================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31747
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, Maryland 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 363-3000
Inapplicable
---------------------------------------------------
(Former name, former address and former fiscal year
if changed from last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes No X
----- -----
At August 11, 2005, the number of shares outstanding of the registrant's common
stock was 1,673,498.
================================================================================
TABLE OF CONTENTS
Part I - Financial Information Page
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at June 30, 2005
and March 31, 2005 3
Consolidated Statements of Earnings for the Three
Months Ended June 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 12
Item 4. Controls and Procedures 12
Part II - Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits 13
Signatures 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS June 30, 2005 March 31, 2005
------------- --------------
CURRENT ASSETS
Cash $ 117,496 $ 59,287
Accounts receivable:
Trade less allowance for doubtful
accounts of $15,000 at June 30 and 1,229,256 1,014,757
March 31, 2005
Employees 23,889 21,503
----------- -----------
1,253,145 1,036,260
Amount due from factor 4,115,055 3,394,084
Inventories, net 4,032,290 4,834,486
Prepaid expenses 280,209 145,394
----------- -----------
TOTAL CURRENT ASSETS 9,798,195 9,469,511
DEFERRED TAX ASSET 451,780 351,780
INVESTMENT IN JOINT VENTURE 6,833,379 6,131,481
PROPERTY AND EQUIPMENT - NET 77,181 81,690
OTHER ASSETS
15,486 15,486
----------- -----------
TOTAL ASSETS $17,176,021 $16,049,948
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,767,543 $ 1,725,402
Accrued liabilities:
Patent litigation and settlement reserve 649,893 555,893
Professional fees 415,413 355,652
Payroll, commissions and other
555,295 515,333
----------- -----------
TOTAL CURRENT LIABILITIES 3,388,144 3,152,280
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per share;
authorized 20,000,000 shares; issued
and outstanding 1,653,164 and 1,652,998
shares at June 30, 2005 and
March 31, 2005, respectively 16,532 16,530
Additional paid-in capital 11,469,881 11,469,444
Retained earnings 2,301,464 1,411,694
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 13,787,877 12,897,668
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,176,021 $16,049,948
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Three Months Ended June 30,
2005 2004
----------- -----------
Net sales $ 6,923,810 $ 4,874,782
Cost of goods sold 4,874,856 3,390,069
----------- -----------
GROSS PROFIT 2,048,954 1,484,713
Research and development expense 52,178 66,226
Selling, general and administrative expense 1,888,060 1,181,358
----------- -----------
Operating income 108,716 237,129
Other income (expense):
Interest income and other 9,667 --
Interest expense (17,941) (12,771)
----------- -----------
INCOME BEFORE EARNINGS FROM JOINT VENTURE 100,442 224,358
Earnings from Joint Venture:
Equity in earnings of Joint Venture 701,900 541,939
----------- -----------
NET INCOME BEFORE TAXES 802,342 766,297
Provision for income tax (benefit) expense (87,428) --
----------- -----------
NET INCOME $ 889,770 $ 766,297
=========== ===========
Net income per common share amounts
Basic $0.54 $0.49
Diluted $0.50 $0.44
Weighted average number of
common shares outstanding
Basic 1,653,025 1,564,702
Diluted 1,788,428 1,757,283
See accompanying notes to consolidated financial statements.
-4-
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended June 30,
2005 2004
--------- ---------
OPERATING ACTIVITIES
Net income $ 889,770 $ 766,297
Adjustments to reconcile net income
to net cash (used in) provided
by operating activities:
Depreciation and amortization 6,911 8,095
Earnings of the Joint Venture (701,900) (541,939)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable and (937,856) 765,696
amounts due from factor
Decrease (increase) in inventories and prepaid 667,381 (895,312)
expenses
Increase (decrease) in accounts payable and 235,864 (281,696)
(Increase) in deferred tax asset
(100,000) --
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 60,170 (178,859)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,400) (4,190)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,400) (4,190)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock from 439 43,257
exercise of employee stock options
Principal payments on capital lease -- (2,788)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 439 40,469
--------- ---------
INCREASE (DECREASE) IN CASH 58,209 (142,580)
Cash at beginning of period 59,287 188,190
--------- ---------
CASH AT END OF PERIOD $ 117,496 $ 45,610
--------- ---------
Supplemental information:
Interest paid $ 17,941 $ 12,771
See accompanying notes to consolidated financial statements.
