-----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, DwJKOwNCro1PkBbd5wmg0dyipYecdinM14lLZ7TkuI6bwQgARVg2VzjJqAiTW5/C M6FllO9gfiq9Jp6eeNRfNw== 0001014100-99-000112.txt : 19990714 0001014100-99-000112.hdr.sgml : 19990714 ACCESSION NUMBER: 0001014100-99-000112 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL SECURITY INSTRUMENTS INC CENTRAL INDEX KEY: 0000102109 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 520898545 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07885 FILM NUMBER: 99663360 BUSINESS ADDRESS: STREET 1: 10324 S DOLFIELD RD CITY: OWINGS MILLS STATE: MD ZIP: 21117-3586 BUSINESS PHONE: 4103633000 MAIL ADDRESS: STREET 1: 10324 S. DOLFIELD RD CITY: OWINGS MILLS STATE: MD ZIP: 21117-3586 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended March 31, 1999 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ____________ to ________________ Commission file number 0-7885 UNIVERSAL SECURITY INSTRUMENTS, INC. (Exact name of registrant as specified in its charter) Maryland 52-0898545 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10324 S. Dolfield Road, Owings Mills, MD 21117 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 410-363-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 11, 1999: Common Stock, $.01 Par Value - $998,036 The number of shares outstanding of the issuer's classes of common stock as of June 11, 1999: Common Stock, $.01 Par Value - 887,143 shares ITEM 1. BUSINESS GENERAL Universal Security Instruments, Inc. (the "Company") was incorporated in the State of Maryland in 1969. Its principal offices are located at 10324 South Dolfield Road, Owings Mills, MD 21117 and its telephone number is 410-363-3000. The 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 realizes on its telecommunications and video products, the Company has focused its business primarily on security products. As a result, the Company (i) changed its marketing of telecommunications and video products to concentrate virtually exclusively on made-to-order private label sales, and (ii) entered into the electrical distribution market with an enhanced and newly packaged line of smoke alarms as well as its other security products. The Company imports virtually all of its products from various suppliers overseas. Approximately 81% of the Company's purchases are bought from a Hong Kong Joint Venture with a Hong Kong Corporation (Hong Kong Joint Venture), in which the Company owns a 50% interest, that has manufacturing facilities in the People's Republic of China. The Company's sales for the year ended March 31, 1999 were $9,071,628 compared to $11,566,317 for the year ended March 31, 1998, a decrease of approximately 22%. The primary reason for this decrease in sales was due to decreased demand for some of the Company's private label products. The Company reported a loss in fiscal 1999 of $806,552 compared to a loss of $445,126 for its prior fiscal year. The main reasons for the increase in losses were lower sales and gross profit margins. SECURITY PRODUCTS The Company markets a complete line of smoke alarms under the trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signaltm" manufactured by the Hong Kong joint venture. The Company also markets a line of electronically advanced outdoor floodlights under the name "Lite Aidetm," whose features include special sensors that activate automatic lighting mechanisms and a quartz halogen system, offering the consumer a variety of dependable outdoor security lighting systems. Sales of the Company's security products aggregated $5,139,919 or approximately 57% of total sales in the fiscal year ended March 31, 1999 and $6,094,152 or approximately 53% of total sales in the fiscal year ended March 31, 1998. This decrease in sales volume was due primarily to lower export sales of smoke alarms. - 2 - The Company is focusing its sales and marketing efforts to maximize security product sales, especially smoke alarm products by its Hong Kong Joint Venture. OTHER PRODUCTS The Company markets a variety of private label products on a made-to-order basis, such as telephones and video tape. The majority of these products are produced by the Hong Kong Joint Venture. For the fiscal year ended March 31, 1999, sales of the Company's private label products aggregated $3,931,709 or 43% of total sales. For the fiscal year ended March 31, 1998, sales of these products were $5,472,165 or 47% of total sales. The primary reason for the decrease in sales was a reduction in high volume, low margin, private label products. SUBSEQUENT EVENT The Company sold its headquarters facility on June 16, 1999. See Item 2. Properties. FCC REGULATION The Federal Communications Commission (FCC) establishes technical standards for telecommunications equipment and products transmitting signals over the airways. These regulations have had no material effect upon the Company's business or its products to date, and all products subject to such regulation comply with the FCC requirements. IMPORT MATTERS The Company imports virtually all of its security, telecommunications and video products. The Company, as an importer, is subject to numerous tariffs which vary depending on types of products and country of origin, changes in economic and political conditions in the country of manufacture, potential trade restrictions, including loss of Most Favored Nation status, and currency fluctuations. The Company has attempted to protect itself from fluctuations in currency exchange rates to the extent possible by negotiating most commitments in U.S. dollars. The Company's purchases are subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated with purchasing products abroad. The Company imports a majority of its products from the People's Republic of China. The loss of China's Most Favored Nation status with the United States would most likely have a material adverse impact on the Company's business until competitive alternative sources of supply were obtained. SALES AND MARKETING The Company's products are generally marketed to retailers, wholesale distributors, service companies, catalog and mail order companies and to other distributors. Sales are made both by the Company and by approximately 33 independent sales organizations which are compensated by commissions. The Company has agreements with the sales organizations which are cancelable by either party upon 30 days notice. The Company does not believe that the loss of any one of these organizations would have a material adverse effect upon its business. - 3 - The Company formed a new subsidiary, USI ELECTRIC, for the purpose of selling security products to the electrical distribution trade. The subsidiary has hired a sales manager from the electrical distribution trade and has engaged 19 independent sales organizations. The Company also promotes its products through its own sales catalogs and brochures, which are mailed directly to trade customers. The Company's customers, in turn, advertise the Company's products in their own catalogs and brochures and in their ads in newspapers and other media. The Company also exhibits and sells its products at various trade shows, including the annual National Hardware Show in Chicago, Illinois. The Company's domestic marketing strategy is designed to attract retailing customers outside the consumer electronics industry, such as supermarkets, drug stores, variety stores and home centers. Sales by the Company are also made by officers and full-time employees of the Company, four of whom are also engaged in sales management and training. Sales outside the United States, which are made by officers of the Company and through exporters, were less than 25% of total sales in fiscal 1999. The Company's foreign marketing strategy is to increase sales of products from the Hong Kong Joint Venture to overseas markets. The Company's products are retailed to "do-it-yourself" consumers by chain and independent department, discount, drug, electrical, electronic, building supply, electrical distributors and hardware stores; as well as through catalog and mail-order houses. The Company also distributes its products through special markets such as premium/incentive, direct mail, catalog and showroom sales. The Company does not currently market any significant portion of its products directly to end users. The Company's backlog of orders believed to be firm as of March 31, 1999 was approximately $1,310,000. The Company's backlog as of March 31, 1998, was approximately $2,510,000. The decrease in backlog is a function of the timing of orders received from its customers and the general decline in sales volume. SUPPLIERS - HONG KONG JOINT VENTURE The Company has a 50% interest in a Hong Kong Joint Venture with a Hong Kong Corporation (Hong Kong Joint Venture) which has manufacturing facilities in the People's Republic of China, for the manufacturing of certain consumer electronic products sold by the Company. The Company believes that this Hong Kong Joint Venture arrangement will ensure a continuing source of supply for each product at competitive prices. At the present time, the Company buys approximately 81% of its total purchases from the Hong Kong Joint Venture. The products produced by the Hong Kong Joint Venture include video tape, smoke alarms and certain models of telecommunications products and Caller ID products. The Company is currently pursuing the development of additional products to be produced by the Hong Kong Joint Venture. A loss of China's Most Favored Nation status with the United States or changes in economic and political conditions in China could adversely affect the value of the Company's investment in the Hong Kong Joint Venture. Refer to Note C of the Financial Statements in Item 8 for a comparison of annual sales and earnings of the Hong Kong Joint Venture. - 4 - SUPPLIERS - OTHERS Private label products not manufactured for the Company by the Hong Kong Joint Venture are manufactured by other foreign suppliers for the Company. The Company believes that its relationships with its suppliers are good. The Company believes that the loss of any of its suppliers could have a short-term adverse effect on its operations, but that replacement sources could be developed. CHINA CELLULAR TELEPHONE PROJECT In the year ended March 31, 1993, the Hong Kong Joint Venture entered into a Cellular Joint Venture with a People's Republic of China Company to design and develop a portable cellular telephone for manufacture and sale in China. The Hong Kong Joint Venture has a 30% interest in the Cellular Joint Venture. The Cellular Joint Venture engaged the Hong Kong Joint Venture to design and develop two versions of a portable cellular telephone for a fee of $3.5 million. Through March, 1996, the Hong Kong Joint Venture had received $3,150,000 of the $3.5 million fee. For the year ended March 31, 1996, the Hong Kong Joint Venture recorded no profit from the development contract. During fiscal 1997, the Hong Kong