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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, 2003
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ________________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7-A Gwynns Mill Court, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __________
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 19, 2003:
Common Stock, $.01 Par Value - $5,725,825
The number of shares outstanding of the issuer's classes of
common stock as of June 19, 2003:
Common Stock, $.01 Par Value - 654,380 shares
ITEM 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of the federal securities laws.
These statements can be identified by the use of forward-looking
terminology such as "believes", "expects", "may", "will",
"should", or "anticipates" or similar terminology, or by
discussions of strategy. These statements reflect the reasonable
judgment of our management with respect to future events and are
subject to risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking
statements. We cannot guarantee that our forward-looking
statements will turn out to be correct or that our beliefs or
goals will not change. Our actual results could be very different
from, and worse than, our expectations for various reasons,
including factors that may affect future results discussed in
Management's Discussion and Analysis of Financial Condition and
Results of Operations. Under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, an
SEC-reporting company that identifies forward-looking statements
and warns investors that actual results could differ materially
from those in the forward-looking statements, will not be liable
for any private action arising under the Securities Act of 1933
based on such forward-looking statements.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company" or "USI") was
incorporated in the State of Maryland in 1969. Its principal
offices are located at 7-A Gwynns Mill Court, Owings Mills, MD
21117 and its telephone number is 410-363-3000.
The Company designs and markets a variety of popularly-priced
safety and private label products consisting primarily of smoke
alarms, carbon monoxide alarms and related products. Most of the
Company's products require minimal installation and are designed
for easy installation by the consumer without professional
assistance. The products sold by USI ELECTRIC usually require
professional installation.
Prior to 2000, the Company also designed and marketed a variety
of telecommunication and video products. Due to the low margins
realized on its telecommunications and video products, the
Company has since focused its business primarily on safety
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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
safety products.
The Company imports all of its products from various foreign
suppliers. For the fiscal year ended March 31, 2003,
approximately 66% of the Company's purchases were from a Joint
Venture with a Hong Kong corporation (Hong Kong Joint Venture),
in which the Company owns a 50% interest. The Hong Kong Joint
Venture has manufacturing facilities in the People's Republic of
China. The Company's purchases during fiscal 2003 represented 31%
of the Hong Kong Joint Venture's total sales.
The Company's sales for the year ended March 31, 2003 were
$15,953,883 compared to $10,480,829 for the year ended March 31,
2002, an increase of approximately 52%.
The Company reported net income of $2,400,318 in fiscal 2003
compared to net income of $261,625 in fiscal 2002. The reasons
for the increase in earnings were higher Hong Kong Joint Venture
earnings and higher operating income due to higher levels of
sales due to increased sales by USI ELECTRIC.
SAFETY PRODUCTS
The Company markets a line of residential smoke alarms under the
trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signal(TM)" all
of which are manufactured by the Hong Kong Joint Venture.
Our line of smoke alarms consists of battery, electrical and
electrical with battery backup alarms. The Company's products
contain different types of batteries with different battery
lives, and some with alarm silencers. The smoke alarms marketed
to the electrical distribution trade also include hearing
impaired and heat alarms with a variety of additional features.
The Company also markets a line of outdoor floodlights under the
name "Lite Aide(TM)," carbon monoxide alarms, door chimes and
ground fault circuit interrupters.
Sales of the Company's safety products aggregated $15,438,715
or approximately 97% of total sales in the fiscal year ended
March 31, 2003 and $10,054,979 or approximately 96% of total
sales in the fiscal year ended March 31, 2002. This increase in
sales volume was due primarily to increased sales volume to the
electrical distribution trade.
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The Company is focusing its sales and marketing efforts to
maximize safety product sales, especially smoke alarms and
carbon monoxide alarms manufactured by its Hong Kong Joint
Venture and marketed to the electrical distribution trade. The
electrical distribution trade covers electrical and lighting
distributors as well as manufactured housing companies.
OTHER PRODUCTS
For the fiscal year ended March 31, 2003, sales of the Company's
other private label products consisted primarily of audio tape,
which aggregated $515,168 or 3% of total sales. For the fiscal
year ended March 31, 2002, sales of these products were $425,850
or 4% of total sales. The primary reason for the decrease in
sales was fewer private label customers.