-5-
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statement of Management
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Significant inter-company accounts and
transactions have been eliminated in consolidation. In the opinion of the
Company's management, the interim consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America have been condensed or omitted. The interim consolidated financial
statements should be read in conjunction with the Company's March 31, 2005
audited financial statements filed with the Securities and Exchange Commission
on Form 10-K. The interim operating results are not necessarily indicative of
the operating results for the full fiscal year.
Income Taxes
No income tax expense has been provided for the three month period ended June
30, 2005, principally as a result of the carryforward of prior years' operating
losses. The valuation allowance previously established to offset tax benefits
associated with our net operating loss carryforwards and other deferred tax
assets was reduced during the quarter by $100,000, resulting in a net income tax
benefit of $87,428. The valuation allowance is heavily influenced by historical
results of operations and management believes recent operating results support
the recognition of a portion of the income tax benefits associated with
realization of net operation loss carryforwards and other deferred tax assets.
We will continue to monitor the remaining valuation allowance of $676,523 which
offsets future tax benefits associated with net operating loss carryforwards and
other deferred tax assets until circumstances indicate the allowance is no
longer required.
Joint Venture
The Company maintains a 50% interest in a joint venture with a Hong Kong
corporation ("Joint Venture") that has manufacturing facilities in the People's
Republic of China, for the manufacturing of security products. The following
represents summarized balance sheet and income statement information of the Hong
Kong Joint Venture for the three months ended June 30, 2005 and 2004:
2005 2004
----------- -----------
Net sales $ 6,013,212 $ 6,843,904
Gross profit 2,120,533 2,214,058
Net income 1,200,195 1,238,336
Total current assets 7,320,006 6,789,802
Total assets 16,673,743 13,841,081
Total current liabilities 4,717,636 4,547,686
During the three months ended June 30, 2005 and 2004, respectively, the Company
purchased $2,835,861 and $2,693,179 of products from the Hong Kong Joint
Venture. At June 30, 2005 and 2004, the Company had amounts payable to the Hong
Kong Joint Venture of $500,000 and $341,451, respectively. For the quarter ended
June 30, 2005, the Company has adjusted its equity in earnings of the Joint
Venture to reflect a reduction of $101,802 in inter-company profit in inventory
as required by US GAAP.
Net Income Per Common Share
Basic earnings per common share is computed based on the weighted average number
of common shares outstanding during the periods presented. Diluted earnings per
common share is computed based on the weighted average number of common shares
outstanding plus the effect of stock options and other potentially dilutive
common stock equivalents. The dilutive effect of stock options and other
potentially dilutive common stock equivalents is determined using the treasury
stock method based on the Company's average stock price.
-6-
A reconciliation of the weighted average shares of common stock utilized in the
computation of basic and diluted earnings per share for the three month period
ended June 30, 2005 and 2004 is as follows:
Three Months Ended June 30,
2005 2004
----------- -----------
Weighted average number of common shares 1,653,025 1,564,702
outstanding for basic EPS
Shares issued upon the assumed exercise of
outstanding stock options 135,403 192,581
----------- -----------
Weighted average number of common and common
equivalent shares 1,788,428 1,757,283
=========== ===========
outstanding for diluted EPS
At June 30, 2005 and 2004 there were no securities outstanding whose issuance
would have an anti-dilutive effect on the earnings per share calculation. All
share and per share amounts included in the consolidated financial statements
have been retroactively adjusted to reflect the 4-for-3 stock dividend paid on
April 5, 2004 to shareholders of record on March 15, 2004.
