-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MY1NYd5S+dy0GiWcPPVWP8+dxxz9JcrZYjLXlDOgemzTbIS8TWrFf4iF/kA4XKE8 qi6PlHbNcrDhvtU1tWLR1w== 0000102109-97-000006.txt : 19970714 0000102109-97-000006.hdr.sgml : 19970714 ACCESSION NUMBER: 0000102109-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970711 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL SECURITY INSTRUMENTS INC CENTRAL INDEX KEY: 0000102109 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 520898545 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07885 FILM NUMBER: 97639342 BUSINESS ADDRESS: STREET 1: 10324 S DOLFIELD RD CITY: OWINGS MILLS STATE: MD ZIP: 21117-3586 BUSINESS PHONE: 4103633000 MAIL ADDRESS: STREET 1: 10324 S. DOLFIELD RD CITY: OWINGS MILLS STATE: MD ZIP: 21117-3586 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended March 31, 1997 ( ) 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: Common Stock, $.01 Par Value - $1,825,643 The number of shares outstanding of the issuer's classes of common stock as of June 23, 1997: Common Stock, $.01 Par Value - 3,245,587 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 Company designs and markets a variety of popularly-priced (i) security products, (ii) telecommunications products and (iii) video products. Most of the Company's products either require minimal installation, or are designed for easy installation by the consumer without professional assistance and requiring little or no technical knowledge. The Company imports virtually all of its products from various suppliers overseas. Approximately 57% of the Company's purchases are bought from a Joint Venture with a Hong Kong Corporation (Hong Kong Joint Venture), in which the Company owns a 50% interest, that has manufacturing facilities in the People's Republic of China. The Company's sales for the year ended March 31, 1997 were $15,423,149 compared to $19,507,889 for the year ended March 31, 1996, a decrease of approximately 21%. The primary reason for this decrease in sales was due to decreased demand for some of the Company's high volume, low margin, private label products. SECURITY PRODUCTS The Company 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. The Company also markets a smoke detector under the name "Smoke Signaltm" manufactured by the joint venture and markets a wireless intercom and a line of speakers. Sales of the Company's security products aggregated $8,007,748 or approximately 52% of total sales in the fiscal year ended March 31, 1997 and $9,216,686 or approximately 47% of total sales in the fiscal year ended March 31, 1996. This decrease in sales volume was due primarily to the discontinuance of the Company's flexible flashlight. - 2 - TELECOMMUNICATIONS PRODUCTS The Company markets a variety of telephones with unique styling and containing multiple features. The Company offers a variety of popularly-priced multicolored trimline and feature telephones and telephone answering machines which are produced by the Joint Venture. Some of the features available on the Company's telephone products include cordless, handsfree speaker, true hold and conferencing, high-speed dial function, memory capability, last number redial, ringer silencer, programmable direct access emergency buttons, pushbutton operation, and pulse/touchtone switch, making them usable with all long distance networks. The Company has recently introduced several models of Caller ID. For the fiscal year ended March 31, 1997, sales of the Company's telecommunications products aggregated $3,607,531 or 23% of total sales. For the fiscal year ended March 31, 1996, sales of these products were $6,786,584 or 35% of total sales. The primary reason for the decrease in sales was a reduction in high volume, low margin, private label products. VIDEO PRODUCTS The Company designs and markets blank video cassette tapes and other video products, including a wireless remote control converter. For the fiscal year ended March 31, 1997, sales of the Company's video products and accessories aggregated $3,807,870 or 25% of total sales for the year. For the fiscal year ended March 31, 1996, sales of these products were $3,504,619 or 18% of total sales. FCC REGULATION The Federal Communications Commission establishes technical standards for telecommunications equipment and products transmitting signals over the airways and allocates frequencies for cordless telephones. 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. - 3 - 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 35 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. 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 International Consumer Electronics Show in Las Vegas, Nevada. 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 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 1997. 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 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, 1997 was approximately $2,956,500. The Company's backlog as of March 31, 1996, was approximately $2,753,530. The increase in backlog is a function of the timing of orders received from its customers. - 4 - SUPPLIERS - JOINT VENTURE The Company has a 50% interest in a 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 Joint Venture arrangement will ensure a continuing source of supply for each product at competitive prices. At the present time, the Company buys approximately 57% of its total purchases from the Hong Kong Joint Venture. The products produced by the Hong Kong Joint Venture include most of the video tape purchased by the Company, smoke detectors 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. SUPPLIERS - OTHERS Telecommunications, video and security products not manufactured for the Company by the Hong Kong Joint Venture are manufactured by other foreign suppliers for the Company. The Company's 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 the 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 has 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. - 5 - COMPETITION The market for telephones and telephone products is highly competitive and subject to sudden shifts in consumer preferences and rapid changes in technology. Since deregulation of the telephone industry, many companies have entered the market, competing with lower prices and the continuous introduction of new products incorporating the most advanced technology. The Company competes with many other companies such as AT&T, Southwestern Bell, Bell South, Panasonic, Sony, Dynascan, Uniden, Unisonic and other major companies competing for the same markets, almost all of which have much greater financial resources than the Company. The Company believes, however, that its products compete favorably with other products in the marketplace primarily by reason of styling and pricing. In the video products industry, there are numerous competitors for each product in the Company's line of video products. Blank VHS video cassettes are marketed by many companies, including such large international firms as Polaroid, Sony, Fuji, Maxell and TDK The Company's channel converter competes with similar products marketed by such companies as Zenith, General Instrument, Recoton, Hamlin, Gemini and Panasonic. Virtually all of these competitors have greater financial resources than the Company. The Company believes, however, that its products compete favorably with other products in the marketplace primarily by reason of styling and pricing. In the security lighting area, the Company competes with All-Trade, Regent, Intelectron and Heath-Zenith. In the smoke detector area, the Company competes with Pittway, BRK, Fyrenetics and Coleman. 