UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A10-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, 19971999
( ) 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.)
10324 S. Dolfield Road, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for at least the
past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 23, 1997:11, 1999:
Common Stock, $.01 Par Value - $1,825,643$998,036
The number of shares outstanding of the issuer's classes of common
stock as of June 23, 1997:11, 1999:
Common Stock, $.01 Par Value - 3,245,587887,143 shares
ITEM 1.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company") was incorporated in the
State of Maryland in 1969. Its principal offices are located at 10324 South
Dolfield Road, Owings Mills, MD 21117 and its telephone number is 410-363-3000.
The Registrant hereby amendsCompany designs and markets a variety of popularly-priced security,
telecommunications and video products and miscellaneous private label products.
Most of the following items, financial statements, exhibitsCompany's products either require minimal installation, or are
designed for easy installation by the consumer without professional assistance
and requiring little or no technical knowledge.
Due to the low margins realizes on its telecommunications and video products,
the Company has focused its business primarily on security products. As a
result, the Company (i) changed its marketing of telecommunications and video
products to concentrate virtually exclusively on made-to-order private label
sales, and (ii) entered into the electrical distribution market with an enhanced
and newly packaged line of smoke alarms as well as its other portionssecurity products.
The Company imports virtually all of its Annual Reportproducts from various suppliers
overseas. Approximately 81% of the Company's purchases are bought from a Hong
Kong Joint Venture with a Hong Kong Corporation (Hong Kong Joint Venture), in
which the Company owns a 50% interest, that has manufacturing facilities in the
People's Republic of China.
The Company's sales for the year ended March 31, 1999 were $9,071,628 compared
to $11,566,317 for the year ended March 31, 1998, a decrease of approximately
22%. The primary reason for this decrease in sales was due to decreased demand
for some of the Company's private label products.
The Company reported a loss in fiscal 1999 of $806,552 compared to a loss of
$445,126 for its prior fiscal year. The main reasons for the increase in losses
were lower sales and gross profit margins.
SECURITY PRODUCTS
The Company markets a complete line of smoke alarms under the trade names "USI
ELECTRIC," "UNIVERSAL" and "Smoke Signaltm" manufactured by the Hong Kong joint
venture. The Company also markets a line of electronically advanced outdoor
floodlights under the name "Lite Aidetm," whose features include special sensors
that activate automatic lighting mechanisms and a quartz halogen system,
offering the consumer a variety of dependable outdoor security lighting systems.
Sales of the Company's security products aggregated $5,139,919 or approximately
57% of total sales in the fiscal year ended March 31, 1999 and $6,094,152 or
approximately 53% of total sales in the fiscal year ended March 31, 1998. This
decrease in sales volume was due primarily to lower export sales of smoke
alarms.
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The Company is focusing its sales and marketing efforts to maximize security
product sales, especially smoke alarm products by its Hong Kong Joint Venture.
OTHER PRODUCTS
The Company markets a variety of private label products on Form 10-Ka made-to-order
basis, such as telephones and video tape. The majority of these products are
produced by the Hong Kong Joint Venture.
For the fiscal year ended March 31, 1999, sales of the Company's private label
products aggregated $3,931,709 or 43% of total sales. For the fiscal year ended
March 31, 1998, sales of these products were $5,472,165 or 47% of total sales.
The primary reason for the decrease in sales was a reduction in high volume, low
margin, private label products.
SUBSEQUENT EVENT
The Company sold its headquarters facility on June 16, 1999. See Item
2. Properties.
FCC REGULATION
The Federal Communications Commission (FCC) establishes technical standards for
telecommunications equipment and products transmitting signals over the airways.
These regulations have had no material effect upon the Company's business or its
products to date, and all products subject to such regulation comply with the
FCC requirements.
IMPORT MATTERS
The Company imports virtually all of its security, telecommunications and video
products. The Company, as an importer, is subject to numerous tariffs which vary
depending on types of products and country of origin, changes in economic and
political conditions in the country of manufacture, potential trade
restrictions, including loss of Most Favored Nation status, and currency
fluctuations. The Company has attempted to protect itself from fluctuations in
currency exchange rates to the extent possible by negotiating most commitments
in U.S. dollars. The Company's purchases are subject to delays in delivery due
to problems with shipping and docking facilities, as well as other problems
associated with purchasing products abroad. The Company imports a majority of
its products from the People's Republic of China. The loss of China's Most
Favored Nation status with the United States would most likely have a material
adverse impact on the Company's business until competitive alternative sources
of supply were obtained.
SALES AND MARKETING
The Company's products are generally marketed to retailers, wholesale
distributors, service companies, catalog and mail order companies and to other
distributors. Sales are made both by the Company and by approximately 33
independent sales organizations which are compensated by commissions. The
Company has agreements with the sales organizations which are cancelable by
either party upon 30 days notice. The Company does not believe that the loss of
any one of these organizations would have a material adverse effect upon its
business.
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The Company formed a new subsidiary, USI ELECTRIC, for the purpose of selling
security products to the electrical distribution trade. The subsidiary has hired
a sales manager from the electrical distribution trade and has engaged 19
independent sales organizations.
The Company also promotes its products through its own sales catalogs and
brochures, which are mailed directly to trade customers. The Company's
customers, in turn, advertise the Company's products in their own catalogs and
brochures and in their ads in newspapers and other media. The Company also
exhibits and sells its products at various trade shows, including the annual
National Hardware Show in Chicago, Illinois. The Company's domestic marketing
strategy is designed to attract retailing customers outside the consumer
electronics industry, such as supermarkets, drug stores, variety stores and home
centers.
Sales by the Company are also made by officers and full-time employees of the
Company, four 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 25% of total sales in fiscal 1999. The Company's
foreign marketing strategy is to increase sales of products from the Hong Kong
Joint Venture to overseas markets.
The Company's products are retailed to "do-it-yourself" consumers by chain and
independent department, discount, drug, electrical, electronic, building supply,
electrical distributors and hardware stores; as well as through catalog and
mail-order houses. The Company also distributes its products through special
markets such as premium/incentive, direct mail, catalog and showroom sales. The
Company does not currently market any significant portion of its products
directly to end users.
The Company's backlog of orders believed to be firm as of March 31, 1999 was
approximately $1,310,000. The Company's backlog as of March 31, 1998, was
approximately $2,510,000. The decrease in backlog is a function of the timing of
orders received from its customers and the general decline in sales volume.
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has a 50% interest in a Hong Kong Joint Venture with a Hong Kong
Corporation (Hong Kong Joint Venture) which has manufacturing facilities in the
People's Republic of China, for the manufacturing of certain consumer electronic
products sold by the Company.
The Company believes that this Hong Kong Joint Venture arrangement will ensure a
continuing source of supply for each product at competitive prices. At the
present time, the Company buys approximately 81% of its total purchases from the
Hong Kong Joint Venture. The products produced by the Hong Kong Joint Venture
include video tape, smoke alarms and certain models of telecommunications
products and Caller ID products. The Company is currently pursuing the
development of additional products to be produced by the Hong Kong Joint
Venture. A loss of China's Most Favored Nation status with the United States or
changes in economic and political conditions in China could adversely affect the
value of the Company's investment in the Hong Kong Joint Venture. Refer to Note
C of the Financial Statements in Item 8 for a comparison of annual sales and
earnings of the Hong Kong Joint Venture.