Joint Venture completed the accounting of its cellular development contract and, additionally, wrote down its investment in its Cellular Joint Venture. The Hong Kong Joint Venture recorded a profit of $122,328 on the development contract and a write- down of $725,745 on its Cellular Joint Venture. Due to the uncertainty of the commercial acceptance of the cellular telephone designed by the Cellular Joint Venture, the Hong Kong Joint Venture wrote-off the balance of its Cellular Joint Venture investment in the amount of $337,464 in fiscal 1998. COMPETITION In the smoke alarm area, the Company competes with First Alert, Firex, Fyrenetics and Walter Kidde. In the security lighting area, the Company competes with All-Trade, Regent and Heath-Zenith. Many of these companies have greater financial resources and financial strength than the Company. The Company believes that its security products compete favorably with other such products in the market primarily on the basis of styling and pricing. The security industry in general, however, involves rapidly changing technology, and the success of the Company's products may depend on the Company's ability to improve and update the technology of its products in a timely manner and to adapt to new technological advances. EMPLOYEES The Company has 14 employees, 6 of whom are engaged in administration and sales, and the balance of whom are engaged in product development and servicing. The Company's employees are not unionized. The Company believes that its relations with its employees are satisfactory. - 5 - ITEM 2. PROPERTIES On June 16, 1999, the Company sold its headquarters facility, located in Baltimore County, Maryland which became expendable when the Company reduced the number of its employees. Under the contract of sale, the Company must vacate the property by November 15, 1999. The Company believes that it will have no difficulty leasing alternative space for its administrative and executive offices, warehousing and research and development activities. The property was sold for a price of $2.2 million to KA Real Estate Associates, LLC. After deducting the mortgage and settlement charges, the Company will have excess cash of approximately $840,000. The Company will report, in its quarter ending June 30, 1999 a gain on the sale of this property of approximately $800,000. The Company retained ownership of approximately 1-1/2 acres of undeveloped land adjacent to its headquarters property which the Company has put up for sale. The Hong Kong Joint Venture's manufacturing facility consists of six buildings totaling 100,000 square feet. Three of the buildings (totaling 31,000 square feet) are leased pursuant to a long-term lease which expires in 2010. The other three buildings (69,000 square feet) are owned by the Hong Kong Joint Venture and were built on property leased for a 48 year term. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. - 6 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company was informed on January 21, 1999 that the Company's common stock has been delisted from the NASDAQ Small Cap Market for failure to meet the market value of public float requirement for continued listing. The Company meets all other continued listing requirements. The Company announced that its common stock will be traded on the Over-The-Counter (OTC) market through which real-time quote, price and volume information is electronically available for the Company's securities. The following table shows the fiscal 1999 and 1998 quarterly high and low bid prices for the Company's Common Stock as reported by NASDAQ. The bid quotations represent prices between dealers and do not reflect the retailer markups, markdowns or commissions and may not represent actual transactions. Fiscal year ended March 31, 1999 Bid Prices* High Low First Quarter 1-3/4 1-1/8 Second Quarter 1-3/8 11/16 Third Quarter 2 5/8 Fourth Quarter 2-1/16 1-1/16 Fiscal year ended March 31, 1998 Bid Prices* High Low First Quarter 2-7/8 2-1/8 Second Quarter 4 2-1/4 Third Quarter 3-1/4 2-1/16 Fourth Quarter 3-1/8 1-1/8 As of June 11, 1999, there were approximately 609 holders of record of the Company's Common Stock. The Company has not paid any cash dividends on its Common Stock in the last three years. It is the Company's present intention to retain all earnings for use in its operations. *Prices adjusted to reflect one-for-four reverse stock split as of February 27, 1998. - 7 - ITEM 6. SELECTED FINANCIAL DATA Year Ended March 31, 1999 1998 1997 1996 1995 Operations Net sales $ 9,071,628 $11,566,317 $15,423,149 $19,507,889 $24,841,794 Loss before equity in earnings (loss) of Hong Kong Joint Venture and income taxes (1,119,154) (414,351) (1,332,427) (1,316,990) (2,220,460) Net loss (806,552) (445,126) (1,483,438) (1,098,817) (1,296,426) Per common share: Loss before equity in earnings (loss) of Hong Kong Joint Venture, income taxes(1) (1.30) (.51) (1.64) (1.62) (2.74) Net loss(1) (.93) (.55) (1.83) (1.35) (1.60) Weighted average number of common shares outstanding - basic(1) 863,706 811,397 811,397 811,397 810,649 Financial Condition Total assets 6,402,120 7,705,310 9,557,116 12,676,391 13,732,846 Long-term debt and obligations (non- current) 0 1,246,861 1,344,211 1,277,394 497,222 Working capital 1,514,425 2,130,408 2,253,553 2,194,108 2,728,405 Current ratio 1.63 to 1 2.25 to 1 1.75 to 1 1.46 to 1 1.50 to 1 Shareholders' equity 3,987,072 4,747,351 5,192,477 6,675,915 7,774,540 Shareholders' equity per share - basic(1) 4.49 5.85 6.40 8.23 9.59
(1) All per share amounts and number of outstanding shares have been restated to reflect the one-for-four reverse stock split as of February 27, 1998. - 8 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS SALES In fiscal year 1999, sales decreased by $2,494,689 (22%) from the prior year. This decrease was primarily due to decreased demand for certain of the Company's private label products, which amounted to $1,540,456 and a decrease in security products of $954,233. In fiscal year 1998, sales decreased by $3,856,832 (25%) from the prior year. This decrease was primarily due to a decreased demand for certain of the Company's security products, which amounted to $1,913,596 and a decrease in video products of $1,551,986, resulting from lower private label sales. Sales of security products for the fiscal year totaled $6,094,152 (53%) while sales of telecommunications and video products were $3,216,281 (28%) and video products were $2,255,884 (19%), respectively. NET PROFIT AND LOSS The Company incurred a net loss of $806,552 for fiscal year 1999 as compared to a net loss of $445,126 for fiscal year 1998. The most significant reasons for the increase in losses were lower gross margins and sales, partially offset by higher earnings of the Hong Kong Joint Venture. The Company incurred a net loss of $445,126 for fiscal year 1998, as compared to a net loss of $1,483,438 for fiscal year 1997. The most significant reasons for the decrease in loss were reductions in selling, general and administrative expenses, increased gross margins and decreased equity in losses of the Hong Kong Joint Venture. EXPENSES In fiscal year 1999, research, selling, general and administrative expenses decreased by approximately $127,202 (5%) from the prior year. This savings resulted from the Company's cost reduction program. As a percentage of sales, research, selling, general and administrative expenses were 24% for the fiscal year ended March 31, 1999 and 20% for the prior year. In fiscal year 1998, research, selling, general and administrative expenses decreased by approximately $1,141,614 (33%) from the prior year. This savings resulted from the Company's cost reduction program. As a percentage of sales, research, selling, general and administrative expenses were 20% for the fiscal year ended March 31, 1998 and 22% for the prior year. - 9 - INTEREST EXPENSE AND INCOME 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 in the current fiscal year. Interest income decreased to $2,719 in fiscal 1999 from $2,916 in fiscal 1998. Interest expense for fiscal 1998 decreased to $270,817 from $411,541 in fiscal 1997 due to a decrease in the average outstanding debt during the period resulting from decreased inventory levels from the prior fiscal year. Interest income decreased to $2,916 in fiscal 1998 from $5,984 in fiscal 1997. FINANCIAL CONDITION AND LIQUIDITY Cash needs of the Company are currently met by funds generated from operations and the Company's line of credit with a financial institution which supplies both short-term borrowings and letters of credit to finance foreign inventory purchases. The Company's maximum line of credit is currently the lower of $7,500,000 or specified percentages of the Company's accounts receivable and inventory. Approximately $804,664 had been utilized in short-term borrowings and letter of credit commitments as of March 31, 1999. The amount available under the line of credit as of March 31, 1999 was approximately $116,000 based on the specified percentages. The outstanding principal balance of the revolving credit line is payable upon demand. The interest rate on the revolving credit line is equal to 1-1/2% in excess of the prime rate of interest charged by the Company's lender. The loan is collateralized by the Company's accounts receivable, inventory and a 1.5 acre parcel of the Company's real estate. During the year ended March 31, 1999, working capital decreased by $615,983, from $2,130,408 on March 31, 1998 to $1,514,425 on March 31, 1999. Operating activities provided cash of $316,102 for the year ended March 31, 1999. A decrease of $170,738 from 1998 was primarily due to decreases in inventory and accounts receivable of $542,619 and $704,068, a decrease in accounts payable of $268,991, partially offset by a net loss of $806,552. For the prior fiscal year, operating activities provided cash of $486,840 for the year ended March 31, 1998. This was primarily due to a decrease in inventory of $943,414 and a distribution in excess of Joint Venture earnings of $280,775. Investing activities used cash of $28,725 in 1999, due to the purchase of equipment. For the same period last year, investing activities use cash of $13,786, due to the purchase of equipment. - 10 - Financing activities used cash in 1999 of $227,647 mainly due to the repayment of $182,842 in short-term debt and $75,000 in payments on a legal settlement and partially offset by the sale of 113,636 shares of common stock for $100,000, and for the same period last year, financing activities used cash of $490,129 primarily due to the repayment of $394,315 in short-term debt and $81,250 in payments on the legal settlement. During the fiscal year ended March 31, 1999, the Company received a distribution of $300,000 from the Hong Kong Joint Venture. The Company believes that its line of credit and its working capital, together with the excess cash generated from the sale of its headquarters facility, provide