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 approximately 17 employees, approximately 9 of whom are engaged in administration and sales, and the balance of whom are engaged in product development and servicing. The Company's employees are not unionized. The Company believes that its relations with its employees are satisfactory. - 6 - ITEM 2. PROPERTIES The Company's main facility, located in Baltimore County, Maryland, contains approximately 32,000 square feet on approximately four acres and is used for research and development, warehousing and administrative and executive offices. This facility was completed in December 1993 and is subject to a mortgage with a balance of $1,277,616 as of March 31, 1997. The Company has listed this facility for sale. If the Company is successful in selling its facility, the Company believes alternative space would be readily available at reasonable rental. In addition, 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 Joint Venture and were built on property leased for a 48 year term. ITEM 3. LEGAL PROCEEDINGS 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 adjustments and recovery, the net charge for this matter amounted to $247,500. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE - 7 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is traded on the over-the-counter market. The following table shows the fiscal 1996 and 1997 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, 1996 Bid Prices High Low First Quarter 1-3/16 13/16 Second Quarter 1-7/16 7/8 Third Quarter 1-1/2 7/8 Fourth Quarter 1-9/16 15/16 Fiscal year ended March 31, 1997 Bid Prices High Low First Quarter 1-5/16 13/16 Second Quarter 7/8 14/32 Third Quarter 29/32 1/2 Fourth Quarter 11/16 1/2 As of June 18, 1997, there were approximately 676 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. - 8 - ITEM 6. SELECTED FINANCIAL DATA Year Ended March 31, 1997 1996 1995 1994 1993 Operations Net sales $15,423,149 $19,507,889 $24,841,794 $25,804,715 $23,013,066 Loss before equity in earnings of joint venture, income taxes (1,332,427) (1,316,990) (2,220,460) (1,230,834) (1,326,653) Net (loss) income (1,483,438) (1,098,817) (1,296,426) 36,931 (783,720) Per common share: Loss before equity in earnings of joint venture, income taxes (.41) (.41) (.68) (.37) (.41) Net (loss) income (.46) (.34) (.40) .01 (.24) Weighted average number of common shares outstanding 3,245,587 3,245,587 3,242,595 3,237,608 3,227,195 Financial Condition Total assets 9,557,116 12,676,391 13,732,846 15,864,756 11,767,934 Long-term debt and obligations (non- current) 1,344,211 1,277,394 497,222 927,500 Working capital 2,253,553 2,194,108 2,728,405 4,777,650 6,146,506 Current ratio 1.75 to 1 1.46 to 1 1.50 to 1 1.81 to 1 3.23 to 1 Share- holders' equity 5,192,477 6,675,915 7,774,540 9,063,910 9,011,887 Share- holders' equity per share 1.60 2.06 2.40 2.80 2.79
- 9 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS SALES In fiscal year 1997, sales decreased by $4,084,740 (21%) from the prior year. This decrease was primarily due to a decreased demand for certain of the Company's telecommunications products, which amounted to $3,179,053 and a decrease in security products of $1,208,938, partially offset by increased video sales of $303,251. Sales of security products for the fiscal year totaled $8,007,748 (52%), while sales of telecommunications and video products were $3,607,531 (23%) and $3,807,870 (25%), respectively. In fiscal year 1996, sales decreased by $5,333,905 (21%) from the prior year. This decrease was primarily due to a decreased demand for certain of the Company's telecommunications products, which amounted to $3,940,095 and a decrease in video products of $2,814,776, partially offset by the sale of new security products, which amounted to $1,420,966. Sales of security products for the fiscal year totaled $9,216,686 (47%), while sales of telecommunications and video products were $6,786,584 (35%) and $3,504,619 (18%), respectively. NET PROFIT AND LOSS The Company incurred a net loss of $1,483,438 for fiscal year 1997, as compared to a net loss of $1,098,817 for fiscal year 1996. The primary reason for the increase was the Company's Joint Venture writing down its investment by $725,745 in its China Cellular Joint Venture. The Company's 50% portion of this write-down was $362,873. The Company incurred a net loss of $1,098,817 for fiscal year 1996 as compared to a net loss of $1,296,426 for fiscal year 1995. The most significant reasons for the decrease were reductions in research and development, and selling, general and administrative expenses, partially offset by a reduction in equity earnings of the Joint Venture. EXPENSES In fiscal year 1997, research, selling, general and administrative expenses decreased by approximately $450,000 (12%) from the prior year. As a percentage of sales, research, selling, general and administrative expenses were 22% for the fiscal year ended March 31, 1997 and were 20% for the prior year. The primary reason for reduction in expenses was a reduction in personnel and associated cost. - 10 - In fiscal year 1996, research, selling, general and administrative expenses decreased by approximately $850,000 (18%) from the prior year. As a percentage of sales, research, selling, general and administrative expenses were 20% for the fiscal year ended March 31, 1996 and were 19% for the prior year. INTEREST EXPENSE AND INCOME Interest expense for fiscal 1997 decreased to $411,541 from $543,352 in 1996 due to a decrease in the average outstanding debt during the period resulting from decreased inventory levels in the current fiscal year. Interest income increased to $5,984 from $4,935 in fiscal 1996. Interest expense for fiscal 1996 decreased to $543,352 from $582,581 in 1995 due to a decrease in the average outstanding debt during the period resulting from decreased inventory levels in the current fiscal year. Interest income decreased to $4,935 in fiscal 1996 from $4,970 in fiscal 1995. 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 $1,417,000 has been utilized in short-term borrowings and letter of credit commitments as of March 31, 1997. The amount available under the line of credit as of March 31, 1997 was approximately $300,000 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, 1997, working capital increased by $59,445, from $2,194,108 on March 31, 1996 to $2,253,553 on March 31, 1997. Operating activities provided cash of $1,454,631 for the year ended March 31, 1997. The increase of $1,247,783 was primarily due to decreases in inventory of $1,338,874, an increase in accounts payable of $601,223 and distributions in excess of earnings of the Joint Venture of $401,393, partially offset by a net loss of $1,483,438. For the prior fiscal year, operating activities provided cash of $206,748 for the year ended March 31, 1996. This was primarily due to a decrease in accounts receivable of $1,014,065, an increase in accounts payable of $231,202 partially offset by the net loss of $1,098,817 and the undistributed Joint Venture earnings of $218,173. - 11 - Investing activities provided cash of $384,588, mainly due to the sale of an undeveloped parcel of real estate. For the same period last year, investing activities used $93,924, primarily due to purchases of equipment. Financing activities used cash of $1,786,560 mainly due to the repayment of $1,630,044 in short-term debt and $143,250 in payments on the legal settlement and, for the same period last year, financing activities used cash of $188,840 primarily due to the refinancing of the Company's facilities, offset by the