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, 2007 or
o 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: 001-31747
UNIVERSAL
SECURITY INSTRUMENTS, INC.
(Exact
name of registrant as specified in its charter)
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MARYLAND
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52-0898545
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification
No.)
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7-A
Gwynns Mill Court Owings Mills, Maryland
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21117
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code
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(410) 363-3000
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.01 par value
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American
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Title
of
Class
Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined
in
Rule 405 of the Act). Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No
x
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. x
Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large
accelerated filer o Accelerated
filer o Non-Accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No
x
The
aggregate market value of Common Stock, $.01 par value, held by non-affiliates
of the registrant based on the closing sales price of the Common Stock on the
American Stock Exchange Stock on September 30, 2006, was $44,099,300.
The
number of shares of common stock outstanding as of June 29, 2007 was
2,479,245.
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 2007 Annual
Meeting of Shareholders (to be filed).
UNIVERSAL
SECURITY INSTRUMENTS, INC.
2007
ANNUAL REPORT ON FORM 10-K
Table
of Contents
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Page
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PART
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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5
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Item
1B.
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Unresolved
Staff Comments
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8
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Item
2.
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Properties
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9
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Item
3.
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Legal
Proceedings
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9
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Item
4.
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Submission
of Matters to Vote of Security Holders
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10
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Executive
Officers of the Registrant
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10
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related
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Stockholder
Matters and Issuer Purchases of Equity Securities
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11
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Item
6.
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Selected
Financial Data
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13
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Item
7.
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Management’s
Discussion and Analysis of Financial
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Condition
and Results of Operations
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14
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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19
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Item
8.
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Financial
Statements and Supplementary Data
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19
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Item
9.
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Changes
in and Disagreements with Accountants
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on
Accounting and Financial Disclosure
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19
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Item
9A.
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Controls
and Procedures
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19
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Item
9B.
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Other
Information
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19
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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20
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Item
11.
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Executive
Compensation
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20
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Item
12.
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Security
Ownership of Certain Beneficial Owners
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and
Management and Related Stockholder Matters
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20
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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20
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Item
14.
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Principal
Accountant Fees and Services
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20
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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21
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Signatures
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22
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PART
I
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.
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 (46.38% and 49.60% of its sales during fiscal 2007
and 2006 respectively), with the balance of its sales made to unrelated
customers worldwide.
During
the third quarter of fiscal 2007, we formed 2113824 Ontario, Inc., a
wholly-owned subsidiary of the Company, under the laws of the Province of
Ontario, Canada for the purpose of acquiring a majority interest in two Canadian
corporations. In October 2006, 2113824 Ontario, Inc. acquired two-thirds of
the
issued and outstanding capital stock of International Conduits, Ltd. (Icon)
and
Intube, Inc. (Intube). Icon and Intube are based in Toronto, Canada and
manufacture and distribute electrical mechanical tubing (EMT) steel conduit.
Icon also sells home safety products, primarily purchased from USI, in the
Canadian market. The primary purpose of the Icon and Intube acquisition is
to
expand our product offerings to include EMT steel conduit, and to provide this
product and service to the commercial construction market. On April 2, 2007,
Icon and Intube were amalgamated (merged) under the laws of the Province of
Ontario, Canada to form one corporation. All future operations of the Canadian
subsidiaries are combined under International Conduits, Ltd.
(Icon).
We
import
all of our products from various foreign suppliers. For the fiscal year ended
March 31, 2007, approximately 65.04% of our purchases were imported from the
Hong Kong Joint Venture and 4.90% of our purchases were imported from our
Canadian subsidiaries.
Our
sales
for the year ended March 31, 2007 were $35,823,575 compared to $28,894,101
for
the year ended March 31, 2006, an increase of approximately 23.98%. We reported
net income of $5,533,258 in fiscal 2007 compared to net income of $4,600,352
in
fiscal 2006, an increase of 20.28%. Included in the fiscal 2007 results are
$4,200,921 in sales and a $570,961 net loss by our newly acquired Canadian
operations.
The
Company was incorporated in Maryland in 1969. Our principal executive office
is
located at 7-A Gwynns Mill Court, Owings Mills, Maryland 21117, and our
telephone number is 410-363-3000. Information about us may be obtained from
our
website www.universalsecurity.com.
Copies
of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current
reports on Form 8-K, are available free of charge on our website as soon as
they
are filed with the Securities and Exchange Commission (SEC) through a link
to
the SEC’s EDGAR reporting system. Simply select the “Investor Relations” menu
item, then click on the “SEC Filings” link. The SEC’s EDGAR reporting system can
also be accessed directly at www.sec.gov.
Safety
Products
We
market
a line of residential smoke alarms under the trade names “USI Electric” and
“UNIVERSAL” both of which are manufactured by the Hong Kong Joint
Venture.
Our
line
of smoke alarms consists of battery, electrical and electrical with battery
backup alarms. Our products contain different types of batteries with different
battery lives, and some with alarm silencers. The smoke alarms marketed to
the
electrical distribution trade also include hearing impaired and heat alarms
with
a variety of additional features. We also market outdoor floodlights under
the
name “Lite Aide(TM),” carbon monoxide alarms, door chimes and ground fault
circuit interrupter (GFCI) units.
Our
wholly-owned subsidiary, USI Electric. Inc., focuses its 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-
EMT
Steel Conduit
Icon
manufactures mechanical steel tubing at its Toronto, Canada facility. Mechanical
steel tubing is used for a variety of purposes, including EMT steel conduit,
steel fencing, and as a component part of various other products. In Canada,
EMT
steel conduit is marketed principally through Icon’s electrical distribution
network to the commercial construction market. Sales of steel fencing and other
mechanical steel tubing products are marketed directly by Icon’s sales force. In
the United States, EMT conduit is marketed principally through the Company’s
electrical distribution network to the commercial construction
market.
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. Substantially all of our safety products, including
products we purchase from our Hong Kong Joint Venture, are imported from the
People’s Republic of China. Mechanical steel tubing manufactured for us by Icon
is imported by land transport from Canada.
Sales
and Marketing; Customers
We
sell
our products to various customers, and our total sales market can be divided
generally into three categories; sales by the Company, sales by our USI Electric
subsidiary, and sales by Icon.
The
Company markets our products to retailers, including wholesale distributors,
chain, discount, television retailers and home center stores, catalog and mail
order companies and to other distributors (“retailers”). Our products have
historically been retailed to “do-it-yourself” consumers by these retailers. We
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 less than 5.0% of total sales in the fiscal years ended March
31, 2007 and 2006.
In
recent
years, no one customer amounted to 10% of our total sales. During the fourth
quarter of fiscal 2007, we began selling home safety products to The Home Depot,
Inc., a major national home improvement retailer, and total sales to Home Depot
for fiscal 2007 represented approximately 11% of our revenues.
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
12
regional stocking warehouses throughout the United States which generally
enables customers to receive their orders the next day without paying for
overnight freight charges. USI Electric engages sales personnel from the
electrical distribution trade and has engaged 27 independent sales organizations
which represent approximately 230 sales representatives, some of which have
warehouses where USI Electric products are maintained by our sales
representatives for sale.
We
also
market our products through our own sales catalogs and brochures, which are
mailed directly to trade customers, and our website. Our customers, in turn,
may
advertise our products in their own catalogs and brochures and in their ads
in
newspapers and other media. We also exhibit and sell our products at various
trade shows, including the annual National Hardware Show.
Our
Icon
Canadian subsidiary markets its EMT conduit, other manufactured tubing products
and related security products to the electrical distribution trade utilizing
its
internal sales force and independent representatives.
Our
backlog of orders believed to be firm as of March 31, 2007 was approximately
$2,219,435. Our backlog as of March 31, 2006 was approximately $2,996,000.
This
decrease in backlog is primarily due to a reduction in the backlog of orders
we
had for ground fault circuit interrupters at March 31, 2006 in advance of new
regulations affecting these devices which went into effect July 28, 2006,
partially offset by our addition of Icon’s backlog for mechanical
tubing.
-4-
Hong
Kong Joint Venture
We
have a
50% interest in the 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.
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 2007, 65.04% 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. 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.
Our
purchases from the Hong Kong Joint Venture represented approximately 46% of
the
Hong Kong Joint Venture’s total sales during fiscal 2007 and 50% of total sales
during fiscal 2006, with the balance of the Hong Kong Joint Venture’s sales
being primarily made in Europe and Australia, to unrelated customers. The Hong
Kong Joint Venture’s sales to unrelated customers are $22,065,702 in fiscal 2007
and $12,506,135 in fiscal 2006. Please see Note D 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 would have a short-term
adverse effect on our operations, but replacement sources for these other
suppliers could be developed.
Competition
In
fiscal
year 2007, sales of safety products accounted for substantially all of our
total
sales. In the sale of smoke alarms, we compete in all of our markets with First
Alert, Firex and Kidde Safety. In the sale of GFCI units, we compete in all
our
markets with Leviton Manufacturing Co., Inc., Pass & Seymour, Inc., Cooper
Wiring Devices and Hubbell, Inc. All of these companies have greater financial
resources and financial strength than we have. We believe that our safety
products compete favorably 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
As
of
March 31, 2007, including the employees or our consolidated Canadian
subsidiaries, we had 34 employees, 16 of whom are engaged in administration
and
sales, and the balance of whom are engaged in product development, manufacturing
and servicing. Our employees are not unionized, and we believe that our
relations with our employees are satisfactory.
ITEM
1A. RISK
FACTORS
An
investment in our Common Stock is subject to risks inherent to our business.
The
material risks and uncertainties that management believes affect the Company
are
described below. Additional risks and uncertainties that management is not
aware
of or focused on or that management currently deems immaterial may also impair
the Company’s business operations.
-5-
Risk
Factors Relating To Our Business Generally
Our
success depends to a very large degree on our relationship with and the success
of our Hong Kong Joint Venture.
During
fiscal year 2007, 65.04% of our total inventory purchases were made from the
Hong Kong Joint Venture. The products produced by the Hong Kong Joint Venture
include smoke alarms and carbon monoxide alarms, and we are currently pursuing
the development of additional products to be manufactured by the Hong Kong
Joint
Venture. Our purchases from the Hong Kong Joint Venture represented
approximately 46.38% of the Hong Kong Joint Venture’s total sales during fiscal
2007, with the balance of the Hong Kong Joint Venture’s sales being primarily
made in Europe and Australia to unrelated customers. If the Hong Kong Joint
Venture does not maintain profitability, our profitability will be adversely
affected.
In
addition, adverse changes in our relationship with our Hong Kong Joint Venture
partners would unfavorably affect the value of our investment in the Hong Kong
Joint Venture and could have a material adverse effect on our ability to
purchase products for distribution.
Our
reliance on the Hong Kong Joint Venture exposes us to uncertainties and risks
from abroad which could negatively affect our operations and
sales.
Our
relationship with the Hong Kong Joint Venture and our and the Hong Kong Joint
Venture’s sales in other countries expose us to particular risks. The following
are among the risks that could negatively affect our imports and our and the
Hong Kong Joint Venture’s sales in foreign markets:
| · |
new
restrictions on access to markets,
|
| · |
currency
devaluation,
|
| · |
new
tariffs,
|
| · |
adverse
changes in monetary and/or tax
policies,
|
| · |
inflation,
and
|
| · |
governmental
instability.
|
Should
any of these risks occur, the value of our investment in the Hong Kong Joint
Venture could be reduced and our results of operations could be negatively
impacted.
The
lack of availability of inventory could adversely affect our financial
results.
We
source
inventory primarily from our Hong Kong Joint Venture, which has manufacturing
facilities in the People’s Republic of China. Our purchases of inventory are
subject to being affected by a number of factors, namely, production capacity,
labor unrest and untimely deliveries. Changes in economic and political
conditions in China or any other adversity to the Hong Kong Joint Venture will
unfavorably affect the value of our investment in the Hong Kong Joint Venture
and could have a material adverse effect on the our ability to purchase products
for distribution.
Our
Hong Kong Joint Venture is subject to political and economic factors unique
to
China.
The
Chinese government has been reforming the Chinese economic system. In recent
years, the government has also begun reforming the government structure. These
reforms have resulted in significant economic growth and social progress.
Although the majority of the production assets in China are still state-owned,
economic reform policies have emphasized autonomous enterprises and the
utilization of market mechanisms. Our Hong Kong Joint Venture currently expects
that the Chinese government will continue its reform by further reducing
governmental intervention in business enterprises and allowing market mechanisms
to allocate resources. Any adverse changes in political, economic or social
conditions in China could have a material adverse effect on the Hong Kong Joint
Venture’s operations and our financial results, as well as our ability to
purchase products manufactured by the Hong Kong Joint Venture.
We
are subject to risks in connection with the importation of our products from
foreign countries.
We
import
all of our products. As an importer, we are subject to numerous tariffs which
vary depending on types of products and country of origin, changes in economic
and political conditions in the country of manufacture, potential trade
restrictions and currency fluctuations. We have attempted to protect ourselves
from fluctuations in currency exchange rates to the extent possible by
negotiating commitments in U.S. dollars. We are also subject to strikes or
other
labor unrest at points of origin and destination, as well as delays and
restrictions which impact shipping and shipping routes.
-6-
Our
newly acquired Canadian mechanical steel tubing subsidiary will need to increase
production to be profitable.
Icon’s
production of EMT conduit for the six month period ended March 31, 2007 did
not
produce sufficient income to cover operating expenses. If we are unable to
increase production and sales of EMT conduit, our Canadian subsidiary will
continue to generate losses.
We
rely on our key personnel and the loss of one or more of those personnel could
have a material adverse effect on our business, financial condition and results
of operations.
Our
operations and prospects depend in large part on the performance of our senior
management team. There can be no assurance that we would be able to find
qualified replacements for any of these individuals if their services were
no
longer available. The loss of the services of one or more members of our senior
management team could have a material adverse effect on our business, financial
condition, and results of operations.
Our
competition is both intense and varied and our failure to effectively compete
could adversely affect our prospects.
In
fiscal
year 2007, our sales of safety products accounted for 85.06% of our sales.
Many
of our competitors have greater financial resources and financial strength
than
we have. Some of our competitors may be willing to reduce prices and accept
lower profit margins to compete with us. While we believe that our safety
products compete favorably with other such products in the market, primarily
on
the basis of styling, features, and pricing, the safety industry in general
involves changing technology. The success of our products may depend on our
ability to improve and update our products in a timely manner and to adapt
to
new technological advances. As a result of this competition, we could lose
market share and suffer losses, which could have a material adverse effect
on
our future financial performance.
The
security products marketplace is dynamic and challenging because of the
introduction of new products and services.
We
must
constantly introduce new products, services, and product features to meet
competitive pressures. We may be unable to timely change our existing
merchandise sales mix in order to meet these competitive pressures, which may
result in increased inventory costs or loss of market share.
Adverse
changes in national or regional U.S. economic conditions could adversely affect
our financial results.
We
market
our products nationally to retailers, including wholesale distributors, chain,
discount, and home center stores, catalog and mail order companies and to other
distributors. Overall consumer confidence, consumer credit availability,
recessionary trends, housing starts and prices, mortgage rates, and consumers’
disposable income and spending levels directly impact our sales. Negative
trends, whether national or regional in nature, in any of these economic
conditions could adversely affect our financial results.
Our
products must meet specified quality and safety standards to enter and stay
on
the market.
Our
products must meet US. and various international standards before they are
sold.
For example, in the United States, our products must be certified by
Underwriters Laboratories (UL) and similar certifications must be obtained
in
each country where we compete for market share. If our manufacturers’ products
or manufacturing facilities (including those of the Hong Kong Joint Venture
and
Icon) fail to pass periodic inspections, the approval certificates for the
relevant products may be suspended until corrections are made. Loss of UL or
other independent certifications could have a material adverse affect on our
sales and financial results.
Our
products expose us to the potential of product liability
claims.
All
of
our products are manufactured by the Hong Kong Joint Venture, Icon, or others.
Nevertheless, we could be named as a defendant in an action arising from damages
suffered as a result of one of our products. While we carry products liability
insurance, to the extent we are found liable for damages for which we are
uninsured, our profitability may be adversely affected. Any suit, even if not
meritorious or if covered by an indemnification obligation, could result in
the
expenditure of a significant amount of our financial and managerial resources
and could create significant negative publicity for us and our
products.
-7-
We
may be unable to successfully execute our merchandising and marketing strategic
initiatives.
Our
wholly-owned subsidiary, USI Electric focuses its sales and marketing efforts
and initiatives to maximize safety product sales, especially smoke alarms and
carbon monoxide alarms manufactured by our Hong Kong Joint Venture and marketed
to the electrical distribution and retail trade. Our majority-owned subsidiary,
Icon, focuses its marketing efforts and initiatives to maximize its manufactured
mechanical tubing sales. If we fail to successfully execute these initiatives,
our business could be adversely affected.
We
are and could become subject to litigation regarding intellectual property
rights, which could seriously harm our business.
We
design
most of our security products and contract with suppliers to manufacture those
products and deliver them to us. We have been the subject of lawsuits by third
parties which assert against us infringement claims or claims that we have
violated a patent or infringed upon a copyright, trademark or other proprietary
right belonging to them. If such infringement by our suppliers or us were found
to exist, we could be subject to monetary damages and an injunction preventing
the use of their intellectual property. If one of our products were found to
infringe, we may attempt to acquire a license or right to use such technology
or
intellectual property, which could result in higher manufacturing costs. Any
infringement claim, even if not meritorious and/or covered by an indemnification
obligation, could result in the expenditure of a significant amount of our
financial and managerial resources.
If
governmental regulations change or are applied differently, our business could
suffer.
The
sales
of our smoke and carbon monoxide alarms are impacted by local laws and
regulations mandating the installation of these security devices in new and
sometimes existing homes and buildings. Changes in these consumer safety
regulations, both in the United States and abroad, could impact our
business.
Risk
Factors Relating to our Articles of Incorporation and our
Stock
The
liability of our directors is limited.
Our
Articles of Incorporation limit the liability of directors to the maximum extent
permitted by Maryland law.
It
is unlikely that we will issue dividends on our common stock in the foreseeable
future.
We
have
not declared or paid cash dividends on our common stock in over 21 years and
do
not intend to pay cash dividends in the foreseeable future. The payment of
dividends in the future will be at the discretion of our board of
directors.
The
exercise of outstanding options will dilute the percentage ownership of our
stockholders, and any sales in the public market of shares of our common stock
underlying such options may adversely affect prevailing market prices for our
common stock.
As
of
March 31, 2007, there are outstanding options to purchase an aggregate of
102,441 shares of our common stock at per share exercise prices ranging from
$7.68 to $16.09. The exercise of such outstanding options would dilute the
percentage ownership of our existing stockholders, and any sales in the public
market of shares of our common stock underlying such options may adversely
affect prevailing market prices for our common stock.
It
may be difficult for a third party to acquire us, which could affect our stock
price.
Our
charter and Bylaws contain certain anti-takeover provisions pursuant to the
Maryland General Corporation Law. This means that we may be a less attractive
target to a potential acquirer who otherwise may be willing to pay a premium
for
our common stock above its market price.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
Not
applicable.
-8-
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 is due to expire
October 2008. The current rental, with common area maintenance, approximates
$5,835 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 expires in February 2009 and
is
subject to increasing rentals at 3% per year. The monthly rental, with common
area maintenance, approximates $3,089 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 and a 250,000
square-foot manufacturing facility in the Fujian province of Southern
China.
Icon
operates a 40,000 square foot office and manufacturing facility in Toronto,
Canada. The initial lease expires in January 2010 and has two, three-year
renewal options. The current rental with common area maintenance, approximates
$19,560 per month during the current fiscal year, with increasing rentals at
3.7% per year,
The
Company believes that its current facilities, and those of Icon and the Hong
Kong Joint Venture, are currently suitable and adequate.
On
June
10, 2003, Leviton Manufacturing Co., Inc. (“Leviton”) filed a 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 that the Company’s
GFCI units infringe one or more of Leviton’s six patents for reset lockout
technology related to but not required by UL Standard 943 for GFCI units,
effective January 2003. Leviton also asserted trade dress and unfair competition
claims. In May 2006, Leviton and the Company settled the trade dress/deceptive
trade practice claims of the action, all subject to a confidentiality agreement.
The settlement did not cover the patent infringement claims. In January 2006,
the Company was granted summary judgment on the infringement claims and Leviton
appealed that judgment and dismissal. On January 10, 2007, the United States
Court of Appeals for the Federal Circuit issued a decision affirming the lower
court’s summary judgment and dismissal of Leviton’s patent infringement claims.
As a result of this decision, the Company obtained a successful outcome and
the
entirety of this suit by Leviton is now concluded.
On
March
31, 2005, Leviton filed another lawsuit (Case No. 05cv0889) in the United States
District Court for the District of Maryland against the Company. In this suit,
Leviton alleges that the Company’s GFCI units infringe on US Patent 6,864,766.