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SUPPLIERS - OTHERS
Private label products not manufactured for the Company by the Hong Kong Joint
Venture are manufactured by other foreign suppliers for the Company. The Company
believes that its relationships with its suppliers are good. The Company
believes that the loss of any of its suppliers could have a short-term adverse
effect on its operations, but that replacement sources could be developed.
CHINA CELLULAR TELEPHONE PROJECT
In the year ended March 31, 1993, the Hong Kong Joint Venture entered into a
Cellular Joint Venture with a People's Republic of China Company to design and
develop a portable cellular telephone for manufacture and sale in China. The
Hong Kong Joint Venture has a 30% interest in the Cellular Joint Venture. The
Cellular Joint Venture engaged the Hong Kong Joint Venture to design and develop
two versions of a portable cellular telephone for a fee of $3.5 million. Through
March, 1996, the Hong Kong Joint Venture had received $3,150,000 of the $3.5
million fee. For the year ended March 31, 1996, the Hong Kong Joint Venture
recorded no profit from the development contract. During fiscal 1997, the Hong
Kong Joint Venture completed the accounting of its cellular development contract
and, additionally, wrote down its investment in its Cellular Joint Venture. The
Hong Kong Joint Venture recorded a profit of $122,328 on the development
contract and a write- down of $725,745 on its Cellular Joint Venture. Due to the
uncertainty of the commercial acceptance of the cellular telephone designed by
the Cellular Joint Venture, the Hong Kong Joint Venture wrote-off the balance of
its Cellular Joint Venture investment in the amount of $337,464 in fiscal 1998.
COMPETITION
In the smoke alarm area, the Company competes with First Alert, Firex,
Fyrenetics and Walter Kidde. In the security lighting area, the Company competes
with All-Trade, Regent and Heath-Zenith. Many of these companies have greater
financial resources and financial strength than the Company. The Company
believes that its security products compete favorably with other such products
in the market primarily on the basis of styling and pricing. The security
industry in general, however, involves rapidly changing technology, and the
success of the Company's products may depend on the Company's ability to improve
and update the technology of its products in a timely manner and to adapt to new
technological advances.
EMPLOYEES
The Company has 14 employees, 6 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.
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ITEM 2.
PROPERTIES
On June 16, 1999, the Company sold its headquarters facility, located in
Baltimore County, Maryland which became expendable when the Company reduced the
number of its employees. Under the contract of sale, the Company must vacate the
property by November 15, 1999. The Company believes that it will have no
difficulty leasing alternative space for its administrative and executive
offices, warehousing and research and development activities.
The property was sold for a price of $2.2 million to KA Real Estate Associates,
LLC. After deducting the mortgage and settlement charges, the Company will have
excess cash of approximately $840,000. The Company will report, in its quarter
ending June 30, 1999 a gain on the sale of this property of approximately
$800,000.
The Company retained ownership of approximately 1-1/2 acres of undeveloped land
adjacent to its headquarters property which the Company has put up for sale.
The Hong Kong Joint Venture's manufacturing facility consists of six buildings
totaling 100,000 square feet. Three of the buildings (totaling 31,000 square
feet) are leased pursuant to a long-term lease which expires in 2010. The other
three buildings (69,000 square feet) are owned by the Hong Kong Joint Venture
and were built on property leased for a 48 year term.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company was informed on January 21, 1999 that the Company's common stock has
been delisted from the NASDAQ Small Cap Market for failure to meet the market
value of public float requirement for continued listing. The Company meets all
other continued listing requirements. The Company announced that its common
stock will be traded on the Over-The-Counter (OTC) market through which
real-time quote, price and volume information is electronically available for
the Company's securities.
The following table shows the fiscal 1999 and 1998 quarterly high and low bid
prices for the Company's Common Stock as reported by NASDAQ. The bid quotations
represent prices between dealers and do not reflect the retailer markups,
markdowns or commissions and may not represent actual transactions.
Fiscal year ended March 31, 1999
Bid Prices*
High Low
First Quarter 1-3/4 1-1/8
Second Quarter 1-3/8 11/16
Third Quarter 2 5/8
Fourth Quarter 2-1/16 1-1/16
Fiscal year ended March 31, 1998
Bid Prices*
High Low
First Quarter 2-7/8 2-1/8
Second Quarter 4 2-1/4
Third Quarter 3-1/4 2-1/16
Fourth Quarter 3-1/8 1-1/8
As of June 11, 1999, there were approximately 609 holders of record of the
Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock in the last
three years. It is the Company's present intention to retain all earnings for
use in its operations.
*Prices adjusted to reflect one-for-four reverse stock split as of February 27,
1998.
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ITEM 6.
SELECTED FINANCIAL DATA
Year Ended March 31,
1999 1998 1997 1996 1995
Operations
Net sales $ 9,071,628 $11,566,317 $15,423,149 $19,507,889 $24,841,794
Loss before
equity in
earnings (loss)
of Hong Kong Joint
Venture and
income taxes (1,119,154) (414,351) (1,332,427) (1,316,990) (2,220,460)
Net loss (806,552) (445,126) (1,483,438) (1,098,817) (1,296,426)
Per common share:
Loss before
equity in earnings
(loss) of Hong
Kong Joint Venture,
income taxes(1) (1.30) (.51) (1.64) (1.62) (2.74)
Net loss(1) (.93) (.55) (1.83) (1.35) (1.60)
Weighted average number
of common shares
outstanding -
basic(1) 863,706 811,397 811,397 811,397 810,649
Financial Condition
Total assets 6,402,120 7,705,310 9,557,116 12,676,391 13,732,846
Long-term debt and
obligations (non-
current) 0 1,246,861 1,344,211 1,277,394 497,222
Working capital 1,514,425 2,130,408 2,253,553 2,194,108 2,728,405
Current ratio 1.63 to 1 2.25 to 1 1.75 to 1 1.46 to 1 1.50 to 1
Shareholders' equity 3,987,072 4,747,351 5,192,477 6,675,915 7,774,540
Shareholders' equity
per share - basic(1) 4.49 5.85 6.40 8.23 9.59
(1) All per share amounts and number of outstanding shares have been restated to
reflect the one-for-four reverse stock split as of February 27, 1998.
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 1999, sales decreased by $2,494,689 (22%) from the prior year.
This decrease was primarily due to decreased demand for certain of the Company's
private label products, which amounted to $1,540,456 and a decrease in security
products of $954,233.
In fiscal year 1998, sales decreased by $3,856,832 (25%) from the prior year.
This decrease was primarily due to a decreased demand for certain of the
Company's security products, which amounted to $1,913,596 and a decrease in
video products of $1,551,986, resulting from lower private label sales. Sales of
security products for the fiscal year totaled $6,094,152 (53%) while sales of
telecommunications and video products were $3,216,281 (28%) and video products
were $2,255,884 (19%), respectively.
NET PROFIT AND LOSS
The Company incurred a net loss of $806,552 for fiscal year 1999 as compared to
a net loss of $445,126 for fiscal year 1998. The most significant reasons for
the increase in losses were lower gross margins and sales, partially offset by
higher earnings of the Hong Kong Joint Venture.
The Company incurred a net loss of $445,126 for fiscal year 1998, as compared to
a net loss of $1,483,438 for fiscal year 1997. The most significant reasons for
the decrease in loss were reductions in selling, general and administrative
expenses, increased gross margins and decreased equity in losses of the Hong
Kong Joint Venture.
