-----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, BEQ3wxfrHS2To5TQANbWDBVteQc7ATVugVNsBITtar2N86L89WetthnzWAecLvjF yfbNXVvihF0LmN76cQayJw== /in/edgar/work/20000629/0000102109-00-000002/0000102109-00-000002.txt : 20000920 0000102109-00-000002.hdr.sgml : 20000920 ACCESSION NUMBER: 0000102109-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL SECURITY INSTRUMENTS INC CENTRAL INDEX KEY: 0000102109 STANDARD INDUSTRIAL CLASSIFICATION: [5065 ] IRS NUMBER: 520898545 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07885 FILM NUMBER: 665389 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 0001.txt 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, 2000 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ____________ to ________________ Commission file number 0-7885 UNIVERSAL SECURITY INSTRUMENTS, INC. (Exact name of registrant as specified in its charter) Maryland 52-0898545 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7-A Gwynns Mill Court, Owings Mills, MD 21117 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 410-363-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 12, 2000: Common Stock, $.01 Par Value - $3,192,945 The number of shares outstanding of the issuer's classes of common stock as of June 12, 2000: Common Stock, $.01 Par Value - 912,270 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 7-A Gwynns Mill Court, Owings Mills, MD 21117 and its telephone number is 410-363-3000. The Company designs and markets a variety of popularly-priced security, telecommunications and video products and miscellaneous private label 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. Due to the low margins realized on its telecommunications and video products, the Company has focused its business primarily on security products. As a result, the Company (i) changed its marketing of telecommunications and video products to concentrate virtually exclusively on made-to-order private label sales, and (ii) entered into the electrical distribution market with an enhanced and newly packaged line of smoke alarms as well as its other security products. The electrical distribution trade covers electrical and lighting distributors as well as manufactured housing companies. The Company imports virtually all of its products from various suppliers overseas. Approximately 79% 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, 2000 were $7,667,530 compared to $9,071,628 for the year ended March 31, 1999, a decrease of approximately 15%. The primary reason for this decrease in sales was due to decreased demand for some of the Company's private label products. The Company reported net income of $41,056 in fiscal 2000 compared to a net loss in fiscal 1999 of $806,552 for its prior fiscal year. The main reason for the decrease in losses was the sale of the Company's headquarters which resulted in a gain of $804,861, partially offset by an increased inventory reserve of $495,000. SECURITY PRODUCTS The Company markets a complete line of smoke alarms under the trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signaltm" manufactured by the Hong Kong joint venture. The Company also markets a line of electronically advanced outdoor floodlights under the name "Lite Aidetm," whose features include special sensors that activate automatic lighting mechanisms and a quartz halogen system, offering the consumer a variety of dependable outdoor security lighting systems. - 2 - Sales of the Company's security products aggregated $6,618,178 or approximately 86% of total sales in the fiscal year ended March 31, 2000 and $5,139,919 or approximately 57% of total sales in the fiscal year ended March 31, 1999. This increase in sales volume was due primarily to higher sales to the electrical distribution trade. The Company is focusing its sales and marketing efforts to maximize security product sales, especially smoke alarms manufactured by its Hong Kong Joint Venture and marketed to the electrical distribution trade. OTHER PRODUCTS The Company markets a variety of private label products on a made-to- order basis, such as telephones and audio tape. The majority of these products are produced by the Hong Kong Joint Venture. For the fiscal year ended March 31, 2000, sales of the Company's private label products aggregated $1,049,352 or 14% of total sales. For the fiscal year ended March 31, 1999, sales of these products were $3,931,709 or 43% of total sales. The primary reason for the decrease in sales was a voluntary reduction in high volume, low margin, private label products. FCC REGULATION The Federal Communications Commission (FCC) establishes technical standards for telecommunications equipment and products transmitting signals over the airways. These regulations have had no material effect upon the Company's business or its products to date, and all products subject to such regulation comply with the FCC requirements. IMPORT MATTERS The Company imports virtually all of its security and other products. The Company, as an importer, is subject to numerous tariffs which vary depending on types of products and country of origin, changes in economic and political conditions in the country of manufacture, potential trade restrictions, including loss of Most Favored Nation status, and currency fluctuations. The Company has attempted to protect itself from fluctuations in currency exchange rates to the extent possible by negotiating most commitments in U.S. dollars. The Company's purchases are subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated with purchasing products abroad. The Company imports a majority of its products from the People's Republic of China. The loss of China's Most Favored Nation status with the United States would most likely have a material adverse impact on the Company's business until competitive alternative sources of supply could be obtained. - 3 - SALES AND MARKETING The Company's products are generally marketed to retailers, wholesale distributors, home centers, catalog and mail order companies and to other distributors. Sales are made both by the Company and by approximately 23 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. In 1999, the Company formed a new subsidiary, USI ELECTRIC, for the purpose of selling security products to the electrical distribution trade. The subsidiary has hired two sales personnel from the electrical distribution trade and has engaged 23 independent sales organizations many of which have warehouses where USI ELECTRIC products are maintained for sale. The Company also promotes its products through its own sales catalogs and brochures, which are mailed directly to trade customers. The Company's customers, in turn, advertise the Company's products in their own catalogs and brochures and in their ads in newspapers and other media. The Company also exhibits and sells its products at various trade shows, including the annual National Hardware Show in Chicago, Illinois. The Company's domestic marketing strategy is designed to attract retailing customers outside the consumer electronics industry, such as supermarkets, drug stores, variety stores and home centers as well as the electrical distribution trade. Sales by the Company are also made by officers and full-time employees of the Company, five of whom are also engaged in sales management and training. Sales outside the United States, which are made by officers of the Company and through exporters, were less than 15% of total sales in fiscal 2000. 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, discount, electrical, building supply, electrical distributors and hardware stores; as well as through catalogs. The Company also distributes its products through special markets such as premium/ incentive and direct mail. 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, 2000 was approximately $791,000. The Company's backlog as of March 31, 1999 was approximately $1,310,000. The decrease in backlog is a function of the timing of orders received from its customers and the general decline in sales volume. SUPPLIERS - HONG KONG JOINT VENTURE The Company has a 50% interest in a Hong Kong Joint Venture which has manufacturing facilities in the People's Republic of China, for the manufacturing of certain consumer electronic products sold by the Company. - 4 - The Company believes that this Hong Kong Joint Venture arrangement will ensure a continuing source of supply for a majority of the Company's security products at competitive prices. At the present time, the Company buys approximately 79% of its total purchases from the Hong Kong Joint Venture. The products produced by the Hong Kong Joint Venture include smoke alarms and certain models of telecommunications products. The Company is currently pursuing the development of additional products such as photoelectric smoke alarms and carbon monoxide alarms to be produced by the Hong Kong Joint Venture. 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 Certain private label products not manufactured for the Company by the Hong Kong Joint Venture are manufactured by other foreign suppliers for the Company. The Company believes that its relationships with its suppliers are good. The Company believes that the loss of any of its suppliers could have a short-term adverse effect on its operations, but that replacement sources could be developed. CHINA CELLULAR TELEPHONE PROJECT In the year ended March 31, 1993, the Hong Kong Joint Venture entered into a Cellular Joint Venture with a People's Republic of China Company to design and develop a portable cellular telephone for manufacture and sale in China. The Hong Kong Joint Venture has a 30% interest in the Cellular Joint Venture. The Cellular Joint Venture engaged the Hong Kong Joint Venture to design and develop two versions of a portable cellular telephone for a fee of $3.5 million. Through March, 1996, the Hong Kong Joint Venture had received $3,150,000 of the $3.5 million fee. For the year ended March 31, 1996, the Hong Kong Joint Venture recorded no profit from the development contract. During fiscal 1997, the Hong Kong Joint Venture completed the accounting of its cellular development contract and, additionally, wrote down its investment in its Cellular Joint Venture. The Hong Kong Joint Venture recorded a profit of $122,328 on the development contract and a write-down of $725,745 on its Cellular Joint Venture. Due to the uncertainty of the commercial acceptance of the cellular telephone designed by the Cellular Joint Venture, the Hong Kong Joint Venture wrote-off the balance of its Cellular Joint Venture investment in the amount of $337,464 in fiscal 1998. COMPETITION In the smoke alarm area, the Company competes with First Alert, Firex, Fyrenetics and Walter Kidde. In the security lighting area, the Company competes with Regent and Heath-Zenith. All 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. - 5 - The security industry in general involves changing technology, and the success of the Company's products may depend on the Company's ability to improve and update its products in a timely manner and to adapt to new technological advances. EMPLOYEES The Company has 16 employees, 8 of whom are engaged in administration and sales, and the balance of whom are engaged in product development and servicing. The Company's employees are not unionized. The Company believes that its relations with its employees are satisfactory. ITEM 2. PROPERTIES On June 16, 1999, the Company sold its headquarters facility, located in Baltimore County, Maryland which became expendable when the Company reduced the number of its employees. The property was sold for a price of $2.2 million to KA Real Estate Associates, LLC. After deducting the mortgage and settlement charges, the Company received excess cash of approximately $840,000. The Company reported, in its quarter ending June 30, 1999, a gain on the sale of this property of approximately $800,000. The Company retained ownership of approximately 1-1/2 acres of undeveloped land adjacent to the Company's former headquarters property which the Company has put up for sale. Effective December 1999, the Company entered into an operating lease for a 9,000 square foot office and warehouse located in Baltimore County, Maryland. This lease, which expires in October 2002, is subject to renewal for an additional six years with increasing rentals at 3% per year. The monthly rental approximates $4,500 per month during the initial term. The Hong Kong Joint Venture's manufacturing facility consists of six buildings totaling 100,000 square feet. Three of the buildings (totaling 31,000 square feet) are leased pursuant to a long-term lease which expires in 2010. The other three buildings (69,000 square feet) are owned by the Hong Kong Joint Venture and were built on property leased for a 48 year term. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. - 6 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Over-The-Counter (OTC) Bulletin Board market through which real-time quote, price and volume information is electronically available for the Company's common stock. The Company's common stock was traded on the NASDAQ Small Cap Market until January 21, 1999, when it was delisted for failure to meet market value requirements. The following table shows the fiscal 2000 and 1999 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, 2000 Bid Prices High Low First Quarter 1-5/8 1 Second Quarter 2 1-9/32 Third Quarter 2-3/8 1-5/16 Fourth Quarter 4-3/4 1-5/8 Fiscal year ended March 31, 1999 Bid Prices High Low First Quarter 1-3/4 1-1/8 Second Quarter 1-3/8 11/16 Third Quarter 2 5/8 Fourth Quarter 2-1/16 1-1/16 As of May 25, 2000, there were approximately 170 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. - 7 - ITEM 6. SELECTED FINANCIAL DATA Year Ended March 31, 2000 1999 1998 1997 1996 Operations Net sales $ 7,667,530 $ 9,071,628 $11,566,317 $15,423,149 $19,507,889 Loss before equity in earnings (loss) of Hong Kong Joint Venture and income taxes (95,925) (1,119,154) (414,351) (1,332,427) (1,316,990) Net income (loss) 41,056 (806,552) (445,126) (1,483,438) (1,098,817) Per common share: Loss before equity in earnings (loss) of Hong Kong Joint Venture, income taxes - basic(1) (.11) (1.30) (.51) (1.64) (1.62) - diluted(2) (.10) Net income (loss) - basic(1) .05 (.93) (.55) (1.83) (1.35) - diluted(2) .04 Weighted average number of common shares outstanding - basic(1) 903,495 863,706 811,397 811,397 811,397 - diluted(2) 938,807 Financial Condition Total assets 5,476,545 6,402,120 7,705,310 9,557,116 12,676,391 Long-term debt and obligations (non- current) 60,260 -0- 1,246,861 1,344,211 1,277,394 Working capital 1,368,513 1,514,425 2,130,408 2,253,553 2,194,108 Current ratio 2.01 to 1 1.63 to 1 2.25 to 1 1.75 to 1 1.46 to 1 Share- holders' equity 4,062,244 3,987,072 4,747,351 5,192,477 6,675,915 Share- holders' equity per share - basic(1) 4.45 4.49 5.85 6.40 8.23 - diluted(2) 4.33 (1) All per share amounts and number of outstanding shares have been restated to reflect the one-for-four reverse stock split as of February 27, 1998. (2) Diluted outstanding shares and per share data is reported only for the years where reporting would not have an anti-dilutive effect.
