UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 20022003
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ________________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7-A Gwynns Mill Court, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)__________
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 19, 2002:2003:
Common Stock, $.01 Par Value - $2,188,951$5,725,825
The number of shares outstanding of the issuer's classes of
common stock as of June 19, 2002:2003:
Common Stock, $.01 Par Value - 1,009,770654,380 shares
ITEM 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of the federal securities laws.
These statements can be identified by the use of forward-looking
terminology such as "believes", "expects", "may", "will",
"should", or "anticipates" or similar terminology, or by
discussions of strategy. These statements reflect the reasonable
judgment of our management with respect to future events and are
subject to risks and uncertainties that could cause actual
results to differ materially from those in the forward-
lookingforward-looking
statements. We cannot guarantee that our forward-looking
statements will turn out to be correct or that our beliefs or
goals will not change. Our actual results could be very different
from, and worse than, our expectations for various reasons,
including factors that may affect future results discussed in
Management's Discussion and Analysis of Financial Condition and
Results of Operations. Under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, an
SEC-reporting company that identifies forward-looking statements
and warns investors that actual results could differ materially
from those in the forward-looking statements, will not be liable
for any private action arising under the Securities Act of 1933
based on such forward-looking statements.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company" or "USI") was
incorporated in the State of Maryland in 1969. Its principal
offices are located at 7-A Gwynns Mill Court, Owings Mills, MD
21117 and its telephone number is 410-363-3000.
The Company designs and markets a variety of popularly-priced
securitysafety and private label products which currently consistconsisting primarily of smoke
alarms, carbon monoxide alarms and related products. Most of the
Company's products require minimal installation orand are designed
for easy installation by the consumer without professional
assistance. The products sold by USI ELECTRIC usually require
professional installation.
Prior to 2000, the Company also designed and marketed a variety
of telecommunication and video products. Due to the low margins
realized on its telecommunications and video products, the
Company has since focused its business primarily on securitysafety
- 2 -
products. As a result, the Company (i) changed its marketing of
telecommunications and video products to concentrate virtually
exclusively on made-to-order private label sales, and (ii)
entered into the electrical distribution market with an enhanced
and newly packaged line of smoke alarms as well as its other
securitysafety products.
- 2 -
The Company imports virtually all of its products from various suppliers overseas.foreign
suppliers. For the fiscal year ended March 31, 2002,2003,
approximately 78%66% of the Company's purchases are boughtwere from a Joint
Venture with a Hong Kong corporation (Hong Kong Joint Venture),
in which the Company owns a 50% interest. The Hong Kong Joint
Venture has manufacturing facilities in the People's Republic of
China. The Company's purchases during fiscal 2003 represented 31%
of the Hong Kong Joint Venture's total sales.
The Company's sales for the year ended March 31, 20022003 were
$10,480,829$15,953,883 compared to $7,731,501$10,480,829 for the year ended March 31,
2001,2002, an increase of approximately 36%52%.
The Company reported net income of $2,400,318 in fiscal 2003
compared to net income of $261,625 in fiscal 2002 compared
to a net loss of $758,940 in fiscal 2001.2002. The main reasonreasons
for the increase in earnings waswere higher Hong Kong Joint Venture
earnings.
SECURITYearnings and higher operating income due to higher levels of
sales due to increased sales by USI ELECTRIC.
SAFETY PRODUCTS
The Company markets a complete line of residential smoke alarms under the
trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signal(TM)" all
of which are manufactured by the Hong Kong Joint Venture.
TheOur line of smoke alarms consists of battery, electrical and
electrical with battery backup alarms. The Company's 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.
The Company also markets a line of electronically advanced outdoor floodlights under the
name "Lite Aide (TM)Aide(TM)," carbon monoxide alarms, door chimes and
ground fault circuit interrupters.
Sales of the Company's securitysafety products aggregated $15,438,715
or approximately 97% of total sales in the fiscal year ended
March 31, 2003 and $10,054,979 or approximately 96% of total
sales in the fiscal year ended March 31, 2002 and $6,487,456 or approximately 84% of total sales in the fiscal
year ended March 31, 2001.2002. This increase in
sales volume was due primarily to higher USI ELECTRIC sales.increased sales volume to the
electrical distribution trade.
- 3 -
The Company is focusing its sales and marketing efforts to
maximize securitysafety product sales, especially smoke alarms and
carbon monoxide alarms manufactured by its Hong Kong Joint
Venture and marketed to the electrical distribution trade. The
electrical distribution trade covers electrical and lighting
distributors as well as manufactured housing companies.
OTHER PRODUCTS
The Company markets a varietyFor the fiscal year ended March 31, 2003, sales of the Company's
other private label products on a made-to-
order basis, such as telephones and video products. The majorityconsisted primarily of these products are produced by the Hong Kong Joint Venture.
- 3 -audio tape,
which aggregated $515,168 or 3% of total sales. For the fiscal
year ended March 31, 2002, sales of the Company's
private labelthese products aggregatedwere $425,850
or 4% of total sales. For
the fiscal year ended March 31, 2001, sales of these products were
$1,244,045 or 16% of total sales. The primary reason for the decrease in
sales was fewer private label customers.
IMPORT MATTERS
The Company imports virtually all of its security and other products.the products it sells. 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. The Company has
attempted to protect itself from fluctuations in currency
exchange rates to the extent possible by negotiating most
commitments in U.S. dollars.
The Company's purchases are also subject to delays in delivery
due to problems with shipping and docking facilities, as well as
other problems associated with purchasing products abroad. The
Company imports a majority of its products including those it
purchases from the Hong Kong Joint Venture, from the People's
Republic of China.
SALES AND MARKETING
The Company sells its products to various customers. In 1999, the
Company formed a new subsidiary, USI ELECTRIC, INC. for the
purpose of selling safety products to the electrical
distribution trade and the manufactured home industry
manufacturers. USI ELECTRIC has established a national
distribution system with 9 regional stocking warehouses
throughout the United States which enables customers to receive
their orders the next day without paying for overnight freight
charges. The subsidiary (USI ELECTRIC) has hired sales personnel
from the electrical distribution trade and has engaged 26
independent sales organizations which represent approximately 200
sales representatives, some of which have warehouses where USI
ELECTRIC products are maintained for sale.
- 4 -
The Company's products are generallyalso marketed to retailers, wholesale
distributors, home centers, catalog and mail order companies and
to other distributors.distributors ("retailers"). The Company's products have
historically been retailed to "do-it-yourself" consumers by
chain, discount, electrical, building supply, electrical
distributors and hardware stores, as well as through catalogs.
The Company also distributes its products through specialty
markets such as premium/incentive and direct mail. The Company
does not currently market any significant portion of its
products directly to end users.
Sales to retailers are made both by the Company and by
approximately 1210 independent sales organizations (for Universal
Security Instruments, Inc.) whichwho are
compensated by commissions. The Company has agreements with the
sales organizations which are cancelable by either party upon 30
days notice. The Company does not believe that the loss of any
one of these organizations would have a material adverse effect
upon its business.
The Company also promotes its products through its own sales
catalogs and brochures, which are mailed directly to trade
customers. The Company's customers, in turn, may advertise the
Company's products in their own catalogs and brochures and in
their ads in newspapers and other media. The Company also
exhibits and sells its products at various trade shows, including
the annual National Hardware Show in Chicago, Illinois. The
Company's domestic retail marketing strategy is designed to
attract retailing customers outside the consumer electronics
industry, such as variety stores and home centers.
Sales by the Company are also made by officers and full-time employees of the
Company, five of whom are also engaged in sales management and
training. Sales outside the United States, which are made by
officers of the Company and through exporters, were less than 1%4%
of total sales in fiscal 2002.
- 4 -2003.
The Company's products have historically been retailed to
"do-it-yourself" consumers by chain, discount, electrical, building
supply, electrical distributors and hardware stores, as well as
through catalogs. The Company also distributes its products through
specialty markets such as premium/incentive and direct mail. The
Company does not currently market any significant portion of its
products directly to end users.
In 1999, the Company formed a new subsidiary, USI ELECTRIC, INC. for
the purpose of selling security products to the electrical
distribution trade and the manufactured home industry manufacturers.
USI ELECTRIC has established a national distribution system with 12
regional stocking warehouses throughout the United States which
enables customers to receive their orders the next day without paying
for overnight freight charges. The subsidiary (USI ELECTRIC) has hired
sales personnel from the electrical distribution trade and has engaged
28 independent sales organizations which represent approximately 200
sales representatives, some of which have warehouses where USI
ELECTRIC products are maintained for sale.
The Company and its subsidiary's backlog of orders believed to be firm as of March
31, 20022003 was approximately $714,085.$774,183. The Company's backlog as of
March 31, 20012002 was approximately $229,350.$714,085. The increase in
backlog is a function of the timing of orders received from its
customers.
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has a 50% interest in a Hong Kong Joint Venture which
has manufacturing facilities in the People's Republic of China,
for the manufacturing of certain electronic and electrical
products sold by the Company.
- 5 -
The Company believes that this Hong Kong Joint Venture
arrangement will ensure a continuing source of supply for a
majority of the Company's securitysafety products at competitive
prices. During fiscal year 2002,2003, the Company made 78%66% of its
total purchases from the Hong Kong Joint Venture, with the Company'sVenture. These
purchases representing 43%represented approximately 31% of the Hong Kong Joint
Venture's total sales. The products produced by the Hong Kong
Joint Venture include smoke alarms and certain other products.carbon monoxide alarms.
The Company is currently pursuing the development of additional
products by the Hong Kong Joint Venture such as photoelectricother smoke
alarms and a combination carbon monoxide alarms.and smoke alarm.
Changes in economic and political conditions in China or any
other adversity to the Hong Kong Joint Venture will unfavorably
affect the value of the Company's investment in the Hong Kong
Joint Venture and would have a material adverse effect on the
Company.Company's ability to purchase products for distribution. Refer to
NOTE C of the Financial Statements for a comparison of annual
sales and earnings of the Hong Kong Joint Venture. In the past
two fiscal years, the Hong Kong Joint Venture has increased its
sales to customers other than the Company.
- 5 -Company by $9,562,275 from
$6,473,735 in fiscal 2002 to $16,036,010 in fiscal 2003.
SUPPLIERS - OTHERS
Certain private label products not manufactured for the Company
by the Hong Kong Joint Venture are manufactured by other foreign
suppliers. The Company believes that its relationships with its
suppliers are good. The Company believes that the loss of its
ability to purchase products from the Hong Kong Joint Venture
would have a material adverse effect on the Company. The loss of
any of its other suppliers could have a short-term adverse effect
on its operations, but the Company believes that replacement
sources for these other suppliers could be developed.
COMPETITION
In fiscal year 2002,2003, sales of securitysafety products accounted for
approximately 96%97% of total sales. In the sale of smoke alarms,
the Company competes in all of its markets with First Alert,
Firex and Walter Kidde. All of these companies have greater
financial resources and financial strength than the Company. The
Company believes that its securitysafety products compete favorably
with other such products in the market primarily on the basis of
styling, features and pricing.
The securitysafety industry in general involves changing technology.
The success of the Company's products may depend on the Company's
ability to improve and update its products in a timely manner and
to adapt to new technological advances.
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EMPLOYEES
The Company has 1716 employees, 9 of whom are engaged in
administration and sales, and the balance of whom are engaged in
product development and servicing.
The Company's employees are not unionized. The Company believes
that its relations with its employees are satisfactory.
ITEM 2.
PROPERTIES
Effective December 1999, the Company entered into an operating
lease for a 9,000 square foot office and warehouse located in
Baltimore County, Maryland. This lease, which expires in October
2002,2005, is subject to renewal for an additional three years with
increasing rentals at 3% per year. The monthly rental
approximates $5,244 per month during the current fiscal year.
Effective March 2003, the Company entered into an operating lease
for an approximately 1,800 square foot office in Naperville,
Illinois. This lease, which expires in February 2006, is subject
to renewal for an additional six years with increasing rentals
at 3% per year. The monthly rental approximates $4,500$2,689 per month
during the initial term.
The Company intends to renew for its first
three year option.
- 6 -
The Hong Kong Joint Venture's manufacturing facility consists of six
buildings totaling 100,000 square feet. Three of the buildings
(totaling 31,000 square feet) are leased pursuant to a long-term lease
which expires in 2010. The other three buildings (69,000 square feet)
are owned by the Hong Kong Joint Venture and were built on property
leased for a 48 year term, which expires in 2041.
On June 16, 1999, the Company sold its headquarters facility, located
in Baltimore County, Maryland for a price of $2.2 million. After
deducting the mortgage and settlement charges, the Company received
cash of approximately $830,000. The Company recorded a gain on the
sale of this property of approximately $805,000.
The Company retained ownership of approximatelyalso owns 1-1/2 acres of undeveloped land adjacent to the Company's former headquarter's
property which the Company sold.located in
an industrialized area in Baltimore County, Maryland. This
propertyundeveloped parcel of land is heldpledged as collateral byto the
Company's factor. The Company is currently negotiating for the sale
of this property and expects the sale to be complete in earlylate
2003.
The Company believes that its current facilities, and those of
the Hong Kong Joint Venture, are currently suitable and adequate.
ITEM 3.
LEGAL PROCEEDINGS
In December 2001, Leviton Manufacturing Company filed a civil
action in the United States District Court for the District of
Maryland (Case No. 01CV3855), alleging that, subsequent to
December 11, 2001, the Company's ground fault circuit
interrupters infringe on the plaintiff's patents and service
marks. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company and its counsel believe that
the Company has meritorious defenses to the claim and is
aggressively defending the suit. The Company believes it has
adequately reserved for this case.
- 7-
On June 13, 2003, Leviton Manufacturing Co., Inc. filed a second
civil suit against the Company in the United States District
Court for the District of Maryland (Case No. 03-CV-1701),
alleging this time that the Company's ground fault circuit
interrupters infringe on several more patents issued to the
plaintiff with respect to reset lockout technology mandated
by the revision of UL Standard 943 for ground fault circuit
interrupters, effective January 2003. Leviton has also asserted
various trade dress and unfair competition claims many of which
correspond to the claims in the previously identified pending
suit. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
On June 11, 2003, Walter Kidde Portable Equipment Inc. filed a
civil suit against the Company in the United States District
Court for the Middle District of North Carolina (Case No.
1:03CV00537), alleging that certain of the Company's battery
powered smoke detectors infringe a patent acquired by Kidde. The
plaintiff is seeking injunctive relief and damages to be
determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
From time to time, the Company is involved in various lawsuits
and legal matters. It is the opinion of management, and,based on the
advice of legal counsel, that these matters will not have a
material adverse effect on the Company's financial statements.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 78 -
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Over-The-Counter
Bulletin Board (OTCBB). The OTCBB is a regulated quotation
service that displays real-time quotes, last sales prices and
volume information on over-the-counter equity securities.
The following table shows the fiscal 20022003 and 20012002 quarterly high
and low bid prices for the Company's common stock as reported by
the OTCBB. The bid quotations represent prices between dealers
and do not reflect the retailer markups, markdowns or commissions
and may not represent actual transactions.
Fiscal year ended March 31, 2003
Bid Prices
High Low
First Quarter 4.50 2.60
Second Quarter 7.80 3.57
Third Quarter 10.50 4.60
Fourth Quarter 9.55 7.40
Fiscal year ended March 31, 2002
Bid Prices
High Low
First Quarter 1.25 0.90
Second Quarter 1.65 0.95
Third Quarter 3.95 0.90
Fourth Quarter 4.40 2.20
Fiscal year ended March 31, 2001
Bid Prices
High Low
First Quarter 3.63 2.13
Second Quarter 4.13 2.25
Third Quarter 3.88 2.00
Fourth Quarter 2.25 1.25
On June 19, 2002,2003, the closing quotation for our common stock as
reported on the OTC Bulletin Board was $3.52.$8.75. You should obtain
current market quotations for our common stock because the market
price of our stock may fluctuate greatly. You can obtain these
quotations from various websites or by calling your broker.
As of March 31, 2002,2003, there were approximately 160175 holders of
record of the Company's common stock. Approximately 57%55% of the
Company's 1,009,7701,159,932 outstanding shares of common stock were held
in street name by an unknown number of beneficial owners since it
does not reflect persons or entities that hold our stock in
"Street" name or through various brokerage firms.
The Company has not paid any cash dividends on its common stock
in the last three years. It is the Company's present intention to
retain all earnings for use in its future operations.
- 89 -
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the five
years ended March 31, 20022003 have been derived from the audited
consolidated financial statements. The information set forth
below inis not necessarily indicative of results of future
operations.
Years Ended March 31,
2003 2002 2001 2000 1999 1998
Consolidated Statement of Operations Data:
Net sales
$15,953,883 $10,480,829 $ 7,731,501 $ 7,667,530 $ 9,071,628
$11,566,317
LossIncome (loss) before equity in earnings (loss) of Hong Kong Joint
Venture
and income
taxes504,422 (976,063) (799,183) (95,925) (1,119,154)
(414,351)
Net income (loss)
2,400,318 261,625 (758,940) 41,056 (806,552)
(445,126)
Per common share:
Loss before
equity in
earnings
(loss) of
Hong Kong
Joint Venture
and income
taxes
- basic and
diluted (1) (1.03) (.88) (.11) (1.30) (.51)
Net income (loss) - - basic
(1)2.23 .28 (.83) .05 (.93)
(.55)
- diluted(1)diluted
2.05 .28 (.83) .04 (.93) (.55)
Weighted average number of common shares outstanding - basic(1)basic
1,075,079 938,624 912,270 903,495 863,706
811,397
- diluted(1)diluted
1,171,309 945,770 912,270 938,807 863,706 811,397
Consolidated Balance Sheet Data:
Total assets
8,382,043 5,182,462 5,945,690 5,476,545 6,402,120
7,705,310
Long-term debt (non-current)
29,9167,224 22,396 45,088 60,260 -0- 1,246,861-
Working capital 409,945(1)
2,377,688 402,425 585,032 1,368,513 1,514,425
2,130,408
Current ratio(2) 1.28ratio (1)
2.26 to 1 1.27 to 1 1.23 to 1 2.01 to 1 1.63 to 1
2.25 to 1
Shareholders' equity
6,493,415 3,681,273 3,303,304 4,062,244 3,987,072
4,747,351
(1) All per share amounts and numberWorking capital is computed as the excess of outstanding shares have been restated to
reflect the one-for-four reverse stock split as of February 27, 1998.
(2)current assets
over current liabilities. The current ratio is calculated by
dividing current assets by current liabilities.
- 9 -
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years
20022003 and 20012002 are summarized as follows:
Quarter Ended
2003 June 30, September 30, December 31, March 31,
Net sales $3,750,926 $4,091,272 $4,252,447 $3,859,238
Gross profit 1,083,225 1,286,147 1,289,601 1,314,843
Net income 576,940 630,129 673,365 519,883
Net income
per share
- basic .57 .60 .61 .46
Net income
per share
- diluted .55 .55 .55 .42
Quarter Ended
2002 June 30, September 30, December 31, March 31,
Net sales $2,255,130 $2,653,482 $2,965,386 $2,606,831
Gross profit 552,282 748,584 790,350 721,436
Net earningsincome 62,359 23,543 36,433 139,290
EarningsNet income
per share-basicshare
- basic .07 .03 .04 .14
EarningsNet income
per share-dilutedshare
- diluted .07 .03 .04 .13
Quarter Ended
2001 June 30, September 30, December 31, March 31,
Net sales $2,051,116 $1,740,167 $2,522,377 $1,417,841
Gross profit 560,396 621,451 710,079 186,959
Net earnings (loss) 32,473 5,490 (196,270) (600,633)
Earnings (loss)
per share-basic .04 .01 (.22) (.66)
Earnings (loss)
per share-diluted .03 .01 (.22) (.66)- 10 -
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 2003, sales increased by $5,473,054 (52%) from the
prior year. The Company's focus on marketing to the electrical
distribution trade through USI ELECTRIC generated an increase in
sales to this market of approximately $4,000,000, from
approximately $8,300,000 in 2002 to approximately $12,300,000 in
2003. The Company experienced an increase of approximately
$1,473,000 in sales from its retail and wholesale distribution
customers over the prior year. The Company anticipates these
favorable trends will continue.
In fiscal year 2002, sales increased by $2,749,328 (36%) from the
prior year. The Company's focus on marketing to the electrical
distribution trade through USI ELECTRIC generated an increase in
sales to this market of approximately $4,000,000, from
approximately $4,300,000 in 2001 to approximately $8,300,000 in
2002. The Company experienced a decrease of approximately
$1,210,000 in sales from its retail and wholesale distribution
customers. ThisThe decrease resulted primarily from lower private
label sales.
COST OF SALES AND GROSS PROFIT
Gross profit as a percentage of net sales ("gross margin") in
fiscal 2003 was 31.2% compared to 26.8% and 26.9% in fiscal 2002
and 2001, respectively. The increase in gross profit for fiscal
2003 resulted from a higher concentration of USI ELECTRIC sales
and increased productivity and efficiency. Gross margins were
similar in fiscal years 2002 and 2001.
The Company's strategy is consistent withto increase gross margins by increasing
sales, which will increase the Company's change in
marketing focus discussed in Item 1.gross margin percentage as a
percent of sales as the fixed costs will not increase at the
same rate as sales.
- 1011 -
EXPENSES
In fiscal year 2001, sales2003, selling, general and administrative expenses
increased by $63,971 (1%approximately $662,927 (20%), from fiscal year
2000. While the Company's$3,377,847 in
2002 to $4,040,774 in 2003. As a percentage of sales, remained relatively constant with the
prior year, the focus on marketing to the electrical distribution trade
through USI ELECTRIC generated an increase in sales to this market of
approximately $2,500,000, from approximately $1,800,000 in 2000 to
approximately $4,300,000 in 2001. The Company experienced a corresponding
decrease in sales from its retailselling,
general and wholesale distribution customers.
This is consistent with the Company's change in marketing focus discussed
above.
GROSS PROFIT
The gross profit was 27%administrative expenses were 25% for fiscal year 20022003
and fiscal year 2001. The
gross profit was 22% for fiscal year 2000. The principal cause of the
lower gross profit32% in fiscal year 2000 is2002. The decrease in selling, general
and administrative expense as a percent of sales was due to
a $495,000 write-off for
abandonedhigher sales volume and slow-moving inventory.
EXPENSESvariable costs which did not increase at
the same rate as sales, including increased sales commissions and
freight, and higher legal costs partly associated with defending
the patent suit described under Item 3 - LEGAL PROCEEDINGS.
In fiscal year 2002, selling, general and administrative expenses
increased by approximately $924,466 (38%), from $2,453,381 in
2001 to $3,377,847 in 2002. As a percentage of sales, selling,
general and administrative expenses were 32% for both fiscal
years 2002 and 2001. The increase in the amount of these expenses
resulted from higher sales and associated costs, including
increased sales commissions and freight associated with the Company's
subsidiary, USI ELECTRIC, INC. and higher legal costs
partly associated with defending the patent suit described in Part I, ITEM 3.
In fiscal year 2001, selling, general and administrative expenses
increased by approximately $214,013 (10%) from fiscal year 2000. As a
percentage of sales, selling, general and administrative expenses
were 32%under
Item 3 - LEGAL PROCEEDINGS.
INTEREST EXPENSE
Interest expense for fiscal year 2001 and 29% for2003 decreased to $153,168 from
$188,020 in fiscal year 2000. The increase
resulted from higher costs, including sales commissions and freight,
associated with the Company's subsidiary, USI ELECTRIC, INC.
Management believes that as sales continue2002 due primarily to increase, selling,
general and administrative expenses will continue to increase.
INTEREST EXPENSElower interest
rates.
Interest expense for fiscal year 2002 decreased to $188,020 from
$248,135 in fiscal year 2001 due primarily to lower levels of
borrowings and lower interest rates.
Interest expense for fiscal year 2001 increased to $248,135 from $140,635
in fiscal year 2000 due primarily to higher levels of borrowings and
higher interest rates.
- 11 -
INCOME TAX
The Company did not make any provision for federal or state
income taxes in each of the three years in the period ended March
31, 20022003 due to the operating loss carry forward for income tax
purposes. A valuation allowance has been established and,
accordingly, no benefit has been recognized for the tax benefit
of our net operating losses or other deferred tax assets.
- 12 -
NET INCOME
The Company reported net income of $2,400,318 for fiscal year
2003 compared to a net income of $261,625 for fiscal year 2002.
The 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 associated
with increased sales and higher legal costs partly associated
with defending the patent suit described under Item 3 - LEGAL
PROCEEDINGS.
The Company reported net income of $261,625 for fiscal year 2002
compared to a net loss of $758,940 for fiscal year 2001. The
increase in net income resulted from higher Hong Kong Joint
Venture earnings, partially offset by higher selling, general and
administrative expenses for the Company's
subsidiary, USI ELECTRIC, INC.associated with increased sales and
higher legal costs partly associated with defending the patent
suit described in Part I, ITEM 3.
The Company reported a net loss of $758,940 for fiscal year 2001 compared
to net income of $41,056 for fiscal year 2000. Included in net income for
fiscal year 2000 was a gain on the sale of real estate of approximately
$805,000.under Item 3 - LEGAL PROCEEDINGS.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated
from operations and from the Company's Factoring Agreement, which
supplies both short-term borrowings and letters of credit to
finance foreign inventory purchases. The Company's maximum
borrowing under this Agreement is $7,500,000. However, based on
specified percentages of the Company's accounts receivable and
inventory and letter of credit commitments, at March 31, 2002,2003,
the borrowings were limited to $670,959.$1,696,000. Of this amount,
$216,959$153,400 had been utilized in short-term borrowings,for letters of credit, leaving
$454,000$1,534,000 available under thethis Agreement as of March 31, 2002.2003.
The outstanding principal balance of theunder 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 1-1/4%1% in excess of the prime rate of interest
charged by the Company's lender,factor; which, was
6-1/4% atas of March 31, 2002.2003,
resulted in a 5.25% rate. The borrowings are collateralized by
all the Company's accounts receivable, inventory and a 1.5 acre
parcel of land which is adjacent toowned by the Company's prior headquarters.Company. During the year ended March
31, 2002,2003, working capital decreasedincreased by $175,087,$1,975,263, from $585,032$402,425
on March 31, 2001,2002, to $409,945$2,377,688 on March 31, 2002.2003.
Operating activities used cash of $779,740$61,873 for the year ended
March 31, 2002.2003. For the prior fiscal year ended March 31, 2002,
operating activities used cash of $1,004,749 for the year ended March 31, 2001. An increase$114,109. This decrease of
$225,009
from 2001$52,236 was primarily due to lowerhigher levels of accounts receivable and
inventory,
undistributed Joint Venture earnings primarily offset by undistributed Joint Venture earnings.
Investing activities provided cash of $663,309 for fiscal 2002.higher
net income and accounts payable.
- 13 -
Investing activities used cash of $11,182 in 2001. The primary reason$16,892 and 2,322 for fiscal
years ended 2003 and 2002 for the change
waspurchase of equipment.
The Hong Kong Joint Venture dividends.
- 12 -offset $1,279,187 and $665,631 of
trade amounts due to the Hong Kong Joint Venture in lieu of cash
payments.
Financing activities in 20022003 provided cash of $101,172,$110,494, primarily
due to the sale of common stock pursuant toand the exercise of employee
stock options. Financing activities in 20012002 provided cash of
$958,556, due to
short-term borrowings used to finance higher levels$101,172 which was also primarily from the sale of accounts receivable
and inventory.common stock.
HONG KONG JOINT VENTURE
In fiscal year 2002,2003, sales of the Hong Kong Joint Venture were
$11,410,035$23,365,301 compared to $6,053,815$11,410,035 and $5,517,170$6,053,815 in fiscal
years 20012002 and 2000,2001, respectively.
Net income was $2,475,376$4,755,540 for fiscal year 20022003 compared to net
income of $80,487$2,475,376 and $273,962$80,487 in fiscal years 20012002 and 2000,2001,
respectively. The increase in income for the year ended March 31,
20022003 was due primarily to higher sales, including to customers
other than the Company.
Gross margins of the Hong Kong Joint Venture for fiscal 2003
increased to 33.7% from 32.6% in the prior year. The primary
reason for this increase was that the variable costs in cost of
goods sold did not increase at the same rate as sales.
Selling, general and administrative expenses were $2,806,412,
$1,530,579 $1,448,320
and $1,176,392$1,448,320 for fiscal years 2003, 2002 2001 and 2000,2001,
respectively. As a percentage of sales, expenses were 13%12%, 24%13%
and 21%24% for fiscal years 2003, 2002 2001 and 2000,2001, respectively. The
decrease in expensesselling, general and administrative expense as a
percentagepercent of sales in fiscal 2002 was primarily due to higher sales volume.volume and variable
costs which did not increase at the same rate as sales.