EXPENSES
In fiscal year 1999, research, selling, general and administrative expenses
decreased by approximately $127,202 (5%) from the prior year. This savings
resulted from the Company's cost reduction program. As a percentage of sales,
research, selling, general and administrative expenses were 24% for the fiscal
year ended March 31, 1997,1999 and 20% for the prior year.
In fiscal year 1998, research, selling, general and administrative expenses
decreased by deleting those itemsapproximately $1,141,614 (33%) from the prior year. This savings
resulted from the Company's cost reduction program. As a percentage of sales,
research, selling, general and administrative expenses were 20% for the fiscal
year ended March 31, 1998 and 22% for the prior year.
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INTEREST EXPENSE AND INCOME
Interest expense for fiscal 1999 decreased to $230,625 from $270,817 in their entirety and inserting in
their place the following:
Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (as amended on August
19, 1997,fiscal
1998 due to correct a typographical error in Note F -decrease in the original filing,average outstanding debt during the period
resulting from decreased inventory levels in the column headed "3/31/97,"current fiscal year. Interest
income decreased to $2,719 in fiscal 1999 from $2,916 in fiscal 1998.
Interest expense for fiscal 1998 decreased to $270,817 from $411,541 in fiscal
1997 due to a decrease in the "Federal tax benefit at statutoryaverage outstanding debt during the period
resulting from decreased inventory levels from the prior fiscal year. Interest
income decreased to $2,916 in fiscal 1998 from $5,984 in fiscal 1997.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated from operations
and the Company's line of credit with a financial institution which supplies
both short-term borrowings and letters of credit to finance foreign inventory
purchases. The Company's maximum line of credit is currently the lower of
$7,500,000 or specified percentages of the Company's accounts receivable and
inventory. Approximately $804,664 had been utilized in short-term borrowings and
letter of credit commitments as of March 31, 1999. The amount available under
the line of credit as of March 31, 1999 was approximately $116,000 based on the
specified percentages. The outstanding principal balance of the revolving credit
line is payable upon demand. The interest rate on the revolving credit line is
equal to 1-1/2% in excess of the prime rate of interest charged by the Company's
lender. The loan is collateralized by the Company's accounts receivable,
inventory and a 1.5 acre parcel of the Company's real estate. During the year
ended March 31, 1999, working capital decreased by $615,983, from $2,130,408 on
March 31, 1998 to $1,514,425 on March 31, 1999.
Operating activities provided cash of $316,102 for the year ended March 31,
1999. A decrease of $170,738 from 1998 was primarily due to decreases in
inventory and accounts receivable of $542,619 and $704,068, a decrease in
accounts payable of $268,991, partially offset by a net loss (34%)"of $806,552. For
the prior fiscal year, operating activities provided cash of $486,840 for the
year ended March 31, 1998. This was primarily due to a decrease in inventory of
$943,414 and a distribution in excess of Joint Venture earnings of $280,775.
Investing activities used cash of $28,725 in 1999, due to the purchase of
equipment. For the same period last year, investing activities use cash of
$13,786, due to the purchase of equipment.
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Financing activities used cash in 1999 of $227,647 mainly due to the repayment
of $182,842 in short-term debt and $75,000 in payments on a legal settlement and
partially offset by the sale of 113,636 shares of common stock for $100,000, and
for the same period last year, financing activities used cash of $490,129
primarily due to the repayment of $394,315 in short-term debt and $81,250 in
payments on the legal settlement.
During the fiscal year ended March 31, 1999, the Company received a distribution
of $300,000 from the Hong Kong Joint Venture.
The Company believes that its line of credit and its working capital,
together with the excess cash generated from the sale of its headquarters
facility, provide it with sufficient resources to meet its requirements for
liquidity and working capital in the ordinary course of its business over the
next twelve months.
HONG KONG JOINT VENTURE
In fiscal year 1999, sales of the Hong Kong Joint Venture were $6,440,817
compared to $6,984,960 and $6,644,142 in fiscal years 1998 and 1997,
respectively.
Net income was $625,205 for the year ended March 31, 1999 compared to net losses
of $61,550 and $302,023 in fiscal years 1998 and 1997, respectively. The
decrease in income for the years ended March 31, 1998 and 1997 was due primarily
to a write-down of its investment in its China Cellular Joint Venture of
$337,464 in 1998 and $725,745 in 1997, respectively.
Selling, general and administrative expenses were $1,188,859, $1,288,622 and
$1,337,015 for the fiscal years ended March 31, 1999, 1998 and 1997,
respectively. As a percentage of sales, expenses were 18%, 18% and 20% for
fiscal 1999, 1998 and 1997, respectively. The decrease in expenses as a
percentage of sales in fiscal 1999 was primarily due to lower expenses.
Interest income net of interest expense was $132,591 for the year ended March
31, 1999, compared to $96,469 and $85,414 in fiscal years 1998 and 1997,
respectively. The decrease in net interest income in fiscal year 1997 was
primarily due to a distribution of $2,000,000 paid to its shareholders in April
1996.
Cash needs of the Hong Kong Joint Venture are currently met by funds generated
from operations. During the year ended March 31, 1999, working capital increased
by $309,602 from $1,760,188 on March 31, 1998 to $2,069,790 on March 31, 1999.
YEAR 2000 COMPLIANCE
The Company has undertaken a project that addresses the Year 2000 (Y2K)
issue of computer systems and other equipment with embedded chips or processors
not being able to properly recognize and process date-sensitive information
after December 31, 1999. The Company's Y2K project is designed to ensure the
compliance of all of the Company's applications, operating system and hardware
platforms, and to address the compliance of key business partners. Key business
partners are those customers and vendors that have a material impact on the
Company's operations. The Company is in the process of hiring a consultant to
review its computer operations and anticipates that all phases of the project
should be $(504,269),completed during 1999. The Company estimates that the "Dividends received from joint venture
for which net deferred taxes weretotal cost of
the required modifications to its systems to become Y2K compliant will not
previously provided" shouldexceed $50,000 and will not be $340,000,
the "Effect on net operating loss carryforwards" should be $60,000 and "Other"
should be $52,925).
SIGNATURES
Pursuantmaterial to the requirementsCompany's financial position.
Failure to make all internal business systems Y2K compliant could result in an
interruption in, or a failure of, Section 13 or 15(d)some of the Securities Exchange
ActCompany's business activities or
operations. Y2K disruptions in the operations of 1934,key vendors could impact the
RegistrantCompany's ability to obtain products and service its customers. The Company is
unable to determine the readiness of its key business partners at this time and
is therefore unable to determine whether the consequences of Y2K failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The Company's Y2K project is expected to significantly
reduce the Company's level of uncertainty about the Y2K problem and reduce the
possibility of significant interruptions of normal business operations.
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INFLATION
The Company believes that inflation has duly caued this amendment to be signed onnot had a material effect upon its
behalf byresults of operations, and liquidity and capital resources for any of the
undersigned, thereunto duly authorized:
UNIVERSAL SECURITY INSTRUMENTS, INC.