IMPORT MATTERS
The Company imports all of the products it sells. 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 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 also 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 including those it
purchases from the Hong Kong Joint Venture, from the People's
Republic of China.
SALES AND MARKETING
The Company sells its products to various customers. In 1999, the
Company formed a new subsidiary, USI ELECTRIC, INC. for the
purpose of selling safety products to the electrical
distribution trade and the manufactured home industry
manufacturers. USI ELECTRIC has established a national
distribution system with 9 regional stocking warehouses
throughout the United States which enables customers to receive
their orders the next day without paying for overnight freight
charges. The subsidiary (USI ELECTRIC) has hired sales personnel
from the electrical distribution trade and has engaged 26
independent sales organizations which represent approximately 200
sales representatives, some of which have warehouses where USI
ELECTRIC products are maintained for sale.
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The Company's products are also marketed to retailers, wholesale
distributors, home centers, catalog and mail order companies and
to other distributors ("retailers"). The Company's products have
historically been retailed to "do-it-yourself" consumers by
chain, discount, electrical, building supply, electrical
distributors and hardware stores, as well as through catalogs.
The Company also distributes its products through specialty
markets such as premium/incentive and direct mail. The Company
does not currently market any significant portion of its
products directly to end users.
Sales to retailers are made both by the Company and by
approximately 10 independent sales organizations who are
compensated by commissions. The Company has agreements with the
sales organizations which are cancelable by either party upon 30
days notice. The Company does not believe that the loss of any
one of these organizations would have a material adverse effect
upon its business.
The Company also promotes its products through its own sales
catalogs and brochures, which are mailed directly to trade
customers. The Company's customers, in turn, may 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 retail marketing strategy is designed to
attract retailing customers outside the consumer electronics
industry, such as variety stores and home centers.
Sales are also made by officers and full-time employees of the
Company, five of whom are also engaged in sales management and
training. Sales outside the United States, which are made by
officers of the Company and through exporters, were less than 4%
of total sales in fiscal 2003.
The Company's backlog of orders believed to be firm as of March
31, 2003 was approximately $774,183. The Company's backlog as of
March 31, 2002 was approximately $714,085. The increase in
backlog is a function of the timing of orders received from its
customers.
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has a 50% interest in a Hong Kong Joint Venture which
has manufacturing facilities in the People's Republic of China,
for the manufacturing of certain electronic and electrical
products sold by the Company.
- 5 -
The Company believes that this Hong Kong Joint Venture
arrangement will ensure a continuing source of supply for a
majority of the Company's safety products at competitive
prices. During fiscal year 2003, the Company made 66% of its
total purchases from the Hong Kong Joint Venture. These
purchases represented approximately 31% of the Hong Kong Joint
Venture's total sales. The products produced by the Hong Kong
Joint Venture include smoke alarms and carbon monoxide alarms.
The Company is currently pursuing the development of additional
products by the Hong Kong Joint Venture such as other smoke
alarms and a combination carbon monoxide and smoke alarm.
Changes in economic and political conditions in China or any
other adversity to the Hong Kong Joint Venture will unfavorably
affect the value of the Company's investment in the Hong Kong
Joint Venture and would have a material adverse effect on the
Company's ability to purchase products for distribution. Refer to
NOTE C of the Financial Statements for a comparison of annual
sales and earnings of the Hong Kong Joint Venture. In the past
two fiscal years, the Hong Kong Joint Venture has increased its
sales to customers other than the Company by $9,562,275 from
$6,473,735 in fiscal 2002 to $16,036,010 in fiscal 2003.
SUPPLIERS - OTHERS
Certain private label products not manufactured for the Company
by the Hong Kong Joint Venture are manufactured by other foreign
suppliers. The Company believes that its relationships with its
suppliers are good. The Company believes that the loss of its
ability to purchase products from the Hong Kong Joint Venture
would have a material adverse effect on the Company. The loss of
any of its other suppliers could have a short-term adverse effect
on its operations, but the Company believes that replacement
sources for these other suppliers could be developed.
COMPETITION
In fiscal year 2003, sales of safety products accounted for
approximately 97% of total sales. In the sale of smoke alarms,
the Company competes in all of its markets with First Alert,
Firex and Walter Kidde. All of these companies have greater
financial resources and financial strength than the Company. The
Company believes that its safety products compete favorably
with other such products in the market primarily on the basis of
styling, features and pricing.
