UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 2000
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ________________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7-A Gwynns Mill Court, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for at least the
past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 12, 2000:
Common Stock, $.01 Par Value - $3,192,945
The number of shares outstanding of the issuer's classes of common
stock as of June 12, 2000:
Common Stock, $.01 Par Value - 912,270 shares
<PAGE>
ITEM 1.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company") was incorporated
in the State of Maryland in 1969. Its principal offices are located at
7-A Gwynns Mill Court, Owings Mills, MD 21117 and its telephone
number is 410-363-3000.
The Company designs and markets a variety of popularly-priced
security, telecommunications and video products and miscellaneous
private label products. Most of the Company's products either require
minimal installation, or are designed for easy installation by the
consumer without professional assistance and requiring little or no
technical knowledge.
Due to the low margins realized on its telecommunications and video
products, the Company has focused its business primarily on security
products. As a result, the Company (i) changed its 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 its other security products.
The electrical distribution trade covers electrical and lighting
distributors as well as manufactured housing companies.
The Company imports virtually all of its products from various
suppliers overseas. Approximately 79% of the Company's purchases are
bought from a Joint Venture with a Hong Kong Corporation (Hong Kong
Joint Venture), in which the Company owns a 50% interest, that has
manufacturing facilities in the People's Republic of China.
The Company's sales for the year ended March 31, 2000 were $7,667,530
compared to $9,071,628 for the year ended March 31, 1999, a decrease
of approximately 15%. The primary reason for this decrease in sales
was due to decreased demand for some of the Company's private label
products.
The Company reported net income of $41,056 in fiscal 2000 compared to
a net loss in fiscal 1999 of $806,552 for its prior fiscal year. The
main reason for the decrease in losses was the sale of the Company's
headquarters which resulted in a gain of $804,861, partially offset
by an increased inventory reserve of $495,000.
SECURITY PRODUCTS
The Company markets a complete line of smoke alarms under the
trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signaltm" manufactured
by the Hong Kong joint venture. The Company also markets a line of
electronically advanced outdoor floodlights under the name "Lite
Aidetm," whose features include special sensors that activate
automatic lighting mechanisms and a quartz halogen system, offering
the consumer a variety of dependable outdoor security lighting
systems.
- 2 -
Sales of the Company's security products aggregated $6,618,178 or
approximately 86% of total sales in the fiscal year ended March 31,
2000 and $5,139,919 or approximately 57% of total sales in the fiscal
year ended March 31, 1999. This increase in sales volume was due
primarily to higher sales to the electrical distribution trade.
The Company is focusing its sales and marketing efforts to maximize
security product sales, especially smoke alarms manufactured by its
Hong Kong Joint Venture and marketed to the electrical distribution
trade.
OTHER PRODUCTS
The Company markets a variety of private label products on a made-to-
order basis, such as telephones and audio tape. The majority of these
products are produced by the Hong Kong Joint Venture.
For the fiscal year ended March 31, 2000, sales of the Company's
private label products aggregated $1,049,352 or 14% of total sales.
For the fiscal year ended March 31, 1999, sales of these products were
$3,931,709 or 43% of total sales. The primary reason for the decrease
in sales was a voluntary reduction in high volume, low margin, private
label products.
FCC REGULATION
The Federal Communications Commission (FCC) establishes technical
standards for telecommunications equipment and products transmitting
signals over the airways. These regulations have had no material
effect upon the Company's business or its products to date, and all
products subject to such regulation comply with the FCC requirements.
IMPORT MATTERS
The Company imports virtually all of its security and other products.
The Company, as an importer, is subject to numerous tariffs which vary
depending on types of products and country of origin, changes in
economic and political conditions in the country of manufacture,
potential trade restrictions, including loss of Most Favored Nation
status, and currency fluctuations. The Company has attempted to
protect itself from fluctuations in currency exchange rates to the
extent possible by negotiating most commitments in U.S. dollars. The
Company's purchases are subject to delays in delivery due to problems
with shipping and docking facilities, as well as other problems
associated with purchasing products abroad. The Company imports a
majority of its products from the People's Republic of China. The loss
of China's Most Favored Nation status with the United States would
most likely have a material adverse impact on the Company's business
until competitive alternative sources of supply could be obtained.
- 3 -
SALES AND MARKETING
The Company's products are generally marketed to retailers, wholesale
distributors, home centers, catalog and mail order companies and
to other distributors. Sales are made both by the Company and by
approximately 23 independent sales organizations which are compensated
by commissions. The Company has agreements with the sales
organizations which are cancelable by either party upon 30 days
notice. The Company does not believe that the loss of any one of these
organizations would have a material adverse effect upon its business.
In 1999, the Company formed a new subsidiary, USI ELECTRIC, for the
purpose of selling security products to the electrical distribution
trade. The subsidiary has hired two sales personnel from the
electrical distribution trade and has engaged 23 independent sales
organizations many of which have warehouses where USI ELECTRIC
products are maintained for sale.
The Company also promotes its products through its own sales catalogs
and brochures, which are mailed directly to trade customers. The
Company's customers, in turn, advertise the Company's products in
their own catalogs and brochures and in their ads in newspapers and
other media. The Company also exhibits and sells its products at
various trade shows, including the annual National Hardware Show in
Chicago, Illinois. The Company's domestic marketing strategy is
designed to attract retailing customers outside the consumer
electronics industry, such as supermarkets, drug stores, variety
stores and home centers as well as the electrical distribution trade.
Sales by the Company are also made by officers and full-time employees
of the Company, five of whom are also engaged in sales management and
training. Sales outside the United States, which are made by officers
of the Company and through exporters, were less than 15% of total
sales in fiscal 2000. The Company's foreign marketing strategy is to
increase sales of products from the Hong Kong Joint Venture to
overseas markets.
The Company's products are retailed to "do-it-yourself" consumers by
chain, discount, electrical, building supply, electrical distributors
and hardware stores; as well as through catalogs. The Company also
distributes its products through special markets such as premium/
incentive and direct mail. The Company does not currently market any
significant portion of its products directly to end users.
The Company's backlog of orders believed to be firm as of March 31,
2000 was approximately $791,000. The Company's backlog as of March
31, 1999 was approximately $1,310,000. The decrease in backlog is a
function of the timing of orders received from its customers and the
general decline in sales volume.
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has 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 consumer electronic products sold by the
Company.
- 4 -
The Company believes that this Hong Kong Joint Venture arrangement
will ensure a continuing source of supply for a majority of the
Company's security products at competitive prices. At the present
time, the Company buys approximately 79% of its total purchases from
the Hong Kong Joint Venture. The products produced by the Hong Kong
Joint Venture include smoke alarms and certain models of
telecommunications products. The Company is currently pursuing the
development of additional products such as photoelectric smoke
alarms and carbon monoxide alarms to be produced by the Hong Kong
Joint Venture. Changes in economic and political conditions in China
could adversely affect the value of the Company's investment in the
Hong Kong Joint Venture. Refer to Note C of the Financial Statements
in Item 8 for a comparison of annual sales and earnings of the Hong
Kong Joint Venture.
SUPPLIERS - OTHERS
Certain private label products not manufactured for the Company by the
Hong Kong Joint Venture are manufactured by other foreign suppliers
for the Company. The Company believes that its relationships with its
suppliers are good. The Company believes that the loss of any of its
suppliers could have a short-term adverse effect on its operations,
but that replacement sources could be developed.
CHINA CELLULAR TELEPHONE PROJECT
In the year ended March 31, 1993, the Hong Kong Joint Venture entered
into a Cellular Joint Venture with a People's Republic of China
Company to design and develop a portable cellular telephone for
manufacture and sale in China. The Hong Kong Joint Venture has a 30%
interest in the Cellular Joint Venture. The Cellular Joint Venture
engaged the Hong Kong Joint Venture to design and develop two versions
of a portable cellular telephone for a fee of $3.5 million. Through
March, 1996, the Hong Kong Joint Venture had received $3,150,000 of
the $3.5 million fee. For the year ended March 31, 1996, the Hong Kong
Joint Venture recorded no profit from the development contract. During
fiscal 1997, the Hong Kong Joint Venture completed the accounting of
its cellular development contract and, additionally, wrote down its
investment in its Cellular Joint Venture. The Hong Kong Joint Venture
recorded a profit of $122,328 on the development contract and a write-down of
$725,745 on its Cellular Joint Venture. Due to the uncertainty
of the commercial acceptance of the cellular telephone designed by the
Cellular Joint Venture, the Hong Kong Joint Venture wrote-off the
balance of its Cellular Joint Venture investment in the amount of
$337,464 in fiscal 1998.
COMPETITION
In the smoke alarm area, the Company competes with First Alert, Firex,
Fyrenetics and Walter Kidde. In the security lighting area, the
Company competes with Regent and Heath-Zenith. All of these companies
have greater financial resources and financial strength than the
Company. The Company believes that its security products compete
favorably with other such products in the market primarily on the
basis of styling and pricing.