Date: August 20, 1997 By: Harvey Grossblatt
Harvey Grossblatt,
President, Secretary, Treasurer, CFO
periods presented.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description Page
ReportsReport of Independent AuditorsCertified Public Accountants -
Grant Thornton LLP 13
Report of Independent Auditor - Deloitte & Touche LLP 14
Ernst & Young LLP 15
Financial statements
Consolidated balance sheets, March 31, 19971999 and 1996 161998 15
Consolidated statements of operations for the years ended
March 31, 1999, 1998 and 1997 1996 and 1995 1817
Consolidated statements of shareholders' equity for the
years ended March 31, 1999, 1998 and 1997 1996 and 1995 1918
Consolidated statements of cash flows for the years ended
March 31, 1999, 1998 and 1997 1996 and 1995 2019
Notes to consolidated financial statements 2120
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INDEPENDENT AUDITORS'CERTIFIED PUBLIC ACCOUNTANT'S REPORT
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the accompanying consolidated balance sheetssheet of Universal
Security Instruments, Inc. and subsidiaries (the Corporation) as of March 31,
1997 and 1996,1999 and the related consolidated statements of operations, shareholders'
equity, and cash flows for the yearsyear then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.audit. We did not
audit the financial statements of the Hong Kong Joint Venture, the Corporation's
investment which is accounted for by use ofusing the equity method. The Corporation's
equityinvestment of $2,508,957 and $3,660,350$2,240,785 in the Hong Kong Joint Venture's net assets at March
31, 19971999 and 1996, andequity in earnings of $(151,011) and
$218,173 in that company's net (loss) income$312,602 for the yearsyear then ended is included
in the accompanying consolidated financial statements. The financial statements
of the Hong Kong Joint Venture were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for the Hong Kong Joint Venture, is based solely on the report of the
other auditors. The consolidated financial statements of Universal Security
Instruments, Inc. and Subsidiaries as of and for the two years ended March 31,
1998 were audited by other auditors whose report dated June 17, 1998 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Universal Security
Instruments, Inc. and subsidiaries as of March 31, 1999, and the results of
their consolidated operations and their consolidated cash flows for the year
then ended in conformity with generally accepted accounting principles.
We have also audited the financial statement Schedule II for the year ended
March 31, 1999. In our opinion, this Schedule presents fairly in all material
respects the information required to be set forth therein.
Grant Thornton LLP
June 16, 1999
Baltimore, Maryland
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INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the consolidated balance sheet of Universal Security
Instruments, Inc. and subsidiaries (the Corporation) as of March 31, 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended March 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14 for each of the two years in the period ended March 31, 1999. These
financial statements and financial statement schedule are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.
We did not audit the financial statements of the Hong Kong Joint Venture, the
Corporation's investment which is accounted for by use of the equity method. The
Corporation's equity of $2,228,182 in the Hong Kong Joint Venture's net assets
at March 31, 1998, and of $(30,775) and $(151,011) in that company's net loss
for each of the two years is included in the consolidated financial statements.
The financial statements of the Hong Kong Joint Venture were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for such company, is based solely on the reportreports
of such other auditors.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Universal Security Instruments, Inc. at
March 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
1997 and 1996 consolidated financial statements taken as a whole. The 1997
and 1996 supplemental schedules are presented for the purpose of additional
analysis and are not a required part of the basic 1997 and 1996 consolidated
financial statements. The 1997 and 1996 supplemental schedules are the
responsibility of the Company's management. Such 1997 and 1996 supplemental
schedules have been subjected to the auditing procedures applied in our
audits of the basic consolidated financial statements and, in our opinion,
are fairly stated in all material respects when considered in relation to
the basic 1997 and 1996 consolidated financial statements taken as a whole.
Deloitte & Touche LLP
June 30, 1997
Baltimore, Maryland
- 14 -
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the consolidated balance sheet (not presented
separately herein) of Universal Security Instruments, Inc. and
subsidiaries as of March 31, 1995 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the
year then ended. Our audit also included the financial statement
schedule listed in the index at item 14(a). These financial statements
and this schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and this schedule based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Universal Security Instruments, Inc. and subsidiaries at
March 31, 19951998, and the consolidated results of their operations and their cash flows for
each of the year thentwo years in the period ended March 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the relatedsuch financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ErnstDELOITTE & YoungTOUCHE LLP
June 21, 199517, 1998
Baltimore, Maryland
- 1514 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1997 19961999 1998
CURRENT ASSETS
Cash $ 150,452193,107 $ 97,793
Time deposits 8,748133,377
Accounts receivable:
Trade (less allowance for doubtful
accounts of $50,000$100,000 in 19971999 and
$25,771 in 1996) 1,723,979 2,033,0921998) 549,149 1,248,023
Officers and employees 1,545 40,678
1,725,524 2,073,770321 5,515
549,470 1,253,538
Inventories:
Finished goods 2,900,910 4,099,9071,749,684 2,228,070
Raw materials - foreign locations 127,656 152,303
3,028,566 4,252,21049,869 83,728
1,799,553 2,311,798
Prepaid expenses 369,439 484,669112,419 142,793
Assets held for sale - net
of depreciation 1,274,924
TOTAL CURRENT ASSETS 5,273,981 6,917,1903,929,473 3,841,506
INVESTMENT IN HONG KONG JOINT VENTURE 2,508,957 3,660,3502,240,785 2,228,182
PROPERTY PLANT AND EQUIPMENT 1,757,488 1,985,790225,862 1,613,222
OTHER ASSETS 16,690 113,0616,000 22,400
TOTAL ASSETS $9,557,116 $12,676,391$6,402,120 $7,705,310
See notes to consolidated financial statements.
- 1615 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
1997 19961999 1998
CURRENT LIABILITIES
Short-term borrowings $1,363,641 $ 2,993,685786,484 $ 969,326
Current maturity of long-term debt 89,655 13,48891,190
Accounts payable 1,502,193 858,557
Accounts payable - joint venture 750,000294,618 583,910
Accrued liabilities:
Payroll, commissions and
payroll taxes 45,991 71,372
Other 18,948 35,980liabilities 86,973 66,672
Debt related to assets held for sale 1,246,973
TOTAL CURRENT LIABILITIES 3,020,428 4,723,0822,415,048 1,711,098
LONG-TERM DEBT, less current portion 1,344,211 1,277,3941,246,861
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
3,245,587887,143 and 811,397 shares in
19971999 and 1996 32,456 32,4561998 8,871 8,114
Additional paid-in capital 10,429,588 10,429,58810,499,446 10,453,930
Retained earnings (deficit) (5,269,567) (3,786,129)deficit (6,521,245) (5,714,693)
TOTAL SHAREHOLDERS' EQUITY 5,192,477 6,675,9153,987,072 4,747,351
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,557,116 $12,676,3916,402,120 $ 7,705,310
See notes to consolidated financial statements.
- 1716 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
1999 1998 1997 1996 1995
Net sales $ 9,071,628 $11,566,317 $15,423,149 $19,507,889 $24,841,794
Cost of goods sold 7,770,737 9,393,376 13,000,896 16,369,364 21,713,689
GROSS PROFIT 1,300,891 2,172,941 2,422,253 3,138,525 3,128,105
Research and development expense 129,877 226,529 250,751 220,051 446,178
Selling, general and
administrative expense 2,062,020 2,092,570 3,209,962 3,696,740 4,327,921
Operating loss (891,006) (146,158) (1,038,460) (778,266) (1,645,994)
Other income (expense):
Interest income 2,719 2,916 5,984 4,935 4,970
Interest expense (230,625) (270,817) (411,541) (543,352) (582,581)
Gain from sale of land 312,625
Legal settlement (247,500)
Other (242) (292) 46,465
(307) 3,145(228,148) (268,193) (293,967) (538,724) (574,466)
LOSS BEFORE EQUITY IN EARNINGS
(LOSS) EARNINGS OF HONG KONG
JOINT VENTURE (1,119,154) (414,351) (1,332,427) (1,316,990) (2,220,460)
Equity in earnings (loss) earnings of
joint ventureHong Kong Joint Venture 312,602 (30,775) (151,011) 218,173 924,034
NET LOSS $ (806,552) $ (445,126) $(1,483,438) $(1,098,817) $(1,296,426)
Per common share amounts:
PrimaryBasic and Diluted $ (.46)(.93) $ (.34)(.55) $ (.40)
Fully diluted (.46) (.34) (.40)(1.83)
Weighted average number of
common shares outstanding:
Primary 3,245,587 3,245,587 3,242,595
Fully diluted 3,245,587 3,245,587 3,242,595Basic and Diluted 863,706 811,397 811,397
See notes to consolidated financial statements.
