58,205,352 Purchases 2,410,042 3,977,932 Sales commission expense 1,111,515 678,373 Interest income 229,550 198,245 Interest expenses 46,957 44,648 Transaction with a director Rental expenses 240,000 240,000 28. MAJOR NON-CASH TRANSACTION During the year, HK$3,582,073 (2004 : HK$9,075,253) of the dividends for the year was settled through the current account with a shareholder. JV-22 The Joint Venture (name withheld and filed separately with The Securities and Exchange Commission) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2005 (CONTINUED) 29. PRIOR YEAR ADJUSTMENTS For the year ended 31 March 2004, a dividend income of HK$22,035,000 from and a facility usage fee of HK$26,941,652 to a subsidiary were recorded in the books of the company. During the process of preparing for listing of the company's shares on the Main Board of the HKEX in 2004, it was found out that such facility usage fee should be reversed in order to comply with the relevant PRC regulations and accordingly, the dividend from the subsidiary to the company has also been reversed. The directors consider it appropriate to effect the above reversals through prior year adjustments in the financial statements of the company for the year ended 31 March 2005. As a result, the retained earnings and the amount due from a subsidiary as at 31 March 2004 and the net profit for the year then ended of the company have been increased by HK$4,906,652 individually. Except for reclassification of certain tax reconciling items of the group as set out in note 6 to the financial statements, there is no tax attributable to these prior year adjustments to the company and the group. 30. COMPARATIVE FIGURES Certain comparative figures have been adjusted as a result of the prior year adjustments, details of which are set out in note 29 to the financial statements. 31. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved by the board of directors on 24 June 2005. JV-23
SCHEDULE II UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED March 31, 2005, 2004 and 2003 Balance at Charged to Charged to beginning cost and other Balance at of year expenses accounts Deductions end of year Year ended March 31, 2005 ---------- ---------- ---------- ----------- ----------- Allowance for doubtful accounts $ 15,000 $ 0 $ 0 $ 0 $ 15,000 Year ended March 31, 2004 Allowance for doubtful accounts $ 10,000 $ 64,537 $ 0 $ 59,537 $ 15,000 Year ended March 31, 2003 Allowance for doubtful accounts $ 68,358 $ 10,000 $ 0 $ 68,358 $ 10,000 Year ended March 31, 2005 Allowance for inventory reserve $ 100,000 $ 0 $ 0 $ 0 $ 100,000 Year ended March 31, 2004 Allowance for inventory reserve $ 101,741 $ 0 $ 0 $ 1,741 $ 100,000 Year ended March 31, 2003 Allowance for inventory reserve $ 111,741 $ 0 $ 0 $ 10,000 $ 101,741 Year ended March 31, 2005 Valuation allowance $1,015,315 $ 0 $ 47,595 $ 286,387 $ 776,523 Year ended March 31, 2004 Valuation allowance $ 912,696 $ 0 $ 102,619 $ 0 $1,015,315 Year ended March 31, 2003 Valuation allowance $1,848,455 $ 0 $ 0 $ 935,759 $ 912,696
S-1 EX-23.1 2 v020796_ex23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement of Universal Security Instruments, Inc. and subsidiaries on Form S-8 (No. 333-81930 dated February 1, 2002) pertaining to the Non-Qualified Stock Option Plan as Amended, Registration Statements on Form S-8 (No. 2-83323 dated May 4, 1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April 13, 1988) pertaining to the Non-Qualified Stock Option Plan and in the Registration Statement on Form S-8 (No. 33-21225 dated April 13, 1988) pertaining to the 1988 Employee Stock Purchase Plan, of our report dated June 24, 2005, included in the Annual Report of Universal Security Instruments, Inc. and subsidiaries on Form 10-K for the year ended March 31, 2005 filed with the Securities and Exchange Commission. GRANT THORNTON LLP Baltimore, Maryland June 29, 2005 EX-23.2 3 v020796_ex23-2.txt EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-81930 dated February 1, 2002) pertaining to the Non-Qualified Stock Option Plan as Amended, Registration Statements on Form S-8 (No. 2-83323 dated May 4, 1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April 13, 1988) pertaining