The safety industry in general involves changing technology.
The success of the Company's products may depend on the Company's
ability to improve and update its products in a timely manner and
to adapt to new technological advances.
- 6 -
EMPLOYEES
The Company has 16 employees, 9 of whom are engaged in
administration and sales, and the balance of whom are engaged in
product development and servicing.
The Company's employees are not unionized. The Company believes
that its relations with its employees are satisfactory.
ITEM 2.
PROPERTIES
Effective December 1999, the Company entered into an operating
lease for a 9,000 square foot office and warehouse located in
Baltimore County, Maryland. This lease, which expires in October
2005, is subject to renewal for an additional three years with
increasing rentals at 3% per year. The monthly rental
approximates $5,244 per month during the current fiscal year.
Effective March 2003, the Company entered into an operating lease
for an approximately 1,800 square foot office in Naperville,
Illinois. This lease, which expires in February 2006, is subject
to renewal for an additional six years with increasing rentals
at 3% per year. The monthly rental approximates $2,689 per month
during the initial term.
The Company also owns 1-1/2 acres of undeveloped land located in
an industrialized area in Baltimore County, Maryland. This
undeveloped parcel of land is pledged as collateral to the
Company's factor. The Company is currently negotiating the sale
of this property and expects the sale to be complete in late
2003.
The Company believes that its current facilities, and those of
the Hong Kong Joint Venture, are currently suitable and adequate.
ITEM 3.
LEGAL PROCEEDINGS
In December 2001, Leviton Manufacturing Company filed a civil
action in the United States District Court for the District of
Maryland (Case No. 01CV3855), alleging that, subsequent to
December 11, 2001, the Company's ground fault circuit
interrupters infringe on the plaintiff's patents and service
marks. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company and its counsel believe that
the Company has meritorious defenses to the claim and is
aggressively defending the suit. The Company believes it has
adequately reserved for this case.
- 7-
On June 13, 2003, Leviton Manufacturing Co., Inc. filed a second
civil suit against the Company in the United States District
Court for the District of Maryland (Case No. 03-CV-1701),
alleging this time that the Company's ground fault circuit
interrupters infringe on several more patents issued to the
plaintiff with respect to reset lockout technology mandated
by the revision of UL Standard 943 for ground fault circuit
interrupters, effective January 2003. Leviton has also asserted
various trade dress and unfair competition claims many of which
correspond to the claims in the previously identified pending
suit. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
On June 11, 2003, Walter Kidde Portable Equipment Inc. filed a
civil suit against the Company in the United States District
Court for the Middle District of North Carolina (Case No.
1:03CV00537), alleging that certain of the Company's battery
powered smoke detectors infringe a patent acquired by Kidde. The
plaintiff is seeking injunctive relief and damages to be
determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
From time to time, the Company is involved in various lawsuits
and legal matters. It is the opinion of management, based on the
advice of legal counsel, that these matters will not have a
material adverse effect on the Company's financial statements.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Over-The-Counter
Bulletin Board (OTCBB). The OTCBB is a regulated quotation
service that displays real-time quotes, last sales prices and
volume information on over-the-counter equity securities.
The following table shows the fiscal 2003 and 2002 quarterly high
and low bid prices for the Company's common stock as reported by
the OTCBB. 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, 2003
Bid Prices
High Low
First Quarter 4.50 2.60
Second Quarter 7.80 3.57
Third Quarter 10.50 4.60
Fourth Quarter 9.55 7.40
Fiscal year ended March 31, 2002
Bid Prices
High Low
First Quarter 1.25 0.90
Second Quarter 1.65 0.95
Third Quarter 3.95 0.90
Fourth Quarter 4.40 2.20
On June 19, 2003, the closing quotation for our common stock as
reported on the OTC Bulletin Board was $8.75. You should obtain
current market quotations for our common stock because the market
price of our stock may fluctuate greatly. You can obtain these
quotations from various websites or by calling your broker.