- 1817 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Retained
Common Stock Paid-In EarningsRetained
Shares Amount Capital (Deficit)Deficit Total
Balance at
March 31, 1994 3,239,835 $32,398 $10,422,398 $(1,390,886) $9,063,910
Net loss
for 1995 (1,296,426) (1,296,426)
Common stock
issued to
employees
through
employee
stock
purchase
plan 547 6 800 806
Common stock
issued to
employees
as compen-
sation 5,000 50 6,200 6,250
Balance at
March 31,
1995 3,245,382 32,454 10,429,398 (2,687,312) 7,774,540
Net loss
for 1996 (1,098,817) (1,098,817)
Common stock
issued to
employees
through
employee
stock
purchase
plan 205 2 190 192
Balance at
March 31,
1996 3,245,587 32,456 10,429,588 (3,786,129)811,397 $8,114 $10,453,930 $(3,786,129) $ 6,675,915
Net loss for 1997 (1,483,438) (1,483,438)
Balance at
March 31, 1997 3,245,587 $32,456 $10,429,588 $(5,269,567) $5,192,477811,397 8,114 10,453,930 (5,269,567) 5,192,477
Net loss for 1998 (445,126) (445,126)
Balance at
March 31, 1998 811,397 8,114 10,453,930 (5,714,693) 4,747,351
Common stock sold
to employee 113,636 1,136 98,864 100,000
Common stock
repurchased (37,950) (380) (53,347) (53,727)
Shares issued in
reverse stock split 60 1 (1)
Net loss for 1999 (806,552) (806,552)
Balance at
March 31, 1999 887,143 $ 8,871 $10,499,446 $(6,521,245) $ 3,987,072
See notes to consolidated financial statements.
- 1918 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
1999 1998 1997 1996 1995
OPERATING ACTIVITIES
Net loss $ (806,552) $ (445,126) $(1,483,438) $(1,098,817) $(1,296,426)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 141,161 158,051 165,096 181,781 200,166
Provision for losses on accounts
receivable 50,000 24,229 27,330
Legal settlement 300,000
Distributions(Undistributed) distributions
in excess of (undistributed) earnings of joint ventureHong
Kong Joint Venture (12,603) 280,775 401,393 (218,173) (424,034)
Gain on sale of property plant
and
equipment (312,635) (7,200)
Changes in operating assets
and liabilities:
Decrease in accounts receivable
trade 704,068 421,986 284,884 1,014,065 921,324
Decrease in inventories and
prepaid expenses 542,619 943,414 1,338,874
107,418 1,411,789
Increase(Decrease) increase in
accounts payable and
accrued liabilities (268,991) (916,550) 601,223 231,202 746,286
Decrease (increase) in other
assets 16,400 (5,710) 135,005 (10,728) (3,829)
NET CASH PROVIDED BY OPERATING ACTIVITIES 316,102 486,840 1,454,631 206,748 1,575,406
INVESTING ACTIVITIES
Purchases of property plant
and equipment (28,725) (13,786) (7,589)
(93,498) (110,755)
Decrease (increase) in time deposits 8,748 (426) (265)
Proceeds from sale of property plant
and
equipment 383,429
16,055
NET CASH (USED IN) PROVIDED BY
(USED IN)
INVESTING ACTIVITIES (28,725) (13,786) 384,588 (93,924) (94,965)
FINANCING ACTIVITIES
Net repayment of short-term debt (182,842) (394,315) (1,630,044) (876,026) (1,195,214)
Proceeds from issuance of
long term-debt 1,300,000 110,000
Principal payments on long-term debt (16,078) (14,564) (13,266)
(613,006) (503,612)
PaymentPayments on legal settlement (75,000) (81,250) (143,250)
Proceeds from issuance of common stock 192 7,056100,000
Purchase of common stock (53,727)
NET CASH USED IN FINANCING ACTIVITIES (227,647) (490,129) (1,786,560) (188,840) (1,581,770)
INCREASE (DECREASE) IN CASH 59,730 (17,075) 52,659 (76,016) (101,329)
CASH AT BEGINNING OF YEAR 133,377 150,452 97,793 173,809 275,138
CASH AT END OF YEAR $ 150,452193,107 $ 97,793133,377 $ 173,809150,452
Supplemental information:
Interest paid $ 411,541230,625 $ 543,352270,817 $ 582,581411,541
Income taxes paid - - -
See notes to consolidated financial statements.
- 2019 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Research and Development: Research and development costs are charged to
operations as incurred.
Accounts Receivable: The Company provides allowances for doubtful receivables by
a charge against income in amounts equal to the estimated losses that will be
incurred in collection of all receivables. The estimated losses are based on
historical collection experience and a review of the current status of the
existing receivables. Customer accounts are written off against the allowance
for doubtful accounts when an account is determined to be uncollectible.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Included as a component of finished goods inventory are additional non-material
costs. These costs include freight, import duty, inspection fees, etc.
Year Ended March 31,
1999 1998
Materials $1,500,587 $1,894,816
Non-Materials 249,097 333,254
$1,749,684 $2,228,070
Property Plant and Equipment: Property plant and equipment is recorded at cost, less
accumulated depreciation and amortization. Depreciation and amortization is
provided by the straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes. The estimated useful lives for
financial reporting purposes are as follows:
Building - 40 years
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
- 20 -
Income Taxes: The Company accounts for income taxes using SFAS No. 109,
"Accounting for Income Taxes.Taxes:" For further information (see Note
F).
Net LossIncome taxes are provided based on the liability
method for financial reporting purposes. Deferred and prepaid taxes are provided
for on temporary differences in the basis of assets and liabilities which are
recognized in different periods for financial and tax reporting purposes.
Per Share Data: The Company implemented Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share: PrimaryShare" for all years presented which
requires presentation of basic and fullydiluted earnings per share amounts and a
reconciliation for all years presented of the respective calculations. The
Company incurred a net loss for the years ended March 31, 1999, 1998 and 1997;
therefore, all potential dilutive common shares are antidilutive and not
included in the calculation of diluted earnings per share. Basic and diluted net
lossincome per share are computed by dividing net lossincome (loss) by the weighted
average number of common and potential dilutive common equivalent(if any) shares
outstanding. Common equivalent shares
includeoutstanding during the dilutive effect of outstanding stock options calculated
under the treasury stock method. Stock options are antidilutive for the
fiscal years 1997, 1996 and 1995.
- 21 -
period.
New Accounting Pronouncement:Pronouncements - The Company is required to adoptimplemented SFAS No. 128, "Earnings per Share"130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of An
Enterprise and Related Information" effective April 1, 1998. The standard
specifiesThese standards
specify the computation, presentation and disclosure requirements for earnings per share.comprehensive income
and segment information. SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" standardizes the accounting for all derivative
instruments. The Companycompany does not believe this statement
will have a material effect on earnings per share.hold or issue derivative financial
instruments.