to the Non-Qualified Stock Option Plan and in the Registration Statement on Form S-8 (No. 33-21225 dated April 13, 1988) pertaining to the 1988 Employee Stock Purchase Plan of our report dated June 17, 2005 with respect to the consolidated financial statements of The Joint Venture (Name withheld and filed separately with the Securities and Exchange Commission), included in the Annual Report on Form 10-K of Universal Security Instruments, Inc. for the year ended March 31, 2005, filed with the Securities and Exchange Commission. GRANT THORNTON HONG KONG Hong Kong June 29, 2005 EX-31.1 4 v020796_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Harvey B. Grossblatt, certify that: 1. I have reviewed this Annual Report on Form 10-K of Universal Security Instruments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: June 29, 2005 /s/ Harvey B. Grossblatt ------------------------------------------- Harvey B. Grossblatt Chief Executive Officer EX-31.2 5 v020796_ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, James B. Huff, certify that: 1. I have reviewed this Annual Report on Form 10-K of Universal Security Instruments, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: June 29, 2005 /s/ James B. Huff ------------------------------------------- James B. Huff Chief Financial Officer EX-32.1 6 v020796_ex32-1.txt EXHIBIT 32.1 SECTION 1350 CERTIFICATIONS In connection with the Annual Report of Universal Security Instruments, Inc. (the "Company") on Form 10-K for the fiscal year ended March 31, 2005 as filed with the Securities and Exchange Commission and to which this Certification is an exhibit (the "Report"), the undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods reflected therein. Date: June 29, 2005 /s/ Harvey B. Grossblatt ------------------------------------------- Harvey B. Grossblatt President and Chief Operating Officer /s/ James B. Huff ------------------------------------------- James B. Huff Chief Financial Officer EX-99.1 7 v020796_ex99-1.txt EXHIBIT 99.1 For Immediate Release Contact: Harvey Grossblatt, President Universal Security Instruments, Inc. 410-363-3000, Ext. 224 or Don Hunt, Jeff Lambert Lambert, Edwards & Associates, Inc. 616-233-0500 Universal Security Instruments Announces Record Earnings and Sharply Increased Sales For Fiscal Year Sales Increase 36%, Earnings rise to $2.13 Per Share Vs. $1.69 OWINGS MILLS, MD, June 29 2005: Universal Security Instruments, Inc. (AMEX: UUU) today announced record earnings on increased sales for the fiscal year ended March 31, 2005 (the highest in its 36-year history). Universal said the results include sharp increases in sales and earnings for the fourth quarter of the fiscal year. The Company cited ongoing market share gains in both the electrical distribution channel and the retail marketplace for its core smoke and carbon monoxide alarm product lines, as well as higher sales of ground fault circuit interrupters (GFCI) and continued good performance of its Hong Kong Joint Venture. Universal reported a 68% increase in fourth quarter net earnings to $814,152, or $0.49 per basic share ($0.46 per diluted share), on a 56% increase in sales to $6,119,296, compared with net earnings of $484,290, or $0.30 per basic share ($0.26 per diluted share), and sales of $3,932,491 for last year's fourth quarter. For the 12 months ended March 31, 2005, sales rose 36% to $23,465,443, versus $17,201,116 for the same period last year. The Company reported net earnings rose 33% to $3,417,854, a record, or $2.13 per basic share ($1.94 per diluted share), compared to net earnings of $2,571,026, or $1.69 per basic ($1.49 per diluted share), for the same period last year. Included in both the fourth quarter and year end results at March 31, 2005 is a net tax benefit of $281,137. "We are pleased with our performance for the fourth quarter and year end, as the Company continues to execute its strategy of increasing market share in both its retail and electrical distribution channels. We continue to benefit from competitive advantages within our experienced sales organization, as well as our established reputation for providing a highly reliable product at a competitive cost," said Harvey Grossblatt, chief executive officer. UNIVERSAL is pleased to announce that subsequent to the year end its Hong Kong Joint Venture has received approval to sell certain models of its smoke alarms into the China market. In addition, the Joint Venture expects to open its new 250,000-square-foot manufacturing facility in the Fujian province of Southern China shortly. UNIVERSAL SECURITY INSTRUMENTS, INC. is a U.S.