10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended September 30, 2000 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 of Incorporation I.R.S. Employer Identification Number 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 Indicate by check mark whether the registrant (l) 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 and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO _______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Date Class Shares Outstanding November 13, 2000 Common Stock, $.01 par value 912,270 UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES INDEX Part I - FINANCIAL INFORMATION Item l. Financial Statements Consolidated balance sheets at September 30, 2000 and March 31, 2000 Consolidated statements of operations for the six months ended September 30, 2000 and 1999 and three months ended September 30, 2000 and 1999 Consolidated statements of cash flows for the six months ended September 30, 2000 and 1999 Notes to consolidated financial statements Item 2. Management's discussion and analysis of results of operations and financial condition Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports - 2 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS Sept 30, 2000 March 31, 2000 CURRENT ASSETS Cash $ 29,877 $ 92,017 Accounts receivable: Trade (less allowance for doubtful accounts of $100,000 at September 30, 2000 and March 31, 2000) 949,629 595,880 Officers and employees 1,084 4,845 950,713 600,725 Inventories: Finished goods 2,843,172 1,912,987 Raw materials-foreign locations 12,807 25,071 2,855,979 1,938,058 Prepaid expenses 106,668 91,754 TOTAL CURRENT ASSETS 3,943,237 2,722,554 INVESTMENT IN JOINT VENTURE 2,562,032 2,377,766 PROPERTY, PLANT AND EQUIPMENT - NET 344,325 363,920 OTHER ASSETS 12,305 12,305 TOTAL ASSETS $6,861,899 $5,476,545 See notes to consolidated financial statements.
- 3 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Sept 30, 2000 March 31, 2000 CURRENT LIABILITIES Short-term borrowings $ 2,061,883 $ 817,714 Accounts payable 505,368 399,100 Accrued liabilities 126,037 121,497 Current obligations under capital lease 15,730 15,730 TOTAL CURRENT LIABILITIES 2,709,018 1,354,041 LONG-TERM OBLIGATIONS UNDER CAPITAL LEASE 52,674 60,260 SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued 912,270 shares at September 30, 2000 and March 31, 2000 9,123 9,123 Additional paid-in capital 10,533,310 10,533,310 Retained earnings (deficit) (6,442,226) (6,480,189) TOTAL SHAREHOLDERS' EQUITY 4,100,207 4,062,244 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,861,899 $ 5,476,545 See notes to consolidated financial statements.
- 4 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Six Months Ended Sept 30, 2000 Sept 30, 1999 Net sales $3,791,283 $3,879,665 Cost of goods sold 2,609,436 2,937,273 Reserve for discontinuance of telephone and video product lines (495,000) GROSS PROFIT 1,181,847 447,392 Research and development expense 84,710 114,832 Selling, general and administrative expense 1,137,948 1,176,347 Operating loss (40,811) (843,787) Other income (expense): Interest income 233 127 Interest expense (105,714) (80,631) Gain on sale of building 804,861 Other (11) (14,122) (105,492) 710,235 LOSS BEFORE EQUITY IN EARNINGS OF JOINT VENTURE (146,303) (133,552) Equity in earnings of joint venture 184,266 121,307 NET INCOME (LOSS) $ 37,963 $ (12,245) Per common share amounts: Basic .04 (.01) Diluted .04 (.01) Weighted average number of common shares outstanding Basic 912,270 897,565 Diluted 950,012 897,565 See notes to consolidated financial statements.
- 5 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Three Months Ended Sept 30, 2000 Sept 30, 1999 Net sales $1,740,167 $1,821,314 Cost of goods sold 1,118,716 1,350,235 Reserve for discontinuance of telephone and video product lines (495,000) GROSS PROFIT 621,451 (23,921) Research and development expense 34,151 50,741 Selling, general and administrative expense 574,625 567,792 Operating income (loss) 12,675 (642,454) Other income (expense): Interest income 22 Interest expense (65,019) (32,600) Other (11) (176) (65,030) (32,754) LOSS BEFORE EQUITY IN EARNINGS OF JOINT VENTURE (52,355) (675,208) Equity in earnings of joint venture 57,845 12,094 NET INCOME (LOSS) $ 5,490 $ (663,114) Per common share amounts: Basic .01 (.73) Diluted .01 (.73) Weighted average number of common shares outstanding Basic 912,270 902,805 Diluted 950,012 902,805 See notes to consolidated financial statements.