Stock Based Compensation
During the three months ended June 30, 2005 and 2004, the Company granted
options for the purchase of 0 and 1,000 shares, respectively, to employees. The
options issued during the three months ended June 30, 2004 are exercisable at an
average price of $13.00 per share, respectively, expiring in 2009, and vest over
a four year period from the date of grant.
Subsequent to June 30, 2005, on July 12, 2005, as described in Part II, Other
Information, Item 1 - Legal Proceedings, the Company settled the litigation with
a former director. As a part of this settlement, the Company accepted the June
6, 2002 exercise by the former director of the option to purchase 20,000 shares
at an exercise price of $2.25 per share. The exercise price for these shares was
paid simultaneously with the closing of the settlement agreement.
The Company uses the intrinsic value method as defined by Accounting Principles
Board Opinion No. 25 to account for stock-based employee compensation. The
Company has adopted the disclosure requirements of Financial Accounting
Standards Board (FASB) Statement No. 123, Accounting for Stock-Based
Compensation, as amended by FASB No. 148. The following table illustrates the
effect on net income and earnings per share as if the fair value based method
had been applied to all outstanding and unvested awards in the period.
Three Months Ended June 30,
2005 2004
----------- -----------
Net income, as reported $ 889,770 $ 766,297
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (25,962) (14,531)
----------- -----------
Pro forma net income $ 863,808 $ 751,766
=========== ===========
Earnings per share:
Basic - as reported $ 0.54 $ 0.49
=========== ===========
Basic - pro forma $ 0.52 $ 0.48
=========== ===========
Diluted - as reported $ 0.50 $ 0.44
=========== ===========
Diluted - pro forma $ 0.48 $ 0.43
=========== ===========
All share and per share amounts included in the consolidated financial
statements have been retroactively adjusted to reflect the 4-for-3 stock
dividend paid on April 5, 2004 to shareholders of record on March 15, 2004.
-7-
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, "Accounting for Changes and
Error Corrections - a replacement of Accounting Opinions Board ("APB") Opinion
No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective
application to changes in accounting principles for prior periods' financial
statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005, and earlier adoption is permitted for accounting
changes and corrections of errors made in fiscal years beginning after this
statement was issued. The Company has adopted SFAS No. 154 as of its issuance
and will apply its provisions to any changes in accounting principle that occur
in future periods. The Company's adoption of SFAS No. 154 did not have a
material impact on the Company's financial condition or results of operations
during the three months ended June 30, 2005.
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB
Statement No. 123R, "Share-Based Payment," which requires companies to expense
the value of employee stock options and similar awards. The effective date of
FASB 123R is for interim and annual periods beginning after June 15, 2005.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
which provides guidance on the implementation of SFAS No. 123R, including
guidance related to share-based payment transactions with nonemployees,
valuation methods, the accounting for certain redeemable financial instruments
issued under share-based payment arrangements, the classification of
compensation expense, and the accounting for income tax effects of share-based
payment arrangements under SFAS No. 123R.
In April 2005, the SEC delayed the implementation date for SFAS No. 123R until
an issuer's first annual period that begins after June 15, 2005. Therefore, the
Company is required to adopt SFAS No. 123R effective April 1, 2006, using one of
three implementation alternatives. The Company anticipates that the adoption of
SFAS No. 123R may have a significant impact on the Company's financial
statements. The Company is currently in the process of determining which
implementation alternative to use and what the overall accounting impact of
adopting SFAS No. 123R may be.