it with sufficient resources to meet its requirements for liquidity and working capital in the ordinary course of its business over the next twelve months. HONG KONG JOINT VENTURE In fiscal year 1999, sales of the Hong Kong Joint Venture were $6,440,817 compared to $6,984,960 and $6,644,142 in fiscal years 1998 and 1997, respectively. Net income was $625,205 for the year ended March 31, 1999 compared to net losses of $61,550 and $302,023 in fiscal years 1998 and 1997, respectively. The decrease in income for the years ended March 31, 1998 and 1997 was due primarily to a write-down of its investment in its China Cellular Joint Venture of $337,464 in 1998 and $725,745 in 1997, respectively. Selling, general and administrative expenses were $1,188,859, $1,288,622 and $1,337,015 for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. As a percentage of sales, expenses were 18%, 18% and 20% for fiscal 1999, 1998 and 1997, respectively. The decrease in expenses as a percentage of sales in fiscal 1999 was primarily due to lower expenses. Interest income net of interest expense was $132,591 for the year ended March 31, 1999, compared to $96,469 and $85,414 in fiscal years 1998 and 1997, respectively. The decrease in net interest income in fiscal year 1997 was primarily due to a distribution of $2,000,000 paid to its shareholders in April 1996. Cash needs of the Hong Kong Joint Venture are currently met by funds generated from operations. During the year ended March 31, 1999, working capital increased by $309,602 from $1,760,188 on March 31, 1998 to $2,069,790 on March 31, 1999. YEAR 2000 COMPLIANCE The Company has undertaken a project that addresses the Year 2000 (Y2K) issue of computer systems and other equipment with embedded chips or processors not being able to properly recognize and process date-sensitive information after December 31, 1999. The Company's Y2K project is designed to ensure the compliance of all of the Company's applications, operating system and hardware platforms, and to address the compliance of key business partners. Key business partners are those customers and vendors that have a material impact on the Company's operations. The Company is in the process of hiring a consultant to review its computer operations and anticipates that all phases of the project should be completed during 1999. The Company estimates that the total cost of the required modifications to its systems to become Y2K compliant will not exceed $50,000 and will not be material to the Company's financial position. Failure to make all internal business systems Y2K compliant could result in an interruption in, or a failure of, some of the Company's business activities or operations. Y2K disruptions in the operations of key vendors could impact the Company's ability to obtain products and service its customers. The Company is unable to determine the readiness of its key business partners at this time and is therefore unable to determine whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company's Y2K project is expected to significantly reduce the Company's level of uncertainty about the Y2K problem and reduce the possibility of significant interruptions of normal business operations. - 11 - 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 13 Report of Independent Auditor - Deloitte & Touche LLP 14 Financial statements Consolidated balance sheets, March 31, 1999 and 1998 15 Consolidated statements of operations for the years ended March 31, 1999, 1998 and 1997 17 Consolidated statements of shareholders' equity for the years ended March 31, 1999, 1998 and 1997 18 Consolidated statements of cash flows for the years ended March 31, 1999, 1998 and 1997 19 Notes to consolidated financial statements 20 - 12 - INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S REPORT Shareholders and Board of Directors Universal Security Instruments, Inc. We have audited the accompanying consolidated balance sheet of Universal Security Instruments, Inc. and subsidiaries (the Corporation) as of March 31, 1999 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year 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 audit. 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 $2,240,785 in the Hong Kong Joint Venture's net assets at March 31, 1999 and equity in earnings of $312,602 for the year then ended is included in the accompanying consolidated financial statements. The financial statements of the Hong Kong Joint Venture were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Hong Kong Joint Venture, is based solely on the report of the other auditors. The consolidated financial statements of Universal Security Instruments, Inc. and Subsidiaries as of and for the two years ended March 31, 1998 were audited by other auditors whose report dated June 17, 1998 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Security Instruments, Inc. and subsidiaries as of March 31, 1999, and the results of their consolidated operations and their consolidated cash flows for the year then ended in conformity with generally accepted accounting principles. We have also audited the financial statement Schedule II for the year ended March 31, 1999. In our opinion, this Schedule presents fairly in all material respects the information required to be set forth therein. Grant Thornton LLP June 16, 1999 Baltimore, Maryland - 13 - INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors Universal Security Instruments, Inc. We have audited the consolidated balance sheet of Universal Security Instruments, Inc. and subsidiaries (the Corporation) as of March 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended March 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14 for each of the two years in the period ended March 31, 1999. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of the Hong Kong Joint Venture, the Corporation's investment which is accounted for by use of the equity method. The Corporation's equity of $2,228,182 in the Hong Kong Joint Venture's net assets at March 31, 1998, and of $(30,775) and $(151,011) in that company's net loss for each of the two years is included in the consolidated financial statements. The financial statements of the Hong Kong Joint Venture were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for such company, is based solely on the reports of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Universal Security Instruments, Inc. and subsidiaries at March 31, 1998, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP June 17, 1998 Baltimore, Maryland - 14 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, 1999 1998 CURRENT ASSETS Cash $ 193,107 $ 133,377 Accounts receivable: Trade (less allowance for doubtful accounts of $100,000 in 1999 and 1998) 549,149 1,248,023 Officers and employees 321 5,515 549,470 1,253,538 Inventories: Finished goods 1,749,684 2,228,070 Raw materials - foreign locations 49,869 83,728 1,799,553 2,311,798 Prepaid expenses 112,419 142,793 Assets held for sale - net of depreciation 1,274,924 TOTAL CURRENT ASSETS 3,929,473 3,841,506 INVESTMENT IN HONG KONG JOINT VENTURE 2,240,785 2,228,182 PROPERTY AND EQUIPMENT 225,862 1,613,222 OTHER ASSETS 6,000 22,400 TOTAL ASSETS $6,402,120 $7,705,310
See notes to consolidated financial statements. - 15 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY March 31, 1999 1998 CURRENT LIABILITIES Short-term borrowings $ 786,484 $ 969,326 Current maturity of long-term debt 91,190 Accounts payable 294,618 583,910 Accrued liabilities 86,973 66,672 Debt related to assets held for sale 1,246,973 TOTAL CURRENT LIABILITIES 2,415,048 1,711,098 LONG-TERM DEBT, less current portion 1,246,861 SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 887,143 and 811,397 shares in 1999 and 1998 8,871 8,114 Additional paid-in capital 10,499,446 10,453,930 Retained deficit (6,521,245) (5,714,693) TOTAL SHAREHOLDERS' EQUITY 3,987,072 4,747,351 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,402,120 $ 7,705,310
See notes to consolidated financial statements. - 16 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended March 31, 1999 1998 1997 Net sales $ 9,071,628 $11,566,317 $15,423,149 Cost of goods sold 7,770,737 9,393,376 13,000,896 GROSS PROFIT 1,300,891 2,172,941 2,422,253 Research and development expense 129,877 226,529 250,751 Selling, general and administrative expense 2,062,020 2,092,570 3,209,962 Operating loss (891,006) (146,158) (1,038,460) Other income (expense): Interest income 2,719 2,916 5,984 Interest expense (230,625) (270,817) (411,541) Gain from sale of land 312,625 Legal settlement (247,500) Other (242) (292) 46,465 (228,148) (268,193) (293,967) LOSS BEFORE EQUITY IN EARNINGS (LOSS) OF HONG KONG JOINT VENTURE (1,119,154) (414,351) (1,332,427) Equity in earnings (loss) of Hong Kong Joint Venture 312,602 (30,775) (151,011) NET LOSS $ (806,552) $ (445,126) $(1,483,438) Per common share amounts: Basic and Diluted $ (.93) $ (.55) $ (1.83) Weighted average number of common shares outstanding: Basic and Diluted 863,706 811,397 811,397
See notes to consolidated financial statements. - 17 - 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, 1996 811,397 $8,114 $10,453,930 $(3,786,129) $ 6,675,915 Net loss for 1997 (1,483,438) (1,483,438) Balance at March 31, 1997 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
See notes to consolidated financial statements. - 18 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended March 31, 1999 1998 1997 OPERATING ACTIVITIES Net loss $ (806,552) $ (445,126) $(1,483,438) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 141,161 158,051 165,096 Provision for losses on accounts receivable 50,000 24,229 Legal settlement 300,000 (Undistributed) distributions in excess of earnings of Hong Kong Joint Venture (12,603) 280,775 401,393 Gain on sale of property and equipment (312,635) Changes in operating assets and liabilities: Decrease in accounts receivable trade 704,068 421,986 284,884 Decrease in inventories and prepaid expenses 542,619 943,414 1,338,874 (Decrease) increase in accounts payable and accrued liabilities (268,991) (916,550) 601,223 Decrease (increase) in other assets 16,400 (5,710) 135,005 NET CASH PROVIDED BY OPERATING ACTIVITIES 316,102 486,840 1,454,631 INVESTING ACTIVITIES Purchases of property and equipment (28,725) (13,786) (7,589) Decrease in time deposits 8,748 Proceeds from sale of property and equipment 383,429 NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (28,725) (13,786) 384,588 FINANCING ACTIVITIES Net repayment of short-term debt (182,842) (394,315) (1,630,044) Principal payments on long-term debt (16,078) (14,564) (13,266) Payments on legal settlement (75,000) (81,250) (143,250) Proceeds from issuance of common stock 100,000 Purchase of common stock (53,727) NET CASH USED IN FINANCING ACTIVITIES (227,647) (490,129) (1,786,560) INCREASE (DECREASE) IN CASH 59,730 (17,075) 52,659 CASH AT BEGINNING OF YEAR 133,377 150,452 97,793 CASH AT END OF YEAR $ 193,107 $ 133,377 $ 150,452 Supplemental information: Interest paid $ 230,625 $ 270,817 $ 411,541 Income taxes paid - - -