- 5 -
The security industry in general involves changing technology, and the
success of the Company's products may depend on the Company's ability
to improve and update its products in a timely manner and to adapt to
new technological advances.
EMPLOYEES
The Company has 16 employees, 8 of whom are engaged in administration
and sales, and the balance of whom are engaged in product development
and servicing.
The Company's employees are not unionized. The Company believes that
its relations with its employees are satisfactory.
ITEM 2.
PROPERTIES
On June 16, 1999, the Company sold its headquarters facility, located
in Baltimore County, Maryland which became expendable when the Company
reduced the number of its employees.
The property was sold for a price of $2.2 million to KA Real Estate
Associates, LLC. After deducting the mortgage and settlement charges,
the Company received excess cash of approximately $840,000. The
Company reported, in its quarter ending June 30, 1999, a gain on the
sale of this property of approximately $800,000.
The Company retained ownership of approximately 1-1/2 acres of
undeveloped land adjacent to the Company's former headquarters
property which the Company has put up for sale.
Effective December 1999, the Company entered into an operating lease
for a 9,000 square foot office and warehouse located in Baltimore
County, Maryland. This lease, which expires in October 2002, is
subject to renewal for an additional six years with increasing rentals
at 3% per year. The monthly rental approximates $4,500 per month
during the initial term.
The Hong Kong Joint Venture's manufacturing facility consists of six
buildings totaling 100,000 square feet. Three of the buildings
(totaling 31,000 square feet) are leased pursuant to a long-term lease
which expires in 2010. The other three buildings (69,000 square feet)
are owned by the Hong Kong Joint Venture and were built on property
leased for a 48 year term.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 6 -
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Over-The-Counter (OTC)
Bulletin Board market through which real-time quote, price and volume
information is electronically available for the Company's common
stock. The Company's common stock was traded on the NASDAQ Small
Cap Market until January 21, 1999, when it was delisted for failure
to meet market value requirements.
The following table shows the fiscal 2000 and 1999 quarterly
high and low bid prices for the Company's common stock as reported
by NASDAQ. The bid quotations represent prices between dealers and
do not reflect the retailer markups, markdowns or commissions and
may not represent actual transactions.
Fiscal year ended March 31, 2000
Bid Prices
High Low
First Quarter 1-5/8 1
Second Quarter 2 1-9/32
Third Quarter 2-3/8 1-5/16
Fourth Quarter 4-3/4 1-5/8
Fiscal year ended March 31, 1999
Bid Prices
High Low
First Quarter 1-3/4 1-1/8
Second Quarter 1-3/8 11/16
Third Quarter 2 5/8
Fourth Quarter 2-1/16 1-1/16
As of May 25, 2000, there were approximately 170 holders of record of
the Company's common stock.
The Company has not paid any cash dividends on its common stock in the
last three years. It is the Company's present intention to retain all
earnings for use in its operations.
- 7 -
ITEM 6.
SELECTED FINANCIAL DATA
<TABLE>
Year Ended March 31,
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Operations
Net sales $ 7,667,530 $ 9,071,628 $11,566,317 $15,423,149 $19,507,889
Loss
before
equity
in
earnings
(loss) of
Hong Kong
Joint
Venture
and income
taxes (95,925) (1,119,154) (414,351) (1,332,427) (1,316,990)
Net income
(loss) 41,056 (806,552) (445,126) (1,483,438) (1,098,817)
Per common share:
Loss before
equity in
earnings
(loss)
of Hong
Kong Joint
Venture,
income
taxes
- basic(1) (.11) (1.30) (.51) (1.64) (1.62)
- diluted(2) (.10)
Net income
(loss)
- basic(1) .05 (.93) (.55) (1.83) (1.35)
- diluted(2) .04
Weighted average
number
of common
shares
outstanding
- basic(1) 903,495 863,706 811,397 811,397 811,397
- diluted(2) 938,807
Financial Condition
Total assets 5,476,545 6,402,120 7,705,310 9,557,116 12,676,391
Long-term
debt and
obligations
(non-
current) 60,260 -0- 1,246,861 1,344,211 1,277,394
Working
capital 1,368,513 1,514,425 2,130,408 2,253,553 2,194,108
Current
ratio 2.01 to 1 1.63 to 1 2.25 to 1 1.75 to 1 1.46 to 1
Share-
holders'
equity 4,062,244 3,987,072 4,747,351 5,192,477 6,675,915
Share-
holders'
equity
per share
- basic(1) 4.45 4.49 5.85 6.40 8.23
- diluted(2) 4.33
(1) All per share amounts and number of outstanding shares have been restated
to reflect the one-for-four reverse stock split as of February 27, 1998.
(2) Diluted outstanding shares and per share data is reported only for the
years where reporting would not have an anti-dilutive effect.
</TABLE>
- 8 -
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 2000, sales decreased by $1,404,098 (15%) from the
prior year. This decrease was primarily due to decreased demand for
certain of the Company's private label products, which amounted
to $2,882,357, partially offset by an increase in security products of
$1,478,259.
In fiscal year 1999, sales decreased by $2,494,689 (22%) from the
prior year. This decrease was primarily due to a decreased demand for
certain of the Company's private label products which amounted to
$1,540,456 and a decrease in security products of $954,233.
NET PROFIT AND LOSS
The Company earned a net profit of $41,056 for fiscal year 2000 as
compared to a net loss of $806,552 for fiscal year 1999. The most
significant reasons for the decrease in losses was a gain on the sale
of the Company's headquarters of $804,862 and higher gross profit
margins partially offset by a write off of discontinued inventory of
$495,000.
The Company incurred a net loss of $806,552 for fiscal year 1999, as
compared to a net loss of $445,126 for fiscal year 1998. The most
significant reason for the increase in losses was lower Hong Kong
Joint Venture earnings.
EXPENSES
In fiscal year 2000, research, selling, general and administrative
expenses increased by approximately $239,122 (11%) from the prior
year. The increase resulted from higher staffing levels for the
Company's new subsidiary, USI ELECTRIC, INC. As a percentage of sales,
research, selling, general and administrative expenses were 23% for
the fiscal year ended March 31, 2000 and 24% for the prior year.
In fiscal year 1999, research, selling, general and administrative
expenses decreased by approximately $127,202 (5%) from the prior
year. This savings resulted from the Company's cost reduction program.
As a percentage of sales, research, selling, general and
administrative expenses were 24% for the fiscal year ended March 31,
1999 and 20% for the prior year.
INTEREST EXPENSE AND INCOME
Interest expense for fiscal 2000 decreased to $140,635 from $230,625
in fiscal 1999 due primarily to the sale of the Company's headquarters
and payoff of the related mortgage in June 1999. Interest income
decreased to $301 in fiscal 2000 from $2,719 in fiscal 1999.
- 9 -
Interest expense for fiscal 1999 decreased to $230,625 from $270,817 in
fiscal 1998 due to a decrease in the average outstanding debt during the
period resulting from decreased inventory levels from the prior fiscal
year. Interest income decreased to $2,719 in fiscal 1999 from $2,916 in
fiscal 1998.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated from
operations and the Company's line of credit with a financial institution
which supplies both short-term borrowings and letters of credit to finance
foreign inventory purchases. The Company's maximum line of credit is
currently the lower of $7,500,000 or specified percentages of the Company's
accounts receivable and inventory. Approximately $854,866 had been utilized
in short-term borrowings and letter of credit commitments as of March 31,
2000. The amount available under the line of credit as of March 31, 2000
was approximately $505,000 based on the specified percentages. The
outstanding principal balance of the revolving credit line is payable upon
demand. The interest rate on the revolving credit line is equal to 1-1/2%
in excess of the prime rate of interest charged by the Company's lender.
The loan is collateralized by the Company's accounts receivable, inventory
and a 1.5 acre parcel of the Company's real estate. During the year ended
March 31, 2000, working capital decreased by $145,912, from $1,514,425 on
March 31, 1999 to $1,368,513 on March 31, 2000.
Operating activities used cash of $905,444 for the year ended March 31,
2000. A decrease of $1,221,546 from 1999 was primarily due to the gain on
the sale of the Company's headquarters of $804,861. For the prior fiscal
year, operating activities provided cash of $316,102 for the year ended
March 31, 1999. This was primarily due to a decrease in accounts
receivable, inventory and prepaid expenses totaling $1,246,687 and
partially offset by a loss of $806,552.
Investing activities provided cash of $1,990,941 in 2000, primarily due to
the sale of the Company's headquarters. For the same period last year,
investing activities used cash of $28,725, due to the purchase of
equipment.
Financing activities used cash in 2000 of $1,186,587 mainly due to the
repayment of the mortgage of $1,246,973 on the Company's headquarters
facility which was sold in June 1999 and, for the same period last
year, financing activities used cash of $227,647 primarily due to the
repayment of $182,842 in short-term debt and $75,000 in payments on
the legal settlement.