- 8 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS SALES In fiscal year 2000, sales decreased by $1,404,098 (15%) from the prior year. This decrease was primarily due to decreased demand for certain of the Company's private label products, which amounted to $2,882,357, partially offset by an increase in security products of $1,478,259. In fiscal year 1999, sales decreased by $2,494,689 (22%) from the prior year. This decrease was primarily due to a decreased demand for certain of the Company's private label products which amounted to $1,540,456 and a decrease in security products of $954,233. NET PROFIT AND LOSS The Company earned a net profit of $41,056 for fiscal year 2000 as compared to a net loss of $806,552 for fiscal year 1999. The most significant reasons for the decrease in losses was a gain on the sale of the Company's headquarters of $804,862 and higher gross profit margins partially offset by a write off of discontinued inventory of $495,000. The Company incurred a net loss of $806,552 for fiscal year 1999, as compared to a net loss of $445,126 for fiscal year 1998. The most significant reason for the increase in losses was lower Hong Kong Joint Venture earnings. EXPENSES In fiscal year 2000, research, selling, general and administrative expenses increased by approximately $239,122 (11%) from the prior year. The increase resulted from higher staffing levels for the Company's new subsidiary, USI ELECTRIC, INC. As a percentage of sales, research, selling, general and administrative expenses were 23% for the fiscal year ended March 31, 2000 and 24% for the prior year. In fiscal year 1999, research, selling, general and administrative expenses decreased by approximately $127,202 (5%) from the prior year. This savings resulted from the Company's cost reduction program. As a percentage of sales, research, selling, general and administrative expenses were 24% for the fiscal year ended March 31, 1999 and 20% for the prior year. INTEREST EXPENSE AND INCOME Interest expense for fiscal 2000 decreased to $140,635 from $230,625 in fiscal 1999 due primarily to the sale of the Company's headquarters and payoff of the related mortgage in June 1999. Interest income decreased to $301 in fiscal 2000 from $2,719 in fiscal 1999. - 9 - Interest expense for fiscal 1999 decreased to $230,625 from $270,817 in fiscal 1998 due to a decrease in the average outstanding debt during the period resulting from decreased inventory levels from the prior fiscal year. Interest income decreased to $2,719 in fiscal 1999 from $2,916 in fiscal 1998. 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 $854,866 had been utilized in short-term borrowings and letter of credit commitments as of March 31, 2000. The amount available under the line of credit as of March 31, 2000 was approximately $505,000 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, 2000, working capital decreased by $145,912, from $1,514,425 on March 31, 1999 to $1,368,513 on March 31, 2000. Operating activities used cash of $905,444 for the year ended March 31, 2000. A decrease of $1,221,546 from 1999 was primarily due to the gain on the sale of the Company's headquarters of $804,861. For the prior fiscal year, operating activities provided cash of $316,102 for the year ended March 31, 1999. This was primarily due to a decrease in accounts receivable, inventory and prepaid expenses totaling $1,246,687 and partially offset by a loss of $806,552. Investing activities provided cash of $1,990,941 in 2000, primarily due to the sale of the Company's headquarters. For the same period last year, investing activities used cash of $28,725, due to the purchase of equipment. Financing activities used cash in 2000 of $1,186,587 mainly due to the repayment of the mortgage of $1,246,973 on the Company's headquarters facility which was sold in June 1999 and, for the same period last year, financing activities used cash of $227,647 primarily due to the repayment of $182,842 in short-term debt and $75,000 in payments on the legal settlement. During the fiscal year ended March 31, 1999, the Company received a distribution of $300,000 from the Hong Kong Joint Venture. The Company believes that its line of credit and its working capital, together with the excess cash generated from the sale of its headquarters facility, provide it with sufficient resources to meet its requirements for liquidity and working capital in the ordinary course of its business over the next twelve months. HONG KONG JOINT VENTURE In fiscal year 2000, sales of the Hong Kong Joint Venture were $5,517,170 compared to $6,440,817 and $6,984,960 in fiscal years 1999 and 1998, respectively. - 10 - Net income was $273,962 for the year ended March 31, 2000 compared to net income of $625,205 and a net loss of $61,550 in fiscal years 1999 and 1998, respectively. The decrease in income for the years ended March 31, 2000 and 1999 was due primarily to lower sales volume. Selling, general and administrative expenses were $1,176,392, $1,188,859 and $1,288,622 for the fiscal years ended March 31, 2000, 1999 and 1998, respectively. As a percentage of sales, expenses were 21%, 18% and 18% for fiscal 2000, 1999 and 1998, respectively. The increase in expenses as a percentage of sales, in fiscal 2000 was primarily due to cost containment and lower sales volume. Interest income net of interest expense was $140,425 for the year ended March 31, 2000, compared to $132,591 and $96,469 in fiscal years 1999 and 1998, respectively. Cash needs of the Hong Kong Joint Venture are currently met by funds generated from operations. During the year ended March 31, 2000, working capital increased by $362,407 from $2,069,790 on March 31, 1999 to $2,432,197 on March 31, 2000. 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 Report of Independent Certified Public Accountants - Grant Thornton LLP 12 Report of Independent Auditors - Deloitte & Touche LLP 13 Financial statements Consolidated balance sheets, March 31, 2000 and 1999 14 Consolidated statements of operations for the years ended 16 March 31, 2000, 1999 and 1998 Consolidated statements of shareholders' equity for the years ended March 31, 2000, 1999 and 1998 17 Consolidated statements of cash flows for the years ended March 31, 2000, 1999 and 1998 18 Notes to consolidated financial statements 19 - 11 - REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Shareholders and Board of Directors Universal Security Instruments, Inc. We have audited the accompanying consolidated balance sheets of Universal Security Instruments, Inc. (a Maryland corporation) and subsidiaries (the Corporation) as of March 31, 2000 and 1999, 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 using the equity method. The Corporation's investment of $2,377,766 and $2,240,785 in the Hong Kong Joint Venture's net assets at March 31, 2000 and 1999, and equity in earnings of $136,981 and $312,602, for the years then ended are included in the accompanying consolidated financial statements. The financial statements of the Hong Kong Joint Venture were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Hong Kong Joint Venture, is based solely on the report of the other auditors. The consolidated financial statements of Universal Security Instruments, Inc. and subsidiaries for the year ended March 31, 1998 were audited by other auditors whose report dated June 17, 1998 expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Universal Security Instruments, Inc. and subsidiaries as of March 31, 2000 and 1999, and the results of their consolidated operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. We have also audited the financial statement Schedule II for the years ended March 31, 2000 and 1999. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP June 8, 2000 Baltimore, Maryland - 12 - INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors Universal Security Instruments, Inc. We have audited the accompanying consolidated financial statements of Universal Security Instruments, Inc. and subsidiaries (the Corporation) for the year ended March 31, 1998 listed in Item 14(a)1. Our audit also included the financial statement schedule for the year ended March 31, 1998 listed in Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit. We did not audit the financial statements of the Hong Kong Joint Venture, the Corporation's investment which is accounted for by use of the equity method. The Corporation's equity of $2,228,182 in the Hong Kong Joint Venture's net assets at March 31, 1998, and of $(30,775) in that company's net (loss) for the year then ended is included in the 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 conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements of Universal Security Instruments, Inc. and subsidiaries referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended March 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Baltimore, Maryland June 17, 1998 - 13 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, 2000 1999 CURRENT ASSETS Cash $ 92,017 $ 193,107 Accounts receivable: Trade (less allowance for doubtful accounts of $100,000 in 2000 and 1999) 595,880 549,149 Officers and employees 4,845 321 600,725 549,470 Inventories: Finished goods 1,912,987 1,749,684 Raw materials - foreign locations 25,071 49,869 1,938,058 1,799,553 Prepaid expenses 91,754 112,419 Assets held for sale - net of depreciation 1,274,924 TOTAL CURRENT ASSETS 2,722,554 3,929,473 INVESTMENT IN HONG KONG JOINT VENTURE 2,377,766 2,240,785 PROPERTY AND EQUIPMENT, NET 363,920 225,862 OTHER ASSETS 12,305 6,000 TOTAL ASSETS $5,476,545 $6,402,120 See notes to consolidated financial statements.
- 14 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY March 31, 2000 1999 CURRENT LIABILITIES Short-term borrowings $ 817,714 $ 786,484 Accounts payable 399,100 294,618 Accrued liabilities 121,497 86,973 Current obligations under capital lease 15,730 Debt related to assets held for sale 1,246,973 TOTAL CURRENT LIABILITIES 1,354,041 2,415,048 LONG-TERM OBLIGATIONS UNDER CAPITAL LEASE 60,260 COMMITMENTS SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 912,270 and 887,143 shares in 2000 and 1999, respectively 9,123 8,871 Additional paid-in capital 10,533,310 10,499,446 Retained deficit (6,480,189) (6,521,245) TOTAL SHAREHOLDERS' EQUITY 4,062,244 3,987,072 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,476,545 $ 6,402,120 See notes to consolidated financial statements.
- 15 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended March 31, 2000 1999 1998 Net sales $7,667,530 $9,071,628 $11,566,317 Cost of goods sold 5,982,314 7,770,737 9,393,376 GROSS PROFIT 1,685,216 1,300,891 2,172,941 Research and development expense 191,651 129,877 226,529 Selling, general and administrative expense 2,239,368 2,062,020 2,092,570 Operating loss (745,803) (891,006) (146,158) Other income (expense): Interest income 301 2,719 2,916 Interest expense (140,635) (230,625) (270,817) Gain from sale of building 804,861 Other (14,649) (242) (292) 649,878 (228,148) (268,193) LOSS BEFORE EQUITY IN EARNINGS OF HONG KONG JOINT VENTURE (95,925) (1,119,154) (414,351) Equity in earnings of joint venture 136,981 312,602 (30,775) NET INCOME (LOSS) $ 41,056 $ (806,552) $ (445,126) Per common share amounts: Basic $ .05 $ (.93) $ (.55) Diluted $ .04 Weighted average number of common shares outstanding: Basic 903,495 863,706 811,397 Diluted 938,807 See notes to consolidated financial statements.
- 16 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Common Stock Paid-In Retained Shares Amount Capital Deficit Total Balance at March 31, 1997 811,397 $8,114 $10,453,930 $(5,269,567) $5,192,477 Net loss for 1998 (445,126) (445,126) Balance at March 31, 1998 811,397 8,114 10,453,930 (5,714,693) 4,747,351 Common stock sold to employee 113,636 1,136 98,864 100,000 Common stock repurchased (37,950) (380) (53,347) (53,727) Shares issued in reverse stock split 60 1 (1) Net loss for 1999 (806,552) (806,552) Balance at March 31, 1999 887,143 $8,871 10,499,446 (6,521,245) 3,987,072 Common stock issued to employee 25,000 250 33,866 34,116 Shares issued in reverse stock split 127 2 (2) Net income for 2000 41,056 41,056 Balance at March 31, 2000 912,270 $9,123 $10,533,310 $(6,480,189) $4,062,244 See notes to consolidated financial statements.
- 17 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended March 31, INCREASE (DECREASE) IN CASH 2000 1999 1998 OPERATING ACTIVITIES Net income (loss) $ 41,056 $(806,552) $ (445,126) Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 31,736 141,161 158,051 Provision for losses on accounts receivable 50,000 (Undistributed earnings of Joint Venture) (136,981) (12,603) 280,775 Gain on sale of building (804,861) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (51,255) 704,068 421,986 (Increase) decrease in inventories and prepaid expenses (117,840) 542,619 943,414 Increase (decrease) in accounts payable and accrued expenses 139,006 (268,991) (916,550) (Increase) decrease in other assets (6,305) 16,400 (5,710) NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (905,444) 316,102 486,840 INVESTING ACTIVITIES Proceeds from sale of building 2,079,785 Purchases of property and equipment (88,844) (28,725) (13,786) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,990,941 (28,725) (13,786) FINANCING ACTIVITIES Net borrowings (repayment) of short-term debt 31,230 (182,842) (394,315) Principal payments on long-term debt (4,960) (16,078) (14,564) Payment on legal settlement (75,000) (81,250) Payment of debt related to assets held for sale (1,246,973) Sale of common stock 34,116 100,000 Purchase of common stock (53,727) NET CASH USED IN FINANCING ACTIVITIES (1,186,587) (227,647) (490,129) (DECREASE) INCREASE IN CASH (101,090) 59,730 (17,075) CASH AT BEGINNING OF PERIOD 193,107 133,377 150,452 CASH AT END OF PERIOD $ 92,017 $ 193,107 $ 133,377 Supplemental information: Interest paid $ 140,635 $ 230,625 $ 270,817 Income taxes paid - - - Non-cash investing and financing activity: The Company acquired equipment under capital lease obligations totaling $80,950 during the year ended March 31, 2000. See notes to consolidated financial statements.