Interest income net of interest expense was $54,164$2,315 for fiscal
year 2002,2003, compared to $158,098$54,164 and $140,425$158,098 in fiscal years 20012002
and 2000,2001, respectively. The decrease in interest income is due to
the decrease in
the loan receivable balance from the Company.higher sales and dividend payments which reduced investment
balances.
Cash needs of the Hong Kong Joint Venture are currently met by
funds generated from operations. During fiscal year 2002,2003, working
capital increased by $1,223,521$1,738,218 from $2,621,133 on March 31, 2001 to $3,844,654 on March 31, 2002.2002
to $5,582,872 on March 31, 2003.
- 14 -
RECENTLY ISSUED ACCOUNTING STANDARDS
During fiscal year 2002,2003, the Financial AccountingAccounts Standards Board
issued Statement of Financialfinancial Account Standards (SFAS) No. 141, "Business
Combinations,"145,
"Rescission of FASB Statements 4, 44, and SFAS No. 142 "Goodwill64, and Other Intangible Assets,Amendment of
FASB Statement 13, and Technical Corrections," SFAS No. 143,146,
"Accounting for Asset Retirement Obligations"Costs Associated with Exit and Disposal
Activities," SFAS No. 144, "Accounting147, "Acquisition of Financial
Institutions," and FASB Interpretations (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Impairment or DisposalGuarantees, Including
Indirect Guarantees of Long-Lived Assets.Indebtedness of Others." The Company does
not expect these new pronouncements to impact the preparation of
financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure: an amendment
of FASB Statement No. 123." SFAS 148 allows alternative methods
of transition for an entity to report a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on the reported results. SFAS 148 is effective for fiscal
years ending after December 15, 2002. The Company is evaluating
both whether to adopt a fair-value based method and the
transition methods allowed under this standard and accordingly,
cannot determine the impact of adoption at this time.
On January 31, 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities," which clarifies existing accounting
for whether interest entities should be consolidated in financial
statements based upon the investees' ability to finance its
activities without additional financial support and whether
investors possess characteristics of a controlling financial
interest. FIN 46 applies to years or interim periods beginning
after June 15, 2003 with certain disclosure provisions required
for financial statements issued after January 31, 2003. We are
currently evaluating the applicability of FIN 46 to our
investments in our Hong Kong Joint Venture and have complied with
the disclosure provisions of FIN 46 in these financial
statements.
- 1315 -
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Company's
consolidated financial statements and results of operations are
based upon the Company's 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, the Company evaluates these estimates, including those
related to bad debts, inventories, income taxes, and
contingencies and litigation. The Company bases 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.
The Company believes 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 attached consolidated
financial statements. 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:
The Company's revenue recognition policies are in compliance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" issued by the Securities and Exchange
Commission. Revenue is recognized at the time product
is shipped and titled 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. The Company establishes allowances to cover
anticipated doubtful accounts based upon historical experience.
- 16 -
Inventories are valued at the lower of market or cost. Cost is
determined on the first-in first-out method. The Company has
recorded a reserve for obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
demand and market conditions. Management reviews the reserve
quarterly.
We currently have significant deferred tax assets resulting from
tax credit carryforwards, net operating loss carryforwards and
deductible temporary differences, which will reduce taxable
income in future periods. We have provided a valuation allowance
on future tax benefits such as foreign tax credits, foreign net
operating losses, capital losses and net operating losses.
A valuation allowance is required when it is more likely than not
that all or a portion of a deferred tax assets will not be
realized. Forming a conclusion that a valuation allowance is not
needed is difficult when there is a negative evidence such as
cumulative losses and losses in recent years. Cumulative losses
weigh heavily in the overall assessment. As a result of our
assessment, we established a full valuation allowance for our
remaining net deferred tax assets at March 31,2003.
We are subject to lawsuits and other claims, related to patents
and other matters. We are 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. For more information, see Note H to
the consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is its Factoring
Agreement which provides for interest at the factor's prime rate
(4.25% at March 31, 2003) plus 1-1/4%1%. The Company is affected by
market risk exposure primarily through the effect of changes in
interest rates on amounts payable by the Company under its
credit
facility.Factoring Agreement. A significant rise in the prime rate could
materially adversely affect the Company's business, financial
- 17 -
condition and results of operations. At March 31, 2002, an2003, the
Company had no aggregate principal amount of $216,959
was outstanding under the
facility bearing interest at an annual rate of
6-1/4%.facility. If principal amounts outstanding under the Company's
Factoring Agreement remained at this year-end level for an entire
year and the prime rate increased or decreased, respectively, by
0.5%, the Company would pay or save, respectively, an additional
$8,500.00 in interest in that year. The Company does not utilize
derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description Page
Report of Independent Certified Public Accountants 1519
Consolidated balance sheets, March 31, 2003 and 2002 and 2001 1620
Consolidated statements of operations for the years ended 1821
March 31, 2003, 2002 2001 and 20002001
Consolidated statements of shareholders' equity for the 1923
years ended March 31, 2003, 2002 2001 and 20002001
Consolidated statements of cash flows for the years ended 2024
March 31, 2003, 2002 2001 and 20002001
Notes to consolidated financial statements 2125
Schedule II - Valuation and Qualifying Accounts 4052
- 1418 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 20022003 and 2001,2002, and the related
consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended March
31, 2002.2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did
not audit the financial statements of the Hong Kong Joint Venture
the Company's investment, which is accounted for using the equity method. The Company's
investment of $2,990,067$3,831,583 and $2,418,010$2,990,067 in the Hong Kong Joint
Venture's net assets at March 31, 20022003 and 2001,2002, and equity in
earnings of $2,120,703, $1,237,688 $40,243 and $136,981$40,243 for each of the
three years in the period ended March 31, 20022003 are included in
the accompanying consolidated financial statements. The financial
statements of the Hong Kong Joint Venture were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for the Hong Kong
Joint Venture, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements present fairly,
in all material respects, the consolidated financial position of Universal
Security Instruments, Inc. and subsidiaries as of March 31, 2003
and 2002, and 2001, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended March 31,
2002,2003, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited the financial statement schedule of Universal
Security Instruments, Inc. and subsidiariesSchedule II for each of the three years in
the period ended March 31, 2002 as listed in the index at Item 14.2003. In our opinion, this schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information required to be set forth therein.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
May 31, 2002June 13, 2003
- 1519 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2003 2002 2001
CURRENT ASSETS
Cash $ 19,38351,112 $ 34,64219,383
Accounts receivable:
Trade, less allowance for doubtful
accounts of $10,000 and $68,358
in 2003 and $100,000
in 2002, and 2001, respectively 193,488 939,176
Officers and employees207,539 155,052
Employees 16,303 1,115
7,048
194,603 946,224223,842 156,157
Amount due from factor 623,566 38,436
Inventory 3,224,229 1,557,994 2,143,793
Prepaid expenses 136,343 109,238 57,671
TOTAL CURRENT ASSETS 4,259,092 1,881,218 3,182,330
INVESTMENT IN HONG KONG JOINT VENTURE 3,831,583 2,990,067 2,418,010
PROPERTY AND EQUIPMENT, NET 279,896 301,082 329,243
OTHER ASSETS 11,472 10,095 16,107
TOTAL ASSETS $8,382,043 $5,182,462 $5,945,690
See notes to consolidated financial statements.
- 1620 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
2003 2002 2001
CURRENT LIABILITIES
Amount due to factor $ 216,959- $ 1,791,442216,959
Accounts payable 1,173,175 787,492 652,615
Accrued liabilities 684,979 451,092 137,511
Current obligations under
capital lease 15,730 15,73023,250 23,250
TOTAL CURRENT LIABILITIES 1,471,273 2,597,2981,881,404 1,478,793
LONG-TERM OBLIGATIONS UNDER
CAPITAL LEASE 29,916 45,0887,224 22,396
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
1,009,7701,121,982 shares and 912,2701,009,770
shares at March 31, 2003
and 2002, and 2001, respectively 11,220 10,098 9,123
Additional paid-in capital 11,059,381 10,648,679 10,533,310
Accumulated deficit (4,577,186) (6,977,504) (7,239,129)
TOTAL SHAREHOLDERS' EQUITY 6,493,415 3,681,273 3,303,304
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 5,182,4628,382,043 $ 5,945,6905,182,462
See notes to consolidated financial statements.
- 1721 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
2003 2002 2001
2000
Net sales $15,953,883 $10,480,829 $7,731,501 $7,667,530
Cost of goods sold 10,980,067 7,668,177 5,652,616
5,982,314
GROSS PROFIT 4,973,816 2,812,652 2,078,885 1,685,216
Research and development
expense 284,552 222,817 176,767 191,651
Selling, general and
administrative expense 4,040,774 3,377,847 2,453,381
2,239,368
Operating lossincome (loss) 648,490 (788,012) (551,263) (745,803)
Other income (expense):
Interest income - - 233 301
Interest expense (153,168) (188,020) (248,135)
(140,635)
Gain from sale of building - - 804,861
Other 9,100 (31) (18)
(14,649)(144,068) (188,051) (247,920)
649,878
LOSSINCOME (LOSS) BEFORE EQUITY
IN EARNINGS OF HONG KONG
JOINT VENTURE 504,422 (976,063) (799,183)
(95,925)Earnings from Hong Kong
Joint Venture:
Equity in earnings of
Hong Kong joint ventureJoint
Venture 2,120,703 1,237,688 40,243
136,981Cost allocable to
Joint Venture (224,807) - -
NET INCOME (LOSS) $ 2,400,318 $ 261,625 $ (758,940) $ 41,056
Net income (loss) per share
Basic $ .28 $ (.83) $ .05
Diluted2.23 $ .28 $ (.83)
Diluted $ .042.05 $ .28 $ (.83)
Shares used in computing net
income (loss) per share:
Basic 1,075,079 938,624 912,270
903,495
Diluted 1,171,309 945,770 912,270 938,807
See notes to consolidated financial statements.
- 1822 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
Balance at
March 31,
1999 887,270 $8,873 $10,499,444 $(6,521,245) $3,987,072
Common stock issued
to employees 25,000 250 33,866 34,116
Net income 41,056 41,056
Balance at
March 31, 2000 912,270 $ 9,123 10,533,310 (6,480,189) 4,062,244$10,533,310 $(6,480,189) $4,062,244
Net loss (758,940) (758,940)
Balance at
March 31,
2001 912,270 9,123 10,533,310 (7,239,129) 3,303,304
Issuance of
common
stock from
the
exercise
of
employee
stock
options 97,500 975 115,369 116,344
Net income 261,625 261,625
Balance at
March 31,
2002 1,009,770 $10,098 $10,648,679 $(6,977,504) $3,681,27310,098 10,648,679 (6,977,504) 3,681,273
Issuance
of common
stock
from the
exercise
of
employee
stock
options 40,750 407 92,218 92,625
Issuance
of
common
stock 51,000 510 249,490 250,000
Stock
issued
in lieu
of
directors
fees 6,974 70 29,930 30,000
Stock
issued
in
satis-
faction
of
accrued
liabil-
ities 13,488 135 39,064 39,199
Net income 2,400,318 2,400,318
Balance at
March 31,
2003 1,121,982 $11,220 $11,059,381 $(4,577,186) $6,493,415
See notes to consolidated financial statements.
- 1923 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
CASH FLOWS FROM
OPERATING ACTIVITIES 2003 2002 2001 2000
OPERATING ACTIVITIES
Net income (loss) $ 2,400,318 $ 261,625 $ (758,940) $ 41,056
Adjustments to reconcile
net income (loss) to
net cash used in
operating activities:
Depreciation and
amortization 38,077 30,483 45,858
31,736Stock issued to
directors in lieu
of fees 30,000 - -
Change in allowance
for doubtful
accounts (58,358) (31,642) -
Inventory reserve
write-down (10,000) 61,741 -
Undistributed earningsEarnings of Hong Kong
Joint Venture (2,120,703) (1,237,688) (40,243) (136,981)
Gain on sale of building - - (804,861)
Issuance of common stock to
employee for services - - 34,116
Inventory reserve write-down 61,741 - 495,000
Changes in operating
assets and
liabilities:
Increase in
accounts
receivable and
amount due from
factor (594,447) (106,494) (345,499)
(51,255)
Decrease (increase)(Increase) decrease
in inventories and(1,656,235) 524,058 (205,735)
(Increase) decrease
in prepaid
expenses 472,491 (171,652) (612,840)(27,105) (51,567) 34,083
Increase in accounts
payable and
accrued liabilities 448,458expenses 1,937,597 1,114,087 269,529
139,006
Decrease (increase)(Increase) decrease
in other assets (1,377) 6,012 (3,802) (6,305)
Decrease in amount
due to factor - (684,726) - -
NET CASH USED IN
OPERATING ACTIVITIES (779,740)(61,873) (114,109) (1,004,749) (871,328)
INVESTING ACTIVITIES
Distribution by Hong Kong Joint Venture 665,631 - -
Proceeds from salePurchase of building - - 2,079,785
Purchases of property and equipment (16,892) (2,322) (11,182)
(88,844)
NET CASH PROVIDED BY (USED IN)USED IN
INVESTING ACTIVITIES 663,309(16,892) (2,322) (11,182) 1,990,941
FINANCING ACTIVITIES
Net (repayments)
borrowings of
short-term debt (216,959) - 973,728 31,230
Principal payments of
capital lease
obligations (15,172) (15,172) (4,960)
Payment of debt related to the sale of
the building - - (1,246,973)
Issue(15,172)
Proceeds from issuance
of common stock from
exercise of employee
stock options 92,625 - -
Proceeds from issuance
of common stock 250,000 116,344 - -
NET CASH PROVIDED BY
(USED IN)
FINANCING ACTIVITIES 110,494 101,172 958,556
(1,220,703)
NETINCREASE (DECREASE) INCREASE
IN CASH 31,729 (15,259) (57,375)
(101,090)
CASH AT BEGINNING OF YEARCash at beginning of
period 19,383 34,642 92,017 193,107
CASH AT END OF YEARPERIOD $ 51,112 $ 19,383 $ 34,642 $ 92,017
Supplemental information:
Interest paid $ 153,168 $ 188,020 $ 248,135 $ 140,635
Income taxes paid - - -
Non-cash investing
and financing activity:
The Company acquired equipment under capital lease obligations totaling
$80,950 duringtransactions:
Issuance of 13,488
shares of common
stock in
satisfaction of
accrued liabilities 39,199 - -
Repayment of trade
payables due the
year ended March 31, 2000.Hong Kong Joint
Venture in lieu of
cash distributions 1,279,187 665,631 -
See notes to consolidated financial statements.
- 2024 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Company's primary business is the sale of
smoke alarms and other securitysafety 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 virtually all of its
securitysafety and other products.products from foreign manufacturers. The
Company, as an importer, is subject to numerous tariffs which
vary depending on types of products and country of origin,
changes in economic and political conditions in the country of
manufacture, potential trade restrictions and currency
fluctuations.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. SignificantAll significant intercompany accounts and
transactions have been eliminated in consolidation.
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: The Company recognizes sales upon the
shipment of its products net of applicable provisions for any
discounts andor allowances.
Stock-Based Compensation: TheFor fiscal 2003 and prior years the
Company accountsused the intrinsic value method as defined by Accounting
Principles Board Opinion No. 25 to account for stock-based
employee compensation arrangements in accordance witheach period presented. The Company
intends to adopt SFAS No. 123 as amended by SFAS No. 148 during
fiscal 2003 but has not yet made a determination as to the
transition method to use or completed the valuation of the
options granted during January 2003.
The following table illustrates the effect on net income (loss)
and net income (loss) per share had compensation costs for the
stock-based compensation plan been determined based on the grant
date fair values of awards under the provisions of Accounting Principles Bases Board Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees, and complies with the disclosure
provisions of Statement of Financial Accounting StandardSFAS No. 123,
(SFAS
No. 123), Accounting for Stock-Based Compensation. Under APBthe fiscal years.
- 25 -
Year Ended March 31
2003 2002 2001
Net income, as reported $2,400,318 $261,625 $(758,940)
Deduct: Total stock-based
employee compensation
expense is based on the difference, if any, on the datedetermined under
fair value, net of
grant, between the market value of the Company's stock and the exercise
value of the option granted.related tax effects. (83,939) (48,729) 23,634
Pro forma net income 2,316,379 212,896 (782,574)
Earnings per share:
Basic - as reported 2.23 .28 (.83)
Basic - pro forma 2.15 .23 (.86)
Diluted - as reported 2.05 .28 (.83)
Diluted - pro forma 1.98 .23 (.86)
Research and Development: Research and development costs are
charged to operations as incurred.
Accounts Receivable: In September, 2000, the Financial Accounting
StandardStandards 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.
- 21 -
In fiscal year 2002, the Company achieved the sales criteria of
Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and, as such, amounts transferred
under the Company's Factoring Agreement are treated as a sale of
the asset.
The Company sells trade receivables on a pre-approved non-recourse
basis to the Factor under the Factoring Agreement on an ongoing basis.
Net discounts recognized on sales of receivables are included in
selling, general and administrative expenses in the consolidated
statements of income and amounted to $103,490 for the year ended March
31, 2002. 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.
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.
PriorThe Company sells trade receivables on a pre-approved non-
recourse basis to the achievementFactor under the Factoring Agreement on an
ongoing basis. Factoring charges recognized on sales of
SFAS 140,receivables are included in selling, general and administrative
expenses in the amounts were not netted, but rather shown gross.consolidated statements of income and amounted to
- 26 -
$160,125 and $104,164 for the years ended March 31, 2003 and
2002, 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 $498,179, $376,359 $244,149 and
$90,457$244,149 in fiscal years 2003, 2002 and 2001, and 2000.respectively.
Inventories: Inventories (consisting primarily of finished goods)
are stated at the lower of cost (first-in, first-out method) or
market. Included as a component of finished goods inventory are
additional non-material costs. These costs include freight,
import duty and inspection fees of $186,470$376,899 and $289,121$186,470 at March
31, 20022003 and 2001,2002, respectively.
The Company reviews inventory periodicallyquarterly to identify slow moving
products.products and valuation allowances are provided when deemed
necessary.
Property and Equipment: Property and equipment are recorded at
cost, less accumulated depreciation and amortization.
Depreciation and amortization isare provided by using the
straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. The estimated useful
lives for financial reporting purposes are as follows:
Leasehold improvements - Term of lease
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Accounting for Hong Kong Joint Venture: The Company has a 50%
investment in a Hong Kong manufacturing facility. The Hong Kong
Joint Venture investment is accounted for using the equity
method. The investment and earnings are adjusted to eliminate
intercompany profits.
- 2227 -
Income Taxes: The Company recognizes a liability or asset for
the deferred tax consequences of temporary differences between
the tax basis of assets or liabilities and their reported amounts
in the financial statements. These temporary differences will
result in taxable or deductible amounts in future years when the
reported amounts of the assets or liabilities are recovered or
settled. The deferred tax assets are reviewed periodically for
recoverability and valuation allowances are provided, as
necessary.
Net Income (Loss) per Share: The Company reports basic and
diluted earnings per share. Basic earnings per share exclude
dilution and are computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net
income (loss), adjusted by the assumed conversion of any
potential common share equivalents, including stock options, by
the weighted number of common shares and common share equivalents
outstanding (unless their effect is anti-dilutive). Common stock
equivalents totaling 912,27014,750 at March 31, 2001 were not included
in the computation of diluted loss per share, because to do so
would have been anti-dilutive.
Recently Issued Accounting Standards: During fiscal year 2002,2003,
the Financial AccountingAccounts Standards Board issued Statement of
Financialfinancial Account Standards (SFAS) No. 141, "Business Combinations,"145, "Rescission of FASB
Statements 4, 44, and SFAS No.
142 "Goodwill64, and Other Intangible Assets,Amendment of FASB Statement 13, and
Technical Corrections," SFAS No. 143,146, "Accounting for Asset Retirement Obligations"Costs
Associated with Exit and Disposal Activities," SFAS No. 144, "Accounting147,
"Acquisition of Financial Institutions," and FASB Interpretations
(FIN) 45, "Guarantor's Accounting and Disclosure Requirements for
Impairment or DisposalGuarantees, Including Indirect Guarantees of Long-Lived Assets.Indebtedness of
Others." The Company does not expect these new pronouncements
to impact the preparation of financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure: an amendment
of FASB Statement No. 123." SFAS 148 allows alternative methods
of transition for an entity to report a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on the reported results. SFAS 148 is effective for fiscal
years ending after December 15, 2002. The Company is evaluating
both whether to adopt a fair-value based method and the
transition methods allowed under this standard and accordingly,
cannot determine the impact of adoption at this time.
- 28 -
On January 31, 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities," which clarifies existing accounting
for whether interest entities should be consolidated in financial
statements based upon the investees' ability to finance its
activities without additional financial support and whether
investors possess characteristics of a controlling financial
interest. FIN 46 applies to years or interim periods beginning
after June 15, 2003 with certain disclosure provisions required
for financial statements issued after January 31, 2003. We are
currently evaluating the applicability of FIN 46 to our
investments in our Hong Kong Joint Venture and have complied with
the disclosure provisions of FIN 46 in these financial
statements.
Reclassifications: Certain prior year amounts have been
reclassified in order to conform with current year presentation.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
2003 2002 2001
Land and improvements $174,034 $174,034
Leasehold improvements 71,885 71,885
Machinery and equipment 157,62677,746 157,626
Furniture and fixtures 166,344 155,154 154,533
Computer equipment 69,830 65,955 64,254
Equipment held under capital lease 80,950 80,950
640,789 705,604 703,282
Less accumulated depreciation
and amortization 360,893 404,522
374,039$279,896 $301,082 $329,243
- 23 -
NOTE C - INVESTMENT IN 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, 2002,2003, the Company has an
investment balance of $2,990,067$3,831,583 for its 50% interest in the Hong
Kong Joint Venture.
- 29 -
The following represents summarized financial information is
derived from the audited financial statements of the Hong Kong
Joint Venture as of March 31, 20022003 and 20012002 and for the years
ended March 31, 2003, 2002 2001
and 2000.2001. This information was audited
by other accountants and their report is included at March 31,
20022003 and 2001.2002. (See Page 101 for additional details.)
March 31,
2003 2002 2001
Current assets $ 5,897,705 $3,683,0488,343,860 $5,897,705
Property and other assets 2,500,674 2,117,443
2,205,082
Total $ 8,015,148 $5,888,130$10,844,534 $8,015,148
Current liabilities $ 2,053,051 $1,061,9152,761,078 $2,053,051
Non-current liabilities 43,0473,846 43,047
Equity 8,079,610 5,919,050
4,783,168
Total $ 8,015,148 $5,888,130$10,844,534 $8,015,148
For the Year Ended March 31,
2003 2002 2001
2000
Net sales $23,365,301 $11,410,035 $6,053,815
$5,517,170
Gross profit 7,870,436 3,717,474 1,305,164
1,248,979
Net income 4,755,540 2,475,376 80,487 273,962
During the years ended March 31, 2003, 2002 2001 and 2000,2001, the Company
purchased $7,329,221, $4,895,903 $3,841,325 and $4,567,052,$3,841,325, respectively, of
finished product from the Hong Kong Joint Venture, which
represents 78%66%, 66%78% and 79%66%, respectively, of the Company's total
finished product purchases for the years ended at March 31,
2003, 2002 2001 and 2000.2001. Amounts due the Hong Kong Joint Venture
included in Accounts Payable totaled $199,917$480,546 and $368,511$199,917 at
March 31, 20022003 and 2001,2002, respectively. Amounts due from the Hong
Kong Joint Venture included in Accounts Receivable totaled
$53,676$40,000 and $37,871$53,676 at March 31, 20022003 and 2001,2002, respectively.
The Company incurred interest costs charged by the Hong Kong
Joint Venture of $16,585, $27,659 $26,762 and $7,301$26,762 during the years
ended March 31, 2003, 2002 2001 and 2000,2001, respectively, related to its
purchases.
- 2430 -
In 2002, the Company has amended its employment agreements so
that bonuses are based on the domestic and joint venture
operating performance and, as a result, payments are allocable
between domestic operations and joint venture operations. The
Company recorded $224,807 of costs allocatable to the joint
venture in the accompanying statement of operations for the year
ended March 31, 2003.
NOTE D - AMOUNTS DUE TO 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 recorded in the Company's
consolidated balance sheet at March
31, 2002.sheets. The financing from the factoring of
the Company's trade receivables totaled $1,691,139 and
$1,426,751 at March 31, 2002. Prior to the
achievement of SFAS 140 sales criteria, on April 1, 2001, the Company
recorded the full amount of the factored receivables2003 and related
repayment obligation as an asset and liability.2002, respectively.
The Company's Factoring 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.inventory, which at March 31, 2003
was $1,696,000.
At March 31, 20022003 and 20012002 the Company owed $216,959$0 and $1,791,442$216,959 to
its factor under the Agreement. The amounts due to its factor at
March 31, 2002 relates to amounts advanced to the Company under
the Agreement in excess of amount allowed to be advanced related
to the Company's factored accounts receivable. In addition to the
factored accounts receivable, this excess amount is secured by
the Company's inventory and real property owned by the Company.
The balance due at March 31,
2001 was secured by the Company's factored accounts receivable and
inventory and real property owned by the Company.
Under this Factoring Agreement, the Company sold receivables of
approximately $15,500,000 and $10,300,000 during fiscal year 2002.the years ended
March 31, 2003 and 2002, respectively. Gains and losses
recognized on the sale of factored receivables include the
fair value of the limited recourse obligation. The uncollected
balance of factorednon-recourse receivables held by the factor amounted
to $2,171,324 and $1,426,751 at March 31, 2002.
The2003 and 2002,
respectively.
Any outstanding amountamounts due to the factor isare payable upon
demand. The interest rate on this amount plus the balance of the uncollected
factored trade receivables is equal to 1-1/4% in excess of the prime rate of
interest charged by the Company's lender (6-1/4%plus 1% (5.25% at March 31, 2002)2003).
- 31 -
NOTE E - LEASES
The Company entered into capital lease agreements for various
equipment, with an outstanding balance of $45,646$30,474 as of March 31,
2002.2003. The leases have imputed interest rates ranging from 7.6% to
10%, with monthly payments aggregating $1,810 per month.
- 25 -
Year Ended March 31,
2003 2002 2001
Obligations under capital lease $30,474 $45,646 $60,818
Less current maturities 15,730 15,730
$29,916 $45,08823,250 23,250
$ 7,224 $22,396
Maturities of long term capital lease obligations for the three
years following March 31, 20022003 are as follows:
Year
2003 $21,719
2004 18,193$24,487
2005 7,435
Total 47,34731,922
Less amounts representing interest 1,7011,448
Obligations under capital lease $45,646$30,474
During December 1999, the Company entered into an operating lease
for its office and warehouse expiringwhich expires in October 2002,2005. This
lease is subject to renewal.
Therenewal for an additional three years and
has increasing rentals at 3% per year.
Effective March 2003, the Company intendsentered into an operating lease
for an approximately 1,800 square foot office in Naperville,
Illinois. This lease, which expires in February 2006, is subject
to renewrenewal for its first three year option.an additional six years with increasing rentals
at 3% per year.
Rental expenses recognized under the lease totaled $57,164$67,886 and $51,369$57,164 for the years ended
March 31, 20022003 and 2001.2002. Future obligations for the years ended
March 31, under this leasethese non-cancelable operating leases are as
follows:
Year Amount
2003 $31,9702004 $ 95,685
2005 98,184
2006 31,048
$224,917
- 32 -
NOTE F - INCOME TAXES
No provision for US federal or state income taxes have been
recorded in any period presented, as the Company has incurred
domestic operating losses in all suchprior periods.
Realization of deferred tax assets is dependent upon future
earnings, if any. The Company has recorded a full valuation
allowance against its deferred tax assets since management
believes it is more likely than not that these assets may not be
realized. No income tax benefit has been recorded for all periods
presented because of the valuation allowance.
At March 31, 2002,2003, the Company has net operating loss (NOL)
carryforwards in the United States of America of approximately
$6,970,000$5,346,359 for income tax purposes that expire in years 2009 through
2020.