Reclassifications
Certain prior year amounts have been reclassified in order to conform with
current year presentation.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used throughout this Report, "we," "our," "the Company" and similar
words refers to Universal Security Instruments, Inc.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements reflecting our current expectations with respect to our operations,
performance, financial condition, and other developments. These forward-looking
statements may generally be identified by the use of the words "may", "will",
"believes", "should", "expects", "anticipates", "estimates", and similar
expressions. These statements are necessarily estimates reflecting management's
best judgment based upon current information and involve a number of risks and
uncertainties. We caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and readers
are advised that various factors could affect our financial performance and
could cause our actual results for future periods to differ materially from
those anticipated or projected. While it is impossible to identify all such
factors, such factors could include: (i) our and our Hong Kong Joint Venture's
respective ability to maintain operating profitability, (ii) competitive
practices in the industries in which we compete, (iii) our dependence on current
management, (iv) the impact of current and future laws and governmental
regulations affecting us and our Hong Kong Joint Venture, (v) general economic
conditions, (vi) other factors which may be identified from time to time in our
Securities and Exchange Commission filings and other public announcements, and
(vii) currency fluctuations. We do not undertake and specifically disclaim any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2005 and 2004
Sales. Net sales for the three months ended June 30, 2005 were $6,923,810
compared to $4,874,782 for the comparable three months in the prior fiscal year,
an increase of $2,049,028 (42.03%). Net sales of safety products increased by
$2,545,631 compared to the quarter ended June 30, 2004. The primary reason for
the increase in safety sales was that sales were up across our core product
lines, including ground fault circuit interrupters (GFCI), smoke and carbon
monoxide alarms and chimes.
Gross Profit Margin. The gross profit margin is calculated as net sales
less cost of goods sold expressed as a percentage of net sales. Our gross profit
margin decreased .9%, to 29.6% of sales for the quarter ended June 30, 2005 from
30.5% for the corresponding quarter last year. The decrease in gross profit
margin resulted from increased costs of purchases from the Company's foreign
suppliers and changes in the mix of products sold.
Expenses. Selling, general and administrative expenses increased by
$706,702 from the comparable three months in the prior year. As a percentage of
net sales, these expenses increased to 27.3% for the three month period ended
June 30, 2005, from 24.2% for the comparable 2004 period. The increase in
selling and general administrative expense as a percent of sales was due to
higher sales volume and variable costs that increase with sales. Various expense
categories contributed to the increased dollar amount of the expense, but the
following major account classifications were significant factors in this dollar
increase: (i) Commissions and freight charges, as a percentage of sales,
remained consistent with commissions and freight charges of the prior year;
however, these expenses vary directly with sales volume and, therefore, of the
$706,702 increase in expenses, $241,181 is attributable to commissions and
freight charges from higher sales volume during the 2005 period. (ii)
Professional fees (principally associated with the previously reported suit by a
former director and chief executive officer) increased by $432,366 for the 2005
period as compared to the same quarter in the previous year. As previously
reported (see Part II, Other Information, Item 1 - Legal Proceedings), the
litigation with the former director and chief executive officer settled on July
12, 2005.
-9-
Interest Expense and Income. Our interest expense, net of interest income,
decreased to $8,274 for the quarter ended June 30, 2005 from $12,771 for the
quarter ended June 20, 2004. The lower net interest expenses resulted primarily
from an increase in interest income on investments.
Net Income. We reported net income of $889,770 for the quarter ended June
30, 2005 compared to net income of $766,297 for the corresponding quarter of the
prior fiscal year. The primary reason for the increase in net income is
increased earnings from our Hong Kong Joint Venture, the tax benefit arising
from the reduction of the deferred tax asset valuation allowance, partially
offset by increased selling, general and administrative expense.
FINANCIAL CONDITION AND LIQUIDITY
Our cash needs are currently met by funds from our Factoring Agreement
which supplies both short-term borrowings and letters of credit to finance
foreign inventory purchases. The maximum amount available under the Factoring
Agreement is currently $7,500,000. However, based on specified percentages of
our accounts receivable and inventory and letter of credit commitments, we had
$5,254,000 available under the Factoring Agreement, all of which was available
as of June 30, 2005. The interest rate under the Factoring Agreement on the
uncollected factored accounts as of June 30, 2005 was 6.25%. Borrowings are
collateralized by all of our accounts receivable and inventory.