- 18 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United Stated of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Research and Development: Research and development costs are charged to operations as incurred. Accounts Receivable: The Company provides allowances for doubtful receivables by a charge against income in amounts equal to the estimated losses that will be incurred in collection of all receivables. The estimated losses are based on historical collection experience and a review of the current status of the existing receivables. Customer accounts are written off against the allowance for doubtful accounts when an account is determined to be uncollectible. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Included as a component of finished goods inventory are additional non-material costs. These costs include freight, import duty, inspection fees, etc. The Company reviews inventory periodically to identify slow moving product lines. In considering the relocation to new space, management chose to write-off abandoned and slow-moving product line inventory of $495,000. Year Ended March 31, 2000 1999 Materials $1,748,687 $1,550,456 Non-Materials 189,371 249,097 $1,938,058 $1,799,553
- 19 - Property and Equipment: Property 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 Leasehold improvements - Term of lease Machinery and equipment - 5 to 10 years Furniture and fixtures - 5 to 15 years Computer equipment - 5 years Accounting for Hong Kong Joint Venture: The Company has a joint investment in a Hong Kong manufacturing facility. The investment is accounted for using the equity method. Income Taxes: The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary. Per Share Data: The Company implemented Statement of Financial Accounting Standards, SFAS No. 128, "Earnings per Share" for all years presented which requires presentation of basic and diluted earnings per share amounts. The Company incurred a net loss for the years ended March 31, 1999 and 1998; therefore, all potential dilutive common shares are antidilutive and not included in the calculation of diluted earnings per share. Basic and diluted net income per share are computed by dividing net income (loss) by the weighted average number of common and potential dilutive common (if any) shares outstanding during the period. NOTE B - PROPERTY AND EQUIPMENT Property and equipment consist of the following: March 31, 2000 1999 Land and improvements $174,034 $ 174,034 Leasehold improvements 69,573 Machinery and equipment 151,686 835,966 Furniture and fixtures 154,004 260,616 Computer equipment 61,853 50,586 Equipment held under capital lease 80,950 692,100 1,321,202 Less accumulated depreciation and amortization 328,180 1,095,340 $363,920 $ 225,862
- 20 - At March 31, 1999, assets, net of depreciation, from land, building and improvements totaling $1,274,924 were transferred to assets held for sale and sold during the year ended March 31, 2000. See Note K. NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE The Company maintains a Joint Venture with a Hong Kong Corporation, which has manufacturing facilities in the People's Republic of China, for the manufacturing of consumer electronic products. As of March 31, 2000, the Company has an investment balance of $2,377,766 for their 50% interest in the Hong Kong Joint Venture. The investment has been accounted for using the equity method of accounting. The following represents summarized financial information from the financial statements of the Hong Kong Joint Venture as of March 31, 2000 and 1999 and for the years ended March 31, 2000, 1999 and 1998. As of the year ended March 31, 2000 1999 1998 Current assets $3,343,848 $3,053,302 Property and other assets 2,301,452 2,422,311 Total $5,645,300 $5,475,613 Current liabilities $ 922,963 $ 983,512 Non-current liabilities 38,520 63,382 Shareholders' equity $4,683,817 $4,428,719 Total $5,645,300 $5,475,613 Net sales $5,517,170 $6,440,817 $6,984,960 Gross profit 1,248,979 1,537,855 1,327,380 Net income (loss) 273,962 625,205 (61,550)
As of and for the years ended March 31, 2000, 1999 and 1998, the period ending exchange rate and the weighted average exchange rates were approximately 7.79, 7.75 and 7.75 Hong Kong dollars to each U.S. dollar, respectively. During the years ended March 31, 2000, 1999 and 1998, the Company purchased $4,567,052, $4,365,481 and $6,078,933, respectively, of finished product from the Hong Kong Joint Venture, which represents 79%, 81% and 73%, respectively, of the Company's total finished product purchases. NOTE D - DEBT Debt consisted of the following: Year Ended March 31, 2000 1999 Short-term borrowings $817,714 $ 786,484 Obligations under capital lease 75,990 Debt related to assets held for sale - 1,246,973 75,990 1,246,973 Less current maturities 15,730 1,246,973 $ 60,260 $ -0-
- 21 - 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. The short-term borrowings consist of a revolving line of credit and letters of credit. The outstanding principal balance of the revolving credit line ($817,714 at March 31, 2000) 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 (10-1/4% at March 31, 2000). As of March 31, 2000, the amount available for borrowings under the line was approximately $505,000 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 weighted average interest rate on outstanding short-term borrowings for the years ended March 31, 2000, 1999 and 1998 was 9.71%, 9.62% and 10.00%, respectively. The terms of the Company's mortgage are a $1,300,000 loan repayable in 60 equal monthly installments of principal and interest based on a 25 year amortization schedule, with an interest rate of 10%. The full outstanding balance is due at the earlier of the end of the 60 month period or when the property is sold. At March 31, 1999, the outstanding principal balance was $1,246,973 and was paid in full upon the sale of the Company's headquarters. See Note K. NOTE E - LEASES The Company entered into capital lease agreements for various equipment, with an outstanding balance of $75,990 as of March 31, 2000. The leases have imputed interest rates ranging from 7.6% to 10%. Monthly payments aggregate $1,810.00 per month. Maturities of long term obligations for the five years following March 31, 2000 are as follows: Year Capital Lease Obligation 2001 $21,719 2002 21,719 2003 21,719 2004 18,193 2005 8,364 Total $91,714 Less Amounts Representing Interest 15,724 Net Capitalized Lease $75,990
During December 1999, the Company entered into an operating lease for its office and warehouse expiring in October 2002, subject to renewal. Rental expenses recognized under the lease totaled $16,866 for the year ended March 31, 2000. Future obligations under this lease are as follows: Year Amount 2001 $ 52,306 2002 53,875 2003 31,970 $138,151
- 22 - NOTE F - INCOME TAXES At March 31, 2000, the Company has net operating loss (NOL) carryforwards in the United States of approximately $5,900,000 for income tax purposes that expire in years 2009 through 2020. From 1999 to 2000, the deferred tax asset valuation allowance increased by $237,140. From 1998 to 1999, the deferred tax asset valuation allowance decreased by $15,577 primarily due to the adjustment of prior year NOL. 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, 2000 1999 Deferred tax liabilities: Unremitted Hong Kong Joint Venture earnings not considered permanently reinvested $ 818,920 $ 771,396 Gross deferred tax liabilities 818,920 771,396 Deferred tax assets: Financial statement accruals and allowances 102,313 83,728 Inventory uniform capitalization 72,200 72,200 Other 34,361 67,553 NOL carryforwards and tax credits 2,256,512 1,957,241 Gross deferred tax assets 2,465,386 2,180,722 Valuation allowance (1,646,466) (1,409,326) Net deferred tax assets $ -0- $ -0-
The reconciliation of the income tax computed at the U.S. federal statutory tax rates to income tax expense is: 3/31/00 3/31/99 3/31/98 Federal tax expense (benefit) at statutory rate on income (loss) (34%) $ 13,959 $(276,229) $(151,343) Equity in (earnings) loss from Hong Kong Joint Venture (46,894) (106,285) 10,464 Dividends received from Hong Kong Joint Venture for which net deferred taxes were not previously provided - 102,000 85,000 Effect of net operating loss carryforwards, net of valuation allowance 24,628 279,616 81,144 Other 8,307 898 (25,265) $ -0- $ -0- $ -0- Investment and other tax credits are accounted for by the flow-through method.
- 23 - NOTE G - COMMON STOCK On February 27, 1998, the Shareholders approved a one-for-four reverse stock split of the Company's issued and outstanding common stock. The effective date of the reverse stock split was March 9, 1998, which reduced the number of outstanding shares from 3,245,587 shares to 811,397 shares. Additional paid-in capital was increased and common stock was decreased by $24,342 as a result of the reverse stock split. All share and per share amounts in this report have been restated to reflect the reverse stock split. Common Stock - On September 2, 1998, the Company sold 113,636 shares of common stock to the Chairman of the Board of the Company at a price of $0.88 cents per share (the mean between the closing bid and asked prices on NASDAQ) or an aggregate of $100,000. On November 12, 1998, the Board of Directors authorized the Company to purchase up to 100,000 shares of the Company's common stock. During the year ended March 31, 1999, pursuant to the stock purchase program, the Company repurchased 37,950 shares at a cost of $53,727. During the year ended March 31, 2000, the Company issued 25,000 shares of its common stock to a new employee. As part of the issuance, the Company recognized $34,116 of compensation expense. Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as amended, 493,750 shares of common stock are authorized for the granting of stock options, of which 11,519 shares have been issued as of March 31, 2000, leaving 482,231 available for issuance upon exercise of options granted, or available for future grants to employees and directors. Under provisions of the Plan, a committee of the Board of Directors determines the option price and the dates exercisable. All options expire five years from the date of grant and have an exercise price at least equal to the market price at the date of grant. The following tables summarize the status of options under the Non-Qualified Stock Option Plan at March 31, 2000 and option transactions for the two years then ended: Status as of March 31, 2000 Number of Shares Presently exercisable 175,031 Exercisable in future years 62,844 Total outstanding 237,875 Available for future grants 244,356 Shares of common stock reserved 482,231 Outstanding options: Number of holders 18 Average price per share $2.57 Expiration dates April 2001 to January 2005
- 24 - Transactions for the Three Years Ended March 31, 2000: Weighted Average Number of Per Share Total Shares Option Price Option Price Outstanding at March 31, 1997 163,125 6.44 $1,050,900 Granted 42,500 4.01 170,500 Canceled (17,500) 8.26 (144,575) Outstanding at March 31, 1998 188,125 $1,076,825 Granted 82,250 2.11 173,625 Canceled (45,875) 6.89 (315,875) Outstanding at March 31, 1999 224,500 934,575 Granted 73,500 1.79 131,314 Canceled (60,125) 7.55 (454,075) Outstanding at March 31, 2000 237,875 $ 611,844
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 25,000 shares of common stock for issuance under the Plan. No member of the Board of Directors who is not an employee of the Company, and no member of the committee administering the Plan, can participate in the Plan. At March 31, 2000, approximately 16,250 shares remain reserved for issuance under this Plan. 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 for fiscal years 1999 and 1998 would not have been materially affected on a pro forma basis. In fiscal 2000, the weighted average fair value at date of grant for options issued in 2000 was $1.01 per share. The fair value of these options was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected dividend yield -0-, expected volatility 82.67%, risk-free interest rate of 6.38% and expected term of five years. The net income as reported of $41,056 would be pro forma $4,210 and the net income per share as reported of $0.05 would be pro forma $0.01. NOTE H - COMMITMENTS The Company entered into a three year employment agreement with the President of its USI ELECTRIC, INC. subsidiary with fixed annual remuneration amounts for three years. In addition, the agreement provides incentive compensation based on the Company achieving certain levels of sales. The agreement expires in December, 2001. Outstanding letters of credit commitments which are used solely for short-term inventory financing totaled $37,152 at March 31, 2000. - 25 - NOTE J - BUSINESS AND SALES INFORMATION The Company is primarily a distributor of a variety of security products for use in homes and businesses and manufactures private label products to order. Approximately 17%, 24% and 15% of the Company's total sales were to the same customer in 2000, 1999 and 1998, respectively, and an additional 15% to a different customer in 2000. An additional 17% and 12% of the Company's total sales were to a different customer in 1999 and 1998. NOTE K - GAIN ON SALE OF BUILDING Universal Security Instruments, Inc. sold its headquarters facility in Owings Mills, MD, on June 16, 1999 for a price of $2.2 million to KA Real Estate Associates, LLC. After deducting the mortgage and settlement charges, the Company had a gain of $804,861. NOTE L - LITIGATION In fiscal 1997, the Company settled its legal proceeding for patent infringement litigation with Black & Decker (U.S.). 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 $200,00 payable in 32 equal monthly installments without interest beginning September 1, 1996 and ending March 1999. As a result of the other related expenses and insurance carrier recovery, the net charge for this matter amounted to $247,500. - 26 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The Company's Board of Directors consists of four directors. The following is a list of individuals currently serving as directors of the Company until the Company's next annual stockholders meeting and individuals currently serving as executive officers of the Company: Principal Occupation Director for past five years since Stephen Knepper.....56 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......57 Director; Chairman of the Board 1970 of the Company since September 1996; President of the Company from 1970 to September 1996. Harvey Grossblatt...53 Director since September 1996; 1996 President since June 1996; Chief Financial Officer since April 1997; Vice President of the Company from December 1986 to June 1996; Secretary and Treasurer of the Company since September, 1988; Vice President and Chief Financial Officer of the Company from October 1983 through May 1995. Gary Goldberg*......51 1993 to 1996 President of Ultravision 1998 LLC; 1996 to 1997, Independent Consultant; 1997 to present, Procurement Agent for Sierra Military Health Services, Inc. *resigned as a Director effective June 15, 2000. - 27 - 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 Michael Kovens 2000 $175,000 75,000 - - 23,750 - $ -0- Chairman 1999 175,000 75,000 - - 12,500 - -0- of the 1998 175,000 - - - 15,000 - -0- Board Harvey Gross- blatt 2000 $122,500 10,000 - - - - $ -0- Presi- 1999 122,500 - - - 6,250 - -0- dent, 1998 122,500 - - - - - -0- Secre- tary and Treasurer
Table II. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values Value Number of Unexercised of Unexercised In-The-Money Shares Options at FY-End Options at FY-End Acquired Value Exerci-/Unexerci- Exerci-/Unexerci- Name In Exercise Realized sable/sable sable/sable Michael Kovens - - 68,750/ -0- -0- / -0- Harvey Grossblatt - - 24,000/ -0- -0- / -0-
- 28 - ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of May 25, 2000, the following persons were "beneficial owners" (as that term is defined under Rule 13d-3 promulgated by the Securities and Exchange Commission) of more than five percent of the Company's common stock. Name and address of Shares Percent beneficial owner Beneficially Owned(1) of class Michael Kovens 328,295(2) 34.3% 7-A Gwynns Mill Court Owings Mills, MD 21117 Stephen Knepper 105,360(3) 11.0% 7-A Gwynns Mill Court Owings Mills, MD 21117 Bruce Paul 129,400 14.0% One Hampton Road Purchase, NY 10577 (1) For the purpose of determining the percentages of stock beneficially owned, shares of stock subject to options exercisable within 60 days of May 25, 2000 are deemed to be outstanding. (2) Includes 68,750 shares which Mr. Kovens presently has the right to acquire through the exercise of stock options and 5,048 shares held by Mr. Kovens' adult children. (3) Includes 68,750 shares which Mr. Knepper presently has the right to acquire through the exercise of stock options and 4,487 shares held by Mr. Knepper's adult children.
- 29 - As of May 25, 2000, 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 333,343(2) 34.0% Stephen Knepper 105,360(3) 10.7% Harvey Grossblatt 31,272(4) 3.3% All directors and officers as 470,600 43.8% a group (5 persons included) (1) See footnote 1 under previous table. (2) See footnote 2 under previous table. (3) See footnote 3 under previous table. (4) Includes 24,000 shares which Mr. Grossblatt presently has the right to acquire through the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. - 30 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements are included in Part II, Item 8. Consolidated balance sheets, March 31, 2000 and 1999 Consolidated statements of operations for the years ended March 31, 2000, 1999 and 1998. Consolidated statements of shareholders' equity for the years ended March 31, 2000, 1999 and 1998. Consolidated statements of cash flows for the years ended March 31, 2000, 1999 and 1998. Notes to consolidated financial statements. (a) 2. Financial Statement Schedules Schedule II - Schedule of Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, are not required, or because the required information is included in the consolidated financial statements or notes thereto. (a) 3. Exhibits required to be filed by Item 601 of Regulation S-K Exhibit No. 10.19 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, MD 21117. 10.2 Hong Kong Joint Venture Agreement (confidential treatment of Name requested and filed separately with the Commission) (Incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1994, File No. 0-7885) 23.1 Consent of Deloitte & Touche LLP 27 Financial Data Schedule - 31 - (b) Reports on Form 8-K None (d) Financial Statements Required by Regulation S-X Separate financial statements of the Hong Kong Joint Venture (confidential treatment of name requested and filed separately with the Commission. Page Report of the auditors JV-1 Consolidated profit and loss account, JV-2 March 31, 2000 and 1999 Consolidated balance sheets, March 31, 2000 and 1999 JV-3 Consolidated cash flow statements, March 31, 2000 JV-5 and 1999 Notes to consolidated financial statements JV-8 - 32 - SCHEDULE II UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES VALUATION ACCOUNT YEARS ENDED MARCH 31, 2000, 1999 and 1998 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, 2000 Allowance for doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000 Year ended March 31, 1999 Allowance for doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000 Year ended March 31, 1998 Allowance for doubtful accounts $ 50,000 $50,000 $-0- $ -0- $100,000 (1) Write-off of uncollectible accounts, net of recoveries.