- 26 -
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
March 31,
2003 2002 2001 2000
Deferred tax liabilities:
Unremitted Hong Kong
Joint Venture
earnings not
considered
permanently
reinvested $ 1,465,270 $ 1,054,553 $ 836,800 $ 818,920
Gross deferred tax
liabilities 1,465,270 1,054,553 836,800
818,920- 33 -
March 31,
2003 2002 2001
Deferred tax assets:
Financial statement
accruals and
allowances 232,167 170,990 75,070 102,313
Inventory uniform
capitalization 72,200 72,200 72,200
Other 41,983 47,367 39,650 34,361
NOL carryforwards
and tax credits 2,031,616 2,612,451 2,611,908 2,295,812
Gross deferred
tax assets 2,377,966 2,903,008 2,798,828
2,504,686
Valuation allowance (912,696) (1,848,455) (1,962,028) (1,685,766)(1,6962,028)
Net deferred tax assets $ -0- $ -0- $ -0-
The reconciliation of the income tax computed at the U.S. federal
statutory tax rates to income tax expense is as follows:
Years ended March 31,
2003 2002 2001 2000
Federal tax expense (benefit)
at statutory rate on
domestic income (loss)(34%) $ 95,056 $(331,981) $(271,722)
$(32,615)
State Tax Expensetax expense (Benefit) 96,013 10,451 (30,357) 1,642
Equity in (earnings) loss from
Hong Kong Joint Venture 721,039 420,814 13,683 46,894
Change in valuation allowance (935,758) (113,573) 276,262
(22,831)
Other 23,650 14,289 12,134 6,910
$ -0- $ -0- $ -0-
- 2734 -
NOTE G - SHAREHOLDERS' EQUITY
Common Stock - During the year ended March 31, 2000,2003, the Company
issued 25,000112,212 shares of its common stock of which 40,750 were
issued on the exercise of employee stock options for total
proceeds of $92,625; 51,000 shares were sold for $250,000;
6,974 shares were issued to a new employee. As partdirectors in lieu of the
issuance, the Company recognized $34,116directors fees
and 13,488 shares were issued in satisfaction of compensation expense.previously
accrued amounts. During the year ended March 31, 2002, the
Company issued 97,500 shares of its common stock on the exercise
by employees of employee stock options and received proceeds of $116,344.$92,625.
Employee Stock Purchase Plan - Under the terms of the Company's
1988 Employee Stock Purchase Plan, eligible employees can
purchase shares of the Company's common stock through payroll
deductions at a price equal to 90% of the price of the shares.
The Company has reserved 25,000 shares of common stock for
issuance under the Plan. No member of the Board of Directors who
is not an employee of the Company, and no member of the committee
administering the Plan, can participate in the Plan. At March 31,
2002,2003, approximately 16,250 shares remain reserved for issuance
under this Plan.
Stock Options - Under terms of the Company's 1978 Non-Qualified
Stock Option Plan, as amended, 493,750 shares of common stock are
reserved for the granting of stock options, of which 109,019
shares have been issued as of March 31, 2002,2003, leaving 384,731343,981
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.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 20022003 and option
transactions for the three years then ended:
- 35 -
Status as of March 31, 20022003 Number of Shares
Presently exercisable 180,500206,875
Exercisable in future years 48,75039,625
Total outstanding 229,250246,500
Available for future grants 155,48197,481
Shares of common stock reserved 384,731343,981
Outstanding options:
Number of holders 1718
Average price per share $2.58$3.43
Expiration dates June 2002December 2003 to FebruarySeptember 2007
- 28 -
Transactions for the Three Years Ended March 31, 2002:2003:
Number of Weighted Average
Shares Exercise Price
Outstanding at March 31, 1999 224,500
Granted 73,500 1.79
Canceled (60,125) 7.55
Outstanding at March 31, 2000 237,875
Granted 5,000 4.50$4.50
Canceled (4,500) 2.56
Outstanding at March 31, 2001 238,375
Granted 149,000 2.23
Canceled (60,625) 4.11
Exercised (97,500) 1.19
Outstanding at March 31, 2002 229,250
Granted 89,000 4.96
Canceled (31,000) 3.02
Exercised (40,750) 2.17
Outstanding at March 31, 2003 246,500
The following table summarizes information about stock options
outstanding at March 31, 2002:2003:
Options
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Number Average Exercise
Range of Exercise Number of Exercise Contract Number of PriceExercise
Exercise Price Shares Price Life (Yrs) Shares Exercise
$0.66 to $1.29 6,250 0.66 1.61 6,250 0.66Price
$1.30 to $2.99 117,500 2.09 4.52 107,000 2.0976,250 $1.93 3.50 70,250 $2.06
$3.00 to $3.99 100,500 3.06 1.14 66,000 3.01101,250 3.23 2.75 75,125 3.18
$4.00 to $5.99 5,00045,000 4.50 3.17 1,5003.96 42,500 4.50
Totals 229,250 180,750$6.00 to $7.20 24,000 6.97 4.50 19,000 7.20
- 36 -
The Company accounts for stock options granted to employees in
accordance with APB 25. Under APB 25, when the exercise price of
the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. The Company has provided additional pro forma
disclosures as required by SFAS No. 123, "Accounting for
Stock-Based Compensation."
For disclosure purposes, 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 used for stock options and rights to receive stock in
2003, 2002 2001 and 2000;2001; no annual dividends, expected volatility of
80%, 80% and 85%, respectively, risk-free interest rate ranging
from 4.0% to 6.5% and expected life of five years. The
weighted-average fair values of the stock options granted in
2003, 2002 and 2001 were $5.00, $1.16 and 2000 were $1.16, $1.44, and $1.01,
respectively.
- 29 -
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.
HadThe following disclosures for the financial statements for the
year ended March 31, 2003, assume that the Company continues to
account for stock-based employee compensation using the intrinsic
value method under Opinion 25. For simplicity, this illustration
also assumes that all previous awards were fixed stock options
with no intrinsic value at the date of grant.
At March 31, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in Note G. The
Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for
Stock Issues to Employees, and related interpretations. No stock-
based employee compensation cost been based uponis reflected in net income, as
all options granted under those plans had an exercise price
equal to the fairmarket value of the optionunderlying common stock on the
date of grant, as prescribed by SFASgrant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123,
the Company's pro
forma net income/(loss) and net income/(loss) per shareAccounting for the years
ended March 31, 2002, 2001 and 2000 using the Black-Scholes option
pricing model would have been $212,896 and $0.23, $(782,574) and
$(.86) and $18,527 and $0.02, respectively.Stock-Based Compensation, to stock-based employee
compensation.
- 37 -
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company entered into a three year employment agreement with
the President of its USI ELECTRIC, INC. subsidiary with fixed
annual remuneration amounts for three years which was extendedand expires in April, 2001.
In addition, theMarch
2006. The agreement provides, among other things, incentive
compensation based on the Company achieving certain levels of
sales. The agreement expires in
December, 2003. Subsequent toprofitability from certain levels of sales for the year ended
March 31, 2002, the2003. The Company also entered into a three-year
employment agreement with its President with annual remuneration
amounts and incentive compensation based on the Company achieving
certain levels of profitability. The agreement was extended
effective April 1, 2003, and expires March
2005.in July 2008.
In December 2001, Leviton Manufacturing Company filed a civil
action in the United States District Court for the District of
Maryland (Case No. 01CV3855), alleging that, subsequent to
December 11, 2001, the Company's ground fault circuit
interrupters infringe on the plaintiff's patents and service
marks. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company and its legal
counsel believe that
the Company has meritorious defenses to the claim and is
aggressively defending the suit. The Company believes it has
adequately reserved for this case.
On June 13, 2003, Leviton Manufacturing Co., Inc. filed a second
civil suit against the Company in the United States District
Court for the District of Maryland (Case No. 03-CV-1701),
alleging this time that the Company's ground fault circuit
interrupters infringe on several more patents issued to the
plaintiff with respect to reset lockout technology mandated
by the revision of UL Standard 943 for ground fault circuit
interrupters, effective January 2003. Leviton has also asserted
various trade dress and unfair competition claims many of which
correspond to the claims in the previously identified pending
suit. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
On June 11, 2003, Walter Kidde Portable Equipment Inc. filed a
civil suit against the Company in the United States District
Court for the Middle District of North Carolina (Case No.
1:03CV00537), alleging that certain of the Company's battery
powered smoke detectors infringe a patent acquired by Kidde. The
plaintiff is seeking injunctive relief and damages to be
determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company and its
counsel believe that the Company has meritorious defenses to the
claims and will aggressively defend the suit.
- 38 -
From time to time, the Company is involved in various lawsuits
and legal matters. It is the opinion of management, and,based on the
advice of
its legal counsel, that these matters will not have a
material adverse effect on the Company's financial statements.
NOTE I - MAJOR CUSTOMERS
The Company is primarily a distributor of securitysafety products for
use in home and business under both its tradenames and private
labels for other companies. The Company's purchased a majority of
its products from its 50% owned Hong Kong Joint Venture
manufactures the majority of the Company's products.
- 30 -
CustomersVenture.
There were not any customers that represented in excess of 10% of
the Company's product sales during the three years in the period
ended March 31, 2003.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years
2003 and 2002 are summarized as follows:
Quarter Ended
2003 June 30, September 30, December 31, March 31,
Net sales $3,750,926 $4,091,272 $4,252,447 $3,859,238
Gross profit 1,083,225 1,286,147 1,289,601 1,314,843
Net income 576,940 630,129 673,365 519,883
Net income
per share
- basic .57 .60 .61 .46
Net income
per share
- diluted .55 .55 .55 .42
Quarter Ended
2002 June 30, September 30, December 31, March 31,
2001 March 31, 2000
Customer ANet sales $2,255,130 $2,653,482 $2,965,386 $2,606,831
Gross profit 552,282 748,584 790,350 721,436
Net income 62,359 23,543 36,433 139,290
Net income
per share
- basic .07 .03 .04 .14
Net income
per share
- 17%
Customer B - - 15%
Customer C - - -diluted .07 .03 .04 .13
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
- 3139 -
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of threesix directors. The
following is a list of individuals currently serving as directors
of the Company until the Company's next annual stockholders
meeting and individuals currently serving as executive officers
of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper....58Knepper....59 Director; Chairman of the Board 1970
of the Company since October 2001;
Vice Chairman of the Board of the
Company since September 1996;
Chairman of the Board of the Company
from 1970 to September 1996.
Michael Kovens.....59Kovens.....60 Director; Chairman of the Board 1970
of the Company from September
1996 to October 2001; President
of the Company from 1970 to
September 1996.
Harvey Grossblatt..55Grossblatt..56 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
April 1997;October 1983; Vice President
of the Company from December
1986 to June 1996; Secretary and
Treasurer of the Company since
September, 1988;1988.
Cary Luskin........46 President of The Big Screen Store, 2002
Inc., a chain of large-screen
television retail stores.
Howard Silverman...61 Vice President, and Chief Financial Officer of
the CompanyMagellan Health
2002
Service from October 1983
through May 1995.1990 to 2001. Self-
employed as a consultant since
2001.
Ronald Seff........55 Ophthalmologist since 1977. 2002
- 3240 -
ITEM 11.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table reflects the aggregate amount paid or accrued
by the Company in its three most recent fiscal years, for each
executive officer whose compensation exceeded $100,000 in that
year.year:
All
Long-Term Compensation Name and Awards Payouts
PrincipalOther
Annual Compensation Stock LTIP All Other
Positioncompen-
Year Salary Bonus Other Awards Options Payouts Compensationsation
Name and Principal Position
Stephen Knepper, 2002 $ 87,676 - - - 42,500 - $16,153 Chairman of the Board and Chief Executive
Officer(1)
Michael
Kovens2003 $ 97,832 $110,219 $22,271(2) - 35,000 - $15,024(3)
2002 $125,74087,676 13,081 17,503(2) - 42,500 - 12,762(3)
2001 55,132 - 15,116(2) - - - 17,500 - $16,819
Former
Chairman
of the 2001 179,701846(3)
Harvey Grossblatt, President, CFO, Secretary & Treasurer
2003 $123,928 $120,219 $ - - 20,000 - 23,750 - 20,663
Board
and
Chief 2000 179,701 75,000 - - 12,500 - 16,338
Executive
Officer(1)
Harvey
Grossblatt$15,655(4)
2002 $143,202 -128,849 13,081 - - 47,750 - $ 5,519
President,
Secretary15,261(4)
2001 124,780 - - - 5,000 - -0-
and
Treasurer 2000 130,258 10,000 - - - - -0-2,890(4)
(1) On October 23, 2001, Mr. Knepper was elected Chairman and
Chief Executive OfficerOfficer.
(2) Includes an automobile allowance of $12,000 for the fiscal
year ended March 31, 2003, reimbursement of medical expenses
in the amount of $11,292 for the fiscal year ended March
31, 2002, and payment of life insurance premiums in the
amount of $4,861 for the fiscal year ended March 31, 2001.
(3) Represents: payment of term life insurance premiums in the
amount of $1,624, $1,012, and $846 for the fiscal years ended
March 31, 2003, 2002 and 2001, respectively; and Company
contributions on behalf of the named officer to the Company's
401(k) Plan in the amount of $12,650 and $12,500 for the
fiscal years ended March 31, 2003 and 2002, respectively.
(4) Represents: payment of term life insurance premiums in the
amount of $2,255, $2,761, and $2,890 for the fiscal years
ended March 31, 2003, 2002 and 2001, respectively; and
Company contributions on behalf of the named officer to the
Company's 401(k) Plan in the amount of $12,650 and $12,500
for the fiscal years ended March 31, 2003 and 2002,
respectively.
Option Grants in Last Fiscal Year
The following table sets forth information with respect to the
grant of stock options during the Company's fiscal year ended
March 31, 20022003 to the executive officers named in the Summary
Compensation Table:
Potential
RealizableIndividual Grants Realized Value
% of Total at Assumed Annual
Options to Exercise Rates of Stock
No. of Granted toin or Base Expi- Price Appreciation
Options Employees in Price rationExpiration for Option Term(1)
Name
Granted Fiscal Year ($/Share) Date 0%(2) 5% 10%
Name
Stephen Knepper
17,500(3) 11.75% $2.35 02/07/20,000(3) 22.47% $4.50 06/27/07 - $2,056 $4,112$4,500 $9,000
Stephen Knepper(4) 25,000(3) 16.78% $1.50 11/02/06Knepper
15,000(3) 16.85% $3.75 06/27/07 - $1,875 $3,750
Michael
Kovens 17,500(3) 11.75% $2.35 02/07/Harvey Grossblatt
20,000(3) 22.47% $4.50 03/31/07 - $2,056 $4,112
Harvey
Grossblatt 13,250(5) 8.89% $3.00 07/01/06 - $1,988 $3,975
Harvey
Grossblatt 15,000(3) 10.07% $1.30 11/02/06 - $ 975 $1,950
Harvey
Grossblatt 15,000(3) 10.07% $1.70 11/02/06 - $1,275 $2,550
Harvey
Grossblatt 4,500(3) 3.02% $2.35 02/07/07 - $ 529 $1,058
- 33 -$4,500 $9,000
(1) The 5% and 10% assumed rates of compensation are mandated by
the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the
future Common Stock price.
(2) Denotes realizable value at the date of grant which reflected
a market value or higher valuation per share.
(3) Five year option fully exercisable and vested.
(4) Exercised January 2002.
(5) Five year option exercisable 25% per year beginning July 2002.- 41 -
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
Number Value
of Unexercised of Unexercised
Shares Options at FY-End Options at FY-End
Acquired Value Exerci-/Exerci/Unexerci- Exerci-/Exerci/Unexerci-
Name In Exercise Realized sable/sable sable/sable
Stephen
Knepper 61,250 $76,203 32,500/ -0- $32,500/ -0-
Michael Kovens 36,250- $ 7,375 32,500/ -0- -0- / -0-- 52,500/ - $233,150/ -
Harvey
Grossblatt - - 42,000/17,000 $42,000/Gross-
blatt 6,250 18,188 60,312/12,438 $290,868/$13,25058,564
Employment Agreements
Harvey Grossblatt entered into an employment agreement with the
Company effective April 1, 2002. The employment agreement
provides that Mr. Grossblatt is employed for a term ending March 31,June
30, 2005 at an initial base annual salary of $122,500, subject to
automatic annual cost of living increases and further subject to
increases in the Board's discretion. Additionally, Mr. Grossblatt
is entitled to bonus compensation for each fiscal year of the
Company in which the Company earned pre-tax net income of at
least $100,000, in an amount equal to 5% of pre-tax net income up
to $1,000,000, 4% of pre-tax net income over $1,000,000 up to
$2,000,000, 3% of pre-tax net income over $2,000,000 up to
$3,000,000, and 1% of pre-tax net income over $3,000,000.
Effective April 1, 2003, Mr. Grossblatt's Employment Agreement
was amended to: (i) extend the term until July 31, 2008; (ii)
increase the annual base salary to $180,000 subject to automatic
annual cost of living increases up to 4%; and (iii) revising the
annual bonus compensation to provide that the bonus is paid on
pre-tax net income in excess of an amount equal to 8% of
shareholders' equity as of the start of the fiscal year, as
follows: 3% of all (after the 8% threshold) pre-tax net income up
to $1 million, 4% of pre-tax net income from $1-$2 million, 5%
of pre-tax net income from $2-$3 million, 6% of pre-tax net
income from $3-$4 million, 7% of pre-tax net income over $4
million.
Under the Employment Agreement, Mr. Grossblatt has been granted
an option to purchase 20,000 shares of common stock at an
exercise price of $4.50 per share pursuant to the Company's
Non-Qualified Stock Option Plan, and is also entitled to life,
health and disability insurance benefits, medical reimbursement,
automobile allowance, and Company paid retirement plan
contributions.
If the employment agreement is terminated by the Company other
than for cause or Mr. Grossblatt's death or disability, Mr.
Grossblatt is entitled to receive a lump sum payment equal to Mr.
Grossblatt's base salary for the balance of the employment
agreement's term plus the amount of Mr. Grossblatt's last bonus
- 42 -
and an additional lump sum payment payable on the date the term
of the employment agreement would have expired equal to two times
Mr. Grossblatt's base salary for the last 12 months plus the
amount of Mr. Grossblatt's last bonus. In addition, Mr.
Grossblatt would be entitled to receive the health insurance and
medical reimbursement benefits for the balance of the term and a
period of three years thereafter.
- 34 -
If Mr. Grossblatt's employment is terminated following or in
anticipation of a "change of control" of the Company, Mr.
Grossblatt will be entitled to receive a lump sum payment equal
to Mr. Grossblatt's base salary for the balance of the employment
agreement's term and the amount of Mr. Grossblatt's last bonus,
plus an amount equal to three times Mr. Grossblatt's base salary
for the last 12 months and the amount of Mr. Grossblatt's last
bonus, limited to 2.99 times Mr. Grossblatt's average annual
taxable compensation from the Company which is included in his
gross income for the five taxable years of the Company ending
before the date on which the change of control occurs.
If the employment agreement is terminated by the Company due to
Mr. Grossblatt's death or disability, Mr. Grossblatt (or his
estate) is entitled to the continuation of the payment of his
base salary for the balance of the term, reduced, in the event of
death, by any individual life insurance benefits the premiums for
which are paid for by the Company, and in the event of
disability, by any group or individual disability income
insurance benefits the premiums for which are paid for by the
Company. In addition, Mr. Grossblatt (or his estate) is entitled
to the health insurance and medical reimbursement benefits for
the longer of balance of the term or three years following the
date of death or disability.
The employment agreement generally prohibits Mr. Grossblatt from
competing with the Company during the term and during any
subsequent period during which he receives compensation from the
Company.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 28, 2002,June 19, 2003, the following persons were "beneficial
owners" (as that term is defined under Rule 13d-3 promulgated by
the Securities and Exchange Commission) of more than five percent
of the Company's common stock.
- 43 -
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 317,764(2) 30.5%285,795 25.5%
6 Regency Court
Baltimore, MD 21208
Stephen Knepper 127,873(3) 12.3%151,631(2) 12.9%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Ronald Lazarus 128,850(3) 10.7%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Bruce Paul 104,500 9.5%9.3%
One Hampton Road
Purchase, NY 10577
Harvey B. Grossblatt 78,396(4) 6.6%
7-A Gwynns Mill Court
Owings Mills, MD 21117
(1) For the purpose of determining the percentages of stock
beneficially owned, shares of stock subject to options
exercisable within 60 days of May 28,
2002June 19, 2003 are deemed to be
outstanding.
- 35 -
(2) Includes 32,500 shares which Mr. Kovens presently has the right to acquire
through the exercise of stock options.
(3) Includes 32,50052,500 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options and
2,000 shares held by a trust in which Mr. Knepper has voting
control.
(3) Includes 82,000 shares which Mr. Lazarus presently has the
right to acquire through the exercise of stock options.
(4) Includes 64,874 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
- 44 -
As of May 28, 2002,June 19, 2003, the shares of the Company's common stock
owned beneficially by each director, by each executive officer
and by all directors and officers as a group were as follows:
Shares Percent
Name of beneficial owner Beneficially Owned(1) of class
Michael Kovens 317,764(2) 30.5%285,795 25.5%
Stephen Knepper 127,873(3) 12.3%151,631(2) 12.9%
Harvey Grossblatt 49,272(4) 4.7%78,396(3) 6.6%
Cary Luskin 30,167(4) 2.7%
Ronald A. Seff 39,515 3.5%
Howard Silverman 6,167(4) 0.3%
All directors and officers as 590,659 50.0%720,596(5) 54.3%
a group (4(6 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Includes 42,00064,874 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
(4) Includes 2,500 shares which Mr. Luskin and Dr. Silverman each
presently has the right to acquire through the exercise of
stock options.
(5) See footnotes 1 through 4 on previous table.
Equity Compensation Plan Information
Number of
securities
remaining
available for
for future
issuance
Number of securities remainingunder equity
Securities Weighted- compensation
to available for future
be average plans
issued issuance under
upon Weighted-average equity compensationexercise (excluding)
exercise of exercise price of plans (excludingsecurities
outstanding outstanding securities reflected
Plan options options in column(a)]
Plan Category (a) (b) (c)
Equity 246,500 $3.43 97,481
compensation 229,250 $2.58 155,481
plans approved
by security
holders
Equity compensation - - -
compensation
plans not
approved by
security
holders
Total 229,250 $2.58 155,481246,500 $3.43 97,481
- 3645 -
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that the Company's directors and executive officers and
each person who owns more than 10% of the Company's Common Stock,
file with the Securities and Exchange Commission an initial
report of beneficial ownership and subsequent reports of
changes in beneficial ownership of the Shares. To our knowledge,
based solely upon the review of the copies of such reports
furnished to us, all of these reporting persons complied with the
Section 16(a) filing requirements applicable to them with respect
to transactions during the fiscal year ended March 31, 2003,
other than Mr. Kovens, who filed one Form 4 late with respect to
a disposition of shares of Common Stock.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had several related party transactions with its Hong
Kong Joint Venture in its normal course of business. See NOTE C
to the Consolidated Financial Statements for a description of
these transactions.
ITEM 14.
CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and
procedures by Stephen C. Knepper, the Company's Chief Executive
Officer, and Harvey B. Grossblatt, the Company's Chief Financial
Officer, as of a date within 90 days of the filing date of this
annual report, such officers have concluded that the Company's
disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time period specified by the
Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
- 3746 -
ITEM 15.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
The following is a description of the fees billed to the Company
by Grant Thornton LLP (the "Auditor") during the fiscal years
ended March 31, 2003 and 2002:
Audit Fees. Audit fees include fees paid by the Company to the
Auditor in connection with the annual audit of the Company's
consolidated financial statements, and review of the Company's
interim financial statements. Audit fees also include fees for
services performed by the Auditor that are closely related to the
audit and in many cases could only be provided by the Auditor.
Such services include consents related to SEC and other
regulatory filings. The aggregate fees billed to the Company by
the Auditor for audit services rendered to the Company for the
years ended March 31, 2003 and 2002 totaled $69,500 and $42,250,
respectively.
Audit Related Fees. Audit related services include due diligence
services related to accounting consultations, internal control
reviews, and employee benefit plan audits. The aggregate fees
billed to the Company by the Auditor for audit related services
rendered to the Company for the years ended March 31, 2003 and
2002 totaled $0 and $0, respectively.
Tax Fees. Tax fees include corporate tax compliance, counsel and
advisory services. The aggregate fees billed to the Company by
the Auditor for the tax related services rendered to the Company
for the years ended March 31, 2003 and 2002 totaled $5,000 and
$5,000, respectively.
All Other Fees. There were no other audit services provided in
both years.
- 47 -
Approval of Independent Auditor Services and Fees
The Company's Audit Committee reviews all fees charged by the
Company's independent auditors, and actively monitors the
relationship between audit and non-audit services provided.
Effective April 1, 2003, the Audit Committee must pre-approve all
services provided by the Company's independent auditors and fees
charged. The Audit Committee has further mandated that all
independent auditor services strictly adhere to the limitations
contained within the SEC's release, "Strengthening the
Commission's Requirements Regarding Auditor Independence," which
was issued in final form in January 2003. The release restricts
engagement of the independent auditors to perform non-audit
services; requires Audit Committee pre-approval of all audit
and non-audit services; addresses the duration of time certain
independent auditor partners can serve on the audit engagement
and the manner of the partners' compensation; restricts
employment by the Company of senior engagement team personnel;
requires the independent auditor to report certain matters to the
Audit Committee; and requires certain disclosures to investors of
information related to the nature of audit and non-audit services
provided and associated fees. The Company's senior corporate
financial management administers these requirements, and will
report throughout the year to the Audit Committee.
- 48 -
PART IV
ITEM 14.16.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are
included in Part II, Item 8.
Consolidated balance sheets, March 31, 20022003 and 20012002
Consolidated statements of operations for the years
ended March 31, 2003, 2002 2001 and 2000.2001.
Consolidated statements of shareholders' equity for the
years ended March 31, 2003, 2002 2001 and 2000.2001.
Consolidated statements of cash flows for the years
ended March 31, 2003, 2002 2001 and 2000.2001.
Notes to consolidated financial statements.
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
are not required, or because the required information is included
in the consolidated financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation
S-K
Exhibit No.
3.1 Articles of Incorporation, as amended (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1988, File No. 0-7885)
3.2 Articles Supplementary, filed October 14, 2003 (incorporated
by reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K filed October 31, 2002, file No. 0-7885)
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3.3
to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2002, file No. 0-7885)
- 49 -
10.1 Non-Qualified Stock Option Plan, 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, 1999, File No.
0-7885)
10.2 Hong Kong Joint Venture Agreement, as amended (confidential
treatment of Name requested and filed separately with the
Commission) (incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1994, and Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2001, File No.
0-7885)
- 38 -*
10.3 Amended Factoring Agreement with CIT Group (successor to
Congress Talcott, Inc.) dated November 14, 1999
(incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended March 31,
2003, File No. 0-7885)
10.4 Amendment to Factoring Agreement with CIT Group
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2002, File No.
0-7885)
10.5 Lease between Universal Security Instruments, Inc. and
National Instruments Company dated October 21, 1999 for its
office and warehouse located at 7-A Gwynns Mill Court,
Owings Mills, Maryland 21117 (incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended March 31, 2000, File No. 0-7885)
10.510.6 Employment Agreement dated April 1, 2002 between the Company
and Harvey B. Grossblatt (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended March 31, 2002, File No. 0-7885)
10.7 Amendment to Employment Agreement dated as of April 1, 2002
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, 2002,
File No. 0-7885)
10.8 Amended and Restated Employment Agreement dated April 1,
2003 between the Company and Harvey B. Grossblatt*
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended March 31, 2001, File No. 0-7885)
23.1 Consent of Grant Thornton LLPLLP*
23.2 Consent of Ernst & Young (Hong Kong)*
- 50 -
99.1 Rule 15d-14(a) Certification of Chief Executive Officer*
99.2 Rule 15d-14(a) Certification of Chief Financial Officer*
99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99.4 June 26, 2003 Letter to Stockholders and Press Release*
*Filed herewith
(b) Reports on Form 8-K
On February 14, 2002, the Company filed a Form 8-K containing a
press release issued on February 13, 2002None
(d) Financial Statements Required by Regulation S-X
Separate financial statements of the Hong Kong Joint Venture
(confidential treatment of name requested and filed
separately with the Commission.
PagePages
Independent auditor's report 88103
Consolidated profit and loss account, 89
March 31,
2003 and 2002 and 2001104
Consolidated balance sheets, March 31, 2003
and 2002 and 2001 90105
Consolidated cash flow statements, March 31,
2003 and 2002 91
and 2001107-109
Notes to consolidated financial statements 94110-127
- 3951 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED March 31, 2003, 2002 2001 and 20002001
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions of year
Year ended
March 31, 2003
Allowance for
doubtful accounts $ 68,358 $ 10,000 $-0- $ 68,358 $ 10,000
Year ended
March 31, 2002
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ 31,642 $ 68,358
Year ended
March 31, 2001
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 20002003
Allowance for
doubtful accounts $100,000inventory reserve $111,741 $ -0- $-0- $ -0- $100,00010,000 $101,741
Year ended
March 31, 2002
Allowance for
inventory reserve $ 50,000 $ 61,741 $-0- $ -0- $111,741
Year ended
March 31, 2001
Allowance for
inventory reserve $ 92,000 $ -0- $-0- $ 42,000 $ 50,000
Year ended
March 31, 2000
Allowance for
inventory reserve $100,000 $495,000 $-0- $503,000 $ 92,000
- 4052 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By: /s/ Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated.