The Company has filed a counterclaim against Leviton and the case has been
consolidated with a declaratory judgment action filed by the GFCI manufacturer,
Shanghai Meihao Electric, Inc. Discovery is now concluded. 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
June
11, 2003, Walter Kidde Portable Equipment, Inc. (“Kidde”) filed a civil suit
against the Company in the United States District Court for the Middle District
of North Carolina (Case No. 03cv00537), alleging that certain of the Company’s
AC powered/battery backup smoke detectors infringe on a patent acquired by
Kidde. Kidde is seeking injunctive relief and damages to be determined at trial.
On March 31, 2006, following numerous procedural and substantive rulings which
the Company believes were favorable to the Company, Kidde obtained dismissal,
without prejudice, of its suit. On November 28, 2005, prior to the March 31,
2006 dismissal of the original suit, Kidde filed a second lawsuit based on
virtually identical infringement allegations as the earlier case. Because,
the
court dismissed the first case without conditions and without prejudice, the
Company has appealed the dismissal to the United States Court of Appeals for
the
Federal Circuit, believing that at a minimum, procedurally, conditions should
have been imposed. On March 2, 2007, the appellate court affirmed the lower
court’s dismissal of the first case, and the second case is now in the
preliminary stages. Although some aspects of the case are more complicated,
the
Company’s substantive position and its defenses to Kidde’s claims on most issues
are substantially the same as the first Kidde case. 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 the Company is not yet determinable.
On
October 13, 2003, Maple Chase Company filed a civil suit in the United States
District Court for the Northern District of Illinois (Case No. 03cv07205),
against the Company, its USI Electric subsidiary, and one former and one present
Illinois-based sales representative, alleging that certain of the Company's
smoke detectors infringe on a patent owned by Maple Chase (US Reissue Patent
No.
Re: 33290). On April 11, 2005, this action was dismissed pending the outcome
of
a reexamination in the United States Patent and Trademark Office (USPTO). In
April 2006, the USPTO rejected most of the claims in the patent. Maple Chase
filed a substantive response which resulted in issuance of a further Official
Action from the USPTO. After considering Maple Chase’s arguments, on September
29, 2006 the USPTO issued a further action confirming the patentability of
many
of the claims at issue and rejecting others. On October 30, 2006, Maple Chase
filed a further response canceling the rejected claims. On December 19, 2006,
the USPTO issued a formal notice of intent to issue a re-examination certificate
for the Maple Chase Company patent on which the patent infringement suit was
filed. In March 2007, the full term of the patent was reached and no
Re-examination Certificate has been issued by the USPTO. Under the U.S. patent
laws, a patent owner may still sue for damages for up to six years following
expiration of a patent but may recover damages only for the period between
six
years prior to filing the suit and the date of the patent expiration. Therefore,
Maple Chase may still file suit for damages and the amount of potential loss
to
the Company, if any, is not yet determinable but declining daily. The Company
believes that it has meritorious and substantial technical defenses to any
action that might be filed against it by Maple Chase. The Company also believes
that it is entitled to a number of legal and equitable defenses due to the
long
period of inaction and acquiescence by Maple Chase (and its
predecessors).
-9-
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.
There
were no submissions of matters to a vote of security holders during the quarter
ended March 31, 2007.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Set
forth
below is information about the Company’s executive officers.
|
NAME
|
AGE
|
POSITIONS
|
||
|
Harvey
B. Grossblatt
|
60
|
President,
Chief Operating Officer and Chief Executive Officer
|
||
|
James
B. Huff
|
55
|
Chief
Financial Officer, Secretary and
Treasurer
|
HARVEY
B.
GROSSBLATT has been 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 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.
-10-
PART
II
Market
for Common Stock
Our
common
stock, $.01 par value (the “Common Stock”) trades on
the
American Stock Exchange under the symbol UUU.
As
of
June 20, 2007, there were 196 record holders of the Common Stock. The closing
price for the Common Stock on that date was $32.00. 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. 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 October 16, 2006 to
shareholders of record on September 25, 2006.
|
Fiscal
Year Ended March 31, 2007
|
|||||||
|
First
Quarter
|
High
|
$
|
24.45
|
||||
|
Low
|
$
|
17.75
|
|||||
|
Second
Quarter
|
High
|
$
|
26.93
|
||||
|
Low
|
$
|
20.97
|
|||||
|
Third
Quarter
|
High
|
$
|
30.25
|
||||
|
|
Low
|
$
|
20.47
|
||||
|
Fourth
Quarter
|
High
|
$
|
35.04
|
||||
|
|
Low
|
$
|
25.80
|
||||
|
Fiscal
Year Ended March 31, 2006
|
|||||||
|
First
Quarter
|
High
|
$
|
14.63
|
||||
|
Low
|
$
|
9.00
|
|||||
|
Second
Quarter
|
High
|
$
|
14.63
|
||||
|
Low
|
$
|
11.25
|
|||||
|
Third
Quarter
|
High
|
$
|
14.25
|
||||
|
Low
|
$
|
12.01
|
|||||
|
Fourth
Quarter
|
High
|
$
|
18.12
|
||||
|
Low
|
$
|
12.34
|
-11-
Performance
Graph
The
following graph compares
the
cumulative total shareholder return on the Company’s Shares for the period March
31, 2002 through March 31, 2007 with the cumulative total return for the same
period for the NASDAQ Composite Index and the Dow Jones Wilshire SmallCap Index.
Dividend reinvestment has been assumed.
|
Total
Return Analysis
|
|
|
|
|
|
|
|||||||||||||
|
|
3/31/2002
|
3/31/2003
|
3/31/2004
|
3/31/2005
|
3/31/2006
|
3/31/2007
|
|||||||||||||
|
Universal
Security Instruments, Inc.
|
$
|
100.00
|
$
|
230.00
|
$
|
462.16
|
$
|
552.07
|
$
|
785.59
|
$
|
1,650.45
|
|||||||
|
Nasdaq
Composite
|
$
|
100.00
|
$
|
72.11
|
$
|
109.76
|
$
|
111.26
|
$
|
132.74
|
$
|
139.65
|
|||||||
|
Dow
Jones Wilshire SmallCap
|
$
|
100.00
|
$
|
75.37
|
$
|
124.70
|
$
|
134.62
|
$
|
169.50
|
$
|
182.73
|
|||||||
Source:
Research Data Group, Inc
-12-
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, 2003, 2004, 2005, 2006 and 2007 and 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 October 16, 2006 to
shareholders of record on September 25, 2006.
|
Year
Ended March 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||
|
Net
sales
|
$
|
35,823,575
|
$
|
28,894,101
|
$
|
23,465,443
|
$
|
17,201,116
|
$
|
15,953,883
|
||||||
|
Income
before equity in earnings of Hong Kong Joint Venture and income
taxes
|
3,008,597
|
2,394,258
|
765,742
|
429,716
|
279,615
|
|||||||||||
|
Net
income
|
5,533,258
|
4,600,352
|
3,417,854
|
2,571,026
|
2,400,318
|
|||||||||||
|
Per
common share:
|
||||||||||||||||
|
Net
income
|
-
|
|||||||||||||||
|
Basic
|
2.31
|
2.06
|
1.60
|
1.27
|
1.25
|
|||||||||||
|
Diluted
|
2.23
|
1.89
|
1.46
|
1.12
|
1.15
|
|||||||||||
|
Weighted
average number of common shares outstanding
|
||||||||||||||||
|
Basic
|
2,398,284
|
2,228,908
|
2,136,599
|
2,022,461
|
1,924,585
|
|||||||||||
|
Diluted
|
2,484,606
|
2,432,705
|
2,352,632
|
2,300,275
|
2,082,327
|
|||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Total
assets
|
36,195,468
|
20,358,603
|
16,049,948
|
11,098,916
|
8,382,043
|
|||||||||||
|
Long-term
debt (non-current)
|
168,062
|
-
|
-
|
-
|
7,224
|
|||||||||||
|
Working
capital (1)
|
10,177,983
|
9,911,628
|
6,317,231
|
4,200,170
|
2,377,688
|
|||||||||||
|
Current
ratio (1)
|
1.90:1
|
4.60:1
|
3.00:1
|
3.21:1
|
2.26:1
|
|||||||||||
|
Shareholders’
equity
|
24,671,881
|
17,606,569
|
12,897,668
|
9,198,273
|
6,493,415
|
|||||||||||
| (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 2007 and 2006 are
summarized as follows:
|
Quarter
Ended
|
|||||||||||||
|
June
30,
|
September
30,
|
December
31,
|
March
31,
|
||||||||||
|
2007
|
|||||||||||||
|
Net
sales
|
$
|
8,038,437
|
$
|
8,018,088
|
$
|
8,620,893
|
$
|
11,146,157
|
|||||
|
Gross
profit
|
2,780,517
|
2,607,922
|
2,795,342
|
2,492,889
|
|||||||||
|
Net
income
|
1,577,468
|
1,416,204
|
1,712,883
|
826,703
|
|||||||||
|
Net
income per share - basic
|
0.68
|
0.59
|
0.70
|
0.34
|
|||||||||
|
Net
income per share - diluted
|
0.62
|
0.57
|
0.70
|
0.34
|
|||||||||
|
2006
|
|||||||||||||
|
Net
sales
|
$
|
6,923,810
|
$
|
7,119,100
|
$
|
7,353,597
|
$
|
7,497,594
|
|||||
|
Gross
profit
|
2,048,954
|
2,278,838
|
2,549,300
|
2,580,060
|
|||||||||
|
Net
income
|
889,770
|
1,162,695
|
1,456,809
|
1,091,078
|
|||||||||
|
Net
income per share - basic
|
0.40
|
0.52
|
0.65
|
0.49
|
|||||||||
|
Net
income per share - diluted
|
0.37
|
0.48
|
0.60
|
0.44
|
|||||||||
Net
income per share - diluted as stated above for
the quarters ended December 31, 2006 and March 31, 2007 are $0.02 and
$0.01,
respectively,
more than the amounts reported in the
Company's Quarterly Reports on Form10-Q for the respective periods. This
change in net income per share - diluted is as a result of implementation
by the
Company of FAS 123R.
-13-
|
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 the Risk Factors
discussed elsewhere in this Annual Report and other risks, 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. In the third quarter of fiscal 2007, we expanded our business with
the
acquisition of our Canadian EMT conduit subsidiary. 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, 2007,
2006
and 2005 relate to the operational results of the Company and its consolidated
subsidiaries only (including our new Canadian EMT conduit business), and
includes the Company’s equity share of earnings in the Hong Kong Joint Venture.
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, 2007, 2006 and
2005
Sales.
In
fiscal year 2007, our net sales increased by $6,929,474 (23.98%), from
$28,894,101 in fiscal 2006 to $35,823,575 in fiscal 2007. Sales to the
electrical distribution trade through our USI Electric subsidiary decreased
to
$19,916,690, principally due to decreased volume from the U.S. residential
construction trade (from approximately $21,260,000 in 2006). The Company
increased its sales to retail and wholesale customers in the fiscal year ended
March 31, 2007 to $11,705,964 from $7,634,030 at March 31, 2006, principally
as
a result of sales to a national home improvement retailer. Consolidated net
sales include net sales of our Canadian subsidiary of $4,200,921.
In
fiscal
year 2006, sales increased by $5,428,658 (23.1%) from $23,465,443 in fiscal
2005
to $28,894,101 in fiscal 2006. Our focus on marketing to the electrical
distribution trade through our USI Electric subsidiary accounted for
approximately $4,780,000 of the increased 2006 sales, principally due to
increased volume (from approximately $16,480,000 in 2005 to approximately
$21,260,000 in 2006). The Company also increased its sales to retail and
wholesale customers in the fiscal year ended March 31, 2006.
Gross
Profit.
Gross
profit margin is calculated as net sales less cost of goods sold expressed
as a
percentage of net sales. Our gross profit margin for the fiscal year ended
March
31, 2007 was 29.80% compared to 32.73% and 31.19% in fiscal 2006 and 2005,
respectively. The decrease in 2007 gross margins is attributed to lower gross
margins on retail sales and to lower gross profit realized by our Canadian
operations, as further explained below. The increase in gross margin in the
fiscal year ended March 31, 2006 over 2005 reflects variations in the mix of
products sold and is a function of higher sales, since certain fixed costs
do
not increase at the same rate as sales.
Our
U.S.
operations’ gross profit margin for the fiscal year ended March 31, 2007 is
33.01% compared to 32.73% and 31.19% for fiscal for fiscal 2006 and 2005,
respectively. The decrease in 2007 gross margin for our U.S. operations is
attributed primarily to reduced margins on increased retail sales, and the
increase in 2006 gross margin over 2005 reflects variations in the mix of
products sold and is a function of higher sales.
Our
Canadian operations’ gross profit margin for the six months ended March 31, 2007
is 5.63%. We believe that these low margins are attributable to certain high
costs and low productivity. Since these high costs will not increase at the
same
rate as sales, we have initiated steps to increase Icon’s productivity and sales
which we believe will have a significant positive impact on the Canadian
operations’ gross profit margin and results of operations.
Expenses.
Selling,
general and administrative expenses for fiscal 2007 increased by $513,781
(7.58%), from $6,776,688 in fiscal 2006 to $7,290,469 in fiscal 2007. As a
percentage of net sales, these expenses decreased to 20.35% for the fiscal
year
ended March 31, 2007 from 23.45% for the fiscal year ended March 31, 2006.
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 and a reduction in legal expenses from the 2006 period. With respect
to
the $513,781 fiscal 2007 increase in dollars spent on selling, general and
administrative expenses, our legal expenses in fiscal 2007 decreased by
$484,145, due solely to decreased activity on matters before the court, from
$822,477 in fiscal 2006 to $338,332 in fiscal 2007. The reduction in legal
expense was partially offset by a fiscal 2007 increase of $407,635 in salaries,
wages and employee benefits. Approximately $743,860 of our fiscal 2007 expenses
represent the selling, general and administrative expenses of our Canadian
EMT
conduit operations for the period from acquisition of October 2006 to March
31,
2007.
-14-
Selling,
general and administrative expenses for fiscal 2006 increased by $585,663
(9.45%) from $6,191,025 in fiscal 2005 to $6,776,688 in fiscal 2006. As a
percentage of net sales, these expenses decreased to 23.45% for the fiscal
year
ended March 31, 2006 from 26.38% for the fiscal year ended March 31, 2005.
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 and a reduction in legal expenses from the 2005 period. Our legal
expenses decreased by $259,876 in 2006 to $822,477 from $1,082,353 in fiscal
2005. The reduction in legal expense was partially offset by an increase
of
$718,216 in commissions and freight charges; the account classification which
was the most significant factor in this dollar increase, due to our higher
2006
sales volume. Commissions and freight charges, as a percentage of sales,
while
consistent with commission and freight charges of the prior year, vary directly
with sales volume.
Interest
Income and Expense. Interest
expense for fiscal 2007 increased to $73,517 from $48,999 in fiscal 2006
primarily due to increased borrowing. Interest expense for fiscal 2006 decreased
to $48,999 from $85,521 in fiscal 2005 primarily due to less borrowing. The
majority of the Company’s cash balances are maintained on deposit with the
Company’s factor and earn interest at the factor’s prime rate of interest minus
3%. During the fiscal year ended March 31, 2007, the Company earned interest
of
$22,023 on these deposits and $9,668 on these deposits for the year ended
March
31, 2006.
Income
Taxes.
During
the fiscal year ended 2007, the Company offset the payment of taxes on
$3,265,940 of taxable income with the difference between the option price
and
the exercise price recognized as an employment expense for federal income
tax
purposes related to employee stock options. For book purposes, this benefit
has
been treated as an addition to paid-in capital. In addition, the Company
offset
a portion of its federal taxes of approximately $731,395 with foreign tax
credits available as a result of foreign taxes paid on the repatriated
earnings
of the Hong Kong Joint Venture. The Company has a foreign tax credit
carryforward of $190,887 available to offset future taxes at March 31,
2007.
After application of the deductions and credits identified above, the Company
has a net tax liability for federal and state income tax purposes of
approximately $337,000. The deductions and the income tax credits for foreign
income taxes paid resulted in an effective income tax rate of approximately
19.28% for the fiscal year ended March 31, 2007.
During
the fiscal year ended 2006, the Company offset $2,151,593 of taxable income
by
utilizing the remainder of its net operating loss carryforward deduction.
In
addition, the Company offset federal taxes of approximately $115,000 with
foreign tax credits available as a result of foreign taxes paid on the
repatriated earnings of the Hong Kong Joint Venture. At March 31, 2006, the
Company has no remaining net operating loss carryforwards available to offset
future U.S. federal taxable income, and the valuation allowance previously
established to offset tax benefits associated with our net operating loss
carryforwards and other deferred tax assets was fully utilized. The Company
recognized an income tax benefit of $96,500 and $281,137 for fiscal year
2006
and 2005, respectively.
Net
Income. We
reported net income of $5,533,258 for fiscal year 2007 compared to a net
income
of $4,600,352 for fiscal year 2006, a $932,906 (20.28%) increase. This increase
in net income resulted from increased income of our Hong Kong Joint Venture,
partially offset by higher selling, general and administrative expenses as
described above, and the income tax effects described above. Net income also
was
impacted by a net loss from our Canadian subsidiary of $570,961. Although
no
assurances can be given, management believes that actions which Icon is now
taking to increase capacity, together with sales efforts by Icon and the
Company, will have a positive impact on Icon’s financial results in future
periods.
We
reported net income of $4,600,352 for fiscal year 2006 compared to a net
income
of $3,417,854 for fiscal year 2005, a $1,182,498 (34.60%) 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 with CIT Group, 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. Based on specified percentages
of our
accounts receivable and inventory and letter of credit commitments, at March
31,
2007, our maximum borrowing availability under this Agreement is $6,751,563.
Any
outstanding principal balance under this Agreement is payable upon demand.
The
interest rate on the Factoring Agreement, on the uncollected factored accounts
receivable and any additional borrowings is equal to the prime rate of interest
charged by the factor which, as of March 31, 2007, was 8.25%. Any borrowings
are
collateralized by all our accounts receivable and inventory. During the year
ended March 31, 2007, working capital (computed as the excess of current
assets
over current liabilities) increased by $266,355, from $9,911,628 on March
31,
2006, to $10,177,983 on March 31, 2007.
-15-
Subsequent
to our fiscal year end, on June 22, 2007 we entered into an Amended and Restated
Factoring Agreement with CIT Group/Commercial
Services, Inc.
At the
same time, our Icon Canadian subsidiary entered into a financing facility
with
CIT Financial Ltd., as described in our Current Report on Form 8-K filed
with
the Securities and Exchange Commission on June 26, 2007.
Our
operating activities used cash of $3,169,647 for the year ended March 31,
2007.
For the fiscal year ended March 31, 2006, operating activities provided
cash of
$1,776,297. This decrease of $4,945,944 was primarily due to increases
in
accounts receivable, inventory and prepaid expenses generated by U.S. operations
associated with sales to a national home improvement retailer and associated
with the Canadian operations, and to the earnings of our Hong Kong Joint
Venture. These decreases were partially offset by increases in accounts
payable
and accrued expenses associated with the Canadian operations.
Our
investing activities used cash of $1,139,562 during fiscal 2007 and provided
cash of $1,091,358 during fiscal 2006. This decrease resulted primarily
from our
acquisition of the Canadian operations and our subsequent purchases of
machinery
and equipment to be utilized in the Canadian operations, partially offset
by
distributions from the Hong Kong Joint Venture. During 2007, as in prior
years,
the Company offset a portion of its distributions from the Hong Kong Joint
Venture with amounts due by the Company to the Hong Kong Joint Venture
for the
purchase of safety products. The Company offset $250,000 during fiscal
2007 and
$458,940 during fiscal 2005 of trade amounts due by it to the Hong Kong
Joint
Venture in lieu of cash distributions. The Company discloses these payments
as a
non-cash transaction in its statement of cash flows.
Financing
activities in 2007 provided the Company with cash of $1,566,188. Borrowings
of
$2,254,966 from our factor provided a portion of the cash used to repay
$2,333,036 of debt acquired in the acquisition of the Canadian subsidiaries.
Our
net debt repayment was offset by cash provided from the issuance of common
stock
from the exercise of employee stock options of $585,658 and the tax benefit
associated with the deduction of employment expense related thereto. Financing
activities in 2006 provided cash of $98,549 which was 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 -
US GAAP
differences in the Hong Kong Joint Venture’s accounting policies.
In
fiscal
year 2007, sales of the Hong Kong Joint Venture were $41,151,055 compared
to
$24,811,790 and $25,899,630 in fiscal years 2006 and 2005, respectively.
The
increase in sales for 2007 was primarily due to increased sales to
non-affiliated customers. The decrease in sales for the 2006 period from
the
2005 period was primarily due to lower sales to unrelated third parties,
partially offset by higher sales to the Company.