On December 17, 2004, the Company obtained an unsecured $250,000 line of
credit from a commercial bank. Amounts borrowed on this line of credit bear
interest at the prime rate of interest as published from time to time by The
Wall Street Journal. The agreement requires, among other provisions, that the
Company maintain a zero balance on the facility for thirty consecutive days each
year. No amounts have been borrowed or are outstanding on this line of credit.
Our accounts receivable as of the end of our last fiscal year (net of
allowances for doubtful accounts) were $1,014,757, and were $1,229,256 as of
June 30, 2005. The increase in trade accounts receivable during the first three
months of the current fiscal year is due to increased sales, primarily direct
shipments from our foreign manufacturers, directly to customers for which we
bear the credit risk. Our prepaid expenses as of the end of our last fiscal year
were $145,394, and were $280,209 as of June 30, 2005. The increase in prepaid
expenses during the first three months of the current fiscal year is primarily
due to the timing of premium payments to various insurance carriers.
Operating activities provided cash of $60,170 for the period ended June
30, 2005. This was primarily due to a decrease in inventory and prepaid expenses
of $667,381, and an increase in accounts payable and accrued expenses of
$235,864, which were partially offset by equity in the earnings from our Hong
Kong Joint Venture of $701,900 and an increase in accounts receivable and
amounts due to factor of $937,856.
Investing activities used cash of $2,400 in the current period from
purchases of office equipment. For the same period last year, investing
activities used cash of $4,190.
Financing activities provided cash of $439 from the exercise of employee
stock options. For the same period last year, financing activities provided cash
of $40,469.
We believe that funds available under the Factoring Agreement,
distributions from the Hong Kong Joint Venture, working capital, and our new
line of credit provide us with sufficient resources to meet our requirements for
liquidity and working capital in the ordinary course of our business over the
next twelve months and over the long term.
HONG KONG JOINT VENTURE
Net Sales. Net sales of the Hong Kong Joint Venture for the three months
ended June 30, 2005 were $6,013,212, compared to $6,843,904, for the comparable
period in the prior fiscal year. Sales of the Hong Kong Joint Venture to the
Company amounted to $2,835,861 (47%) for the three month period ended June 30,
2005 and $2,693,179 (39%) for the same period of the prior year.
Net Income. Net income for the three months ended June 30, 2005 was
$1,200,195, compared to $1,238,336, in the comparable period last year. The 0.3%
decrease in net income for the quarter was mainly due to lower sales.
-10-
Gross Margins. Gross margins of the Hong Kong Joint Venture for the three
month period ended June 30, 2005 increased to 35% from 32% for the 2004 period.
The increase in the percent of gross margin is due primarily to price increases
initiated during the past fiscal year.
Expenses. Selling, general and administrative expenses were $886,270, for
the three month period ended June 30, 2005, compared to $864,871, in the prior
year's respective period. As a percentage of sales, expenses were 15%, for the
three month period ended June 30, 2005, compared to 13%, for the three month
period ended June 30, 2004. The increase in selling, general and administrative
expense was primarily due to increased professional fees associated with the
pursuit of legal action against a company in Germany which the Hong Kong Joint
Venture believes is infringing on patents and copyrights of the Hong Kong Joint
Venture.
Interest Income and Expense. Interest expense, net of interest income, was
$6,870, for the three month period ended June 30, 2005, compared to interest
expense of $9,780 for the prior year's period.
Liquidity. Cash needs of the Hong Kong Joint Venture are currently met by
funds generated from operations. During the three months ended June 30, 2005,
working capital increased by $1,008,603 from $1,593,767 on March 31, 2005 to
$2,602,370 on June 30, 2005.