Date: June , 200226, 2003 By: /s/ Stephen Knepper
Stephen Knepper
Chairman of the Board, Director
Date: June , 200226, 2003 By: /s/ Harvey Grossblatt
Harvey Grossblatt, President,
Director, Chief Accounting Officer
Date: June , 2002 By: Michael Kovens
Michael Kovens
Director
- 41 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By:
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: By:
Stephen Knepper
Chairman of the Board, Director
Date: By:
Harvey Grossblatt, President,
Director, Chief Accounting Officer
Date: By:
Michael Kovens
Director
- 41 -
Exhibit 3.2
BY-LAWS
UNIVERSAL SECURITY INSTRUMENTS, INC.
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
The annual meeting of the stockholders of the Corporation
shall be held at the principal office of the Corporation in
Owings Mills, Maryland, on such date in the month of September as
may be selected by the Board of Directors at 10:30 o'clock a.m.
(or such other time and place as may be fixed by the Board of
Directors) for the election of directors and for the transaction
of general business. Such annual meetings shall be general
meetings, that is to say, open for the transaction of any
business within the powers of the Corporation without special
notice of such business, except in any case in which special
notice is required by statute.
Section 2. Special Meetings.
Special meetings of the stockholders of the Corporation may
be called at any time by either the Chairman of the Board or the
President and shall be called by the President or the Secretary
at the request in writing of a majority of the Board of
Directors, or at the request in writing of the holders of a
majority of all the shares outstanding and entitled to vote.
Such request shall state the purpose of the meeting and notice
thereof shall be given as provided in Section 3 of this Article
I. No business other than that stated in the notice of the
meeting shall be transacted at any special meeting of the
stockholders, however called. Special meetings of the
stockholders shall be held at the principal office of the
Corporation, or at such other place designated in the notice to
stockholders.
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Section 3. Notice of Meetings.
Not less than ten (10) days and not more than ninety (90)
days written or printed notice of every annual meeting and of
every special meeting of the stockholders shall be given to each
holder of stock having voting rights whose name appears as a
holder of record upon the books of the Corporation at the close
of business on the date fixed by the Board of Directors for the
determination of stockholders entitled to notice of such meeting,
and, if no such date shall have been fixed by the Board for such
purpose, then to the holders of record on the date when such
notice shall be given. Such notices of annual or special
meetings shall state the place, day and hour of such meeting,
and, in the case of special meetings, shall also state the
business proposed to be transacted thereat. Such notice shall be
given to each stockholder by mailing it postage prepaid and
addressed to him at his address as it appears upon the records of
the Corporation. No notice of the time, place or purpose of any
meeting of stockholders, whether prescribed by law, by the
Charter, or by these By-Laws, need be given to any stockholder
who attends in person, or by proxy, or who, in writing executed
and filed with the records of the meeting either before or after
the holding thereof, waives such notice. No notice of any
meeting, regular or special, be given to any stockholder who is
not entitled to vote thereat.
Section 4. Quorum.
At any meeting of stockholders, the presence, in person or
by proxy, of shareholders entitled to cast a majority of votes
thereat shall constitute a quorum for the election of directors
or for the transaction of other business; but, in the absence of
a quorum, the stockholders entitled to vote who shall be present
in person or by proxy at any meeting (or adjournment thereof),
may, by vote of a majority of shares so present and entitled to
vote, adjourn the meeting from time to time, but not for a period
of over thirty (30) days at any one time, by announcement at the
meeting until a quorum shall attend. At any such adjourned
meeting at which a quorum shall be present, any business may be
transacted at the meeting as originally notified.
Section 5. Organization.
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The Chairman of the Board shall call meetings of the
Stockholders to order and shall act as Chairman of such meetings
The Board of Directors or Stockholders may appoint any
stockholder to act as Chairman of any meeting in the absence of
the Chairman of the Board and President. The Secretary of the
Corporation shall act as Secretary at all meetings of
Stockholders, but, in the absence of the Secretary, the presiding
officer may appoint any person to act as Secretary of the
meeting.
Section 6. Proxies.
Stockholders may vote either in person or by proxy, but no
proxy which is dated more than eleven months before the meeting
at which it is offered shall be accepted unless such proxy shall
on its face name a longer period for which it is to remain in
force. Every proxy shall be in writing subscribed by a
stockholder, or by his duly authorized attorney, and shall be
dated; but need not be sealed, witnessed or acknowledged.
Section 7. Voting.
At every meeting of the stockholders, every stockholder of
the Corporation shall be entitled to one (1) vote for each share
of voting stock registered in his name on the books of the
Corporation on the date for the determination of voting rights
thereat. The affirmative vote of the holders of a majority of
the stock issued and entitled to vote shall be sufficient and
necessary to elect directors or for the taking or authorization
of any action by the stockholders.
Section 8. List of Stockholders.
Prior to each meeting of the stockholders, the Secretary
shall prepare a full, true and complete list in alphabetical
order of all stockholders entitled to vote at such meeting,
indicating the number of shares held by each, and shall be
responsible for the production of such list at the meeting.
Section 9. Stockholder Proposals.
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Nominations by stockholders of persons for election to the
Board of Directors of the Corporation and the proposal by
stockholders of business to be considered by the stockholders at
an annual meeting of stockholders may be made by any stockholder
of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this By-Law, who is entitled to
vote at the meeting and who complies with the notice procedures
set forth in this By-Law.
For nominations or other business to be properly brought
before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of
the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the
close of business on the 120th day prior to the first anniversary
of the mailing of the proxy statement with respect to preceding
year's annual meeting; provided, however that in the event that
the date of the annual meeting is more than 30 days before or
after the first anniversary date of the preceding year's annual
meeting, notice by the stockholder to be timely must be so
delivered not later than the close of business on the 90th day
prior to such annual meeting. In no event shall be public
announcement of an adjournment of an annual meeting commence a
new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder
proposed to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons
for conducting such business at the meeting and any material
interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made; (i) the
name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the
class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such
beneficial owner.
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Notwithstanding anything in the second sentence of the
previous paragraph of this By-Law to the contrary, in the event
that the number of directors to be elected to the Board of
Directors of the Corporation is increased and there is no public
announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of
Directors at least 100 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required
by this By-Law shall also be considered timely, but only with
respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the
close of business on the 10th day following the day on which such
public announcement is first made by the Corporation.
Only such persons who are nominated in accordance with the
procedures set forth in these By-Laws shall be eligible to serve
as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the
meeting in accordance with the procedures set forth in these
By-Laws. Except as otherwise provided by law, the Charter or
these By-Laws, the Chairman of the meeting shall have the power
and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed,
as the case may be, in accordance with the procedures set forth
in these By-Laws and, if any proposed nomination or business is
not in compliance with these By-Laws, to declare that such
defective proposal or nomination shall be disregarded.
Notwithstanding the foregoing provisions of these By-Laws, a
stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in these By-Laws. Nothing in
these By-Laws shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
For purposes of these By-Laws, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News
Services, Associated Press or comparable national news service or
in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or
15(d) of the Exchange Act.
- 46 -
ARTICLE II
BOARD OF DIRECTORS
Section 1. Election and Powers.
The business and property of the Corporation shall be
conducted and managed by its Board of Directors which shall
consist of not less than three (3) members nor more than fifteen
(15) members. The Board of Directors may increase or decrease
the number of directors (but the number of Directors shall not be
more than 15 or less than 3) at any meeting called for that
purpose. The members of the Board of Directors shall be elected
at the annual meeting of stockholders by holders of stock
represented in person or by proxy at such meeting and entitled to
vote thereat. Each director elected at any annual meeting shall
hold office until his successor shall have been elected and
qualified or until he shall die or resign, or shall have been
removed.
Section 2. First Regular Meeting.
After each meeting of stockholders at which a Board of
Directors shall have been elected, the Board of Directors so
elected shall meet for the purpose or organization and the
transaction of other business, at such time and place as may be
designated by the Chairman of the Board.
Section 3. Additional Regular Meetings.
Regular meetings of the Board of Directors shall be held at
such times as may be fixed by resolution of the Board.
Section 4. Special Meetings.
Special meetings of the Board of Directors shall be held
whenever called by the Chairman of the Board, the President, or
by a majority of the Directors either in writing or by vote.
Section 5. Place of Meetings.
Subject to the provisions of Section 2 of this Article II,
the Board of Directors may hold its regular meetings at such
place or places as it may from time to time determine. Each
special meeting of the Board of Directors shall be held at such
place as shall be designated in the notice of the meeting.
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Section 6. Notice of Meeting.
Notice of the place, day and time of every regular and
special meeting shall be given to each director, either:
1. By notice in writing mailed to him postage prepaid not
later than the second day before the day set for the
meeting and addressed to him at his last known post
office address according to the records of the
Corporation; or
2. By notice in writing delivered personally or at his
usual place of business not later than the day before
the day fixed for the meeting; or
3. By oral personal or telephone communication or by fax
not later than the day before the day set for the
meeting.
provided, however, that no notice need be given to any director
with respect to the first regular Board of Directors meeting
following the meeting of the stockholders at which a Board of
Directors shall be elected. No notice of any meeting need be
given to any director, who, in writing executed and filed with
the records of the meeting either before or after the holding
thereof, waives such notice.
Section 7. Quorum.
A majority of the Board of Directors shall be necessary and
sufficient to constitute a quorum for the transaction of business
at every meeting of the Board of Directors.
Section 8. Voting.
The affirmative vote of a majority of the directors present
at any meeting of the Board of Directors at which a quorum is
present shall be sufficient and necessary for the taking or
authorization of any action by the Board of Directors.
Section 9. Organization.
At all meetings of the Board of Directors the Chairman of
the Board, or in his absence, the President shall preside. The
Secretary of the Corporation shall act as Secretary at all
meetings of the Board, and in his absence the Chairman of the
meeting may designate any person to act as Secretary.
- 48 -
Section 10. Removal.
At any meeting of the stockholders called for the purpose,
any director may, by the vote of a majority of all the shares of
stock outstanding and entitled to vote, be removed from office,
with or without cause, and another may be appointed in the place
of the person so removed, to serve for the remainder of his term.
Section 11. Vacancies.
In case of any vacancy in the Board of Directors through
death, resignation, or any cause other than removal by the
stockholders, the remaining directors may elect a successor to
hold office for the unexpired portion of the term of the person
whose place shall be vacant and until his successor shall have
been duly chosen and qualified.
Section 12. Compensation.
Directors, as such, shall not receive any stated
compensation for their services, but by resolution of the Board
of Directors and a fixed sum and expenses of attendance, if any,
may be allowed for attendance at any regular or special meeting
thereof. Nothing in this Section shall be construed to preclude
a director from serving the Corporation in any other capacity and
receiving compensation therefor.
Section 13. Executive Committee.
The Board of Directors may designate by vote of a majority
of the whole Board, three or more directors to constitute an
executive committee, and may designate one of such members to act
as Chairman. Vacancies in the Executive Committee may be filled
by the remaining members of the Executive Committee at a meeting
at which a quorum is present. The Executive Committee may
exercise such powers of the Board of Directors in the management
of business and affairs of the Corporation as the Board may from
time to time confer upon it, and shall have the power to
authorize the seal of the Corporation to be affixed to all papers
which may require it. A majority of the members of the Executive
Committee may determine its action and fix the time and place of
its meetings unless otherwise provided by the Board of Directors.
- 49 -
Section 14. Other Committees.
The Board of Directors may designate, by resolution, one or
more directors to constitute a committee, other than an executive
committee, such other committee to serve at the pleasure of the
Board of Directors.
Section 15. Nomination of Directors.
Nominations for directors to be elected at the Corporation's
annual meeting of stockholders shall be made by the Board of
Directors of the Corporation. Nominations for directors to be
elected at the Corporation's annual meeting of stockholders may
be made by stockholders in accordance with the procedures set
forth in Article I Section 9 of these By-Laws. Only such persons
who are nominated in accordance with the procedures set forth in
these By-Laws shall be eligible to serve as directors.
ARTICLE III
OFFICERS
Section 1. Officers.
The officers of the Corporation shall be a Chairman of the
Board, a Vice Chairman of the Board (if elected by the Board of
Directors), a President, one or more Vice Presidents (if elected
by the Board of Directors), a Secretary and a Treasurer, all of
whom shall be elected by, and be subject to the control of, the
Board of Directors. The officers shall be elected annually by
the Board of Directors at its first meeting following the annual
meeting of stockholders, subject to changes or additions at other
regular or special meetings of the Board of Directors. Each of
such officers shall hold office for a term of one year, and
thereafter until his successor is elected and qualified or until
his death, resignation or removal. The Board of Directors may
appoint such other officers and assistant officers as it deems
necessary, who shall have such authority and perform such duties
as the Board may from time to time prescribe.
- 50 -
Section 2. Chairman of the Board.
The Chairman of the Board shall be a director of the
Corporation and the chief executive officer of the Corporation.
He shall preside at all meetings of the stockholders and of the
Board of Directors. He shall supervise, control and direct all
of the business and affairs of the Corporation. He shall have
authority to sign and execute in the name of the Corporation all
authorized deeds, contracts and other instruments.
Section 3. Vice Chairman of the Board.
The Vice Chairman of the Board shall be a director of the
Corporation. In the event of the absence of the Chairman of the
Board, the Vice Chairman shall perform all of the duties of the
Chairman and when so acting have all of the powers of the
Chairman. He shall have authority to sign and execute in the
name of the Corporation all authorized deeds, contracts and other
instruments.
Section 4. President.
In the absence of the Chairman and Vice Chairman of the
Board, he shall preside at all meetings of the stockholders and
of the Board of Directors. He shall be responsible for the
day-to-day operations of the Corporation subject to the
supervision and control of the Board of Directors and the
Chairman of the Board. He shall have authority to sign and
execute in the name of the Corporation all authorized deeds,
contracts and other instruments.
Section 5. Vice President.
In the absence of the President, the Vice Presidents (in the
order designated at the time of their election, or in the absence
of any designation, in the order of their election) shall perform
all the duties of the President and when so acting, shall have
the powers of the President. The Vice Presidents shall also have
such additional powers and duties as may be assigned to each of
them by the Board of Directors.
- 51 -
Section 6. Secretary.
The Secretary shall keep the minutes of the meetings of the
stockholders and of the Board of Directors in books provided for
the purpose; he shall see that all notices are duly given in
accordance with the provisions of the By-Laws or as required by
law; he shall be the custodian of the records and of the
corporate seal or seals of the Corporation; he shall see that the
corporate seal is affixed to all documents, the execution of
which on behalf of the Corporation under its seal is duly
authorized, and when so affixed may attest the same; he may sign,
with the President or Chairman of the Board, certificates of
stock of the Corporation; and, in general, he shall perform all
duties ordinarily incident to the office of a Secretary of a
corporation, and such other duties as, from time to time, may be
assigned to him by the Board of Directors, or by the President.
Section 7. Treasurer.
The Treasurer shall have charge of and be responsible for
all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the
name of the Corporation all moneys or other valuable effects in
such banks, trust companies, or other depositories as shall, from
time to time, be selected by the Board of Directors; he shall
render to the President and to the Board of Directors, whenever
requested, an account of the financial condition of the
Corporation; he may sign, with the President, or Chairman of the
Board, certificates of stock of the Corporation; and, in general,
shall perform all duties ordinarily incident to the office of a
treasurer of a corporation, and such other duties as may be
assigned to him by the Board of Directors or by the President.
Section 8. Assistant Officers.
The Board of Directors may elect one or more Assistant
Secretaries and one or more Assistant Treasurers. Each such
Assistant Secretary and Assistant Treasurer shall hold office for
such period and shall have such authority and perform such duties
as the Board of Directors may prescribe.
Section 9. Compensation.
The Board of Directors shall have power to fix the
compensation of all officers of the Corporation. It may
authorize any officer upon whom the power of appointing
subordinate officers may have been conferred to fix the
compensation of such subordinate officers.
- 52 -
Section 10. Reimbursement.
Any payments made to an officer of the Corporation such as a
salary, commission, bonus, interest or rent, or entertainment
expense incurred by him, which shall be disallowed in whole or in
part as a deductible expense by the Internal Revenue Service,
shall be reimbursed by such officer to the Corporation to the
full extent of such disallowance. It shall be the duty of the
directors, as a Board, to enforce payment of each amount
disallowed. In lieu of payment by the officer, subject to the
determination of the directors, proportionate amounts may be
withheld from his future compensation payments until the amount
owed to the Corporation has been recovered.
Section 11. Officers Holding More Than One Office.
Two or more officers (except that of President and Vice
President, Secretary and Assistant Secretary, and Treasurer and
Assistant Treasurer) may be held by the same person, but
no officer shall execute, acknowledge or verify any instrument in
more than one capacity.
Section 12. Removal.
The Board of Directors shall have power at any regular or
special meeting to remove any officer with or without cause, and
such action shall be conclusive on the officer so removed. The
Board of Directors may authorize any officer to remove
subordinate officers.
Section 13. Vacancies.
The Board of Directors at any regular or special meeting
shall have power to fill a vacancy occurring in any office for
the unexpired portion of the term.Date: June 26, 2003 By: /s/ Cary Luskin
Cary Luskin
Director
Date: June 26, 2003 By: /s/ Ronald Seff
Ronald Seff
Director
Date: June 26, 2003 By: /s/ Howard Silverman
Howard Silverman
Director
- 53 -
ARTICLE IV
STOCK
Section 1. Certificates.
Each stockholder shall be entitled to a stock certificate or
certificates certifying the number and kind
EXHIBIT 10.2
2002 JOINT VENTURE AGREEMENT
This 2002 Joint Venture Agreement (the "Agreement") is made on
this 22nd day of shares owned. The
certificates shall be signed by the President or Chairman of the
Board and by the Secretary or Treasurer and shall be sealed with
the seal of the Corporation.
The Corporation may treat the holder of record of any share
or shares of stock as the holder in fact thereof and shall not be
bound to recognize any equitable or other claim to or interest in
any such share or shares on the part of any other person, save as
expressly provided by the laws of Maryland.
The name and address of the person to whom the shares
represented thereby are issued with the number of shares and date
of issue shall be entered on the records of the Corporation.
All certificates surrendered to the Corporation shall be
cancelled and no new certificate shall be issued until the former
certificate for a like number of shares shall have been
surrendered and cancelled, except that in the case of a lost,
destroyed or mutilated certificate a new one may be issued
therefor upon such terms and indemnity to the Corporation as may
be prescribed by the Board of Directors.
Section 2. Transfer.
Transfer of shares of the Corporation shall be made only on
the stock transfer books of the Corporation by the holder of
record thereof or by his legal representative, or by his attorney
thereunto authorized by power of attorney duly exercised and
filed with the Secretary of the Corporation, and on surrender for
cancellation of the certificate for such shares.
Section 3. Rules and Regulations.
The Board of Directors shall have authority to make all such
rules and regulations as they may deem expedient concerning the
issue, transfer and registration of stock certificates and may
appoint a transfer agent and a registrar of transfers.
- 54 -
Section 4. Closing of Transfer Books or Fixing of Record Date.
The Board of Directors may fix, in advance, a date as the
record date for the purpose of determining shareholders entitled
to notice of, or to vote at, any meeting of shareholders, or
shareholders entitled to receive payment of any dividend or the
allotment of any rights, or in order to make a determination of
shareholders for any other proper purpose. Such date, in any
case, shall not be more than sixty (60) days, and in case of a
meeting of shareholders not less than ten (10) days, prior to the
date on which the meeting or particular action requiring such
determination of shareholders is to be held or taken.
ARTICLE V
SUNDRY PROVISIONS
Section 1. Dividends.
Subject to the applicable provisions of law and of the
Charter, the Board of Directors may in its discretion declare
what, if any, dividends shall be paid or upon any class of such
stock, the date when such dividends shall be payable, and the
date for the determination of holders of record to whom such
dividends shall be payable.
Section 2. Working Capital.
The Board of Directors shall, from time to time, and in its
discretion, fix and vary the amount of working capital of the
Corporation and determine what portion of the surplus shall be
reserved as working capital or declared as dividends and
distributed to the stockholders.
Section 3. Negotiable Instruments and Other Evidences of
Indebtedness.
All checks, drafts or orders for the payment of money, notes
and other evidences of indebtedness, issued in the name of the
Corporation, shall be signed by such officer or officers as may
be designated from time to time by resolution of the Board of
Directors. No checks shall be signed in blank.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as provided by
the Board of Directors.
- 55 -
Section 5. Seal.
The seal of the Corporation shall be circular in form, with
the name of the Corporation inscribed around the outer edge, and
in the center shall inscribed the words "MARYLAND" and the year
of incorporation.
Section 6. Amendments.
The Board of Directors shall have power to make, amend and
repeal the By-Laws of the Corporation, by vote of a majority of
all of the directors, at any regular or special meeting of the
Board; provided, however, that any By-Laws made by the Board of
Directors may be amended, altered, or repealed by the
stockholders as hereinafter provided.
The stockholders, by the affirmative vote of the majority of
the stock issued, outstanding and entitled to vote, may make,
alter or amend the By-Laws at any annual meeting, or any special
meeting if notice thereof is contained in the notice of such
meeting.
Section 7. Contracts.
No contract or other transaction between this Corporation
and any other corporation and no act of this Corporation shall in
any way be affected or invalidated by the fact that any of the
directors of this Corporation are pecuniarily or otherwise
interested in or are directors or officers of such other
corporation; any director, individually or any firm of which any
director may be a member, may be a party to, or may be
pecuniarily or otherwise interested in, any contract or
transaction of this Corporation, provided that the fact that he
or such firm is so interested shall be disclosed or shall have
been known to the Board of Directors or a majority thereof; and
any director of this Corporation who is also a director or
officer of such other corporation or who is so interested may be
counted in determining the existence of a quorum at any meeting
of the Board of Directors of this Corporation, which shall
authorize any such contract or transaction, and may vote thereat
to authorize any such contract or transaction, with the like
force and effect as if he were not such director or officer of
such other corporation or not so interested.
- 56 -
Section 8. Voting Upon Stocks or Other Ownership Interests.
Unless otherwise ordered by the Board of Directors, the
President and the Chairman of the Board, or either of them, shall
have full power and authority on behalf of the Corporation to
attend and to vote and to grant proxies to be used at any
meetings, or for written consents, of stockholders or other
equity owners of any corporation or other entity in which the
corporation may own an interest.
ARTICLE VI
INDEMNIFICATION
Section l. Definitions.
As used in this Article VI, any word or words that are
defined in Section 2-418 of the Corporations and Associations
Article of the Annotated Code of Maryland (the "Indemnification
Section"), as amended from time to time, shall have the same
meaning as provided in the Indemnification Section.
Section 2. Indemnification of Directors and Officers.
The Corporation shall indemnify and advance expenses to a
director or officer of the Corporation in connection with a
proceeding to the fullest extent permittedOctober 2002, by and in accordance
with the Indemnification Section.
Section 3. Indemnification of Other Agents and Employees.
With respect to an employee or agent, other than a director
or officer of the Corporation, the Corporation may, as determined
by and in the discretion of the Board of Directors of the
Corporation, indemnify and advance expenses to such employees or
agents in connection with a proceeding to the extent permitted by
and in accordance with the Indemnification Section.
END OF BY-LAWS
- 57 -
Exhibit 10.3
The CIT Group/
Commercial Services, Inc.
1211 Avenue of the Americas
New York, NY 10036
November 14, 1999
USI Electric, Inc.
10324 South Dolfield Road
Owings Mills, Maryland 21117-3586
FACTORING AGREEMENT
Ladies and Gentlemen:
We are pleased to confirm the terms and conditions that will
govern our funds in use accounting, notification factoring
arrangement with advances (the "Agreement").
1. SALE OF ACCOUNTS
You sell and assign to us, and we purchase as absolute
owner, all accounts receivable arising from your sales of
inventory or rendition of services, including those under any
trade names, through any divisions and through any selling agent
(collectively, the "Accounts" and individually, an "Account").
2. CREDIT APPROVAL
2.1 Requests for credit approval for all of your orders
must be submitted to our Credit~ Department via computer by
either: (a) On-Line Terminal Access, or (b) Electronic Batch
Transmission. If you are unable to submit orders via computer,
then orders can be submitted over the phone, by fax or in
writing. All credit decisions by our Credit Department (including
approvals, declines and holds) will be sent to you daily by a
Credit Decisions Report, which constitutes the official record of
our credit decisions. Credit approvals will be effective only if
shipment is made or services are rendered within thirty (30) days
from the completion date specified in our credit approval. Credit
approval of any Account may be withdrawn by us any time before
delivery is made or services are rendered.
2.2 We assume the Credit Risk on each Account approved
in the Credit Decision Report. "Credit Risk" means the customer s
failure to pay the Account in full when due on its longest
maturity solely because of its financial inability to pay. If
there is any change in the amount, terms, shipping date or
delivery date for any shipment of goods or rendition of services
- 58 -
(other than accepting returns and granting allowances as provided
in section 8 below), you must submit a change of terms request to
us, and, if such pertains to a Factor Risk Account, then we shall
advise you of our decision either to retain the Credit Risk or to
withdraw the credit approval. Accounts on which we bear the
Credit Risk are referred to collectively as "Factor Risk
Accounts", and individually as a "Factor Risk Account". Accounts
on which you bear some or all of the risk as to credit are
referred to collectively as "Client Risk Accounts", and
individually as a "Client Risk Account".
2.3 We shall have no liability to you or to any person,
firm or entity for declining, withholding or withdrawing credit
approval on any order. If we decline to credit approve an order
and furnish to you any information regarding the credit standing
of that customer, such information is confidential and you agree
not to reveal same to the customer, your sales agent or any third
party. You agree that we have no obligation to perform, in any
respect, any contracts relating to any Accounts.
3. INVOICING
You agree to place a notice (in form and content
acceptable to us) on each Invoice and invoice equivalent that the
Account is sold, assigned and payable only to us, and to take all
necessary steps so that payments and remittance information are
directed to us. All invoices, or their equivalents, will be
promptly mailed or otherwise transmitted by you to your customers
at your expense. You will provide us with copies of all invoices
(or the equivalent thereof If the invoices were sent
electronically), confirmation of the sale of the Accounts to us
and proof of shipment or delivery, all as we may reasonably
request. If you fail to provide us with copies of such invoices
(or equivalents) or such proofs when requested by us, we will not
bear any Credit Risk as to those Accounts.
4. REPRESENTATIONS AND WARRANTIES
4.1 You represent and warrant that: each Account is
based upon a bona fide sale and delivery of inventory or
rendition of services made by you in the ordinary course of
business; the inventory being sold and the Accounts created are
your exclusive property and are not, and will not be, subject to
any lien, consignment arrangement, encumbrance or security
interest other than in our favor; all amounts are due in United
States Dollars; all original invoices bear notice of the sale and
assignment to us; any taxes or fees relating to your Accounts or
inventory are solely your responsibility; and none of the
Accounts factored with us hereunder represent sales to any
subsidiary, affiliate or parent company. You also warrant and
represent that: your customers have accepted the goods or
services and owe and are obligated to pay the full amounts stated
in the invoices according to their terms, without dispute, claim,
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offset, defense, deduction, rejection, recoupment, counterclaim
or contra account, other than as to returns and allowances as
provided in section 8 below (the foregoing being referred to in
this Agreement as "Customer Claims").
4.2 You further represent and warrant that: you are a
duly organized and validly existing business organization
qualified to do business in all states where required; the most
recent financial statements provided by you to us accurately
reflect your financial condition as of that date and there has
been no material adverse change in your financial condition since
the date of those financial statements. You agree to furnish us
with such information concerning your business affairs and
financial condition as we may reasonably request from time to
time. You will furnish to us as soon as possible, but not later
than one hundred twenty (120) days after the dose of each of your
fiscal years, your and your consolidated subsidiaries financial
statements as of the end of such year, on a consolidated and
consolidating basis, audited by a firm of independent, certified
public accountants, selected by you and acceptable to us.
4.3 You agree that you will promptly notify us of any
change in your: name, location of your chief executive office,
place(s) of business, use of trade names and divisions, and legal
or business structure. Further, you agree that you will promptly
notify us of any change in control of the ownership of your
business organization, and of significant law suits or
proceedings against you.
5. PURCHASE OF ACCOUNTS
We shall purchase the Accounts for the gross amount of the
respective invoices, less: factoring fees or charges, trade and
cash discounts allowable to, or taken by, your customers,
credits, cash on account and allowances ("Purchase Price"). Our
purchase of the Accounts will be reflected on the Statement of
Account (defined in section 10 below), which we shall render to
you, which will also reflect all credits and discounts made
available to your customers.
6. ADVANCES
At your request, and in our sole discretion, we may advance
funds to you of up to seventy-five percent (75%) of your Factor
Risk Accounts, prior to the collection of the Accounts. We have
the right, at any time and from time to time, to hold any
reserves we deem reasonably necessary as security for the payment
and performance of any and all of your-obligations (defined in
section 12 below). All amounts you owe us, including all advances
to you and any debit balance in your Client Position Account
(defined in section 10 below), and any Obligations, are payable
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on demand and may be charged to your account at any time.