As of March 31, 2003, there were approximately 175 holders of
record of the Company's common stock. Approximately 55% of the
Company's 1,159,932 outstanding shares of common stock were held
in street name by an unknown number of beneficial owners since it
does not reflect persons or entities that hold our stock in
"Street" name or through various brokerage firms.
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 future operations.
- 9 -
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the five
years ended March 31, 2003 have been derived from the audited
consolidated financial statements. The information set forth
below is not necessarily indicative of results of future
operations.
Years Ended March 31,
2003 2002 2001 2000 1999
Consolidated Statement of Operations Data:
Net sales
$15,953,883 $10,480,829 $ 7,731,501 $ 7,667,530 $ 9,071,628
Income (loss) before equity in earnings (loss) of Hong Kong Joint
Venture
504,422 (976,063) (799,183) (95,925) (1,119,154)
Net income (loss)
2,400,318 261,625 (758,940) 41,056 (806,552)
Per common share:
Net income (loss) - basic
2.23 .28 (.83) .05 (.93)
- diluted
2.05 .28 (.83) .04 (.93)
Weighted average number of common shares outstanding - basic
1,075,079 938,624 912,270 903,495 863,706
- diluted
1,171,309 945,770 912,270 938,807 863,706
Consolidated Balance Sheet Data:
Total assets
8,382,043 5,182,462 5,945,690 5,476,545 6,402,120
Long-term debt (non-current)
7,224 22,396 45,088 60,260 -
Working capital (1)
2,377,688 402,425 585,032 1,368,513 1,514,425
Current ratio (1)
2.26 to 1 1.27 to 1 1.23 to 1 2.01 to 1 1.63 to 1
Shareholders' equity
6,493,415 3,681,273 3,303,304 4,062,244 3,987,072
(1) Working capital is computed as the excess of current assets
over current liabilities. The current ratio is calculated by
dividing current assets by current liabilities.
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years
2003 and 2002 are summarized as follows:
Quarter Ended
2003 June 30, September 30, December 31, March 31,
Net sales $3,750,926 $4,091,272 $4,252,447 $3,859,238
Gross profit 1,083,225 1,286,147 1,289,601 1,314,843
Net income 576,940 630,129 673,365 519,883
Net income
per share
- basic .57 .60 .61 .46
Net income
per share
- diluted .55 .55 .55 .42
Quarter Ended
2002 June 30, September 30, December 31, March 31,
Net sales $2,255,130 $2,653,482 $2,965,386 $2,606,831
Gross profit 552,282 748,584 790,350 721,436
Net income 62,359 23,543 36,433 139,290
Net income
per share
- basic .07 .03 .04 .14
Net income
per share
- diluted .07 .03 .04 .13
- 10 -
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 2003, sales increased by $5,473,054 (52%) from the
prior year. The Company's focus on marketing to the electrical
distribution trade through USI ELECTRIC generated an increase in
sales to this market of approximately $4,000,000, from
approximately $8,300,000 in 2002 to approximately $12,300,000 in
2003. The Company experienced an increase of approximately
$1,473,000 in sales from its retail and wholesale distribution
customers over the prior year. The Company anticipates these
favorable trends will continue.
In fiscal year 2002, sales increased by $2,749,328 (36%) from the
prior year. The Company's focus on marketing to the electrical
distribution trade through USI ELECTRIC generated an increase in
sales to this market of approximately $4,000,000, from
approximately $4,300,000 in 2001 to approximately $8,300,000 in
2002. The Company experienced a decrease of approximately
$1,210,000 in sales from its retail and wholesale distribution
customers. The decrease resulted primarily from lower private
label sales.
COST OF SALES AND GROSS PROFIT
Gross profit as a percentage of net sales ("gross margin") in
fiscal 2003 was 31.2% compared to 26.8% and 26.9% in fiscal 2002
and 2001, respectively. The increase in gross profit for fiscal
2003 resulted from a higher concentration of USI ELECTRIC sales
and increased productivity and efficiency. Gross margins were
similar in fiscal years 2002 and 2001.
The Company's strategy is to increase gross margins by increasing
sales, which will increase the gross margin percentage as a
percent of sales as the fixed costs will not increase at the
same rate as sales.