- 33 - 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: June 29, 2000 By: Michael Kovens Michael Kovens Chairman of the Board, Director Date: June 29, 2000 By: Stephen Knepper Stephen Knepper Vice Chairman of the Board, Director Date: June 29, 2000 By: Harvey Grossblatt Harvey Grossblatt, President, Director, Secretary, Treasurer, Chief Accounting Officer - 34 - REPORT OF THE AUDITORS To the members THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) (Incorporated in Hong Kong with limited liability) We have audited the financial statements on pages 2 to 20 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 of the Group as at 31 March 2000 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance. Hong Kong 30 May 2000 JV-1 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended 31 March 2000 Notes 2000 1999 HK$ HK$ TURNOVER 4 42,855,134 49,928,815 Cost of sales (33,127,883) (39,065,280) Gross profit 9,727,251 10,863,535 Other revenue 1,672,198 1,771,018 Administrative expenses (9,119,320) (7,573,225) PROFIT FROM OPERATING ACTIVITIES 5 2,280,129 5,061,328 Finance costs 6 (33,951) (25,595) PROFIT BEFORE TAX 2,246,178 5,035,733 Tax 7 (122,441) (189,182) NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS 8 2,123,737 4,846,551 Retained profits at beginning of year 31,462,000 31,259,649 RETAINED PROFITS AVAILABLE FOR DISTRIBUTION 33,585,737 36,106,200 Interim dividend 9 - (4,644,200) RETAINED PROFITS AT END OF YEAR 33,585,737 31,462,000 Other than the net profit for the year, the Group had no recognized gains or losses. Accordingly, a Statement of Recognized Gains and Losses is not presented in the financial statements.
JV-2 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED BALANCE SHEET 31 March 2000 Notes 2000 1999 HK$ HK$ ASSETS Non-current assets: Fixed assets 10 17,927,978 18,777,601 Long term investment 11 - - 17,927,978 18,777,601 Current assets: Due from a shareholder 1 1,661,636 561,008 Inventories 13 5,498,125 4,322,225 Prepayments, deposits and other receivables 236,252 144,551 Pledged time deposit 14 1,570,039 1,487,639 Cash and cash equivalents 17,076,376 17,153,586 26,042,428 23,669,009 TOTAL ASSETS 43,970,406 42,446,610 EQUITY AND LIABILITIES Current liabilities: Due to a related company 1 - 217,943 Current portion of loan from a related company 1 164,004 164,004 Taxation 2,256,337 2,609,485 Other payables and accrued liabilities 2,858,529 2,234,876 Accounts payable 1,909,316 2,397,819 7,188,186 7,624,127 Non-current liabilities: Loans from shareholders 15 2,868,954 2,868,954 Long term portion of loan from a related company 1 27,329 191,329 Deferred tax 16 300,000 300,000 3,196,283 3,360,283 TOTAL LIABILITIES-page 4 10,384,469 10,984,410
JV-3 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED BALANCE SHEET (continued) 31 March 2000 Notes 2000 1999 HK$ HK$ TOTAL LIABILITIES-page 3 10,384,469 10,984,410 Capital and reserves: Share capital 17 200 200 Retained profits 33,585,737 31,462,000 33,585,937 31,462,200 TOTAL EQUITY AND LIABILITIES 43,970,406 42,446,610
JV-4 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED CASH FLOW STATEMENT 31 March 2000 Notes 2000 1999 HK$ HK$ NET CASH INFLOW FROM OPERATING ACTIVITIES 18(a) 1,596,234 9,315,981 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 1,122,513 1,027,582 Interest paid (33,951) (25,595) Dividend paid - (4,644,200) Net cash inflow/(outflow) from returns on investments and servicing of finance 1,088,562 (3,642,213) TAXATION Hong Kong profits tax paid (475,589) (444,614) INVESTING ACTIVITIES Purchases of fixed assets (2,040,017) (737,733) Increase in pledged time deposit (82,400) (96,286) Net cash outflow from investing activities (2,122,417) (834,019) NET CASH INFLOW BEFORE FINANCING ACTIVITY 86,790 4,395,135 FINANCING ACTIVITY 18(b) Repayment of loan from a related company (164,000) (164,000) Net cash outflow from financing activity (164,000) (164,000) INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (77,210) 4,231,135 Cash and cash equivalents at beginning of year 17,153,586 12,922,451 CASH AND CASH EQUIVALENTS AT END OF YEAR 17,076,376 17,153,586 ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 17,076,376 17,153,586
JV-5 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) BALANCE SHEET 31 March 2000 Notes 2000 1999 HK$ HK$ ASSETS Non-current assets: Fixed assets 10 17,927,978 18,777,601 Interests in subsidiaries 12 10,008 10,008 17,937,986 18,787,609 Current assets: Due from a subsidiary 1 90,604 57,454 Due from a shareholder 1 1,661,636 561,008 Tax recoverable 162,580 - Inventories 13 5,498,125 4,322,225 Prepayments, deposits and other receivables 236,252 144,551 Pledged time deposit 14 1,570,039 1,487,639 Cash and cash equivalents 14 16,981,395 17,037,600 26,200,631 23,610,477 TOTAL ASSETS 44,138,617 42,398,086 EQUITY AND LIABILITIES Current liabilities: Due to a subsidiary 1 16,541,609 16,551,789 Due to a related company 1 - 217,943 Current portion of loan from a related company 1 164,004 164,004 Taxation - 190,568 Other payables and accrued liabilities 1,618,854 993,201 Accounts payable 1,909,316 2,397,819 20,233,783 20,515,324 Non-current liabilities: Loans from shareholders 15 2,868,954 2,868,954 Long term portion of loan from a related company 1 27,329 191,329 Deferred tax 16 300,000 300,000 3,196,283 3,360,283 TOTAL LIABILITIES-page 6 23,430,066 23,875,607
JV-6 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) BALANCE SHEET (continued) 31 March 2000 Notes 2000 1999 HK$ HK$ TOTAL LIABILITIES-page 6 23,430,066 23,875,607 Capital and reserves: Share capital 17 200 200 Retained profits 20,708,351 18,522,279 20,708,551 18,522,479 TOTAL EQUITY AND LIABILITIES 44,138,617 42,398,086
JV-7 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 1. CORPORATE INFORMATION The Company was incorporated under the laws of Hong Kong on 7 July 1989. It operates under a joint venture agreement entered into on 23 October 1989 between Universal Security Instruments, Inc.("USI"), a company incorporated in the United States, and The Original Joint Venture Owner (name withheld and filed separately with the SEC) which is incorporated in Hong Kong. The Company is economically dependent on USI 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. During the year, the following significant related party transactions were recorded: Group 2000 1999 Notes HK$ HK$ Sales made to USI (i) 35,475,009 39,098,998 Purchases from USI (i) 949,947 137,948 Rentals paid to: An Affiliate of the Company (name withheld and filed separately with the SEC) (ii) 840,000 840,000 A Manager of the Company (name withheld and filed separately with the SEC) (ii) 240,000 240,000 Management fee paid to: An Affiliate of the Company (name withheld and filed separately with the SEC) (iii) 1,440,000 1,440,000 Interest income from USI (iv) 108,837 116,959 Notes: (i) Sales and purchases were made according to the published prices and conditions similar to those offered to other customers or by other suppliers of the Group. (ii) Rental expenses were charged for the offices owned by An Affiliate of the Company (name withheld and filed separately with the SEC) and A Manager of the Company (name withheld and filed separately with the SEC) in Hong Kong and the People's Republic of China (the "PRC") based on the prevailing market rate and area occupied by the Group.
JV-8 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 1. CORPORATE INFORMATION (continued) (iii) Management fee was charged at HK$120,000 per month for the provision of management services rendered in planning, execution and operation of electronics manufacturing plant in the PRC. (iv) Interest income from USI was charged ranging at 9.5% to 12% per annum (1999: ranging 9.5% to 12% per annum) of the trading balance overdue for 30 days during the year. An Affiliate of the Company (name withheld and filed separately with the SEC) is a company of which A Manager of the Company (name withheld and filed separately with the SEC) director of the Company, is a director. Loan from An Affiliate of the Company (name withheld and filed separately with the SEC) is unsecured, bearing interest at 0.49% per annum, and is repayable by 14 (1999: 26) equal monthly installments. Except for the trading balance of HK$992,377 (1999: HK$521,343) with USI included in due from a shareholder of HK$1,661,636 (1999: HK$561,008) under current assets as at 31 March 2000 which is interest-bearing ranging from 9.5% to 12% per annum (1999: ranging 9.5% to 12% per annum), balances with a shareholder, subsidiaries and a related company are unsecured, interest-free, and have no fixed terms of repayment. 2. IMPACT OF NEW STATEMENT OF STANDARD ACCOUNTING PRACTICE ("SSAP") SSAP 1: Presentation of Financial Statements has been adopted for the first time in the preparation of the current year's financial statements. SSAP 1 prescribes the basis for the presentation of financial statements and sets out guidelines for their structure and minimum requirements for the content thereof. The format of the consolidated profit and loss account and consolidated balance sheet and balance sheet as set out on pages 2 - 4 and 5 - 6 and 7, respectively, have been revised in accordance with the SSAP. Additional disclosures as required are included in the supporting notes. JV-9 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention. Basis of consolidation The consolidated financial statements include the audited financial statements of the Company and its subsidiaries for the year ended 31 March 2000. 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. Goodwill Goodwill arising on consolidation of subsidiaries represents the excess purchase consideration paid for subsidiaries 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. Subsidiaries A subsidiary is a company in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors. Interests in subsidiaries are stated at cost unless, in the opinion of the directors, there have been permanent diminutions in value, when they are written down to values determined by the directors. Long term investment Investments held on a long term basis are stated at cost less provisions for any permanent diminutions in values deemed necessary by the directors, on an individual basis. JV-10 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Related parties Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. Fixed assets and depreciation Fixed assets are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the assets have been put into operation, such as repairs and maintenance, is normally charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset. Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows: Land held on medium term leases Over the lease terms Buildings 5% Leasehold improvements 20% Plant and machinery 10% Furniture and fixtures 20% Motor vehicles 20%
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 in the case of work in progress and finished goods, comprises direct materials, direct labor and an appropriate proportion of overheads. Net realizable value is based on the estimated selling prices less any estimated costs to be incurred to completion and disposal. JV-11 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash equivalents For the purpose of the cash flow statement, cash equivalents represent short term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired. For the purpose of balance sheet classification, cash equivalents represent assets similar in nature to cash, which are not restricted as to use. Revenue recognition Revenue is recognized when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases: (a) on the sales of goods, when the significant risks and rewards of ownership have been transferred to the buyer; (b) rental income, on the straight-line basis over the lease term; (c) management fee income, when the services are rendered; and (d) interest, on a time proportion basis, taking into account the principal outstanding and the effective interest rate applicable. 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. 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. Foreign currencies 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. JV-12 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 4. TURNOVER AND REVENUE Turnover represents the invoiced value of goods sold, net of discounts and returns. An analysis of turnover and revenue is as follows: 2000 1999 HK$ HK$ Turnover 42,855,134 49,928,815 Exchange gains, net 140,522 557,017 Rental income 290,800 285,000 Management fee income 102,285 139,320 Interest income 1,122,513 1,027,582 Sundry income 156,600 319,116 Revenue 1,812,720 2,328,035 TURNOVER AND REVENUE 44,667,854 52,256,850
5. PROFIT FROM OPERATING ACTIVITIES The Group's profit from operating activities is arrived at after charging/(crediting): 2000 1999 HK$ HK$ Depreciation 2,889,640 3,219,389 Less: Amount included in cost of sales (2,687,601) (3,018,501) 202,039 200,888 Auditors' remuneration 168,000 168,000 Staff costs 5,554,236 5,458,242 Directors' remuneration - - Operating lease rentals for land and buildings 1,098,347 1,098,347 Provision for inventories 146,537 - Exchange gains, net (140,522) (557,017) Interest income (1,122,513) (1,027,582) Gross and net rental income (290,800) (285,000)
JV-13 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 6. FINANCE COSTS Group 2000 1999 HK$ HK$ Interest on inward bills 33,951 25,595
7. TAX Hong Kong profits tax has been provided at the rate of 16% (1999: 16%) 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 2000 1999 HK$ HK$ Provision for the year 134,000 407,000 Overprovision in prior years (11,559) (97,818) Deferred tax credit - note 16 - (120,000) Taxation charge for the year 122,441 189,182
8. NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS The net profit attributable to shareholders dealt with in the financial statements of the Company is HK$2,186,072 (1999: HK$4,909,904). 9. INTERIM DIVIDEND 2000 1999 HK$ HK$ Interim - HK$2,322,100 per ordinary share - 4,644,200
JV-14 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 10. FIXED ASSETS Group and Company Leasehold Leasehold Furniture land and improve- Plant and and Motor buildings ments machinery fixtures vehicles Total HK$ HK$ HK$ HK$ HK$ HK$ Cost: At begin- ning of year 15,814,592 6,691,399 28,828,314 2,796,387 452,501 54,583,193 Additions - 188,140 1,255,575 196,302 400,000 2,040,017 Disposals - - - (7,070) (280,001) (287,071) At 31 March 2000 15,814,592 6,879,539 30,083,889 2,985,619 572,500 56,336,139 Accumulated deprecia- tion: At begin- ning of year 4,008,564 5,816,503 23,025,891 2,502,133 452,501 35,805,592 Provided during the year 729,401 473,204 1,480,330 146,705 60,000 2,889,640 Disposals - - - (7,070) (280,001) (287,071) At 31 March 2000 4,737,965 6,289,707 24,506,221 2,641,768 232,500 38,408,161 Net book value: At 31 March 2000 11,076,627 589,832 5,577,668 343,851 340,000 17,927,978 At 31 March 1999 11,806,028 874,896 5,802,423 294,254 - 18,777,601 The leasehold land and buildings are situated in the PRC under medium-term leases.