net repayment of short-term debt and principal payments on long-term debt. During the fiscal year ended March 31, 1997, the Company received a distribution of $1,000,000 from the Hong Kong Joint Venture, of which $750,000 was used to repay its accounts payable to Joint Venture. The Company believes that its line of credit and its working capital 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 1997, sales of the Hong Kong Joint Venture were $6,644,142 compared to $9,977,272 and $15,260,179 in fiscal years 1996 and 1995, respectively. Net loss was $302,022 for the year ended March 31, 1997 compared to net income of $436,345 and $1,848,069 in fiscal years 1996 and 1995, respectively. The decrease in income for the year ended March 31, 1997 was due primarily to a write-down of its investment in its China Cellular Joint Venture of $725,745. The decrease in income for the year ended March 31, 1996 was primarily due to a decrease in sales. Selling, general and administrative expenses were $1,337,015, $1,456,591 and $1,672,523 for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. As a percentage of sales, expenses were 20%, 15% and 11% for fiscal 1997, 1996 and 1995, respectively. The increase in expenses as a percentage of sales in fiscal 1997 and fiscal 1996 was primarily due to a decrease in sales. Interest income net of interest expense was $85,414 for the year ended March 31, 1997, compared to $191,916 and $74,741 in fiscal years 1996 and 1995, respectively. The decrease in net interest income 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, 1997, working capital increased by $935,835 from $712,439 on March 31, 1996 to $1,648,274 on March 31, 1997. - 12 - INFLATION The Company believes that inflation has not had a material effect upon its results of operations, and liquidity and capital resources for any of the periods presented. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Description Page Reports of Independent Auditors Deloitte & Touche LLP 14 Ernst & Young LLP 15 Financial statements Consolidated balance sheets, March 31, 1997 and 1996 16 Consolidated statements of operations for the years ended March 31, 1997, 1996 and 1995 18 Consolidated statements of shareholders' equity for the years ended March 31, 1997, 1996 and 1995 19 Consolidated statements of cash flows for the years ended March 31, 1997, 1996 and 1995 20 Notes to consolidated financial statements 21 - 13 - INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors Universal Security Instruments, Inc. We have audited the accompanying consolidated balance sheets of Universal Security Instruments, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the Hong Kong Joint Venture, the Corporation's investment which is accounted for by use of the equity method. The Corporation's equity of $2,508,957 and $3,660,350 in the Hong Kong Joint Venture's net assets at March 31, 1997 and 1996, and of $(151,011) and $218,173 in that company's net (loss) income for the years 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 such company, is based solely on the report 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, 1995 and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. Ernst & Young LLP June 21, 1995 Baltimore, Maryland - 15 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, 1997 1996 CURRENT ASSETS Cash $ 150,452 $ 97,793 Time deposits 8,748 Accounts receivable: Trade (less allowance for doubtful accounts of $50,000 in 1997 and $25,771 in 1996) 1,723,979 2,033,092 Officers and employees 1,545 40,678 1,725,524 2,073,770 Inventories: Finished goods 2,900,910 4,099,907 Raw materials - foreign locations 127,656 152,303 3,028,566 4,252,210 Prepaid expenses 369,439 484,669 TOTAL CURRENT ASSETS 5,273,981 6,917,190 INVESTMENT IN JOINT VENTURE 2,508,957 3,660,350 PROPERTY, PLANT AND EQUIPMENT 1,757,488 1,985,790 OTHER ASSETS 16,690 113,061 TOTAL ASSETS $9,557,116 $12,676,391 See notes to consolidated financial statements.
- 16 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY March 31, 1997 1996 CURRENT LIABILITIES Short-term borrowings $1,363,641 $ 2,993,685 Current maturity of long-term debt 89,655 13,488 Accounts payable 1,502,193 858,557 Accounts payable - joint venture 750,000 Accrued liabilities: Payroll, commissions and payroll taxes 45,991 71,372 Other 18,948 35,980 TOTAL CURRENT LIABILITIES 3,020,428 4,723,082 LONG-TERM DEBT, less current portion 1,344,211 1,277,394 SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 3,245,587 shares in 1997 and 1996 32,456 32,456 Additional paid-in capital 10,429,588 10,429,588 Retained earnings (deficit) (5,269,567) (3,786,129) TOTAL SHAREHOLDERS' EQUITY 5,192,477 6,675,915 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,557,116 $12,676,391 See notes to consolidated financial statements.
- 17 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended March 31, 1997 1996 1995 Net sales $15,423,149 $19,507,889 $24,841,794 Cost of goods sold 13,000,896 16,369,364 21,713,689 GROSS PROFIT 2,422,253 3,138,525 3,128,105 Research and development expense 250,751 220,051 446,178 Selling, general and administrative expense 3,209,962 3,696,740 4,327,921 Operating loss (1,038,460) (778,266) (1,645,994) Other income (expense): Interest income 5,984 4,935 4,970 Interest expense (411,541) (543,352) (582,581) Gain from sale of land 312,625 Legal settlement (247,500) Other 46,465 (307) 3,145 (293,967) (538,724) (574,466) LOSS BEFORE EQUITY IN (LOSS) EARNINGS OF JOINT VENTURE (1,332,427) (1,316,990) (2,220,460) Equity in (loss) earnings of joint venture (151,011) 218,173 924,034 NET LOSS $(1,483,438) $(1,098,817) $(1,296,426) Per common share amounts: Primary $ (.46) $ (.34) $ (.40) Fully diluted (.46) (.34) (.40) 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 3,242,595 See notes to consolidated financial statements.
- 18 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Retained Common Stock Paid-In Earnings Shares Amount Capital (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) 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) $5,192,477 See notes to consolidated financial statements.
- 19 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended March 31, 1997 1996 1995 OPERATING ACTIVITIES Net loss $(1,483,438) $(1,098,817) $(1,296,426) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 165,096 181,781 200,166 Provision for losses on accounts receivable 24,229 27,330 Legal settlement 300,000 Distributions in excess of (undistributed) earnings of joint venture 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 284,884 1,014,065 921,324 Decrease in inventories and prepaid expenses 1,338,874 107,418 1,411,789 Increase in accounts payable and accrued liabilities 601,223 231,202 746,286 Decrease (increase) in other assets 135,005 (10,728) (3,829) NET CASH PROVIDED BY OPERATING ACTIVITIES 1,454,631 206,748 1,575,406 INVESTING ACTIVITIES Purchases of property, plant and equipment (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 PROVIDED BY (USED IN) INVESTING ACTIVITIES 384,588 (93,924) (94,965) FINANCING ACTIVITIES Net repayment of short-term debt (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 (13,266) (613,006) (503,612) Payment on legal settlement (143,250) Proceeds from issuance of common stock 192 7,056 NET CASH USED IN FINANCING ACTIVITIES (1,786,560) (188,840) (1,581,770) INCREASE (DECREASE) IN CASH 52,659 (76,016) (101,329) CASH AT BEGINNING OF YEAR 97,793 173,809 275,138 CASH AT END OF YEAR $ 150,452 $ 97,793 $ 173,809 Supplemental information: Interest paid $ 411,541 $ 543,352 $ 582,581 Income taxes paid - - - See notes to consolidated financial statements.