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EXPENSES
In fiscal year 2003, selling, general and administrative expenses
increased by approximately $662,927 (20%), from $3,377,847 in
2002 to $4,040,774 in 2003. As a percentage of sales, selling,
general and administrative expenses were 25% for fiscal year 2003
and 32% in fiscal year 2002. The decrease in selling, general
and administrative expense as a percent of sales was due to
higher sales volume and variable costs which did not increase at
the same rate as sales, including increased sales commissions and
freight, and higher legal costs partly associated with defending
the patent suit described under Item 3 - LEGAL PROCEEDINGS.
In fiscal year 2002, selling, general and administrative expenses
increased by approximately $924,466 (38%), from $2,453,381 in
2001 to $3,377,847 in 2002. As a percentage of sales, selling,
general and administrative expenses were 32% for both fiscal
years 2002 and 2001. The increase in the amount of these expenses
resulted from higher sales and associated costs, including
increased sales commissions and freight and higher legal costs
partly associated with defending the patent suit described under
Item 3 - LEGAL PROCEEDINGS.
INTEREST EXPENSE
Interest expense for fiscal year 2003 decreased to $153,168 from
$188,020 in fiscal year 2002 due primarily to lower interest
rates.
Interest expense for fiscal year 2002 decreased to $188,020 from
$248,135 in fiscal year 2001 due primarily to lower levels of
borrowings and lower interest rates.
INCOME TAX
The Company did not make any provision for federal or state
income taxes in each of the three years in the period ended March
31, 2003 due to the operating loss carry forward for income tax
purposes. A valuation allowance has been established and,
accordingly, no benefit has been recognized for the tax benefit
of our net operating losses or other deferred tax assets.
- 12 -
NET INCOME
The Company reported net income of $2,400,318 for fiscal year
2003 compared to a net income of $261,625 for fiscal year 2002.
The increase in net income resulted from both higher Hong Kong
Joint Venture earnings and higher gross profit, partially offset
by higher selling, general and administrative expenses associated
with increased sales and higher legal costs partly associated
with defending the patent suit described under Item 3 - LEGAL
PROCEEDINGS.
The Company reported net income of $261,625 for fiscal year 2002
compared to a net loss of $758,940 for fiscal year 2001. The
increase in net income resulted from higher Hong Kong Joint
Venture earnings, partially offset by higher selling, general and
administrative expenses associated with increased sales and
higher legal costs partly associated with defending the patent
suit described under Item 3 - LEGAL PROCEEDINGS.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated
from operations and from the Company's Factoring Agreement, which
supplies both short-term borrowings and letters of credit to
finance foreign inventory purchases. The Company's maximum
borrowing under this Agreement is $7,500,000. However, based on
specified percentages of the Company's accounts receivable and
inventory and letter of credit commitments, at March 31, 2003,
the borrowings were limited to $1,696,000. Of this amount,
$153,400 had been utilized for letters of credit, leaving
$1,534,000 available under this Agreement as of March 31, 2003.
The outstanding principal balance under this Agreement is payable
upon demand. The interest rate on the Factoring Agreement on the
uncollected factored accounts receivable and any additional
borrowings is equal to 1% in excess of the prime rate of interest
charged by the Company's factor; which, as of March 31, 2003,
resulted in a 5.25% rate. The borrowings are collateralized by
all the Company's accounts receivable, inventory and a 1.5 acre
parcel of land owned by the Company. During the year ended March
31, 2003, working capital increased by $1,975,263, from $402,425
on March 31, 2002, to $2,377,688 on March 31, 2003.
Operating activities used cash of $61,873 for the year ended
March 31, 2003. For the fiscal year ended March 31, 2002,
operating activities used cash of $114,109. This decrease of
$52,236 was primarily due to higher levels of inventory,
undistributed Joint Venture earnings primarily offset by higher
net income and accounts payable.
- 13 -
Investing activities used cash of $16,892 and 2,322 for fiscal
years ended 2003 and 2002 for the purchase of equipment.
The Hong Kong Joint Venture offset $1,279,187 and $665,631 of
trade amounts due to the Hong Kong Joint Venture in lieu of cash
payments.
Financing activities in 2003 provided cash of $110,494, primarily
due to the sale of common stock and the exercise of employee
stock options. Financing activities in 2002 provided cash of
$101,172 which was also primarily from the sale of common stock.