See notes to consolidated financial statements. - 19 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Research and Development: Research and development costs are charged to operations as incurred. Accounts Receivable: The Company provides allowances for doubtful receivables by a charge against income in amounts equal to the estimated losses that will be incurred in collection of all receivables. The estimated losses are based on historical collection experience and a review of the current status of the existing receivables. Customer accounts are written off against the allowance for doubtful accounts when an account is determined to be uncollectible. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. Included as a component of finished goods inventory are additional non-material costs. These costs include freight, import duty, inspection fees, etc. Year Ended March 31, 1999 1998 Materials $1,500,587 $1,894,816 Non-Materials 249,097 333,254 $1,749,684 $2,228,070
Property 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 Machinery and equipment - 5 to 10 years Furniture and fixtures - 5 to 15 years Computer equipment - 5 years - 20 - Income Taxes: The Company accounts for income taxes using SFAS No. 109, "Accounting for Income Taxes:" Income taxes are provided based on the liability method for financial reporting purposes. Deferred and prepaid taxes are provided for on temporary differences in the basis of assets and liabilities which are recognized in different periods for financial and tax reporting purposes. Per Share Data: The Company implemented Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" for all years presented which requires presentation of basic and diluted earnings per share amounts and a reconciliation for all years presented of the respective calculations. The Company incurred a net loss for the years ended March 31, 1999, 1998 and 1997; therefore, all potential dilutive common shares are antidilutive and not included in the calculation of diluted earnings per share. Basic and diluted net 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. New Accounting Pronouncements - The Company implemented SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information" effective April 1, 1998. These standards specify the presentation and disclosure requirements for comprehensive income and segment information. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" standardizes the accounting for all derivative instruments. The company does not hold or issue derivative financial instruments. NOTE B - PROPERTY AND EQUIPMENT Property and equipment consist of the following: March 31, 1999 1998 Land and improvements $ 174,034 $ 234,284 Building and improvements 1,412,271 Machinery and equipment 835,966 824,171 Furniture and fixtures 260,616 246,036 Computer equipment 50,586 49,085 1,321,202 2,765,847 Less accumulated depreciation and amortization 1,095,340 1,152,625 $ 225,862 $1,613,222
Assets net of depreciation from land, building and improvements totaling $1,274,924 were transferred to assets held for sale. See Note L. - 21 - NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE The Company maintains a Joint Venture with a Hong Kong Corporation, which has manufacturing facilities in the People's Republic of China, for the manufacturing of consumer electronic products. As of March 31, 1999, the Company has invested $2,240,785 for their 50% interest in the Hong Kong Joint Venture. The investment has been accounted for using the equity method of accounting. During fiscal 1997, the Hong Kong Joint Venture completed the accounting for its development contract and recorded a profit of $122,328 on the development contract and a write-down of $725,745 on its Cellular Joint Venture investment. During fiscal 1998, the Hong Kong Joint Venture wrote off the balance of its Cellular Joint Venture investment in the amount of $337,464. The following represents summarized financial information from the financial statements of the Hong Kong Joint Venture as of March 31, 1999 and 1998 and for the years ended March 31, 1999, 1998 and 1997. Year Ended March 31, 1999 1998 1997 Current assets $3,053,302 $3,041,311 Property and other assets 2,422,311 2,742,444 Total $5,475,613 $5,783,755 Current liabilities $ 983,512 $1,281,123 Non-current liabilities 63,382 100,017 Shareholders' equity $4,428,719 $4,402,615 Total $5,475,613 $5,783,755 Net sales $6,440,817 $6,984,960 $6,644,142 Gross profit 1,537,855 1,327,380 1,792,877 Net income (loss) 625,205 (61,550) (302,023)
As of and for the years ended March 31, 1999, 1998 and 1997, the period ending exchange rate and the weighted average exchange rates were approximately 7.75 Hong Kong dollars to each U.S. dollar. During the years ended March 31, 1999, 1998 and 1997, the Company purchased $4,365,481, $6,078,933 and $5,824,622, respectively, of finished product from the Hong Kong Joint Venture, which represents 81%, 73% and 57%, respectively, of the Company's total finished product purchases. - 22 - NOTE D - DEBT Debt consisted of the following: Year Ended March 31, 1999 1998 Short-term borrowings $ 786,484 $ 969,326 Promissory notes - long-term 1,338,051 Debt related to assets held for sale 1,246,973 1,246,973 1,338,051 Less current maturities 1,246,973 91,190 $ -0- $1,246,861
The short-term borrowings relate to the Company's agreement with a financial institution to provide a maximum line of credit of the lower of $7,500,000 or specified percentages of the Company's accounts receivable and inventory consisting of a revolving line of credit and letters of credit. The outstanding principal balance of the revolving credit line ($786,484 at March 31, 1999) is payable on demand. The interest rate on the revolving credit line is equal to 1-1/2% in excess of the prime rate of interest (9-1/4% at March 31, 1999). As of March 31, 1999, the amount available for borrowings under the line was approximately $116,000 based on the specified percentages. The loan is collateralized by the Company's accounts receivable, inventory and a 1.5 acre parcel of the Company's real estate. The agreement does not contain any provision for compliance with financial covenants. The weighted average interest rate on outstanding short-term borrowings for the years ended March 31, 1999, 1998 and 1997 was 9.62%, 10.00% and 9.40%, respectively. During the year ended March 31, 1996, the Company refinanced its mortgage on its corporate headquarters. The terms of the mortgage are a $1,300,000 loan repayable in 60 equal monthly installments of principal and interest based on a 25 year amortization schedule, with an interest rate of 10%. The full outstanding balance is due at the earlier of end of 60 month period or when property is sold. At March 31, 1999 and 1998, the outstanding principal balances were $1,246,973 and $1,263,051, respectively. Included in debt at March 31, 1998 is a note payable of $75,000, payable to Black & Decker, as a result of a legal settlement (see Note K). This note is non-interest bearing and payable at $6,250 per month. NOTE E - LEASES There were no operating leases for either of the years ended March 31, 1999 or March 31, 1998. - 23 - NOTE F - INCOME TAXES At March 31, 1999, the Company has net operating loss (NOL) carryforwards in the United States of approximately $5,150,000 for income tax purposes that expire in years 2009 through 2019. From 1998 to 1999, the deferred tax asset valuation allowance decreased by $15,577 due to adjustments of prior year's NOL's. From 1997 to 1998, the deferred tax asset valuation allowance increased by $344,248 primarily due to operating losses generated in fiscal 1998 and the adjustment of prior year NOL's. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows: March 31, 1999 1998 Deferred tax liabilities: Unremitted Hong Kong Joint Venture earnings not considered permanently reinvested $ 771,396 $ 766,174 Gross deferred tax liabilities 771,396 766,174 Deferred tax assets: Financial statement accruals and allowances 83,728 106,032 Inventory uniform capitalization 72,200 72,200 Other 67,553 34,615 NOL carryforwards and tax credits 1,957,241 1,978,230 Gross deferred tax assets 2,180,722 2,191,077 Valuation allowance (1,409,326) (1,424,903) Net deferred tax assets $ -0- $ -0-
The reconciliation of the income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense is: 3/31/99 3/31/98 3/31/97 Federal tax benefit at statutory rate on loss (34%) $(276,229) $(151,343) $(504,269) Equity in (earnings) loss from Hong Kong Joint Venture (106,285) 10,464 51,344 Dividends received from Hong Kong Joint Venture for which net deferred taxes taxes were not previously provided 102,000 85,000 340,000 Effect of net operating loss carryforwards 279,616 81,144 60,000 Other 898 (25,265) 52,925 $ -0- $ -0- $ -0-
Investment and other tax credits are accounted for by the flow-through method. - 24 - NOTE G - COMMON STOCK On February 27, 1998, the Shareholders approved a one-for-four reverse stock split of the Company's issued and outstanding common stock. The effective date of the reverse stock split was March 9, 1998, which reduced the number of outstanding shares from 3,245,587 shares to 811,397 shares. Additional paid-in capital was increased and common stock was decreased by $24,342 as a result of the reverse stock split. All share and per share amounts in this report have been restated to reflect the reverse stock split. Common Stock - On September 2, 1998, the Company sold 113,636 shares of common stock to the Chairman of the Board of the Company at a price of $.88 cents per share (the mean between the closing bid and asked prices on NASDAQ) or an aggregate of $100,000. On November 12, 1998, the Board of Directors authorized the Company to purchase up to 100,000 shares of the Company's common stock. During the year ended March 31, 1999, pursuant to the stock purchase program, the Company repurchased 37,950 shares at a cost of $53,727. Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as amended, 243,750 shares of common stock are authorized for the granting of stock options, of which 11,519 shares have been issued as of March 31, 1999, leaving 232,231 available for issuance upon exercise of options granted, or available for future grants to employees and directors. Under provisions of the Plan, a committee of the Board of Directors determines the option price and the dates exercisable. All options expire five years from the date of grant. The following tables summarize the status of options under the Non-Qualified Stock Option Plan at March 31, 1999 and option transactions for the two years then ended: Status as of March 31, 1999 Number of Shares Presently exercisable 172,561 Exercisable in future years 51,939 Total outstanding 224,500 Available for future grants 7,731 Shares of common stock reserved 232,231 Outstanding options: Number of holders 13 Average price per share $0.98 Expiration dates September 1999 to November 2003 - 25 - Transactions for the Two Years Ended March 31, 1999: Weighted Average Number of Per Share Total Shares Option Price Option Price Outstanding at March 31, 1997 163,125 .76 $124,010 Granted 42,500 .25 10,656 Canceled (17,500) .51 (8,925) Outstanding at March 31, 1998 188,125 125,741 Granted 82,250 2.11 173,625 Canceled (45,875) 1.72 (78,969) Outstanding at March 31, 1999 224,500 $220,397