7. PAYMENT OF ACCOUNTS
7.1 All payments received by us on the Accounts will be
promptly applied to your account with us after crediting your
customer s account. In exchange for such application, we shall
charge your account monthly with the cost of ten (10) additional
business days on all such payments at the rate charged by us in
section 14.1 below on debit balances. No checks, drafts or other
instruments received by us will constitute final payment of an
Account unless and until such items have actually been collected.
7.2 The amount of the Purchase Price of any Factor Risk
Account which remains unpaid will be deemed collected and will be
credited to your account as of the earlier of the following
dates:
(a) the date of the Account s longest maturity if a
proceeding or petition is filed by or against the customer under
any state or federal bankruptcy or insolvency law, or if a
receiver or trustee is appointed for the customer; or
(b) the last day of the third month following the
Account s longest maturity date if such Account remains unpaid as
of said date without the occurrence of any of the events
specified in clause (a) above.
If any Factor Risk Account credited to you was not paid for
any reason other than Credit Risk, we shall reverse the credit
and charge your account accordingly, and such Account is then
deemed to be a Client Risk Account.
8. CUSTOMER CLAIMS AND CHARGE BACKS
8.1 You must notify us promptly of any matter affecting
the value, enforceability or collectibility of any Account and of
all Customer Claims. You agree to promptly issue credit memoranda
or otherwise adjust the customer s account upon accepting returns
or granting allowances. For full invoice credit memoranda, you
agree to send duplicate copies thereof to us and to confirm their
assignment to us. You may continue to do so until we have advised
you that all such credits or allowances on Factor Risk Accounts
require our prior written approval. We shall cooperate with you
in the adjustment of Customer Claims, but we retain the right to
adjust Customer Claims on Factor Risk Accounts directly with
customers, upon such terms as we in our sole discretion may deem
advisable.
8.2 We may at any time charge back to your account the
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amount of: (a) any Factor Risk Account which is not paid in full
when due for any reason other than Credit Risk; (b) any Factor
Risk Account which is not paid In full when due because of an act
of God, civil strife, or war; (c) anticipation (interest)
deducted by a customer on any Account; (d) Customer Claims; (e)
any Client Risk Account which is not paid in full when due; and
(f) any Account for which there is a breach of any representation
or warranty. A charge back does not constitute a reassignment of
an Account. We shall immediately charge any deduction taken by a
customer to your account.
8.3 We may at any time charge to your account the amount
of: (a) payments we receive on Client Risk Accounts which we are
required at any time to turnover or return (including preference
claims); (b) all remittance expenses (including incoming wire
charges, currency conversion fees and stop payment fees), other
than stop payment fees on Factor Risk Accounts; (c) expenses,
collection agency fees and attorneys fees incurred by us in
collecting or attempting to collect any Client Risk Account or
any Obligation (defined in section 12 below); and (d) our fees
for handling collections on Client Risk Accounts which you have
requested us to process, as provided in the Guide (see section
18.2 below).
8. HANDLING AND COLLECTING ACCOUNTS; RETURNED GOODS
9.1 As owners of the Factor Risk Accounts, we have the
right to: (a) bring suit, or otherwise enforce collection, in
your name or ours; (b) modify the terms of payment, (c) settle,
compromise or release, in whole or in part, any amounts owing,
and (d) issue credits in your name or ours. To 'the extent
applicable, you waive any and all claims and defenses based on
suretyship. If moneys are due and owing from a customer for both
Factor Risk Accounts and Client Risk Accounts, you agree that any
payments or recoveries received on such Accounts will be applied
using our normal procedures. If at the time of a customer
liquidation, we each have Accounts at our respective risk, we
agree that all payments, dividends, recoveries or proceeds will
be shared pro rate in proportion to our respective Credit Risk
for that customer. Once you have granted or issued a discount,
credit or allowance on any Account, you have no further interest
therein. Any checks, cash, notes or other documents or
instruments, proceeds or property received with respect to the
Accounts must be held by you in trust for us, separate from your
own property, and immediately turned over to us with proper
endorsements. We may endorse your name or ours on any such check,
draft, instrument or document.
9.2 As owners and assignees of the Accounts and all
proceeds thereof, upon our written notice, you will, at your
expense, set aside, mark with our name and hold in trust for us,
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any and all returned, rejected, reclaimed or repossessed
inventory ("Returned Goods"). Further, upon such notice, you
agree promptly: to notify us of all Returned Goods and, at our
request, either to deliver same to us, or to pay us the invoice
price thereof, or to sell the same for our account.
10. STATEMENT OF ACCOUNT
After the end of each month, we shall send you certain
reports reflecting Accounts purchased, advances made, fees and
charges and all other financial transactions between us during
that month ("Reports"). The Reports sent to you each month
include a Statement of Account reflecting transactions in three
sections: Accounts Receivable, Client Position Account and Funds
In Use. The Reports shall be deemed correct and binding upon you
and shall constitute an account stated between us unless we
receive your written statement of exceptions within thirty (30)
days after same are mailed to you.
11. GRANT OF SECURITY INTEREST
11.1 You hereby assign and grant to us a continuing
security interest In all of your right, title and interest in and
to all of your now existing and future: (a) accounts receivable
(including Accounts), instruments, documents, chattel paper,
general intangibles, and any other obligations owing to you; (b)
unpaid seller s rights (including rescission, repossession,
replevin, reclamation and stoppage in transit); (c) rights to any
inventory represented by the foregoing, including Returned Goods;
(d) reserves and credit balances arising hereunder; (e)
guarantees or collateral for the foregoing (including rights
under any letters of credit or other credit enhancements in your
favor); (f) insurance policies, proceeds or rights relating to
the foregoing; (g) federal, state and local income tax refunds;
(h) cash and non-cash proceeds of the foregoing; and (I) Books
and Records (defined in section 13 below) evidencing or
pertaining to the foregoing.
11.2 You agree to comply with all applicable laws to
perfect our security interest in collateral pledged to us
hereunder, and to execute financing statements and other
documents as we may require to effectuate the foregoing and to
implement this Agreement. To the extent permitted by applicable
law, you authorize us to sign your name, or to file financing
statements or continuations without your signature, all in order
to create, perfect or maintain our security interest in the
collateral.
12. OBLIGATIONS SECURED
The security Interest granted hereunder and any lien or
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security interest that we now or hereafter have in any of your
other assets, collateral or property, secure the payment and
performance of all of your now existing and future indebtedness
and obligations to us, whether absolute or contingent, whether
arising under this Agreement or any other agreement or
arrangement between us, by operation of law or otherwise
("Obligations"). Obligations also includes ledger debt (which
means indebtedness for goods and services purchased by you from
any party whose accounts receivable are factored or financed by
us), and indebtedness arising under any guaranty, credit
enhancement or other credit support granted by you in our favor.
Any reserves or balances to your credit and any other assets,
collateral or property of yours in our possession constitutes
security for any and all Obligations.
13. BOOKS AND RECORDS AND EXAMINATION
13.1 You agree to maintain such Books and Records
concerning the Accounts as we may reasonably request and to
reflect our ownership of the Accounts therein. "Books and
Records" means your accounting and financial records (whether
paper, computer or electronic), data, tapes, discs, or other
media, and all programs, files, records and procedure manuals
relating thereto, wherever located.
13.2 Upon our reasonable request, you agree to make your
Books and Records available to us for examination and to permit
us to make copies or extracts thereof. Also, you agree to permit
us to visit your premises during your business hours and to
conduct such examinations as we deem reasonably necessary. To
cover our costs and expenses of any such examinations, we shall
charge you a fee for each day, or part thereof, during which such
examination is conducted, plus any out-of-pocket costs and
expenses incurred by us, as provided in the Guide (see section
18.2 below).
14. INTEREST
14.1 Interest is charged as of the last day of each month
based on the daily debit balances in your Funds In Use account
for that month, at a rate equal to the sum of one and one-half
percent (1-1/2%) per annum, plus the Chase Prime Rate (defined
below). The Chase Prime Rate is the per annum rate of interest
publicly announced by The Chase Manhattan Bank (or its successor)
in New York, New York from time to time as Its prime rate, and Is
not intended to be the lowest rate of interest charged by The
Chase Manhattan Bank to its borrowers. Any change in the rate of
interest hereunder due to a change in the Chase Prime Rate will
take effect as of the first of the month following such change in
the Chase Prime Rate. Interest will be credited as of the last
day of each month based on the daily credit balances in your
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Funds In Use account for that month, at a rate four percent (4%)
per annum below the Chase Prime Rate being used to calculate
Interest for the period. All interest is calculated on a 360 day
year.
14.2 In no event will interest charged hereunder exceed
the highest lawful rate. In the event, however, that we do
receive interest in excess of the highest lawful rate, you agree
that your sole remedy would be to seek repayment of such excess,
and you irrevocably waive any and all other rights and remedies
which may be available to you under law or in equity.
15. FACTORING FEES AND OTHER CHARGES
15.1 For our services hereunder, you will pay us a
factoring fee or charge of one percent (1%) of the gross face
amount of all Accounts factored with us, but in no event less
than $4.50 per invoice. In addition, you will pay a fee of one-quarter
of one percent (1/4 of 1%) of the gross face amount of
each Account for each thirty (30) day period or part thereof by
which the longest terms of sale applicable to such Account exceed
ninety (90) days (whether as originally stated or as a result of
a change of terms requested by you or the customer). For Accounts
arising from sales to customers located outside the fifty states
of the United States of America and the Commonwealth of Puerto
Rico, you will pay us an additional factoring fee of one percent
(1%) of the gross face amount of all such Accounts. All factoring
fees or charges are due and charged to your account upon our
purchase of the underlying Account. In the event the actual
factoring fees or charges paid to us during any twelve-month
period, or part thereof, commencing on October 1, 1999, and each
consecutive twelve-month period or part thereof thereafter
(herein referred to as a "Period"), by you and Universal Security
Instruments, Inc. ("Universal") of 7-A Gwynns Mill Court, Owings
Mills, Maryland 21117-3586, United States of America ("USA"), a
corporation organized and existing under its separate factoring
agreementthe laws of the State of
Maryland, USA, and The Original Joint Venture Owner (name
withheld and filed separately with us, is less than Forty-Eight Thousand Dollars
($48,000.00) (hereinthe SEC) ("Original Owner"), a
limited liability company organized and existing under the laws
of Hong Kong.
WHEREAS
A. The parties hereto (the "Parties") are parties to a Joint
Venture Agreement dated 23 October 1989 as supplemented by a
Supplementary Agreement dated 21 August 2001 and a memorandum
letter dated 8 October 2001 (collectively referred to as the
"Minimum Factoring
Fees""1989-2001 Agreements") relating to the business, management
and operation of (name withheld and filed separately with the
Securities and Exchange Commission) ("The Joint Venture"), we shall charge Universal s account asa
limited liability company organized and existing under the
laws of Hong Kong.
B. The Parties have concluded that certain provisions of the
end1989-2001 Agreements are redundant, obsolete and no longer
appropriate.
C. The Parties are also considering a listing of such
Period(name withheld
and filed separately with an amount equalthe Securities and Exchange
Commission) or its business on The Stock Exchange of Hong Kong
Limited or another stock exchanges of equivalent international
standing (the "Stock Exchange").
D. In view of these considerations, the Parties have agreed to
enter into this Agreement and thereby to terminate the
1989-2001 Agreements.
- 54 -
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, IT IS HEREBY
AGREED AS FOLLOWS:
ARTICLE ONE
ESTABLISHMENT AND OPERATION OF A PARENT COMPANY
(NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES A
EXCHANGE COMMISSION)
1.1 Establishment of A Parent Company (name withheld and filed
separately with the Securities and Exchange Commission).
The Parties shall promptly purchase (name withheld and
filed separately with the Securities and Exchange
Commission) ("Parent Company"), a private company limited
by shares, duly organized, validly existing and properly
registered in Hong Kong. The Parties shall share equally
all costs with regard to the differencepurchase of (name withheld
and filed separately with the Securities and Exchange
Commission). The initial capital of (name withheld and
filed separately with the Securities and Exchange
Commission) shall be the normal minimums permissible in
Hong Kong.
1.2 Memorandum and Articles of Association (name withheld and
filed separately with the Securities and Exchange
Commission). It is recognized that, upon the acquisition
of (name withheld and filed separately with the
Securities and Exchange Commission), there will be
inconsistencies between this Agreement and the Memorandum
and Articles of Association of (name withheld and filed
separately with the Securities and Exchange Commission).
The Parties agree promptly, with the assistance of
counsel, to cause the Memorandum and Articles of
Association of (name withheld and filed separately with
the Securities and Exchange Commission) to be amended so
that they will be consistent with terms and conditions of
this Agreement.
In all cases, before and after the amendment of the
Memorandum and Articles of Association, in the event of
conflict between the actual
factoring fees or charges paid during such Period and said
Minimum Factoring Fees.
15.2 You agree to pay all costs and expenses incurred by
us in connection with the administration and enforcement of this
Agreement, including all reasonable fees and expenses
attributable to the services of our attorneys (whether in-house
or outside), search fees and public record filing fees.
Furthermore, you agree to pay to us our fees (as more fully set
forth in the Guide, see section 18.2 below) including fees for:
(a) special reports prepared by us at your request; (b) wire
transfers; (c) handling change of terms requests relating to
Accounts; and (d) your usage of our on-line computer services.
- 65 -
Beginning on the first of the month six months from the date
hereof, you also agree to pay us our fees for: (i) each new
customer setup on our customer accounts receivable data base and
each new customer relationship established for you; (ii)
crediting your account with proceeds of non-factored invoices
received by us; and (iii) charge backs of invoices factored with
us that were paid directly to you. All such fees will be charged
to your account when incurred. Our fees may be changed by us from
time to time upon notice to you; however, any failure to give you
such notice does not constitute a breachprovisions of this Agreement and does not impair our ability to institute any such change.
15.3 Any tax or feethe
Memorandum and Articles of any governmental authority imposed
on or arising from any transactions between us, any sales made by
you, or any inventory relating to such sales Is your sole
responsibility (other than incomeAssociation of (name withheld
and franchise taxes imposed on
us which are not related to any specific transaction between us).
If we are required to withhold or pay any such tax or fee, or any
interest or penalties thereon, you hereby indemnify and hold us
harmless therefor and we shall charge your accountfiled separately with the full
amount thereof.
16. TERMINATION
16.1 You may terminate this Agreement only asSecurities and Exchange
Commission), the provisions of an
Anniversary Date and then only by giving us at least sixty (60)
days prior written notice of termination. "Anniversary Date"
means September 30, 2000, and the same month and date in each
year thereafter; however, you may terminate this Agreement at any
time by giving us at least sixty (60) days prior written notice
of termination if you shall have presented to us a bona fide
written proposal for you to obtain from, and as issued by,
another lender or factor, a factoring or financing arrangement
and we, in our discretion, shall have elected not to provide you
with a factoring or financing arrangement on similar or more
favorable terms and conditions. In the event that this Agreement
is terminated by you prior to an Anniversary Date, we shall be
entitled to the unpaid portion of the Minimum Factoring Fees, if
any, for such Period, as provided in section 15.1 above, as of
the effective date of termination, calculated by multiplying the
number of days during the Period for which this Agreement shall
have beenprevail.
- 55 -
1.3 Transfer of (name withheld and filed separately with the
Securities and Exchange Commission) Shares to (name
withheld and filed separately with the Securities and
Exchange Commission). The Parties are the beneficial
owners of fifty percent (50%) each of the share capital of
(name withheld and filed separately with the Securities
and Exchange Commission). Upon the formation of (name
withheld and filed separately with the Securities and
Exchange Commission), each of the Parties shall promptly
transfer all of their shares in effect(name withheld and filed
separately with the Securities and Exchange Commission) to
(name withheld and filed separately with the
Securities and Exchange Commission) in exchange for fully
paid-up shares of (name withheld and filed separately with
the Securities and Exchange Commission). The transfer of
(name withheld and filed separately with the Securities
and Exchange Commission) shares of the Parties shall be
completed simultaneously, and each Party (or its nominees)
shall receive fifty percent (50%) of the share capital of
(name withheld and filed separately with the Securities
and Exchange Commission) immediately upon completion of
the transaction. The (name withheld and filed separately
with the Securities and Exchange Commission) shares
transferred shall be free from all encumbrances, liens and
third party rights. Neither Party shall be obligated to
carry out the transfer of its interest in(name withheld
and filed separately with the Securities and Exchange
Commission) unless the other Party demonstrates that it
can fully comply with its obligations with respect to this
transfer.
1.4 Stamp Duty. Any stamp duty or similar excise taxes
imposed in Hong Kong as a result of the transactions
stated in Paragraph 1.3 shall be shared equally by the
Minimum Factoring Fees,Parties.
1.5 Right of First Refusal. Each shareholder (name withheld
and dividing
such amountfiled separately with the Securities and Exchange
Commission) shall have a right of first refusal for the
purchase of any or all shares in Parent Company (name
withheld and filed separately with the Securities and
Exchange Commission) proposed to be transferred by 360 days. Except as otherwise provided, we may
terminate this Agreement at any time by giving you at least sixty
(60) days prior written noticethe
other shareholder. This right of termination. However, we may
terminate this Agreement immediately, without prior notice to
you, upon the occurrence of an Event of Default (defined in
section 17.1 below).
16.2 This Agreement remains effective between us until
terminated as herein provided. Unless sooner demanded, all
- 66 -
Obligations will become immediately due and payable upon any
termination of this Agreement.
16.3 All of our rights, liens and security interests
hereunder continue and remain in full force and effect after any
termination of this Agreement and pending a final accounting, we
may withhold any balances in your account unless we are supplied
with an indemnity satisfactory to us to cover all Obligations.
You agree to continue to assign accounts receivable to us and to
remit to us all collections on accounts receivable, until all
Obligations have been paid in full or we have been supplied with
an indemnity satisfactory to us to cover all Obligations.
17. EVENTS OF DEFAULT AND REMEDIES UPON DEFAULT
17.1 It is an "Event of Default" under this Agreement if:
(a) your business ceases or a meeting of your creditors is
called; (b) any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceeding is commenced
by or against you under any federal or state law and which
proceedingfirst refusal shall not have been dismissedbe
exercised within thirty (30) days of commencement; (c) you breachnotice to the other
shareholder of the proposed transfer of shares.
- 56 -
1.6 Transferee to Accept This Agreement. In addition to the
requirements of Paragraph 1.5, in the event either
shareholder (name withheld and filed separately with the
Securities and Exchange Commission) proposes to transfer
any representation, warrantyof its shares in (name withheld and filed separately
with the Securities and Exchange Commission) to a third
party, such transferring Party shall not transfer such
shares until it has secured the written agreement of the
proposed transferee to assume all the rights and
obligations of a Party to this Agreement.
1.7 No Pledge. Neither(name withheld and filed separately
with the Securities and Exchange Commission) shareholder
may pledge or covenant containedencumber its shares in (name withheld and
filed separately with the Securities and Exchange
Commission) without prior written consent of (name
withheld and filed separately with the Securities and
Exchange Commission) shareholder.
1.8 Board (name withheld and filed separately with the
Securities and Exchange Commission). The board of
directors of (name withheld and filed separately with the
Securities and Exchange Commission) (the "Board") shall
consist of four (4) members, two (2) to be nominated by
Universal and two (2) to be nominated by (name withheld
and filed separately with the Securities and Exchange
Commission). The Parties shall vote their shares for the
nominees. The nominating Party shall have the right to
remove and replace its directors. The quorum required for
a meeting of the Board (name withheld and filed separately
with the Securities and Exchange Commission) shall be two
(2) members, provided that at least one director nominated
by (name withheld and filed separately with the Securities
and Exchange Commission) and at least one director
nominated by Universal is present.
1.9 Chairman (name withheld and filed separately with the
with the Securities and Exchange Commission). The chairman
of the Board (name withheld and filed separately with the
Securities and Exchange Commission)(the "Chairman") shall
be nominated by (name withheld and filed separately with
the Securities and Exchange Commission). The Board (name
withheld and filed separately with the Securities and
Exchange Commission) shall appoint such Board (name
withheld and filed separately with the Securities and
Exchange Commission) member nominated by (name withheld
- 57 -
and filed separately with the Securities and Exchange
Commission) as the Chairman (name withheld and filed
separately with the Securities and Exchange Commission).
For as long as (name withheld and filed separately
with the Securities and Exchange Commission) provides
operations and management services to (name withheld and
filed separately with the Securities and Exchange
Commission), the Chairman (name withheld and filed
separately with the Securities and Exchange Commission)
shall have a casting vote on all matters, except for the
matters specifically set out in Paragraph 1.11, presented
to the Board (name withheld and filed separately with the
Securities and Exchange Commission).
1.10 Management of (name withheld and filed separately with the
Securities and Exchange Commission). Day-to-day
operations and management of (name withheld and filed
separately with the Securities and Exchange Commission)
and its subsidiaries, if any, and companies controlled
directly or indirectly by (name withheld and filed
separately with the Securities and Exchange Commission)
shall be under the control of (name withheld and filed
separately with the Securities and Exchange Commission),
save as specifically set out in Paragraph 1.11 below.
1.11 Major Decisions. The following matters shall require
approval of the Board (name withheld and filed separately
with the Securities and Exchange Commission): (i) approval
of annual financial statements/reports of (name withheld
and filed separately with the Securities and Exchange
Commission); (ii) determination on remuneration of (name
withheld and filed separately with the Securities and
Exchange Commission) for providing operations and
management services to (name withheld and filed separately
with the Securities and Exchange Commission); (iii)
declaration of dividends of (name withheld and filed
separately with the Securities and Exchange Commission);
(iv) the merger of (name withheld and filed separately
with the Securities and Exchange Commission) with any
other entity or the acquisition of any other entity by
(name withheld and filed separately with the Securities
and Exchange Commission); (v) the sale, lease or disposal
of the whole or a substantial part of the business or
assets of (name withheld and filed separately with the
Securities and Exchange Commission); (vi) any capital
- 58 -
increase or any request for shareholder contribution to
provide additional funding to (name withheld and filed
separately with the Securities and Exchange Commission),
including additional capital or shareholder loans; (vii)
capital investment of (name withheld and filed separately
with the Securities and Exchange Commission) in excess of
One Million Hong Kong Dollars (HKD1,000,000); (viii) any
amendment to the Memorandum and Articles of Association of
(name withheld and filed separately with the Securities
and Exchange Commission); (ix) any mortgage of the assets
of (name withheld and filed separately with the Securities
and Exchange Commission); (x) change of the Company
auditor; and (xi) any business transaction, excluding the
sales transactions of the products of (name withheld and
filed separately with the Securities and Exchange
Commission) which are the subject of Appendix I and II
hereof, between (name withheld and filed separately with
the Securities and Exchange Commission) and any Company
owned or controlled, directly or indirectly, by one of the
shareholders of (name withheld and filed separately with
the Securities and Exchange Commission).
1.12 Management Obligations. (name withheld and filed
separately with the Securities and Exchange Commission)
shall not be obligated to provide operations and
management services to (name withheld and filed separately
with the Securities and Exchange Commission) and its
subsidiaries specified in Paragraph 1.10 above, in the
event that (name withheld and filed separately with the
Securities and Exchange Commission) ceases to be a
shareholder of (name withheld and filed separately with
the Securities and Exchange Commission) or the composition
or procedures of the (name withheld and filed separately
with the Securities and Exchange Commission) Board as set
forth in this Agreement; or (d) you failAgreement are changed so as to pay any
Obligation when due.
17.2 Afterbe less
favorable to (name withheld and filed separately with the
occurrenceSecurities and Exchange Commission).
1.13 Fiscal Year. (name withheld and filed separately with the
Securities and Exchange Commission) shall have a fiscal
year ending March 31.
- 59 -
1.14 Financial Statements. (name withheld and filed separately
with the Securities and Exchange Commission). (name
withheld and filed separately with the Securities and
Exchange Commission) shall, at its expense, have its
financial statements audited once a year by an independent
auditor. Until otherwise determined by the (name withheld
and filed separately with the Securities and Exchange
Commission) Board, Ernst and Young shall remain the
company auditor of an Event(name withheld and filed separately
with the Securities and Exchange Commission). (name
withheld and filed separately with the Securities and
Exchange Commission) shall also produce unaudited monthly
financial statements to be promptly distributed to the
shareholders.
- 60 -
ARTICLE TWO
PRODUCT DISTRIBUTION AGREEMENTS
Immediately upon the signing of Default which is
not waived by us, we may terminate this Agreement, without noticeUniversal and
(name withheld and filed separately with the Securities and
Exchange Commission) shall enter into a product distribution
agreement with terms and conditions identical to you. WeAppendix I of
this Agreement, and (name withheld and filed separately
with the Securities and Exchange Commission) and (name withheld
and filed separately with the Securities and Exchange Commission)
shall then have immediate accessenter into a product distribution agreement with terms and
conditions identical to Appendix II of this Agreement.
ARTICLE THREE
LISTING
3.1 Potential Listing. It is the intention of the Parties
that, provided both Parties agree the prevailing
conditions are suitable and may remove
from any premisesconfirm this agreement in
writing, (name withheld and filed separately with the
Securities and Exchange Commission) will seek the listing
of (name withheld and filed separately with the Securities
and Exchange Commission) shares or, where same mayappropriate, a
listing of a special purpose vehicle formed to become the
holding company of (name withheld and filed separately
with the Securities and Exchange Commission) or its
business on the Stock Exchange (the "Listing").
3.2 An Ownership Company. (name withheld and filed separately
with the Securities and Exchange Commission), or a
specially formed holding company of (name withheld and
filed separately with the Securities and Exchange
Commission) or its business, is referred to herein as
"Ownership Company." (name withheld and filed separately
with the Securities and Exchange Commission) and its
subsidiaries are collectively referred to herein as the
"Group." (name withheld and filed separately with the
Securities and Exchange Commission) shall be located, anyset up as a
subsidiary of (name withheld and all Booksfiled separately with the
Securities and Records as may pertainExchange Commission). The rules applicable
to the Accounts, Returned GoodsListing of (name withheld and filed separately with
the Securities and Exchange Commission) on the Stock
Exchange are herein referred to as the "Listing Rules."
- 61 -
3.3 Board (name withheld and filed separately with the
Securities and Exchange Commission). Prior to the Listing,
(name withheld and filed separately with the Securities
and Exchange Commission) shall be structured or its
structure amended so that the board of directors of (name
withheld and filed separately with the Securities and
Exchange Commission) (the "Board") shall consist of three
types of directors: Executive Directors, Non-Executive
Directors, and Independent (Non-Executive) Directors. Two
(2) Non-executive Directors and one (1) Independent
(Non-Executive) Director shall be nominated by Universal.
Subject to the ability of the post-Listing public
shareholders to elect one or more directors, all the
remaining directors shall be nominated by (name withheld
and filed separately with the Securities and Exchange
Commission) so that (name withheld and filed separately
with the Securities and Exchange Commission) shall be able
at all times to nominate one more director than Universal.
The number of directors shall be determined by the Parties
according to the need of operations from time to time, and
the agreements set forth in this Paragraph 3.3. (name
withheld and filed separately with the Securities and
Exchange Commission) shall vote its shares for the
nominees determined in accordance with this Paragraph 3.3.
The nominating Party shall have the right to remove and
replace its directors subject to any applicable laws and
Listing Rules.
3.4 Major Decisions (name withheld and filed separately with
the Securities and Exchange Commission). Prior to a
Listing, no board resolution on the following matters
shall be passed by the (name withheld and filed separately
with the Securities and Exchange Commission) Board unless
approved by at least one Non-executive Director of the
(name withheld and filed separately with the Securities
and Exchange Commission) Board nominated by Universal and
at least one Executive Director of the (name withheld and
filed separately with the Securities and Exchange
Commission) Board nominated by (name withheld and filed
separately with the Securities and Exchange Commission):
(i) approval of annual financial statements/reports of
(name withheld and filed separately with the Securities
and Exchange Commission); (ii) determination on
remuneration of (name withheld and filed separately with
the Securities and Exchange Commission) for providing
- 62 -
operations and management services to (name withheld and
filed separately with the Securities and Exchange
Commission); (iii) declaration of dividends of (name
withheld and filed separately with the Securities and
Exchange Commission); (iv) the merger of (name withheld
and filed separately with the Securities and Exchange
Commission) with any other entity or the acquisition of
any other entity by (name withheld and filed separately
with the Securities and Exchange Commission); (v) the
sale, lease or disposal of the whole or a substantial part
of the business or assets of (name withheld and filed
separately with the Securities and Exchange Commission);
(vi) any capital increase or any request for shareholder
contribution to provide additional funding to (name
withheld and filed separately with the Securities and
Exchange Commission), including additional capital or
shareholder loans; (vii) capital investment of (name
withheld and filed separately with the Securities and
Exchange Commission) in excess of One Million Hong Kong
Dollars (HKD1,000,000); (viii) any amendment to the
Memorandum and Articles of Association of (name withheld
and filed separately with the Securities and Exchange
Commission); (ix) any mortgage of the assets of (name
withheld and filed separately with the Securities and
Exchange Commission); (x) appointment or change of the
company auditor; and (xi) any business transaction,
excluding the sales transactions of the products of
(name withheld and filed separately with the Securities
and Exchange Commission), which are the subject of
Appendix I and II hereof, between (name withheld and filed
separately with the Securities and Exchange Commission)
and any other collateral hereunder. Furthermore,company owned or controlled, directly or
indirectly, by one of the shareholders of (name withheld
and filed separately with the Securities and Exchange
Commission).