NOTE B - PROPERTY PLANT AND EQUIPMENT
Property plant and equipment consist of the following:
March 31,
1997 19961999 1998
Land and improvements $ 234,284174,034 $ 305,079234,284
Building and improvements 1,412,271
1,412,271
Machinery and equipment 812,171 810,172835,966 824,171
Furniture and fixtures 244,250 241,366260,616 246,036
Computer equipment 50,586 49,085
46,379
2,752,061 2,815,2671,321,202 2,765,847
Less accumulated depreciation
and amortization 994,573 829,477
$1,757,488 $1,985,7901,095,340 1,152,625
$ 225,862 $1,613,222
Assets net of depreciation from land, building and improvements
totaling $1,274,924 were transferred to assets held for sale. See Note
L.
- 21 -
NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE
The Company maintains a Joint Venture with a Hong Kong Corporation, which has
manufacturing facilities in the People's Republic of China, for the
manufacturing of consumer electronic products. As of March 31, 1997,1999, the Company
has invested approximately $2,508,957$2,240,785 for their 50% interest in the Hong Kong Joint Venture.
The investment has been accounted for using the equity method of accounting.
Included in the Company's
accounts receivable and accounts payable are $171,123 and $149,018,
due from and due to the Joint Venture, respectively.
During fiscal 1997, the Hong Kong Joint Venture completed the accounting offor its
development contract and recorded a write-down of its investment in
its Cellular Joint Venture. The Joint Venture recorded a profit of $122,328 on the development
contract and a write-down of $725,745 on its Cellular Joint Venture investment.
- 22 -
During fiscal 1998, the Hong Kong Joint Venture wrote off the balance of its
Cellular Joint Venture investment in the amount of $337,464.
The following represents summarized financial information from the financial
statements of the Hong Kong Joint Venture as of March 31, 19971999 and 19961998 and for
the years ended March 31, 1997, 19961999, 1998 and 1995.1997.
Year Ended March 31,
1999 1998 1997 1996 1995
Current assets $2,712,051 $4,807,113$3,053,302 $3,041,311
Property and other assets 3,456,418 4,694,3642,422,311 2,742,444
Total $6,168,469 $9,501,477$5,475,613 $5,783,755
Current liabilities $1,063,777 $4,094,674$ 983,512 $1,281,123
Non-current liabilities 141,296 141,38463,382 100,017
Shareholders' equity $4,963,396 5,265,419$4,428,719 $4,402,615
Total $6,168,469 $9,501,477$5,475,613 $5,783,755
Net sales $6,440,817 $6,984,960 $6,644,142 $9,977,272 $15,260,179
Gross profit 1,537,855 1,327,380 1,792,877
1,640,186 3,308,602
Net income (loss) income625,205 (61,550) (302,023) 436,345 1,848,069
As of and for the years ended March 31, 1997, 19961999, 1998 and 1995,1997, the period ending
exchange rate and the weighted average exchange rates arewere approximately 7.75
Hong Kong dollars to each U.S. dollar.
Current liabilities at March 31, 1996 include $2,000,000 in dividends
payable to shareholders which were distributed in April 1996.
During the years ended March 31, 1997, 19961999, 1998 and 1995,1997, the Company purchased
$5,824,622, $9,206,000$4,365,481, $6,078,933 and $13,832,000,$5,824,622, respectively, of finished product from
the Hong Kong Joint Venture, which represents 57%81%, 53%73% and 81%57%, respectively, of
the Company's total finished product purchases.
- 22 -
NOTE D - DEBT
Debt consisted of the following:
Year Ended March 31,
1997 19961999 1998
Short-term borrowings $1,363,641 $2,993,685$ 786,484 $ 969,326
Promissory notes - long-term 1,433,866 1,290,882
2,797,507 4,284,5671,338,051
Debt related to assets held for sale 1,246,973
1,246,973 1,338,051
Less current maturities 1,453,296 3,007,173
$1,344,211 $1,277,3941,246,973 91,190
$ -0- $1,246,861
- 23 -
The short-term borrowings relate to the Company's agreement with a financial
institution to provide a maximum line of credit of the lower of $7,500,000 or
specified percentages of the Company's accounts receivable and inventory
consisting of a revolving line of credit and letterletters of credit. The outstanding
principal balance of the revolving credit line ($1,363,641786,484 at March 31, 1997)1999) is
payable on demand. The interest rate on the revolving credit line is equal to
1-1/2% in excess of the prime rate of interest (10%(9-1/4% at March 31, 1997)1999). As of
March 31, 1997,1999, the amount available for borrowings under the line was
approximately $300,000$116,000 based on the specified percentages. The loan is
collateralized by the Company's accounts receivable, inventory and a 1.5 acre
parcel of the Company's real estate. The agreement does not contain any
provision for compliance with financial covenants. The weighted average interest
rate on outstanding short-term borrowings for the years ended March 31, 1999,
1998 and 1997 1996was 9.62%, 10.00% and 1995 was 9.4%, 11.0% and
9.0%9.40%, respectively.
During the year ended March 31, 1996, the Company refinanced its mortgage on its
corporate headquarters. The terms of the mortgage are a $1,300,000 loan
repayable in 60 equal monthly installments of principal and interest based on a
25 year amortization schedule, with an interest rate of 10%. The full
outstanding balance is due at the earlier of end of the 60 month period.period or when
property is sold. At March 31, 19971999 and 1996,1998, the outstanding principal balances
were $1,277,616$1,246,973 and $1,290,882,$1,263,051, respectively.
Included in debt at March 31, 1998 is a note payable of $156,250,$75,000, payable to
Black & Decker, as a result of thea legal settlement.settlement (see Note K). This note is
non-interest bearing and payable at $6,250 per month for 25 months.
The annual maturities for all debt outstanding at March 31, 1997 are:
1998, $1,453,296; 1999, $91,190; 2000, $1,253,021.month.
NOTE E - LEASES
There were no operating leases for either of the years ended March 31, 19971999 or
March 31, 1996.1998.
- 23 -
NOTE F - INCOME TAXES
At March 31, 1997,1999, the Company has net operating loss (NOL) carryforwards in the
United States of approximately $4,463,000$5,150,000 for income tax purposes that expire in
years 19992009 through 2011 and tax credit carryforwards of
approximately $36,000 in the United States.2019. From 19961998 to 1997,1999, the deferred tax asset valuation
allowance decreased by $1,025,421,$15,577 due to IRS Audit adjustments and establishing a deferred tax liability for
the unremitted earnings of the Joint Venture which was offset somewhat
by losses generated during 1997.prior year's NOL's. From
19951997 to 1996,1998, the deferred tax asset valuation allowance increased by $339,555. This net increase is
mainly$344,248
primarily due to allowances provided from domestic loss carryforwardsoperating losses generated during 1995.
- 24 -
in fiscal 1998 and the adjustment of
prior year NOL's.