Net
income was $8,377,365 for fiscal year 2007 compared to net income of $4,160,935
and $5,005,886 in fiscal years 2006 and 2005, respectively. The increase
in the
current fiscal year is primarily due to increased sales volume. Net income
for
the fiscal year ended March 31, 2006 was decreased by the establishment of
a
reserve of approximately $535,000 for previously capitalized costs associated
with the Hong Kong Joint Venture’s application for listing on the Hong Kong
Stock Exchange during the fourth quarter and for the fiscal year ended March
31,
2006. The increase in income for the year ended March 31, 2006 was due primarily
to price increases initiated during the year.
Gross
margins of the Hong Kong Joint Venture for fiscal 2007 decreased to 33.42%
from
34.69% in the prior fiscal year. The primary reason for this decrease was
due to
variation in product mix. At March 31, 2006, the Hong Kong Joint Venture’s gross
margin increased to 34.69% from 33.55% at March 31, 2005. The primary reason
for
this increase was higher gross margins attributed to price increases initiated
during the year.
Selling,
general and administrative expenses of the Hong Kong Joint Venture were
$4,789,424, $4,269,714 and $3,495,678 for fiscal years 2007, 2006 and 2005,
respectively. As a percentage of sales, these expenses were 12%, 17% and
13% for
fiscal years 2007, 2006 and 2005, respectively. The increase in dollars of
selling, general and administrative expenses for the year ended March 31,
2006
was due to higher costs, increased legal expense and the expensing of
approximately $535,000 of costs previously capitalized associated with the
Hong
Kong Joint Venture’s application for listing on the Hong Kong Stock
Exchange.
-16-
Interest
expense net of interest income was $52,181 for fiscal year 2007, compared
to
$34,130 and $30,666 in fiscal years 2006 and 2005, respectively. The increase
in
interest expense net of interest income for 2007 was due to a decrease in
investments. The increase from 2005 to 2006 is due to variations in the amount
of investments in bonds during that fiscal period.
Cash
needs of the Hong Kong Joint Venture are currently met by funds generated
from
operations. During fiscal year 2007, working capital increased by $5,558,281
from $1,826,756 on March 31, 2006 to $7,385,037 on March 31, 2007.
Contractual
Obligations and Commitments
The
following table presents, as of March 31, 2007, 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 F to the
consolidated financial statements.
|
Payment
due by period
|
||||||||||||||||
|
Less
than
|
1-3
|
3-5
|
More
than
|
|||||||||||||
|
Total
|
1
year
|
years
|
years
|
5
years
|
||||||||||||
|
Operating
lease obligations
|
$
|
765,737
|
$
|
312,830
|
$
|
452,907
|
$
|
-
|
$
|
-
|
||||||
|
Capital
lease obligations
|
269,737
|
101,675
|
146,621
|
21,441
|
-
|
|||||||||||
|
Notes
payable
|
231,625
|
231,625
|
-
|
-
|
-
|
|||||||||||
|
Note
payable - factor
|
2,254,966
|
2,254,966
|
-
|
-
|
-
|
|||||||||||
|
$
|
3,522,065
|
$
|
2,901,096
|
$
|
599,528
|
$
|
21,441
|
$
|
-
|
|||||||
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.
We
believe that the following critical accounting policies affect management’s more
significant judgments and estimates used in the preparation of its consolidated
financial statements. For a detailed discussion on the application on these
and
other accounting policies see Note A to the consolidated financial statements
included in this Annual Report. Certain of our accounting policies require
the
application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty and actual results
could differ from these estimates. These judgments are based on our historical
experience, terms of existing contracts, current economic trends in the
industry, information provided by our customers, and information available
from
outside sources, as appropriate. Our critical accounting policies
include:
Our
revenue recognition policies are in compliance with Staff Accounting Bulletin
No. 104, “Revenue
Recognition in Financial Statements”
issued by the Securities
and Exchange Commission.
Revenue
is recognized at the time product is shipped and title passes pursuant to
the
terms of the agreement with the customer, the amount due from the customer
is
fixed and collectibility of the related receivable is reasonably assured.
We
established allowances to cover anticipated doubtful accounts and sales returns
based upon historical experience.
Inventories
are valued at the lower of market or cost. Cost is determined on the first-in
first-out method. We have recorded a reserve for obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. Management reviews the reserve quarterly.
-17-
We
currently have a foreign tax credit carryforward and deferred tax assets
resulting from deductible temporary differences, which will reduce taxable
income in future periods. We had previously provided a valuation allowance
on
the deferred tax assets associated with the future tax benefits such as foreign
tax credits, foreign net operating losses, capital losses and net operating
losses. A
valuation allowance is required when it is more likely than not that all
or a
portion of a deferred tax asset will not be realized. Forming a conclusion
that
a valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses and losses in recent years. Cumulative losses weigh
heavily in the overall assessment. As a result of management’s assessment, the
allowance previously provided to offset tax benefits associated with net
operating loss carryforwards and other deferred tax assets at March 31, 2007
has
been reduced to zero.
We
are
subject to lawsuits and other claims, related to patents and other matters.
Management is required to assess the likelihood of any adverse judgments
or
outcomes to these matters, as well as potential ranges of probable losses.
A
determination of the amount of reserves required, if any, for these
contingencies is based on a careful analysis of each individual issue with
the
assistance of outside legal counsel. The required reserves may change in
the
future due to new developments in each matter or changes in approach such
as a
change in settlement strategy in dealing with these matters.
Recently
Issued Accounting Pronouncements
In
May
2006, the FASB issued Statement 154, Accounting for Changes and Error
Corrections, which replaces APB Opinion No. 20, Accounting Changes, and
Statement 3, Reporting Accounting Changes in Interim Financial Statements,
and
provides guidance on the accounting for and reporting of accounting changes
and
error corrections. Statement 154 applies to all voluntary changes in accounting
principle and requires retrospective application (a term defined by the
statement) to prior periods’ financial statements, unless it is impracticable to
determine the effect of a change. It also applies to changes required by
an
accounting pronouncement that does not include specific transition provisions.
In addition, Statement 154 redefines restatement as the revising of previously
issued financial statements to reflect the correction of an error. The statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2006. The Company will adopt Statement
154
beginning April 1, 2007 and does not foresee any changes to its financial
statements.
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements:
In
September 2006, the U.S. Securities and Exchange Commission staff issued
Staff
Accounting Bulletin No. 108 (SAB 108), Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB 108
eliminates the diversity of practice regarding how public companies quantity
financial statement misstatements. It establishes an approach that requires
quantification of financial statement misstatements based on the effects
of the
misstatements on each of the Company’s financial statements and the related
financial statement discloses, SAB 108 must be applied to annual financial
statements for their first fiscal year ended after November 15, 2006. The
adoption of SAB 108 did not have a material impact on the Company’s financial
condition or results of operations.
Fair
Value Measurements:
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair
Value Measurement (SFAS 157).
This
standard clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS 157 is effective
for
financial statements issued for fiscal years beginning after November 15,
2007.
The Company has not yet determined the impact that the implementation of
SFAS
157 will have on its results of operations or financial condition.
Accounting
for Uncertainty in Income Taxes:
In July
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109,
which
clarifies the accounting for uncertainty in tax positions. FIN 48 requires
that
the Company recognizes in its financial statements the impact of a tax position
if that position is more likely than not to be sustained upon audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
as
of the beginning of our 2007 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. The Company is currently reviewing the impact of adopting the
provisions of FIN 48.
The
Fair Value Option for Financial Assets and Financial
Liabilities:
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities,
including an amendment of FASB Statements No. 115 (SFAS No. 159). SFAS No.
159
permits entities to choose, at specified election dates, to measure eligible
items at fair value (the “fair value option”). A business entity shall report
unrealized gains and losses on items for which the fair value option has
been
elected in earnings at each subsequent reporting period. This accounting
standard is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The effect, if any, of adopting SFAS No.
159 on
the Company’s financial position and results of operations has not been
finalized.
-18-
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 (8.25% at March 31, 2007). 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, 2007 and during the fiscal
year then ended, we had $2,254,966 principal outstanding under the facility.
We
do not utilize derivative financial instruments to hedge against changes
in
interest rates or for any other purpose.
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.
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.
During
the third quarter of fiscal 2007, we acquired Icon and Intube. Management
is
assessing the system of internal controls at the acquired subsidiaries. Our
internal control over financial reporting during the most recent fiscal year
has
not been materially affected, or are reasonably likely to be materially
affected.
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.
ITEM
9B. OTHER
INFORMATION
Not
applicable.
-19-
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 Company’s definitive Proxy Statement to
be filed pursuant to Regulation 14A and issued in conjunction with the 2007
Annual Meeting of Stockholders (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 regarding security ownership is incorporated
herein by reference to the sections captioned “Beneficial Ownership” and
“Information Regarding Share Ownership of Management” in the Proxy Statement.
Information required by this item regarding our equity compensation plans
is
incorporated herein by reference to the Section entitled “Executive
Compensation” in the Proxy Statement.
ITEM
13. CERTAIN
RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
information required by this item is incorporated herein by reference to
the
sections captioned “Transactions with Management”, if any, and “Election of
Directors” 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.
-20-
PART
IV
(a)1.
Financial Statements.
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of March 31, 2007 and 2006
|
F-2
|
|
Consolidated
Statements of Income for the Years Ended March 31, 2007, 2006
and 2005
|
F-3
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended March 31, 2007,
2006 and 2005
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2007,
2006 and
2005
|
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.
1-31747)
|
| 3.2 |
Articles
Supplementary, filed October 14, 2003 (incorporated by reference
to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31,
2002,
file No. 1-31747)
|
| 3.3 |
Bylaws,
as amended (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed June 13, 2007, file No.
1-31747)
|
| 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.
1-31747)
|
| 10.2 |
Hong
Kong Joint Venture Agreement, as amended (incorporated by reference
to
Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year
ended March 31, 2003, File No.
1-31747)
|
| 10.3 |
Amended
Factoring Agreement with CIT Group (successor to Congress Talcott,
Inc.)
dated November 14, 1999 (incorporated by reference to Exhibit 10.3
to the
Company’s Annual Report on Form 10-K for the year ended March 31, 2003,
File No. 1-31747)
|
| 10.4 |
Amendment
to Factoring Agreement with CIT Group (incorporated by reference
to
Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 2006, File No.
1-31747)
|
| 10.5 |
Amendment
to Factoring Agreement with CIT Group dated September 28, 2004
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly
Report on Form 10-Q for the period ended September 30, 2004, File
No.
1-31747)
|
|
10.6
|
Amended
and Restated Factoring Agreement between the Registrant and The
CIT
Group/Commercial Services, Inc. (“CIT”), dated June 22, 2007
(substantially identical agreement entered into by the Registrant’s
wholly-owned subsidiary, USI Electric, Inc.) (incorporated by reference
to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 26,
2007, file No. 1-31747)
|
|
10.7
|
Amended
and Restated Inventory Security Agreement between
the Registrant and CIT, dated June 22, 2007 (substantially identical
agreement entered into by the Registrant’s wholly-owned subsidiary, USI
Electric, Inc.) (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed June 26, 2007, file No.
1-31747)
|
|
10.8
|
Credit
Agreement between International Conduits Ltd. (“Icon”) and CIT Financial
Ltd. (“CIT Canada”), dated June 22, 2007 (“CIT Canada Credit Agreement”)
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed June 26, 2007, file No.
1-31747)
|
|
10.9
|
General
Security Agreement between CIT Canada and Icon, dated June 22,
2007, with
respect to the obligations of Icon under the CIT Canada Credit
Agreement
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed June 26, 2007, file No.
1-31747)
|
| 10.10 |
Guaranty
made by the Registrant and
USI Electric, Inc., in favor of CIT
Canada, dated
June 22, 2007, with respect to the obligations of Icon under the
CIT
Canada Credit Agreement (incorporated by reference to Exhibit 10.5
to the
Company’s Current Report on Form 8-K filed June 26, 2007, file No.
1-31747)
|
| 10.11 |
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.
1-31747)
|
-21-
| 10.12 |
Amended
and Restated Employment Agreement dated July 18, 2006 between the
Company
and Harvey B. Grossblatt (incorporated by reference to Exhibit
10.7 to the
Company’s Quarterly Report on Form 10-Q for the period ended September
30,
2006, File No. 1-31747)
|
| 14 |
Code
of Ethics (incorporated
by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for
the year ended March 31, 2004, File No.
1-31747)
|
| 21 |
Subsidiaries
of the Registrant*
|
|
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 July 12, 2007*
|
*Filed
herewith
(c) Financial
Statements Required by Regulation S-X.
Separate
financial statements of the Hong Kong Joint Venture
|
Independent
Auditors’ Report
|
JV-1
|
|
Report
of Independent Registered Public Accounting Firm
|
JV-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
|
|
JV-8
|
-22-
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.
|
||
| |
|
|
| July 12, 2007 | 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
Harvey
B. Grossblatt
|
President,
Chief Executive Officer
and
Director
|
July
12, 2007
|
||
|
/s/
James B. Huff
James
B. Huff
|
Chief
Financial Officer
|
July
12, 2007
|
||
|
/s/
Cary Luskin
Cary
Luskin
|
Director
|
July
12, 2007
|
||
|
/s/
Ronald A. Seff
Ronald
A. Seff
|
Director
|
July
12, 2007
|
||
|
Howard
Silverman, Ph.D.
|
Director
|
July
12, 2007
|
-23-
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, 2007 and
2006,
and the related consolidated statements of income, shareholders' equity,
and
cash flows for each of the three years in the period ended March 31, 2007.
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. The Company is not required
to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Universal Security
Instruments, Inc. and subsidiaries as of March 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years
in
the period ended March 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
Our
audit
was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/
GRANT
THORNTON LLP
Baltimore,
Maryland
July
11,
2007
F-1
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
March
31
|
|||||||
|
2007
|
2006
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
240,545
|
$
|
3,015,491
|
|||
|
Accounts
receivable:
|
|||||||
|
Trade
less allowance for doubtful accounts of $15,000 at March 31,
2007 and 2006
|
2,555,895
|
1,106,435
|
|||||
|
Employees
|
22,073
|
23,656
|
|||||
|
2,577,968
|
1,130,091
|
||||||
|
Amount
due from factor
|
7,158,597
|
4,259,131
|
|||||
|
Inventories,
net of allowance for obsolete inventory of $40,000 at March
31, 2007
and 2006
|
11,318,734
|
4,062,086
|
|||||
|
Prepaid
expenses
|
237,666
|
196,863
|
|||||
|
TOTAL
CURRENT ASSETS
|
21,533,510
|
12,663,662
|
|||||
|
DEFERRED
TAX ASSET
|
808,566
|
476,384
|
|||||
|
INVESTMENT
IN HONG KONG JOINT VENTURE
|
9,072,284
|
7,140,859
|
|||||
|
PROPERTY
AND EQUIPMENT - NET
|
3,030,060
|
62,212
|
|||||
|
GOODWILL
|
1,732,562
|
-
|
|||||
|
OTHER
ASSETS
|
18,486
|
15,486
|
|||||
|
TOTAL
ASSETS
|
$
|
36,195,468
|
$
|
20,358,603
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Note
payable - factor
|
$
|
2,254,966
|
$
|
-
|
|||
|
Notes
payable - other
|
231,625
|
-
|
|||||
|
Current
portion of lease obligation
|
74,394
|
-
|
|||||
|
Accounts
payable
|
6,777,283
|
1,604,845
|
|||||
|
Accrued
liabilities:
|
|||||||
|
Litigation
reserve
|
703,193
|
556,787
|
|||||
|
Payroll
and employee benefits
|
622,083
|
243,197
|
|||||
|
Commissions
and other
|
691,981
|
347,205
|
|||||
|
TOTAL
CURRENT LIABILITIES
|
11,355,525
|
2,752,034
|
|||||
|
LONG-TERM
OBLIGATIONS
|
|||||||
|
Long-term
portion of lease obligation
|
168,062
|
-
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
-
|
-
|
|||||
|
Minority
Interest
|
-
|
-
|
|||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Common
stock, $.01 par value per share; authorized 20,000,000 shares;
issued
and outstanding 2,475,612 and 2,258,409 shares at March 31, 2007
and
March 31, 2006, respectively
|
24,756
|
22,584
|
|||||
|
Additional
paid-in capital
|
13,214,025
|
11,571,939
|
|||||
|
Retained
earnings
|
11,545,304
|
6,012,046
|
|||||
|
Other
comprehensive loss
|
(112,204
|
)
|
-
|
||||
|
TOTAL
SHAREHOLDERS’ EQUITY
|
24,671,881
|
17,606,569
|
|||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
36,195,468
|
$
|
20,358,603
|
|||
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|||||||
F-2
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Years
Ended March 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
sales
|
$
|
35,823,575
|
$
|
28,894,101
|
$
|
23,465,443
|
||||
|
Cost
of goods sold
|
25,146,905
|
19,436,949
|
16,145,615
|
|||||||
|
GROSS
PROFIT
|
10,676,670
|
9,457,152
|
7,319,828
|
|||||||
|
Research
and development expense
|
296,534
|
246,875
|
277,540
|
|||||||
|
Selling,
general and administrative expense
|
7,290,469
|
6,776,688
|
6,191,025
|
|||||||
|
Loss
on foreign currency transactions
|
29,576
|
-
|
-
|
|||||||
|
Operating
income
|
3,060,091
|
2,433,589
|
851,263
|
|||||||
|
|
||||||||||
|
Other
income (expense):
|
||||||||||
|
Interest
expense
|
(73,517
|
)
|
(48,999
|
)
|
(85,521
|
)
|
||||
|
Interest
income
|
22,023
|
9,668
|
-
|
|||||||
|
(51,494
|
)
|
(39,331
|
)
|
(85,521
|
)
|
|||||
|
INCOME
BEFORE EQUITY IN EARNINGS OF AFFILIATES
|
3,008,597
|
2,394,258
|
765,742
|
|||||||
|
|
||||||||||
|
Equity
in earnings of Hong Kong Joint Venture
|
3,845,960
|
2,109,594
|
2,370,975
|
|||||||
|
Net
income before income taxes and minority interest
|
6,854,557
|
4,503,852
|
3,136,717
|
|||||||
|
Minority
interest
|
-
|
-
|
-
|
|||||||
|
Provision
for income tax expense (benefit)
|
1,321,299
|
(96,500
|
)
|
(281,137
|
)
|
|||||
|
NET
INCOME
|
$
|
5,533,258
|
$
|
4,600,352
|
$
|
3,417,854
|
||||
|
Net
income per share:
|
||||||||||
|
Basic
|
$
|
2.31
|
$
|
2.06
|
$
|
1.60
|
||||
|
Diluted
|
$
|
2.23
|
$
|
1.89
|
$
|
1.45
|
||||
|
Shares
used in computing net income per share:
|
||||||||||
|
Basic
|
2,398,284
|
2,228,908
|
2,136,599
|
|||||||
|
Diluted
|
2,484,606
|
2,432,705
|
2,352,632
|
|||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
||||||||||
F-3
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Common
Stock
|
|
|
|
|
||||||||||||||
|
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Other
Comprehensive
Income
|
|
Total
|
||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
Balance
at March 31, 2004
|
2,070,528
|
$
|
20,705
|
$
|
11,183,393
|
($2,005,825
|
)
|
-
|
$
|
9,198,273
|
|||||||||
|
|
|||||||||||||||||||
|
Fractional
shares unissued from 4-for-3 split
|
(173
|
)
|
(2
|
)
|
-
|
-
|
-
|
(2
|
)
|
||||||||||
|
|
|||||||||||||||||||
|
Issuance
of common stock from the exercise of employee stock
options
|
132,375
|
1,324
|
270,551
|
(332
|
)
|
-
|
271,543
|
||||||||||||
|
|
|||||||||||||||||||
|
Stock
issued in lieu of directors’ fees
|
1,267
|
13
|
9,990
|
(3
|
)
|
-
|
10,000
|
||||||||||||
|
|
|||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
3,417,854
|
-
|
3,417,854
|
|||||||||||||
|
|
|||||||||||||||||||
|
Balance
at March 31, 2005
|
2,203,997
|
$
|
22,040
|
$
|
11,463,934
|
$
|
1,411,694
|
-
|
$
|
12,897,668
|
|||||||||
|
|
|||||||||||||||||||
|
Issuance
of common stock from the exercise of employee stock
options
|
53,805
|
538
|
98,011
|
-
|
-
|
98,549
|
|||||||||||||
|
|
|||||||||||||||||||
|
Stock
issued in lieu of directors’ fees
|
607
|
6
|
9,994
|
-
|
-
|
10,000
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
4,600,352
|
-
|
4,600,352
|
|||||||||||||
|
|
|||||||||||||||||||
|
Balance
at March 31, 2006
|
2,258,409
|
$
|
22,584
|
11,571,939
|
$
|
6,012,046
|
-
|
$
|
17,606,569
|
||||||||||
|
|
|||||||||||||||||||
|
Issuance
of common stock from the exercise of employee stock
options
|
217,203
|
2,172
|
583,486
|
-
|
-
|
585,658
|
|||||||||||||
|
|
|||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
5,533,258
|
-
|
-
|
|||||||||||||
|
|
|||||||||||||||||||
|
Effect
of currency translation
|
-
|
-
|
-
|
-
|
(112,204
|
)
|
-
|
||||||||||||
|
|
|||||||||||||||||||
|
Comprehensive
income
|
-
|
-
|
-
|
-
|
-
|
5,421,054
|
|||||||||||||
|
|
|||||||||||||||||||
|
Tax
benefit from exercise of stock options
|
-
|
-
|
1,058,600
|
-
|
-
|
1,058,600
|
|||||||||||||
|
|
|||||||||||||||||||
|
Balance
at March 31, 2007
|
2,475,612
|
$
|
24,756
|
$
|
13,214,025
|
$
|
11,545,304
|
$
|
(112,204
|
)
|
$
|
24,671,881
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended March 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||
|
OPERATING
ACTIVITIES
|
||||||||||
|
Net
income
|
$
|
5,533,258
|
$
|
4,600,352
|
$
|
3,417,854
|
||||
|
Adjustments
to reconcile net income to net cash
used
in operating activities:
|
||||||||||
|
Depreciation
and amortization
|
150,972
|
28,338
|
34,048
|
|||||||
|
Stock
issued to directors in lieu of fees
|
-
|
10,000
|
10,000
|
|||||||
|
(Increase)
in deferred taxes
|
(318,227
|
)
|
(124,604
|
)
|
(294,881
|
)
|
||||
|
Earnings
of the Hong Kong Joint Venture
|
(3,845,960
|
)
|
(2,109,594
|
)
|
(2,485,302
|
)
|
||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
(Increase)
in accounts receivable and amounts due from factor
|
(3,187,222
|
)
|
(958,878
|
)
|
(1,204,719
|
)
|
||||
|
(Increase)
decrease in inventories
|
(5,430,731
|
)
|
772,400
|
(1,966,836
|
)
|
|||||
|
Decrease
(increase) in prepaid expenses
|
28,079
|
(51,469
|
)
|
(38,342
|
)
|
|||||
|
Increase
(decrease) in accounts payable and accrued expenses
|
3,903,184
|
(400,248
|
)
|
1,430,096
|
||||||
|
Increase
in other assets
|
(3,000
|
)
|
-
|
-
|
||||||
|
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(3,169,647
|
)
|
1,766,297
|
(1,098,082
|
)
|
|||||
|
INVESTING
ACTIVITIES:
|
||||||||||
|
Cash
distributions from Joint Venture
|
1,914,535
|
1,100,216
|
727,167
|
|||||||
|
Purchase
of equipment
|
(1,130,474
|
)
|
(8,858
|
)
|
(22,307
|
)
|
||||
|
Acquisition
of subsidiaries, net of cash acquired
|
(1,923,623
|
)
|
-
|
-
|
||||||
|
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(1,139,562
|
)
|
1,091,358
|
704,860
|
||||||
|
FINANCING
ACTIVITIES:
|
||||||||||
|
Borrowing
from factor
|
2,254,966
|
-
|
-
|
|||||||
|
Principal
payment of notes payable
|
(2,333,036
|
)
|
-
|
-
|
||||||
|
Principal
payments of lease obligations
|
-
|
|
-
|
(7,224
|
)
|
|||||
|
Proceeds
from issuance of common stock from exercise of employee stock
options
|
585,658
|
98,549
|
271,543
|
|||||||
|
Tax
benefit from exercise of stock options
|
1,058,600
|
-
|
-
|
|||||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
1,566,188
|
98,549
|
264,319
|
|||||||
|
Effects
of exchange rate on cash
|
(31,925
|
)
|
-
|
-
|
||||||
|
(DECREASE)
INCREASE IN CASH
|
(2,774,946
|
)
|
2,956,204
|
(128,903
|
)
|
|||||
|
Cash
at beginning of period
|
3,015,491
|
59,287
|
188,190
|
|||||||
|
CASH
AT END OF PERIOD
|
$
|
240,545
|
$
|
3,015,491
|
$
|
59,287
|
||||
|
Supplemental
information:
|
||||||||||
|
Interest
paid
|
$
|
73,517
|
$
|
48,999
|
$
|
85,521
|
||||
|
Income
taxes paid
|
$
|
109,500
|
$
|
50,320
|
$
|
17,000
|
||||
|
Non-cash
investing transactions:
|
||||||||||
|
Issuance
of 455 shares in 2006 and 950 shares in 2005 in lieu of directors’
fees
and accrued compensation
|
$
|
-
|
$
|
10,000
|
$
|
10,000
|
||||
|
Offset
of trade payables due the Hong Kong Joint Venture in lieu of
cash
Distributions
|
$
|
250,000
|
$
|
-
|
$
|
458,940
|
||||
|
The
accompanying notes are an integral part of these consolidated
financial
statements
|
||||||||||
F-5
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Business:
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. During the third quarter, the
Company acquired two Canadian subsidiaries, International Conduit, Inc. (Icon)
and Intube, Inc. (Intube), whose primary business is the manufacture and
sale of
EMT steel conduit to the commercial construction market in Canada and in
the
United States.