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, 1999, 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 would not have been materially affected on a pro forma basis. NOTE H - COMMITMENTS The Company entered into a three year employment agreement with its Vice President of Sales with fixed annual remuneration of $175,000 in year one and $200,000 in years two and three. In addition, the agreement provides incentive compensation based on the Company achieving certain levels of sales. The agreement expires in December, 2001. The Company had employment agreements with two of its officers, which expired on March 31, 1998. The fixed aggregate annual remuneration under these agreements approximated $300,000 per year. In addition, the agreements provide incentive compensation to these officers based on the Company's achievement of certain levels of earnings. Outstanding letters of credit commitments which are used solely for short-term inventory financing totaled $18,180 at March 31, 1999. - 26 - NOTE I - YEAR 2000 COMPLIANCE The Company has undertaken a project that addresses the Year 2000 (Y2K) issue of computer systems and other equipment with embedded chips or processors not being able to properly recognize and process date-sensitive information after December 31, 1999. The Company's Y2K project is designed to ensure the compliance of all of the Company's applications, operating system and hardware platforms, and to address the compliance of key business partners. Key business partners are those customers and vendors that have a material impact on the Company's operations. The Company is in the process of hiring a consultant to review its computer operations and anticipates that all phases of the project should be completed during 1999. The Company estimates that the total cost of the required modifications to its systems to become Y2K compliant will not exceed $50,000 and will not be material to the Company's financial position. Failure to make all internal business systems Y2K compliant could result in an interruption in, or a failure of, some of the Company's business activities or operations. Y2K disruptions in the operations of key vendors could impact the Company's ability to obtain products and service its customers. The Company is unable to determine the readiness of its key business partners at this time and is therefore unable to determine whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company's Y2K project is expected to significantly reduce the Company's level of uncertainty about the Y2K problem and reduce the possibility of significant interruptions of normal business operations. NOTE J - BUSINESS AND SALES INFORMATION The Company is primarily a manufacturer and wholesaler of a variety of security products for use in homes and businesses and manufactures private label products to order. Approximately 24%, 15% and 15% of the Company's total sales were to a the same customer in 1999, 1998 and 1997, respectively. An additional 17% and 12% of the Company's total sales were to a different customer in 1999 and 1998. NOTE K - 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 $200,000 payable in 32 equal monthly installments without interest beginning September 1, 1996. As a result of the other related expenses and insurance carrier recovery, the net charge for this matter amounted to $247,500. NOTE L - SUBSEQUENT EVENT AND LIQUIDITY Universal Security Instruments, Inc. sold its headquarters facility in Owings Mills, MD, on June 16, 1999 for a price of $2.2 million to KA Real Estate Associates, LLC. After deducting the mortgage and settlement charges, the Company will have excess cash of approximately $840,000. The Company will report, in its quarter ending June 30, 1999, a gain on the sale of this property of approximately $800,000. Management believes that the excess cash generated from the sale, together with its line of credit and working capital, will be sufficient to meet the Company's liquidity needs for the fiscal year ending March 31, 2000. - 27 - PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The Company's Board of Directors consists of five directors. The following is a list of individuals currently serving as directors of the Company until the Company's next annual stockholders meeting and individuals currently serving as executive officers of the Company: Principal Occupation Director for past five years since Stephen Knepper.....55 Director; Vice Chairman of the 1970 Board of the Company since September 1996; Chairman of the Board of the Company from 1970 to September 1996. Michael Kovens......56 Director; Chairman of the Board 1970 of the Company since September 1996; President of the Company from 1970 to September 1996. Harvey Grossblatt...52 Director since September 1996; 1996 President since June 1996; Chief Financial Officer since April 1997; Vice President of the Company from December 1986 to June 1996; Secretary and Treasurer of the Company since September, 1988; Vice President and Chief Financial Officer of the Company from October 1983 through May 1995. Ronald Frank(1).....33 Vice President of Lexington 1998 National Insurance Company since 1993. Gary Goldberg.......50 1993 to 1996 President of Ultravision 1998 LLC; 1996 to 1997, Independent Consultant; 1997 to present, Procurement Agent for Sierra Military Health Services, Inc. (1) Mr. Frank is the son-in-law of Mr. Michael Kovens, Director and Chairman of the Board of the Company. - 28 - ITEM 11. EXECUTIVE COMPENSATION Table I. Summary Compensation Table The following table reflects the aggregate amount paid or accrued by the Company in its three most recent fiscal years, for each executive officer whose compensation exceeded $100,000 in that year. Long-Term Compensation Name and Awards Payouts Principal Annual Compensation Stock LTIP All Other Position Year Salary Bonus Other Awards Options Payouts Compensation(1) Michael Kovens 1999 $175,000 - - - 12,500 - $ -0- Chairman of the Board 1998 175,000 - - - 15,000 - -0- 1997 300,000 - - - 17,500 - 3,200 Stephen C. Knepper 1999 $ 50,000 - - - 12,500 - $ -0- Vice Chairman of the 1998 50,000 - - - 15,000 - -0- Board 1997 183,328 - - - 17,500 - 3,200 Harvey Gross- blatt 1999 $122,500 - - - 6,250 - $ -0- President, Secre- tary 1998 122,500 - - - - - -0- and Treasurer 1997 142,923 - - - 17,500 - 2,857
(1) Consists of Company contributions under its 401(k) plan. Table II. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values Value Number of Unexercised of Unexercised In-The-Money Shares Options at FY-End Options at FY-End Acquired Value Exerci-/Unexerci- Exerci-/Unexerci- Name In Exercise Realized sable / sable sable / sable Michael Kovens - - 68,750/ -0- -0- / -0- Stephen C. Knepper - - 68,750/ -0- -0- / -0- Harvey Grossblatt - - 24,000/ -0- -0- / -0-
- 29 - ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of June 11, 1999, the following persons were "beneficial owners" (as that term is defined under Rule 13d-3 promulgated by the Securities and Exchange Commission) of more than five percent of the Company's Common Stock. Name and address of Shares Percent beneficial owner Beneficially Owned(1) of class Michael Kovens 328,295(2) 34.3% 10324 South Dolfield Rd. Owings Mills, MD 21117 Stephen Knepper 105,360(3) 11.0% 10324 South Dolfield Rd. Owings Mills, MD 21117 Bruce Paul 129,400 14.0% One Hampton Road Purchase, NY 10577 (1) For the purpose of determining the percentages of stock beneficially owned, shares of stock subject to options exercisable within 60 days of June 11, 1999 are deemed to be outstanding. (2) Includes 68,750 shares which Mr. Kovens presently has the right to acquire through the exercise of stock options. (3) Includes 68,750 shares which Mr. Knepper presently has the right to acquire through the exercise of stock options and 4,487 shares held by Mr. Knepper's adult children. - 30 - As of June 11, 1999, the shares of the Company's Common Stock owned beneficially by each director, by each executive officer and by all directors and officers as a group were as follows: Shares Percent Name of beneficial owner Beneficially Owned(1) of class Michael Kovens 328,295(2) 34.3% Stephen Knepper 105,360(3) 11.0% Harvey Grossblatt 31,273(4) 3.4% All directors and officers as 474,976 45.1% a group (5 persons included) (1) See footnote 1 under previous table. (2) See footnote 2 under previous table. (3) See footnote 3 under previous table. (4) Includes 24,000 shares which Mr. Grossblatt presently has the right to acquire through the exercise of stock options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. - 31 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements are included in Part II, Item 8. Consolidated balance sheets, March 31, 1999 and 1998 Consolidated statements of operations for the years ended March 31, 1999, 1998 and 1997. Consolidated statements of shareholders' equity for the years ended March 31, 1999, 1998 and 1997. Consolidated statements of cash flows for the years ended March 31, 1999, 1998 and 1997. Notes to consolidated financial statements. (a) 2. Financial Statement Schedules Schedule II - Schedule of Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, are not required, or because the required information is included in the consolidated financial statements or notes thereto. (a) 3. Exhibits required to be filed by Item 601 of Regulation S-K Exhibit No. 10.1 Non-Qualified Stock Option Plan, as amended 10.2 Hong Kong Joint Venture Agreement (confidential treatment of Name requested and filed separately with the Commission) (Incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1994, File No. 0-7885) 23.1 Consent of Deloitte & Touche LLP 27 Financial Data Schedule - 32 - (b) Reports on Form 8-K On March 30, 1999, the Registrant filed a Current Report on 8-K, dated March 29, 1999, reporting the change in the Registrant's certifying accountant from Deloitte & Touche LLP to Grant Thornton LLP (d) Financial Statements Required by Regulation S-X Separate financial statements of the Hong Kong Joint Venture (confidential treatment of name requested and filed separately with the Commission. Page Report of the auditors JV-1 Consolidated profit and loss account, JV-2 March 31, 1999 and 1998 Consolidated balance sheets, March 31, 1999 and 1998 JV-3 Consolidated cash flow statements, March 31, 1999 JV-5 and 1998 Notes to consolidated financial statements JV-7 - 33 - SCHEDULE II UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES VALUATION ACCOUNT YEARS ENDED MARCH 31, 1999, 1998 AND 1997 Charged Balance at to cost Charged Balance beginning and to other at end of year expenses accounts Deductions(1) of year Year ended March 31, 1999 Allowance for doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000 Year ended March 31, 1998 Allowance for doubtful accounts $ 50,000 $50,000 $-0- $ -0- $100,000 Year ended March 31, 1997 Allowance for doubtful accounts $ 25,771 $24,229 $-0- $ -0- $ 50,000