3.5 Dividends (name withheld and filed separately with the
Securities and Exchange Commission). (name withheld and
filed separately with the Securities and Exchange
Commission) shall, to the extent permissible under
applicable law, pay quarterly dividends to (name withheld
and filed separately with the Securities and Exchange
Commission) with a total amount equal to at least fifty
percent (50%) of the quarterly after-tax net profit
determined after the quarterly review of the unaudited
quarterly financial statements by the (name withheld and
filed separately with the Securities and Exchange
Commission) Board.
- 63 -
3.6 Dividends. (name withheld and filed separately with the
Securities and Exchange Commission) shall, to the extent
permissible under applicable law, pay as may bequarterly
dividends to its shareholders all of the dividends
received from (name withheld and filed separately with the
Securities and Exchange Commission) less any normal and
customary deductions necessary to administercover the operational
expenses of (name withheld and enforce our rightsfiled separately with the
Securities and Exchange Commission).
3.7 Management of the Listing. The Listing shall be managed by
(name withheld and filed separately with the Securities
and Exchange Commission), which shall be responsible for
all negotiations and determinations, including, without
limitation determining the overall policy, structure,
manner and arrangements of the Listing and in carrying out
the Accounts, Returned
Goodsapplication for the Listing, including, but not
limited, to:
(a) the appointment of sponsor(s), legal advisers,
reporting accountants, valuers and any other collateral hereunder, professional
advisers of (name withheld and filed separately
with the Securities and Exchange Commission) and/or
(name withheld and filed separately with the
Securities and Exchange Commission) incidental to the
Listing;
(b) all liaison with the Stock Exchange; (c) allowing for
the disclosure of all relevant information about the
Group to the public and the Stock Exchange as
required by the applicable laws, regulations and
rules incidental to the Listing, and to all
professional parties to facilitate their provision of
advice and service to (name withheld and filed
separately with the Securities and Exchange
Commission) and/or (name withheld and filed
separately with the Securities and Exchange
Commission) for the purpose of the Listing, including
without limitation, its corporate and shareholders
information, financial, business and customers
information and material contracts;
- 64 -
(d) amending and/or restructuring the Group's and/or
(name withheld and filed separately with the
Securities and Exchange Commission) memorandum,
article of association, corporate structure and
business arrangements to comply with the applicable
Listing Rules or otherwise to facilitate the collection Listing
and/or realization thereof, wepublic issue and/or placing of shares of
(name withheld and filed separately with the
Securities and Exchange Commission) incidental to the
Listing as the sponsor(s) and/or other professional
advisers appointed under sub-clause (a) above may
advise to be necessary or desirable.
The Parties hereby acknowledge that the restructuring
of the Group in preparation for the Listing may
involve inter-company transfer of assets, merger and
acquisition of new intermediary holding vehicle(s).
3.8 Final Approval. Notwithstanding the provisions of
Paragraph 3.7, the arrangements for the offering and the
timing of the Listing application shall be subject to the
prior written approval of each of the Parties.
ARTICLE FOUR
SHAREHOLDER SALES
4.1 Request for Sale. After the expiration of any lock-up
period required by the Listing Rules or agreed with the
Stock Exchange, (name withheld and filed separately with
the Securities and Exchange Commission) shall, at any time
after the Listing, upon written request from either of the
Parties, use its reasonable endeavors to dispose of such
number of shares in (name withheld and filed separately
with the Securities and Exchange Commission) as the
requesting Party may request, provided that:
(a) (name withheld and filed separately with the
Securities and Exchange Commission) shall not dispose
more than five percent (5%) of the issued share
capital of (name withheld and filed separately with
the Securities and Exchange Commission) under any
request at any time;
- 65 -
(b) (name withheld and filed separately with the
Securities and Exchange Commission) shall not made
any disposal if it has disposed of any interest in
shares in (name withheld and filed separately with
the Securities and Exchange Commission) in the ten
(10) weeks immediately preceding the date of the
request;
(c) (name withheld and filed separately with the
Securities and Exchange Commission) shall not dispose
any shares if, immediately following the disposal,
(name withheld and filed separately with the
Securities and Exchange Commission) would cease to
hold at least fifty point one percent (50.1%) of the
issued share capital of (name withheld and filed
separately with the Securities and Exchange
Commission);
(d) (name withheld and filed separately with the
Securities and Exchange Commission) shall not make
any disposal to the extent and at any time where it
is prohibited or restricted by law or applicable
rules and regulations from making such disposal and
shall comply with all applicable laws, rules and
regulations in making such disposal;
(e) (name withheld and filed separately with the
Securities and Exchange Commission) shall dispose of
such shares in the manner set out in Paragraph 4.2
below; and
(f) (name withheld and filed separately with the
Securities and Exchange Commission) shall exercise
its best endeavors to make such disposal in a manner
so as to maintain an orderly market for the shares of
(name withheld and filed separately with the
Securities and Exchange Commission).
4.2 First Offer. Provided that it raises no issues under the
Takeover Code of Hong Kong, (name withheld and filed
separately with the Securities and Exchange Commission)
shall dispose of shares in (name withheld and filed
separately with the Securities and Exchange Commission)
under Paragraph 4.1 above by:
- 66 -
(a) first offering (the "First Offer") such shares to the
Party which did not request the sale pursuant to
Clause 4.1 above (the "Non-Requesting Party");
(b) the First Offer shall be made to the Non-Requesting
Party at a price equivalent to the average closing
price less five percent (5%) for such shares on the
Stock Exchange on which they are primarily listed for
the ten (10) consecutive trading days ending on the
trading day immediately preceding the date of the
request and on which there was trading in the shares
(the "Sale Price"). Such offer shall remain open for
a minimum of three (3) working days for acceptance
(the "Offer Period") and can be accepted in whole or
in part;
(c) (name withheld and filed separately with the
Securities and Exchange Commission) shall only offer
to sell and make arrangements for the disposal of
such shares to third parties (the "Open Offer") if
and to the extent the Non-Requesting Party does not
accept or reply to the First Offer made in
subparagraph (b) above prior to the expiry of the
Offer Period;
(d) the Open Offer shall be made at a price no less than
the Sale Price; and
(e) the Open Offer shall remain open for a period of
fifteen (15) trading days (the "Open Offer Period").
If (name withheld and filed separately with the
Securities and Exchange Commission) fails to conclude
any definite agreement for the sale or placing of all
or any part of such shares during the Open Offer
Period, the request in the above Paragraph 4.1 and
the Open Offer in respect of all or such part of the
shares, as the case may be, shall both be deemed to
have your permission to:
(a) use (at your expense) your personnel, supplies, equipment,
computerslapsed.
4.3 Sales Proceeds. The net proceeds arising from the disposal
of shares in (name withheld and space,filed separately with the
Securities and Exchange Commission) under Paragraphs 4.1
and 4.2 above shall, to the extent distributable under
applicable law, be distributed to the shareholders of
(name withheld and filed separately with the Securities
and Exchange Commission) as dividends as soon as
practicable.
- 67 -
ARTICLE FIVE
1989-2001 AGREEMENTS SUPERSEDED
Upon being duly signed by both Parties, this Agreement shall
supersede the 1989-2001 Agreements and the 1989-2001 Agreements
shall cease to have legal effect. The Parties hereby waive and
release against each other and forever discharge any claims
arising out of or in connection with the 1989-2001 Agreements.
ARTICLE SIX
GENERAL PROVISIONS
6.1 Term. This Agreement shall be of unlimited duration unless
terminated by mutual agreement. Termination does not
release either Party from liability already accrued.
6.2 Breach. This Agreement may be terminated for breach. In
the event of termination for breach, the non-breaching
Party shall have all rights and remedies available at yourlaw.
6.3 Disputes. Any dispute or difference arising out of or in
connection with this Agreement shall be referred to and
determined by arbitration in Hong Kong in accordance with
the UNCITRAL Arbitration Rules in force at the date of
this Agreement. In the event of arbitration, the
appointing authority shall be the Hong Kong International
Arbitration Centre (the "HKIAC"). The place of business or elsewhere; and
(b) notify postal authoritiesarbitration
shall be in Hong Kong at the HKIAC. The language to changebe
used in the addressarbitral proceedings shall be English. Any
such arbitration shall be administered by HKIAC in
accordance with HKIAC Procedures for delivery
of your mail to such address as we may designate and to receive
and open your mail. WeArbitration. The
Parties agree to turn overexclude any right of application or
appeal to youany courts in connection with any question of
law arising in the course of the arbitration or your
representative all mail not related to the aforesaid purposes.
17.3 After the occurrence of an Event of Default which is
not waived by us, with
respect to any other property or
collateral in which we have a security interest, we shall have
all of the rights and remedies of a secured party under Article 9
of the Uniform Commercial Code. If notice of intended disposition
of any such property or collateral is required by law, it is
agreed that five (5) days notice constitutes reasonable notice.
The net cash proceeds resulting from the exercise of any of the
foregoing rights, after deducting all charges, costs and expenses
(including reasonable attorneys fees) will be applied by us to
- 67 -
the payment or satisfaction of the Obligations, whether due or to
become due, in such order as we may elect. You remain liable to
us for any deficiencies. With respect to Factor Risk Accounts and
Returned Goods relating thereto, you hereby confirm that we are
the owners thereof, and that our rights of ownership permit us to
deal with this property as owner and you confirm that you have no
interest therein.
18. MISCELLANEOUS PROVISIONS
18.1.award made.
6.4 Entire Agreement; Amendment; Waiver. This Agreement and all attendant documentation, as
the same may be amended from time to time,
constitutes the entire agreement between us with regardthe Parties
pertaining to the subject matter hereof and supersedes anyall
prior and contemporaneous agreements, representations, and
understandings of the Parties. No supplement,
modification, or understandings. Thisamendment of this Agreement canshall be
changed only by a writing signedbinding unless executed by both Parties in writing. No
waiver of us. Our failureany of the provisions of this Agreement shall be
deemed, or delay in exercising any right hereunder will notshall constitute, a waiver thereofof any other
- 68 -
provisions, whether or bar us from exercisingnot similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the Party making the waiver.
6.5 Assignment. This Agreement may not be assigned or
transferred without the prior written approval of our rights atthe
other Party and shall be binding on, and shall inure to
the benefit of, the Parties and their respective heirs,
legal representatives, successors, and assigns.
6.6 Assignment. All notices, request, demands, and other
communications under this Agreement shall be in writing,
in English, and shall be deemed to have been duly given to
a Party when received, addressed as below. A Party may
change its address for purposes of this Paragraph by
giving the other Party its written notice of the new
address in the manner set forth above.
To Universal:
Universal Security Instruments, Inc.
7-A Gwynns Mill Court
Owings Mills, Maryland 21117, U.S.A.
Telephone: 1 410 363 3000
Facsimile: 1 410 363 2218
To (name withheld and filed separately with the Securities and
Exchange Commission):
(name withheld and filed separately with the Securities and
Exchange Commission)
6.7 Savings. Should any time. The validity, interpretation and enforcementprovision of this Agreement is governed by the laws of the State of New York,
excluding the conflict laws of such State.
18.2 The Client Service Guide, as supplemented and amended
from time to time (the "Guide") has been furnished to yoube
judicially declared invalid, unenforceable, or is
being furnished to you concurrently with the signing of this
Agreement, and by your signature below you acknowledge receipt
thereof. The Guide provides information on credit approval
processes, accounting procedures and fees. The procedures for
Electronic Batch Transmission are covered in supplemental
instructions to the Guide. From time to time, we may provide you
with amendments, additions, modifications, revisions or supplements
to the Guide, which will be operative for transactions between us.
All information and exhibits contained in the Guide, on any screen
accessed by you, and on any print-outs, reports, statements or
notices received by you are, and will be, our exclusive property
and are not to be disclosed to, or used by, anyone other than you,
your employees or your professional advisors,void, in
whole or in part, unless wesuch decision shall not have consented in writing.
18.3 This Agreement binds and benefits eachthe effect
of us and our
respective successors and however, assigns, provided, that you may
not assigninvalidating or voiding the remainder of this
Agreement, and the Parties agree that the provision of
this Agreement so held to be invalid, unenforceable, or
your rights hereunder without our
prior written consent.
18.4 Section headings are for convenience onlyvoid shall be deemed to have been stricken herefrom, and
are not
controlling. The use of "including" means "including without
limitation".
18.5 Ifthe remainder shall have the same force and effect as if
such provision had never been included herein. With
respect to any provision of this Agreement declared
invalid, unenforceable or void, the Parties agree to
negotiate in good faith for the purpose of replacing such
clause, sentence or paragraph with a provision which is contraryas
near in substance as possible to prohibitedthat declared invalid,
- 69 -
unenforceable or void without itself being so declared.
6.8 Time of the Essence. Time is of the essence with respect
to all matters related to this Agreement.
6.9 Counterparts. This Agreement may be executed by or deemed invalid under applicable laws or
regulations, such provision willthe
Parties in any number of counterparts, each of which when
so executed and delivered shall be inapplicablean original but all
counterparts together shall constitute one and deemed omitted
to such extent, but the remainder will notsame
instrument.
6.10 Applicable Law. This Agreement shall be invalidated thereby
- 68 -governed by and
will be given effect so far as possible.
18.6 You shall take all action reasonably necessary to
assure that your computer-based systems are able to effectively
process date-sensitive data functions. You represent and warrant
that the "Year 2000" problem (that is, the inability of certain
computer applications to recognize and properly perform date-sensitive
functions involving certain dates on or about or
subsequent to December 31, 1999) will not result in a material
adverse effect on your business, assets, or operations. You
reasonably anticipate that all computer applications which are
material to your business will, on a timely basis, be able to
properly perform date-sensitive functions for all dates on and
after January 1, 2000. Upon our request, from time to time you
shall provide to us assurances that your computer systems and
software are or will be Year 2000 compliant on a timely basis, all
in form and substance reasonably satisfactory to us.
19. JURY TRIAL WAIVER
To the extent permitted by applicable law, we each hereby
waive any right to a trial by jury In any action or proceeding
arising directly or indirectly out of this Agreement, or any other
agreement or transaction between us or to which we are parties.
If the foregoing isconstrued in accordance with your understanding,
please so indicate by signingthe laws of Hong Kong.
6.11 Headings. The titles and returning to usheadings used in this Agreement
are for the originalconvenience of the Parties only and one copy ofshall not
be used in interpreting or construing this Agreement.
ThisIN WITNESS WHEREOF, this Agreement will take effect as ofhas been duly entered into by
the date set forthParties the day and year first above but only after being accepted below by one
of our officers in New York, after which we shall forward a fully
executed copy to you for your files.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By Steven Forleiter
Name: Steven Forleiter
Title: VP
Readwritten.
Universal Security Instruments, Inc. (name withheld and Agreed to:
USI ELECTRIC, INC.
By Harvey Grossblatt
Name: Harvey Grossblatt
Title: Secretaryfiled
separately with the
Securities and Exchange
Commission)
By: /s/ Stephen Knepper By: /s/
Stephen Knepper (name withheld and filed
Chairman and Chief Executive Officer separately with the
Securities and Exchange
Commission)
Director
- 6970 -
EXHIBIT 10.510.8
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Agreement") is made and entered into as of April 1, 2002,2003, by
and between UNIVERSAL SECURITY INSTRUMENTS, INC., a Maryland
corporation (the "Company"), and HARVEY B. GROSSBLATT (the
"Executive").
RECITALS
WHEREAS, the Company is engaged in the business of
designing, manufacturing and marketing security products (the
"Business"); and
WHEREAS, the Executive is the ExecutivePresident of the Company; and
WHEREAS, the Company desires to continue to employ the
Executive to perform services as the ExecutivePresident and Chief
Operating Officer of the company,Company, and to perform other duties
which may be assigned from time to time by the Board of
Directors of the Company (the "Board") or the Chairman of the
Board of the Company (the "Chairman") from time to time at its
discretion;
WHEREAS, the Company and Executive entered into an
Employment Agreement dated as of April 1, 2002, as amended by
Addendum to Employment Agreement dated October 21, 2002 (the
"Original Agreement");
WHEREAS, the parties desire to set forthextend the term of the
Original Agreement, amend certain other provisions of the
Original Agreement to be effective from and after April 1, 2003,
and in writingfurtherance thereof, the termsparties have agreed to amend and
conditions of their agreement and
understanding.restate the Original Agreement.
NOW, THEREFORE, in consideration of the foregoing, the
mutual promises herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree that the Original
Agreement is hereby amended and restated in its entirety as
follows:
- 71 -
1. Employment.
(a) Agreement to Employ. Upon the terms and
subject to the conditions of this Agreement, the Company shall
hereby employ the Executive and the Executive hereby agrees to be
employed by Company.
(b) Term of Employment. Subject to Section 7, the
Company shall employ the Executive pursuant to the terms hereof
for the period commencing as of the date hereof and ending on
the
day immediately preceding the third anniversary of the date
hereofJuly 31, 2008 (the "Term"). The period during which the Executive
is employed pursuant to this Agreement, including any renewal
thereof shall be referred to as the "Employment Period."
- 70 -
2. Position and Duties. During the Employment Period,
the Executive shall serve as, and have responsibilities and
authority consistent with the position of, President and Chief
Operating Officer of the Company, which shall be subject to the
discretion of the Board. The Executive shall diligently and
conscientiously devote his full and exclusive business time and
attention and best efforts in discharging his duties. The
Company shall provide appropriate office space and services to
allow the Executive to discharge his duties, consistent with
policies established by the Board from time to time.
3. Compensation.
(a) Salary. The Company shall initially pay the
Executive an annual base salary ("Annual Base Salary") of
$122,500.00.$180,000. The Annual Base Salary during any year of the
Employment Period shall be an amount determined by the Board.
The Annual Base Salary shall be subject to periodic review at
least annually by the Board or by a committee established by the
Board for increases based on the policies of the Company in
effect from time to time. There shall be a minimuman annual increase in
the Annual Base Salary, effective as of each anniversary date of
this Agreement, equal to or any increase, up to 4%, in the Consumer
Price Index for the Greater Baltimore Area (as determined by the
U.S. Bureau of Labor Statistics) for the immediately preceding
four calendar quarters.quarters (the "COL Adjustment"). Once established,
the Annual Base Salary shall not be reduced without the prior
written consent of the Executive. The Annual Base Salary shall
be payable according to the Company's regular payroll practices
and shall be subject to all applicable federal, state and local
withholding taxes.
- 72 -
(b) Bonus.
(i) In addition to the Annual Base Salary,
the Executive shall receive an annual bonus equal to the amount
determined pursuant to Exhibit A attached hereto and incorporated
herein by reference ("Bonus"), which shall be paid by the Company
within 12030 days afterfollowing the endfiling with the United States
Securities and Exchange Commission of the Company's Annual Report
on Form 10-K for the fiscal year with respect to which itthe Bonus
is earned. The Bonus shall be deemed fully earned by the
Executive with respect to any fiscal year of the Company during
which the Executive has been employed by the Company for 60 days.at least
nine months. The Bonus shall be subject to all applicable
federal, state and local withholding taxes.
(ii) To the extent the Company reports
income from both its domestic operations (currently shown
on the Company's annual consolidated statements of
operations as "Operating income") and Hong Kong Joint Venture
(currently shown on the Company's annual consolidated
statements of operations as "Equity in earnings of Hong Kong
joint venture"), the Bonus expense shall be allocated between
such two components in the respective proportions as such
components bear to the consolidated Net Income (currently shown
on the Company's annual audited consolidated statements of
operations).
(c) Stock Options. In addition to the Annual Base
Salary and any Bonus, the Executive shall be eligible to
receive grants of options to acquire shares of the Company's
Common Stock, as may be granted from time to time by the Board or
a committee thereof. EffectiveThe parties acknowledge that on the
effective date hereof,of the Original Agreement, the Board hereby
- 71 -
grantsgranted to
the Executive options to purchase 20,000 shares of the Company's
Common Stock, at an exercise price of $4.50 per share,
exercisable immediately, pursuant to the Company's Non-Qualified
Stock Option Plan.
4. Benefits. During the Employment Period, the Company
shall provide the Executive with the following benefits:
- 73 -
(a) Participation by the Executive, and his wife
and dependant children in any group health plans sponsored or
arranged by the Company for its employees. The full amount
of all premiums for such insurance will be paid by the Company.
In the event the Executive declines or is ineligible to
participate in such group health plans, the Company shall pay to
the Executive, no less frequently than quarterly, additional
compensation equal to the amount of such premiums which the
Company would have paid for such period had the Executive
accepted such participation for himself, his wife and dependant
children. Nothing herein shall obligate the Company to continue
any health plan currently offered to employees or offered to
employees in the future. The Executive agrees to cooperate with
the Company and to take all steps reasonably necessary to assist
the Company in obtaining such insurance. The Executive
represents that he currently has no significant health condition
which would make it commercially unreasonable to obtain such
insurance.
(b) Participation in any retirement plans, disability
income insurance and term life insurance policies sponsored or
arranged by the Company for its employees from time to time.
Nothing herein shall obligate the Company to continue any plan or
policy currently offered to employees or offered to employees in
the future.
(c) For each calendar year during the Term, the
Company shall contribute the maximum amount permitted by
applicable law on behalf of the Executive to the Company's 401(k)
Plan. The Executive shall be entitled to the full amount of this
benefit with respect to any fiscalcalendar year of the Company during which the
Executive has been employed by the Company for at least 60 days.
(d) FourThree weeks per year of paid vacation time
plus sick leave and personal leave in accordance with the
Company's policies for senior executive officers. The Executive
shall be entitled to the full amount of this benefit with respect
to any fiscal year of the Company during which the Executive has
been employed by the Company for 60 days.
- 72 -
(e) Use of a Company owned or leased automobile
or, at the Executive's option, an automobile payment allowance of
$800 per month, andmonth. In addition, the Company shall pay for the
insurance, fuel and service for such automobile.
- 74 -
(f) All costs and expenses of a mobile phone for
the Executive's use in connection with the performance of his
duties, in accordance with the terms and conditions that the
Board shall determine from time to time.
(g) In addition to the benefit provided under
Section 4(a), reimbursement up to a maximum of $25,000 per annum
for expenses incurred by the Executive, his wife and dependant
children for medical, dental, optical and long-term care and
prescription drugs, or third-party payor coverage therefor, which
are not reimbursable under any medical coverage for which the
premiums are paid by the Company. This amount shall be increased
annually by an amount equal to the then-current medical expense
reimbursement benefit multiplied by the COL Adjustment. All
requests by the Executive for such reimbursement must be in
writing accompanied by receipts for such amounts.
(h) Participation in the Company's Cafeteria
Plan/Flexible Spending Plan.
(i) Any other group employee benefit plans or
programs to the extent that he is qualified under the
requirements relating to participation in any such plan or
program.
5. Business Expenses. The Company shall pay or reimburse
the Executive for business expenses incurred by the Executive
during the Employment Period in connection with his employment.
6. Termination of Employment. Executive's employment
will be terminated in accordance with Sections 6(a), or may be
terminated in accordance with Sections 6(b) - (c)(e), as follows:
(a) Upon the last day of a Term.
(b) By the Company for "Cause". For the purpose
of this Section, "Cause" shall mean a determination by a court of
competent jurisdiction that:
(i) The Executive committed a willful act
against the interest of the Company resulting in material harm to
the Company's interests; or
- 75 -
(ii) The Executive committed a material act
of dishonesty or fraud against the Company, unless it is
determined by such court that the Executive acted in a manner
which he believed, in good faith, to be in the interest of
the Company.
- 73 -
(c) By the Executive after 15-days written notice
to the Company of the Company's material breach of this Agreement
unless the Company cures such breach during such notice period.
If the Executive terminates employment hereunder, the Executive's
employment shall be deemed to have been terminated by the Company
without Cause.
(d) Upon the death of the Executive, or by the
Company if the Executive is Permanently Disabled (as hereafter
defined). For purposes of this Agreement, the term "Permanently
Disabled" or "Permanent Disability" shall mean (i) becoming
permanently disabled as provided in any permanent disability
income policy provided by the Company under this Agreement
insuring the Executive or (ii) in the absence of any such
disability income policy, the inability for a period of six
consecutive months, with reasonable accommodation, due to a
mental or physical injury, illness or disorder, of Executive to
provide substantially all of the services required pursuant to
this Agreement to be provided by Executive. Whether or not
Executive is Permanently Disabled under subsection (ii) shall
be determined by a medical doctor agreed to by Company and
Executive. If Company and the Executive cannot agree on such
a medical doctor, they shall each, at their own expense,
designate an unrelated medical doctor and such medical doctors
shall in turn designate a third unrelated medical doctor, whose
fee shall be shared equally by Company and Executive. Such
medical doctor(s) shall determine whether Executive is
Permanently Disabled and shall also determine the date of the
commencement and termination, if any, of such Permanent
Disability. Such determinations (whether made by unanimous or
majority vote of the medical doctors) shall be binding on the
parties hereto. If any party (the "Second Party") fails to
select its medical doctor within 30 days after written notice
from the other party (the "First Party") of the appointment of
the First Party's medical doctor, then the First Party's medical
doctor shall determine whether Executive is Permanently Disabled
and shall also determine the date of the commencement and
termination, if any, of such Permanent Disability.
- 76 -
(e) By the Executive on 30 days advance written
notice at any time within 24 months following a "Change of
Control", as defined in Exhibit B attached hereto and
incorporated herein by reference (a "Change of Control").
- 74 -
7. Effect of Termination.
(a) In the event that Executive's employment is
terminated for any reason, Executive shall be paid on the payroll
date next following the date of termination, all compensation,
and reimbursement of all expenses, for the applicable Term
accruing through the effective date of termination of employment.
(b) In the event of the termination of the
Executive's employment hereunder by the Company for any reason other than
pursuant to Sections 6(a), 6(b) or 6(d)Section 6(c), the
Executive shall be entitled to receive in addition to the payment
under Section 7(a):
(i) A lump sum severance payment in an
amount equal to the Annual Base Salary for the balance of the
Term plus the amount of the last Bonus, payable concurrently with
the delivery by the Company to the Executive of the written
notice of termination, and, on the date on which the Term
would have expired, a lump sum severance payment in an amount
equal to two times the previous 12 months' Annual Base Salary and
last Bonus, in each instance subject to all applicable federal,
state and local withholding taxes; and
(ii) For the balance of the Term and a
period of three years following the end of the Term, the benefits
set forth in Sections 4(a) and 4(g).
(c) In the event the Executive's employment is
terminated by the Company or its successor following or in
anticipation of a Change of Control, or in the event the
Executive's employment is terminated by the Executive pursuant to
Section 6(e) above, the Executive shall be entitled to receive in
addition to the payment under Section 7(a):
- 77 -
(i) A lump sum severance payment in an
amount equal to (A) the Annual Base Salary for the balance of the
Term, (B) the amount of the last Bonus, and (C) three times the
previous 12 months' Annual Base Salary and last Bonus, payable
concurrently with the delivery by the Company or its successor to
the Executive of the written notice of termination or within 30
days following termination by the Executive, as the case may be,
subject to all applicable federal, state and local withholding
taxes; and
- 75 -
(ii) For a period of three years following
the end of the Term of this Agreement, the benefits set forth in
Sections 4(a) and 4(g); provided, however, the aggregate present
value of payments pursuant to this Section 7(c) (plus any
payments under any other plan of the Company and its
affiliates which are contingent on a change of control),
determined in accordance with Section 280G of the Internal
Revenue Code of 1986, as amended, or any corresponding provision
of any succeeding law, may not exceed 2.99 times the Executive's
average annual taxable compensation from the Company or its
affiliates which is included in the Executive's gross income for
the five taxable years of the Company ending before the date on
which the change of control occurs.