11. LONG TERM INVESTMENT Group 2000 1999 HK$ HK$ Unlisted investment, at cost 9,305,588 9,305,588 Amount due from investee company 1,158,675 1,158,675 10,464,263 10,464,263 Less: Provision for permanent diminution in value (9,305,588) (9,305,588) Provision against amount due from investee company (1,158,675) (1,158,675) - -
JV-15 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 11. LONG TERM INVESTMENT (continued) Particulars of investee company are as follows: Percentage Country of Nominal value of equity registration of registered attributable Principal Name and operation capital to the Group activity 2000 1999 An Associate of the The PRC US$4,000,000 30 30 Dormant Company (name withheld and filed separately with the SEC) The Group does not have significant influence on the financial and operating policy decisions of investee company and, accordingly, the investment is classified as long term investment. The amount due from the investee company is unsecured, interest-free, and has no fixed terms of repayment.
12. INTERESTS IN SUBSIDIARIES Company 2000 1999 HK$ HK$ Unlisted shares, at cost 210,008 210,008 Less: Provision for permanent diminution (200,000) (200,000) 10,008 10,008
Particulars of the wholly-owned subsidiaries are as follows: Nominal value Place of of issued incorporation ordinary Principal Name and operation share capital activities A Subsidiary of The Company Hong Kong HK$200,000 Investment (name withheld and filed holding separately with the SEC) A Subsidiary of The Company British US$1 Dormant (name withheld and filed Virgin separately with the SEC) Islands A Subsidiary of The Company Hong Kong HK$10,000 Dormant (name withheld and filed holding separately with the SEC)
JV-16 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 13. INVENTORIES Group and Company 2000 1999 HK$ HK$ Raw materials 3,836,437 2,553,140 Work in progress 914,409 558,208 Finished goods 747,279 1,210,877 5,498,125 4,322,225
14. BANKING FACILITIES Time deposit of HK$1,570,039 (1999: HK$1,487,639) is pledged to a bank for credit facilities of HK$3,329,000 (1999: HK$3,329,000) granted to the Company. The banking facilities of the Company are also secured by personal guarantees of A Manager (name withheld and filed separately with the SEC), a director of the Company. The facilities were not utilized at the balance sheet date. 15. LOANS FROM SHAREHOLDERS Group and Company 2000 1999 HK$ HK$ Universal Security Instruments, Inc. 1,434,477 1,434,477 The Original Joint Venture Owner (name withheld and filed separately with the SEC) 1,434,477 1,434,477 2,868,954 2,868,954 The loans are unsecured, interest-free and repayable on demand by the respective shareholders with the consent of the other. The directors of the Company consider that these liabilities are non-current.
JV-17 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 16. DEFERRED TAX Group and Company 2000 1999 HK$ HK$ Balance at beginning of year 300,000 420,000 Credit for the year - note 7 - (120,000) Balance at end of year 300,000 300,000 The principal components of the Group's deferred tax liability comprise accelerated depreciation allowances.
17. SHARE CAPITAL Company 2000 1999 HK$ HK$ Authorized: 100 ordinary shares of HK$100 each 10,000 10,000 Issued and fully paid: 2 ordinary shares of HK$100 each 200 200
18. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of profit from operating activities to net cash inflow from operating activities: 2000 1999 HK$ HK$ Profit from operating activities 2,280,129 5,061,328 Interest income (1,122,513) (1,027,582) Depreciation 2,889,640 3,219,389 Decrease/(increase) in amount due from a shareholder (1,100,628) 2,208,486 Decrease/(increase) in inventories (1,175,900) 1,893,401 Decrease/(increase) in prepayments, deposits and other receivables (91,701) 132,583 Decrease in amount due to a related company (217,943) (17,670) Increase/(decrease) in other payables and accrued liabilities 623,653 (22,086) Decrease in accounts payable (488,503) (2,131,868) Net cash inflow from operating activities 1,596,234 9,315,981
JV-18 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 2000 18. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued) (b) Analysis of changes in financing during the year Loan from a related company HK$ Balance 1 April 1998 519,333 Repayment (164,000) Balance at 31 March 1999 and 1 April 1999 355,333 Repayment (164,000) Balance at 31 March 2000 191,333
19. COMPARATIVE AMOUNTS As further explained in note 2 to the financial statements, due to the adoption of new SSAP during the current year, the presentation of the profit and loss account, the balance sheets and certain supporting notes have been revised to comply with the new requirements. Accordingly certain comparative amounts have been reclassified to conform with the current year's presentation. 20. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved by the board of directors on 30 May 2000. JV-19 EX-27 2 0002.txt
5 3-MOS 12-MOS MAR-31-2000 MAR-31-2000 MAR-31-2000 MAR-31-2000 92,017 92,017 0 0 700,725 700,725 100,000 100,000 1,938,058 1,938,058 2,722,554 2,722,554 692,100 692,100 328,180 328,180 5,476,545 5,476,545 1,354,041 1,354,041 0 0 0 0 0 0 9,123 9,123 4,053,121 4,053,121 5,476,545 5,476,545 1,395,899 7,667,530 1,395,899 7,667,530 784,586 5,982,314 784,586 5,982,314 555,240 2,431,019 0 0 15,569 140,635 2,832 41,056 0 0 0 0 0 0 0 0 0 0 2,832 41,056 .003 .05 .003 .04
EX-23 3 0003.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of our report dated June 17, 1998, with respect to the consolidated financial statements and financial statement schedule of Universal Security Instruments, Inc. and subsidiaries for the year ended March 31, 1998 included in this Annual Report on 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 Employee Stock Purchase Plan: 33-21225 Form S-8 DELOITTE & TOUCHE LLP Baltimore, Maryland June 28, 2000 EX-10 4 0004.txt EXHIBIT 10.19 NORTHWEST BUSINESS CENTER (BUILDING #7) AGREEMENT OF LEASE BETWEEN NATIONAL INSTRUMENT COMPANY AND UNIVERSAL SECURITY INSTRUMENTS, INC. TABLE OF CONTENTS Section Section 1. Certain Defined Words or Phrases Section 2. The Premises Section 3. Term Section 4. Construction of Premises Section 5. Rental 5.1. Basic Rent 5.2 Deposit 5.3 Real Estate Taxes 5.4. Common Area Expense 5.5. Insurance 5.6. Additional Rent Section 6. Permitted Use Section 7. Common Areas Section 8. Assignment and Subletting Section 9. Repairs Section 10. Utilities Section 11. Compliance with Rules, Ordinances, etc. Section 12. Tenant's Alterations Section 13. Insurance Section 14. Changes to Center Section 15. Fire or Other Casualty Section 16. Signs Section 17. Eminent Domain Section 18. Trade Fixtures Section 19. Right of Entry Section 20. Surrender Section 21. Curing the Tenant's Default Section 22. Responsibility of the Tenant Section 23. Subordination and Attornment Section 24. Defaults by the Tenant Section 25. Notices Section 26. Tenant's Certificate Section 27. Quite Enjoyment Section 28. The Landlord Section 29. The Tenant Section 30. Entire Agreement Section 31. Waiver of Jury Trial Section 32. Brokers Exhibits EXHIBIT D. Option to Extend Lease Term NORTHWEST BUSINESS CENTER AGREEMENT OF LEASE THIS AGREEMENT OF LEASE ("this Lease&WP1-9;), made this 21st day of October, 1999, between National Instrument Company, Inc. (herein "Landlord"), and Universal Security Instruments, Inc. (herein "Tenant"), WITNESSETH, THAT FOR AND IN CONSIDERATION of the rents, and of the mutual covenants and agreements of the parties hereto, as are hereinafter set forth, Landlord and Tenant do hereby agree as follows: SECTION 1. Certain Defined Words and Phrases. As used herein, the words or phrases: 1.1. "Basic Rent" means the annual sum set forth in Section 5.1, payable in the equal consecutive monthly installments provided in that subsection. 1.2. "Buildings" means the warehouse and office buildings of the Center, shown on Exhibit A, containing collectively the agreed upon rentable area of 126,010 square feet and "Building" means the warehouse and office building identified as Building 7, containing the agreed upon rentable area of 45,000 square feet, in which the Premises are located. 1.3. "Center" means that certain office/warehouse development located in the Owings Mills Industrial Park, commonly known as Northwest Business Center, Owings Mills, Maryland 21117, which Center is shown on Exhibit A. 1.4. "Date of this Lease" means the date on which the last party to sign this Lease (or any Guaranty thereof) shall have executed and delivered the Lease to the other party hereto. 1.5. "Deposit" means the sum of Four Thousand Three Hundred Five and 00/100 Dollars ($4,305.00), of which shall constitute payment by Tenant of the Security Deposit which shall be applied as provided in Section 5.2. 1.6. "Permitted Use" means the offices and warehouse. -1- 1.7. "Premises" means that portion of the Building in the Center leased by Tenant from Landlord and shown cross-hatched on Exhibit A, containing the agreed upon equivalent of 9,000 square feet of rentable area. 1.8. "Tenant Notice Address" means: Northwest Business Center 7-A Gwynns Mill Court Owings Mills, MD 21117 1.9. Tenant's "Proportionate Share" means the rentable area of the Premises divided by the rentable area of the Buildings equal to seven and two-tenths percent (7.20%). The base year for Landlord's insurance costs pursuant to Section 5.5 below shall be the calendar year which commences on January 1, 2000. 1.10. "Term" means (i) a period of three (3) years plus the fractional part of a month commencing on the agreed upon date of __________________________________ or if no date is herein set forth, then on the date established pursuant to Section 3 hereof ("the Occupancy Term"), plus (ii) a period equal to the number of days between the Date of this Lease and the first day of the Occupancy Term ("the Pre-Occupancy Term"). SECTION 2. The Premises, The Landlord hereby leases to the Tenant and Tenant rents from the Landlord the Premises, located in the Building within the Center. SECTION 3. Term. The Pre-Occupancy Term of this Lease shall commence on the Date of this Lease. The Occupancy Term of this Lease shall commence upon the date specified in Section 1.10 hereof, but if no date is specified therein, then upon that date which is forty-five (45) days after Landlord shall have delivered possession of the Premises to Tenant; and terminating (unless sooner terminated pursuant to the provisions of this Lease) on the last day of the last calendar month of the Term. Promptly upon the commencement of the Occupancy Term, the parties hereto shall enter into a supplementary agreement, setting forth the dates of commencement and termination of the Occupancy Term. "Substantial completion" as used herein shall mean that the Premises have been completed except for so-called punch list items and are ready for Tenant to commence the installation of its trade fixtures, equipment and inventory and so certified to by the Landlord or his representative. -2- SECTION 4. Construction of Premises. 4.1. Tenant shall, at its sole cost, prepare the Premises for its use and occupancy by doing all work ("Tenant's Improvements") required of Tenant in the approved Plan (Exhibit B-1-1) and Specifications (as hereinafter defined), set forth in Exhibit B-2. Tenant shall, within five (5) days from the Date of this Lease, and prior to the commencement of the construction of Tenant's Improvements by Tenant or a contractor hired by Tenant, submit to Landlord three (3) complete sets of Plans and Specifications of Tenants Improvements ("the Plans and Specifications") for any work other than that described on Exhibit B-1-1. One such set shall be returned to Tenant after review by Landlord with approval thereof by Landlord, or with such modification as Landlord may require. Upon approval of the Plans and Specifications by Landlord, pursuant to any required modifications, Tenant shall promptly complete its work in the Premises in accordance therewith and in accordance with the terms of this Lease. In the event Tenant shall fail to complete minimum Tenant Improvements as stated on Exhibit B-l at a cost not less than Twenty-Seven Thousand Four Hundred Nine and 00/100 Dollars ($27,409.00) in accordance with the Plans and Specifications on or before ninety (90) days from the start date of the term, Landlord shall have the right, at its sole option, but at the sole cost and expense of Tenant, to complete the same and Tenant agrees to reimburse the entire expense incurred by Landlord within five (5) days after written demand therefore as Additional Rent hereunder. 4.2. Anything herein to the contrary notwithstanding, if for any reason the Occupancy Term of this Lease shall not have commenced within one (1) year from the Date of this Lease, either party shall have the right and option to terminate this Lease by written notice to the other, whereupon, effective with the giving of said notice, this Lease shall be canceled and neither party shall have any liability arising hereunder, except that Landlord shall return any sum deposited by Tenant pursuant to Section 1.5 hereof and Tenant shall promptly reimburse Landlord for all costs expended by Landlord in constructing or preparing the Premises to the specifications of the Tenant, as set forth on Exhibit B. -3- 4.3. By its entry into this Lease, the Tenant represents and acknowledges to the Landlord that the Tenant has satisfied itself as to the use which it is permitted to make of the Premises and has inspected the Premises, and the streets, sidewalks, curbs, utilities and access ways contiguous to or adjoining the same, that the same are in all ways acceptable to the Tenant for use by the Tenant pursuant to this Lease, in the condition or state in which they are found as of the date Tenant begins Tenant's Improvements, and that the Landlord has made no expressed or implied warranty, representation or covenant to or with the Tenant with respect to the same, other than as may be set forth expressly herein. By beginning the Tenant's Improvements, Tenant shall be deemed to have accepted the Premises, to have acknowledged that the same are in the condition called for hereunder and to have agreed that the obligations of the Landlord imposed for the delivery of the Premises have been fully performed. Landlord agrees to assign for the benefit of Tenant such warranties as may be available from Landlord's contractors with respect to Landlord's Improvements. SECTION 5. Rental. Tenant covenants and agrees to pay to Landlord during the Term, as rental for the Premises, the following: 5.1. Basic Rent for the Pre-Occupancy Term shall be Ten Dollars ($10.00) plus any Additional Rent due hereunder. During the Occupancy Term, Tenant shall pay Basic Rent as set forth below, in equal monthly installments, in advance on the first (1st) day of each full calendar month during the Occupancy Term, without any deduction or setoff whatsoever, and without demand. Lease Year Annual Basic Rent Monthly Installment Year 1 $51,660.00 $4,305.00 Year 2 $53,209.80 $4,434.15 Year 3 $54,806.09 $4,567.17 Notwithstanding the provisions of Section 24.1, if the Tenant fails to pay the rental more than five days after the date when such is due more than twice in any twelve (12) month period, thereafter a late fee of five percent (5%) of the rental then due may be assessed at the option of the Landlord. The first monthly payment during the Occupancy Term shall include any prorated Basic Rent for the period from the first day of the Occupancy Term to the first day of the first full calendar month of the Occupancy Term. -4- 5.2. Deposit. Landlord hereby acknowledges receipt from Tenant of the Deposit. In no instance shall the amount of such Deposit be considered a measure of liquidated damages. Until the first day of the first full month of the Occupancy Term, all or any part of the Deposit may be applied by Landlord in total or partial satisfaction of any default by Tenant. After the first day of the first full month of the Occupancy Term, all or any part of the Deposit remaining after application of the Prepaid First Month's Rent, may be applied by Landlord in total or partial satisfaction of any default by Tenant. The application of all or any part of the Deposit to any obligation or default of Tenant under this Lease shall not deprive Landlord of any other rights or remedies Landlord may have nor shall such application by Landlord constitute a waiver by Landlord. If all or any part of the Deposit is applied to an obligation of Tenant hereunder, Landlord shall have the right to call upon Tenant to restore the Deposit to its original amount by giving notice to Tenant and Tenant shall immediately restore the Deposit by payment thereof to Landlord. It is understood and agreed that should Landlord convey its interest under this Lease, the Deposit may be turned over by Landlord to Landlord's grantee or transferee, and upon any such delivery of the Deposit, Tenant hereby releases the party named herein as Landlord of any and all liability with respect to the Deposit, its application and return, and Tenant agrees to look solely to such grantee or transferee, and it is further understood that this provision shall also apply to subsequent grantees and transferees. Landlord will return the balance of the Deposit not previously applied as provided herein (and exclusive of the Prepaid First Month's Rent), within thirty (30) days after expiration of the Term. No interest will be paid to Tenant on the Deposit throughout the Lease Term. 5.3. Real Estate Taxes. Landlord shall pay all Taxes levied upon or assessed against the land and improvements comprising the Center, and the appurtenances thereto, during the Term of this Lease. In the event that said Taxes payable by Landlord shall be increased in any tax year during the Term of this Lease over the amount of such Taxes due and payable for the tax year in which the Term of this Lease shall commence, Tenant shall pay to Landlord, as Additional Rent, its Proportionate Share of such tax increase. The term "Taxes" shall be defined as (1) all real estate and other ad valorem taxes, including, without limitation, general and special assessments (including paving assessments), real estate rental, receipt or gross receipt tax or any other tax on Landlord (excluding Landlord's income taxes), now or hereafter imposed by any federal, state or local taxing authority, whether as a substitution for or in addition to the present method of -5- real property taxation currently in use, and (2) any metropolitan district water and sewer charges and other governmental charges which customarily are part of the real estate tax bill issued by governmental authorities charged with said responsibility. Taxes shall be adjusted on a proportionate basis for any period which shall be less than a Tax Year. The term "Tax Year" shall mean the year so established by the governmental authority charged with said responsibility. If requested by Tenant, Landlord agrees to provide Tenant with a copy of the tax bill and the calculation of Tenant's share thereof within a reasonable period of time after the Landlord's receipt thereof. Tenant agrees to pay its Proportionate Share of taxes in the manner set forth in Section 5.6 hereof. 