During the fiscal year ended March 31, 1999, the Company received a
distribution of $300,000 from the Hong Kong Joint Venture.
The Company believes that its line of credit and its working capital,
together with the excess cash generated from the sale of its
headquarters facility, provide it with sufficient resources to meet
its requirements for liquidity and working capital in the ordinary
course of its business over the next twelve months.
HONG KONG JOINT VENTURE
In fiscal year 2000, sales of the Hong Kong Joint Venture were $5,517,170
compared to $6,440,817 and $6,984,960 in fiscal years 1999 and 1998,
respectively.
- 10 -
Net income was $273,962 for the year ended March 31, 2000 compared to net
income of $625,205 and a net loss of $61,550 in fiscal years 1999 and 1998,
respectively. The decrease in income for the years ended March 31, 2000 and
1999 was due primarily to lower sales volume.
Selling, general and administrative expenses were $1,176,392, $1,188,859
and $1,288,622 for the fiscal years ended March 31, 2000, 1999 and 1998,
respectively. As a percentage of sales, expenses were 21%, 18% and 18% for
fiscal 2000, 1999 and 1998, respectively. The increase in expenses as a
percentage of sales, in fiscal 2000 was primarily due to cost containment
and lower sales volume.
Interest income net of interest expense was $140,425 for the year ended
March 31, 2000, compared to $132,591 and $96,469 in fiscal years 1999 and
1998, respectively.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During the year ended March 31, 2000, working
capital increased by $362,407 from $2,069,790 on March 31, 1999 to
$2,432,197 on March 31, 2000.
INFLATION
The Company believes that inflation has not had a material effect upon its
results of operations, and liquidity and capital resources for any of the
periods presented.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description
Page
Report of Independent Certified Public Accountants -
Grant Thornton LLP 12
Report of Independent Auditors - Deloitte & Touche LLP 13
Financial statements
Consolidated balance sheets, March 31, 2000 and 1999 14
Consolidated statements of operations for the years ended 16
March 31, 2000, 1999 and 1998
Consolidated statements of shareholders' equity for the
years ended March 31, 2000, 1999 and 1998 17
Consolidated statements of cash flows for the years ended
March 31, 2000, 1999 and 1998 18
Notes to consolidated financial statements 19
- 11 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the accompanying consolidated balance sheets of Universal
Security Instruments, Inc. (a Maryland corporation) and subsidiaries (the
Corporation) as of March 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the
financial statements of the Hong Kong Joint Venture, the Corporation's
investment which is accounted for using the equity method. The
Corporation's investment of $2,377,766 and $2,240,785 in the Hong Kong
Joint Venture's net assets at March 31, 2000 and 1999, and equity in
earnings of $136,981 and $312,602, for the years then ended are 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
solely on the report of the other auditors. The consolidated financial
statements of Universal Security Instruments, Inc. and subsidiaries for
the year ended March 31, 1998 were audited by other auditors whose report
dated June 17, 1998 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits and the 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 consolidated financial position of Universal Security
Instruments, Inc. and subsidiaries as of March 31, 2000 and 1999, and the
results of their consolidated operations and their consolidated cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
We have also audited the financial statement Schedule II for the years
ended March 31, 2000 and 1999. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
GRANT THORNTON LLP
June 8, 2000
Baltimore, Maryland
- 12 -
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the accompanying consolidated financial
statements of Universal Security Instruments, Inc. and
subsidiaries (the Corporation) for the year ended March 31, 1998
listed in Item 14(a)1. Our audit also included the financial
statement schedule for the year ended March 31, 1998 listed in
Item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based
on our audit. We did not audit the financial statements of the
Hong Kong Joint Venture, the Corporation's investment which is
accounted for by use of the equity method. The Corporation's
equity of $2,228,182 in the Hong Kong Joint Venture's net assets
at March 31, 1998, and of $(30,775) in that company's net (loss)
for the year then ended is included in the consolidated financial
statements. The financial statements of the Hong Kong Joint
Venture were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the
amounts included for such company, is based solely on the report
of such other auditors.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements of
Universal Security Instruments, Inc. and subsidiaries referred to
above present fairly, in all material respects, the results of
their operations and their cash flows for the year ended March
31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement
schedule referred to above, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
DELOITTE & TOUCHE LLP
Baltimore, Maryland
June 17, 1998
- 13 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
March 31,
2000 1999
<S> <C> <C>
CURRENT ASSETS
Cash $ 92,017 $ 193,107
Accounts receivable:
Trade (less allowance for doubtful
accounts of $100,000 in 2000 and
1999) 595,880 549,149
Officers and employees 4,845 321
600,725 549,470
Inventories:
Finished goods 1,912,987 1,749,684
Raw materials - foreign locations 25,071 49,869
1,938,058 1,799,553
Prepaid expenses 91,754 112,419
Assets held for sale - net
of depreciation 1,274,924
TOTAL CURRENT ASSETS 2,722,554 3,929,473
INVESTMENT IN HONG KONG JOINT VENTURE 2,377,766 2,240,785
PROPERTY AND EQUIPMENT, NET 363,920 225,862
OTHER ASSETS 12,305 6,000
TOTAL ASSETS $5,476,545 $6,402,120
See notes to consolidated financial statements.
</TABLE>
- 14 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
March 31,
2000 1999
<S> <C> <C>
CURRENT LIABILITIES
Short-term borrowings $ 817,714 $ 786,484
Accounts payable 399,100 294,618
Accrued liabilities 121,497 86,973
Current obligations under capital lease 15,730
Debt related to assets held for sale 1,246,973
TOTAL CURRENT LIABILITIES 1,354,041 2,415,048
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASE 60,260
COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
912,270 and 887,143 shares in
2000 and 1999, respectively 9,123 8,871
Additional paid-in capital 10,533,310 10,499,446
Retained deficit (6,480,189) (6,521,245)
TOTAL SHAREHOLDERS' EQUITY 4,062,244 3,987,072
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,476,545 $ 6,402,120
See notes to consolidated financial statements.
</TABLE>
- 15 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Year ended March 31,
2000 1999 1998
<S> <C> <C> <C>
Net sales $7,667,530 $9,071,628 $11,566,317
Cost of goods sold 5,982,314 7,770,737 9,393,376
GROSS PROFIT 1,685,216 1,300,891 2,172,941
Research and development expense 191,651 129,877 226,529
Selling, general and
administrative expense 2,239,368 2,062,020 2,092,570
Operating loss (745,803) (891,006) (146,158)
Other income (expense):
Interest income 301 2,719 2,916
Interest expense (140,635) (230,625) (270,817)
Gain from sale of building 804,861
Other (14,649) (242) (292)
649,878 (228,148) (268,193)
LOSS BEFORE EQUITY IN EARNINGS
OF HONG KONG JOINT VENTURE (95,925) (1,119,154) (414,351)
Equity in earnings of
joint venture 136,981 312,602 (30,775)
NET INCOME (LOSS) $ 41,056 $ (806,552) $ (445,126)
Per common share amounts:
Basic $ .05 $ (.93) $ (.55)
Diluted $ .04
Weighted average number of
common shares outstanding:
Basic 903,495 863,706 811,397
Diluted 938,807
See notes to consolidated financial statements.
</TABLE>
- 16 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1997 811,397 $8,114 $10,453,930 $(5,269,567) $5,192,477
Net loss for 1998 (445,126) (445,126)
Balance at
March 31, 1998 811,397 8,114 10,453,930 (5,714,693) 4,747,351
Common stock sold
to employee 113,636 1,136 98,864 100,000
Common stock
repurchased (37,950) (380) (53,347) (53,727)
Shares issued in
reverse stock split 60 1 (1)
Net loss for 1999 (806,552) (806,552)
Balance at
March 31, 1999 887,143 $8,871 10,499,446 (6,521,245) 3,987,072
Common stock issued
to employee 25,000 250 33,866 34,116
Shares issued in
reverse stock split 127 2 (2)
Net income for 2000 41,056 41,056
Balance at
March 31, 2000 912,270 $9,123 $10,533,310 $(6,480,189) $4,062,244
See notes to consolidated financial statements.