(d) In the event the Executive's employment is
terminated pursuant to Section 6(d), the Executive (or his
estate) shall be entitled to receive in addition to the payment
under Section 7(a):
(i) The continuation of the payment of the
Executive's then current Annual Base Salary for the balance of
the Term, reduced, in the event of the Executive's death, by any
individual life insurance benefits the premiums for which are
paid for by the Company, and in the event of the Executive's
Permanent Disability, by any group or individual disability
income insurance benefits the premiums for which are paid for by
the Company.Company and Social Security disability benefits paid to the
Executive. The net amount payable hereunder shall be paid
according to the Company's regular payroll practices, subject to
all applicable federal, state and local withholding taxes; and
- 78 -
(ii) The continuation of the benefits set
forth in Sections 4(a) and 4(g) for the longer of (A) the balance
of the Term, or (B) three years following the date of the
Executive's death or Permanent Disability; provided, however,
that if the terms of the group health plans sponsored or arranged
by the Company for its employees limit the length of time during
which the benefit set forth in Section 4(a) may be provided, the
Company shall pay to the Executive (or his estate) with respect
to any period during which such benefit may not be provided, no
less frequently than quarterly, a sum equal to the amount of the
premiums which the Company would have paid for such period had
the benefit set forth in Section 4(a) continued.
8. Company Obligations. The amounts payable to the
Executive pursuant to Section 7 following termination of his
employment shall be in addition to any rights the Executive may
have with respect to previously granted stock options and any
rights the Executive may have arising from claims of breaches by
the Company of the terms of this Agreement.
- 76 -
9. Restrictive Covenants.
(a) Noncompetition. During the Employment Period
and any additional period during which the Executive receives
compensation from the Company pursuant to Section 7, the
Executive will not directly or indirectly, either as principal,
agent, employee, or in any other capacity, enter into or engage
in any business in which the Company is engaged during the Term
hereof.
(b) CONFIDENTIALITY. DURING THE EMPLOYMENT PERIOD
AND AT ALL TIMES AFTER THE TERMINATION OF THIS AGREEMENT FOR ANY
REASON, THE EXECUTIVE WILL NOT DISCLOSE TO ANY THIRD PARTY ANY
TRADE SECRETS, CUSTOMER LISTS OR OTHER CONFIDENTIAL INFORMATION
PERTAINING TO THE BUSINESS.
(c) Company Property. Promptly following the
Executive's termination of employment for any reason, the
Executive shall return to the Company all property of such
entity, and originals and any copies thereof in the Executive's
possession or under his control, including all confidential
information and trade secrets, in whatever media or in whatever
form.
- 79 -
(d) Nonsolicitation of Employees. During the
Employment Period and any additional period during which the
Executive receives compensation from the Company pursuant to
Section 7, the Executive shall not directly or indirectly induce
any management or supervisor-level employee of the Company or any
of its affiliates to terminate employment with such entity, and
will not directly or indirectly, either individually or as owner,
agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or
a subsidiary thereof as a management or supervisor-level employee
unless such person shall have ceased to be employed by such
entity for a period of at least three months.
(e) INJUNCTIVE RELIEF WITH RESPECT TO COVENANTS.
THE EXECUTIVE ACKNOWLEDGES AND AGREES THAT THE COVENANTS AND
OBLIGATIONS OF THE EXECUTIVE WITH RESPECT TO NONCOMPETITION,
NONSOLICITATION, CONFIDENTIALITY AND COMPANY PROPERTY RELATE TO
SPECIAL, UNIQUE AND EXTRAORDINARY MATTERS AND THAT A VIOLATION OF
ANY OF THE TERMS OF SUCH COVENANTS AND OBLIGATIONS WILL CAUSE THE
COMPANY AND ITS SUBSIDIARIES IRREPARABLE INJURY FOR WHICH
ADEQUATE REMEDIES ARE NOT AVAILABLE AT LAW. THEREFORE, THE
EXECUTIVE AGREES THAT THE COMPANY AND ITS SUBSIDIARIES SHALL BE
ENTITLED TO AN INJUNCTION, RESTRAINING ORDER OR SUCH OTHER
- 77 -
EQUITABLE RELIEF AS A COURT OF COMPETENT JURISDICTION MAY DEEM
NECESSARY OR APPROPRIATE TO RESTRAIN THE EXECUTIVE FROM
COMMITTING ANY VIOLATION OF THE COVENANTS AND OBLIGATIONS
CONTAINED IN THIS SECTION. THESE INJUNCTIVE REMEDIES ARE
CUMULATIVE AND ARE IN ADDITION TO ANY OTHER RIGHTS AND REMEDIES
THE COMPANY OR ITS SUBSIDIARIES MAY HAVE AT LAW OR IN EQUITY. IN
THE EVENT (I) THE ENFORCEABILITY OF ANY OF THE COVENANTS
CONTAINED IN THIS SECTION IS CHALLENGED BY EXECUTIVE IN ANY
JUDICIAL PROCEEDING, (II) EXECUTIVE IS NOT ENJOINED IN SUCH
PROCEEDING FROM BREACHING SUCH COVENANT, AND (III) EXECUTIVE
DOES, IN FACT BREACH SUCH COVENANT, THEN, IF A COURT OF COMPETENT
JURISDICTION DETERMINES THAT THE CHALLENGED COVENANT IS
ENFORCEABLE, THE TIME PERIOD SET FORTH IN SUCH COVENANT SHALL BE
DEEMED TOLLED UPON THE INITIATION OF SUCH PROCEEDING UNTIL THE
DISPUTE IS FINALLY RESOLVED AND ALL PERIODS OF APPEAL HAVE
EXPIRED.
- 80 -
10. Miscellaneous.
(a) Binding Effect. This Agreement shall be
binding on the Company and any person or entity which succeeds to
the interest of the Company (regardless of whether such
succession occurs by operation of law, by reason of the sale of
all or a portion of the Company's stock or assets or a merger,
consolidation or reorganization involving the Company). This
Agreement shall also inure to the benefit of the Executive's
heirs, executors, administrators and legal representatives.
(b) Assignment. Neither this Agreement nor any of
the rights or obligations hereunder shall be assigned or
delegated by either party hereto without the prior written
consent of the other party.
(c) Entire Agreement. This Agreement supersedes
any and all prior agreements between the parties hereto, and
constitutes the entire agreement between the parties hereto with
respect to the matters referred to herein, and no other
agreement, oral or otherwise, shall be binding between the
parties unless it is in writing and signed by the party against
whom enforcement is sought. There are no promises,
representations, inducements or statements between the parties
other than those that are expressly contained herein. THE
EXECUTIVE ACKNOWLEDGES THAT HE IS ENTERING INTO THIS AGREEMENT OF
HIS OWN FREE WILL AND ACCORD, AND WITH NO DURESS, THAT HE HAS
READ THIS AGREEMENT AND THAT HE UNDERSTANDS IT AND ITS LEGAL
CONSEQUENCES. No parol or other evidence may be admitted to
alter, modify or construe this Agreement, which may be changed
only by a writing signed by the parties hereto.
- 78 -
(d) Severability; Reformation. In the event that
one or more of the provisions of this Agreement shall become
invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained
herein shall not be affected thereby. In the event any of Section
9(a), (b), (c), (d) or (e) is not enforceable in accordance with
its terms, the Executive and the Company agree that such Section,
or such portion of such Section, shall be reformed to make it
enforceable in a manner which provides the Company the maximum
rights permitted under applicable law.
- 81 -
(e) Waiver. Waiver by either party hereto of any
breach or default by the other party of any of the terms of this
Agreement shall not operate as a waiver of any other breach or
default, whether similar to or different from the breach or
default waived. No waiver of any provision of this Agreement
shall be implied from any course of dealing between the
parties hereto or from any failure by either party hereto to
assert its or his rights hereunder on any occasion or series of
occasions.
(f) Notices. Any notice required or desired to be
delivered under this Agreement shall be in writing and shall be
delivered personally, by courier service, by registered mail,
return receipt requested, or by telecopy and shall be effective
upon dispatch to the party to whom such notice shall be directed,
and shall be addressed as follows (or to such other address as
the party entitled to notice shall hereafter designate in
accordance with the terms hereof):
If to the Company: Universal Security Instruments, Inc.
7-A Gwynns Mill Court
Owings Mills, Maryland 21117
Fax (410) 363-2218
Attention: Chairman of the Board
If to the Executive: Harvey B. Grossblatt
28 Westspring Way
Lutherville, Maryland 21093
(g) Amendments. This Agreement may not be
altered, modified or amended except by a written instrument
signed by each of the parties hereto.
(h) Headings. Headings to sections in this
Agreement are for the convenience of the parties only and are not
intended to be part of or to affect the meaning or interpretation
hereof.
- 79 -
(i) Counterparts. This Agreement may be executed
in counterparts, each of which shall be deemed an original but
both of which together shall constitute one and the same
Agreement.
- 82 -
(j) Withholding. Any payments provided for herein
shall be reduced by any amounts required to be withheld by the
Company from time to time under applicable federal, state or
local income or employment tax laws or similar statutes or other
provisions of law then in effect.
(k) Governing Law. This Agreement shall be
governed by the laws of the State of Maryland, without reference
to principles of conflicts or choice of law under which the law
of any other jurisdiction would apply.
(l) Context. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the
singular, to the singular include the plural, to the part include
the whole, and to the male gender shall also pertain to the
female and neuter genders and vice versa. The term "including"
is not limiting, and the term "or" has the inclusive meaning
represented by the phrase "and/or". The words "hereof,"
"herein," "hereby", "hereto", "hereunder" and similar terms in
this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement. Section and Exhibit and
clause references are to this Agreement unless otherwise
specified.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officer and the Executive has
hereunto set his hand as of the day and year first above written.
WITNESS: THE COMPANY:
UNIVERSAL SECURITY INSTRUMENTS, INC.
/s/_________________________ By: /s/ Stephen Knepper
Stephen Knepper
Chairman of the Board
THE EXECUTIVE:
/s/_________________________ /s/ Harvey B. Grossblatt
Harvey B. Grossblatt
- 8083 -
EXHIBIT A
BONUS FORMULA
For purposes of the Bonus calculation, the Company's
"Pre-Tax Net Income" with respect to any fiscal year means the
amount of net income before income taxes and before Bonus
calculation which will be reported by the Company in its annual
audited consolidated financial statements with respect to such
fiscal year.
With respect to any fiscal year of the Company in which the
Company has achieved at least $100,000Pre-Tax Net Income, the amount of Pre-Tax
Net Income equal to 8% of shareholders' equity as of the start of
the fiscal year shall be excluded from the Bonus calculation (the
"Bonus Threshold"). Thereafter, the Executive shall be entitled
to receive as a Bonus an amount equal to the aggregate of the
percentages of such Pre-Tax Net Income in excess of the Bonus
Threshold, as specified below:
On all portions of Pre-Tax Net Income up to and including $1 million 5%3%
On all portions of Pre-Tax Net Income from over
$1 million up to and including $2 million 4%
On all portions of Pre-Tax Net Income from over
$2 million up to and including $3 million 3%5%
On all portions of Pre-Tax Net Income from over
$3 million up to and including $4 million 6%
On all portions of Pre-Tax Net Income over $3$4 million 1%7%
- 8184 -
EXHIBIT B
CHANGE OF CONTROL
For the purposes of this Agreement, a "Change of Control"
means the occurrence of any one or more of the following events,
provided that the Chief Executive Officer of the Company as of
the date of this Agreement either exercises his/her rights under
a Change of Control pursuant to his/her employment agreement with
the Company, or consents to the exercise by the Executive:
(i) The acquisition or attainment of "beneficial
ownership" by a person or entity, including any "group", as such
terms are defined under Section 13(d) of the Securities Exchange
Act of 1934, including any of the equity owners of the Company as
of the date hereof, of 50% or more (on a primary and not a fully
diluted basis) of the outstanding common equity of the Company. *
(ii) The sale or other disposition of all or
substantially all of the assets of the Company in one transaction
or a series of transactions (other than financing arrangements).,
unless approved by the Board.
(iii) A merger, consolidation or share exchange
involving the Company and any other person or entity, including
any of the equity owners as of the date hereof, in which the
Company or one of its subsidiaries is not the surviving entity.entity,
unless approved by the Board.
(iv) Any other "business combination" (as defined
in Section 3-601(e) of the Maryland General Corporation Law)
involving the Company and any person or entity, including any of
the equity owners as of the date hereof, whether or not such
person or entity is an "interested stockholder" under that
statute.statute, unless approved by the Board.
(v) The deadlock of the Board with respect to the
management of the Company's affairs that a majority vote for
action by the Board cannot be obtained either within a reasonable
time or, if shorter, for two consecutive Board meetings.
- 85 -
(vi) The filing by the Company or any other party
with the Securities and Exchange Commission ("SEC") of proxy
materials with respect to the election to the Board of
individuals other than those nominated by the Board and who, if
elected would constitute, together with other directors serving
on the Board who were not nominated by the Board, a majority of
the Board.
(vii) The filing by any party or group (other than
the Executive or a group which includes the Executive) with the
SEC of information disclosing the plan or proposal of such party
or group to accomplish any of the following:
- 82 -
1. The acquisition by such party or group of
additional securities of the Company
which, if accomplished, would result in
the occurrence of the event(s) specified
in paragraphs (i) or (ii), above;
2. An extraordinary corporate transaction,
such as a merger, reorganization or
liquidation, involving the Company or any
of its subsidiaries;
3. A sale or transfer of a material amount of
assets of the Company or any of its
subsidiaries (other than financing
arrangements);
4. Any change in the present Board or
management of the Company, including any
plans or proposals to change the number or
term of directors or to fill any existing
vacancies on the Board;
5. Changes in the Company's charter, bylaws
or instruments corresponding thereto or
other actions which may impede or advance
the acquisition of control of the Company
by any person;
- 86 -
6. Causing a class of securities of the
Company to be delisted from a national
securities exchange or to cease to be
authorized to be quoted in an inter-dealer
quotation system sponsored or maintained
by a registered national securities
association;
7. A class of equity securities of the
Company becoming eligible for termination
of registration pursuant to Section
12(g)(4) of the Securities Exchange Act of
1934, as amended; or
8. Any action similar to any of those
enumerated above.
* For purposes of this definition, the transfer in a single
or series of transactions of 30% or more of the voting control of
any equity owner of the Company shall be deemed to be a transfer
of beneficial ownership of the common equity of the Company owned
by such equity owner.
- 83-87 -
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration
Statement of Universal Security Instruments, Inc. and
subsidiaries on Form S-8 (No. 333-81930 dated February 1, 2002)
pertaining to the Non-Qualified Stock Option Plan as Amended,
Registration Statements on Form S-8 (No. 2-83323 dated May 4,
1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April
13, 1988) pertaining to the Non-
QualifiedNon-Qualified Stock Option Plan and
in the Registration Statement on Form S-8 (No. 33-21225 dated
April 13, 1988) pertaining to the 1988 Employee Stock Purchase
Plan, of our report dated May 31, 2002,June 13, 2003, included in the Annual
Report of Universal Security Instruments, Inc. and subsidiaries
on Form 10-K for the year ended March 31, 20022003 filed with the
Securities and Exchange Commission.
GRANT THORNTON LLP
Baltimore, Maryland
May 31, 2002June 13, 2003
- 8488 -
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-81930 dated February 1, 2002)
pertaining to the Non-Qualified Stock Option Plan as Amended,
Registration Statements on Form S-8 (No. 2-83323 dated May 4,
1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April
13, 1988) pertaining to the Non-
QualifiedNon-Qualified Stock Option Plan and
in the Registration Statement on Form S-8 (No. 33-21225 dated
April 13, 1988) pertaining to the 1988 Employee Stock Purchase
Plan of our report dated June 14, 2002May 9, 2003 with respect to the
consolidated financial statements of The Joint Venture (Name
withheld and filed separately with the Securities and Exchange
Commission), included in the Annual Report (Form 10-K) of
Universal Security Instruments, Inc. for the year ended March 31,
2002,2003, filed with the Securities and Exchange Commission.
ErnstERNST & YoungYOUNG
Hong Kong
June 25,23, 2003
- 89 -
EXHIBIT 99.1
RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Stephen C. Knepper, certify that:
1. I have reviewed this Annual Report on Form 10-K of
Universal Security Instruments. Inc.;
2. Based on my knowledge, this Annual Report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and
other financial information included in this Annual Report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of, and
for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this Annual report is being prepared;
b) evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this Annual Report (the
"Evaluation Date"); and
c) presented in this Annual Report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
- 90 -
5. The Registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have
indicated in this Annual Report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: June 26, 2003 /s/ Stephen C. Knepper
Stephen C. Knepper
Chief Executive Officer
- 91 -
EXHIBIT 99.2
RULE 15d-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Harvey Grossblatt, certify that:
1. I have reviewed this Annual Report on Form 10-K of
Universal Security Instruments. Inc.;
2. Based on my knowledge, this Annual Report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and
other financial information included in this Annual Report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of, and
for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this Annual report is being prepared;
b) evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this Annual Report (the
"Evaluation Date"); and
c) presented in this Annual Report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
- 92 -
5. The Registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have
indicated in this Annual Report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: June 26, 2003 /s/ Harvey Grossblatt
Harvey Grossblatt
Chief Financial Officer
- 93 -
Exhibit 99.3
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Universal Security
Instruments, Inc. (the "Company") on Form 10-K for the period
ending March 31, 2003 as filed with the Securities and Exchange
Commission and to which this Certification is an exhibit (the
"Report"), the undersigned hereby certify, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in this Form 10-K fairly
presents, in all material respects, the financial
condition and result of the Company as of, and for,
the periods reflected therein.
Date: June 26, 2003 /s/ Stephen C. Knepper
Stephen C. Knepper
Chairman,
Chief Executive Officer
/s/ Harvey B. Grossblatt
Harvey B. Grossblatt
President,
Chief Financial Officer
- 8594 -
EXHIBIT 99.4
June 26, 2003
Dear Partners/Shareholders:
I am very pleased to have an opportunity to share with you our
results for the fourth quarter and fiscal year ended March 31,
2003. The first full fiscal year under our new leadership team
has been one of important operational progress and top and
bottom-line success.
While many factors have contributed to our growth of the past
year, overall we must credit a Company-wide commitment to strong
execution of our strategic plan. In late 2001, we were determined
to return to our roots as an aggressive, innovative Company that
puts the customer first. We focused on building market share
across the board, developing new products and becoming more
service-driven and efficient.
Our financial performance reflects the results of this focus. For
the quarter, sales rose 48% to $3,859,238 versus $2,606,831 a
year ago while earnings increased to $519,883 or $0.46 per basic
share, ($.42 per diluted share), versus last year's $139,290, or
$0.14 per basic share ($0.13 per diluted share). As the fourth
quarter is typically our softest, we are very encouraged by these
results and our momentum heading into the first quarter.
For our fiscal year, earnings were $2,400,318, or $2.23 per basic
share, ($2.05 per diluted share), the highest in your Company's
history, versus last year's $261,625, or $0.28 per basic share
and diluted share, and a sales increase for the 12 months of 52%
to $15,953,883 versus $10,480,829 for the same period a year ago.
I cannot point to just one operational area as the reason for our
progress this year. We have seen domestic market share growth in
our wholesale and electrical distribution business. Our
50-percent-owned Hong Kong joint venture continues to provide us
with outstanding manufacturing in a highly efficient manner. Our
joint venture is also performing well in expanding sales in
international markets and continues to explore new markets.
In addition, new products such as our smoke alarms with
side-loading battery drawer and carbon monoxide alarms have been
introduced to our marketplace. We expect to continue to introduce
other new products this year.
- 95 -
Looking back over the past four quarters, our story has been
remarkably consistent despite an unpredictable economy. While our
progress has been good, be assured we will continue to focus on
building our business and generating shareholder value for the
long term. Universal has worked hard over the past year and is
well positioned to take advantage of the opportunities we see in
the market.
As always, should you have any questions, please don't hesitate
to contact me. Thank you for your continued support.
Respectfully,
Stephen C. Knepper
Chairman
_________________________________________________________________
Statements contained in this document that are not historical
facts are forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Although
UNIVERSAL SECURITY INSTRUMENTS, INC. believes that the
expectations reflected in such forward-looking statements are
reasonable, the forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ
materially from those projections.
- 96 -
EXHIBIT 99.4
For Immediate Release
Contact: Harvey Grossblatt, President
Universal Security Instruments, Inc.
410-363-3000, Ext. 224
or
Don Hunt, Jeff Lambert
Lambert, Edwards & Associates, Inc.
616-233-0500
Universal Security Instruments Announces Sharply Higher
Sales & Earnings For Fourth Quarter and Fiscal Year
Annual Sales Increase 52%; Earnings Per Share Rise to
$2.23 Vs. $0.28
OWINGS MILLS, MD, June 26, 2003: Universal Security Instruments,
Inc. (OTC-BB: USEC) today announced significant sales and
earnings growth for the fourth quarter and fiscal year ended
March 31, 2003. The Company cited continued market share
expansion, successful new product launches and solid growth at
its Hong Kong joint venture.
The Owings Mills, MD-based designer and marketer of safety and
security equipment reported fourth quarter net earnings rose to
$519,883, or $0.46 per basic share ($0.42 per diluted share), and
sales rose 48% to $3,859,238, compared with net earnings of
$139,290, or $0.14 per basic share (0.13 per diluted share), and
sales of $2,606,831 for last year's fourth quarter.
For the 12 months ended March 31, 2003 sales rose 52% to
$15,953,883, versus $10,480,829 for the same period last year.
The Company reported net earnings rose to $2,400,318, or $2.23
per basic share ($2.05 per diluted share), compared to net
earnings of $261,625, or $0.28 per basic and diluted share, for
the same period last year.
The Company said the annual results, the best in Universal's
33-year history, reflect consistent performance, efficiency and
growth in all areas of the Company's business. The Company's
50-percent-owned Hong Kong manufacturing joint venture continues
to focus on outstanding quality and efficiency and has expanded
sales in international markets as it continues to explore new
opportunities. In addition, the Company's wholesale and
electrical distribution businesses have increased their domestic
market share.
- 97 -
"We are very pleased with our results for the fourth quarter and
fiscal 2003. As the fourth quarter is traditionally one of the
softest periods for our industry, it was highly rewarding to
close our year on such a positive note. We have aggressively
gained market share across the board, introduced new products and
kept costs in check," said Harvey Grossblatt, President and Chief
Operating Officer of Universal Security Instruments, Inc.
"Looking back over the past 12 months, it is clear that the plan
we began implementing in late 2001 to improve all levels of our
operation has taken hold. While aggressively pursuing the many
opportunities present in our markets today, we have not lost our
focus on remaining efficient, service-oriented and
quality-driven. Gross margins rose 16% from 27% to 31% during the
past year, sales per employee are up and customer retention and
satisfaction are strong. We are very enthusiastic about the work
that's been done this year and believe we are well-positioned
heading into 2004," Grossblatt added.
UNIVERSAL SECURITY INSTRUMENTS, INC., founded in 1969, is a
Maryland-based manufacturer and worldwide marketer of safety and
security products directly and through its 50%-owned Hong Kong
joint venture.
-- more --
- 98 -
Universal/Page 2
UNIVERSAL SECURITY INSTRUMENTS, INC.
ANNOUNCES RESULTS FOR THE
FOURTH QUARTER ENDED MARCH 31:
UNAUDITED
2003 2002
Sales $3,859,238 $2,606,831
Net income* 519,883 139,290
Income per share:
Basic .46 .14
Diluted .42 .13
Weighted average number of
common shares outstanding:
Basic 1,121,191 999,562
Diluted 1,248,880 1,055,769
RESULTS FOR THE FISCAL YEAR ENDED MARCH 31:
AUDITED
2003 2002
Sales $15,953,883 $10,480,829
Net income* 2,400,318 261,625
Income per share:
Basic 2.23 .28
Diluted 2.05 .28
Weighted average number of
common shares outstanding:
Basic 1,075,079 938,624
Diluted 1,171,309 945,770
*Due to the tax benefit carryforward of prior years' operating
losses, no tax liability was incurred.
OTC:USEC
- 99 -
Statements contained in this press release that are not
historical facts are forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995.
Although UNIVERSAL SECURITY INSTRUMENTS, INC. believes that the
expectations reflected in such forward-looking statements are
reasonable; the forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ
materially from those projections.
- 100 -
Audited Financial Statements
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
31 March 20022003
- 86101 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONTENTS
Pages
REPORT OF INDEPENDENT AUDITORS 88103
AUDITED FINANCIAL STATEMENTS
Consolidated profit and loss account 89104
Consolidated balance sheet 90-91105
Consolidated statement of changes in equity 106
Consolidated cash flow statement 92107-109
Notes to consolidated financial statements 94-108110-127
- 87102 -
Report of Independent Auditors
To the board of directors
THE JOINT VENTURE ((NAME(NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION)(name withheld and filed separately with the Securities and
Exchange Commission) (the "Company") and its subsidiaries as of
31 March 20022003 and 2001,2002, and the related consolidated profit and
loss accounts, consolidated statements of changes in equity and
cash flows for each of the two years in the period ended 31 March
2002.2003. 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 auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provideprovides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of 31
March 20022003 and 2001,2002, and the consolidated results of their
operations and their cash flows for each of the two years in the
period ended 31 March 20022003 in conformity with accounting
principles generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in
certain significant respects from accounting principles generally
accepted in the United States of America. Application of
generally accepted accounting principles in the United States of
America would not have had a significant effect on the
consolidated results of operations of the Company and its
subsidiaries for each of the two years in the period ended 31 March 20022003 and
the financial position of the Company and its subsidiaries as of
31 March 20022003 and 2001.2002.
Ernst & Young
Hong Kong
14 June 20029 May 2003
- 88103 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
YearsYear ended 31 March 2002 and 20012003
Notes 2003 2002 2001
HK$ HK$
TURNOVER 4 182,256,085 88,449,887 46,928,800
Cost of sales (120,864,232) (59,632,260) (36,811,248)
Gross profit 61,391,853 28,817,627 10,117,552
Other revenue 4 1,221,670 1,345,281 1,900,140
Administrative and
operating expenses ( 21,819,089) (11,864,956) (11,341,896)
PROFIT FROM OPERATING ACTIVITIES 5 40,794,434 18,297,952 675,796
Finance costs 6 (145,454) (49,055)( 355,013) ( 145,454)
PROFIT BEFORE TAX 40,439,421 18,152,498 626,741
Tax 7 ( 3,344,724) 1,036,461 (2,814)
NET PROFIT ATTRIBUTABLE TO
SHAREHOLDERSFOR THE YEAR 37,094,697 19,188,959
623,927
Retained profits at beginning
of year 34,209,664 33,585,737
RETAINED PROFITS AVAILABLE
FOR DISTRIBUTION 53,398,623 34,209,664
DividendsINTERIM DIVIDENDS 8 (10,383,672)19,955,322 10,383,672
- RETAINED PROFITS AT END OF YEAR 43,014,951 34,209,664
Other than the net profit attributable to shareholders, the Group had no
recognised gains or losses. Accordingly, a Consolidated Statement of
Recognised Gains and Losses is not presented in the financial statements.