5.4. Common Area Expense. In each lease year, Tenant will pay to Landlord, as Additional Rent, its Proportionate Share of Common Area Expense, at the time and in the manner provided in Section 5.6 hereof. The term "Common Area Expense" shall mean the total costs and expenses of every kind and nature incurred in connection with the management, operation, maintenance, repair and redecorating of the Building and the common areas used in connection therewith, including costs and expenses incurred by Landlord in landscaping, storm drainage and other utility systems, fire protection and security services, if any, lighting, parking lot striping, sanitary control, lawn maintenance, removal of snow and trash, exterior painting, security lighting, depreciation on or rental of equipment used in such maintenance, the cost of personnel, if any, to implement such services and fifteen percent (15%) of all of the foregoing costs included in Common Area Expense to cover Landlord's administrative and overhead costs. Said expenses will include operation of the areas and services described in Articles 7 and 10 hereof, but excluding capital expenditures, depreciation, debt service on any mortgages, leasing commissions, and costs incurred for a specific tenant. 5.5. Insurance. The Landlord shall maintain throughout the Term, all risk or fire and extended coverage insurance on the Buildings, including Landlord's Improvements. The Tenant shall pay to the Landlord, as additional rent hereunder, upon demand, the amount, if any, by which Landlord's premium shall be increased by reason of Tenant's occupancy of the Premises. The Tenant shall also pay to Landlord, as Additional Rent hereunder, upon demand, the Tenant's Proportionate Share of any increase in the cost of insuring the Buildings over the cost of such insurance for the calendar year commencing January 1, 2000. -6- 5.6. Additional Rent. Tenant's Proportionate Share of the expenses described in Sections 5.3, 5.4 and 5.5 hereof, together with any other charges, costs or expenses due and payable by Tenant as set forth in this Lease, shall be deemed "Additional Rent" and shall be paid within ten (10) days after written request therefor by the Landlord. SECTION 6. Permitted Use and Continued Occupancy. The Premises shall be used and occupied for the Permitted Use and for no other use or purpose without Landlord&WP1-9;s prior written consent. SECTION 7. Common Areas. During the Term of this Lease, Tenant shall be entitled to the nonexclusive use, free of charge, but in common with others, of the driveways, walkways, and parking areas presently existing or to be constructed in connection with the Buildings, provided that such use shall be subject to such reasonable rules and regulations as Landlord may from time to time prescribe; and provided further that Landlord shall at all times have full and exclusive control, management and direction of said driveways, walkways, and parking areas. Landlord shall further have the right to police them; to restrict parking by Tenants, their officers, agents and employees; to close temporarily all or any portion of the parking areas or facilities as may be required for proper maintenance and/or repair; to discourage non-customer parking; and to do and perform such other acts in and to such areas as, in the use of its business judgment, the Landlord shall determine to be advisable in order to improve or make more convenient the use thereof by all tenants, their officers, agents, employees and customers. Tenant shall be responsible for taking all reasonable measures to ensure that its customers, guests and other invitees comply with the rules and regulations applicable to the common areas and refrain from loitering in, or damaging the, common areas. Landlord may from time to time change the location, layout and arrangement of the parking areas, driveways and walkways and reduce them by erecting thereon buildings or other structures or improvements of any kind including, but not limited to, additions to the Center; provided that the convenience off parking facilities available to Tenant shall not be substantially prejudiced thereby; and provided further that there shall at all times be provided such parking facilities as meet local governmental requirements. Landlord shall provide reasonable illumination for the aforesaid driveways, walkways and parking areas, and will keep them in reasonable repair and reasonably free of litter and snow. -7- SECTION 8. Assignment and Subletting. Tenant shall not assign this Lease in whole or in part, nor sublease all or any part of the Premises, nor permit other persons to occupy said Premises or any part thereof, nor grant any license or concession for all or any part of said Premises, nor allow any transfer of an ownership interest in Tenant by sale, assignment, bequest, inheritance, operation of law or otherwise that results in a change of voting control of, or majority interest in, Tenant without the prior written consent of Landlord in each instance. An assignment for the benefit of Tenant&WP1-9;s creditors or otherwise by operation of law shall not be effective to transfer or assign Tenant&WP1-9;s interest under this Lease unless Landlord shall have first consented thereto in writing. Any consent by Landlord to an assignment or subletting of this Lease shall not constitute a waiver of the necessity of such consent as to any subsequent assignment or subletting and shall not relieve Tenant of liability hereunder. Tenant shall be responsible for all of Landlord's reasonable attorney's fees and other reasonable costs incurred in negotiation and consultation concerning any proposed assignment or subletting, and in the preparation, drafting, review and negotiation of any assignment or subletting documents. Although Landlord may withhold its consent, in its sole discretion, to any proposed assignment or sublease, Landlord's approval of any such proposed assignment or sublease shall be conditioned on use of Landlord's form documents and payment by Tenant on demand of Landlord's reasonable attorney's fees and other reasonable costs. Notwithstanding the above, Landlord will not unreasonably withhold its consent provided (x) such assignee is credit worthy, (y) Tenant is not then in default of any obligations at the date of request or at the effective date of assignment and (z) the use of the Tenant will not be obnoxious, offensive or interfere with the use and enjoyment of the Premises within the Center by other tenants or the Landlord. SECTION 9. Repairs 9.1. Landlord shall keep and maintain the roof, subfloors, structural and exterior portions of the Premises (exclusive of doors, windows, and glass) in repair, provided that Tenant shall give Landlord written notice of the necessity for such repairs, and provided that the damage thereto shall not have been caused by Tenant, its agents, contractors, or employees, in which event Tenant shall be responsible therefor and shall promptly make repairs thereto. Except as expressly set forth in this -8- subsection, Landlord shall be under no liability for repair or maintenance of the Premises, or any part thereof; nor shall Landlord be under any liability to repair or maintain any electrical, plumbing or other mechanical installation. Notwithstanding the above, Tenant shall be obligated to also notify Landlord of any inherently dangerous condition existing in the Premises as of the Occupancy Term of which Tenant becomes aware. 9.2. Tenant shall provide and maintain its own janitorial services for the interior of the Premises, and shall otherwise keep the interior of the Premises, together with all electrical plumbing, and other mechanical installations and equipment used by or in connection with the Premises, in good order, replacement and repair (and any necessary replacement and repair shall be of equal or better quality as originally delivered to Tenant or shall be as specified by Landlord), except as provided in paragraph 9.4 below, and promptly replace any plate glass which may be broken or damaged with glass of like kind and quality, and surrender the Premises at the expiration of the Term in as good condition as when received except for ordinary wear and tear and damage by fire or other casualty included in the extended coverage endorsement to Landlord's fire insurance policies. To ensure the continued quality of the equipment, all repairs, replacement and service work on such equipment shall be performed by persons authorized by the manufacturer of the particular equipment, unless Tenant obtains the prior written consent of Landlord to employ another repair person. Tenant may, at its option, enter into a maintenance, repair and service contract which Landlord will assist Tenant in obtaining. Tenant will not overload the electrical wiring and will not install any additional electrical wiring or plumbing unless it has first obtained Landlord's written consent thereto, and, if such consent is given, Tenant will make such installation at its own cost and expense. Tenant will repair promptly, at its own expense, any damage to the Premises caused by bringing into the Premises any property for Tenant's use, or by the installation, use or removal of such property, regardless of fault or by whom such damage shall be caused unless caused by the willful misconduct of Landlord, its agents, employees or contractors. Landlord shall not be responsible for any loss by Tenant for water damage due to any cause, including by way of illustration and not of limitation, leaks or bursts of the plumbing, pipes or roof, or damage due to the sprinkler system or other fire protection/extinguishment apparatus. -9- 9.3. If Tenant shall not proceed promptly and diligently to make any repairs or perform any obligation imposed upon it by the preceding subsections within forty-eight (48) hours after receiving written notice from Landlord to make such repairs or perform such obligation, then and in such event Landlord may, at its option, enter the Premises and do and perform the things specified in said notice, without liability on the part of Landlord for any loss or damage resulting from any such action by Landlord, and Tenant agrees to pay promptly upon demand any cost or expense incurred by Landlord in taking such action. It Landlord shall fail to make, or commence to make, any repairs required of the Landlord hereunder within fifteen (15) days after written request therefore by Tenant, Tenant will have the right, by written notice to Landlord within ten (10) days thereafter, which notice shall include a breakdown of the reasonable costs to be incurred by Tenant, to perform the work at the expense of the Landlord. Upon completion thereof, Tenant will provide Landlord with such evidence of the payment of such costs as reasonably requested and Landlord shall reimburse the Tenant for the expense thereof. In the event that Landlord shall fail to do so, Tenant will have no right to offset the same against any sums due Landlord hereunder, but will have the right to bring a separate action against Landlord for the collection of said expenses. 9.4 Landlord shall obtain a master service policy to maintain, repair and replace all heating, air conditioning and ventilation equipment. Tenant shall reimburse the Landlord upon demand, as Additional Rent hereunder, the actual costs of maintaining, repairing and replacing such heating, air conditioning and ventilation equipment which are directly attributable to the Premises. The replacement of the HVAC unit in the warehouse will be at the Landlord's expense in the event of failure. SECTION 10. Tenant shall reimburse Landlord upon demand for Tenant's Proportionate Share of all utility charges not billed directly to Tenant. Tenant shall pay promptly when due the charges for all utility services billed directly to Tenant, including but without limitation, heat, gas, electricity and telephone. If Tenant defaults in the payment of any such charges, Landlord may, at its option, pay them for Tenant's account, in which event Tenant shall promptly reimburse Landlord therefor. -10- Landlord will provide and maintain the necessary mains and electrical conduits to bring water, gas and electricity to the Premises. Landlord shall under no circumstances be liable to Tenant in damages or otherwise for any interruption in service of electricity, water, gas, heat, telephone or air conditioning whether caused by the making of any repairs or improvements in the Buildings or otherwise. The cost of installing separate meters for utilities not billed individually to Tenant shall be at the expense of the Tenant, which installation may be required by Landlord, in its reasonable judgment. SECTION 11. Compliance with Rules, Ordinances, etc. Tenant shall, throughout the Term, at the Tenant's sole cost and expense, promptly comply with all laws, ordinances, notices, orders, rules, regulations and requirements of or made by any and all federal, state or municipal governments or the appropriate departments, commissions, boards and officers thereof, as well as any and all notices, orders, rules and regulations of the National Board of Fire Underwriters, or any other body now or hereafter constituted and exercising similar functions, relating to all or any part of the Premises; provided, however, that the Tenant shall not be required to take any affirmative action in order to comply with the foregoing laws, ordinances and notices with respect to any portion of the Building or Premises maintained by Landlord pursuant to Section 9.1 hereof or which was not in compliance prior to the date of this Lease unless the need for such compliance arises out of the Tenant's use, manner of use or occupancy of, or installations within or upon, the Premises or such portion of the Building. The Tenant shall likewise observe and comply with the requirements imposed by any and all policies of public liability, fire and other insurance at any time in force with respect to the Premises or with respect to the Building, any other improvements upon the Premises, and/or equipment therein. Tenant shall comply with Landlord's rules and regulations attached hereto as Exhibit C, as amended, modified or supplemented by Landlord from time to time. SECTION 12. Tenant's Alterations. Tenant shall not make any alterations, additions or improvements to the Building or to the Premises, or any part