As we previously reported, the Hong Kong Joint Venture was being
positioned for a possible initial public offering (IPO). On June 30, 2005, the
Joint Venture filed for listing of an IPO on the Main Board of the Hong Kong
Stock Exchange. No assurances can be given that these steps will result in an
IPO for the Hong Kong Joint Venture. We will report further developments at such
time as permitted in accordance with Hong Kong and U.S. regulations. Should the
Hong Kong Joint Venture complete its IPO, our ownership of the Joint Venture
will be reduced.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our consolidated financial
statements and results of operations are based on our Consolidated Financial
Statement included as part of this document. The preparation of these
consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate these estimates, including those related to bad
debts, inventories, income taxes, and contingencies and litigation. We base
these estimates on historical experiences and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily available from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect management's
more significant judgments and estimates used in the preparation of its
consolidated financial statements. For a detailed discussion on the application
on these and other accounting policies, see Note A to the consolidated financial
statements included in Item 8 of the Form 10-K for the year ended March 31,
2005. Certain of our accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating
financial estimates. By their nature, these judgments are subject to an inherent
degree of uncertainty and actual results could differ from these estimates.
These judgments are based on our historical experience, terms of existing
contracts, current economic trends in the industry, information provided by our
customers, and information available from outside sources, as appropriate. Our
critical accounting policies include:
Our revenue recognition policies are in compliance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" issued by the
Securities and Exchange Commission. We recognize sales upon shipment of products
net of applicable provisions for any discounts or allowances. We believe that
the shipping date from our warehouse is the appropriate point of revenue
recognition since upon shipment we have substantially completed our obligations
which entitle us to receive the benefits represented by the revenues, and the
shipping date provides a consistent point within our control to measure revenue.
Customers may not return, exchange or refuse acceptance of goods without our
approval. We have established allowances to cover anticipated doubtful accounts
based upon historical experience.
-11-
Inventories are valued at the lower of market or cost. Cost is determined
on the first-in first-out method. We have recorded a reserve for obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. Management reviews the reserve quarterly.
We currently have significant deferred tax assets resulting from tax
credit carryforwards, net operating loss carryforwards and deductible temporary
differences, which will reduce taxable income in future periods. We have
provided a valuation allowance on future tax benefits such as foreign tax
credits, foreign net operating losses, capital losses and net operating losses.
A valuation allowance is required when it is more likely than not that all
or a portion of the 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. Accordingly, based on
current results of operations, the balance of the valuation allowance for our
remaining net deferred tax assets at June 30, 2005 has been reduced to $676,523.
We are subject to lawsuits and other claims, related to patents and other
matters. Management is required to assess the likelihood of any adverse
judgments or outcomes to these matters, as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies is based on a careful analysis of each individual issue with the
assistance of outside legal counsel. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
We generally provide warranties from one to ten years to the
non-commercial end user on all products sold. The manufacturers of our products
provide us with a one-year warranty on all products we purchase for resale.
Claims for warranty replacement of products beyond the one-year warranty period
covered by the manufacturers are immaterial and we do not record estimated
warranty expense or a contingent liability for warranty claims.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
No material changes have occurred in our quantitative and qualitative
market risk disclosures as presented in our Annual Report Form 10-K for the year
ended March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed by us in the reports that we file or submit under the Securities
and Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and is accumulated and communicated to
management in a timely manner. Our Chief Executive Officer and Chief Financial
Officer have evaluated this system of disclosure controls and procedures as of
the end of the period covered by this quarterly report, and believe that the
system is effective. There have been no changes in our internal control over
financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Management is aware that there is a lack of segregation of duties at the
Company due to the small number of employees dealing with general administrative
and financial matters. However, at this time management has decided that
considering the employees involved and the control procedures in place, the
risks associated with such lack of segregation are insignificant and the
potential benefits of adding employees to clearly segregate duties do not
justify the expenses associated with such increases. Management will
periodically review this situation.