Principles
of Consolidation:
The
consolidated financial statements include the accounts of the Company and
its
wholly owned and majority 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, when title has passed to the buyer,
net of applicable provisions for any discounts or allowances. We recognize
revenue when the following criterion are met: evidence of an arrangement,
fixed
and determinable fee, delivery has taken place, and collectibility is reasonably
assured. Customers may not return, exchange or refuse acceptance of goods
without our approval. We have established allowances to cover anticipated
doubtful accounts based upon historical experience.
Warranties:
We
generally provide warranties, on the safety products, from one to ten years
to
the non-commercial end user on all products sold. The manufacturers of our
safety products provide us with a one-year warranty on all products we purchase
for resale. Claims for warranty replacement of products beyond the one-year
warranty period covered by the manufacturers have not been historically material
and we do not record estimated warranty expense or a contingent liability
for
warranty claims.
Stock-Based
Compensation:
As of
March 31, 2007, under the terms of the Company’s Non-Qualified Stock Option
Plan, as amended, 1,170,369 shares of our common stock are reserved for the
granting of stock options, of which 1,166,137 have been issued, leaving 4,232
available for issuance.
Adoption
of SFAS No. 123R. In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004),
Share-Based Payment,
which
requires compensation costs related to share-based payment transactions to
be
recognized in financial statements. SFAS No. 123R eliminates the intrinsic
value method of accounting available under Accounting Principles Board (APB)
Opinion No. 25,
Accounting for Stock Issued to Employees,
which
generally resulted in no compensation expense being recorded in the financial
statements related to the grant of stock options to employees if certain
conditions were met.
Effective
April 1, 2006, we adopted SFAS No. 123R using the modified prospective
method. Under this method, compensation costs for all awards granted after
the
date of adoption and the unvested portion of previously granted awards will
be
measured at an estimated fair value and included in operating expenses or
capitalized as appropriate over the vesting period during which an employee
provides service in exchange for the award. Accordingly, prior period amounts
presented have not been restated to reflect the adoption of SFAS No. 123R.
As
a
result of adopting SFAS No. 123R, net income for the fiscal year ended March
31,
2007 was reduced by $29,411. No portion of employees’ compensation, including
stock compensation expense, was capitalized during the period.
F-6
During
the fiscal year ended March 31, 2007, 217,203 shares of our common stock
have
been issued as a result of the exercise of the options granted under the
plan.
The tax benefit, for income tax purposes, of $1,058,600 from the exercise
of
these stock options is presented as a cash flow from financing
activities.
Fair
Value Determination.
Under
SFAS No. 123R, we have elected to continue using the Black-Scholes option
pricing model to determine fair value of our awards on date of grant. We
will
reconsider the use of the Black-Scholes model if additional information becomes
available in the future that indicates another model would be more appropriate,
or if grants issued in future periods have characteristics that cannot be
reasonably estimated under this model.
Stock
Option Activity.
During
the fiscal year ended March
31,
2007,
no stock options were granted.
Stock
Compensation Expense.
We have
elected to continue straight-line amortization of stock-based compensation
expense over the requisite service period. Prior to the adoption of SFAS
No. 123R, we recognized the effect of forfeitures in our pro forma
disclosures as they occurred. In accordance with the new standard, we have
estimated forfeitures and are only recording expense on shares we expect
to
vest. For the fiscal year ended March 31,
2007,
we recorded $29,411 of stock-based compensation cost as general and
administrative expense in our statement of operations. No forfeitures have
been
estimated.
As
of
March 31,
2007,
there was $27,599 of unrecognized compensation cost related to share-based
compensation arrangements that we expect to vest. This cost will be fully
amortized within two years. The aggregate intrinsic value of currently
exercisable options was $619,505 at March
31,
2007.
In
prior
periods, as permitted under Statement of Financial Accounting Standards (SFAS)
No. 123,
Accounting for Stock-Based Compensation,
we
accounted for our stock-based compensation plan using the intrinsic value
method
under the recognition and measurement principles of APB Opinion No. 25. In
accordance with the provisions of SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and
Disclosure,
the
following table illustrates the effect on net income and earnings per share
if
we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation for the fiscal years ended March 31, 2006
and
2005
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.
|
2006
|
2005
|
||||||
|
Net
income, as reported
|
$
|
4,600,352
|
$
|
3,417,854
|
|||
|
Stock-based
employee compensation costs, net of income tax, included in net
income
|
10,000
|
10,000
|
|||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value, net of related tax effects
|
(138,846
|
)
|
(144,672
|
)
|
|||
|
Pro
forma net income
|
$
|
4,471,506
|
$
|
3,283,182
|
|||
|
Earnings
per share:
|
|||||||
|
Basic
- as reported
|
$
|
2.06
|
$
|
1.60
|
|||
|
Basic
- pro forma
|
2.00
|
1.54
|
|||||
|
Diluted
- as reported
|
1.89
|
1.45
|
|||||
|
Diluted
- pro forma
|
1.84
|
1.40
|
|||||
Research
and Development:
Research
and development costs are charged to operations as incurred.
Business
Segments:
The
Company conducts its business through two operating segments based on geographic
location.
Historically,
the combined U.S. operations of the Company and its wholly-owned subsidiary,
USI
Electric, Inc., are operated from the Baltimore, Maryland and Naperville,
Illinois offices, respectively, marketing a line of home safety devices such
as
smoke alarms, carbon monoxide alarms, and ground fault circuit interrupter
(GFCI) devices to retail customers and to the electrical distribution
trade.
F-7
The
Company’s Canadian operations consist of Icon and Intube, the majority owned
subsidiaries acquired by the Company in October 2006 and operated from offices
in Toronto, Ontario, with sales in both Canada and the United States. The
primary product line of the Canadian segment is EMT conduit sold to the
electrical distribution trade. Icon also sells home safety devices purchased
primarily from the Company.
While
USI
did not have any significant sales of EMT conduit since the October 2006
acquisition through March 31, 2007, it anticipates that it will sell EMT
conduit
through its distribution network. Icon’s sales of safety products during the six
month period ended March 31, 2007 totaled $191,832.
For
the
period ended March 31, 2007, no inter-company allocation of expenses has
been
made between the headquarters, Icon and Intube.
The
following chart provides segmental information on the U.S. and Canadian
operations of the Company for the period ended March 31, 2007 (all figures
are
presented in U.S. dollars):
|
U.S.
Operations
|
|
Canadian
Operations
|
|||||
|
Sales
to external customers
|
$
|
31,622,654
|
$
|
4,200,921
|
|||
|
Cost
of sales
|
21,182,485
|
3,964,420
|
|||||
|
Gross
profit
|
10,440,169
|
236,501
|
|||||
|
Selling,
general and administrative
|
6,811,674
|
624,357
|
|||||
|
Depreciation
|
31,469
|
119,503
|
|||||
|
Loss
on foreign currency transactions
|
-
|
29,576
|
|||||
|
Operating
income (loss)
|
3,597,026
|
(536,935
|
)
|
||||
|
Equity
in earnings of Joint Venture
|
3,845,960
|
-
|
|||||
|
Interest
income (expense)
|
22,023
|
(73,517
|
)
|
||||
|
Net
income (loss) before taxes
|
7,465,009
|
(610,452
|
)
|
||||
|
Provision
for income taxes (benefit)
|
1,360,790
|
(39,491
|
)
|
||||
|
Net
income (loss)
|
$
|
6,104,219
|
$
|
(570,961
|
)
|
||
|
31,639,596
|
4,556,131
|
||||||
|
Expenditures
for segment assets
|
123,309
|
1,015,044
|
|||||
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
$240,342, $262,670 and $208,913 for the years ended March 31, 2007, 2006
and
2005, 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 $1,042,899,
$966,981 and $702,779 in fiscal years 2007, 2006 and 2005,
respectively.
Inventories:
Inventories (consisting primarily of finished goods) and with approximately
$954,000 of raw material 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 $1,086,928 and $370,419 at March 31,
2007 and
2006, respectively. Inventories are shown net of an allowance for inventory
obsolescence of $40,000 as of March 31, 2007 and March 31,
2006.
F-8
The
Company reviews inventory quarterly to identify slow moving products and
valuation allowances are adjusted when deemed necessary.
Property
and Equipment:
Property
and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided by using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. The estimated useful lives for financial reporting
purposes are as follows:
|
Automotive
and truck equipment
|
-
|
Shorter
of term of lease or life of asset
|
|
Leasehold
improvements
|
-
|
Shorter
of term of lease or life of asset
|
|
Machinery
and equipment
|
-
|
5
to 10 years
|
|
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.
Foreign
currency:
The
Company translates the accounts of its subsidiaries denominated in foreign
currencies at the applicable exchange rate in effect at the year end date
for
balance sheet purposes and at the average exchange rate for the period
for
statement of income purposes. The related translation adjustments in accumulated
other comprehensive income in shareholder’s equity are reported in accumulated
other comprehensive income in shareholders’ equity. Transaction gains and losses
arising from transactions denominated in foreign currencies are included
in the
results of operations. The Company maintains cash in foreign banks of $240,545
to support its operations in Canada and Hong Kong.
Net
Income per Share:
The
Company reports basic and diluted earnings per share. Basic earnings per
share
is computed by dividing net income for the period by the weighted-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,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Common
shares outstanding for basic EPS
|
2,398,284
|
2,228,908
|
2,136,599
|
|||||||
|
Shares
issued upon assumed exercise of outstanding stock options
|
86,322
|
203,797
|
216,033
|
|||||||
|
Weighted
average number of common and common equivalent shares outstanding
for
diluted EPS
|
2,484,606
|
2,432,705
|
2,352,632
|
|||||||
Goodwill:
Goodwill
represents the excess of the purchase price above the fair value of the net
assets acquired. Goodwill is evaluated for impairment annually or when events
or
circumstances occur indicating that goodwill might be impaired. In accordance
with FAS No. 142, “Goodwill and Other Intangible Assets,” the evaluation is a
two-step process that begins with an estimation of the fair value of the
reporting units. The first step assesses potential impairment and the second
step measures that impairment. The measurement of possible impairment is
based
on the comparison of the fair value of each reporting unit with the book
value
of its assets.
Reclassifications:
Certain
prior year amounts have been reclassified in order to conform with current
year
presentation.
F-9
NOTE
B - ACQUISITION
On
October 2, 2006, 2113824 Ontario, Inc., a newly formed wholly owned subsidiary
of the Company, acquired two-thirds of the issued and outstanding capital
stock
of International Conduit, Inc. (Icon) and Intube, Inc. (Intube). Icon and
Intube
are based in Toronto, Canada and manufacture and distribute electrical
mechanical tubing (EMT) steel conduit. Icon also sells home safety products
primarily purchased from USI. The purchase price for the capital stock of
Icon
and Intube was $1,784,120 in cash. The primary purpose of the Icon and Intube
acquisition was to expand our product offering and service the commercial
construction market.
The
acquisition described above was accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to reflect
the
fair value of assets and liabilities acquired at the date of acquisition.
The
results of operations have been included in the consolidated operations since
the date of acquisition.
The
results of these acquisitions, had they been consummated at the beginning
of the
fiscal year ended March 31, 2007, are included in the pro forma information
below. This unaudited pro forma information does not necessarily reflect
the
results of operations that would have occurred had the acquisitions taken
place
at the beginning of each twelve month period and is not necessarily indicative
of results that may be obtained in the future.
|
2007
|
2006
|
||||||
|
Revenue
|
$
|
40,052,000
|
$
|
37,294,000
|
|||
|
Net
earnings
|
5,483,000
|
4,694,290
|
|||||
|
Earnings
per share (diluted)
|
$
|
2.21
|
$
|
1.93
|
|||
Purchase
Price Allocation:
The
allocation of the purchase price for Icon and Intube is as follows:
|
Assets
acquired
|
||||
|
Cash
|
$
|
48,673
|
||
|
Accounts
receivable
|
1,171,616
|
|||
|
Inventory
|
1,825,917
|
|||
|
Property
and equipment
|
1,892,359
|
|||
|
Other
|
82,837
|
|||
|
$
|
5,021,402
|
|||
|
Liabilities
Assumed
|
||||
|
Debt
|
$
|
(2,711,095
|
)
|
|
|
Accounts
payable and accruals
|
(2,123,093
|
)
|
||
|
Minority
interest
|
(4,800
|
)
|
||
|
$
|
(4,838,988
|
)
|
||
|
Goodwill
|
1,789,882
|
|||
|
Total
consideration
|
$
|
1,972,296
|
||
The
goodwill from the Icon and Intube acquisitions are fully allocated to the
Company’s Canadian operations.
NOTE
C - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
March
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Automotive
and truck equipment
|
$
|
105,145
|
$
|
-
|
|||
|
Leasehold
improvements
|
81,243
|
73,535
|
|||||
|
Machinery
and equipment
|
2,882,920
|
158,696
|
|||||
|
Furniture
and fixtures
|
343,919
|
197,482
|
|||||
|
Computer
equipment
|
216,563
|
88,736
|
|||||
|
3,629,790
|
518,449
|
||||||
|
Less
accumulated depreciation and amortization
|
(599,730
|
)
|
(456,237
|
)
|
|||
|
$
|
3,030,060
|
$
|
62,212
|
||||
The
Company is obligated under various capital leases. Property and equipment
under
capital leases included in property and equipment net of accumulated
depreciation was $295,744 at March 31, 2007.
F-10
NOTE
D - 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, 2007, the
Company
has an investment balance of $9,072,284 for its 50% interest in the Hong
Kong
Joint Venture. There are no material Hong Kong - US 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, 2007
and
2006 and for the years ended March 31, 2007, 2006 and 2005.
|
March
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Current
assets
|
$
|
12,646,261
|
$
|
7,402,171
|
|||
|
Property
and other assets
|
11,720,713
|
10,911,009
|
|||||
|
Total
|
$
|
24,366,974
|
$
|
18,313,180
|
|||
|
|
|||||||
|
Current
liabilities
|
$
|
5,261,224
|
$
|
5,575,415
|
|||
|
Non-current
liabilities
|
110,389
|
32,870
|
|||||
|
Equity
|
18,995,361
|
12,704,895
|
|||||
|
Total
|
$
|
24,366,974
|
$
|
18,313,180
|
|||
|
For
the Year Ended March 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
sales
|
$
|
41,151,055
|
$
|
24,811,790
|
$
|
25,899,630
|
||||
|
Gross
profit
|
13,753,123
|
8,608,220
|
8,689,538
|
|||||||
|
Net
income
|
8,377,365
|
4,160,935
|
5,005,886
|
|||||||
During
the years ended March 31, 2007, 2006 and 2005, the Company purchased
$19,085,353, $12,321,401 and $10,513,800, respectively, of finished product
from
the Hong Kong Joint Venture, which represents 46%, 66% and 68%, respectively,
of
the Company’s total finished product purchases for the years ended at March 31,
2007, 2006 and 2005. Amounts due the Hong Kong Joint Venture included in
Accounts Payable totaled $3,270,091 and $500,000 at March 31, 2007 and 2006,
respectively. Amounts due from the Hong Kong Joint Venture included in Accounts
Receivable totaled $127,879 and $48,205 at March 31, 2007 and 2006,
respectively.
The
Company incurred interest costs charged by the Hong Kong Joint Venture of
$25,000, $37,389 and $17,581 during the years ended March 31, 2007, 2006
and
2005, respectively, related to its purchases.
NOTE
E - 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. Financing of $4,496,597 is available at March
31,
2007. 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 8.25%
at
March 31, 2007. Any amount due to the factor is also secured by the Company’s
inventory. There were borrowings of $2,254,966 outstanding under this agreement
at March 31, 2007.
Under
this Factoring Agreement, the Company sold receivables of approximately
$30,316,914 and $26,713,439 during the years ended March 31, 2007 and 2006,
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 $7,254,275
and $4,259,131 at March 31, 2007 and 2006. The amount of the uncollected
balance
of non-recourse receivables borrowed by the Company as of March 31, 2007
and
2006 is $2,254,966 and $0, respectively. Collected cash maintained on deposit
with the factor earns interest at the factor’s prime rate of interest less three
percentage points (5.25%) at March 31, 2007 and 4.75% at March 31,
2006.