HONG KONG JOINT VENTURE
In fiscal year 2003, sales of the Hong Kong Joint Venture were
$23,365,301 compared to $11,410,035 and $6,053,815 in fiscal
years 2002 and 2001, respectively.
Net income was $4,755,540 for fiscal year 2003 compared to net
income of $2,475,376 and $80,487 in fiscal years 2002 and 2001,
respectively. The increase in income for the year ended March 31,
2003 was due primarily to higher sales, including to customers
other than the Company.
Gross margins of the Hong Kong Joint Venture for fiscal 2003
increased to 33.7% from 32.6% in the prior year. The primary
reason for this increase was that the variable costs in cost of
goods sold did not increase at the same rate as sales.
Selling, general and administrative expenses were $2,806,412,
$1,530,579 and $1,448,320 for fiscal years 2003, 2002 and 2001,
respectively. As a percentage of sales, expenses were 12%, 13%
and 24% for fiscal years 2003, 2002 and 2001, respectively. The
decrease in selling, general and administrative expense as a
percent of sales was due to higher sales volume and variable
costs which did not increase at the same rate as sales.
Interest income net of interest expense was $2,315 for fiscal
year 2003, compared to $54,164 and $158,098 in fiscal years 2002
and 2001, respectively. The decrease in interest income is due to
higher sales and dividend payments which reduced investment
balances.
Cash needs of the Hong Kong Joint Venture are currently met by
funds generated from operations. During fiscal year 2003, working
capital increased by $1,738,218 from $3,844,654 on March 31, 2002
to $5,582,872 on March 31, 2003.
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RECENTLY ISSUED ACCOUNTING STANDARDS
During fiscal year 2003, the Financial Accounts Standards Board
issued Statement of financial Account Standards (SFAS) No. 145,
"Rescission of FASB Statements 4, 44, and 64, and Amendment of
FASB Statement 13, and Technical Corrections," SFAS No. 146,
"Accounting for Costs Associated with Exit and Disposal
Activities," SFAS No. 147, "Acquisition of Financial
Institutions," and FASB Interpretations (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Company does
not expect these new pronouncements to impact the preparation of
financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure: an amendment
of FASB Statement No. 123." SFAS 148 allows alternative methods
of transition for an entity to report a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on the reported results. SFAS 148 is effective for fiscal
years ending after December 15, 2002. The Company is evaluating
both whether to adopt a fair-value based method and the
transition methods allowed under this standard and accordingly,
cannot determine the impact of adoption at this time.
On January 31, 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities," which clarifies existing accounting
for whether interest entities should be consolidated in financial
statements based upon the investees' ability to finance its
activities without additional financial support and whether
investors possess characteristics of a controlling financial
interest. FIN 46 applies to years or interim periods beginning
after June 15, 2003 with certain disclosure provisions required
for financial statements issued after January 31, 2003. We are
currently evaluating the applicability of FIN 46 to our
investments in our Hong Kong Joint Venture and have complied with
the disclosure provisions of FIN 46 in these financial
statements.
- 15 -
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Company's
consolidated financial statements and results of operations are
based upon the Company's Consolidated Financial Statement
included as part of this document. The preparation of these
consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. On an ongoing
basis, the Company evaluates these estimates, including those
related to bad debts, inventories, income taxes, and
contingencies and litigation. The Company bases these estimates
on historical experiences and on various other assumptions that
are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
available from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies
affect management's more significant judgments and estimates used
in the preparation of its consolidated financial statements. For
a detailed discussion on the application on these and other
accounting policies see Note A to the attached consolidated
financial statements. Certain of our accounting policies require
the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty and actual results could differ
from these estimates. These judgments are based on our historical
experience, terms of existing contracts, current economic trends
in the industry, information provided by our customers, and
information available from outside sources, as appropriate. Our
critical accounting policies include:
The Company's revenue recognition policies are in compliance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" issued by the Securities and Exchange
Commission. Revenue is recognized at the time product
is shipped and titled passes pursuant to the terms of the
agreement with the customer, the amount due from the customer
is fixed and collectibility of the related receivable is
reasonably assured. The Company establishes allowances to cover
anticipated doubtful accounts based upon historical experience.