- 20 - 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. 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 Income Taxes: The Company accounts for income taxes using SFAS No. 109, "Accounting for Income Taxes." For further information (see Note F). Net Loss per Share: Primary and fully diluted net loss per share are computed by dividing net loss by the weighted average number of common and common equivalent shares outstanding. Common equivalent shares include 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 - New Accounting Pronouncement: The Company is required to adopt SFAS No. 128, "Earnings per Share" effective April 1, 1998. The standard specifies the computation, presentation and disclosure requirements for earnings per share. The Company does not believe this statement will have a material effect on earnings per share. NOTE B - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: March 31, 1997 1996 Land and improvements $ 234,284 $ 305,079 Building and improvements 1,412,271 1,412,271 Machinery and equipment 812,171 810,172 Furniture and fixtures 244,250 241,366 Computer equipment 49,085 46,379 2,752,061 2,815,267 Less accumulated depreciation and amortization 994,573 829,477 $1,757,488 $1,985,790
NOTE C - INVESTMENT IN 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, the Company has invested approximately $2,508,957 for their 50% interest in the 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 Joint Venture completed the accounting of 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 - The following represents summarized financial information from the financial statements of the Joint Venture as of March 31, 1997 and 1996 and for the years ended March 31, 1997, 1996 and 1995. Year Ended March 31, 1997 1996 1995 Current assets $2,712,051 $4,807,113 Property and other assets 3,456,418 4,694,364 Total $6,168,469 $9,501,477 Current liabilities $1,063,777 $4,094,674 Non-current liabilities 141,296 141,384 Shareholders' equity $4,963,396 5,265,419 Total $6,168,469 $9,501,477 Net sales $6,644,142 $9,977,272 $15,260,179 Gross profit 1,792,877 1,640,186 3,308,602 Net (loss) income (302,023) 436,345 1,848,069
As of and for the years ended March 31, 1997, 1996 and 1995, the period ending exchange rate and the weighted average exchange rates are 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, 1996 and 1995, the Company purchased $5,824,622, $9,206,000 and $13,832,000, respectively, of finished product from the Joint Venture, which represents 57%, 53% and 81%, respectively, of the Company's total finished product purchases. NOTE D - DEBT Debt consisted of the following: March 31, 1997 1996 Short-term borrowings $1,363,641 $2,993,685 Promissory notes - long-term 1,433,866 1,290,882 2,797,507 4,284,567 Less current maturities 1,453,296 3,007,173 $1,344,211 $1,277,394
- 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 letter of credit. The outstanding principal balance of the revolving credit line ($1,363,641 at March 31, 1997) 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% at March 31, 1997). As of March 31, 1997, the amount available for borrowings under the line was approximately $300,000 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, 1997, 1996 and 1995 was 9.4%, 11.0% and 9.0%, 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 end of the 60 month period. At March 31, 1997 and 1996, the outstanding principal balances were $1,277,616 and $1,290,882, respectively. Included in debt is a note payable of $156,250, payable to Black & Decker, as a result of the legal settlement. 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. NOTE E - LEASES There were no operating leases for either of the years ended March 31, 1997 or March 31, 1996. NOTE F - INCOME TAXES At March 31, 1997, the Company has net operating loss carryforwards in the United States of approximately $4,463,000 for income tax purposes that expire in years 1999 through 2011 and tax credit carryforwards of approximately $36,000 in the United States. From 1996 to 1997, the deferred tax asset valuation allowance decreased by $1,025,421, 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. From 1995 to 1996, the deferred tax asset valuation allowance increased by $339,555. This net increase is mainly due to allowances provided from domestic loss carryforwards generated during 1995. - 24 - 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 1996 Deferred tax liabilities: Deferred gain on involuntary conversion $ -0- $ 71,092 Unremitted joint venture earnings not considered permanently reinvested 777,868 380,000 Gross deferred tax liabilities 777,868 451,092 Deferred tax assets: Other accruals and reserves 90,782 43,993 Other 35,355 33,419 NOL carryforwards and tax credits 1,732,386 2,479,756 Gross deferred tax assets 1,858,523 2,557,168 Valuation allowance (1,080,655) (2,106,076) 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: 3/31/97 3/31/96 3/31/95 Federal tax benefit at statutory rate on loss (34%) $(504,369) $(373,598) $(440,785) Equity in loss (earnings) from joint venture 51,344 (80,023) (314,172) Dividends received from joint venture for which net deferred taxes were not previously provided (301,891) 170,000 Effect of net operating loss carryforwards 701,642 394,629 585,960 Other 53,274 58,992 (1,003) $ -0- $ -0- $ -0-
Investment and other tax credits are accounted for by the flow-through method. - 25 - NOTE G - COMMON STOCK Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as amended, 975,000 shares of common stock are authorized for the granting of stock options, of which 46,075 shares have been issued as of March 31, 1997, leaving 928,925 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, 1997 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
Transactions for the Two Years Ended March 31, 1997: Weighted Average Number of Per Share Total Shares Option Price Option Price Outstanding at March 31, 1995 589,500 $1.94 $1,143,225 Granted 12,500 2.28 28,450 Canceled (60,500) 2.09 (168,825) Outstanding at March 31, 1996 541,500 1.85 1,002,850 Granted 301,000 1.28 384,250 Canceled (190,000) 1.77 (336,200) Outstanding at March 31, 1997 652,500 $1.61 $1,050,900