thereof, or affix any object to the exterior, roof or structure of the Building, without Landlord's prior consent in each instance, and in the event Landlord so consents, any alteration, addition, or improvement shall be of such good quality as if the alteration, addition, or improvement -11- was made as part of the original Premises, or shall be as specified by Landlord in Landlord's sole discretion; provided, however, that Tenant may make minor interior changes to the Premises which do not impair the structural strength of the Building or, in Landlord's sole opinion, do not reduce the value of the Building or Premises. Any alterations, additions or improvements made by Tenant shall (i) be in accordance with the specifications set forth in Exhibit B-2 and (ii) immediately become the property of Landlord and shall remain upon the Premises or Landlord, at its election, may require Tenant to remove same and restore the Premises to their original condition, in which event Tenant shall comply with such requirement prior to the expiration or other termination of this Lease provided, however, that Landlord agrees that the Tenant Improvements shown herein to be undertaken by Tenant at the commencement of this Lease shall remain on the Premises and shall not be removed by Tenant. Notwithstanding that any alterations by Tenant to the Premises or Tenant's Improvements are, upon installation on the Premises, property of Landlord, Tenant shall have an insurable interest therein so that Tenant shall have the right to insure such alterations and Tenant's Improvements against fire or other casualty. Tenant shall not cut or drill into or secure any fixtures, apparatus or equipment of any kind in or to any part of the Premises without first obtaining Landlord's written consent. Nothing herein shall be deemed to be a consent by Landlord to the filing of any lien upon the Premises or the Building due to Tenant's work and Tenant shall cause to be removed within ten (10) days after notice thereof any lien, including any mechanic's lien asserted against work performed upon the Premises, and, upon the failure of Tenant to do so, Landlord may, at its option, bond, discharge or otherwise remove such lien, and hold Tenant responsible for all costs and expenses in connection therewith, including reasonable attorneys'; fees. Tenant shall indemnify, hold harmless, and at Landlord's option, defend against any injury of, loss by, claim from, or damage to, Tenant, any employee of Tenant or any other person resulting from or arising out of, or in connection of any alteration by Tenant, or any Tenant's Improvements to the Premises. This indemnification shall be in addition to and not in limitation of the provisions of Section 22 of this Lease. -12- SECTION 13. Insurance. 13.1. Tenant, at the Tenant's sole cost and expense, shall maintain and keep in effect throughout the Term, insurance against loss or liability in connection with bodily injury or death or property damage or destruction in or upon the Premises, or arising out of the use of any portion of the Center by the Tenant or its agents, employees, officers, invitees, visitors and guests, under policies of general public liability insurance having such limits as to each as may be reasonably required by the Landlord from time to time, but in any event of not less than One Million Dollars ($1,000,000.00) per occurrence and Three Million Dollars ($3,000,000.00) general aggregate. The Tenant specifically agrees to maintain, at its expense, extended coverage, vandalism, malicious mischief and sprinkler leakage insurance on all of the Tenant's personal property and any fixtures which remain the property of the Tenant or as to which the Tenant retains the right of removal from the demised premises, or of which Tenant has an insurable interest and the Tenant assumes the risk of all loss and damage, direct or indirect, resulting from said perils and will hold the Landlord harmless from any claims therefor. Tenant further agrees to maintain, at its expense, plate glass insurance coverage on the Premises and to assume the risk of loss or damage to said plate glass. All of the aforesaid insurance policies shall name the Landlord; any other parties in interest: designated by Landlord from time to time, and the Tenant as the insured parties, shall provide that they shall not be cancelable without at least thirty (30) days'; prior written notice to the Landlord; shall be written in such a manner as to provide that the insurer consents to the waiver of recovery set forth in Subsection 13.2 hereof and that this waiver shall not affect the said policy or the right of the insured to recover thereunder; and shall be issued by insurers of recognized responsibility licensed to do business in Maryland and recognized reasonably acceptable to Landlord. At least five (5) days prior to the commencement of the Term, the originals or a signed duplicate copy of such policies or a binder of insurance pending issuance of such policies shall be delivered by the Tenant to the Landlord and at least thirty (30) days before any such policy shall expire the Tenant shall deliver the original or a signed duplicate copy of a replacement policy or a binder of insurance pending issuance of such policies to the Landlord. -13- 13.2. Notwithstanding any other provision of this Lease to the contrary, neither Landlord nor Tenant shall be liable to the other or to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage to any building, structure or other tangible property, or any resulting loss of income, or losses under worker's compensation laws and benefits, even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees if any such loss or damage is covered by insurance benefitting the party suffering such loss or damage or was required to be covered by insurance pursuant to this Lease. SECTION 14. Changes to Center. Landlord shall have the exclusive right to use all or any part of the roof and rear and side walls of the Premises for any purpose; to erect additional or other structures over all or any part of the Premises, the common area or the Center; to change or revise the layout of improvements within the Center, or relocate or remove same; to partition same; and to erect and maintain in connection with the construction thereof, temporary scaffolds and other aids to construction on the exterior of the Premises, provided that access to the interior of the Premises shall not be unreasonably denied, that there shall be no encroachment upon the interior of the Premises, and that Tenant and its customers use and enjoyment of the Premises shall not be unreasonably denied. SECTION 15. Fire or Other Casualty. 15.1. If the Premises are damaged by fire, the elements, unavoidable accident or other casualty, Landlord shall promptly, at its expense, repair the damage and, if the Premises are not thereby rendered untenantable in whole or in part in Landlord's reasonable discretion, rent shall not abate. If the Premises are rendered untenantable only in part, as reasonably determined by Landlord and such casualty was not caused by Tenant's negligence or willful misconduct, rent shall abate during such period proportionately as to the portion of the Premises rendered untenantable. If the entire Premises are untenantable as reasonably determined by Landlord and such casualty was not caused by Tenant's negligence or willful misconduct, rent shall abate entirely during the period of untenantability. 15.2. In no event shall Landlord be liable for interruption to Tenant's business or for damage to or replacement or repair of Tenant's personal property, including inventory, trade fixtures, floor coverings, furniture, or property removable by Tenant under the provisions of this Lease, any alterations by Tenant to the Premises or Tenant's Improvements. -14- 15.3. If the Premises are (1) rendered wholly untenantable, or (2) damaged as a result of any cause which is not covered under standard fire and extended coverage insurance or (3) substantially damaged during the last two years of the Term or (4) if the Building of which the Premises are a part, but not the Premises, is damaged to the extent that in Landlord's judgment reasonably exercised, it is necessary to demolish the Building and the Premises, then in any of such events, Landlord may terminate this Lease by giving to Tenant notice within ninety (90) days after the occurrence of such event. Basic Rent and Additional Rent and other charges shall be adjusted as of the date of such cancellation. SECTION 16. The Tenant shall not erect or maintain any exterior sign or any signs within the Premises visible from the outside anywhere upon the Center or Premises without first obtaining the Landlord's prior written consent, which consent may be withheld in the sole discretion of Landlord. If the sign is approved by Landlord, the size, design, location, type of composition and material of the sign must also be approved by Landlord. Any such sign shall be inscribed, painted or affixed by Landlord, or a company approved by Landlord, but the entire cost thereof shall be borne by Tenant. The Tenant shall maintain any such sign or signs in good condition and repair at all times, and pay any taxes imposed thereon. Landlord has erected or will erect, in addition to any other sign erected by Landlord in its sole discretion, (i) a sign at the entrance to the Center identifying the tenants in the Building and their location and (ii) a sign in the entrance to the Premises identifying Tenant's occupancy of the Premises and (iii) a sign at the loading area of Tenant's space identifying the address of the Premises. Upon delivery of possession of the Premised to Tenant, Tenant will pay to Landlord the sum of Three Hundred Dollars ($300.00) as Tenant's contribution to the cost of signs for the Building. SECTION 17. Eminent Domain. If the whole or any part of the Premises shall be taken under the power of eminent domain, this Lease shall terminate as to the part so taken on the date Tenant is required to yield possession thereof to the condemning authority. The Landlord shall make such repairs and alterations as may be necessary to restore the part not taken to useful condition, to the extent of condemnation proceeds available therefor, and the Basic Rent shall be reduced proportionately as to the portion of the Premises so taken. If the amount of the -15- Premises so taken substantially impairs the usefulness of the Premises for the purposes set forth in Section 6, either party may terminate this Lease as of the date when Tenant is required to yield possession. All compensation awarded for any taking of the fee and the leasehold shall belong to and be the property of Landlord; provided, however, that Tenant, and not Landlord, shall be entitled to any portion of the award which does not serve to reduce Landlord's award and is made directly to Tenant in reimbursement for Tenant's cost of removal of its stock, trade fixtures, moving and relocation costs. SECTION 18. Trade Fixtures. All trade fixtures installed by Tenant in the Premises other than improvements made by Tenant to the Premises, shall remain the property of Tenant and shall be removable from time to time and also at the expiration of the Term of this Lease or other termination thereof, provided Tenant shall not at such time be in default under any covenant or agreement contained in this Lease; otherwise such fixtures shall not be removable and Landlord shall have a lien thereon (notwithstanding ownership thereof by a party other than Tenant) to secure itself against loss and damage resulting from such default. Tenant further agrees to restore the Premises to their original condition, reasonable wear and tear excepted. SECTION 19. Right of Entry. Landlord and its representatives shall have the right at all reasonable times to enter the Premises for the purposes of (a) inspecting same; (b) making any repairs thereto or otherwise performing any work therein as herein provided; and (c) to exhibit same for purposes of sale, lease or financing; and Landlord shall not be liable in any manner for any entry into the Premises for the above purposes other than when same results from its gross negligence. SECTION 20. Promptly upon the expiration or earlier termination of the Term, the Tenant shall yield up, broom clean, and in the game condition, order and repair in which they are required to be kept throughout the period of this Lease, the Premises and any and all improvements, alterations and additions thereto, and all fixtures and equipment servicing the Premises. Tenant, subject to the other provisions of this Lease, shall remove therefrom the Tenant's signs, goods and effects and any machinery, fixtures and equipment used in the conduct of Tenant's trade or business and not servicing the Premises or the Building, -16- and shall repair any damage caused by the installation or the removal thereof. Unless sooner terminated pursuant to the provisions hereof, this Lease shall expire absolutely upon the expiration of the Term without the necessity of any notice or other action from or by either party hereto. Tenant further agrees that during the six (6) month period preceding the expiration date of the Term, Landlord may place upon the Premises a FOR RENT or FOR SALE sign. SECTION 21. Curing the Tenant's Defaults. If Tenant should default in the performance of any of its obligations hereunder, including but not limited to the payment of Basic Rent or Additional Rent, the Landlord shall be entitled (but shall not be obligated), in addition to any other rights Landlord may have in law or equity, and after written notice to Tenant except in the case of emergency, to cure such default. Tenant shall reimburse Landlord for any sums paid or costs incurred by Landlord, including reasonable attorney's fees and costs of collection, in curing such default, and/or in enforcing Landlord's rights under this Lease, because of a default by Tenant or otherwise, plus interest thereon at the lesser of the highest rate permitted by law or eighteen percent (18%) per annum, which sums, costs and interest shall be deemed to be additional rent hereunder and shall be payable by the Tenant upon demand by the Landlord. SECTION 22. Responsibility of the Tenant. The Tenant shall be responsible for, and shall relieve and hereby relieves the Landlord from and agrees to indemnify, hold harmless, and at Landlord's option, defend the Landlord against, any and all liability by reason of any injury or damage to the Tenant, any employee of Tenant, or to any other person or property upon the Premises (or in the common areas in connection with the Tenant's use and enjoyment thereof), caused by any fire, breakage, leakage, collapse, inherently dangerous condition or other event upon the Premises or any other portion of the Center, whether or not such event results from a condition which shall have existed prior to the execution of this Lease and whether or not such event results in the termination of this Lease by reason of damage to or destruction of the Center or the Premises, unless such fire, breakage, leakage, collapse or other event, injury or damage be caused by or shall result from the gross negligence or intentionally tortuous act or omission of the Landlord or its -17- agents, officers, invitees, visitors or guests. Notwithstanding the above, and notwithstanding Tenant's maintenance responsibilities set forth in this Lease, Tenant shall have a duty to notify Landlord immediately of any inherently dangerous conditions in the Premises or Common Areas of which Tenant becomes aware. The agreements set forth in this Section 22 shall survive the termination of this Lease for any reason whatsoever. SECTION 23. Subordination and Attornment. This Lease shall be subject and subordinate at all times to the lien of any underlying ground leases, mortgages or deeds of trust now or hereafter placed by the Landlord upon the Center and to any and all advances to be made thereunder. This clause shall be self-operative, and no further instrument or act. on the part of the Tenant shall be required to effectuate such subordination. In confirmation thereof, Tenant shall execute such further assurances as may be required. Any mortgagee, or trustee under any deed of trust, may elect that this Lease shall have priority over its mortgage or deed of trust, and upon notification of such election by such mortgagee or trustee to Tenant, this Lease shall be deemed to have priority over such mortgage or deed of trust whether this Lease is dated prior to or subsequent to the date of such mortgage or deed of trust. If any foreclosure proceedings are brought which affect the Building or the Center, or if the power of sale under a mortgage or deed of trust is exercised, then Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease. Tenant hereby appoints Landlord to be the attorney-in-fact of Tenant (which appointment is irrevocable and coupled with an interest) to execute and deliver any such instrument or instruments for and on behalf of and in the name of Tenant. Landlord agrees to make all reasonable efforts to obtain nondisturbance from any party requesting subordination or attornment from Tenant. SECTION 24. Defaults by the Tenant. 