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,
1997 19961999 1998
Deferred tax liabilities:
Deferred gain on involuntary conversion $ -0- $ 71,092
Unremitted joint ventureHong Kong Joint Venture earnings
not considered permanently reinvested 777,868 380,000$ 771,396 $ 766,174
Gross deferred tax liabilities 777,868 451,092771,396 766,174
Deferred tax assets:
OtherFinancial statement accruals and reserves 90,782 43,993allowances 83,728 106,032
Inventory uniform capitalization 72,200 72,200
Other 35,355 33,41967,553 34,615
NOL carryforwards and tax credits 1,732,386 2,479,7561,957,241 1,978,230
Gross deferred tax assets 1,858,523 2,557,1682,180,722 2,191,077
Valuation allowance (1,080,655) (2,106,076)(1,409,326) (1,424,903)
Net deferred tax assets $ -0- $ -0-
The reconciliation of the income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
3/31/9799 3/31/9698 3/31/9597
Federal tax benefit at
statutory rate on loss (34%) $(276,229) $(151,343) $(504,269) $(373,598) $(440,785)
Equity in (earnings) loss (earnings) from
joint ventureHong Kong Joint Venture (106,285) 10,464 51,344 (80,023) (314,172)
Dividends received from joint ventureHong Kong Joint
Venture for which net deferred taxes
taxes were not previously provided 102,000 85,000 340,000 170,000
Effect of net operating loss carryforwards 279,616 81,144 60,000
394,629 585,960
Other 898 (25,265) 52,925 58,992 (1,003)
$ -0- $ -0- $ -0-
Investment and other tax credits are accounted for by the flow-through method.
- 2524 -
NOTE G - COMMON STOCK
On February 27, 1998, the Shareholders approved a one-for-four reverse stock
split of the Company's issued and outstanding common stock. The effective date
of the reverse stock split was March 9, 1998, which reduced the number of
outstanding shares from 3,245,587 shares to 811,397 shares. Additional paid-in
capital was increased and common stock was decreased by $24,342 as a result of
the reverse stock split. All share and per share amounts in this report have
been restated to reflect the reverse stock split.
Common Stock - On September 2, 1998, the Company sold 113,636 shares of common
stock to the Chairman of the Board of the Company at a price of $.88 cents per
share (the mean between the closing bid and asked prices on NASDAQ) or an
aggregate of $100,000. On November 12, 1998, the Board of Directors authorized
the Company to purchase up to 100,000 shares of the Company's common stock.
During the year ended March 31, 1999, pursuant to the stock purchase program,
the Company repurchased 37,950 shares at a cost of $53,727.
Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as amended,
975,000243,750 shares of common stock are authorized for the granting of stock options,
of which 46,07511,519 shares have been issued as of March 31, 1997,1999, leaving 928,925232,231
available for issuance upon exercise of options granted, or available for future
grants to employees and directors. Under provisions of the Plan, a committee of
the Board of Directors determines the option price and the dates exercisable.
All options expire five years from the date of grant.
The following tables summarize the status of options under the Non-Qualified
Stock Option Plan at March 31, 19971999 and option transactions for the two years
then ended:
Status as of March 31, 1997 Number of Shares
Presently exercisable 516,625
Exercisable in future years 135,875
Total outstanding 652,500
Available for future grants 276,425
Shares of common stock reserved 928,925
Outstanding options:
Number of holders 21
Average price per share $1.61
Expiration dates April 1997 to December 2001
Status as of March 31, 1999 Number of Shares
Presently exercisable 172,561
Exercisable in future years 51,939
Total outstanding 224,500
Available for future grants 7,731
Shares of common stock reserved 232,231
Outstanding options:
Number of holders 13
Average price per share $0.98
Expiration dates September 1999 to November 2003
- 25 -
Transactions for the Two Years Ended March 31, 1997:1999:
Weighted Average
Number of Per Share Total
Shares Option Price Option Price
Outstanding at
March 31, 1995 589,500 $1.94 $1,143,2251997 163,125 .76 $124,010
Granted 12,500 2.28 28,45042,500 .25 10,656
Canceled (60,500) 2.09 (168,825)(17,500) .51 (8,925)
Outstanding at
March 31, 1996 541,500 1.85 1,002,8501998 188,125 125,741
Granted 301,000 1.28 384,25082,250 2.11 173,625
Canceled (190,000) 1.77 (336,200)(45,875) 1.72 (78,969)
Outstanding at
March 31, 1997 652,500 $1.61 $1,050,9001999 224,500 $220,397
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Under the terms of the Company's 1988 Employee Stock Purchase Plan, eligible
employees can purchase shares of the Company's common stock through payroll
deductions at a price equal to 90% of the asked price of the shares. The Company
has reserved 100,00025,000 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, 1997,1999, approximately 65,00016,250 shares remain reserved for issuance under
this Plan.
During the year ended March 31, 1996, 715,000 outstanding warrants
expired.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for the 1978 Non-Qualified Stock Plan. Accordingly, no compensation has been
recognized for the 1978 Stock Plan. Had compensation costs for the 1978 Stock
Plan been determined based on fair value at the grant date forward under that
Plan consistent with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss would not have been materially affected on a pro forma
basis.
No
adjustment to the Company's net loss is required for the year ended
March 31, 1997 and 1996.
NOTE H - BENEFIT PLAN
The Company maintains a 401(k) defined contribution plan for its
employees. For calendar years 1997, 1996 and 1995, the Company has
elected to contribute 2% of each eligible employee's salary to the
Plan. Additionally, the Company has elected to match 20% of employee
contributions, up to a maximum of $200, and to provide an aggregate
contribution of 3% of corporate net income to be allocated among Plan
participants. The Company contributions were terminated as of March
3, 1997. The 401(k) expense for the years ended March 31, 1997, 1996
and 1995 was $23,674, $32,486 and $41,305, respectively.
NOTE I - COMMITMENTS
The Company hasentered into a three year employment agreement with its Vice
President of Sales with fixed annual remuneration of $175,000 in year one and
$200,000 in years two and three. In addition, the agreement provides incentive
compensation based on the Company achieving certain levels of sales. The
agreement expires in December, 2001. The Company had employment agreements with
two of its officers, both
expiringwhich expired on March 31, 1998. The fixed aggregate annual
remuneration under these agreements approximatesapproximated $300,000 per year. In addition,
the agreements provide incentive compensation to these officers based on the
Company's achievement of certain levels of earnings.
Outstanding letterletters of credit commitments which are used solely for short-term
inventory financing totaled $53,770$18,180 at March 31, 1997.1999.
- 2726 -
NOTE I - YEAR 2000 COMPLIANCE
The Company has undertaken a project that addresses the Year 2000 (Y2K) issue of
computer systems and other equipment with embedded chips or processors not being
able to properly recognize and process date-sensitive information after December
31, 1999. The Company's Y2K project is designed to ensure the compliance of all
of the Company's applications, operating system and hardware platforms, and to
address the compliance of key business partners. Key business partners are those
customers and vendors that have a material impact on the Company's operations.
The Company is in the process of hiring a consultant to review its computer
operations and anticipates that all phases of the project should be completed
during 1999. The Company estimates that the total cost of the required
modifications to its systems to become Y2K compliant will not exceed $50,000 and
will not be material to the Company's financial position. Failure to make all
internal business systems Y2K compliant could result in an interruption in, or a
failure of, some of the Company's business activities or operations. Y2K
disruptions in the operations of key vendors could impact the Company's ability
to obtain products and service its customers. The Company is unable to determine
the readiness of its key business partners at this time and is therefore unable
to determine whether the consequences of Y2K failures will have a material
impact on the Company's results of operations, liquidity or financial condition.
The Company's Y2K project is expected to significantly reduce the Company's
level of uncertainty about the Y2K problem and reduce the possibility of
significant interruptions of normal business operations.