- 26 - 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 100,000 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, approximately 65,000 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 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 has employment agreements with two of its officers, both expiring on March 31, 1998. The fixed aggregate annual remuneration under these agreements approximates $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 letter of credit commitments which are used solely for short-term inventory financing totaled $53,770 at March 31, 1997. - 27 - NOTE J - BUSINESS AND SALES INFORMATION The Company is a manufacturer and wholesaler of a variety of products, principally of security, video and telecommunications devices and systems, for use in homes and businesses. Approximately 15% and 11% of the Company's total sales were to a single customer in 1997 and 1996, respectively. Approximately 19% of the Company's total sales were to a different customer in 1995. NOTE K - LITIGATION 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 adjustments and recovery, the net charge for this matter amounted to $247,500. - 28 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The Company's Board of Directors consists of three directors. The following is a list of individuals currently serving as directors of the Company, and individuals currently serving as executive officers of the Company: Principal Occupation Director for past five years since Stephen Knepper.....53 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......54 Director; Chairman of the Board 1970 of the Company since September 1996; President of the Company from 1970 to September 1996. Harvey Grossblatt...50 Director since September 1996; 1996 President since June 1996; Chief Financial Officer since April 1997; Executive Vice President of the Company since December 1986; Secretary and Treasurer of the Company since September, 1988; Vice President and Chief Financial Officer of the Company from October 1983 through May 1995. - 29 - 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) Stephen C. Knepper 1997 $183,328 - - - 70,000 - $3,200 Vice Chairman of the 1996 250,000 - - - - - 2,700 the Board 1995 237,500 - - - 95,000 - 3,250 1994 250,000 - - - 50,000 - 5,014 Michael Kovens 1997 $300,000 - - - 70,000 - $3,200 Chairman of the Board 1996 250,000 - - - - - 3,200 1995 237,500 - - - 95,000 - 3,200 1994 250,000 - - - 50,000 - 4,619 Harvey Gross- blatt 1997 $142,923 - - - 71,000 - $2,857 President, Secretary 1996 143,675 - - - - - 3,918 and Treasurer 1995 143,269 - - - - - 2,840 1994 136,738 - - - 25,000 - 3,771 (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 Stephen C. Knepper - - 215,000/-0- -0- /-0- Michael Kovens - - 215,000/-0- -0- /-0- Harvey Grossblatt - - 69,500/26,500 -0- /-0-
EMPLOYMENT CONTRACTS Stephen Knepper and Michael Kovens each have employment agreements with the Company which expire March 31, 1998. Both agreements prohibit competition with the Company during their term and for one year thereafter. Each employee is entitled to Base Compensation of $250,000 a year plus Incentive Compensation equal to specified percentages of the amount by which the Company's consolidated annual pre-tax profits in each fiscal year exceed the amount the Company would have received if the shareholders' equity (as defined in the agreements) in the Company were invested in United States Treasury Bills. The specified percentage is 5% of the first $1,000,000, 3-3/4% of the second $1,000,000, 2-1/2% of the third 1,000,000 and 1% of everything over $3,000,000. The employment agreements further provide that each employee is entitled to (i) certain life insurance and medical reimbursement benefits, (ii) upon death or disability, 75% of the Base Compensation for a period of 60 months (including Incentive Compensation for that year if death or disability occurs after the first three months of the fiscal year), (iii) deferred compensation upon termination of their employment in the amount of three times the annual Base Compensation, payable within 30 days after termination, and (iv) the continuation of certain life insurance and medical reimbursement benefits for a period of three years after termination. However, in September 1996, one of the officers voluntarily elected to a non-reimbursable reduction in remuneration of $200,000. - 30 - ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of June 23, 1997, 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 745,408(2) 21.5% 10324 South Dolfield Rd. Owings Mills, MD 21117 Stephen Knepper 343,493(3) 9.9% 10324 South Dolfield Rd. Owings Mills, MD 21117 Bruce Paul 184,000 5.7% 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 23, 1997 are deemed to be outstanding. (2) Includes 20,178 shares held by Mr. Kovens' adult children and 215,000 shares which Mr. Kovens presently has the right to acquire through the exercise of stock options. (3) Includes 215,000 shares which Mr. Knepper presently has the right to acquire through the exercise of stock options. - 31 - As of June 23, 1997, 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 745,408(2) 21.5% Stephen Knepper 343,493(3) 9.9% Harvey Grossblatt 98,590(4) 3.0% All directors and officers as a group (6 persons included) 1,207,491 32.2% (1) See footnote 1 under previous table. (2) See footnote 2 under previous table. (3) See footnote 3 under previous table. (4) Includes 69,500 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. - 32 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The following consolidated financial statements are included in Part II, Item 8. Reports of independent auditors Financial statements Consolidated balance sheets, March 31, 1997 and 1996 Consolidated statements of operations for the years ended March 31, 1997, 1996 and 1995. Consolidated statements of shareholders' equity for the years ended March 31, 1997, 1996 and 1995. Consolidated statements of cash flows for the years ended March 31, 1997, 1996 and 1995. Notes to consolidated financial statements. 2. The following financial statement schedule for the years ended March 31, 1997, 1996 and 1995 are submitted herewith: Page Schedule II - Valuation account 35 All other schedules are omitted because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto. - 33 - 3. Exhibits required by Item 601 of Regulation S-K. The following exhibit is incorporated by reference to the exhibit to Form 10-K for the fiscal year ended March 31, 1994, filed by the Company with the Securities and Exchange Commission (SEC). 10.15 Joint Venture Agreement (confidential treatment of name requested and filed separately with the SEC). The following exhibits are attached hereto: 10.16 Discount factoring agreement letter dated January 2, 1997 24.1 Consent of Deloitte & Touche LLP, Independent Auditors. 24.2 Consent of Ernst & Young LLP, Independent Auditors. (d) 1. Separate financial statements of The Joint Venture (name withheld and filed separately with the SEC). Page Report of the auditors JV-1 Consolidated profit and loss account, March 31, 1997 and 1996 JV-2 Consolidated balance sheets, March 31, 1997 and 1996 JV-3 Cash flow statement, March 31, 1997, 1996 and 1995 JV-4 Notes to consolidated financial statements JV-5 - 34 - SCHEDULE II UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES VALUATION ACCOUNT YEARS ENDED MARCH 31, 1997, 1996 AND 1995 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, 1997 Allowance for doubtful accounts $25,771 $24,229 $-0- $ -0- $50,000 Year ended March 31, 1996 Allowance for doubtful accounts $50,000 $ -0- $-0- $24,229 $25,771 Year ended March 31, 1995 Allowance for doubtful accounts $45,000 $27,330 $-0- $22,330 $50,000 (1)Write-off of uncollectible accounts, net of recoveries.