F-11
NOTE
F - LEASES
During
December 1999, the Company entered into an operating lease for its office
and
warehouse which expires in December 2008. This lease is subject to increasing
rentals at 3% per year. In February 2004, the Company entered into an operating
lease for an approximately 2,600 square foot office in Naperville, Illinois.
This lease expires in February 2009 with increasing rentals at 3% per
year.
In
connection with the acquisition of Icon in October 2006, the Company acquired
the existing operating lease for manufacturing, office and warehouse space
in
Toronto, Canada. This lease originated in February 2005 and expires in March
2010. Each of the operating leases for real estate has renewal options with
terms and conditions similar to the original lease. Rent expense, including
common area maintenance, totaled $220,928, $102,589 and $97,011 for the years
ended March 31, 2007, 2006 and 2005, respectively.
The
Company leases certain of its automotive and manufacturing equipment under
various leasing arrangements. The future minimum lease payments, by year
and in
the aggregate, under capital leases and under non-cancelable operating leases
with initial or remaining lease terms in excess of one year, consisted of
the
following at March 31, 2007:
|
Non-Cancelable
|
|
||||||
|
|
|
Capital
Leases
|
|
Operating
Leases
|
|||
|
2008
|
$
|
101,675
|
$
|
312,830
|
|||
|
2009
|
101,675
|
286,972
|
|||||
|
2010
|
44,946
|
165,935
|
|||||
|
2011
|
21,441
|
-
|
|||||
|
2012
|
-
|
-
|
|||||
|
269,737
|
765,737
|
||||||
|
(27,281
|
)
|
-
|
|||||
|
$
|
242,456
|
$
|
765,737
|
||||
F-12
NOTE
G - 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 and will
result in net taxable or deductible amounts in future periods. Deferred tax
expense or benefit is the result of changes in the net asset or liability
for
deferred taxes. The deferred tax liabilities and assets for USI result primarily
from reserves, inventories, accrued liabilities and changes in the unremitted
earnings of the Hong Kong Joint Venture.
At
March
31, 2006, the Company had foreign tax credit carryforwards of $685,654 available
as a result of foreign taxes paid on the repatriated earnings of the Hong
Kong
Joint Venture. In addition, the Company generated $236,628 of foreign tax
credits during the fiscal year ended March 31, 2007. Approximately $731,395
of
foreign tax credits were used to offset federal taxes at March 31, 2007,
resulting in a remaining foreign tax credit carryforward available to offset
future taxes of $190,887.
USI
had a
U.S. net operating loss carryforward as of March 31, 2005 of $2,151,593,
of
which $2,151,593 was utilized during the year ended March 31, 2006. Therefore,
the U.S. net operating loss carryforward has been fully utilized as of March
31,
2006.
The
components of income tax expense (benefit) for the Company are as
follows:
|
March
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Current
expense (benefit)
|
||||||||||
|
U.S.
Federal
|
$
|
1,425,522
|
$
|
17,651
|
$
|
21,000
|
||||
|
U.S.
State
|
215,308
|
10,453
|
5,250
|
|||||||
|
Canadian
Federal
|
-
|
-
|
-
|
|||||||
|
Canadian
Province
|
-
|
-
|
-
|
|||||||
|
1,640,830
|
28,104
|
26,250
|
||||||||
|
Deferred
expense (benefit)
|
(319,531
|
)
|
(124,604
|
)
|
(307,387
|
)
|
||||
|
Total
income tax expense (benefit)
|
$
|
1,321,299
|
$
|
(96,500
|
)
|
$
|
(281,137
|
)
|
||
|
Significant
components of USI’s deferred tax assets and liabilities are as
follows:
|
|
March
31,
|
|||||||
|
2007
|
|
2006
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Financial
statement accruals and allowances
|
$
|
473,132
|
$
|
360,022
|
|||
|
Inventory
uniform capitalization
|
92,752
|
94,741
|
|||||
|
Other
|
12,304
|
0
|
|||||
|
AMT
tax credit carryforward
|
0
|
21,621
|
|||||
|
Foreign
tax credit carryforward
|
190,887
|
0
|
|||||
|
Foreign
NOL carryforward
|
247,313
|
0
|
|||||
|
Domestic
NOL carryforwards and tax credits
|
0
|
0
|
|||||
|
Gross
deferred tax assets
|
1,016,388
|
476,384
|
|||||
|
Valuation
allowance
|
(207,822
|
)
|
0
|
||||
|
Net
deferred tax liability (asset)
|
$
|
808,566
|
$
|
476,384
|
|||
A
valuation allowance of $207,822 has been established to offset tax benefits
associated with the net operating loss carryforwards and other deferred tax
assets associated with our Canadian subsidiary.
F-13
The
reconciliation between the statutory federal income tax provision and the
actual
effective tax provision is as follows:
|
Years
ended March 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Federal
tax expense at statutory rate (34%) before loss
carryforward
|
$
|
2,330,549
|
$
|
1,577,074
|
$
|
1,066,484
|
||||
|
Reduction
in income taxes arising from carryforward of prior years’ operating
losses
|
-
|
-
|
(458,200
|
)
|
||||||
|
Non-patriated
earnings of Hong Kong Joint Venture
|
(635,549
|
)
|
(356,143
|
)
|
(402,855
|
)
|
||||
|
Employment
expense of employee stock options
|
-
|
(224,592
|
)
|
(333,879
|
)
|
|||||
|
Foreign
tax credit net of gross up for US portion of foreign taxes
|
(922,282
|
)
|
(69,210
|
)
|
-
|
|||||
|
Change
in rates for deferreds
|
-
|
(264,630
|
)
|
-
|
||||||
|
State
income tax expense, net of federal benefit
|
195,852
|
10,453
|
5,250
|
|||||||
|
Change
in valuation allowance
|
207,822
|
(776,523
|
)
|
(238,791
|
)
|
|||||
|
Foreign
rate difference
|
(5,925
|
)
|
-
|
-
|
||||||
|
Permanent
differences
|
17,418
|
10,108
|
80,854
|
|||||||
|
Other
|
133,414
|
(3,037
|
)
|
-
|
||||||
|
Provision
for income tax expense (benefit)
|
$
|
1,321,299
|
$
|
(96,500
|
)
|
$
|
(281,137
|
)
|
||
NOTE
H - SHAREHOLDERS’ EQUITY
Common
Stock
- During
the year ended March 31, 2007, the Company issued 217,203 shares of its common
stock, all of which were issued on the exercise of employee stock options
for
total proceeds of $585,658.
Stock
Options
- Under
terms of the Company’s 1978 Non-Qualified Stock Option Plan, as amended, 877,777
shares of common stock are reserved for the granting of stock options, of
which
873,545 shares have been issued as of March 31, 2007, leaving 4,232 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 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 October 16, 2006 to shareholders
of
record on September 25, 2006.
F-14
The
following tables summarize the status of options under the Non-Qualified
Stock
Option Plan at March 31, 2007 and option transactions for the three years
then
ended:
|
Status
as of March 31, 2007
|
Number
of Shares
|
|||
|
Presently
exercisable
|
93,998
|
|||
|
Exercisable
in future years
|
8,443
|
|||
|
Total
outstanding
|
102,441
|
|||
|
Available
for future grants
|
4,232
|
|||
|
Shares
of common stock reserved
|
106,673
|
|||
|
Outstanding
options:
|
||||
|
Number
of holders
|
17
|
|||
|
Average
exercise price per share
|
$
|
12.60
|
||
|
Expiration
dates
|
October
2008 to March 2011
|
|||
|
Transactions
for the Three Years Ended March 31, 2007:
|
Number
of Shares
|
Weighted
Average
Exercise Price
|
|||||
|
Outstanding
at April 1, 2004
|
400,149
|
||||||
|
Granted
|
73,333
|
10.73
|
|||||
|
Canceled
|
(445
|
)
|
1.97
|
||||
|
Exercised
|
(132,376
|
)
|
2.06
|
||||
|
Outstanding
at March 31, 2005
|
340,661
|
||||||
|
Granted
|
36,667
|
10.03
|
|||||
|
Canceled
|
0
|
0.00
|
|||||
|
Exercised
|
(54,000
|
)
|
1.82
|
||||
|
Outstanding
at March 31, 2006
|
323,328
|
||||||
|
Granted
|
0
|
0.00
|
|||||
|
Canceled
|
(3,684
|
)
|
8.51
|
||||
|
Exercised
|
(217,203
|
)
|
2.61
|
||||
|
Outstanding
at March 31, 2007
|
102,441
|
||||||
The
following table summarizes information about stock options outstanding at
March
31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of
Exercise
Price
|
Number
of
Shares
|
Weighted
Average Exercise
Price
|
Weighted
Average Contract Life
(Yrs)
|
Number
of
Shares
|
Weighted
Average Exercise
Price
|
|||||||||||
|
$7.68
to $9.99
|
15,387
|
8.94
|
1.94
|
9,110
|
9.08
|
|||||||||||
|
$10.00
to $12.99
|
51,328
|
11.27
|
3.00
|
49,162
|
11.27
|
|||||||||||
|
$13.00
to $16.09
|
35,726
|
16.09
|
4.00
|
35,726
|
16.09
|
|||||||||||
|
102,441
|
93,998
|
|||||||||||||||
The
fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions in 2006 and 2005; no annual dividends, expected volatility of
36%
and 45%, respectively, risk-free interest rate ranging from 4.0% to 6.5%
and
expected lives of five years. The weighted-average fair values of the stock
options granted in 2006 and 2005 were $8.29 and $6.47 per share,
respectively.
F-15
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
I - COMMITMENTS AND CONTINGENCIES
On
June
10, 2003, Leviton Manufacturing Co., Inc. (“Leviton”) filed a 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 that the Company’s
GFCI units infringe one or more of Leviton’s six patents for reset lockout
technology related to but not required by UL Standard 943 for GFCI units,
effective January 2003. Leviton also asserted trade dress and unfair competition
claims. In May 2006, Leviton and the Company settled the trade dress/deceptive
trade practice claims of the action, all subject to a confidentiality agreement.
The settlement did not cover the patent infringement claims. In January 2006,
the Company was granted summary judgment on the infringement claims and Leviton
appealed that judgment and dismissal. On January 10, 2007, the United States
Court of Appeals for the Federal Circuit issued a decision affirming the
lower
court’s summary judgment and dismissal of Leviton’s patent infringement claims.
As a result of this decision, the Company obtained a successful outcome and
the
entirety of this suit by Leviton is now concluded.
On
March
31, 2005, Leviton filed another lawsuit (Case No. 05cv0889) in the United
States
District Court for the District of Maryland against the Company. In this
suit,
Leviton alleges that the Company’s GFCI units infringe on US Patent 6,864,766.
The Company has filed a counterclaim against Leviton and the case has been
consolidated with a declaratory judgment action filed by the GFCI manufacturer,
Shanghai Meihao Electric, Inc. Discovery is now concluded. 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
June
11, 2003, Walter Kidde Portable Equipment, Inc. (“Kidde”) filed a civil suit
against the Company in the United States District Court for the Middle District
of North Carolina (Case No. 03cv00537), alleging that certain of the Company’s
AC powered/battery backup smoke detectors infringe on a patent acquired by
Kidde. Kidde is seeking injunctive relief and damages to be determined at
trial.
On March 31, 2006, following numerous procedural and substantive rulings
which
the Company believes were favorable to the Company, Kidde obtained dismissal,
without prejudice, of its suit. On November 28, 2005, prior to the March
31,
2006 dismissal of the original suit, Kidde filed a second lawsuit based on
virtually identical infringement allegations as the earlier case. Because,
the
court dismissed the first case without conditions and without prejudice,
the
Company has appealed the dismissal to the United States Court of Appeals
for the
Federal Circuit, believing that at a minimum, procedurally, conditions should
have been imposed. On March 2, 2007, the appellate court affirmed the lower
court’s dismissal of the first case, and the second case is now in the
preliminary stages. Although some aspects of the case are more complicated,
the
Company’s substantive position and its defenses to Kidde’s claims on most issues
are substantially the same as the first Kidde case. 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 the Company is not yet determinable.
On
October 13, 2003, Maple Chase Company filed a civil suit in the United States
District Court for the Northern District of Illinois (Case No. 03cv07205),
against the Company, its USI Electric subsidiary, and one former and one
present
Illinois-based sales representative, alleging that certain of the Company's
smoke detectors infringe on a patent owned by Maple Chase (US Reissue Patent
No.
Re: 33290). On April 11, 2005, this action was dismissed pending the outcome
of
a reexamination in the United States Patent and Trademark Office (USPTO).
In
April 2006, the USPTO rejected most of the claims in the patent. Maple Chase
filed a substantive response which resulted in issuance of a further Official
Action from the USPTO. After considering Maple Chase’s arguments, on September
29, 2006 the USPTO issued a further action confirming the patentability of
many
of the claims at issue and rejecting others. On October 30, 2006, Maple Chase
filed a further response canceling the rejected claims. On December 19, 2006,
the USPTO issued a formal notice of intent to issue a re-examination certificate
for the Maple Chase Company patent on which the patent infringement suit
was
filed. In March 2007, the full term of the patent was reached and no
Re-examination Certificate has been issued by the USPTO. Under the U.S. patent
laws, a patent owner may still sue for damages for up to six years following
expiration of a patent but may recover damages only for the period between
six
years prior to filing the suit and the date of the patent expiration. Therefore,
Maple Chase may still file suit for damages and the amount of potential loss
to
the Company, if any, is not yet determinable but declining daily. The Company
believes that it has meritorious and substantial technical defenses to any
action that might be filed against it by Maple Chase. The Company also believes
that it is entitled to a number of legal and equitable defenses due to the
long
period of inaction and acquiescence by Maple Chase (and its
predecessors).
F-16
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.
NOTE
J - 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.
The
Company has one customer, The Home Depot, which represented 11.09% of the
Company’s product sales during the period ended March 31, 2007 and no customers
that represented in excess of 10% of the Company’s product sales for the years
ended March 31, 2006 and 2005.
NOTE
K - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly
Results of Operations (Unaudited):
The
unaudited quarterly results of operations for fiscal years 2007 and 2006
are
summarized as follows:
|
Quarter
Ended
|
|||||||||||||
|
2007
|
June
30,
|
September
30,
|
December
31,
|
March
31,
|
|||||||||
|
Net
sales
|
$
|
8,038,437
|
$
|
8,018,088
|
$
|
8,620,893
|
$
|
11,146,157
|
|||||
|
Gross
profit
|
2,780,517
|
2,607,922
|
2,795,342
|
2,492,889
|
|||||||||
|
Net
income
|
1,577,468
|
1,416,204
|
1,712,883
|
826,703
|
|||||||||
|
Net
income per share - basic
|
$
|
0.68
|
$
|
0.59
|
$
|
0.70
|
$
|
0.34
|
|||||
|
Net
income per share - diluted
|
$
|
0.62
|
$
|
0.57
|
$
|
0.70
|
$
|
0.34
|
|||||
|
2006
|
|||||||||||||
|
Net
sales
|
$
|
6,923,810
|
$
|
7,119,100
|
$
|
7,353,597
|
$
|
7,497,594
|
|||||
|
Gross
profit
|
2,048,954
|
2,278,838
|
2,549,300
|
2,580,060
|
|||||||||
|
Net
income
|
889,770
|
1,162,695
|
1,456,809
|
1,091,078
|
|||||||||
|
Net
income per share - basic
|
0.40
|
0.52
|
0.65
|
0.49
|
|||||||||
|
Net
income per share - diluted
|
0.37
|
0.48
|
0.60
|
0.44
|
|||||||||
Net
income per share - diluted as stated above for the quarters ended December
31,
2006 and March 31, 2007 are $0.02 and $0.01, respectively, more than the
amounts
reported in the Company’s Quarterly Reports on Form 10-Q for the respective
periods. This change in net income per share - diluted is as a result of
implementation by the Company of FAS 123R.
NOTE
L - SUBSEQUENT EVENTS
Financing:
On June
22, 2007, the Company and its wholly-owned subsidiary, USI Electric, Inc.
(“USI
Electric“), each entered into: (i) an Amended and Restated Factoring Agreement
(the “CIT Factoring Agreement”) with the CIT Group/Commercial Services, Inc.
(“CIT”) and (ii) an Amended and Restated Inventory Security Agreement (the “CIT
Inventory Agreement”) with CIT. Simultaneously, the Company’s indirect
majority-owned Canadian subsidiary, International Conduits Ltd. (“Icon”),
entered into a Credit Agreement (the “CIT Canada Credit Agreement”) with CIT
Financial Ltd. (“Cit Canada”).
Under
the
terms of the CIT Factoring Agreement, the Company and USI Electric collectively
may borrow, on a revolving basis, up to the lesser of (i) $10 million or
(ii)
the aggregate of the value of (a) 85% of the Company and USI Electric’s total
accounts receivable purchased by CIT and (b) 50% of the Company and USI
Electric’s total eligible inventory. The floating interest rate under the
Factoring Agreement, on the uncollected factored accounts receivable and
any
additional borrowings is either 0.25% below the JPMorgan Chase Bank prime
rate
or 2.0% above LIBOR, at the Company’s option. The obligations of the Company and
USI Electric under the CIT Factoring Agreement are secured by all of the
assets
of the Company and USI Electric, and are guaranteed by Icon and the Company’s
wholly-owned Canadian subsidiary (which owns a majority interest in
Icon).
F-17
Under
the
terms of the CIT Canada Credit Agreement, Icon will borrow U.S. $3 million
as a
three-year term loan, and may borrow, on a revolving basis, up to the lesser
of
(i) U.S. $7 million or (ii) the aggregate of the value of (a) 85% of Icon’s
eligible accounts receivable and (b) 50% of Icon’s eligible inventory. The
floating interest rate under the CIT Canada Credit Agreement is the Canadian
prime rate. The obligations of Icon under the CIT Canada Credit Agreement
are
secured by all of the assets of Icon, and are guaranteed by the Company and
USI
Electric. The CIT Canada Credit Agreement expires on June 23, 2010.
NOTE
M - RETIREMENT PLAN
The
Company has a retirement savings plan under
Section 401(k) of the Internal Revenue Code. All full-time employees who
have
completed 12 months of service are eligible to participate. Employees are
permitted to contribute up to the amounts prescribed by law. The Company
may
provide contributions to the plan consisting of a matching amount equal to
a
percentage of the employee’s contribution, not to exceed four percent (4%).
Employer contributions were $54,689 and $43,000 for the years ended March
31,
2007 and 2006.
F-18
SCHEDULE
II
UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
YEARS
ENDED March 31, 2007, 2006 and 2005
|
Balance
at beginning
of
year
|
Charged
to cost and
expenses
|
Deductions
|
Balance
at end
of year
|
||||||||||
|
Year
ended March 31, 2007
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
15,000
|
$
|
0
|
$
|
0
|
$
|
15,000
|
|||||
|
Year
ended March 31, 2006
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
15,000
|
$
|
0
|
$
|
0
|
$
|
15,000
|
|||||
|
Year
ended March 31, 2005
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
10,000
|
$
|
5,000
|
$
|
0
|
$
|
15,000
|
|||||
|
Year
ended March 31, 2007
|
|||||||||||||
|
Allowance
for inventory reserve
|
$
|
40,000
|
$
|
0
|
$
|
0
|
$
|
40,000
|
|||||
|
Year
ended March 31, 2006
|
|||||||||||||
|
Allowance
for inventory reserve
|
$
|
100,000
|
$
|
0
|
$
|
60,000
|
$
|
40,000
|
|||||
|
Year
ended March 31, 2005
|
|||||||||||||
|
Allowance
for inventory reserve
|
$
|
100,000
|
$
|
0
|
$
|
0
|
$
|
100,000
|
|||||
S-1
Eyston
Company Limited
Reports
and Financial Statements
For
the year ended 31 March 2007
Contents
|
Independent
Auditors' Report
|
JV-1
|
|||
|
|
||||
|
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 the Financial Statements
|
JV-8
|
|||
|
|
Expressed
in Hong Kong dollars ("HK$")
Independent
auditors' report
To
the members of Eyston Company Limited
(incorporated
in Hong Kong with limited liability)
We
have
audited the consolidated financial statements of Eyston Company Limited (the
"company") set out on pages 7 to 39, which comprise the consolidated and
company
balance sheets as at 31 March 2007, and the consolidated income statement,
the
consolidated statement of changes in equity and the consolidated cash flow
statement for the year then ended, and a summary of significant accounting
policies and other explanatory notes.
Directors'
responsibility for the financial statements
The
directors of the company are responsible for the preparation and the true
and
fair presentation of these financial statements in accordance with Hong Kong
Financial Reporting Standards issued by the Hong Kong Institute of Certified
Public Accountants and the Hong Kong Companies Ordinance. This responsibility
includes designing, implementing and maintaining internal control relevant
to
the preparation and the true and fair presentation of financial statements
that
are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates
that are reasonable in the circumstances.