NOTE J - BUSINESS AND SALES INFORMATION
The Company is primarily a manufacturer and wholesaler of a variety of products,
principally of security
video and telecommunications devices and
systems,products for use in homes and businesses.businesses and manufactures private label products
to order. Approximately 24%, 15% and 11%15% of the Company's total sales were to a
singlethe same customer in 1999, 1998 and 1997, respectively. An additional 17% and
1996, respectively. Approximately 19%12% of the Company's total sales were to a different customer in 1995.1999 and 1998.
NOTE K - LITIGATION
TheIn fiscal 1997, the Company settled its legal proceeding for patent infringement
litigation with Black & Decker (U.S.). The Company recorded a charge
of $450,000 in its June 30, 1996 quarter for settlement of the patent
litigation and related expenses. In conjunction with the settlement with
Black & Decker, the Company agreed to pay the sum of $300,000. The repayment
terms were $100,000 paid in July 1996 and $200,000 payable in 32 equal monthly
installments without interest beginning September 1, 1996. The Company reduced its accrual for legal fees by
$125,000 related to this matter. The Company recovered $77,500 from
its insurance carrier during the fourth quarter in final settlement of
its claim. As a result of the
adjustmentsother related expenses and insurance carrier recovery, the net charge for this
matter amounted to $247,500.
NOTE L - SUBSEQUENT EVENT AND LIQUIDITY
Universal Security Instruments, Inc. sold its headquarters facility in Owings
Mills, MD, on June 16, 1999 for a price of $2.2 million to KA Real Estate
Associates, LLC. After deducting the mortgage and settlement charges, the
Company will have excess cash of approximately $840,000. The Company will
report, in its quarter ending June 30, 1999, a gain on the sale of this property
of approximately $800,000. Management believes that the excess cash generated
from the sale, together with its line of credit and working capital, will be
sufficient to meet the Company's liquidity needs for the fiscal year ending
March 31, 2000.
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PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of five 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.....55 Director; Vice Chairman of the 1970
Board of the Company since
September 1996; Chairman of the
Board of the Company from 1970
to September 1996.
Michael Kovens......56 Director; Chairman of the Board 1970
of the Company since September
1996; President of the Company
from 1970 to September 1996.
Harvey Grossblatt...52 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
April 1997; Vice President
of the Company from December
1986 to June 1996; Secretary and
Treasurer of the Company since
September, 1988; Vice President
and Chief Financial Officer of
the Company from October 1983
through May 1995.
Ronald Frank(1).....33 Vice President of Lexington 1998
National Insurance Company
since 1993.
Gary Goldberg.......50 1993 to 1996 President of Ultravision 1998
LLC; 1996 to 1997, Independent
Consultant; 1997 to present,
Procurement Agent for Sierra
Military Health Services, Inc.
(1) Mr. Frank is the son-in-law of Mr. Michael Kovens, Director and Chairman of
the Board of the Company.
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ITEM 11.
EXECUTIVE COMPENSATION
Table I. Summary Compensation Table
The following table reflects the aggregate amount paid or accrued by the Company
in its three most recent fiscal years, for each executive officer whose
compensation exceeded $100,000 in that year.
Long-Term Compensation
Name and Awards Payouts
Principal Annual Compensation Stock LTIP All Other
Position Year Salary Bonus Other Awards Options Payouts Compensation(1)
Michael
Kovens 1999 $175,000 - - - 12,500 - $ -0-
Chairman
of the
Board 1998 175,000 - - - 15,000 - -0-
1997 300,000 - - - 17,500 - 3,200
Stephen C.
Knepper 1999 $ 50,000 - - - 12,500 - $ -0-
Vice
Chairman
of the 1998 50,000 - - - 15,000 - -0-
Board 1997 183,328 - - - 17,500 - 3,200
Harvey
Gross-
blatt 1999 $122,500 - - - 6,250 - $ -0-
President,
Secre-
tary 1998 122,500 - - - - - -0-
and
Treasurer 1997 142,923 - - - 17,500 - 2,857
(1) Consists of Company contributions under its 401(k) plan.
Table II. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
Value
Number of Unexercised
of Unexercised In-The-Money
Shares Options at FY-End Options at FY-End
Acquired Value Exerci-/Unexerci- Exerci-/Unexerci-
Name In Exercise Realized sable / sable sable / sable
Michael Kovens - - 68,750/ -0- -0- / -0-
Stephen C. Knepper - - 68,750/ -0- -0- / -0-
Harvey Grossblatt - - 24,000/ -0- -0- / -0-
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ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 11, 1999, 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.
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 328,295(2) 34.3%
10324 South Dolfield Rd.
Owings Mills, MD 21117
Stephen Knepper 105,360(3) 11.0%
10324 South Dolfield Rd.
Owings Mills, MD 21117
Bruce Paul 129,400 14.0%
One Hampton Road
Purchase, NY 10577
(1) For the purpose of determining the percentages of stock
beneficially owned, shares of stock subject to options
exercisable within 60 days of June 11, 1999 are deemed to be
outstanding.
(2) Includes 68,750 shares which Mr. Kovens presently has the right
to acquire through the exercise of stock options.
(3) Includes 68,750 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options and
4,487 shares held by Mr. Knepper's adult children.
- 30 -
As of June 11, 1999, 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 328,295(2) 34.3%
Stephen Knepper 105,360(3) 11.0%
Harvey Grossblatt 31,273(4) 3.4%
All directors and officers as 474,976 45.1%
a group (5 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Includes 24,000 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
- 31 -
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in
Part II, Item 8.
Consolidated balance sheets, March 31, 1999 and 1998
Consolidated statements of operations for the years ended
March 31, 1999, 1998 and 1997.
Consolidated statements of shareholders' equity for the
years ended March 31, 1999, 1998 and 1997.
Consolidated statements of cash flows for the years
ended March 31, 1999, 1998 and 1997.
Notes to consolidated financial statements.
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibit No.
10.1 Non-Qualified Stock Option Plan, as amended
10.2 Hong Kong Joint Venture Agreement (confidential treatment of
Name requested and filed separately with the Commission)
(Incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the Fiscal Year
Ended March 31, 1994, File No. 0-7885)
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- 32 -
(b) Reports on Form 8-K
On March 30, 1999, the Registrant filed a Current Report on 8-K, dated
March 29, 1999, reporting the change in the Registrant's certifying accountant
from Deloitte & Touche LLP to Grant Thornton LLP
(d) Financial Statements Required by Regulation S-X
Separate financial statements of the Hong Kong Joint Venture
(confidential treatment of name requested and filed separately with the
Commission.
Page
Report of the auditors JV-1
Consolidated profit and loss account, JV-2
March 31, 1999 and 1998
Consolidated balance sheets, March 31, 1999 and 1998 JV-3
Consolidated cash flow statements, March 31, 1999 JV-5
and 1998
Notes to consolidated financial statements JV-7
- 33 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions(1) of year
Year ended
March 31, 1999
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 1998
Allowance for
doubtful accounts $ 50,000 $50,000 $-0- $ -0- $100,000
Year ended
March 31, 1997
Allowance for
doubtful accounts $ 25,771 $24,229 $-0- $ -0- $ 50,000
(1)Write-off of uncollectible accounts, net of recoveries.
- 34 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By: Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Date: July 13, 1999 By: Michael Kovens
Michael Kovens
Chairman of the Board, Director
Date: July 13, 1999 By: Stephen Knepper
Stephen Knepper
Vice Chairman of the Board, Director
Date: July 13, 1999 By: Harvey Grossblatt
Harvey Grossblatt, President,
Director, Secretary, Treasurer,
Chief Accounting Officer
- 35 -