- 35 - 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 10, 1997 By: Stephen Knepper Stephen Knepper Vice Chairman of the Board, Director Date: July 10, 1997 By: Michael Kovens Michael Kovens Chairman of the Board, Director Date: July 10, 1997 By: Harvey Grossblatt Harvey Grossblatt, President, Secretary, Treasurer, CFO - 36 - REPORT OF THE AUDITORS To the members The Joint Venture (name withheld and filed separately with the Securities and Exchange Commission) We have audited the financial statements on pages 2 to 17 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. Respective responsibilities of directors and auditors The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's and the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion the financial statements give a true and fair view, in all material respects, of the state of affairs of the Company and the Group as at 31 March 1997 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance. Hong Kong 6 June 1997 JV-1 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended 31 March 1997 Notes 1997 1996 HK$ HK$ TURNOVER 3 57,585,355 77,343,193 PROFIT BEFORE EXCEPTIONAL ITEMS 4 5,333,906 4,379,377 Exceptional items 5 (5,625,929) - PROFIT/(LOSS) BEFORE TAXATION (292,023) 4,379,377 Taxation 7 (2,049,242) (996,854) NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS 8 (2,341,265) 3,382,523 Retained profits at beginning of year 34,078,046 46,155,523 Dividends 9 - (15,460,000) RETAINED PROFITS AT END OF YEAR 31,736,781 34,078,046
JV-2 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY CONSOLIDATED BALANCE SHEET 31 March 1997 Notes 1997 1996 HK$ HK$ ASSETS CURRENT ASSETS Cash and bank balances 10 8,681,244 21,279,916 Bills receivable 135,450 192,430 Inventories 11 6,897,070 8,134,909 Prepayments, deposits and other receivables 209,031 614,656 Due from a shareholder 2 5,100,859 6,849,317 TOTAL CURRENT ASSETS 21,023,654 37,071,228 INTERESTS IN AN ASSOCIATED COMPANY 13 2,616,066 10,945,324 FIXED ASSETS 14 24,177,874 25,638,308 TOTAL ASSETS 47,817,594 73,654,860 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bills payable - 435,117 Accounts payable 3,570,499 4,459,490 Other payables and accrued liabilities 2,447,850 1,059,993 Due to an associated company 15 - 10,113,460 Current portion of loan from a related company 2 164,004 - Taxation 2,063,977 213,600 Dividend payable - 15,460,000 TOTAL CURRENT LIABILITIES 8,246,330 31,741,660 DEFERRED TAXATION 16 576,000 1,096,000 LOANS FROM SHAREHOLDERS 17 6,738,954 6,738,954 LONG TERM PORTION OF LOAN FROM A RELATED COMPANY 2 519,329 - TOTAL LIABILITIES 16,080,613 39,576,614 SHAREHOLDERS' EQUITY Share capital 18 200 200 Retained profits 31,736,781 34,078,046 31,736,981 34,078,246 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 47,817,594 73,654,860
JV-3 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY CONSOLIDATED CASH FLOW STATEMENT Year ended 31 March 1997 Notes 1997 1996 HK$ HK$ NET CASH INFLOW FROM OPERATING ACTIVITIES 19(a) 4,370,287 11,487,214 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 676,510 1,498,463 Interest paid (14,385) (10,742) Dividend paid (15,460,000) - Net cash inflow/(outflow) from returns on investments and servicing of finance (14,797,875) 1,487,721 TAXATION Hong Kong profits tax paid (718,865) (514,556) INVESTING ACTIVITIES Purchases of fixed assets (2,139,552) (1,926,285) Addition to interests in an associated company - (115,868) Sales proceeds from disposal of fixed assets 4,000 - Net cash outflow from investing activities (2,135,552) (2,042,153) NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING ACTIVITIES (13,282,005) 10,418,226 FINANCING ACTIVITIES 19(b) Loan from a related company 820,000 - Repayment of the loan from a related company (136,667) - Net cash inflow from financing activities 683,333 - INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (12,598,672) 10,418,226 Cash and cash equivalents at beginning of year 21,279,916 10,861,690 CASH AND CASH EQUIVALENTS AT END OF YEAR 8,681,244 21,279,916 ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 8,681,244 21,279,916
JV-4 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements include the audited financial statements of the Company and its subsidiaries for the year ended 31 March 1997. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation. Subsidiaries Investments in subsidiaries are stated at cost unless, in the opinion of the directors, there have been permanent diminutions in values, when they are written down to values determined by the directors. Associated companies An associated company is a company, not being a subsidiary, in which the Group has a long term interest of not less than 20% of the equity voting rights and over which it exerts significant influence. The Group's share of the post-acquisition results and reserves of associated companies is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group's investments in associated companies are stated in the consolidated balance sheet at the Group's share of net assets under the equity method of accounting. Goodwill Goodwill arising on consolidation of subsidiaries and on acquisition of associated companies represents the excess purchase consideration paid for subsidiaries/associates over the fair values ascribed to the net underlying assets acquired and is written off to the profit and loss account in the year of acquisition. Fixed assets and depreciation Fixed assets are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows: Land held on medium term leases Over the lease terms Buildings 5% Leasehold improvements 20% Plant and machinery 10% Furniture and fixtures 20% Motor vehicles 20% JV-5 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The gain or loss on disposal or retirement of fixed assets recognized in the profit and loss account is the difference between the sales proceeds and the carrying amount of the relevant asset. Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out basis and comprises direct materials, direct labor and an appropriate proportion of overheads. Net realizable value is based on estimated selling prices less further costs expected to be incurred to completion and disposal. Long term contracts Long term contract work in progress is stated at cost plus attributable profits less foreseeable losses and progress payments received and receivable. The excess of progress payments received and receivable over costs of individual contract plus attributable profits recognized to date is included under current liabilities in the balance sheet. Cost comprises materials, direct labor and an appropriate proportion of overheads. Where losses are currently estimated to arise over the duration of the contracts, allowance is made for such losses. In determining this, account is taken of the anticipated final contract settlement. Attributable profit is calculated and included in long term contract work in progress on a percentage of completion basis where the contract's ultimate outcome can be foreseen and assessed with reasonable certainty. The percentage of completion is measured by reference to the percentage of contract costs incurred for work performed to date to the estimated total contracted costs. Revenue recognition Income received from the sales of goods is recognized upon the time the goods are delivered to customers. Attributable profit arising from long term contracts is recognized on the percentage of completion basis where the contracts' ultimate outcome can be foreseen and assessed with reasonable certainty. Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals applicable to such operating leases are charged to the profit and loss account on the straight-line basis over the lease terms. JV-6 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currency transactions Foreign currency transactions are recorded at the applicable rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange ruling at that date. Exchange differences are dealt with in the profit and loss account. Deferred taxation Deferred taxation is provided, using the liability method, on all significant timing differences to the extent it is probable that the liability will crystallize in the foreseeable future. A deferred tax asset is not recognized until its realization is assured beyond reasonable doubt. Related company Related company is a company in which a shareholder or director has a direct or indirect interest, either as a shareholder or director of that company, and is in a position to exert significant influence over the related company. 2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS The Company was incorporated under the laws of Hong Kong on 7 July 1989. It operates under a joint venture agreement entered into on 23 October 1989 between Universal Security Instruments, Inc., which is incorporated in the United States, and The Original Joint Venture Owner (name withheld and filed separately with the SEC), which is incorporated in Hong Kong. The Company is economically dependent on Universal Security Instruments, Inc. with which it transacts most of its business and the financial statements reflect the effect of these transactions which are conducted on bases determined between the parties. JV-7 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS (continued) During the year, the following significant related party transactions were recorded: Group 1997 1996 HK$ HK$ Sales made to: Universal Security Instruments, Inc. 45,152,112 71,364,067 Sundry income received from: Universal Security Instruments, Inc. 400,139 717,392 Management fee received from: USI Oberlin Limited 139,320 139,320 Purchases of inventories from: Universal Security Instruments, Inc. 838,680 553,559 An Affiliate of The Company (name withheld and filed separately with the SEC) - 314,816 License fees paid to: An Affiliate of The Company (name withheld and filed separately with the SEC) 268,695 292,742 Rentals paid to: An Affiliate of The Company (name withheld and filed separately with the SEC) 840,000 1,080,000 A Manager (name withheld and filed separately with the SEC) 240,000 480,000 Management fee paid to: An Affiliate of The Company (name withheld and filed separately with the SEC) 1,440,000 1,440,000 Interest received from: Universal Security Instruments, Inc. 57,964 - Interest paid to: An Affiliate of The Company (name withheld and filed separately with the SEC) 3,330 - The amount due from a shareholder is unsecured, interest-free, and has no fixed terms of repayment. The amount due to a related company, (name withheld and filed separately with the SEC), is unsecured, bears interest at 0.49% per annum and is repayable by 50 equal installments. The balances with subsidiaries are unsecured, interest-free and have no fixed terms of repayment.