- 89104 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET
31 March 2002 and 20012003
Notes 2003 2002 2001
HK$ HK$
ASSETS
Non-current assets:
Fixed assets 9 19,506,034 16,414,287 17,093,660
Long term investment 10 - -
19,506,034 16,414,287 17,093,660
Current assets:
Due from a shareholder 1 4,204,766 2,208,332 3,990,870
Inventories 11 15,122,141 12,768,297 6,658,344
Trade receivables 3,982,562 1,698,965 -
Prepayments, deposits and
other receivables 881,514 371,644 654,146
Pledged time deposit 12 - 1,676,441 1,631,932
Cash and cash equivalents 13 40,893,730 26,994,967
15,615,46665,084,713 45,718,646 28,550,758
TOTAL ASSETS 84,590,747 62,132,933 45,644,418
EQUITY AND LIABILITIES
Current liabilities:
Loan from a related company 1 - 27,329
Due to a related companyCompany 1 3,435,335 900,000 -
Tax payable 2,366,798 1,379,000 2,332,003
Other payables and accruals 2,387,135 1,447,572 2,479,027
Trade payables 13,347,999 12,188,556
3,393,54121,537,267 15,915,128 8,231,900
Non-current liabilities:
Loans from shareholders 14 2,868,954 2,868,954
Deferred tax 15 30,000 333,700
333,700
3,202,6542,898,954 3,202,654
TOTAL LIABILITIES 24,436,221 19,117,782
Capital and reserve:
Issued capital 16 200 200
Retained profits 60,154,326 43,014,951
60,154,526 43,015,151
TOTAL EQUITY AND LIABILITIES 84,590,747 62,132,933
- page 6 19,117,782 1,434,554
- 90105 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET (continued)STATEMENT OF CHANGES IN EQUITY
Year ended 31 March 2003
Issued Retained
capital profits Total
HK$ HK$ HK$
At 1 April 2001 200 34,209,664 34,209,864
Net profit for the year - 19,188,959 19,188,959
Interim dividends - (10,383,672) (10,383,672)
At 31 March 2002 and
2001
Notes1 April 2002 2001
HK$ HK$
TOTAL LIABILITIES200 43,014,951 43,015,151
Net profit for the year - page 5 19,117,782 11,434,554
Capital and reserve:
Issued capital 1637,094,697 37,094,697
Interim dividends - (19,955,322) (19,955,322)
At 31 March 2003 200 200
Retained profits 43,014,951 34,209,664
43,015,151 34,209,864
TOTAL EQUITY AND LIABILITIES 62,132,933 45,644,41860,154,326 60,154,526
- 91106 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT
YearsYear ended 31 March 2002 and 20012003
Notes 2003 2002 2001
HK$ HK$
NET CASH INFLOW/(OUTFLOW)FLOWS FROM
OPERATING ACTIVITIES
17(a)Profit before tax 40,439,421 18,152,498
Adjustments for:
Finance costs 6 355,013 145,454
Interest income 4 ( 373,074) ( 565,330)
Depreciation 5 3,455,158 2,934,708
Loss on disposal
of fixed assets 5 120,708 29
Operating profit before
working capital changes 43,997,226 20,667,359
Increase in amount due
from a shareholder (11,974,095) ( 3,409,298)
Increase in inventories ( 2,353,844) ( 6,109,953)
Increase in trade
receivables ( 2,283,597) ( 1,698,965)
Decrease/(increase) in
prepayments, deposits
and other receivables ( 509,870) 282,502
Increase in amount due
to a related Company 2,535,335 900,000
Increase/(decrease) in
other payables and
accruals 939,563 ( 1,031,455)
Increase in trade payables 1,159,443 8,795,015
Cash generated from operations 31,510,161 18,395,205 (534,489)
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 373,074 565,330 1,274,622
Interest paid (145,454) (49,055)( 355,013) ( 145,454)
Dividends paid (5,191,836) -
Net cash inflow/(outflow)
from returns on investments
and servicing of finance (4,771,960) 1,225,567
TAX( 9,977,661) ( 5,191,836)
Hong Kong profits tax
refundedrefunded/(paid) ( 2,660,626) 83,458 106,552
INVESTING ACTIVITIES
Purchases of fixed assets (2,271,477) (2,040,643)
Proceeds from disposal of
fixed assets 16,113 8,000
Increase in pledged time deposit (44,509) (61,893)
Net cash outflowinflow from investingoperating
activities (2,299,873) (2,094,536)
NET CASH INFLOW/(OUTFLOW)
BEFORE FINANCING ACTIVITY 11,406,830 (1,296,906)
FINANCING ACTIVITY 17(b)
Repayment of loan from a
related company (27,329) (164,004)
Net cash outflow from
financing activity (27,329) (164,004)
INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 11,379,501 (1,460,910)
Cash and cash equivalents at
beginning of year 15,615,466 17,076,37618,889,935 13,706,703
- 92107 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
YearsYear ended 31 March 2002 and 20012003
Notes 2003 2002 2001
HK$ HK$
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of fixed assets ( 6,738,013) ( 2,271,477)
Proceeds from disposal
of fixed assets 70,400 16,113
Decrease/(increase) in
pledged time deposit 1,676,441 ( 44,509)
Net cash outflow from
investing activities ( 4,991,172) ( 2,299,873)
CASH FLOWS FROM FINANCING
ACTIVITY
Repayment of loan from
a related Company - ( 27,329)
Net cash outflow from
financing activity - ( 27,329)
NET INCREASE IN CASH AND
CASH EQUIVALENTS 13,898,763 11,379,501
Cash and cash equivalents
at beginning of year 26,994,967 15,615,466
CASH AND CASH EQUIVALENTS
AT END OF YEAR 40,893,730 26,994,967
NET INCREASE IN CASH AND
CASH EQUIVALENTS 13,898,763 11,379,501
Cash and cash equivalents
at beginning of year 26,994,967 15,615,466
CASH AND CASH EQUIVALENTS
AT END OF YEAR 40,893,730 26,994,967
- 108 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
ANALYSIS OF THE BALANCES OF CASH
AND CASH EQUIVALENTS
Cash and bank balances 13 33,066,829 14,962,374 4,493,074
Time deposits with original
maturity of less than
three months when acquired 13 7,826,901 12,032,593
11,122,39240,893,730 26,994,967
15,615,466
- 93109 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
1. CORPORATE INFORMATION
The registered office of the Company is at (address withheld
and filed separately with the SEC).
The Company was incorporated under the laws of Hong Kong on
7 July 1989. It operates under a joint venture agreement
entered into on 23 October 1989 between Universal Security
Instruments, Inc. ("USI"), a company incorporated in the
United States, and The Original Joint Venture Owner (name
withheld and filed separately with the SEC), a company
incorporated in Hong Kong.. The Company is
economically dependent on USI with which it transacts a
significant portion of its business and the financial
statements reflect the effect of these transactions that are
conducted on bases determined between the parties.
During the year, the following significant related party
transactions were recorded:
Notes 2003 2002 2001
Notes
HK$ HK$
Sales made to USI (i) 57,170,207 37,952,734 29,777,716
Purchases from USI (i) 7,279,138 5,323,216
1,996,268Sales commission to USI (ii) 335,090 -
Rentals paid to:
An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (ii)(iii) 840,000 840,000
A Director of the
Company (name
withheld and filed
separately with the
SEC) (ii)(iii) 240,000 240,000
Management fee paid to
An Affiliate of the
Company
(name withheld and
filed separately
with the SEC) (iii)(iv) 2,160,000 1,620,000
1,440,000
- 94110 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
1. CORPORATE INFORMATION (continued)
Management bonus paid to
An Affiliate of the
Company (name withheld and filed
separately with the
SEC) (iv)(v) 3,435,335 900,000 -
Interest income from USI (v)(vi) 169,260 214,409 238,359
Purchase of a fixed asset
from An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (vi) - 400,000
Notes:
(i) Sales and purchases were made according to published
prices and conditions similar to those offered to
other customers or by other suppliers of the Group.
(ii) Sales commission was charged at mutually agreed terms
between the Group and USI for the Group's sales to
customers referred by USI.
(iii) Rental expenses were charged for the office premises
owned by An Affiliate of the Company (name withheld and filed separately with the
SEC) and A Director of
the Company (name withheld and filed separately with the
SEC) in Hong Kong and the People's Republic of China
(the "PRC") based onwith reference to the prevailing market
rate and area occupied by the Group.
(iii)(iv) Management fee was charged at a monthly basis of
HK$120,000 (2001: HK$120,000) and HK$180,000 (2001:(2002: HK$120,000)120,000 for the months from
January to December 2001 and HK$180,000 for the
months from January to March 2002, respectively,2002) for the provision
of management services rendered in planning,
execution and operation of electronics manufacturing
plant in the PRC.
(iv)(v) Management bonus was calculated at 10% (2002: 10%) on
the portion of the Company's annual pre-tax profit in
excess of HK$10 million.
(vi) Interest income from USI was charged at 6% (2002: 6%
- 9512%) per annum of the overdue trading balance
during the year.
- 111 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
1. CORPORATE INFORMATION (continued)
(v) Interest income from USI was charged at 6% - 12%
(2001: 12%) per annum of the overdue trading balance
during the year.
(vi) Fixed asset was purchased on negotiated price agreed
between the Group and An Affiliate of the Company
(name withheld and filed separately with the SEC).
An Affiliate of the CompanyNotes (continued):
(name withheld and filed separately with the SEC) is a
company of which A Director of
the Company (name withheld and filed separately with
the SEC) and A Director of the Company (name withheld and filed separately with the
SEC), beneficial shareholders of The
Original Joint Venture Owner (name withheld and filed
separately with the SEC) and ex-directors of the Company,, are also directors. The amount
due to An Affiliate of the
Company (name withheld and filed separately with the
SEC) of HK$900,000 (2001: Nil)3,435,335 (2002: HK$900,000) as at 31 March 20022003
is unsecured, interest-free and has no fixed terms of
repayment.
Loan from
An Affiliate of the Company (name withheld and filed
separately with the SEC) of HK$27,329 as at 31 March 2001
was unsecured, bearing interest at 0.49% per annum and was
fully repaid during the year.
An Affiliate of the Company (name withheld and filed
separately with the SEC) is a company of which A Director
of the Company (name withheld and filed separately with the
SEC) and A Director of the Company (name withheld and filed
separately with the SEC), beneficial shareholders of The
Original Joint Venture Owner (name withheld and filed
separately with the SEC) and ex-directors of the Company,
are also directors.
Except for the trading balance of HK$1,512,801 (2001:3,748,182 (2002:
HK$2,930,354)1,512,801) with USI included as due from a shareholder of
HK$2,208,332 (2001:4,204,766 (2002: HK$3,990,870)2,208,332) under current assets at 31
March 20022003 which is interest-bearing at 6% (2002: 6% - 12% (2001: 12%)
per annum, the remaining balance with USI is unsecured,
interest-free, and has no fixed terms of repayment.
- 96 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
2. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD
ACCOUNTING PRACTICE ("SSAPS")
The following recently-issuednew and revised SSAPs are effective for the
first time for the current year's consolidated financial
statements:
*SSAP 28: "Provisions, contingent liabilities and
contingent assets"
*SSAP 31: "Impairment* SSAP 1 (Revised): "Presentation of assets"financial statements"
* SSAP 15 (Revised): "Cash flow statements"
* SSAP 34: "Employee benefits"
These SSAPs prescribe new accounting measurement and
disclosure practices. The major effects on the Group's
accounting policies and on the amounts disclosed in these
financial statements of adopting these SSAPs are summarised
as follows:
- 112 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
2. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD
ACCOUNTING PRACTICE ("SSAPS") (continued)
SSAP 281 prescribes the recognition criteriabasis for the presentation of
financial statements and measurement
bases to apply to provisions, contingent liabilitiessets out guidelines for their
structure and contingent assets, together withminimum requirements for the required disclosure in
respectcontent thereof.
The revisedprincipal impact of the revision to this SSAP requirements have not hadis that a
material effectconsolidated statement of changes in equity is now presented
on page 106 of the amountsconsolidated financial statements in
place of the consolidated statement of recognised gains and
losses that was previously recorded in the financial
statements; therefore, no prior adjustment has been required.
SSAP 3115 (Revised) prescribes the revised format for the cash
flow statement. The principal impact of the revision of
this SSAP is that the consolidated cash flow statement now
presents cash flows under three headings, cash flows from
operating, investing and financing activities, rather than
the five headings previously required.
SSAP 34 prescribes the recognition and measurement criteria
to apply to employee benefits, together with the required
disclosures in respect thereof. The adoption of this SSAP
has resulted in no material change to the previously adopted
accounting treatments for impairment of assets. The SSAP is required to be applied
prospectively and therefore, has had no effect on amounts
previously reported in prior year financial statements.employee benefits.
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentationpreparation
These financial statements have been prepared in accordance
with Hong Kong Statements of Standard Accounting Practice
and accounting principles generally accepted in Hong Kong.
They have been prepared under the historical cost
convention.
- 97113 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries for the yearsyear
ended 31 March 2002 and 2001.2003. The results of subsidiaries acquired
or disposed of during the year are consolidated from or to
their effective dates of acquisition or disposal,
respectively. All significant intercompany transactions and
balances within the Group are eliminated on consolidation.
Subsidiaries
A subsidiary is a company in which the Company, directly or
indirectly, controls more than half of its voting power or
issued share capital or controls the composition of its
board of directors.
The Company's interests in subsidiaries are stated at cost
less any impairment losses.
Long term investment
Investment held on a long-term basis is stated at cost less
any impairment loss.
Related parties
Parties are related if one party has the ability, directly
or indirectly, to control the other party or exercise
significant influence over the other party in making
financial and operating decisions. Parties are also related
if they are subject to common control or common significant
influence. Related parties may be individuals or corporate
entities.
Impairment of assets
An assessment is made at each balance sheet date of whether
there is any indication of impairment of any asset, or
whether there is any indication that an impairment loss
previously recognised for an asset in prior years may no
longer exist or may have decreased. If any such indication
exists, the asset's recoverable amount is estimated. An
asset's recoverable amount is calculated as the higher of
the asset's value in use or its net selling price.
- 98114 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
An impairment loss is recognised only if the carrying amount
of an asset exceeds its recoverable amount. An impairment
loss is charged to the consolidated profit and loss account
in the period in which it arises, unless the asset is carried at a
revalued amount, when the impairment loss is accounted for
in accordance with the relevant accounting policy for that
revalued asset.arises.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated
depreciation and any impairment losses. The cost of an
asset comprises its purchase price and any directly
attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditure
incurred after fixed assets have been put into operation,
such as repairs and maintenance, is normally charged to the
profit and loss account in the period in which it is
incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be
obtained from the use of the fixed asset, the expenditure is
capitalised as an additional cost of that asset.
Depreciation is calculated on the straight-line basis to
write off the cost of each asset over its estimated useful
life. The principal annual rates used for this purpose are
as follows:
Land held on medium term leaseslease Over the lease termsterm
Buildings 5%
Leasehold improvements 20%
Plant and machinery 10%
Furniture and fixtures 20%
Motor vehicles 20%
Computer equipment and software 50%
The gain or loss on disposal or retirement of a fixed asset
recognised in the consolidated profit and loss account is
the difference between the net sales proceeds and the
carrying amount of the relevant asset.
- 99115 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost and net
realisable value. Cost is determined on the first-in,
first-out basis and, in the case of work in progress and
finished goods, comprises direct materials, direct labour
and an appropriate proportion of overheads. Net realisable
value is based on the estimated selling prices less any
estimated costs to be incurred to completion and disposal.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement,
cash and cash equivalents represent short-termcomprise cash on hand and demand
deposits, and short term highly liquid investments which are
readily convertible into known amounts of cash and which wereare
subject to an insignificant risk of changes in value, and
have a short maturity of generally within three months when
acquired, less bank overdrafts which are repayable on demand
and form an integral part of maturity when
acquired.the Group's cash management.
For the purpose of the consolidated balance sheet, classification,cash and
cash equivalents represent assets similar in nature tocomprise cash thaton hand and at banks,
including term deposits, which are not restricted as to use.
Revenue recognition
Revenue is recognised when it is probable that the economic
benefits will flow to the Group and when the revenue can be
measured reliably, on the following bases:
(a) from the sales of goods, when the significant risks and
rewards of ownership have been transferred to the
buyer, provided that the Group maintains neither
managerial involvement to the degree usually associated
with ownership, nor effective control over the goods
sold, net of discounts and returns;
(b) rental income, on the straight-line basis over the
lease term;
- 116 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) management fee income, when the services are rendered;
and
(d) interest income, on a time proportion basis taking into
account the principal outstanding and the effective
interest rate applicable.
- 100 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the lessor are accounted for
as operating leases. Where the Group is the lessor, assets
leased by the Group under operating leases are included in
non-current assets and rentals receivable under the
operating leases are credited to the consolidated profit and
loss account on the straight-line basis over the lease
terms. Where the Group is the lessee, rentals payable under
the operating leases are charged to the consolidated profit
and loss account on the straight-line basis over the lease
terms.
Deferred tax
Deferred tax is provided, using the liability method, on all
significant timing differences to the extent it is probable
that the liability will crystallise in the foreseeable
future. A deferred tax asset is not recognised until its
realisation is assured beyond reasonable doubt.
Foreign currencies
Foreign currency transactions are recorded at the applicable
exchange rates of exchange ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign currencies at
the balance sheet date are translated at the applicable
exchange rates of exchange ruling at that date. Exchange differences
are dealt with in the consolidated profit and loss account.
- 117 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee benefits
Pension Scheme
The Group 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. Contributions are made based on a
percentage of the employees' basic salaries and are charged
to the consolidated profit and loss account 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 Group in an independently administered fund. The
Group's employer contributions vest fully with the employees
when contributed into the MPF Scheme.
4. REVENUE AND GAINS
Turnover represents the invoiced value of goods sold, net of
discounts and returns. An analysis of turnover, revenue and
gains is as follows:
2003 2002 2001
HK$ HK$
Turnover
Sale of goods 182,256,085 88,449,887
46,928,800Other revenue
Gross rental income 295,200 316,400
Management fee income - 10119,890
Interest income 373,074 565,330
Sundry income 314,918 267,041
983,192 1,168,661
Gains
Exchange gains, net 238,478 176,620
1,221,670 1,345,281
- 118 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
4. REVENUE AND GAINS (continued)
Other revenue
Gross rental income 316,400 325,200
Management fee income 19,890 84,177
Interest income 565,330 1,274,622
Sundry income 267,041 101,530
1,168,661 1,785,529
Gains
Exchange gains, net 176,620 114,611
1,345,281 1,900,1402003
5. PROFIT FROM OPERATING ACTIVITIES
Profit from operating activities is arrived at after
charging/(crediting):
2003 2002 2001
HK$ HK$
Cost of inventories sold 120,864,232 59,632,260
Depreciation 3,455,158 2,934,708 2,860,969
Less: Amount included in
cost of sales (2,400,072) (2,278,081)
(2,521,311)1,055,086 656,627 339,658
Auditors' remuneration 168,000 168,000
Staff costs:
Wages and salaries 9,433,055 7,105,704
6,172,919
Provident fundPension scheme contributions 162,751 148,629
48,1909,595,806 7,254,333 6,221,109
Less: Amount included in
cost of sales (5,012,585) (3,301,487)
(2,834,393)4,583,221 3,952,846 3,386,716
Directors' remuneration - -
Minimum lease payments under
operating leases in respect
of land and buildings 1,175,993 1,120,605 1,095,420
Inventories written off - 701,919
Gross and net rental income ( 295,200) ( 316,400)
( 325,200)Loss on disposal of fixed assets 120,708 29
- 102119 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
6. FINANCE COSTS
2003 2002 2001
HK$ HK$
Interest on inward bills 286,947 101,991 25,358
Interest to An Affiliate of the
Company (name withheld and
filed separately with the SEC) - 667
4,000
Others 68,066 42,796
19,697
Total interestsinterest 355,013 145,454 49,055
7. TAX
Hong Kong profits tax has been provided at the rate of 16%
(2001:(2002: 16%) on the estimated assessable profits arising in
Hong Kong during the year.
2003 2002 2001
HK$ HK$
Provision for the year 3,700,000 1,379,000 8,100
Overprovision in prior years ( 51,576) (2,415,461)
(38,986)
Provision for deferredDeferred tax - note 15 ( 303,700) - 33,700
Tax charge/(credit) for the year 3,344,724 (1,036,461)
2,814
8. DIVIDENDS
2002 2001
HK$ HK$
First interim - HK$4,680,000
(2000: Nil) per ordinary
share 9,360,000 -
Second interim - HK$511,836
(2001: Nil) per ordinary
share 1,023,672 -
10,383,672 -
- 103120 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
8. INTERIM DIVIDENDS
2003 2002
and 2001HK$ HK$
First interim - HK$2,834,679
(2002: HK$4,680,000) per
ordinary share 5,669,358 9,360,000
Second interim - HK$2,692,134
(2002: HK$511,836) per
ordinary share 5,384,268 1,023,672
Third interim - HK$2,526,524
(2002: Nil) per ordinary share 5,053,048 -
Fourth interim - HK$1,924,324
(2002: Nil) per ordinary share 3,848,648 -
19,955,322 10,383,672
9. FIXED ASSETS Computer
equip-
Leasehold Leasehold Furniture ment
land and improve- Plant and and Motor and
buildings ments machinery fixtures vehicles software Total
HK$ HK$ HK$ HK$ HK$ HK$ HK$(continued)
Cost:
At beginning
of year:
15,814,592 7,304,612 30,320,162 3,324,522 1,577,130 - 58,341,018
Additions:
- 515,568 824,260 258,327 - 673,322 2,271,477
Disposals:
- (30,187) (16,000) (91,582) - - (137,769)Year Additions Disposals At 31 March 2002:
15,814,5922003
Medium
term
leasehold
land
HK$ 2,102,686 - - 2,102,686
Buildings
HK$ 13,711,906 - - 13,711,906
Leasehold
improve-
ments
HK$ 7,789,993 2,487,245 - 10,277,238
Plant and
machinery
HK$ 31,128,422 2,566,240 (2,398,412) 31,296,250
Furniture
and
fixtures
HK$ 3,491,267 357,579 - 3,848,846
Motor
vehicles
HK$ 1,577,130 927,603 - 2,504,733
Computer
equipment
and
software
HK$ 673,322 399,346 - 1,072,668
Total HK$ 60,474,726 6,738,013 (2,398,412) 64,814,327
Accumulated appreciation:depreciation:
Provided
At beginning during
of year:
5,467,366 6,742,117 25,839,001 2,759,244 439,630Year the year Disposals At 31 March 2003
Medium
term
leasehold
land
HK$ 471,352 43,806 - 41,247,358
Provided during the year:
729,402 234,763 1,313,916 189,391 280,925515,158
Buildings
HK$ 5,725,416 636,602 - 6,362,018
Leasehold
improve-
ments
HK$ 6,946,693 503,475 - 7,450,168
Plant and
machinery
HK$ 27,139,535 1,216,189 (2,207,304) 26,148,420
Furniture
and
fixtures
HK$ 2,870,577 213,433 - 3,084,010
Motor
vehicles
HK$ 720,555 405,809 - 1,126,364
Computer
equipment
and
software
HK$ 186,311 435,844 - 622,155
Total HK$ 44,060,439 3,455,158 (2,207,304) 45,308,293
Net book value:
At 31 March 2002:
9,617,824 843,300 3,988,887 620,690 856,575 487,011 16,414,2872003 At 31 March 2002:
10,347,226 562,495 4,481,161 565,278 1,137,500 - 17,093,660
The2003
Medium term leasehold
land HK$ 1,587,528 1,631,334
Buildings HK$ 7,349,888 7,986,490
Leasehold
improvements HK$ 2,827,070 843,300
Plant and buildings are situatedmachinery HK$ 5,147,830 3,988,887
Furniture and fixtures HK$ 764,836 1,378,369
Motor vehicles HK$ 1,378,369 856,575
Computer equipment and
software HK$ 450,513 487,011
Total HK$ 19,506,034 16,414,287
- 121 -
In 1991, the Group entered an agreement to lease certain
land located in the PRC under medium-term leases.for the building of factory premises
and staff quarters for a term of 50 years at a consideration
of HK$2,102,686. However, the Group has not obtained the
land use right from the relevant authority in the PRC. This
land is amortised over the lease term of 50 years.
10. LONG TERM INVESTMENT
2003 2002 2001
HK$ HK$
Unlisted investment, at cost 9,305,588 9,305,588
Amount due from the investee
companyCompany 1,158,675 1,158,675
10,464,263 10,464,263
Less: Provision for impairment (9,305,588) (9,305,588)
Provision against an
amount due from the
investee companyCompany (1,158,675) (1,158,675)
- -
- 104122 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 20012003
10. LONG TERM INVESTMENT (continued)
Particulars of the investee company are as follows:
Percentage
CountryPlace of Nominal value of equity
registration value of registered attributable
Principal
Name and operation capitalregistered to the Group activityPrincipal
Name operation capital 2002 2001 activity
An Affiliate
of the Company
(name withheld
and filed
separately
with the SEC) The PRC US$4,000,000 30 30 Dormant
The Group does not have significant influence on the
financial and operating policy decisions of the investee
company and, accordingly, the investment is classified as
long-term investment. The amount due from the investee
company is unsecured, interest-free and has no fixed terms
of repayment.
11. INVENTORIES
2003 2002 2001
HK$ HK$
Raw materials 8,294,473 8,615,554 3,721,912
Work in progress 3,224,558 1,779,372 830,782
Finished goods 3,603,110 2,373,371
2,105,65015,122,141 12,768,297
6,658,344
12. BANKING FACILITIES
Time deposit of HK$1,676,441 (2001: HK$1,631,932) is pledged
to a bank for credit facilities of HK$3,329,000 (2001:
HK$3,329,000) granted to the Company. Last year's banking
facilities of the Company were also secured by a personal
guarantee of A Director of the Company (name withheld and
filed separately with the SEC) a beneficial shareholder
of The Original Joint Venture Owner (name withheld and filed
separately with the SEC) Limited and an ex-director of the
Company, which was released during the year. The facilities
were not utilised at the balance sheet date.
- 105123 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
12. PLEDGED TIME DEPOSIT
At 31 March 2002, and 2001time deposit of HK$1,676,441 was pledged
to a bank for credit facilities of HK$3,329,000 granted to
the Group. The pledge was released during the year.
13. CASH AND CASH EQUIVALENTS
2003 2002 2001
HK$ HK$
Cash and bank balances 33,066,829 14,962,374 4,493,074
Time deposits 7,826,901 12,032,593
11,122,39240,893,730 26,994,967 15,615,466
14. LOANS FROM SHAREHOLDERS
2003 2002 2001
HK$ HK$
USI 1,434,477 1,434,477
The Original Joint Venture Owner
(name withheld and filed
separately with the SEC) 1,434,477 1,434,477
2,868,954 2,868,954
The loans are unsecured, interest-free and repayable on
demand by the respective shareholders with the consent of
the other. The directors of the Company consider that these
liabilities to be non-current.
15. DEFERRED TAX
2002 2001
HK$ HK$
Balance at beginning of year 333,700 300,000
Charge for the year - note 7 - 33,700
Balance at end of year 333,700 333,700
The principal component of deferred tax liability calculated
at 16% (2001: 16%) of the cumulative timing differences
comprises accelerated depreciation allowances at the balance
sheet date.
- 106124 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
15. DEFERRED TAX
2003 2002
and 2001HK$ HK$
Balance at beginning of year 333,700 333,700
Credit for the year - note 7 (303,700) -
Balance at end of year 30,000 333,700
The principal component of deferred tax liability calculated
at 17.5% (2002: 16%) of the cumulative timing differences
comprises accelerated depreciation allowances at the balance
sheet date.
16. SHARE CAPITAL
Company
2003 2002 2001
HK$ HK$
Authorised:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
17. NOTESNOTE TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) ReconciliationMajor non-cash transactions
During the year, interim dividends of profit from operating activities to
net cash inflow/(outflow) from operating activities:
2002 2001
HK$ HK$
Profit from operating activities 18,297,952 675,796
Interest income (565,330) (1,274,622)
Depreciation 2,934,708 2,860,969
Loss on disposal of fixed assets 29 5,992
Increase in amount due from9,977,661 were
settled through the current account with a shareholder (3,409,298) (2,329,234)
Increase in inventories (6,109,953) (1,160,219)
Increase in trade receivables (1,698,965)shareholder.
- Decrease/(increase) in prepayments,
deposits and other receivables 282,502 (417,894)
Increase in amount due to a
related company 900,000 -
Decrease in other payables and
accruals (1,031,455) (379,502)
Increase in trade payables 8,795,015 1,484,225
Net cash inflow/(outflow) from
operating activities 18,395,205 (534,489)
- 107125 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
18. OPERATING LEASE ARRANGEMENTS
The Group leases certain of its office premises and factory
premises under operating lease arrangements for terms
ranging from 1 to 5 years.
At 31 March 2003, the Group had total future minimum lease
payments under non-cancellable operating leases falling due
as follows:
2003 2002
and 2001
17.HK$ HK$
Within one year 913,500 -
In the second to fifth years,
inclusive 2,660,000 -
3,573,500 -
19. COMMITMENTS
In addition to the operating lease commitments detailed in
note 18 above, the Group had the following contracted
commitments at the balance sheet date:
2003 2002
HK$ HK$
Purchase of fixed assets 128,181 162,000
Capital contribution payable to
a PRC wholly-owned subsidiary 117,000,000 -
117,128,181 162,000
- 126 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)
(b) AnalysisFINANCIAL STATEMENTS
31 March 2003
20. COMPARATIVE AMOUNTS
As further explained in note 2 to the financial statements,
due to the adoption of changes in financingcertain new and revised SSAPs during
the current year, Loan from a
related company
HK$
Balance at 1 April 2000 191,333
Repayment (164,004)
Balance at 31 March 2001the presentation of certain items and
1 April 2001 27,329
Repayment (27,329)
Balance at 31 March 2002 -
(c) Major non-cash transactions
Duringbalances in the year, interim dividends of HK$5,191,836 were
settled throughfinancial statements have been revised to
comply with the new requirements. Accordingly, certain
comparative amounts have been reclassified to confirm with
the current account with a shareholder.
18. COMMITMENTS
2002 2001
HK$ HK$
Capital commitments contracted for 162,000 -
19.year's presentation.
21. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED
IN THE UNITED STATES OF AMERICA
The financial statements have been prepared in accordance
with accounting principles generally accepted in Hong Kong,
which differ in certain significant respects from accounting
principles generally accepted in the United States of
America. However, the application of generally accepted
accounting principles in the United States of America
would not have a significant effect on either the operation
results of the Group for each of the two years in the
period ended 31 March 20022003 or the financial position of
the Group as of 31 March 20012003 and 2002.
- 108127 -