Auditors'
responsibility
Our
responsibility is to express an opinion on these financial statements based
on
our audit and to report our opinion solely to you, as a body, in accordance
with
section 141 of the Hong Kong Companies Ordinance, and for no other purpose.
We
do not assume responsibility towards or accept liability to any other person
for
the contents of this report.
We
conducted our audit in accordance with Hong Kong Standards on Auditing issued
by
the Hong Kong Institute of Certified Public Accountants. Those standards
require
that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance as to whether the financial statements are free
from
material misstatement.
JV-1
An
audit
involves performing procedures to obtain audit evidence about the amounts
and
disclosures in the financial statements. The procedures selected depend on
the
auditors' judgement, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error.
In
making those risk assessments, the auditors consider internal control relevant
to the entity's preparation and true and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the directors, as well as
evaluating the overall presentation of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our audit opinion.
Opinion
In
our
opinion, the consolidated financial statements give a true and fair view
of the
state of affairs of the company and of the group as at 31 March 2007 and
of the
group's profit and cash flows for the year then ended in accordance with
Hong
Kong Financial Reporting Standards and have been properly prepared in accordance
with the Hong Kong Companies Ordinance.
Grant
Thornton
Certified
Public Accountants
13th
Floor, Gloucester Tower
The
Landmark
15
Queen's Road Central
Hong
Kong
22
June
20
JV-2
Consolidated
income statement
for
the
year ended 31 March 2007
|
|
|
2007
|
|
2006
|
|
|||||
|
|
|
Notes
|
|
HK$
|
|
HK$
|
||||
|
Turnover
|
5
|
320,142,022
|
192,697,968
|
|||||||
|
Cost
of sales
|
(213,147,126
|
)
|
(125,843,197
|
)
|
||||||
|
Gross
profit
|
106,994,896
|
66,854,771
|
||||||||
|
Other
income
|
6
|
4,693,192
|
2,798,681
|
|||||||
|
Administrative
expenses
|
(37,260,187
|
)
|
(33,160,250
|
)
|
||||||
|
Profit
from operations
|
74,427,901
|
36,493,202
|
||||||||
|
Finance
costs
|
7
|
(405,953
|
)
|
(265,063
|
)
|
|||||
|
Profit
before income tax
|
8
|
74,021,948
|
36,228,139
|
|||||||
|
Income
tax expense
|
9
|
(8,848,735
|
)
|
(3,912,698
|
)
|
|||||
|
Profit
for the year
|
10
|
65,173,213
|
32,315,441
|
|||||||
|
Dividends
|
11
|
29,866,722
|
17,163,365
|
|||||||
JV-3
Consolidated balance
sheet
as
at 31
March 2007
|
|
|
2007
|
|
2006
|
|
|||||
|
|
|
Notes
|
|
HK$
|
|
HK$
|
||||
|
ASSETS
AND LIABILITIES
|
||||||||||
|
Non-current
assets
|
||||||||||
|
Property,
plant and equipment
|
12
|
55,170,184
|
41,660,661
|
|||||||
|
Advanced
lease payments
|
13
|
9,574,779
|
8,708,432
|
|||||||
|
Available-for-sale
financial assets
|
14
|
26,823,106
|
34,277,991
|
|||||||
|
91,568,069
|
84,647,084
|
|||||||||
|
Current
assets
|
||||||||||
|
Inventories
|
16
|
30,441,083
|
18,922,905
|
|||||||
|
Trade
and other receivables
|
17
|
9,209,513
|
8,280,783
|
|||||||
|
Amount
due from shareholder
|
20,344,847
|
-
|
||||||||
|
Loan
to a shareholder
|
19
|
1,950,000
|
3,900,000
|
|||||||
|
Cash
and cash equivalents
|
36,853,474
|
26,322,005
|
||||||||
|
98,798,917
|
57,425,693
|
|||||||||
|
Current
liabilities
|
||||||||||
|
Trade
and other payables
|
22,686,174
|
20,844,537
|
||||||||
|
Obligations
under finance lease
|
21,000
|
-
|
||||||||
|
Amount
due to a related company
|
20
|
7,113,550
|
2,914,238
|
|||||||
|
Dividend
payable
|
21
|
11,700,000
|
11,700,000
|
|||||||
|
Amount
due to a director
|
22
|
200,000
|
-
|
|||||||
|
Amount
due to a shareholder
|
20
|
-
|
409,907
|
|||||||
|
Loans
from shareholders
|
23
|
2,868,954
|
2,868,954
|
|||||||
|
Collateralised
bank advances
|
24
|
2,853,162
|
3,435,122
|
|||||||
|
Provision
for taxation
|
5,360,473
|
1,081,046
|
||||||||
|
52,803,313
|
43,253,804
|
|||||||||
|
Net
current assets
|
45,995,604
|
14,171,889
|
||||||||
|
Non-current
liabilities
|
||||||||||
|
Obligations
under finance lease
|
73,700
|
-
|
||||||||
|
Deferred
tax liabilities
|
25
|
788,712
|
255,000
|
|||||||
|
Net
assets
|
136,701,261
|
98,563,973
|
||||||||
|
EQUITY
|
||||||||||
|
Share
capital
|
26
|
200
|
200
|
|||||||
|
Reserves
|
27
|
136,701,061
|
98,563,773
|
|||||||
|
136,701,261
|
98,563,973
|
|||||||||
JV-4
Balance
sheet
as
at 31
March 2007
|
|
2007
|
2006
|
||||||||
|
|
Notes
|
HK$
|
HK$
|
|||||||
|
ASSETS
AND LIABILITIES
|
||||||||||
|
Non-current
assets
|
||||||||||
|
Property,
plant and equipment
|
12
|
13,465,746
|
5,024,417
|
|||||||
|
Advanced
lease payments
|
13
|
930,239
|
1,191,701
|
|||||||
|
Available-for-sale
financial assets
|
14
|
26,823,106
|
34,277,991
|
|||||||
|
Interests
in subsidiaries
|
15
|
77,807,152
|
39,793,122
|
|||||||
|
119,026,243
|
80,287,231
|
|||||||||
|
Current
assets
|
||||||||||
|
Inventories
|
16
|
30,441,083
|
18,922,905
|
|||||||
|
Other
receivables
|
1,665,784
|
904,638
|
||||||||
|
Amounts
due from subsidiaries
|
18
|
39,149,433
|
26,647,470
|
|||||||
|
Cash
and cash equivalents
|
11,643,897
|
20,200,914
|
||||||||
|
82,900,197
|
66,675,927
|
|||||||||
|
Current
liabilities
|
||||||||||
|
Trade
and other payables
|
19,896,808
|
16,817,998
|
||||||||
|
Obligations
under finance lease
|
21,000
|
-
|
||||||||
|
Amount
due to a related company
|
20
|
7,113,550
|
2,914,238
|
|||||||
|
Dividend
payable
|
21
|
11,700,000
|
11,700,000
|
|||||||
|
Loans
from shareholders
|
23
|
2,868,954
|
2,868,954
|
|||||||
|
Provision
for taxation
|
3,527,182
|
1,081,046
|
||||||||
|
45,127,494
|
35,382,236
|
|||||||||
|
Net
current assets
|
37,772,703
|
31,293,691
|
||||||||
|
Non-current
liabilities
|
||||||||||
|
Obligations
under finance lease
|
73,700
|
-
|
||||||||
|
Deferred
tax liabilities
|
25
|
788,712
|
255,000
|
|||||||
|
Net
assets
|
155,936,534
|
111,325,922
|
||||||||
|
EQUITY
|
||||||||||
|
Share
capital
|
26
|
200
|
200
|
|||||||
|
Reserves
|
27
|
155,936,334
|
111,325,722
|
|||||||
|
155,936,534
|
111,325,922
|
|||||||||
JV-5
Consolidated
statement of changes in equity
for
the
year ended 31 March 2007
|
Share
capital
|
|
Exchange
reserve
|
|
Fair
value
reserve
|
|
Retained
profits
|
|
Total
|
|
|||||||
|
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
||||||
|
Balance
at 1 April 2005
|
200
|
34,233
|
(251,023
|
)
|
83,512,804
|
83,296,214
|
||||||||||
|
Change
in fair value of available-for-sale financial assets
|
-
|
-
|
(499,606
|
)
|
-
|
(499,606
|
)
|
|||||||||
|
Exchange
differences arising on translation of a subsidiary
|
-
|
615,289
|
-
|
-
|
615,289
|
|||||||||||
|
Profit
for the year
|
-
|
-
|
-
|
32,315,441
|
32,315,441
|
|||||||||||
|
Dividends
|
-
|
-
|
-
|
(17,163,365
|
)
|
(17,163,365
|
)
|
|||||||||
|
Balance
at 31 March 2006
|
200
|
649,522
|
(750,629
|
)
|
98,664,880
|
98,563,973
|
||||||||||
|
Change
in fair value of available-for-sale financial assets
|
-
|
-
|
292,456
|
-
|
292,456
|
|||||||||||
|
Exchange
differences arising on translation of a subsidiary
|
-
|
2,538,341
|
-
|
-
|
2,538,341
|
|||||||||||
|
Profit
for the year
|
-
|
-
|
-
|
65,173,213
|
65,173,213
|
|||||||||||
|
Dividends
|
-
|
-
|
-
|
(29,866,722
|
)
|
(29,866,722
|
)
|
|||||||||
|
Balance
at 31 March 2007
|
200
|
3,187,863
|
(458,173
|
)
|
133,971,371
|
136,701,261
|
||||||||||
JV-6
Consolidated
cash flow statement
for
the
year ended 31 March 2007
|
|
2007
|
|
2006
|
|
||||||
|
|
|
Note
|
|
HK$
|
|
HK$
|
||||
|
Cash
flows from operating activities
|
||||||||||
|
Profit
before income tax
|
74,021,948
|
36,228,139
|
||||||||
|
Adjustments
for :
|
||||||||||
|
Amortisation
of advanced lease payment
|
424,328
|
415,454
|
||||||||
|
Depreciation
of property, plant and equipment
|
5,752,971
|
4,414,388
|
||||||||
|
Loss
on disposal of available for sale financial assets
|
87,565
|
-
|
||||||||
|
(Gain)/Loss
on disposal of property, plant and equipment
|
(347,500
|
)
|
9,985
|
|||||||
|
Interest
expense
|
405,953
|
265,063
|
||||||||
|
Interest
income
|
(2,289,039
|
)
|
(1,761,425
|
)
|
||||||
|
Operating
profit before working capital changes
|
78,056,226
|
39,571,604
|
||||||||
|
Increase
in amount due from a shareholder
|
(26,272,135
|
)
|
(3,845,777
|
)
|
||||||
|
Increase
in inventories
|
(11,518,178
|
)
|
(624,869
|
)
|
||||||
|
(Increase)/Decrease
in trade and other receivables
|
(928,730
|
)
|
1,300,430
|
|||||||
|
Decrease
in loan to a shareholder
|
1,950,000
|
-
|
||||||||
|
Increase/(Decrease)
in amount due to a related company
|
4,199,312
|
(698,628
|
)
|
|||||||
|
Increase
in obligations under finance lease
|
94,700
|
-
|
||||||||
|
Increase
in amount due to director
|
200,000
|
-
|
||||||||
|
(Decrease)/Increase
in collateralised bank advances
|
(581,960
|
)
|
3,435,122
|
|||||||
|
Increase
in trade and other payables
|
1,841,637
|
1,836,405
|
||||||||
|
Cash
generated from operations
|
47,040,872
|
40,974,287
|
||||||||
|
Interest
received
|
2,289,039
|
1,761,425
|
||||||||
|
Interest
paid
|
(405,953
|
)
|
(265,063
|
)
|
||||||
|
Dividends
paid
|
33
|
(24,349,341
|
)
|
(13,158,676
|
)
|
|||||
|
Hong
Kong profits tax paid
|
(4,025,500
|
)
|
(4,148,883
|
)
|
||||||
|
Net
cash generated from operating activities
|
20,549,117
|
25,163,090
|
||||||||
|
Cash
flows from investing activities
|
||||||||||
|
Purchase
of property, plant and equipment
|
(18,006,982
|
)
|
(10,630,878
|
)
|
||||||
|
Addition
of land use right
|
(990,000
|
)
|
-
|
|||||||
|
Purchase
of available-for-sale financial assets
|
-
|
(7,729,800
|
)
|
|||||||
|
Proceeds
from disposal of available-for-sale financial assets
|
7,659,776
|
-
|
||||||||
|
Proceeds
from disposal of property, plant and equipment
|
363,865
|
5,919
|
||||||||
|
Net
cash used in investing activities
|
(10,973,341
|
)
|
(18,354,759
|
)
|
||||||
|
Net
increase in cash and cash equivalents
|
9,575,776
|
6,808,331
|
||||||||
|
Cash
and cash equivalents at beginning of the year
|
26,322,005
|
19,468,905
|
||||||||
|
Effect
of foreign exchange rate changes, net
|
955,693
|
44,769
|
||||||||
|
Cash
and cash equivalents at end of the year
|
36,853,474
|
26,322,005
|
||||||||
JV-7
Notes
to
the financial statements
for
the
year ended 31 March 2007
|
1.
|
GENERAL
INFORMATION
|
The
company is a limited liability company incorporated and domiciled in Hong
Kong.
The address of the company's registered office and principal place of business
is B2, 3/F., Fortune Factory Building, 40 Lee Chung Street, Chai Wan, Hong
Kong.
The
principal activities of the company and its subsidiaries (the "group") are
manufacturing and trading of consumer electronic products including smoke,
fire
and carbon monoxide alarms and other home safety products. Details of the
company's subsidiaries are set out in note 15 to the financial
statements.
The
financial statements on pages 7 to 39 have been prepared in accordance with
Hong
Kong Financial Reporting Standards ("HKFRSs") which collective term includes
all
applicable individual Hong Kong Financial Reporting Standards, Hong Kong
Accounting Standards and Interpretations issued by the Hong Kong Institute
of
Certified Public Accountants ("HKICPA") and the requirements of the Hong
Kong
Companies Ordinance.
The
financial statements for the year ended 31 March 2007 were approved for issue
by
the board of directors on 22 June 2007.
|
2.
|
ADOPTION
OF NEW OR AMENDED HKFRS
|
From
1
April 2006, the group has adopted all of the new or amended HKFRSs which
are
first effective on 1 April 2006 and which are relevant to the group. The
adoption of these HKFRSs did not result in any significant changes in the
group's accounting policies.
JV-8
|
2.
|
ADOPTION
OF NEW OR AMENDED HKFRS
(Continued)
|
| 2.1 |
New
or amended HKFRSs that have been issued but are not yet
effective
|
The
group
has not early adopted the following HKFRSs that have been issued but are
not yet
effective. The directors of the company anticipate that the adoption of such
HKFRSs will not result in a material financial impact on the group's financial
statements.
|
Amendment
to HKAS 1
|
"Presentation
of Financial Statements" - Capital Disclosures 1
|
|
HKFRS
7
|
"Financial
Instruments: Disclosures" 1
|
|
HK(IFRIC)
Interpretation 8
|
"Scope
of HKFRS 2" 2
|
|
HK(IFRIC)
Interpretation 9
|
"Reassessment
of Embedded Derivatives" 3
|
|
HK(IFRIC)
Interpretation 10
|
"Interim
Financial Reporting and Impairment" 4
|
|
HK(IFRIC)
Interpretation 11
|
"Group
and Treasury Share Transactions" 5
|
|
HK(IFRIC)
Interpretation 12
|
"Service
Concession Arrangement" 6
|
|
1
|
Effective
for annual periods beginning on or after 1 January 2007
|
|
2
|
Effective
for annual periods beginning on or after 1 May 2006
|
|
3
|
Effective
for annual periods beginning on or after 1 June 2006
|
|
4
|
Effective
for annual periods beginning on or after 1 November
2006
|
|
5
|
Effective
for annual periods beginning on or after 1 March 2007
|
|
6
|
Effective
for annual periods beginning on or after 1 January
2008
|
JV-9
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
| 3.1 |
Basis
of preparation
|
The
significant accounting
policies
that have been used in the preparation of these consolidated financial
statements are summarised below. These policies have been consistently applied
to all the years presented unless otherwise stated.
The
financial statements have been prepared on an historical cost basis except
for
the revaluation of certain financial assets and liabilities. The measurement
bases are fully described in the accounting policies below.
It
should
be noted that accounting estimates and assumptions are used in preparation
of
the financial statements. Although these estimates are based on management's
best knowledge and judgment of current events and actions, actual results
may
ultimately differ from those estimates. The areas involving a higher degree
of
judgment or complexity, or areas where assumptions and estimates are significant
to the financial statements, are disclosed in note 4.
| 3.2 |
Basis
of consolidation
|
The
consolidated financial statements incorporate
the
financial statements of the company and its subsidiaries made up to 31 March
each year.
| 3.3 |
Subsidiaries
|
Subsidiaries
are those entities (including special purpose entities) over which the group
has
the power to control the financial and operating policies so as to obtain
benefits from their activities. The existence and effect of potential voting
rights that are currently exercisable or convertible are considered when
assessing whether the group controls another entity. Subsidiaries are fully
consolidated from the date on which control is transferred to the group.
They
are excluded from consolidation from the date that control ceases.
Business
combinations (other than for combining entities under common control) are
accounted for by applying the purchase method. This involves the revaluation
at
fair value of all identifiable assets and liabilities, including contingent
liabilities of the subsidiary, at the acquisition date, regardless of whether
or
not they were recorded in the financial statements of the subsidiary prior
to
acquisition. On initial recognition, the assets and liabilities of the
subsidiary are included in the consolidated balance sheet at their fair values,
which are also used as the bases for subsequent measurement in accordance
with
the group's accounting policies.
JV-10
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
| 3.3 |
Subsidiaries
(Continued)
|
Intra-group
transactions, balances and unrealised gains on transactions between group
companies are eliminated in preparing the consolidated financial statements.
Unrealised losses are also eliminated unless the transaction provides evidence
of an impairment of the asset transferred.
In
the
company's balance sheet, subsidiaries are carried at cost less any impairment
loss. The results of the subsidiaries are accounted for by the company on
the
basis of dividends received and receivable at the balance sheet date.
| 3.4 |
Property,
plant and equipment
|
Property,
plant and equipment
are
stated at acquisition cost less accumulated depreciation and impairment losses.
Subsequent
costs are included in the asset's carrying amount or recognised as a separate
asset, as appropriate, only when it is probable that future economic benefits
associated with the item will flow to the group and company and the cost
of the
item can be measured reliably. All other repairs and maintenance are charged
to
the income statement during the period in which they are incurred.
Depreciation
is provided to write off the cost of property, plant and equipment over their
estimated useful lives, using the straight line method, at the following
rates
per annum :
|
Buildings
|
5%
or where shorter over 16 - 19 years
|
|||
|
Leasehold
improvements
|
20
|
%
|
||
|
Plant
and machinery
|
10
|
%
|
||
|
Furniture
and fixtures
|
20
|
%
|
||
|
Motor
vehicles
|
20
|
%
|
||
|
Computer
equipment and software
|
50
|
%
|
Construction
in progress represents costs incurred in the construction of buildings. These
costs are not depreciated until such time as the relevant assets are completed
and put into use, at which time the relevant costs are transferred to the
appropriate category of property, plant and equipment.
The
assets' useful lives are reviewed, and adjusted if appropriate, at each balance
sheet date.
JV-11
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
| 3.4 |
Property,
plant and equipment
(Continued)
|
The
gain
or loss arising on the retirement or disposal is determined as the difference
between the sales proceeds and the carrying amount of the assets and is
recognised in the consolidated income statement.
Subsequent
costs are included in the assets' carrying amounts or recognized as separate
assets, as appropriate, only when it is probable that future economic benefits
associated with the items will flow to the group and the cost of the items
can
be measured reliably. All other costs, such as repairs and maintenance, are
expensed in the consolidated income statement during the period in which
they
are incurred.
| 3.5 |
Inventories
|
Inventories
are
stated at the lower of cost and net realisable value. Cost comprises direct
materials computed using first-in, first-out method and, where applicable,
direct labour and those overheads that have been incurred in bringing the
inventories to their present location and condition. Net realisable value
is
calculated as the actual or estimated selling price less all further costs
of
completion and estimated costs necessary to make the sale.
| 3.6 |
Financial
assets
|
The
financial assets include available-for-sale financial assets, trade and other
receivables, bills receivable, and amounts due from group
companies.
JV-12
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
| 3.6 |
Financial
assets (Continued)
|
Loans
and receivables
Loans
and
receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Loans and receivables are
initially recognised at fair value and subsequently measured at amortised
cost
using the effective interest method less any impairment. Any changes in their
value are recognised in income statement.