-based manufacturer (through its Hong Kong Joint Venture) and distributor of safety and security devices. Founded in 1969, the Company has a 36-year heritage of developing innovative and easy-to-install products, including smoke, fire and carbon monoxide alarms. For more information on Universal Security Instruments, visit our website at www.universalsecurity.com. - ---------- "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain matters discussed in this news release may constitute forward-looking statements within the meaning of the federal securities laws that inherently include certain risks and uncertainties. Actual results could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, among other items, our and our Hong Kong Joint Venture's respective ability to maintain operating profitability, currency fluctuations, the impact of current and future laws and governmental regulations affecting us and our Hong Kong Joint Venture and other factors which may be identified from time to time in our Securities and Exchange Commission filings and other public announcements. We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. We will revise our outlook from time to time and frequently will not disclose such revisions publicly. -- more -- 7-A GWYNNS MILL COURT o OWINGS MILLS, MARYLAND 21117, USA (410) 363-3000 o www.universalsecurity.com Universal/Page 2 UNIVERSAL SECURITY INSTRUMENTS, INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) Three Months Ended March 31, 2005 2004 ---------- ---------- Sales $6,119,296 $3,932,491 Net income *814,152 **$484,290 Income per share Basic 0.49 0.30 Diluted 0.46 0.26 Weighted average number of common shares outstanding Basic 1,643,935 1,552,287 Diluted 1,791,720 1,743,851 (AUDITED) Twelve Months Ended March 31 2005 2004 ---------- ---------- Sales $23,465,443 $17,201,116 Net income *$3,417,854 **$2,571,026 Income per share Basic $2.13 $1.69 Diluted $1.94 $1.49 Weighted average number of common shares outstanding Basic 1,602,449 1,516,846 Diluted 1,764,474 1,725,206 * A net tax benefit of $281,137 was recorded due to the recognition of net operating loss carryforwards and due to a reduction in the valuation allowance previously established to offset tax benefits associated with our deferred tax assets. ** Due to the tax benefit carryforward of prior years' operating losses, no tax liability was incurred other than state income taxes.
CONSOLIDATED BALANCE SHEET ASSETS March 31, --------- 2005 2004 ------------ ------------ Cash $ 59,287 $ 188,190 Accounts receivable and amount due from factor 4,430,344 2,937,922 Inventory 4,834,486 2,867,650 Prepaid expenses 145,394 107,052 ------------ ------------ TOTAL CURRENT ASSETS 9,469,511 6,100,814 INVESTMENT IN HONG KONG JOINT VENTURE 6,131,481 4,832,286 PROPERTY, PLANT AND EQUIPMENT - NET 81,690 93,431 OTHER ASSETS AND DEFERRED TAX ASSET 367,266 72,385 ------------ ------------ TOTAL ASSETS $ 16,049,948 $ 11,098,916 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,725,402 $ 1,229,602 Accrued liabilities 1,426,878 663,818 Current obligations under capital lease -- 7,224 ------------ ------------ TOTAL CURRENT LIABILITIES 3,152,280 1,900,644 ------------ ------------ LONG TERM DEBT -- SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 1,652,998 and 1,552,896 shares at March 31, 2005 and March 31, 2004, 16,530 15,529 respectively Additional paid-in capital 11,469,444 11,188,903 Retailed earnings (accumulated deficit) 1,411,694 (2,006,160) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 12,897,668 9,198,272 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,049,948 $ 11,098,916 ============ ============
All shares have been adjusted to reflect the 4-for-3 stock split payable on April 5, 2004. -----END PRIVACY-ENHANCED MESSAGE-----