(1)Write-off of uncollectible accounts, net of recoveries. - 34 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIVERSAL SECURITY INSTRUMENTS, INC. By: Harvey Grossblatt Harvey Grossblatt, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Date: July 13, 1999 By: Michael Kovens Michael Kovens Chairman of the Board, Director Date: July 13, 1999 By: Stephen Knepper Stephen Knepper Vice Chairman of the Board, Director Date: July 13, 1999 By: Harvey Grossblatt Harvey Grossblatt, President, Director, Secretary, Treasurer, Chief Accounting Officer - 35 - EX-10 2 EXHIBIT 10.1 UNIVERSAL SECURITY INSTRUMENTS, INC. NON-QUALIFIED STOCK OPTION PLAN 1. Purpose - The purpose of this Plan is to further the interests of UNIVERSAL SECURITY INSTRUMENTS, INC. (hereinafter called the "Company") by providing incentives for employees, officers and directors of the Company and its subsidiaries, who may be designated for participation therein and to provide additional means of attracting and retaining competent personnel. 2. Administration - The Plan shall be administered by a Committee consisting of the Board of Directors of the Company or such lesser number of such Board (but not less than three persons) as is designated by the Board. Such Committee shall hereinafter be referred to as the "Non-Qualified Stock Option Committee" or the "Committee." Subject to the provisions of the Plan and applicable law, the Committee is authorized to interpret the Plan and to prescribe, amend and rescind rules and regulations relating to the Plan and to any options granted thereunder, and administration of the Plan. 3. Participants and Allotments - The Committee shall determine and designate from time to time those employees and directors of the Company to whom options are to be granted and who thereby become participants in the Plan. The Committee shall allot to such participants options to purchase shares in such amounts as the Committee shall from time to time determine. Employees, officers and directors of the Company or its subsidiaries shall be eligible to participate in the Plan. No member of the Committee shall have any right to vote or decide upon any matter relating solely to himself or a member of his immediate family or solely to any of his rights or benefits (or rights or benefits of a member of his immediate family) under the Plan. Participation of a member shall not confer any right of continuation of service as an employee, officer or a director of the Company or its subsidiaries. 4. Shares Subject to the Plan - Under this Plan, the Committee may from time to time grant options to employees, officers and directors of the Company and its subsidiaries, entitling the holders thereof to purchase shares of the Company's authorized and unissued common stock, par value $.01 per share (the "Common Stock"), or shares of the Company's treasury Common Stock, or a combination of both, up to an aggregate of 975,000 shares of Common Stock. Notwithstanding anything herein to the contrary, no member of the Committee shall be eligible to vote on the granting of any option under the Plan if the option is to be granted to such member of the Committee or to a member of his immediate family. If any option granted under the Plan shall terminate or expire unexercised, in whole or in part, the shares so released from option may be made the subject of additional options granted under the Plan. The Company shall reserve and keep available such number of shares of stock as will satisfy the requirements of all outstanding options granted under the Plan. In the event there is any change in the Company's shares of Common Stock, as by stock splits, reverse stock splits, stock dividends or recapitalization, the number of shares available for option and the shares subject to option shall be appropriately adjusted by the Committee. 5. Option Price - The option price or prices shall be as established by the Committee when such option is granted on the date or dates the options are granted. In the event there is any change in the Company's shares as by stock splits, reverse stock splits, stock dividends or recapitalization, the purchase price of shares subject to option shall be appropriately adjusted by the Committee. 6. Other Provisions - Each option shall be subject to all provisions of this Plan and to the following terms and conditions: (a) Options will be granted will be granted under the Plan which will be exercisable for a period of five years from the date of grant. The Committee may, in its discretion, impose additional restrictions as to the time of exercise and/or number of shares that may be purchased upon any exercise of options. (b) No option shall be transferable by the optionee otherwise than by will or the laws of descent and distribution and shall be exercisable during his lifetime only by the optionee. (c) All unexercised options will terminate, be forfeited and will lapse immediately if (i) the optionee's employment with the Company or its subsidiaries is terminated because the Optionee is discharged for dishonesty, commission of a felony or the intentional committing of an act which has a material adverse effect or impact upon the Company or its subsidiaries, such as his disclosing Company confidential information or trade secrets to an unauthorized person or persons, or (ii) the optionee agrees to accept employment with a competitor of the Company or its subsidiaries without the consent of the Company. (d) If the optionee's employment with the Company or its subsidiaries is terminated for any reason other than as set forth in subparagraph (c) above, or if the optionee ceases to be a director of the Company or its subsidiaries, the Optionee may exercise, subject to the provisions of subparagraph (a) and (c) above, any option which has accrued hereunder as of the date his employment with the Company or its subsidiaries terminated or as of the date he ceases to be a director (as may be the case) for the period of ninety (90) days after the date of the termination of his employment with, or his termination as a director of, the Company or its subsidiaries; provided, however, that if the optionee's employment (or being a director, as may be the case) with the Company or its subsidiaries is terminated by reason of his death, the optionee's personal representatives, estate or heirs (as the case may be) may exercise, subject to the provisions of subparagraph (a) above, any option which has accrued hereunder as of the date of the optionee's death for a period of one hundred eighty (180) days after the date of the optionee's death. (e) Except as otherwise provided in subparagraph (d) above, all unexercised options will terminate, be forfeited and will lapse upon the termination of the optionee's employment with the Company or its subsidiaries (or upon the termination of his being a director of the Comp any or its subsidiaries, as the case may be). 7. Exercise of Options - To exercise the option, the optionee or his successor shall give written notice to the Company's Chief Financial Officer at the Company's principal office in Baltimore, Maryland, accompanied by full payment for the shares being purchased and a written statement that the shares are purchased for investment and not with a view to distribution. However, this statement will not be required in the event the shares subject to the option are registered with the Securities and Exchange Commission. If the option is exercised by the successor of the optionee, following his death, proof shall be submitted, satisfactory to the Committee, of the right of the successor to exercise the option. Shares of the stock issues pursuant to this Plan which have not registered with the Securities and Exchange Commission shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933 and may be offered or sold only if registered under the provisions of that Act or if an exemption from registration is available." The Company shall not be required to transfer or deliver any certificate or certificates for shares purchased upon any such exercise of said option: (a) until after compliance with all then applicable requirements of law; and (b) prior to admission of such shares to listing on any stock exchange on which the stock may then be listed. In no event shall the Company be required to issue fractional shares to the employee, officer or director. 8. Registration - If the Company shall be advised by its counsel that shares of stock deliverable upon any exercise of an option are required to be registered under the Securities Act of 1933, or that the consent of any other authority is required for the issuance of same, the Company may effect registration or obtain consent, and delivery of shares by the Company may be deferred until registration is effected or consent obtained. However, the Company reserves the right to revoke the option if it determines that, in the best interests of the Company, the shares should not be registered or that consent should not be obtained. 9. Issuance of Stock - No stock will be issued until full payment for such stock has been made. The Optionee shall have no rights as a shareholder with respect to optioned shares until the date of the issuance of a stock certificate to him for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Paragraphs 4 or 5. 10. Amendments and Termination - The Board of Directors may amend, suspend, discontinue or terminate the Plan, but no such action may, without the consent of the holder of any option granted hereunder, alter or impair such option, except as provided in Paragraphs 4 and 5. 11. Option Agreement - The granting of an option shall take place only when a written option agreement substantially in the form of the Option Agreement which is attached hereto and marked Exhibit I is executed by or on behalf of the Company and the employee, officer or director to whom the option is granted and such executed agreement is delivered to Company. 