- 6 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Six Months Ended Sept 30, 2000 Sept 30, 1999 OPERATING ACTIVITIES Net income (loss) $ 37,963 $ (12,245) Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 23,759 14,469 Undistributed earnings of Joint venture (184,266) (121,307) Gain on sale of building (804,861) Changes in operating assets and liabilities: (Increase) in accounts receivable (349,988) (356,590) (Increase) decrease in inventories and prepaid expenses (932,835) 77,280 Increase in accounts payable and accrued expenses 110,808 83,911 (Increase) in other assets (2,000) NET CASH (USED IN) OPERATING ACTIVITIES (1,294,559) (1,121,343) INVESTING ACTIVITIES Proceeds from sale of building 2,079,785 Property, plant and equipment (4,164) (2,898) NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (4,164) 2,076,887 FINANCING ACTIVITIES Net borrowings of short-term debt 1,244,169 269,640 Principal payments on long-term debt (7,586) Debt related to assets held for sale (1,246,973) Issuance of common stock 20,569 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,236,583 (956,764) (DECREASE) IN CASH (62,140) (1,220) Cash at beginning of period 92,017 193,107 CASH AT END OF PERIOD $ 29,877 $ 191,887 Supplemental information: Interest paid $ 105,714 $ 80,631 Income taxes paid - - See notes to consolidated financial statements.
- 7 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Statement of Management - The financial information included herein is unaudited and does not include all disclosures normally included in financial statements presented in accordance with generally accepted accounting principles. The interim financial information should be read in connection with the financial statements and related notes in the Company's annual report on Form 10-K for the year ended March 31, 2000. The results for the interim period are not necessarily indicative of the results expected for the year. The accompanying interim information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. Income Taxes - No income tax expense has been provided for the quarter ended September 30, 2000 as a result of the carryforward of prior years' operating losses. Joint Venture - The Company maintains a 50% interest in a joint venture with a Hong Kong corporation (Hong Kong joint venture) which has manufacturing facilities in the People's Republic of China, for the manufacturing of consumer electronic products. The following represents summarized income statement information of the Hong Kong joint venture for the six months ended September 30, 2000 and 1999: 2000 1999 Net sales $3,866,428 $2,962,390 Gross profit 967,586 828,250 Net income 368,531 242,614
- 8 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Six Months Ended September 30, 2000 Compared to Six Months Ended September 30, 1999 Sales - Net sales for the six months ended September 30, 2000 were $3,791,283 compared to $3,879,665 for the comparable six months in the prior fiscal year, a decrease of $88,382. Net sales of security products increased by $450,407 and net sales of certain other products decreased by $538,789. Security sales increased as a result of higher demand of security products sold by the Company's subsidiary, USI ELECTRIC, Inc. The decrease in sales of certain other products resulted primarily from decreased demand. Net Income - The Company reported a net income of $37,963 for the six months ended September 30, 2000 compared to net loss of $12,245 for the corresponding six months of the prior fiscal year. The increase in net income resulted from higher gross margins which increased to 31% from 24%, excluding reserve, resulting from a different product sales mix and higher Joint Venture earnings. Additionally, the sale of the Company's headquarters which resulted in a gain of $804,861, partially offset by a reserve of $495,000 for the discontinuance of the Company's telephone and video product lines, was included in the September 1999 results. Expenses - Research, selling, general and administrative expenses decreased by $68,521 from the comparable six months in the prior year. The decrease in research, selling, general and administrative expenses resulted from lower research and development expense and lower rental expense. As a percentage of sales, research, selling, general and administrative expenses were 32% for the six months ended September 30, 2000 and 33% for the same period in the prior fiscal year. Interest Expense and Income - The Company's interest expense, net of interest income, was $105,481 for the six months ended September 30, 2000 compared to $80,504 for the same period in 1999. The increase in interest expense resulted from the debt service related to higher levels of inventory and higher interest rates. - 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Sales - Net sales for the three months ended September 30, 2000 were $1,740,167 compared to $1,821,314 for the comparable three months in the prior fiscal year, a decrease of $81,147. Net sales of security products increased by $469,332 and sales of other products decreased by $550,479. The increase in security sales resulted primarily from increased demand for smoke alarms sold by the Company's subsidiary, USI