Loans
and
receivables are provided against when objective evidence is received that
the
group will not be able to collect all amounts due to it in accordance with
the
original terms of the receivables. The amount of the impairment is the
difference between the asset's carrying amount and the present value of expected
cash flows, discounted at the effective interest rate.
Available-for-sale
financial assets
Available-for-sale
financial assets include non-derivative financial assets that are either
designated to this category or do not qualify for inclusion in any of the
other
categories of financial assets. All financial assets within this category
are
subsequently measured at fair value, with changes in value recognised in
equity
(i.e. fair value reserve). Upon disposal, the cumulative gain or loss previously
recognised in equity is transferred to the income statement. When a decline
in
the fair value of an available-for-sale financial asset has been recognised
directly in equity and there is objective evidence that the asset is impaired,
the cumulative loss that had been recognised directly in equity is removed
from
equity and recognised in the income statement even though the financial asset
has not been derecognised. Impairment losses previously recognised in the
income
statement on equity instruments will not reverse in subsequent periods.
Impairment losses previously recognised in income statement are subsequently
reversed if an increase in the fair value of the investment can be objectively
related to an event occurring after the recognition of the impairment loss.
Derecognition
of financial assets occurs when the rights to receive cash flows from the
investments expire or are transferred and substantially all of the risks
and
rewards of ownership have been transferred. An assessment for impairment
is
undertaken at least at each balance sheet date whether or not there is objective
evidence that a financial asset or a group of financial assets is impaired.
JV-13
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
3.7 Cash
and cash equivalents
Cash
and
cash equivalents include
cash at
bank and in hand.
3.8 Impairment
of assets
The
group's property, plant and equipment and the company's investments in
subsidiaries are subject to impairment testing.
An
impairment loss is recognised as an expense immediately for the amount by
which
the asset's carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of fair value, reflecting market conditions less costs
to
sell, and value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate
that
reflects the current market assessment of the time value of money and the
risk
specific to the asset.
For
the
purposes of assessing impairment, assets are grouped at the lowest levels
for
which there are separately identifiable cash flows (cash-generating units).
As a
result, some assets are tested individually for impairment and some are tested
at the cash-generating unit level.
All
individual assets or cash-generating units are tested for impairment whenever
events or changes in circumstances indicate that the carrying amount may
not be
recoverable.
An
impairment loss is recognised for the amount by which the asset's or
cash-generating unit's carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of fair value, reflecting market conditions
less costs to sell and value in use, based on an internal discounted cash
flow
evaluation. Any impairment loss is charged pro rata to the assets in the
cash
generating unit.
An
impairment loss is reversed if there has been a favourable change in the
estimates used to determine the asset's recoverable amount and only to the
extent that the asset's carrying amount does not exceed the carrying amount
that
would have been determined, net of depreciation or amortisation, if no
impairment had been recognised.
JV-14
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
3.9 Financial
liabilities
The
financial liabilities include trade and other payables, amounts due to group
and
related companies and borrowings.
Financial
liabilities are recognised when the group or the company becomes a party
to the
contractual agreements of the instrument. All interest related charges are
recognised as an expense in the income statement.
Trade
and
other payables and amounts due to group and related companies are recognised
initially at their fair value and subsequently measured at amortised cost,
using
the effective interest method.
Borrowings
are recognised initially at fair value, net of transaction costs incurred.
Borrowings are subsequently stated at amortised cost; any difference between
the
proceeds (net of transaction costs) and the redemption value is recognised
in
the income statement over the period of the borrowings using the effective
interest method.
3.10 Employee
benefits
Retirement
benefits costs
The
company operates a defined contribution Mandatory Provident Fund retirement
benefits scheme (the "MPF Scheme") under the Mandatory Provident Fund Schemes
Ordinance, for all of its employees in Hong Kong. The MPF Scheme became
effective on 1 December 2000. Contributions are made based on a percentage
of
the employees' basic salaries, limited to a maximum of HK$1,000 per month,
and
are charged to the income statement as they become payable in accordance
with
the rules of the MPF Scheme. The assets of the MPF Scheme are held separately
from those of the company in an independently administered fund. The company's
employer contributions vest fully with the employees when contributed into
the
MPF Scheme.
JV-15
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
3.11 Equity
Ordinary
shares are classified as equity. Share capital is determined using the nominal
value of shares that have been issued.
The
transaction costs of an equity transaction are accounted for as deduction
from
equity (net of any related income tax benefits) to the extent they are
incremental cost directly attributable to the equity transaction that otherwise
would have been avoided. The cost of an equity transaction that is abandoned
are
recognised as an expense.
3.12 Foreign
currency translation
The
consolidated financial
statements are presented in Hong Kong Dollars (HK$), which is also the
functional currency of the company.
In
the
individual financial statements of the consolidated entities, foreign currency
transactions are translated into the functional currency of the individual
entity using the exchange rates prevailing at the dates of the transactions.
At
the balance sheet date, monetary assets are liabilities denominated in foreign
currencies are translated at the foreign exchange rates ruling at the balance
sheet date. Foreign exchange gains and losses resulting from the settlement
of
such transactions and from the balance sheet date retranslation of monetary
assets and liabilities are recognised in the income statement.
Non-monetary
items are carried at fair value that are denominated in foreign currencies
are
retranslated at the rates prevailing on the date when the fair value was
determined and are reported as part of the fair value gain or loss. Non-monetary
items that are measured in terms of historical cost in a foreign currency
are
not re-translated.
In
the
consolidated financial statements, all individual financial statements of
foreign operations, originally presented in a currency different from the
group’s presentation currency, have been converted into Hong Kong dollars.
Assets and liabilities have been translated into Hong Kong dollars at the
closing rate at the balance sheet date. Income and expenses have been converted
into Hong Kong dollars at the exchange rates ruling at the transaction dates,
or
at the average rates over the reporting period, provided that the exchange
rates
do not fluctuate significantly. Any differences arising from this procedure
have
been dealt with separately in the exchange reserve in equity.
JV-16
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
|
3.12
|
Foreign
currency translation
(Continued)
|
Other
exchange differences arising from the translation of the net investment in
foreign entities and of borrowings are taken to shareholders' equity. When
a
foreign operation is sold, such exchange differences are recognized in the
income statement as part of the gain or loss on the sale.
3.13 Accounting
for income taxes
Income
tax comprises current tax and deferred tax.
Current
income tax assets and/or liabilities comprise those obligations to, or claims
from, tax authorities relating to the current or prior reporting period,
that
are unpaid at the balance sheet date. They are calculated according to the
tax
rates and tax laws applicable to the periods to which they relate, based
on the
taxable profit for the year. All changes to current tax assets or liabilities
are recognised as a component of income tax expense in the income
statement.
Deferred
tax is calculated using the liability method on temporary differences at
the
balance sheet date between the carrying amounts of assets and liabilities
in the
financial statements with their respective tax bases. Deferred tax liabilities
are generally recognised for all taxable temporary differences. Deferred
tax
assets are recognised for all deductible temporary differences, tax losses
available to be carried forward as well as other unused tax credits, to the
extent that it is probable that taxable profit will be available against
which
the deductible temporary differences, unused tax losses and unused tax credits
can be utilised.
Deferred
tax is calculated, without discounting, at tax rates that are expected to
apply
in the period the liability is settled or the asset realised, provided they
are
enacted or substantively enacted at the balance sheet date.
Changes
in deferred tax assets or liabilities are recognised in the income statement,
or
in equity if they relate to items that are charged or credited directly to
equity.
3.14 Leases
Leases
where substantially all the risks and rewards of ownership of assets remain
with
the lessor are accounted for as operating leases. Operating lease payments
are
recognised as an expense on a straight-line basis. Affiliated costs, such
as
maintenance and insurance, are expensed as incurred. Contingent rentals are
charged to the income statement in the accounting period in which they are
incurred.
JV-17
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.15 Recognition
of revenue
Revenue
comprises the fair value for the sale of goods, rendering of services and
the
use by others of the group's assets yielding interest, net of rebates and
discounts. Provided it is probable that the economic benefits will flow to
the
group and the revenue and costs, if applicable, can be measured reliably,
revenue is recognised as follows :
Revenue
from the sale of goods is recognised when the significant risks and rewards
of
ownership of the goods have been transferred to customers. This is usually
taken
as the time when the goods are delivered and the customer has accepted the
goods.
Rental
income from properties letting under operating leases is recognised on a
straight line basis over the lease terms.
Interest
income is recognised on a time proportion basis using the effective interest
rate method.
3.16
Related
parties
Parties
are considered to be related to the group if :
(i) directly,
or indirectly through one or more intermediaries, the party :
· controls,
is controlled by, or is under common control with, the group;
· has
an
interest in the group that gives it significant influence over the
group;
· has
joint
control over the group;
(ii) the
party
is a jointly-controlled entity;
(iii) the
party
is an associate;
(iv) the
party
is a member of the key management personnel of the group or its
parent;
(v) the
party
is a close member of the family of any individual referred to in (i) or
(iv);
(vi) the
party
is an entity that is controlled, jointly-controlled or significantly influenced
by or for which significant voting power in such entity resides with, directly
or indirectly, any individual referred to in (iv) or (v); or
(vii) the
party
is a post-employment benefit plan for the benefit of employees of the group,
or
of any entity that is a related party of the group.
JV-18
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
3.17 Contingent
liabilities
A
contingent liability is a possible obligation that arises from past events
and
whose existence will only be confirmed by the occurrence or non-occurrence
of
one or more uncertain future events not wholly within the control of the
group.
It can also be a present obligation arising from past events that is not
recognised because it is not probable that outflow of economic resources
will be
required or the amount of obligation cannot be measured reliably.
A
contingent liability is not recognised but is disclosed in the notes to the
financial statements. When a change in the probability of an outflow occurs
so
that the outflow is probable, it will then be recognised as a
provision.
|
4.
|
CRITICAL
ACCOUNTING ESTIMATES AND
JUDGEMENTS
|
Estimates
and judgements are continually evaluated and are based on historical experience
and other factors, including expectations of future events that are believed
to
be reasonable under the circumstances.
The
group
makes estimates and assumptions concerning the future. The resulting accounting
estimates will, by definition, seldom equal the related actual results. The
estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below :
Depreciation
and amortisation
The
group
and company depreciated the property, plant and equipment on a straight-line
basis over the estimated useful lives, starting from the date on which the
assets are placed into productive use. The estimated useful lives reflect
the
directors' estimate of the periods that the group intends to derive future
economic benefits from the use of the group's and company's property, plant
and
equipment.
Impairment
of receivables
The
policy for the impairment of receivables of the group is based on the evaluation
of collectibility and ageing analysis of accounts and on the management's
judgement. A considerable amount of judgement is required in assessing the
ultimate realisation of these receivables, including the current
creditworthiness and the past collection history of each debtor.
JV-19
|
4.
|
CRITICAL
ACCOUNTING ESTIMATES AND JUDGEMENTS
(Continued)
|
Net
realisable value of inventories
Net
realisable value of inventories is the actual or estimated selling price
in the
ordinary course of business, less further costs of completion and the estimated
costs necessary to make the sale. These estimates are based on the current
market condition and the historical experience of selling products of similar
nature. It could change significantly as a result of competitor actions in
response to the changes in market condition. Management reassess these
estimations at the balance sheet date.
Current
taxation and deferred taxation
The
group
is subject to income taxes in Hong Kong and the People's Republic of China
("PRC"). Significant judgement is required in determining the amount of the
provision of taxation and the timing of payment of the related taxations.
There
are many transactions and calculations for which the ultimate tax determination
is uncertain during the ordinary course of business. Where the final tax
outcome
of these matters is different from the amounts that were initially recorded,
such differences will impact the income tax and deferred tax provisions in
the
period in which such determination is made.
|
5.
|
TURNOVER
|
Revenue,
which is also the group's turnover, represents total invoiced value of goods
supplied, less discounts and returns.
|
6.
|
OTHER
INCOME
|
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|||
|
Gain
on disposal of property, plant and equipment
|
347,500
|
150
|
|||||
|
Interest
income
|
2,289,039
|
1,761,425
|
|||||
|
Rental
income, less outgoings
|
268,800
|
268,800
|
|||||
|
Sundry
income
|
1,787,853
|
768,306
|
|||||
|
4,693,192
|
2,798,681
|
||||||
JV-20
|
7.
|
FINANCE
COSTS
|
|
|
|
2007
|
|
2006
|
|
||
|
|
|
HK$
|
|
HK$
|
|||
|
Interest
charges on :
|
|||||||
|
-
Discounted bills
|
405,953
|
265,063
|
|||||
|
8.
|
PROFIT
BEFORE INCOME TAX
|
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|||
|
Profit
before income tax is arrived at after charging :
|
|||||||
|
Amortisation
of advanced lease payments
|
424,328
|
415,454
|
|||||
|
Auditors'
remuneration
|
270,000
|
187,020
|
|||||
|
Cost
of inventories recognised as expenses
|
213,147,126
|
125,843,197
|
|||||
|
Depreciation
of property, plant and equipment
|
5,752,971
|
4,414,388
|
|||||
|
Exchange
loss, net
|
1,141,163
|
598,754
|
|||||
|
(Gain)/loss
on disposal of property, plant and equipment
|
(347,500
|
)
|
9,178
|
||||
|
Operating
lease charges in respect of land and buildings
|
1,343,100
|
1,334,433
|
|||||
|
Retirement
benefits scheme contributions
|
255,399
|
226,818
|
|||||
|
Staff
costs (excluding retirement benefits scheme contributions)
|
23,430,733
|
14,213,294
|
|||||
JV-21
|
9.
|
INCOME
TAX EXPENSE
|
|
|
|
2007
|
|
2006
|
|
||
|
|
|
HK$
|
|
HK$
|
|||
|
The
tax charge comprises :
|
|||||||
|
Hong
Kong profits tax
|
|||||||
|
-
current year
|
6,480,183
|
3,922,325
|
|||||
|
-
under/(over)provision in prior years
|
1,549
|
(71,627
|
)
|
||||
|
PRC
Foreign Enterprise Income Tax
|
|||||||
|
-
current year
|
1,100,442
|
-
|
|||||
|
-
under provision in prior years
|
732,849
|
-
|
|||||
|
8,315,023
|
3,850,698
|
||||||
|
Deferred
tax (Note
25)
|
|||||||
|
-
current year
|
533,712
|
62,000
|
|||||
|
Total
income tax expense
|
8,848,735
|
3,912,698
|
|||||
Hong
Kong
profits tax has been provided at the rate of 17.5% (2006 : 17.5%) on the
group's
estimated assessable profits arising in Hong Kong for the year.
Reconciliation
between tax expense and accounting profit at applicable tax rates :
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|||
|
Profit
before income tax
|
74,021,948
|
36,228,139
|
|||||
|
Notional
tax on profit before income tax, calculated at the rates applicable
to
profits in the tax jurisdictions concerned
|
12,867,002
|
6,028,317
|
|||||
|
Tax
effect of non-deductible expenses
|
440,037
|
1,105,380
|
|||||
|
Tax
effect of non-taxable revenue
|
(6,390,922
|
)
|
(4,248,502
|
)
|
|||
|
Tax
effect on temporary differences not recognised
|
(160,409
|
)
|
478,546
|
||||
|
Tax
effect on unrecognised tax losses
|
1,358,629
|
620,584
|
|||||
|
Under/(over)provision
in prior years
|
734,398
|
(71,627
|
)
|
||||
|
Actual
tax expense
|
8,848,735
|
3,912,698
|
|||||
JV-22
|
10.
|
PROFIT
FOR THE YEAR
|
Of
the
consolidated profit attributable to shareholders of HK$65,173,213 (2006 :
HK$32,315,441), HK$74,184,879 (2006 : HK$39,334,216) has been dealt with
in the
financial statements of the company.
11. DIVIDENDS
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|||
|
Dividends
attributable to the year :
|
|||||||
|
First
interim dividend of HK$1,165,043 (2006 : HK$1,667,865) per
share
|
2,330,086
|
3,335,730
|
|||||
|
Second
interim dividend of HK$4,352,339 (2006 : HK$2,336,824) per
share
|
8,704,677
|
4,673,649
|
|||||
|
Third
interim dividend of HK$4,421,894 (2006 : HK$2,014,406) per
share
|
8,843,788
|
4,028,813
|
|||||
|
Fourth
interim dividend of HK$4,994,086 (2006 : HK$2,562,586) per
share
|
9,988,171
|
5,125,173
|
|||||
|
29,866,722
|
17,163,365
|
||||||
JV-23
|
12.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Group
|
Buildings
|
|
Leasehold
improvements
|
|
Construction
in
progress
|
|
Plant
and
machinery
|
|
Furniture
and
fixtures
|
|
Motor
vehicles
|
|
Computer
equipment
and
software
|
|
Total
|
|
||||||||||
|
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|||||||||
|
At
1 April 2005
|
|||||||||||||||||||||||||
|
Cost
|
13,711,906
|
10,813,890
|
18,254,227
|
29,168,238
|
4,001,317
|
4,802,240
|
1,731,260
|
82,483,078
|
|||||||||||||||||
|
Accumulated
depreciation
|
(7,852,998
|
)
|
(8,914,682
|
)
|
-
|
(23,475,200
|
)
|
(3,352,164
|
)
|
(2,374,950
|
)
|
(1,471,013
|
)
|
(47,441,007
|
)
|
||||||||||
|
Net
book amount
|
5,858,908
|
1,899,208
|
18,254,227
|
5,693,038
|
649,153
|
2,427,290
|
260,247
|
35,042,071
|
|||||||||||||||||
|
Year
ended 31 March 2006
|
|||||||||||||||||||||||||
|
Opening
net book amount
|
5,858,908
|
1,899,208
|
18,254,227
|
5,693,038
|
649,153
|
2,427,290
|
260,247
|
35,042,071
|
|||||||||||||||||
|
Additions
|
71,154
|
43,319
|
6,332,090
|
2,828,123
|
991,463
|
183,182
|
181,547
|
10,630,878
|
|||||||||||||||||
|
Disposals
|
-
|
(11,083
|
)
|
-
|
(1,733
|
)
|
(2,280
|
)
|
-
|
(808
|
)
|
(15,904
|
)
|
||||||||||||
|
Depreciation
|
(1,271,697
|
)
|
(769,939
|
)
|
-
|
(1,026,319
|
)
|
(304,012
|
)
|
(767,634
|
)
|
(274,787
|
)
|
(4,414,388
|
)
|
||||||||||
|
Exchange
differences
|
-
|
-
|
395,175
|
-
|
2,513
|
19,476
|
840
|
418,004
|
|||||||||||||||||
|
Reclassifications
|
22,971,168
|
-
|
(24,981,492
|
)
|
2,010,324
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Closing
net book amount
|
27,629,533
|
1,161,505
|
-
|
9,503,433
|
1,336,837
|
1,862,314
|
167,039
|
41,660,661
|
|||||||||||||||||
|
At
31 March 2006
|
|||||||||||||||||||||||||
|
Cost
|
36,754,228
|
10,822,209
|
-
|
33,801,485
|
4,976,520
|
5,016,736
|
1,896,641
|
93,267,819
|
|||||||||||||||||
|
Accumulated
depreciation
|
(9,124,695
|
)
|
(9,660,704
|
)
|
-
|
(24,298,052
|
)
|
(3,639,683
|
)
|
(3,154,422
|
)
|
(1,729,602
|
)
|
(51,607,158
|
)
|
||||||||||
|
Net
book amount
|
27,629,533
|
1,161,505
|
-
|
9,503,433
|
1,336,837
|
1,862,314
|
167,039
|
41,660,661
|
|||||||||||||||||
|
Year
ended 31 March 2007
|
|||||||||||||||||||||||||
|
Opening
net book amount
|
27,629,533
|
1,161,505
|
-
|
9,503,433
|
1,336,837
|
1,862,314
|
167,039
|
41,660,661
|
|||||||||||||||||
|
Additions
|
18,091
|
714,741
|
3,447,558
|
12,564,831
|
245,753
|
782,951
|
233,057
|
18,006,982
|
|||||||||||||||||
|
Disposals
|
-
|
-
|
-
|
-
|
(660
|
)
|
(15,555
|
)
|
(150
|
)
|
(16,365
|
)
|
|||||||||||||
|
Depreciation
|
(2,171,707
|
)
|
(763,209
|
)
|
-
|
(1,472,889
|
)
|
(392,155
|
)
|
(761,851
|
)
|
(191,160
|
)
|
(5,752,971
|
)
|
||||||||||
|
Exchange
differences
|
953,978
|
-
|
-
|
240,544
|
35,102
|
40,931
|
1,322
|
1,271,877
|
|||||||||||||||||
|
Reclassifications
|
957,159
|
-
|
(2,837,672
|
)
|
1,880,513
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Closing
net book amount
|
27,387,054
|
1,113,037
|
609,886
|
22,716,432
|
1,224,877
|
1,908,790
|
210,108
|
55,170,184
|
|||||||||||||||||
|
At
31 March 2007
|
|||||||||||||||||||||||||
|
Cost
|
38,684,246
|
10,630,874
|
609,886
|
48,310,888
|
5,204,128
|
5,589,456
|
2,130,013
|
111,159,491
|
|||||||||||||||||
|
Accumulated
depreciation
|
(11,297,192
|
)
|
(9,517,837
|
)
|
-
|
(25,594,456
|
)
|
(3,979,251
|
)
|
(3,680,666
|
)
|
(1,919,905
|
)
|
(55,989,307
|
)
|
||||||||||
|
Net
book amount
|
27,387,054
|
1,113,037
|
609,886
|
22,716,432
|
1,224,877
|
1,908,790
|
210,108
|
55,170,184
|
|||||||||||||||||
JV-24
|
12.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Company
|
Buildings
|
|
Leasehold
Improvements
|
|
Plant
and
machinery
|
|
Furniture
and
fixtures
|
|
Motor
vehicles
|
|
Computer
equipment
and
software
|
|
Total
|
|
|||||||||
|
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
||||||||
|
At
1 April 2005
|
||||||||||||||||||||||
|
Cost
|
2,829,732
|
2,783,937
|
2,571,809
|
1,576,376
|
1,944,233
|
1,022,948
|
12,729,035
|
|||||||||||||||
|
Accumulated
depreciation
|
(1,947,748
|
)
|
(2,160,024
|
)
|
(171,429
|
)
|
(1,259,632
|
)
|
(1,606,890
|
)
|
(780,628
|
)
|
(7,926,351
|
)
|
||||||||
|
Net
book amount
|
881,984
|
623,913
|
2,400,380
|
316,744
|
337,343
|
242,320
|
4,802,684
|
|||||||||||||||
|
Year
ended 31 March 2006
|
||||||||||||||||||||||
|
Opening
net book amount
|
881,984
|
623,913
|
2,400,380
|
316,744
|
337,343
|
242,320
|
4,802,684
|
|||||||||||||||
|
Additions
|
-
|
6,800
|
1,230,371
|
20,990
|
-
|
119,074
|
1,377,235
|
|||||||||||||||
|
Disposals
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Depreciation
|
(141,486
|
)
|
(191,471
|
)
|
(301,321
|
)
|
(105,894
|
)
|
(181,717
|
)
|
(233,613
|
)
|
(1,155,502
|
)
|
||||||||
|
Exchange
differences
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Reclassifications
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Closing
net book amount
|
740,498
|
439,242
|
3,329,430
|
231,840
|
155,626
|
127,781
|
5,024,417
|
|||||||||||||||
|
At
31 December 2005
|
||||||||||||||||||||||
|
Cost
|
2,829,732
|
2,790,737
|
3,802,180
|
1,593,416
|
1,944,233
|
1,125,032
|
14,085,330
|
|||||||||||||||
|
Accumulated
depreciation
|
(2,089,234
|
)
|
(2,351,495
|
)
|
(472,750
|
)
|
(1,361,576
|
)
|
(1,788,607
|
)
|
(997,251
|
)
|
(9,060,913
|
)
|
||||||||
|
Net
book amount
|
740,498
|
439,242
|
3,329,430
|
231,840
|
155,626
|
127,781
|
5,024,417
|
|||||||||||||||
|
Year
ended 31 March 2007
|
||||||||||||||||||||||
|
Opening
net book amount
|
740,498
|
439,242
|
3,329,430
|
231,840
|
155,626
|
127,781
|
5,024,417
|
|||||||||||||||
|
Additions
|
-
|
714,741
|
8,825,718
|
160,399
|
-
|
204,312
|
9,905,170
|
|||||||||||||||
|
Disposals
|
-
|
-
|
-
|
(660
|
)
|
-
|
(150
|
)
|
(810
|
)
|
||||||||||||
|
Depreciation
|
(141,487
|
)
|
(231,656
|
)
|
(722,477
|
)
|
(103,723
|
)
|
(107,921
|
)
|
(155,767
|
)
|
(1,463,031
|
)
|
||||||||
|
Exchange
differences
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Reclassifications
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Closing
net book amount
|
599,011
|
922,327
|
11,432,671
|
287,856
|
47,705
|
176,176
|
13,465,746
|
|||||||||||||||
|
At
31 March 2007
|
||||||||||||||||||||||
|
Cost
|
2,829,732
|
2,599,402
|
12,627,898
|
1,689,183
|
1,944,233
|
1,324,164
|
23,014,612
|
|||||||||||||||
|
Accumulated
depreciation
|
(2,230,721
|
)
|
(1,677,075
|
)
|
(1,195,227
|
)
|
(1,401,327
|
)
|
(1,896,528
|
)
|
(1,147,988
|
)
|
(9,548,866
|
)
|
||||||||
|
Net
book amount
|
599,011
|
922,327
|
11,432,671
|
287,856
|
47,705
|
176,176
|
13,465,746
|
|||||||||||||||
JV-25
|
13.