12. Period of Plan - The Plan, which initially became effective on April 5, 1978, has been extended by the Board of Directors and will continue in effect until and will expire on March 31, 2003. UNIVERSAL SECURITY INSTRUMENTS, INC. NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made as of this ___ day of _________, 19__ by and between UNIVERSAL SECURITY INSTRUMENTS, INC., a Maryland corporation (hereinafter called the Company), and ___________________ (hereinafter called the Optionee). WHEREAS, the Board of Directors of the Company considers it desirable and in the Company's best interest that the Optionee be given an opportunity to purchase shares of its Common Stock to provide an inducement for the Optionee to remain an employee of the Company and to promote the success of the Company. NOW, THEREFORE, in consideration of the premises, it is agreed as follows: l. Grant of Option. The Company hereby grants to Optionee the right, privilege and option to purchase from the Company _________ shares of the Common Stock of the Company at a purchase price of $_____ per share in the manner and subject to the conditions hereinafter provided. 2. Period of Exercise of Option. (a) The option will be exercisable for a period of __________ years from the date of grant, except as provided in subparagraphs (b), (c) and (d) below, in accordance with the following schedule: (INSERT EXERCISE SCHEDULE) (b) All unexercised options will terminate, be forfeited and will lapse immediately if the Optionee's employment with the Company is terminated because (i) the Optionee is discharged for dishonesty, commission of a felony or the intentional committing of an act which has a material adverse effect or impact upon the Company, such as disclosing Company confidential information or trade secrets to an unauthorized person or persons, or (ii) the Optionee accepts employment with a competitor of the Company, without the consent of the Company. (c) If the Optionee's employment with the Company is terminated for any reason other than as set forth in subparagraph (b) above, the Optionee may exercise, subject to the provisions of subparagraph (a) above, any option which as accrued hereunder as of the date of employment with the Company terminated for a period of ninety (90) days after the date of the termination of employment with the Company; provided, however, that if the Optionee's employment with the Company is terminated by reason of death, the Optionee's personal representatives, estate or heirs (as the case may be) may exercise, subject to the provisions of subparagraph (a) above, any option which has accrued hereunder as of the date of the Optionee's death for a period of one hundred eighty (l80) days after the date of the Optionee's death. (d) Except as otherwise provided in subparagraph (c) above, all unexercised options will terminate, be forfeited and will lapse upon the termination of the Optionee's employment with the Company. 3. Method of Exercise. In order to exercise the option, the holder thereof must give written notice to the Secretary of the Company at Baltimore, Maryland, accompanied by full payment of the shares being purchased and a written statement that the shares are purchased for investment and not with a view to distribution. If the option is exercised by the successor of the Optionee following death, proof shall be submitted to the right of the successor to exercise the option. Shares of stock issued pursuant to this Plan which have not been registered with the Securities and Exchange Commission shall bear the following legend: "The shares represented by this Certificate have not been registered under the Securities Act of l933 and may be offered or sold only if registered under the provisions of that Act or if an exemption from registration is available." The Company shall not be required to transfer or deliver any certificate or certificates for shares purchased upon any such exercise of said option: (a) until after compliance with all then applicable requirements of law; and (b) prior to admission of such shares to listing on any stock exchange on which the stock may then be listed. In no event shall the Company be required to issue fractional shares to the Optionee. 4. Limitation upon Transfer. Except as otherwise provided in paragraph 2 hereof, the option and all rights granted hereunder shall not be transferred by the Optionee, other than by will or by laws of descent and distribution, and may not be assigned, pledged or hypothecated in any way and shall not be subject to execution, attachment or similar process. Upon any attempt to transfer the options, other than by will or by the laws of descent and distribution, or to assign, pledge, hypothecate or otherwise dispose of such option or of any rights granted hereunder, contrary to the provisions hereof, or upon the levy of any attachment or similar process upon such option or such rights, such option and such rights shall immediately become null and void. 5. Stock Adjustment. In the event there is any change in the number of issued shares of the Company by reason of stock splits, reverse stock splits, stock dividends, recapitalization or other transactions, the number of shares remaining subject to the option and the option price per share shall be proportionately adjusted. 6. Corporate Reorganization. If there shall be any capital reorganization or consolidation or merger of the Company with another corporation or corporations, or any sale of all or substantially all of the Company's properties and assets to any other corporation or corporations, the Company shall take such action as may be necessary to enable Optionee to receive upon any subsequent exercise of such option, in whole or in part, in lieu of shares of Common Stock, securities or other assets as were issuable or payable upon such reorganization, consolidation, merger or sale in respect of, or in exchange for such shares of Common Stock. 7. Rights of Stockholder. Neither Optionee, legal representatives, nor any other person entitled to exercise such option shall have any rights or be a stockholder in the Company in respect of the shares issuable upon exercise of the option granted hereunder, unless and until certificates representing such shares shall have been delivered pursuant to the terms hereof. 8. Stock Reserved. The Company shall, at all times during the term of this Agreement, reserve and keep available such number of shares of its Common Stock as will be sufficient to satisfy the terms of this Agreement. 9. Binding Effect. This Agreement shall be binding upon and inure to the benefit of any successor or successors of Company. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written. ATTEST: UNIVERSAL SECURITY INSTRUMENTS, INC. (Company) ___________________________ By: __________________________(SEAL) President WITNESS: (Optionee) ___________________________ ______________________________(SEAL) EX-10 3 EXHIBIT 10.2 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 the Group as at 31 March 1999 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 3 June 1999 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 1999 Notes 1999 1998 HK$ HK$ TURNOVER 3 49,928,815 54,146,978 PROFIT BEFORE EXCEPTIONAL ITEMS 4 5,035,733 2,196,879 Exceptional items 5 - (2,616,066) PROFIT/(LOSS) BEFORE TAXATION 5,035,733 (419,187) Taxation 6 (189,182) (57,945) NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS 7 4,846,551 (477,132) Retained profits at beginning of year 31,259,649 31,736,781 RETAINED PROFITS AVAILABLE FOR DISTRIBUTION 36,106,200 31,259,649 Interim dividend 8 (4,644,200) - RETAINED PROFITS AT END OF YEAR 31,462,000 31,259,649
JV-2 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED BALANCE SHEET 31 March 1999 Notes 1999 1998 HK$ HK$ ASSETS CURRENT ASSETS Cash and bank balances 9 18,641,225 14,313,804 Accounts receivable 49,884 26,131 Prepayments, deposits and other receivables 94,667 251,003 Inventories 10 4,322,225 6,215,626 Due from a shareholder 2 561,008 2,769,494 TOTAL CURRENT ASSETS 23,669,009 3,576,058 LONG TERM INVESTMENT 12 - - FIXED ASSETS 13 18,777,601 21,259,257 TOTAL ASSETS 42,446,610 44,835,315 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 2,397,819 4,529,687 Other payables and accrued liabilities 2,234,876 2,256,962 Due to a related company 2 217,943 235,613 Current portion of loan from a related company 2 164,004 164,004 Taxation 2,609,485 2,744,917 TOTAL CURRENT LIABILITIES 7,624,127 9,931,183 DEFERRED TAXATION 14 300,000 420,000 LOANS FROM SHAREHOLDERS 15 2,868,954 2,868,954 LONG TERM PORTION OF LOAN FROM A RELATED COMPANY 2 191,329 355,329 TOTAL LIABILITIES - page 6 10,984,410 13,575,466
JV-3 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED BALANCE SHEET (continued) 31 March 1999 Notes 1999 1998 HK$ HK$ TOTAL LIABILITIES - page 5 10,984,410 13,575,466 SHAREHOLDERS' EQUITY Share capital 16 200 200 Retained profits 31,462,000 31,259,649 31,462,200 31,259,849 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 42,446,610 44,835,315
JV-4 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED CASH FLOW STATEMENT Year ended 31 March 1999 Notes 1999 1998 HK$ HK$ NET CASH INFLOW FROM OPERATING ACTIVITIES 17(a) 9,315,981 9,043,415 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received 1,027,582 779,306 Interest paid (25,595) (31,483) Dividend paid (4,644,200) - Net cash inflow/(outflow) from returns on investments and servicing of finance (3,642,213) 747,823 TAXATION Hong Kong profits tax refunded/(paid) (444,614) 466,995 INVESTING ACTIVITIES Purchases of fixed assets (737,733) (637,674) Sales proceeds from disposal of fixed assets - 46,001 Increase in pledged time deposit (96,286) (93,267) Net cash outflow from investing activities (834,019) (684,940) NET CASH INFLOW BEFORE FINANCING ACTIVITIES 4,395,135 9,573,293 FINANCING ACTIVITIES 17(b) Repayment of loan from a related company (164,000) (164,000) Repayment of loans from shareholders - (3,870,000) Net cash outflow from financing activities (164,000) (4,034,000)
JV-5 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) CONSOLIDATED CASH FLOW STATEMENT (continued) Year ended 31 March 1999 Notes 1999 1998 HK$ HK$ INCREASE IN CASH AND CASH EQUIVALENTS 4,231,135 5,539,293 Cash and cash equivalents at beginning of year 12,922,451 7,383,158 CASH AND CASH EQUIVALENTS AT END OF YEAR 17,153,586 12,922,451 ANALYSIS OF THE BALANCES OF CASH AN CASH EQUIVALENTS Cash and bank balances 17,153,586 12,922,451