-12-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, Michael L. Kovens filed an action in Baltimore
County Circuit Court (Case No. C-03-9639) against the Company and the Estate of
Stephen C. Knepper, Harvey B. Grossblatt, Ronald A. Seff, M.D., Howard
Silverman, Ph.D., and Cary Luskin, alleging various claims and seeking various
relief. The Company incorporates by reference into this Report the information
reported in the Company's Current Report on Form 8-K, filed on July 14, 2005,
with respect to the July 12, 2005 settlement of this litigation.
On June 10, 2003, Leviton Manufacturing Co., Inc. filed a second civil
suit against the Company and its USI Electric subsidiary in the United States
District Court for the District of Maryland (Case No. 03cv1701), alleging this
time that the Company's GFCI units infringe one or more of its more recently
issued patents for reset lockout technology related to but not required by UL
Standard 943 for ground GFCI units, effective January 2003 ("Leviton II").
Leviton also asserted trade dress and unfair competition claims which largely
correspond to the claim in the "Leviton l" suit. On July 23, 2003, the GFCI
manufacturer, Shanghai Meihao Electric, Inc., filed an action for Declaratory
Judgment of non-infringement, invalidity, and unenforceability of the asserted
patents. The Court has bifurcated the action into liability and damage phases,
linked the supplier's Declaratory Judgment action with the action against the
Company, and consolidated Leviton I with Leviton II. In March 2005, the court
dismissed one of the Leviton patents from the suit and in April 2005, issued a
claims construction Order that favors the position of the Company. Discovery is
concluded and the Company has filed for summary judgment on certain aspects of
its defenses to both the accused trade dress infringement and patent
infringement. In the event of an unfavorable outcome, the amount of any
potential loss to USI is not yet determinable.
ITEM 6. EXHIBITS
Exhibit No.
3.1 Articles of Incorporation (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1988, File
No. 1-31747)
3.2 Articles Supplementary, filed October 14, 2003 (incorporated by reference
to Exhibit 3.1 to the Company's Current Report on Form 8-K filed October
31, 2002, file No. 1-31747)
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
2004, File No.
1-31747)
10.1 Non-Qualified Stock Option Plan, as amended (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2003, File No. 1-31747)
10.2 Hong Kong Joint Venture Agreement, as amended (incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 1-31747)
10.3 Amended Factoring Agreement with CIT Group (successor to Congress Talcott,
Inc.) dated November 14, 1999 (incorporated by reference to Exhibit 10.3
to the Company's Annual Report on Form 10-K for the year ended March 31,
2003, File No. 1-31747)
10.4 Amendment to Factoring Agreement with CIT Group (incorporated by reference
to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2002, File No. 1-31747)
10.5 Amendment to Factoring Agreement with CIT Group dated September 28, 2004
(incorporated by reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 2004, File No.
1-31747)
10.6 Lease between Universal Security Instruments, Inc. and National
Instruments Company dated October 21, 1999 for its office and warehouse
located at 7-A Gwynns Mill Court, Owings Mills, Maryland 21117
(incorporated by reference to Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the Fiscal Year Ended March 31, 2000, File No. 1-31747)
10.7 Amended and Restated Employment Agreement dated April 1, 2003 between the
Company and Harvey B. Grossblatt (incorporated by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the year ended March
31, 2003, File No. 1-31747)
10.8 Settlement Agreement with respect to Michael Kovens vs. Universal Security
Instruments, Inc. et al.*
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1 Section 1350 Certifications*
99.1 Press Release dated August 12, 2005*
*Filed herewith
-13-
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: August 12, 2005 By: /s/ Harvey B. Grossblatt
----------------------------------
Harvey B. Grossblatt
President, Chief Executive Officer
By: /s/ James B. Huff
----------------------------------
James B. Huff
Vice President, Chief Financial Officer
-14-