ELECTRIC, INC. The decrease in other sales resulted from lower demand for certain of the Company's products with lower gross margins included in the September, 1999 results. Net Income - The Company reported net income of $5,490 for the quarter ended September 30, 2000 compared to a net loss of $663,114 for the corresponding quarter of the prior fiscal year. The increase in net income resulted from higher gross margins which increased to 36% from 26%, excluding reserve, resulting from a different product sales mix and higher Joint Venture earnings. Included in the September, 1999, results was a $495,000 reserve for the discontinuance of the Company's telephone and video product lines and higher selling, general and administrative expenses. Expenses - Research, selling, general and administrative expenses decreased by $9,757 from the comparable three months in the prior year. As a percentage of sales, research, selling, general and administrative expenses were 35% for the three months ended September 30, 2000 and 34% for the same period in the last fiscal year. Interest Expense and Income - The Company's interest expense was $65,019 for the quarter ended September 30, 2000 compared to $32,578 for the comparable period in 1999. The increase in interest expense resulted from the debt service related to higher levels of inventory and higher interest rates. 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 bank line of credit is currently the lower of $7,500,000 or specified percentages of the Company's accounts receivable and inventory. Approximately $2,092,685 has been utilized in letter of credit commitments and short-term borrowings as of September 30, 2000. As of September 30, 2000, the amount available for borrowings under the line was approximately $25,000 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 1.5% 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. - 10 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating activities used cash of $1,294,559 for the six months ended September 30, 2000. This was primarily due to increases in accounts receivable of $349,988 and $932,835 in inventory and prepaid expenses. Accounts receivable increased due to the addition of a different customer base which required extended dating terms. Inventories were higher due to a seasonal build-up and the addition of several new products, such as Ground Fault Circuit Interrupters and Door Chimes. For the same period last year, operating activities used cash of $1,121,343. Investing activities used cash of $4,164 in the current quarter. For the same period last year, investing activities provided cash of $2,076,887. This resulted primarily from the proceeds of the sale of the building. Financing activities provided cash of $1,236,583, primarily due to increased borrowings under the line of credit. For the same period last year, financing activities used cash of $956,764, primarily due to the repayment of the mortgage from the proceeds on the sale of the building. The Company believes that its line of credit and working capital provide 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 - Net sales of the joint venture for the six months and three months ended September 30, 2000 were $3,866,428 and $1,855,213, respectively, compared to $2,962,390 and $1,187,525, respectively, for the comparable six months and three months in the prior fiscal year. Net income for the six months and three months ended September 30, 2000 was $368,531 and $115,689, respectively, compared to $242,614 and $24,188, respectively, in the comparable six months and three months last year. Cash needs of the Hong Kong joint venture are currently met by funds generated from operations. During the six months ended September 30, 2000, working capital increased by $866,958 from $2,432,197 on March 31, 2000 to $3,299,155 on September 30, 2000. Quantitative and Qualitative Disclosures About Market Risk - No material changes have occurred in the quantitative and qualitative market risk disclosures of the Company as presented in the Company's Annual Report Form 10-K for the year ended March 31, 2000. - 11 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES PART II Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 28, 2000, the Company held its Annual Meeting of Shareholders. The only matter to the shareholders for a vote was the election of directors. The nominees submitted for election as directors were Michael Kovens, Stephen C. Knepper and Harvey Grossblatt. The votes for, against and abstained were as follows: FOR AGAINST ABSTAINED Michael Kovens 843,846 6,490 250 Stephen C. Knepper 843,846 6,415 250 Harvey Grossblatt 843,846 6,565 250 As a result, all of the nominees were elected to serve as directors until the next annual meeting of shareholders of the Company and until their successors are duly elected and qualify. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (b) No reports on Form 8-K were filed during the quarter for which this report is filed. - 12 - UNIVERSAL SECURITY INSTRUMENTS, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNIVERSAL SECURITY INSTRUMENTS, INC. Dated: November 13, 2000 Harvey Grossblatt HARVEY GROSSBLATT President, Chief Financial Officer - 13 -