24.1. If the Tenant should tail to pay the rent or any other charges herein reserved as rent, on the days and time and at the place that the same are made payable hereunder within five days after such due date or if Tenant shall fail to notify Landlord of any change in the control of its partnership interests or corporate stock, or if the Tenant shall in any respect violate any of the other terms, conditions or covenants herein contained and fail to cure the same within fifteen (15) days after written -18- notice thereof from Landlord, the Landlord may, without terminating this Lease, re-enter and repossess the Premises, together with any and all improvements thereon and additions thereto, and/or pursue any remedy permitted by law or equity for the enforcement of the provisions hereof. In the alternative, and at the election of the Landlord, the Landlord may give to the Tenant, at any time default, which remains uncured of the Landlord's election to terminate this Lease on a date to be specified in notice, not less than ten (10) days after the giving thereof; and upon the date specified in said notice, this Lease and the Term shall (except for the continued liability of the Tenant as hereinafter provided) expire and come to an end as fully and completely as if the date specified in said notice were the date definitely fixed in this Lease for the expiration of the Term, and the Tenant shall quit and surrender the Premises, on or before the said date, to the Landlord, without cost or charge to Landlord. No such termination, repossession or re-entry shall release Tenant from liability under this Lease. 24.2 If the Tenant should become insolvent, bankrupt, or make any assignment for the benefit of creditors, or be levied upon or sold out by any sheriff's, marshall's or constable's sale, or if a receiver for the Tenant shall be appointed, or if a reorganization of the Tenant pursuant to any provision of federal or state bankruptcy law shall occur, whether voluntary, or if involuntary and not stayed within sixty (60) days thereafter, this Lease shall automatically terminate (except for the continued liability of the Tenant as hereinafter provided) as fully and completely as if the date of such event were the date fixed herein for the expiration of the Term and the Tenant shall immediately quit and surrender the Premises to the Landlord, without cost to the Landlord. Upon the filing of a petition by or against the Tenant under the Federal Bankruptcy Code (or any similar statute enacted hereafter), the Tenant, as debtor and as debtor-in-possession, and any trustee who may be appointed to represent the bankrupt estate, agree to perform each and every obligation of the Tenant under this Lease, including, but not limited to, the payment of all monetary obligations hereunder, until such time as this Lease is either rejected or assumed by order of a United States Bankruptcy Court, or other federal court having jurisdiction over bankruptcy matters. -19- 24.3. If the Tenant's possession of the Premises should be terminated as herein provided or by reentry, summary dispossession proceedings or any other method, Tenant shall remain liable for its obligations hereunder and the Landlord may, at the Landlord's option, (i) relet the Premises or any part or parts thereof for the account of the Tenant for the remainder of the Term, as herein originally specified, or (ii) relet the Premises or any part or parts thereof for a period extending beyond the date when this Lease would have expired but for such prior expiration on default or for such re-entry and termination, and deem that portion of the period within the Term, as herein originally specified, on such terms and conditions as are commercially reasonable including allowances of free rent periods or reduced rent. In such event, the Tenant shall pay to the Landlord, at the times and in the manner specified by the provisions herein, (x) the Basic Rent and any Additional Rent accruing during the remainder of the Term as specified herein, (y) less any monies received by the Landlord with respect to such remainder from such reletting. In addition, Tenant shall be liable for the cost of any attorney's fees or other expenses (including broker's fees and costs of renovation), or of any repairs or other action taken by the Landlord on account of any default by Tenant. Landlord shall be under no obligation to relet the Premises and Tenant' liability shall not be reduced for any failure to relet. 24.4. In the event Landlord elects to terminate this Lease by reason of a default by Tenant, then notwithstanding such termination, Tenant shall be liable for and shall pay to Landlord the sum of all rental due hereunder and any other indebtedness of Tenant to Landlord through the date of termination including any attorneys&WP1-9; fees arising from such default, plus, as damages, an amount equal to the difference between (i) the total rental hereunder for the remaining portion of the Lease Term (had such Term not been terminated by Landlord due to Tenant's default and assuming additional rent each remaining Lease year equal to the amount of additional rent for the Lease year prior to the Lease year in which the default occurs) discounted to present worth and (ii) the then present value of the then fair rental value of the Premises for such period as determined in Landlord's reasonable opinion. 24.5. Upon any expiration, termination or re-entry as aforesaid, neither the Tenant nor the Tenant's creditors and representatives shall thereafter have any right, legal or -20- equitable, in or to the Center, the Premises or any portion thereof, or in or to the repossession of same, or in, to or under this Lease, and the Tenant hereby waives any and all right or redemption which may then be provided by law. The words "re-enter" and "reentry" as used in this Lease shall not be deemed to be restricted to their technical legal meaning. 24.6. Any and all mention in this Section of the rent or rental herein reserved after the termination of this Lease as in this Section provided, or after the termination ,of the Tenant's possession by re-entry, summary dispossession or other method as herein provided, shall be deemed to refer to the Basic Rent plus all Additional Rent and such additional sums as the Tenant shall be obligated to pay to the Landlord under any of the terms, covenants and conditions of this Lease, whether or not designated or indicated herein to be payable as additional rent. 24.7. In addition to, and not in substitution for the remedies hereinbefore provided, it Tenant shall fail to pay when due, beyond any applicable grace period, any Basic Rent, Additional Rent or any other sums due to Landlord hereunder, Landlord shall have the right to distrain therefor. 24.8. The failure of the Landlord to insist in any one or more instances upon the performance of any of the covenants or conditions of this Lease or to exercise any right or privilege herein conferred, including but not limited to the right to collect late fees pursuant to Section 5.1 above, shall not be construed as thereafter waiving or relinquishing the Landlord's right to the performance of any such covenants, conditions, rights or privileges, and the same shall continue and remain in full force and effect, and the waiver of one default or right shall not constitute waiver of any other default. The receipt of any rent by the Landlord from the Tenant or any assignee or subtenant of the Tenant, whether the same be rent that originally was reserved or that which may become payable under any covenants herein contained, or of any portion thereof, shall not operate as a waiver of the right of the Landlord to enforce the payment of the additional rent or of any of the other obligations of this Lease by such remedies as may be appropriate, and shall not waive or avoid the right of the Landlord at any time thereafter to elect to terminate this Lease, on account of such assignment, subletting, transferring of this Lease or arty other breach of any covenant or condition herein contained, unless evidenced by the Landlord's written waiver thereof. The acceptance of rent or -21- any other consideration by Landlord at any time shall not be deemed an accord and satisfaction, and Landlord shall have absolute discretion to apply such amounts against any sum for any period or reason due hereunder without the same constituting a release of any other sums remaining due and unpaid. SECTION 25. Notices. All notices required or permitted to be given hereunder shall be in writing and shall be hand delivered against receipt or sent by registered or certified mail, return receipt requested, postage prepaid and shall be deemed received on the day on which same were posted, whether or not actually received. Notices to the Tenant shall be addressed to the Tenant's Notice Address. Notices to the Landlord shall be addressed to National Instrument Company, c/o CRM, P.O. Box 17458, Property #409, Baltimore, Maryland 21297-1458, with a carbon copy to any other persons designated from time to time by the Landlord. Either party may, at any time, in the manner set forth for giving notices to the other, set forth a different address to which notices to it shall be sent. SECTION 26. Tenant's Certificate. The Tenant agrees at any time and from time to time within ten (10) days after the Landlord's written request, to execute, acknowledge and deliver to the Landlord a written instrument in recordable form certifying or stating (a) that this Lease is unmodified and in full force and effect (or if there shall then have been modifications, that the same is in full force and effect as so modified, and setting forth such modifications); (b) Landlord's Improvements have been completed by the Landlord in accordance with Section 4 hereof (or if not so completed, stating the respects in which not completed) (c) that the Tenant has accepted possession of the Premises and the date upon which the Occupancy Term shall have commenced; (d) the dates to which rent and other charges have been paid in advance, if any; (a) whether or not to the best knowledge of the signer of such certificate the Landlord is then in default in the performance of any covenant, agreement or condition contained in this Lease and, if so, specifying in detail each such default of which the signer may have knowledge; and (f) that it is understood that such instrument may be relied upon by any prospective purchaser, mortgagee, assignee or lessee of Landlord's interest in this Lease, in the Center, or any portion or part thereof. SECTION 27. Ouiet Enjoyment. Tenant, upon paying the rental herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the Premises for the Term, without hindrance or molestation by Landlord, subject to the terms hereof. -22- SECTION 28. The Landlord. As used herein, the term "the Landlord" shall mean the Landlord named herein above as well as its successors and assigns, and their respective heirs, personal representatives, successors and assigns of any such subsequent owner, each of whom shall have the same rights, remedies, powers, authorities and privileges as it would have had it originally signed this Lease as the Landlord, but any such person, whether or not named herein, shall have no liability hereunder after it shall cease to hold the title to or a leasehold interest in the said real estate, except for obligations which may have theretofore accrued. Neither the Landlord nor any principal of the Landlord, whether disclosed or undisclosed, shall have any personal liability with respect to this Lease or the Premises, and if the Landlord should breach or default with respect to its obligations or otherwise under this Lease, the Tenant shall look solely to the Premises and to the rents, profits and issues to be received therefrom. SECTION 29. The Tenant. As used herein, the term "the Tenant" shall mean the Tenant named herein above as well as its heirs, personal representatives, successors and assigns, each of which shall be under the same obligations, liabilities, and disabilities and have only such rights, privileges and powers as it would have possessed had it originally signed this Lease as the Tenant. However, no such rights, privileges or powers shall inure to the benefit of any assignee of the Tenant, immediate or removed, unless the assignment to such assignee shall have been consented to in writing by the Landlord, as aforesaid. SECTION 30. Entire Agreement. This Lease and the Exhibits attached hereto set forth all the promises, agreements, conditions and understandings between the Landlord and the Tenant with respect to the Premises, and there are no promises, agreements, conditions or understandings, either oral or written, between them other than are herein set forth. No subsequent alteration, amendment, change or addition to this Lease shall be binding upon the Landlord or the Tenant unless reduced to writing and signed and delivered by each of them. This Lease shall be governed by the law of Maryland. Tenant represents and warrants that it is duly organized, validly existing and in good standing under the laws of Maryland; that this Lease has been authorized by all necessary parties, is validly executed by an authorized officer or agent of Tenant and is binding and enforceable in -23- accordance with its terms. If two or more parties sign this Lease as Tenant, the liability of each such party hereunder shall be joint and several. Time shall be of the essence with respect to the performance by Tenant of its obligations hereunder. The headings set forth in this Lease are for convenience of reference only. SECTION 31. Waiver of Jury Trial. Landlord and Tenant hereby expressly waive trial by jury in any action or proceeding or counter-claim brought by either party hereto against the other party on any and every matter, directly or indirectly arising out of or with respect to this Lease, including, without limitation, the relationship between Landlord and Tenant, the use and occupancy by Tenant of the Premises, and any statutory remedy and/or claim of injury or damage regarding this Lease. SECTION 32. Landlord and Tenant acknowledge, represent and warrant each to the other that no broker or real estate agent brought about or was involved in the making of this Lease other than KLNB, Inc., whose commission shall be paid by Landlord, and that no other brokerage fee or commission is due to any other party as a result of the execution of this Lease. Each of the parties hereto agrees to indemnify and hold harmless the other against any claim by any other broker, agent or finder based upon the execution of this Lease and predicated upon a breach of the above representation and warranty. IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Lease, or have caused the same to be executed on their respective behalves by their duly authorized representatives, the date and year first above written. WITNESS: NATIONAL INSTRUMENT COMPANY, INC. __________________________ By: ________________________ (SEAL) The Landlord WITNESS OR ATTEST UNIVERSAL SECURITY INSTRUMENTS, INC. __________________________ By: _________________________ (SEAL) Name: Michael Kovens Title: Chairman The Tenant -24- EXHIBIT D Option to Extend Lease Term In consideration of the rentals to be paid by Tenant hereunder, and provided Tenant is not in default under this Lease at the time of the exercise of the option or at the time the renewal term would take effect, Landlord grants Tenant the right and option to extend the term of this Lease ("Options") for two further periods of three (3) years each at the annual Basic Rent as set forth below in equal monthly payments in advance plus Additional Rental, as provided in the Lease, but otherwise upon the same terms and conditions as are expressed in the Lease, but without further options to renew. Lease Year Annual Basic Rent Monthly Installment Option Year 1 $56,450.00 $4,704.17 Option Year 2 $58,144.00 $4,845.33 Option Year 3 $59,888.00 $4,990.67 Option Year 4 $61,685.00 $5,140.42 Option Year 5 $63,535.00 $5,294.58 Option Year 6 $65,441.00 $5,453.42 Written notice of the exercise of each option shall be given to the Landlord one hundred and eighty (180) or more days prior to the expiration of the term hereof or the first option term as the case may be, failing which, said option shall expire and be of no further force or effect. -----END PRIVACY-ENHANCED MESSAGE-----