</TABLE>
- 17 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended March 31,
INCREASE (DECREASE) IN CASH 2000 1999 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 41,056 $(806,552) $ (445,126)
Adjustments to reconcile net
earnings (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 31,736 141,161 158,051
Provision for losses on accounts
receivable 50,000
(Undistributed earnings of
Joint Venture) (136,981) (12,603) 280,775
Gain on sale of building (804,861)
Changes in operating assets
and liabilities:
(Increase) decrease in
accounts receivable (51,255) 704,068 421,986
(Increase) decrease in
inventories and
prepaid expenses (117,840) 542,619 943,414
Increase (decrease) in
accounts payable
and accrued expenses 139,006 (268,991) (916,550)
(Increase) decrease in
other assets (6,305) 16,400 (5,710)
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (905,444) 316,102 486,840
INVESTING ACTIVITIES
Proceeds from sale of building 2,079,785
Purchases of property and equipment (88,844) (28,725) (13,786)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,990,941 (28,725) (13,786)
FINANCING ACTIVITIES
Net borrowings (repayment) of
short-term debt 31,230 (182,842) (394,315)
Principal payments on long-term debt (4,960) (16,078) (14,564)
Payment on legal settlement (75,000) (81,250)
Payment of debt related to assets
held for sale (1,246,973)
Sale of common stock 34,116 100,000
Purchase of common stock (53,727)
NET CASH USED IN FINANCING ACTIVITIES (1,186,587) (227,647) (490,129)
(DECREASE) INCREASE IN CASH (101,090) 59,730 (17,075)
CASH AT BEGINNING OF PERIOD 193,107 133,377 150,452
CASH AT END OF PERIOD $ 92,017 $ 193,107 $ 133,377
Supplemental information:
Interest paid $ 140,635 $ 230,625 $ 270,817
Income taxes paid - - -
Non-cash investing and financing activity:
The Company acquired equipment under capital lease obligations totaling
$80,950 during the year ended March 31, 2000.
See notes to consolidated financial statements.
</TABLE>
- 18 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United
Stated of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period.
Actual results could differ from those estimates.
Research and Development: Research and development costs are charged
to operations as incurred.
Accounts Receivable: The Company provides allowances for doubtful
receivables by a charge against income in amounts equal to the
estimated losses that will be incurred in collection of all
receivables. The estimated losses are based on historical collection
experience and a review of the current status of the existing
receivables. Customer accounts are written off against the allowance
for doubtful accounts when an account is determined to be
uncollectible.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Included as a component of finished goods inventory are additional
non-material costs. These costs include freight, import duty,
inspection fees, etc.
The Company reviews inventory periodically to identify slow moving
product lines. In considering the relocation to new space, management
chose to write-off abandoned and slow-moving product line inventory
of $495,000.
<TABLE>
Year Ended March 31,
2000 1999
<S> <C> <C>
Materials $1,748,687 $1,550,456
Non-Materials 189,371 249,097
$1,938,058 $1,799,553
</TABLE>
- 19 -
Property and Equipment: Property and equipment is recorded at cost,
less accumulated depreciation and amortization. Depreciation and
amortization is provided by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes.
The estimated useful lives for financial reporting purposes are as
follows:
Building - 40 years
Leasehold improvements - Term of lease
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Accounting for Hong Kong Joint Venture: The Company has a joint
investment in a Hong Kong manufacturing facility. The investment is
accounted for using the equity method.
Income Taxes: The Company recognizes a liability or asset for the
deferred tax consequences of temporary differences between the tax
bases 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.
Per Share Data: The Company implemented Statement of Financial
Accounting Standards, SFAS No. 128, "Earnings per Share" for all years
presented which requires presentation of basic and diluted earnings per
share amounts. The Company incurred a net loss for the years ended
March 31, 1999 and 1998; therefore, all potential dilutive common
shares are antidilutive and not included in the calculation of diluted
earnings per share. Basic and diluted net income per share are computed
by dividing net income (loss) by the weighted average number of common
and potential dilutive common (if any) shares outstanding during the
period.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
March 31,
2000 1999
<S> <C> <C>
Land and improvements $174,034 $ 174,034
Leasehold improvements 69,573
Machinery and equipment 151,686 835,966
Furniture and fixtures 154,004 260,616
Computer equipment 61,853 50,586
Equipment held under capital lease 80,950
692,100 1,321,202
Less accumulated depreciation
and amortization 328,180 1,095,340
$363,920 $ 225,862
</TABLE>
- 20 -
At March 31, 1999, assets, net of depreciation, from land, building and
improvements totaling $1,274,924 were transferred to assets held for
sale and sold during the year ended March 31, 2000. See Note K.
NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE
The Company maintains a Joint Venture with a Hong Kong Corporation,
which has manufacturing facilities in the People's Republic of China,
for the manufacturing of consumer electronic products. As of March 31,
2000, the Company has an investment balance of $2,377,766 for their 50%
interest in the Hong Kong Joint Venture. The investment has been
accounted for using the equity method of accounting.
The following represents summarized financial information from the
financial statements of the Hong Kong Joint Venture as of March 31,
2000 and 1999 and for the years ended March 31, 2000, 1999 and 1998.
<TABLE>
As of the
year ended March 31,
2000 1999 1998
<S> <C> <C> <C>
Current assets $3,343,848 $3,053,302
Property and other assets 2,301,452 2,422,311
Total $5,645,300 $5,475,613
Current liabilities $ 922,963 $ 983,512
Non-current liabilities 38,520 63,382
Shareholders' equity $4,683,817 $4,428,719
Total $5,645,300 $5,475,613
Net sales $5,517,170 $6,440,817 $6,984,960
Gross profit 1,248,979 1,537,855 1,327,380
Net income (loss) 273,962 625,205 (61,550)
</TABLE>
As of and for the years ended March 31, 2000, 1999 and 1998, the
period ending exchange rate and the weighted average exchange rates
were approximately 7.79, 7.75 and 7.75 Hong Kong dollars to each U.S.
dollar, respectively.
During the years ended March 31, 2000, 1999 and 1998, the Company
purchased $4,567,052, $4,365,481 and $6,078,933, respectively, of
finished product from the Hong Kong Joint Venture, which represents
79%, 81% and 73%, respectively, of the Company's total finished product
purchases.
NOTE D - DEBT
Debt consisted of the following:
<TABLE>
Year Ended March 31,
2000 1999
<S> <C> <C>
Short-term borrowings $817,714 $ 786,484
Obligations under capital lease 75,990
Debt related to assets held for sale - 1,246,973
75,990 1,246,973
Less current maturities 15,730 1,246,973
$ 60,260 $ -0-
</TABLE>
- 21 -
The short-term borrowings relate to the Company's agreement with a
financial institution to provide a maximum line of credit of the lower
of $7,500,000 or specified percentages of the Company's accounts
receivable and inventory. The short-term borrowings consist of a
revolving line of credit and letters of credit. The outstanding
principal balance of the revolving credit line ($817,714 at March 31,
2000) is payable on demand. The interest rate on the revolving credit
line is equal to 1-1/2% in excess of the prime rate of interest
(10-1/4% at March 31, 2000). As of March 31, 2000, the amount available
for borrowings under the line was approximately $505,000 based on the
specified percentages. The loan is collateralized by the Company's
accounts receivable, inventory and a 1.5 acre parcel of the Company's
real estate. The weighted average interest rate on outstanding
short-term borrowings for the years ended March 31, 2000, 1999 and 1998
was 9.71%, 9.62% and 10.00%, respectively.
The terms of the Company's mortgage are a $1,300,000 loan repayable in
60 equal monthly installments of principal and interest based on a 25
year amortization schedule, with an interest rate of 10%. The full
outstanding balance is due at the earlier of the end of the 60 month
period or when the property is sold. At March 31, 1999, the outstanding
principal balance was $1,246,973 and was paid in full upon the sale of
the Company's headquarters. See Note K.
NOTE E - LEASES
The Company entered into capital lease agreements for various
equipment, with an outstanding balance of $75,990 as of March 31, 2000.
The leases have imputed interest rates ranging from 7.6% to 10%.
Monthly payments aggregate $1,810.00 per month.
Maturities of long term obligations for the five years following March
31, 2000 are as follows:
<TABLE>
Year Capital Lease Obligation
<S> <C> <C>
2001 $21,719
2002 21,719
2003 21,719
2004 18,193
2005 8,364
Total $91,714
Less Amounts Representing Interest 15,724
Net Capitalized Lease $75,990
</TABLE>
During December 1999, the Company entered into an operating lease for
its office and warehouse expiring in October 2002, subject to renewal.
Rental expenses recognized under the lease totaled $16,866 for the year
ended March 31, 2000. Future obligations under this lease are as
follows:
<TABLE>
Year Amount
<S> <C> <C>
2001 $ 52,306
2002 53,875
2003 31,970
$138,151
</TABLE>
- 22 -
NOTE F - INCOME TAXES
At March 31, 2000, the Company has net operating loss (NOL) carryforwards in
the United States of approximately $5,900,000 for income tax purposes that
expire in years 2009 through 2020. From 1999 to 2000, the deferred tax asset
valuation allowance increased by $237,140. From 1998 to 1999, the deferred tax
asset valuation allowance decreased by $15,577 primarily due to the adjustment
of prior year NOL.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
March 31,
2000 1999
<S> <C> <C>
Deferred tax liabilities:
Unremitted Hong Kong Joint Venture earnings
not considered permanently reinvested $ 818,920 $ 771,396
Gross deferred tax liabilities 818,920 771,396
Deferred tax assets:
Financial statement accruals and allowances 102,313 83,728
Inventory uniform capitalization 72,200 72,200
Other 34,361 67,553
NOL carryforwards and tax credits 2,256,512 1,957,241
Gross deferred tax assets 2,465,386 2,180,722
Valuation allowance (1,646,466) (1,409,326)
Net deferred tax assets $ -0- $ -0-
</TABLE>
The reconciliation of the income tax computed at the U.S. federal statutory
tax rates to income tax expense is:
<TABLE>
3/31/00 3/31/99 3/31/98
<S> <C> <C> <C>
Federal tax expense (benefit) at
statutory rate on income (loss) (34%) $ 13,959 $(276,229) $(151,343)
Equity in (earnings) loss from
Hong Kong Joint Venture (46,894) (106,285) 10,464
Dividends received from Hong Kong Joint
Venture for which net deferred
taxes were not previously provided - 102,000 85,000
Effect of net operating loss carryforwards,
net of valuation allowance 24,628 279,616 81,144
Other 8,307 898 (25,265)
$ -0- $ -0- $ -0-
Investment and other tax credits are accounted for by the flow-through
method.