3. TURNOVER Turnover represents the invoiced value of goods sold, net of discounts and returns and attributable profit of long term contracts. JV-8 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 4. PROFIT BEFORE EXCEPTIONAL ITEMS Profit before exceptional items is arrived at after charging/(crediting): Group 1997 1996 HK$ HK$ Depreciation 3,591,058 5,464,145 Auditors' remuneration 168,000 168,000 Interest on bank overdrafts and loans wholly repayable within five years 14,385 10,742 Operating lease rentals for land and buildings 1,107,918 1,587,918 Loss on disposal of fixed assets 4,928 18,622 Exchange gains, net (161,323) (466,732) Interest income (676,510) (1,498,463) Rental income (284,640) -
5. EXCEPTIONAL ITEMS Group 1997 1996 HK$ HK$ Provision for permanent diminution in value of the Group's interest in an associated company - note 13 1,561,029 - Provision against amount due from an associated company - note 13 4,064,900 - 5,625,929 -
6. DIRECTORS' REMUNERATION Group 1997 1996 HK$ HK$ Fees - - Other emoluments - - -
JV-9 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 7. TAXATION Hong Kong profits tax has been provided at the rate of 16.5% (1996: 16.5%) on the estimated assessable profits arising in Hong Kong during the year. Taxes on profits assessable elsewhere have been calculated at the rates of taxation prevailing in the countries in which the group operates. Group 1997 1996 HK$ HK$ Provision for the year 2,530,917 342,300 Underprovision in prior years 38,325 384,554 Deferred tax charge/(credit) - note 15 (520,000) 270,000 Taxation charge/(credit) for the year 2,049,242 996,854
8. NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS The net loss for the year dealt with in the financial statements of the Company is HK$824,803 (1996: net profit of HK$3,383,065). 9. DIVIDENDS 1997 1996 HK$ HK$ Proposed final - Nil (1996: HK$7,730,000) per ordinary share - 15,460,000
10. CASH AND BANK BALANCES These included time deposits amounting to HK$1,298,086 (1996: HK$1,240,842) which were pledged to banks for credit facilities of HK$3,329,000 (1996: HK$3,329,000) granted to the Company. JV-10 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 11. INVENTORIES Group and Company 1997 1996 HK$ HK$ Raw materials 4,959,689 6,213,308 Work in progress 976,428 1,114,347 Finished goods 960,953 807,254 6,897,070 8,134,909
12. INVESTMENTS IN SUBSIDIARIES Company 1997 1996 HK$ HK$ Unlisted shares, at cost 210,008 210,008
Particulars of the subsidiaries, all of which are wholly-owned by the Company are as follows: Nominal value Place of of issued incorporation ordinary Principal Name and operation share capital activities A Subsidiary of The Incorporated US$1 Provision of Company (name in the British assistance in withheld and Virgin Islands development and filed separately and operates in manufacture with the SEC) the People's of cellular Republic hand-held of China phones A Subsidiary of The Hong Kong HK$200,000 Investment Company (name holding withheld and filed separately with the SEC) A Subsidiary of The Hong Kong HK$10,000 Dormant Company (name withheld and filed separately with the SEC)
JV-11 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 13. INTERESTS IN AN ASSOCIATED COMPANY Group 1997 1997 HK$ HK$ Share of net assets, other than goodwill 3,887,426 9,305,588 Due from an associated company 4,354,569 1,639,736 8,241,995 10,945,324 Less: Provision for permanent diminution - note 5 (1,561,029) - Provision against amount due from an associated company - note 5 (4,064,900) - 2,616,066 10,945,324
The amount due from the associated company is unsecured, interest- free and has no fixed terms of repayment. Particulars of the associated company are as follows: Percentage of equity Counmtry of Nominal value attributable registration of registered to the Group Principal Name and operation capital 1997 1996 activities An Associate The People's US$4,000,000 30 30 Manufacture of the Company Republic of of cellular (name withheld China hand-held and filed phones separately with the SEC)
The Associated Company (name withheld and filed separately with the SEC) was registered under the laws of the People's Republic of China as a sino-foreign equity joint venture on 20 June 1992 and has a tenure of 15 years. The tenure of the joint venture can be extended by the board of directors of The Associated Company (name withheld and filed separately with the SEC) with the approval of the relevant government authorities. The Associated Company (name withheld and filed separately with the SEC) has not commenced its operation at the balance sheet date. JV-12 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 14. FIXED ASSETS Group and Company Leasehold Leasehold Furniture land and improve- Plant and and Motor buildings ments machinery fixtures vehicles Total HK$ HK$ HK$ HK$ HK$ HK$ Cost: At begin- ning of year 15,814,592 5,557,946 26,897,646 2,495,549 627,161 51,392,894 Addi- tions - 926,473 1,128,489 84,590 - 2,139,552 Dis- pos- als - - (150,000) - - (150,000) At 31 March 1997 15,814,592 6,484,419 27,876,135 2,580,139 627,161 53,382,446 Accumulated depreciation: At begin- ning of year 1,820,360 3,105,850 18,668,750 1,658,218 501,408 25,754,586 Pro- vided during the year 729,401 986,213 1,424,998 381,014 69,432 3,591,058 Dispo- sals - - (141,072) - - (141,072) At 31 March 1997 2,549,761 4,092,063 19,952,676 2,039,232 570,840 29,204,572 Net book value: At 31 March 1997 13,264,831 2,392,356 7,923,459 540,907 56,321 24,177,874 At 31 March 1996 13,994,232 2,452,096 8,228,896 837,331 125,753 25,638,308
The leasehold land and buildings, which represent the factory site and facilities, are situated in the People's Republic of China under medium-term leases. During the year, the estimated useful life of plant and machinery changed from 7 years to 10 years. The effect of such change has decreased the depreciation charge for the year from HK$3,118,650 to HK$1,424,998. JV-13 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 15. DUE TO AN ASSOCIATED COMPANY The balance in last year represented long term contract work in progress reflected as a current liability at the balance sheet date and was analyzed as follows: Group 1997 1996 HK$ HK$ Progress payments received - 24,433,500 Less: Costs incurred on an incomplete contract - (7,758,040) Estimated attributable profits - (6,562,000) - 10,113,460