JV-6 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements include the audited financial statements of the Company and its subsidiaries for the year ended 31 March 1999. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation. Subsidiaries 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. Goodwill Goodwill arising on consolidation of subsidiaries and on acquisition of associated companies represents the excess purchase consideration paid for subsidiaries/associated companies 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. 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. JV-7 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS (continued) 31 March 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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-8 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS (continued) 31 March 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash equivalents 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. 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. JV-9 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS (continued) 31 March 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. 2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS The Company was incorporated under the laws of Hong Kong on 7 July 1989. It operates under a joint venture agreement entered into on 23 October 1989 between Universal Security Instruments, Inc.("USI"), which is incorporated in the United States, and The Original Joint Venture Owner (name withheld and filed separately with the SEC) which is incorporated in Hong Kong. The Company is economically dependent on Universal Security Instruments, Inc. with which it transacts most of its business and the financial statements reflect the effect of these transactions which are conducted on bases determined between the parties. During the year, the following significant related party transactions were recorded: Group 1999 1998 Notes HK$ HK$ Sales made to USI (i) 39,098,998 47,123,514 Rentals paid to: An Affiliate of The Company (name (ii) withheld and filed separately with the SEC) 840,000 840,000 A Manager of The Company (name (ii) withheld and filed separately with the SEC) 240,000 240,000 Management fee paid to An Affiliate (iii) of The Company (name withheld and filed separately with the SEC) 1,440,000 1,440,000
Notes: (i) Sales to USI were made according to the published prices and conditions offered to other customers of the Group. JV-10 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS (continued) 31 March 1999 2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS (continued) Notes: (continued) (ii) Rental expense were charged for the offices owned by An Affiliate of The Company (name withheld and filed separately with the SEC) and A Manager (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 the area occupied by the Group. (iii) Management fee was charged at HK$120,000 per month for the provision of management services rendered in planning, execution and operation of electronics manufacturing plant in the PRC. An Affiliate of The Company (name withheld and filed separately with the SEC) is a company of which A Manager (name withheld and filed separately with the SEC) is a director. Loan from An Affiliate of The Company (name withheld and filed separately with the SEC) is unsecured, bearing interest at 0.49% per annum, and is repayable by 26 (1998: 38) equal monthly instalments. The balances with a shareholder, subsidiaries and related company are unsecured, interest-free, and have no fixed terms of repayment. 3. TURNOVER Turnover represents the invoiced value of goods sold, net of discounts and returns. JV-11 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS (continued) 31 March 1999 4. PROFIT BEFORE EXCEPTIONAL ITEMS Profit before exceptional items is arrived at after charging/(crediting): Group 1999 1998 HK$ HK$ Cost of inventories sold 38,007,456 43,857,207 Depreciation 3,219,389 3,506,804 Less: Amount included in cost of inventories sold (3,018,501) (3,233,291) 200,888 273,513 Auditors' remuneration 181,000 190,000 Directors' remuneration - - Interest on other loan wholly repayable within 5 years 25,595 31,483 Operating lease rentals for land and buildings 1,098,347 1,107,021 Loss on disposal of fixed assets - 3,486 Exchange gains, net (557,017) (417,924) Interest income (1,027,582) (779,306) Gross and net rental income (285,000) (304,800)
5. EXCEPTIONAL ITEMS Group 1999 1998 HK$ HK$ Provision for permanent diminution in value of long term investment - 2,326,397 Provision against amount due from investee company - 289,669 - 2,616,066
JV-12 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 6. TAXATION Hong Kong profits tax has been provided at the rate of 16% (1998: 16.5%) on the estimated assessable profits arising in Hong Kong during the year. Taxes on profits assessable elsewhere have been calculated at the rates of taxation prevailing in the countries in which the Group operates. Group 1999 1998 HK$ HK$ Provision for the year 407,000 325,945 Overprovision in prior years (97,818) (112,000) Deferred tax credit - note 14 (120,000) (156,000) Taxation charge for the year 189,182 57,945
7. NET PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS The net profit attributable to shareholders dealt with in the financial statements of the Company is HK$4,559,904 (1998: loss of HK$8,486,396). 8. INTERIM DIVIDEND Group 1999 1998 HK$ HK$ Interim - HK$2,322,100 per ordinary share (1998: Nil) 4,644,200 -
JV-13 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 9. CASH AND BANK BALANCES These included time deposit amounted to HK$1,487,639 (1998: HK$1,391,353) which was pledged to a bank for credit facilities of HK$3,329,000 (1998: HK$3,329,000) granted to the Company. The banking facilities of the Company are also secured by personal guarantees of A Manager (name withheld and filed separately with the SEC), a director of the Company, A Manager (name withheld and filed separately with the SEC) and A Manager (name withheld and filed separately with the SEC), a director of the Company's subsidiary. The facilities were not utilized at the balance sheet date. 10. INVENTORIES Group and company 1999 1998 HK$ HK$ Raw materials 2,553,140 3,739,541 Work in progress 558,208 898,987 Finished goods 1,210,877 1,577,098 4,322,225 6,215,626
11. INVESTMENTS IN SUBSIDIARIES Group 1999 1998 HK$ HK$ Unlisted shares, at cost 210,008 210,008 Less: Provision for permanent diminution (200,000) (200,000) 10,008 10,008
JV-14 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 11. INVESTMENTS IN SUBSIDIARIES (continued) 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 Islands separately with the SEC) A Subsidiary of Hong Kong HK$10,000 Trading of The Company (name withheld consumer and filed separately with electronic the SEC) products
12. LONG TERM INVESTMENT Group 1999 1998 HK$ 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 1999 12. 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 1999 1998 An Associate The People's US$4,000,000 30 30 Dormant of The Republic of Company (name China withheld and filed separately with the SEC)
The Associated Company (name withheld and filed separately with the SEC) does not have significant influence on the financial and operating policy decisions of investee company and, accordingly, the investment is classified as long term investment. The amount due from the investee company is unsecured, interest-free, and has no fixed terms of repayment. 13. FIXED ASSETS Group and Company
Leasehold Furniture land and improve- Plant and and Motor buildings ments machinery fixtures vehicles Total HK$ HK$ HK$ HK$ HK$ HK$ Cost: At begin- ning of year 15,814,592 6,484,419 28,464,599 2,629,349 452,501 53,845,460 Additions 206,980 363,715 167,038 737,733 At 31 March 1999 15,814,592 6,691,399 28,828,314 2,796,387 452,501 54,583,193 Accumulated deprecia- tion: At begin- ning of year 3,279,162 5,074,647 21,478,648 2,301,245 452,501 32,586,203 Provided during the year 29,402 741,856 1,547,243 200,888 - 3,219,389 At 31 March 1999 4,008,564 5,816,503 23,025,891 2,502,133 452,501 35,805,592
JV-16 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 12. FIXED ASSETS (continued) Group and Company
Leasehold Furniture land and improve- Plant and and Motor buildings ments machinery fixtures vehicles Total HK$ HK$ HK$ HK$ HK$ HK$ Net book value: At 31 March 1999 11,806,028 874,896 5,802,423 294,254 - 18,777,601 At 31 March 1998 12,535,430 1,409,772 6,985,951 328,104 - 21,259,257
The leasehold land and buildings are situated in the People's Republic of China under medium-term leases. 14. DEFERRED TAXATION
Group and company 1999 1998 HK$ HK$ Balance at beginning of year 420,000 576,000 Credit for the year - note 6 (120,000) (156,000) Balance at end of year 300,000 420,000
The principal components of the Group's deferred tax liability comprise accelerated depreciation allowances. 15. LOANS FROM SHAREHOLDERS
Group and company 1999 1998 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
JV-17 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 15. LOANS FROM SHAREHOLDERS (continued) 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. 16. SHARE CAPITAL
Company 1999 1998 HK$ HK$ Authorized: 100 ordinary shares of HK$100 each 10,000 10,000 Issued and fully paid: 2 ordinary shares of HK$100 each 200 200
JV-18 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 17. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of profit/(loss) before taxation to net cash inflow from operating activities:
1999 1998 HK$ HK$ Profit/(loss) before taxation 5,035,733 (419,187) Provision for permanent diminution in value of long term investment - 2,326,397 Provision for amount due from investee company - 289,669 Interest income (1,027,582) (779,306) Interest expense 25,595 31,483 Depreciation 3,219,389 3,506,804 Loss on disposal of fixed assets - 3,486 Decrease/(increase) in accounts receivable (23,753) 109,319 Decrease/(increase) in prepayments, deposits and other receivables 156,336 (41,972) Decrease in inventories 1,893,401 681,444 Decrease in amount due from a shareholder 2,208,486 2,331,365 Increase/(decrease) in accounts payable (2,131,868) 959,188 Increase/(decrease) in other payables and accrued liabilities (22,086) 77,807 Decrease in amount due to a related company (17,670) (33,082) Net cash inflow from operating activities 9,315,981 9,043,415
(b) Analysis of changes in financing during the year
Loan from a Loans from related company shareholders HK$ HK$ Balance 1 April 1997 683,333 6,738,954 Repayment (164,000) (3,870,000) Balance at 31 March 1998 and 1 April 1998 519,333 2,868,954 Repayment (164,000) - Balance at 31 March 1999 355,333 2,868,954
JV-19 THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION) NOTES TO FINANCIAL STATEMENTS 31 March 1999 18. APPROVAL OF THE FINANCIAL STATEMENTS The financial statements were approved by the board of directors on 3 June 1999. JV-20 EX-23 4 EXHIBIT 24.1 INDEPENDENT AUDITORS' CONSENT 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 as of March 31, 1998 and for each of the two years in the period then ended included in this Annual Report Form 10-K. Registration Statement Number Description Non-qualified Stock Option Plan: 2-83323 Form S-8 33-6953 Form S-8 33-21226 Form S-8 Incentive Stock Option Plan: 2-99736 Form S-8 Employee Stock Purchase Plan: 33-21225 Form S-8 Deloitte & Touche LLP July 1, 1999 Baltimore, Maryland EX-27 5
5 3-MOS 12-MOS MAR-31-1999 MAR-31-1999 MAR-31-1999 MAR-31-1999 193,107 193,107 0 0 549,470 549,470 100,000 100,000 1,799,553 1,799,553 3,929,473 3,929,473 1,321,202 1,321,202 1,293,786 1,293,786 6,402,120 6,402,120 2,415,048 2,415,048 0 0 0 0 0 0 8,871 8,871 3,978,201 3,978,201 6,402,120 6,402,120 1,414,590 9,071,628 1,414,590 9,071,628 1,173,552 7,770,737 1,173,552 7,770,737 572,117 2,191,897 0 0 48,936 228,148 (408,257) (806,552) 0 0 (408,257) (806,552) 0 0 0 0 0 0 (408,257) (806,550) (.46) (.93) (.46) (.93)
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