</TABLE>
- 23 -
NOTE G - COMMON STOCK
On February 27, 1998, the Shareholders approved a one-for-four reverse
stock split of the Company's issued and outstanding common stock. The
effective date of the reverse stock split was March 9, 1998, which reduced
the number of outstanding shares from 3,245,587 shares to 811,397 shares.
Additional paid-in capital was increased and common stock was decreased by
$24,342 as a result of the reverse stock split. All share and per share
amounts in this report have been restated to reflect the reverse stock
split.
Common Stock - On September 2, 1998, the Company sold 113,636 shares of
common stock to the Chairman of the Board of the Company at a price of $0.88
cents per share (the mean between the closing bid and asked prices on
NASDAQ) or an aggregate of $100,000. On November 12, 1998, the Board of
Directors authorized the Company to purchase up to 100,000 shares of the
Company's common stock. During the year ended March 31, 1999, pursuant
to the stock purchase program, the Company repurchased 37,950 shares at a
cost of $53,727. During the year ended March 31, 2000, the Company issued
25,000 shares of its common stock to a new employee. As part of the issuance,
the Company recognized $34,116 of compensation expense.
Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as
amended, 493,750 shares of common stock are authorized for the granting of
stock options, of which 11,519 shares have been issued as of March 31,
2000, leaving 482,231 available for issuance upon exercise of options
granted, or available for future grants to employees and directors. Under
provisions of the Plan, a committee of the Board of Directors determines
the option price and the dates exercisable. All options expire five years
from the date of grant and have an exercise price at least equal to the market
price at the date of grant.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 2000 and option transactions
for the two years then ended:
<TABLE>
Status as of March 31, 2000 Number of Shares
<S> <C>
Presently exercisable 175,031
Exercisable in future years 62,844
Total outstanding 237,875
Available for future grants 244,356
Shares of common stock reserved 482,231
Outstanding options:
Number of holders 18
Average price per share $2.57
Expiration dates April 2001 to January 2005
</TABLE>
- 24 -
Transactions for the Three Years Ended March 31, 2000:
<TABLE>
Weighted Average
Number of Per Share Total
Shares Option Price Option Price
<S> <C> <C> <C>
Outstanding at
March 31, 1997 163,125 6.44 $1,050,900
Granted 42,500 4.01 170,500
Canceled (17,500) 8.26 (144,575)
Outstanding at
March 31, 1998 188,125 $1,076,825
Granted 82,250 2.11 173,625
Canceled (45,875) 6.89 (315,875)
Outstanding at
March 31, 1999 224,500 934,575
Granted 73,500 1.79 131,314
Canceled (60,125) 7.55 (454,075)
Outstanding at
March 31, 2000 237,875 $ 611,844
</TABLE>
Under the terms of the Company's 1988 Employee Stock Purchase Plan, eligible
employees can purchase shares of the Company's common stock through payroll
deductions at a price equal to 90% of the asked price of the shares. The
Company has reserved 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, 2000, approximately 16,250 shares remain reserved for
issuance under this Plan.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for the 1978 Non-Qualified Stock Plan. Accordingly, no compensation has been
recognized for the 1978 Stock Plan. Had compensation costs for the 1978 Stock
Plan been determined based on fair value at the grant date forward under that
Plan consistent with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss for fiscal years 1999 and 1998 would not have been
materially affected on a pro forma basis.
In fiscal 2000, the weighted average fair value at date of grant for options
issued in 2000 was $1.01 per share. The fair value of these options was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: expected dividend yield -0-, expected volatility
82.67%, risk-free interest rate of 6.38% and expected term of five years. The
net income as reported of $41,056 would be pro forma $4,210 and the net income
per share as reported of $0.05 would be pro forma $0.01.
NOTE H - COMMITMENTS
The Company entered into a three year employment agreement with the President of
its USI ELECTRIC, INC. subsidiary with fixed annual remuneration amounts for
three years. In addition, the agreement provides incentive compensation based on
the Company achieving certain levels of sales. The agreement expires in
December, 2001.
Outstanding letters of credit commitments which are used solely for short-term
inventory financing totaled $37,152 at March 31, 2000.
- 25 -
NOTE J - BUSINESS AND SALES INFORMATION
The Company is primarily a distributor of a variety of security products
for use in homes and businesses and manufactures private label products to
order. Approximately 17%, 24% and 15% of the Company's total sales were to
the same customer in 2000, 1999 and 1998, respectively, and an additional
15% to a different customer in 2000. An additional 17% and 12% of the
Company's total sales were to a different customer in 1999 and 1998.
NOTE K - GAIN ON SALE OF BUILDING
Universal Security Instruments, Inc. sold its headquarters facility in
Owings Mills, MD, on June 16, 1999 for a price of $2.2 million to KA Real
Estate Associates, LLC. After deducting the mortgage and settlement
charges, the Company had a gain of $804,861.
NOTE L - LITIGATION
In fiscal 1997, the Company settled its legal proceeding for patent
infringement litigation with Black & Decker (U.S.). In conjunction with the
settlement with Black & Decker, the Company agreed to pay the sum of
$300,000. The repayment terms were $100,000 paid in July 1996 and $200,00
payable in 32 equal monthly installments without interest beginning
September 1, 1996 and ending March 1999. As a result of the other related
expenses and insurance carrier recovery, the net charge for this matter
amounted to $247,500.
- 26 -
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of four directors. The
following is a list of individuals currently serving as directors of
the Company until the Company's next annual stockholders meeting and
individuals currently serving as executive officers of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper.....56 Director; Vice Chairman of the 1970
Board of the Company since
September 1996; Chairman of the
Board of the Company from 1970
to September 1996.
Michael Kovens......57 Director; Chairman of the Board 1970
of the Company since September
1996; President of the Company
from 1970 to September 1996.
Harvey Grossblatt...53 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
April 1997; Vice President
of the Company from December
1986 to June 1996; Secretary and
Treasurer of the Company since
September, 1988; Vice President
and Chief Financial Officer of
the Company from October 1983
through May 1995.
Gary Goldberg*......51 1993 to 1996 President of Ultravision 1998
LLC; 1996 to 1997, Independent
Consultant; 1997 to present,
Procurement Agent for Sierra
Military Health Services, Inc.
*resigned as a Director effective June 15, 2000.
- 27 -
ITEM 11.
EXECUTIVE COMPENSATION
Table I. Summary Compensation Table
The following table reflects the aggregate amount paid or accrued by the
Company in its three
most recent fiscal years, for each executive officer whose compensation
exceeded $100,000 in
that year.
<TABLE>
Long-Term Compensation
Name and Awards Payouts
Principal Annual Compensation Stock LTIP All Other
Position Year Salary Bonus Other Awards Options Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael
Kovens 2000 $175,000 75,000 - - 23,750 - $ -0-
Chairman 1999 175,000 75,000 - - 12,500 - -0-
of the 1998 175,000 - - - 15,000 - -0-
Board
Harvey
Gross-
blatt 2000 $122,500 10,000 - - - - $ -0-
Presi- 1999 122,500 - - - 6,250 - -0-
dent, 1998 122,500 - - - - - -0-
Secre-
tary
and
Treasurer
</TABLE>
Table II. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
<TABLE>
Value
Number of Unexercised
of Unexercised In-The-Money
Shares Options at FY-End Options at FY-End
Acquired Value Exerci-/Unexerci- Exerci-/Unexerci-
Name In Exercise Realized sable/sable sable/sable
<S> <C> <C> <C> <C> <C> <C>
Michael Kovens - - 68,750/ -0- -0- / -0-
Harvey Grossblatt - - 24,000/ -0- -0- / -0-
</TABLE>
- 28 -
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 25, 2000, the following persons were "beneficial owners"
(as that term is defined under Rule 13d-3 promulgated by the
Securities and Exchange Commission) of more than five percent of the
Company's common stock.