Long term contract work in progress arose as a result of the provision of assistance in the development and manufacture of cellular hand-held phones by a subsidiary, (name withheld and filed separately with the SEC), to an associated company, (name withheld and filed separately with the SEC), at a contract value of US$3,500,000 (HK$27,055,000). The long term contract work in progress was completed in the current year. 16. DEFERRED TAXATION Group and Company 1997 1996 HK$ HK$ Balance at beginning of year 1,096,000 826,000 Charge/(credit) for the year - note 7 (520,000) 270,000 Balance at end of year 576,000 1,096,000
The principal components of the Group's deferred tax liability comprises accelerated depreciation allowances. JV-14 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 17. LOANS FROM SHAREHOLDERS Group and Company 1997 1996 HK$ HK$ Universal Security Instruments, Inc. 3,369,477 3,369,477 An Affiliate of The Company (name withheld and filed separately with the SEC) 3,369,477 3,369,477 6,738,954 6,738,954
The loans are unsecured, interest-free and repayable on demand by the respective shareholder with the consent of the other. The directors of the Company consider that these liabilities are non- current. 18. SHARE CAPITAL Company 1997 1996 HK$ HK$ Authorized: 100 ordinary shares of HK$100 each 10,000 10,000 Issued and fully paid: 2 ordinary shares of HK$100 each 200 200
JV-15 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 19. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of profit/(loss) before taxation to net cash inflow from operating activities: 1997 1996 HK$ HK$ Profit/(loss) before taxation (292,023) 4,379,377 Provision for permanent diminution 1,561,029 - Provision against amount due from an associated company 4,064,900 - Unrealized profit in pre-operating expenses of an associated company 5,418,162 - Interest income (676,510) (1,498,463) Interest expense 14,385 10,742 Depreciation 3,591,058 5,464,147 Loss on disposal of fixed assets 4,928 18,622 Decrease/(increase) in bills receivable 56,980 (192,430) Decrease in inventories 1,237,839 10,970,718 Decrease/(increase) in prepayments, deposits and other receivables 405,625 (225,615) Decrease in amount due from a shareholder 1,748,458 354,986 Increase/(decrease) in bills payable (435,117) 435,117 Decrease in accounts payable (888,991) (3,678,916) Increase/(decrease) in other payables and accrued liabilities 1,387,857 (67,840) Decrease in amount due to an associated company (12,828,293) (637,646) Increase/(decrease) in amount due to a related company - (3,845,585) Net cash inflow from operating activities 4,370,287 11,487,214
(b) Analysis of changes in financing during the year Loan from a related company HK$ Balance at 1 April - Cash inflow from financing 820,000 Repayment (136,667) Balance at 31 March 683,333
JV-16 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC) AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS 31 March 1997 20. COMMITMENTS Group and Company 1997 1996 HK$ HK$ Capital commitments contracted for 303,115 348,400 Commitments payable in the following year under operating leases in respect of land and buildings expiring within one year 1,080,000 1,560,000
21. CONTINGENT LIABILITIES Group and Company 1997 1996 HK$ HK$ Bills discounted 565,771 -
22. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform with the current year's presentation. 23. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved by the board of directors on 6 June 1997. JV-17 EX-24 2 EXHIBIT 24.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following Registration Statements of our report dated June 30, 1997 with respect to the consolidated financial statements and schedule of Universal Security Instruments, Inc. and Subsidiaries as of March 31, 1997 and for the two years then ended included in this Annual Report (Form 10-K). Registration Statement Number Description Non-qualified Stock Option Plan: 2-83323 Form S-8 33-6953 Form S-8 33-21226 Form S-8 Incentive Stock Option Plan: 2-99736 Form S-8 Employee Stock Purchase Plan: 33-21225 Form S-8 Deloitte & Touche LLP Baltimore, Maryland June 30, 1997 EX-27 3
5 3-MOS 12-MOS MAR-31-1997 MAR-31-1997 MAR-31-1997 MAR-31-1997 150,452 150,452 0 0 1,725,524 1,725,524 50,000 50,000 3,028,566 3,028,566 5,273,981 5,273,981 2,752,061 2,752,061 994,573 994,573 9,557,116 9,557,116 3,020,428 3,020,428 0 0 0 0 0 0 32,456 32,456 5,160,021 5,160,021 9,557,116 9,557,116 2,161,708 15,423,149 2,161,708 15,423,149 2,017,038 13,000,896 2,017,038 13,000,896 699,572 3,460,713 0 0 (159,765) 293,967 (520,004) (1,483,438) 0 0 (520,004) (1,483,438) 0 0 0 0 0 0 (520,004) (1,483,438) (.16) (.46) (.16) (.46)
EX-24 4 EXHIBIT 24.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of our report dated June 21, 1995 with respect to the consolidated financial statements and schedule of Universal Security Instruments, Inc. and Subsidiaries as of March 31, 1995 and for the year then ended included in this Annual Report (Form 10-K). Registration Statement Number Description Non-qualified Stock Option Plan: 2-83323 Form S-8 33-6953 Form S-8 33-21226 Form S-8 Incentive Stock Option Plan: 2-99736 Form S-8 Employee Stock Purchase Plan: 33-21225 Form S-8 Ernst & Young LLP Baltimore, Maryland July 8, 1997 EX-10 5 EXHIBIT 10.16 Congress Talcott Corporation 1133 Avenue of the Americas New York NY 10036 212 840 2000 Congress Talcott January 2, 1997 Mr. Harvey Grossblatt Universal Security Instruments, Inc. 10324 So. Dolfield Road Owings Mills, MD 21117 Gentlemen: This letter will modify and amend the Discount Factoring Agreement between us dated February 28, 1995 (as amended) effective January 1, 1997 as follows: Paragraph #6(a) to increase the interest rate from 1% to 1 1/2%, in excess of the prime commercial interest rate from time to time announced by CoreStates Bank, N.A. whether or not such announced rate is the best available at such bank, in effect the first day of each month. Paragraph #7 to inrease the commission rate from 3/4 of 1% to 1%. Nothing herein contained shall vary, or amend any provisions of the said Discount Factoring Agreement between us, except as specifically provided herein. Very truly yours, CONGRESS TALCOTT CORPORATION By: DOREEN DRISCOLL DOREEN DRISCOLL Title: VICE PRESIDENT Agreed and Accepted: UNIVERSAL SECURITY INSTRUMENTS, INC. By: HARVEY GROSSBLATT HARVEY GROSSBLATT Title: PRESIDENT CONGRESS TALCOTT NEW YORK LOS ANGELES A CoreStates Company -----END PRIVACY-ENHANCED MESSAGE-----