|
ADVANCED
LEASE PAYMENTS
|
|
Group
|
|
Company
|
|||||||||||
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
||||||
|
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|||||
|
Land
use rights
|
8,644,540
|
7,516,731
|
-
|
-
|
|||||||||
|
Advanced
lease payments, net
|
930,239
|
1,191,701
|
930,239
|
1,191,701
|
|||||||||
|
9,574,779
|
8,708,432
|
930,239
|
1,191,701
|
||||||||||
|
14.
|
AVAILABLE-FOR-SALE
FINANCIAL ASSETS
|
|
Group
|
|
Company
|
|
||||||||||
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|||||
|
Available-for-sale
financial assets :
|
|||||||||||||
|
Listed
outside Hong Kong, at market value
|
26,823,106
|
34,277,991
|
26,823,106
|
34,277,991
|
|||||||||
|
15.
|
INTERESTS
IN SUBSIDIARIES
|
Company
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
HK$
|
||||
|
Unlisted
shares, at cost
|
78,007,160
|
39,993,130
|
|||||
|
Less
: Impairment
|
(200,000
|
)
|
(200,000
|
)
|
|||
|
77,807,160
|
39,793,130
|
||||||
|
Amount
due to a subsidiary
|
(8
|
)
|
(8
|
)
|
|||
|
77,807,152
|
39,793,122
|
||||||
At
31
March 2007 and 31 March 2006, the amount due to a subsidiary is unsecured,
interest-free and has no fixed terms of repayment and the amounts due from
subsidiaries are repayable on demand and accordingly, are classified as current
assets (note 18).
JV-26
|
15.
|
INTERESTS
IN SUBSIDIARIES
(Continued)
|
Details
of the subsidiaries as at 31 March 2007 are as follows :
|
Name
|
Place
of incorporation/ establishment
|
Nominal
value of issued capital/registered capital
|
Percentage
of issued capital held by the company directly
|
Principal
activities
|
||||
|
Fujian
Taisun Electronics Technologies Co., Ltd.
|
The
PRC
|
US$15,000,000
|
100%
|
Manufacture
of consumer electronic products (trial production in
progress)
|
||||
|
Fujian
Taisun Fire Safety
Technologies
Co.,
Ltd.
|
The
PRC
|
US$5,000,000
|
100%
|
Manufacture
of consumer electronic products (operations not commenced
yet)
|
||||
|
Sound
Well (Hong Kong) Co. Limited
|
Hong
Kong
|
HK$200,000
|
100%
|
Trading
of consumer electronic products and investment holding
|
||||
|
Kimbager
International Limited
|
British
Virgin Islands
|
US$1
|
100%
|
Trading
of machinery and equipment
|
||||
|
Kimbager
Limited
|
Hong
Kong
|
HK$10,000
|
100%
|
Dormant
|
|
16.
|
INVENTORIES
|
|
Group
|
|
Company
|
|
||||||||||
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|
HK$
|
|
HK$
|
|||||
|
Raw
materials
|
20,187,005
|
10,583,470
|
20,187,005
|
10,583,470
|
|||||||||
|
Work
in progress
|
4,651,337
|
3,420,355
|
4,651,337
|
3,420,355
|
|||||||||
|
Finished
goods
|
5,602,741
|
4,919,080
|
5,602,741
|
4,919,080
|
|||||||||
|
30,441,083
|
18,922,905
|
30,441,083
|
18,922,905
|
||||||||||
JV-27
|
17.
|
TRADE
AND OTHER RECEIVABLES
|
|
Group
|
|||||||
|
2007
|
2006
|
||||||
|
|
HK$
|
HK$
|
|||||
|
Accounts
receivable
|
3,785,249
|
3,511,654
|
|||||
|
Bills
receivable
|
2,853,162
|
3,435,122
|
|||||
|
Deposits,
prepayments and other receivables
|
2,571,102
|
1,334,007
|
|||||
|
9,209,513
|
8,280,783
|
||||||
|
18.
|
AMOUNTS
DUE FROM SUBSIDIARIES
|
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|||
|
Trade
*
|
26,651,604
|
7,371,509
|
|||||
|
Non-trade
**
|
13,472,976
|
20,251,108
|
|||||
|
40,124,580
|
27,622,617
|
||||||
|
Less
: Impairment
|
(975,147
|
)
|
(975,147
|
)
|
|||
|
39,149,433
|
26,647,470
|
||||||
| * |
The
amount is unsecured and arises from trading activities of which
the
settlement period is in accordance with normal commercial terms.
Interest
is charged on the overdue portion over HK$1,950,000 (equivalent
to
US$250,000) at 6% per annum.
|
| ** |
The
amount is unsecured, interest-free and repayable on
demand.
|
|
19.
|
LOAN
TO A SHAREHOLDER
|
The
loan
to a shareholder is unsecured, interest bearing at 6% per annum and is repayable
on demand.
| 20. |
AMOUNT
DUE TO A RELATED COMPANY/ A
SHAREHOLDER
|
The
amount is unsecured, interest-free and repayable on demand.
JV-28
|
21.
|
DIVIDEND
PAYABLE
|
At
a
board meeting held on 7 February 2004, the directors declared a final dividend
of HK$5,850,000 per share, totalling HK$11,700,000, which was expected to
be
payable to the shareholders upon successful initial listing of the company's
shares on the Main Board of The Stock Exchange of Hong Kong Limited ("the
HKEX").
|
22.
|
AMOUNT
DUE TO A DIRECTOR
|
During
the year a director of the company paid RMB200,000 (equivalent to HK$200,000)
on
behalf of Fujian Taisun Fire Safety Technologies Co., Ltd., a wholly owned
subsidiary of the company, for the purchase of the use rights for a parcel
of
land in the PRC. The amount is unsecured, interest free, and repayable upon
demand.
|
23.
|
LOANS
FROM SHAREHOLDERS
|
The
loans
are unsecured, interest-free and repayable on demand by the respective
shareholders with the consent of each other and upon successful initial listing
of the company's shares on the Main Board of HKEX, whichever is
earlier.
|
24.
|
COLLATERALISED
BANK ADVANCES
|
This
amount represents the recognition of the bills discounted with recourse at
31
March 2007.
|
25.
|
DEFERRED
TAX
|
At
31
March 2007, the major deferred tax liabilities recognised in the balance
sheets
and the movements during the current and prior years :
Group
and Company
|
|
|
Accelerated
tax
depreciation
|
||
|
HK$
|
||||
|
Balance
at 1 April 2005
|
193,000
|
|||
|
Charge
to income statement
|
62,000
|
|||
|
Balance
at 31 March 2006
|
255,000
|
|||
|
Charge
to income statement (Note 9)
|
533,712
|
|||
|
Balance
at 31 March 2007
|
788,712
|
|||
JV-29
| 25. |
DEFERRED
TAX (Continued)
|
|
2007
|
2006
|
||||||
|
|
HK$
|
HK$
|
|||||
|
Deferred
tax liabilities recognised in the balance sheets of the group and
company
|
788,712
|
255,000
|
|||||
At
the
balance sheet date, the major components of the deferred tax asset that has
not
been recognised is the temporary differences in respect of the pre-operating
expenses incurred by Fujian Taisun Electronics Technologies Co., Ltd. and
Fujian
Taisun Fire Safety Technologies Co., Ltd, the PRC subsidiaries of the company,
of approximately HK$2,266,161 (2006 : HK$1,524,303) and HK$313,109 (2006
: NIL),
respectively, as it is not certain that future taxable profits will be available
against which these deductible temporary difference may be
utilised.
| 26. |
SHARE
CAPITAL
|
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|||
|
Authorised
:
|
|||||||
|
100
ordinary shares of HK$100 each
|
10,000
|
10,000
|
|||||
|
Issued
and fully paid :
|
|||||||
|
2
ordinary shares of HK$100 each
|
200
|
200
|
|||||
| 27. |
RESERVES
|
Group
|
2007
|
|
2006
|
|
||||
|
|
|
HK$
|
|
HK$
|
|||
|
Exchange
reserve
|
3,187,863
|
649,522
|
|||||
|
Fair
value reserve
|
(458,173
|
)
|
(750,629
|
)
|
|||
|
Retained
profits
|
133,971,371
|
98,664,880
|
|||||
|
136,701,061
|
98,563,773
|
||||||
Details
of the movements in the above reserves during the year are set out in the
consolidated statement of changes in equity on page 10.
JV-30
| 27. |
RESERVES
(Continued)
|
Company
|
Retained
profits
|
|
|
Fair
value
reserve
|
|
|
Total
|
||||
|
HK$
|
|
|
HK$
|
|
|
HK$
|
||||
|
Adjusted
balance at 1 April 2005
|
89,905,500
|
(251,023
|
)
|
89,654,477
|
||||||
|
Profit
for the year
|
39,334,216
|
-
|
39,334,216
|
|||||||
|
Change
in fair value of available-for-sale financial assets
|
-
|
(499,606
|
)
|
(499,606
|
)
|
|||||
|
Dividends
|
(17,163,365
|
)
|
-
|
(17,163,365
|
)
|
|||||
|
Balance
at 31 March 2006
|
112,076,351
|
(750,629
|
)
|
111,325,722
|
||||||
|
Profit
for the year
|
74,184,878
|
-
|
74,184,878
|
|||||||
|
Change
in fair value of available-for-sale financial assets
|
-
|
292,456
|
292,456
|
|||||||
|
Dividends
|
(29,866,722
|
)
|
-
|
(29,866,722
|
)
|
|||||
|
Balance
at 31 March 2007
|
156,394,507
|
(458,173
|
)
|
155,936,334
|
|
28.
|
OPERATING
LEASE ARRANGEMENTS
|
At
31
March 2007, the total future minimum rental receivable under non-cancellable
operating leases in respect of land and buildings are as follows :
|
Group
and Company
|
|||||||
|
|
2007
|
2006
|
|||||
|
|
HK$
|
HK$
|
|||||
|
Within
one year
|
57,600
|
53,265
|
|||||
|
57,600
|
53,265
|
||||||
JV-31
|
28.
|
OPERATING
LEASE ARRANGEMENTS
(Continued)
|
At
31
March 2007, the total future minimum lease payments under non-cancellable
operating leases in respect of land and buildings are payable as follows
:
|
Group
|
Company
|
||||||||||||
|
|
2007
|
2006
|
2007
|
2006
|
|||||||||
|
|
HK$
|
HK$
|
HK$
|
HK$
|
|||||||||
|
Within
one year
|
399,314
|
1,160,600
|
140,000
|
1,000,000
|
|||||||||
|
In
the second to fifth years
|
86,710
|
140,000
|
-
|
140,000
|
|||||||||
|
486,024
|
1,300,600
|
140,000
|
1,140,000
|
||||||||||
The
group
and the company lease land and buildings under operating leases. The leases
run
for an initial period of one to two years, with an option to renew the leases
at
the expiry dates. None of the leases includes contingent rentals.
|
29.
|
CAPITAL
COMMITMENTS
|
|
Group
|
Company
|
||||||||||||
|
|
2007
|
2006
|
2007
|
2006
|
|||||||||
|
|
HK$
|
HK$
|
HK$
|
HK$
|
|||||||||
|
Contracted
but not provided for the purchase of property, plant and
equipment
|
-
|
3,853,794
|
2,139,420
|
6,100,930
|
|||||||||
|
Contracted
but not provided for the purchase of land use rights
|
5,834,300
|
-
|
-
|
-
|
|||||||||
|
Contracted
but not provided for the construction of the factory premises in
the
PRC
|
1,374,942
|
2,780,697
|
-
|
-
|
|||||||||
|
Capital
contributions payable to PRC wholly-owned subsidiaries
|
-
|
-
|
78,202,856
|
116,216,878
|
|||||||||
|
7,209,242
|
6,634,491
|
80,342,276
|
122,317,808
|
||||||||||
JV-32
|
30.
|
CONTINGENT
LIABILITIES
|
The
current and prior years' tax provisions have been prepared on the basis that
the
management fees and bonuses are deductible in the determination of the
assessable profits of the company and the company is entitled to the offshore
claims. During the year ended 31 March 2006, the company received enquiries
from
the Hong Kong Inland Revenue Department regarding these deductions and offshore
claims. As at the date of approval of these financial statements, the outcome
of
the enquiries is uncertain. In the opinion of the directors, no provision
for
additional taxes is required. The total contingent tax exposures to the group
and company in respect of the deductions and offshore claims are estimated to be
approximately HK$3.8 million and HK$14.8 million, respectively.
Save
as
disclosed above, the group and company have no contingent liabilities at
31
March 2007.
|
31.
|
DIRECTORS'
REMUNERATION
|
Remuneration
of the directors of the company disclosed pursuant to section 161 of the
Hong
Kong Companies Ordinance is as follows :
|
Group
|
Company
|
||||||||||||
|
|
2007
|
2006
|
2007
|
2006
|
|||||||||
|
|
HK$
|
HK$
|
HK$
|
HK$
|
|||||||||
|
Fees
|
-
|
-
|
-
|
-
|
|||||||||
|
Other
emoluments
|
-
|
-
|
-
|
-
|
|||||||||
JV-33
| 32. |
RELATED
PARTY TRANSACTIONS
|
During
the year, the following transactions were carried out with related parties
:
|
Group
|
|||||||
|
|
2007
|
2006
|
|||||
|
|
HK$
|
HK$
|
|||||
|
Transactions
with a related company
|
|||||||
|
Rental
expense
|
1,080,000
|
840,000
|
|||||
|
Management
fee expense
|
4,434,600
|
4,434,600
|
|||||
|
Management
bonus expense
|
7,113,550
|
2,914,238
|
|||||
|
Transactions
with a shareholder
|
|||||||
|
Sales
|
148,477,931
|
95,570,482
|
|||||
|
Purchases
|
8,451,104
|
5,713,786
|
|||||
|
Sales
commission expense
|
2,250,179
|
605,942
|
|||||
|
Interest
income
|
195,000
|
234,000
|
|||||
|
Transactions
with a director
|
|||||||
|
Rental
expenses
|
-
|
240,000
|
|||||
|
33.
|
MAJOR
NON-CASH TRANSACTION
|
During
the year ended 31 March 2007, HK$5,517,381 (2006 : HK$4,004,689) of the
dividends for the year was settled through the current account with a
shareholder.
|
34.
|
FINANCIAL
RISK MANAGEMENT OBJECTIVES AND
POLICIES
|
The
group's major financial assets and liabilities include bank balances and
cash,
available-for-sale financial assets, trade receivables and payables. Details
of
these financial instruments are disclosed in respective notes. The risks
associated with these financial instruments and the policies on how to mitigate
these risks are set out below. The management manages and monitors these
exposures to ensure appropriate measures are implemented on a timely and
effective manner.
(a) Interest
rate risk
The
group
does not have any significant exposure to interest rate risk as the group
currently has no financial assets and liabilities with floating interest
rates.
JV-34
|
34.
|
FINANCIAL
RISK MANAGEMENT OBJECTIVES AND POLICIES
(Continued)
|
(b) Foreign
currency risk
The
group
mainly operates in China and is exposed to foreign exchange risk arising
from
various currency exposures, primarily with respect to the US dollar and Reminibi
("RMB"). The HK dollar is pegged to the US dollar at an exchange rate of
approximately 7.8, the foreign exchange exposure between US dollar and HK
dollar
is therefore minimal. For assets and transactions denominated in RMB, the
group
is exposed to foreign exchange risk arising from the exposure of the RMB
against
the HK dollar. The group manages its foreign exchange risk by actively
monitoring its foreign currency transactions.
(c) Credit
risks
The
group's bank balances are all deposited with major banks in Hong Kong and
the
PRC.
The
carrying amount of trade and other receivables represent the group's maximum
exposure to credit risk in relation to its financial assets. No other financial
assets carry a significant exposure to credit risk. The group's trade and
other
receivables are actively monitored to avoid significant concentrations of
credit
risk.
(d) Fair
values
The
fair
values of the group's current financial assets and liabilities are not
materially different from their carrying amounts because of the immediate
or
short term maturity of these financial instruments.
|
35.
|
SUBSEQUENT
EVENT
|
Subsequent
to the balance sheet date, a subsidiary of the company has entered into a
factory construction agreement representing a total commitment of
HK$8,480,000.
JV-35