<TABLE>
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
<S> <C> <C>
Michael Kovens 328,295(2) 34.3%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Stephen Knepper 105,360(3) 11.0%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Bruce Paul 129,400 14.0%
One Hampton Road
Purchase, NY 10577
(1) For the purpose of determining the percentages of stock
beneficially owned, shares of stock subject to options
exercisable within 60 days of May 25, 2000 are deemed to be
outstanding.
(2) Includes 68,750 shares which Mr. Kovens presently has the right
to acquire through the exercise of stock options and 5,048
shares held by Mr. Kovens' adult children.
(3) Includes 68,750 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options and
4,487 shares held by Mr. Knepper's adult children.
</TABLE>
- 29 -
As of May 25, 2000, the shares of the Company's common stock owned
beneficially by each director, by each executive officer and by all
directors and officers as a group were as follows:
<TABLE>
Shares Percent
Name of beneficial owner Beneficially Owned(1) of class
<S> <C> <C>
Michael Kovens 333,343(2) 34.0%
Stephen Knepper 105,360(3) 10.7%
Harvey Grossblatt 31,272(4) 3.3%
All directors and officers as 470,600 43.8%
a group (5 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Includes 24,000 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
</TABLE>
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
- 30 -
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in
Part II, Item 8.
Consolidated balance sheets, March 31, 2000 and 1999
Consolidated statements of operations for the years ended
March 31, 2000, 1999 and 1998.
Consolidated statements of shareholders' equity for the
years ended March 31, 2000, 1999 and 1998.
Consolidated statements of cash flows for the years
ended March 31, 2000, 1999 and 1998.
Notes to consolidated financial statements.
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, are
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibit No.
10.19 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, MD
21117.
10.2 Hong Kong Joint Venture Agreement (confidential treatment of
Name requested and filed separately with the Commission)
(Incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the Fiscal Year
Ended March 31, 1994, File No. 0-7885)
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- 31 -
(b) Reports on Form 8-K
None
(d) Financial Statements Required by Regulation S-X
Separate financial statements of the Hong Kong Joint Venture
(confidential treatment of name requested and filed separately with
the Commission.
Page
Report of the auditors JV-1
Consolidated profit and loss account, JV-2
March 31, 2000 and 1999
Consolidated balance sheets, March 31, 2000 and 1999 JV-3
Consolidated cash flow statements, March 31, 2000 JV-5
and 1999
Notes to consolidated financial statements JV-8
- 32 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 2000, 1999 and 1998
<TABLE>
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions(1) of year
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 2000
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 1999
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 1998
Allowance for
doubtful accounts $ 50,000 $50,000 $-0- $ -0- $100,000
(1) Write-off of uncollectible accounts, net of recoveries.
</TABLE>
- 33 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By: Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: June 29, 2000 By: Michael Kovens
Michael Kovens
Chairman of the Board, Director
Date: June 29, 2000 By: Stephen Knepper
Stephen Knepper
Vice Chairman of the Board, Director
Date: June 29, 2000 By: Harvey Grossblatt
Harvey Grossblatt, President,
Director, Secretary, Treasurer,
Chief Accounting Officer
- 34 -
REPORT OF THE AUDITORS
To the members
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
(Incorporated in Hong Kong with limited liability)
We have audited the financial statements on pages 2 to 20 which
have been prepared in accordance with accounting principles
generally accepted in Hong Kong.
Respective responsibilities of directors and auditors
The Companies Ordinance requires the directors to prepare
financial statements which give a true and fair view. In
preparing financial statements which give a true and fair view it
is fundamental that appropriate accounting policies are selected
and applied consistently. It is our responsibility to form an
independent opinion, based on our audit, on those statements and
to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Statements of Auditing
Standards issued by the Hong Kong Society of Accountants. An
audit includes an examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation
of the financial statements, and of whether the accounting
policies are appropriate to the Company's and the Group's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance as to whether the financial statements are free from
material misstatement. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a
reasonable basis for our opinion.
Opinion
In our opinion the financial statements give a true and fair
view, in all material respects, of the state of affairs of the
Company and of the Group as at 31 March 2000 and of the profit
and cash flows of the Group for the year then ended and have been
properly prepared in accordance with the Companies Ordinance.
Hong Kong
30 May 2000
JV-1
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 March 2000
<TABLE>
Notes 2000 1999
HK$ HK$
<S> <C> <C> <C>
TURNOVER 4 42,855,134 49,928,815
Cost of sales (33,127,883) (39,065,280)
Gross profit 9,727,251 10,863,535
Other revenue 1,672,198 1,771,018
Administrative expenses (9,119,320) (7,573,225)
PROFIT FROM OPERATING
ACTIVITIES 5 2,280,129 5,061,328
Finance costs 6 (33,951) (25,595)
PROFIT BEFORE TAX 2,246,178 5,035,733
Tax 7 (122,441) (189,182)
NET PROFIT ATTRIBUTABLE
TO SHAREHOLDERS 8 2,123,737 4,846,551
Retained profits at
beginning of year 31,462,000 31,259,649
RETAINED PROFITS AVAILABLE
FOR DISTRIBUTION 33,585,737 36,106,200
Interim dividend 9 - (4,644,200)
RETAINED PROFITS AT END
OF YEAR 33,585,737 31,462,000
Other than the net profit for the year, the Group had no
recognized gains or losses. Accordingly, a Statement of
Recognized Gains and Losses is not presented in the financial
statements.
</TABLE>
JV-2
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET
31 March 2000
<TABLE>
Notes 2000 1999
HK$ HK$
<S> <C> <C> <C>
ASSETS
Non-current assets:
Fixed assets 10 17,927,978 18,777,601
Long term investment 11 - -
17,927,978 18,777,601
Current assets:
Due from a shareholder 1 1,661,636 561,008
Inventories 13 5,498,125 4,322,225
Prepayments, deposits
and other receivables 236,252 144,551
Pledged time deposit 14 1,570,039 1,487,639
Cash and cash equivalents 17,076,376 17,153,586
26,042,428 23,669,009
TOTAL ASSETS 43,970,406 42,446,610
EQUITY AND LIABILITIES
Current liabilities:
Due to a related company 1 - 217,943
Current portion of loan
from a related company 1 164,004 164,004
Taxation 2,256,337 2,609,485
Other payables and
accrued liabilities 2,858,529 2,234,876
Accounts payable 1,909,316 2,397,819
7,188,186 7,624,127
Non-current liabilities:
Loans from shareholders 15 2,868,954 2,868,954
Long term portion of loan
from a related company 1 27,329 191,329
Deferred tax 16 300,000 300,000
3,196,283 3,360,283
TOTAL LIABILITIES-page 4 10,384,469 10,984,410
</TABLE>
JV-3
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET (continued)
31 March 2000
<TABLE>
Notes 2000 1999
HK$ HK$
<S> <C> <C> <C>
TOTAL LIABILITIES-page 3 10,384,469 10,984,410
Capital and reserves:
Share capital 17 200 200
Retained profits 33,585,737 31,462,000
33,585,937 31,462,200
TOTAL EQUITY AND LIABILITIES 43,970,406 42,446,610
</TABLE>
JV-4
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT
31 March 2000
<TABLE>
Notes 2000 1999
HK$ HK$
<S> <C> <C> <C>
NET CASH INFLOW FROM
OPERATING ACTIVITIES 18(a) 1,596,234 9,315,981
RETURNS ON INVESTMENTS
AND SERVICING OF FINANCE
Interest received 1,122,513 1,027,582
Interest paid (33,951) (25,595)
Dividend paid - (4,644,200)
Net cash inflow/(outflow)
from returns on investments
and servicing of finance 1,088,562 (3,642,213)
TAXATION
Hong Kong profits tax paid (475,589) (444,614)
INVESTING ACTIVITIES
Purchases of fixed assets (2,040,017) (737,733)
Increase in pledged
time deposit (82,400) (96,286)
Net cash outflow from
investing activities (2,122,417) (834,019)
NET CASH INFLOW BEFORE
FINANCING ACTIVITY 86,790 4,395,135
FINANCING ACTIVITY 18(b)
Repayment of loan from
a related company (164,000) (164,000)
Net cash outflow from
financing activity (164,000) (164,000)
INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS (77,210) 4,231,135
Cash and cash equivalents
at beginning of year 17,153,586 12,922,451
CASH AND CASH EQUIVALENTS
AT END OF YEAR 17,076,376 17,153,586
ANALYSIS OF THE BALANCES OF
CASH AND CASH EQUIVALENTS
Cash and bank balances 17,076,376 17,153,586
</TABLE>
JV-5
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
BALANCE SHEET
31 March 2000
<TABLE>
Notes 2000 1999
HK$ HK$
<S> <C> <C> <C>
ASSETS
Non-current assets:
Fixed assets 10 17,927,978 18,777,601
Interests in subsidiaries 12 10,008 10,008
17,937,986 18,787,609
Current assets:
Due from a subsidiary 1 90,604 57,454
Due from a shareholder 1 1,661,636 561,008
Tax recoverable 162,580 -
Inventories 13 5,498,125 4,322,225
Prepayments, deposits and
other receivables 236,252 144,551
Pledged time deposit 14 1,570,039 1,487,639
Cash and cash equivalents 14 16,981,395 17,037,600
26,200,631 23,610,477
TOTAL ASSETS 44,138,617 42,398,086
EQUITY AND LIABILITIES
Current liabilities:
Due to a subsidiary 1 16,541,609 16,551,789
Due to a related company 1 - 217,943
Current portion of loan
from a related company 1 164,004 164,004
Taxation - 190,568
Other payables and
accrued liabilities 1,618,854 993,201
Accounts payable 1,909,316 2,397,819
20,233,783 20,515,324
Non-current liabilities:
Loans from shareholders 15 2,868,954 2,868,954
Long term portion of loan
from a related company 1 27,329 191,329
Deferred tax 16 300,000 300,000
3,196,283 3,360,283
TOTAL LIABILITIES-page 6 23,430,066 23,875,607
</TABLE>
JV-6
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
BALANCE SHEET (continued)
31 March 2000
<TABLE>
Notes 2000 1999
HK$ HK$
<S> <C> <C> <C>
TOTAL LIABILITIES-page 6 23,430,066 23,875,607
Capital and reserves:
Share capital 17 200 200
Retained profits 20,708,351 18,522,279
20,708,551 18,522,479
TOTAL EQUITY AND LIABILITIES 44,138,617 42,398,086
</TABLE>
JV-7
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
1. CORPORATE INFORMATION
The Company was incorporated under the laws of Hong Kong on 7 July
1989. It operates under a joint venture agreement entered into on 23
October 1989 between Universal Security Instruments, Inc.("USI"), a
company incorporated in the United States, and The Original Joint
Venture Owner (name withheld and filed separately with the SEC) which
is incorporated in Hong Kong. The Company is economically dependent on
USI with which it transacts most of its business and the financial
statements reflect the effect of these transactions which are conducted
on bases determined between the parties.
During the year, the following significant related party transactions
were recorded:
<TABLE>
Group
2000 1999
Notes HK$ HK$
<S> <C> <C> <C>
Sales made to USI (i) 35,475,009 39,098,998
Purchases from USI (i) 949,947 137,948
Rentals paid to:
An Affiliate of the Company
(name withheld and filed
separately with the SEC) (ii) 840,000 840,000
A Manager of the Company (name
withheld and filed separately
with the SEC) (ii) 240,000 240,000
Management fee paid to:
An Affiliate of the Company
(name withheld and filed
separately with the SEC) (iii) 1,440,000 1,440,000
Interest income from USI (iv) 108,837 116,959
Notes:
(i) Sales and purchases were made according to the published prices
and conditions similar to those offered to other customers or by
other suppliers of the Group.
(ii) Rental expenses were charged for the offices owned by An
Affiliate of the Company (name withheld and filed separately
with the SEC) and A Manager of the Company (name withheld and
filed separately with the SEC) in Hong Kong and the People's
Republic of China (the "PRC") based on the prevailing market
rate and area occupied by the Group.
</TABLE>
JV-8
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
1. CORPORATE INFORMATION (continued)
(iii) Management fee was charged at HK$120,000 per month for
the provision of management services rendered in
planning, execution and operation of electronics
manufacturing plant in the PRC.
(iv) Interest income from USI was charged ranging at 9.5%
to 12% per annum (1999: ranging 9.5% to 12% per annum)
of the trading balance overdue for 30 days during the
year.
An Affiliate of the Company (name withheld and filed
separately with the SEC) is a company of which A Manager of
the Company (name withheld and filed separately with the SEC)
director of the Company, is a director. Loan from An
Affiliate of the Company (name withheld and filed separately
with the SEC) is unsecured, bearing interest at 0.49% per
annum, and is repayable by 14 (1999: 26) equal monthly
installments.
Except for the trading balance of HK$992,377 (1999:
HK$521,343) with USI included in due from a shareholder of
HK$1,661,636 (1999: HK$561,008) under current assets as at
31 March 2000 which is interest-bearing ranging from 9.5%
to 12% per annum (1999: ranging 9.5% to 12% per annum),
balances with a shareholder, subsidiaries and a related
company are unsecured, interest-free, and have no fixed
terms of repayment.
2. IMPACT OF NEW STATEMENT OF STANDARD ACCOUNTING PRACTICE
("SSAP")
SSAP 1: Presentation of Financial Statements has been
adopted for the first time in the preparation of the current
year's financial statements. SSAP 1 prescribes the basis
for the presentation of financial statements and sets out
guidelines for their structure and minimum requirements for
the content thereof. The format of the consolidated profit
and loss account and consolidated balance sheet and balance
sheet as set out on pages 2 - 4 and 5 - 6 and 7,
respectively, have been revised in accordance with the SSAP.
Additional disclosures as required are included in the
supporting notes.
JV-9
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance
with Hong Kong Statements of Standard Accounting Practice,
accounting principles generally accepted in Hong Kong and
the disclosure requirements of the Hong Kong Companies
Ordinance. They have been prepared under the historical
cost convention.
Basis of consolidation
The consolidated financial statements include the audited
financial statements of the Company and its subsidiaries for
the year ended 31 March 2000. The results of subsidiaries
acquired or disposed of during the year are consolidated
from or to their effective dates of acquisition or disposal,
respectively. All significant intercompany transactions and
balances within the Group are eliminated on consolidation.
Goodwill
Goodwill arising on consolidation of subsidiaries represents
the excess purchase consideration paid for subsidiaries over
the fair values ascribed to the net underlying assets
acquired and is written off to the profit and loss account
in the year of acquisition.
Subsidiaries
A subsidiary is a company in which the Company, directly or
indirectly, controls more than half of its voting power or
issued share capital or controls the composition of its
board of directors.
Interests in subsidiaries are stated at cost unless, in the
opinion of the directors, there have been permanent
diminutions in value, when they are written down to values
determined by the directors.
Long term investment
Investments held on a long term basis are stated at cost
less provisions for any permanent diminutions in values
deemed necessary by the directors, on an individual basis.
JV-10
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Related
parties may be individuals or corporate entities.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation. The cost
of an asset comprises its purchase price and any directly attributable
costs of bringing the asset to its working condition and location for
its intended use. Expenditure incurred after the assets have been put
into operation, such as repairs and maintenance, is normally charged to
the profit and loss account in the period in which it is incurred. In
situations where it can be clearly demonstrated that the expenditure
has resulted in an increase in the future economic benefits expected to
be obtained from the use of the asset, the expenditure is
capitalized as an additional cost of the asset.
Depreciation is calculated on the straight-line basis to write off the
cost of each asset over its estimated useful life. The principal annual
rates used for this purpose are as follows:
<TABLE>
<S> <C> <C>
Land held on medium term leases Over the lease terms
Buildings 5%
Leasehold improvements 20%
Plant and machinery 10%
Furniture and fixtures 20%
Motor vehicles 20%
</TABLE>
The gain or loss on disposal or retirement of fixed assets recognized
in the profit and loss account is the difference between the sales
proceeds and the carrying amount of the relevant asset.
Inventories
Inventories are stated at the lower of cost and net realizable value.
Cost is determined on the first-in, first-out basis and in the case of
work in progress and finished goods, comprises direct materials, direct
labor and an appropriate proportion of overheads. Net realizable
value is based on the estimated selling prices less any estimated costs
to be incurred to completion and disposal.
JV-11
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash equivalents
For the purpose of the cash flow statement, cash equivalents
represent short term highly liquid investments which are
readily convertible into known amounts of cash and which
were within three months of maturity when acquired. For the
purpose of balance sheet classification, cash equivalents
represent assets similar in nature to cash, which are not
restricted as to use.
Revenue recognition
Revenue is recognized when it is probable that the economic
benefits will flow to the Group and when the revenue can be
measured reliably, on the following bases:
(a) on the sales of goods, when the significant risks and
rewards of ownership have been transferred to the
buyer;
(b) rental income, on the straight-line basis over the
lease term;
(c) management fee income, when the services are rendered;
and
(d) interest, on a time proportion basis, taking into
account the principal outstanding and the effective
interest rate applicable.
Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are
accounted for as operating leases. Rentals applicable to
such operating leases are charged to the profit and loss
account on the straight-line basis over the lease terms.
Deferred taxation
Deferred taxation is provided, using the liability method,
on all significant timing differences to the extent it is
probable that the liability will crystallize in the
foreseeable future. A deferred tax asset is not recognized
until its realization is assured beyond reasonable doubt.
Foreign currencies
Foreign currency transactions are recorded at the applicable
rates of exchange ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign currencies at
the balance sheet date are translated at the applicable
rates of exchange ruling at that date. Exchange differences
are dealt with in the profit and loss account.
JV-12
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
4. TURNOVER AND REVENUE
Turnover represents the invoiced value of goods sold, net of
discounts and returns. An analysis of turnover and revenue
is as follows:
<TABLE>
2000 1999
HK$ HK$
<S> <C> <C>
Turnover 42,855,134 49,928,815
Exchange gains, net 140,522 557,017
Rental income 290,800 285,000
Management fee income 102,285 139,320
Interest income 1,122,513 1,027,582
Sundry income 156,600 319,116
Revenue 1,812,720 2,328,035
TURNOVER AND REVENUE 44,667,854 52,256,850
</TABLE>
5. PROFIT FROM OPERATING ACTIVITIES
The Group's profit from operating activities is arrived at
after charging/(crediting):
<TABLE>
2000 1999
HK$ HK$
<S> <C> <C>
Depreciation 2,889,640 3,219,389
Less: Amount included in cost
of sales (2,687,601) (3,018,501)
202,039 200,888
Auditors' remuneration 168,000 168,000
Staff costs 5,554,236 5,458,242
Directors' remuneration - -
Operating lease rentals for
land and buildings 1,098,347 1,098,347
Provision for inventories 146,537 -
Exchange gains, net (140,522) (557,017)
Interest income (1,122,513) (1,027,582)
Gross and net rental income (290,800) (285,000)
</TABLE>
JV-13
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
6. FINANCE COSTS
<TABLE>
Group
2000 1999
HK$ HK$
<S> <C> <C>
Interest on inward bills 33,951 25,595
</TABLE>
7. TAX
Hong Kong profits tax has been provided at the rate of 16%
(1999: 16%) on the estimated assessable profits arising in
Hong Kong during the year. Taxes on profits assessable
elsewhere have been calculated at the rates of taxation
prevailing in the countries in which the Group operates.
<TABLE>
Group
2000 1999
HK$ HK$
<S> <C> <C>
Provision for the year 134,000 407,000
Overprovision in prior years (11,559) (97,818)
Deferred tax credit - note 16 - (120,000)
Taxation charge for the year 122,441 189,182
</TABLE>
8. NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The net profit attributable to shareholders dealt with in
the financial statements of the Company is HK$2,186,072
(1999: HK$4,909,904).
9. INTERIM DIVIDEND
<TABLE>
2000 1999
HK$ HK$
<S> <C> <C>
Interim - HK$2,322,100 per
ordinary share - 4,644,200
</TABLE>
JV-14
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
10. FIXED ASSETS
Group and Company
<TABLE>
Leasehold Leasehold Furniture
land and improve- Plant and and Motor
buildings ments machinery fixtures vehicles Total
HK$ HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Cost:
At begin-
ning of
year 15,814,592 6,691,399 28,828,314 2,796,387 452,501 54,583,193
Additions - 188,140 1,255,575 196,302 400,000 2,040,017
Disposals - - - (7,070) (280,001) (287,071)
At 31
March
2000 15,814,592 6,879,539 30,083,889 2,985,619 572,500 56,336,139
Accumulated
deprecia-
tion:
At begin-
ning of
year 4,008,564 5,816,503 23,025,891 2,502,133 452,501 35,805,592
Provided
during
the year 729,401 473,204 1,480,330 146,705 60,000 2,889,640
Disposals - - - (7,070) (280,001) (287,071)
At 31
March
2000 4,737,965 6,289,707 24,506,221 2,641,768 232,500 38,408,161
Net book
value:
At 31
March
2000 11,076,627 589,832 5,577,668 343,851 340,000 17,927,978
At 31
March
1999 11,806,028 874,896 5,802,423 294,254 - 18,777,601
The leasehold land and buildings are situated in the PRC under medium-term
leases.
</TABLE>
11. LONG TERM INVESTMENT
<TABLE>
Group
2000 1999
HK$ HK$
<S> <C> <C>
Unlisted investment, at cost 9,305,588 9,305,588
Amount due from investee company 1,158,675 1,158,675
10,464,263 10,464,263
Less: Provision for permanent diminution
in value (9,305,588) (9,305,588)
Provision against amount due from
investee company (1,158,675) (1,158,675)
- -
</TABLE>
JV-15
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
11. LONG TERM INVESTMENT (continued)
Particulars of investee company are as follows:
<TABLE>
Percentage
Country of Nominal value of equity
registration of registered attributable Principal
Name and operation capital to the Group activity
2000 1999
<S> <C> <C> <C> <C> <C>
An Associate of the The PRC US$4,000,000 30 30 Dormant
Company (name
withheld and filed
separately with the
SEC)
The Group does not have significant influence on the financial and operating
policy decisions of investee company and, accordingly, the investment is
classified as long term investment. The amount due from the investee company
is unsecured, interest-free, and has no fixed terms of repayment.
</TABLE>
12. INTERESTS IN SUBSIDIARIES
<TABLE>
Company
2000 1999
HK$ HK$
<S> <C> <C>
Unlisted shares, at cost 210,008 210,008
Less: Provision for permanent diminution (200,000) (200,000)
10,008 10,008
</TABLE>
Particulars of the wholly-owned subsidiaries are as follows:
<TABLE>
Nominal value
Place of of issued
incorporation ordinary Principal
Name and operation share capital activities
<S> <C> <C> <C>
A Subsidiary of The Company Hong Kong HK$200,000 Investment
(name withheld and filed holding
separately with the SEC)
A Subsidiary of The Company British US$1 Dormant
(name withheld and filed Virgin
separately with the SEC) Islands
A Subsidiary of The Company Hong Kong HK$10,000 Dormant
(name withheld and filed holding
separately with the SEC)
</TABLE>
JV-16
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
13. INVENTORIES
<TABLE>
Group and Company
2000 1999
HK$ HK$
<S> <C> <C>
Raw materials 3,836,437 2,553,140
Work in progress 914,409 558,208
Finished goods 747,279 1,210,877
5,498,125 4,322,225
</TABLE>
14. BANKING FACILITIES
Time deposit of HK$1,570,039 (1999: HK$1,487,639) is pledged
to a bank for credit facilities of HK$3,329,000 (1999:
HK$3,329,000) granted to the Company. The banking facilities
of the Company are also secured by personal guarantees of
A Manager (name withheld and filed separately with the SEC),
a director of the Company. The facilities were not utilized
at the balance sheet date.
15. LOANS FROM SHAREHOLDERS
<TABLE>
Group and Company
2000 1999
HK$ HK$
<S> <C> <C>
Universal Security
Instruments, Inc. 1,434,477 1,434,477
The Original Joint Venture Owner
(name withheld and filed
separately with the SEC) 1,434,477 1,434,477
2,868,954 2,868,954
The loans are unsecured, interest-free and repayable on
demand by the respective shareholders with the consent of
the other. The directors of the Company consider that these
liabilities are non-current.
</TABLE>
JV-17
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
16. DEFERRED TAX
<TABLE>
Group and Company
2000 1999
HK$ HK$
<S> <C> <C>
Balance at beginning of year 300,000 420,000
Credit for the year - note 7 - (120,000)
Balance at end of year 300,000 300,000
The principal components of the Group's deferred tax liability comprise
accelerated depreciation allowances.
</TABLE>
17. SHARE CAPITAL
<TABLE>
Company
2000 1999
HK$ HK$
<S> <C> <C>
Authorized:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
</TABLE>
18. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of profit from operating activities to net cash
inflow from operating activities:
<TABLE>
2000 1999
HK$ HK$
<S> <C> <C>
Profit from operating activities 2,280,129 5,061,328
Interest income (1,122,513) (1,027,582)
Depreciation 2,889,640 3,219,389
Decrease/(increase) in amount due from a
shareholder (1,100,628) 2,208,486
Decrease/(increase) in inventories (1,175,900) 1,893,401
Decrease/(increase) in prepayments,
deposits and other receivables (91,701) 132,583
Decrease in amount due to a related company (217,943) (17,670)
Increase/(decrease) in other payables and
accrued liabilities 623,653 (22,086)
Decrease in accounts payable (488,503) (2,131,868)
Net cash inflow from operating activities 1,596,234 9,315,981
</TABLE>
JV-18
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO FINANCIAL STATEMENTS
31 March 2000
18. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)
(b) Analysis of changes in financing during the year
<TABLE>
Loan from a
related company
HK$
<S> <C>
Balance 1 April 1998 519,333
Repayment (164,000)
Balance at 31 March 1999 and 1 April 1999 355,333
Repayment (164,000)
Balance at 31 March 2000 191,333
</TABLE>
19. COMPARATIVE AMOUNTS
As further explained in note 2 to the financial statements,
due to the adoption of new SSAP during the current year, the
presentation of the profit and loss account, the balance
sheets and certain supporting notes have been revised to
comply with the new requirements. Accordingly certain
comparative amounts have been reclassified to conform with
the current year's presentation.
20. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved by the board of
directors on 30 May 2000.
JV-19