- 16 -
Inventories are valued at the lower of market or cost. Cost is
determined on the first-in first-out method. The Company has
recorded a reserve for obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
demand and market conditions. Management reviews the reserve
quarterly.
We currently have significant deferred tax assets resulting from
tax credit carryforwards, net operating loss carryforwards and
deductible temporary differences, which will reduce taxable
income in future periods. We have provided a valuation allowance
on future tax benefits such as foreign tax credits, foreign net
operating losses, capital losses and net operating losses.
A valuation allowance is required when it is more likely than not
that all or a portion of a deferred tax assets will not be
realized. Forming a conclusion that a valuation allowance is not
needed is difficult when there is a negative evidence such as
cumulative losses and losses in recent years. Cumulative losses
weigh heavily in the overall assessment. As a result of our
assessment, we established a full valuation allowance for our
remaining net deferred tax assets at March 31,2003.
We are subject to lawsuits and other claims, related to patents
and other matters. We are required to assess the likelihood of
any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies is
based on a careful analysis of each individual issue with the
assistance of outside legal counsel. The required reserves may
change in the future due to new developments in each matter or
changes in approach such as a change in settlement strategy in
dealing with these matters. For more information, see Note H to
the consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is its Factoring
Agreement which provides for interest at the factor's prime rate
(4.25% at March 31, 2003) plus 1%. The Company is affected by
market risk exposure primarily through the effect of changes in
interest rates on amounts payable by the Company under its
Factoring Agreement. A significant rise in the prime rate could
materially adversely affect the Company's business, financial
- 17 -
condition and results of operations. At March 31, 2003, the
Company had no aggregate principal outstanding under the
facility. If principal amounts outstanding under the Company's
Factoring Agreement remained at this year-end level for an entire
year and the prime rate increased or decreased, respectively, by
0.5%, the Company would pay or save, respectively, an additional
$8,500.00 in interest in that year. The Company does not utilize
derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description Page
Report of Independent Certified Public Accountants 19
Consolidated balance sheets, March 31, 2003 and 2002 20
Consolidated statements of operations for the years ended 21
March 31, 2003, 2002 and 2001
Consolidated statements of shareholders' equity for the 23
years ended March 31, 2003, 2002 and 2001
Consolidated statements of cash flows for the years ended 24
March 31, 2003, 2002 and 2001
Notes to consolidated financial statements 25
Schedule II - Valuation and Qualifying Accounts 52
- 18 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Universal Security
Instruments, Inc.
We have audited the accompanying consolidated balance sheets of
Universal Security Instruments, Inc. and subsidiaries (the
Company) as of March 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended March
31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did
not audit the financial statements of the Hong Kong Joint Venture
which is accounted for using the equity method. The Company's
investment of $3,831,583 and $2,990,067 in the Hong Kong Joint
Venture's net assets at March 31, 2003 and 2002, and equity in
earnings of $2,120,703, $1,237,688 and $40,243 for each of the
three years in the period ended March 31, 2003 are included in
the accompanying consolidated financial statements. The financial
statements of the Hong Kong Joint Venture were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for the Hong Kong
Joint Venture, is based on the report of the other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements present fairly,
in all material respects, the financial position of Universal
Security Instruments, Inc. and subsidiaries as of March 31, 2003
and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended March 31,
2003, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited Schedule II for each of the three years in
the period ended March 31, 2003. In our opinion, this schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information required therein.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
June 13, 2003
- 19 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2003 2002
CURRENT ASSETS
Cash $ 51,112 $ 19,383
Accounts receivable:
Trade, less allowance for doubtful
accounts of $10,000 and $68,358
in 2003 and 2002, respectively 207,539 155,052
Employees 16,303 1,115
223,842 156,157
Amount due from factor 623,566 38,436
Inventory 3,224,229 1,557,994
Prepaid expenses 136,343 109,238
TOTAL CURRENT ASSETS 4,259,092 1,881,218
INVESTMENT IN HONG KONG JOINT VENTURE 3,831,583 2,990,067
PROPERTY AND EQUIPMENT, NET 279,896 301,082
OTHER ASSETS 11,472 10,095
TOTAL ASSETS $8,382,043 $5,182,462
See notes to consolidated financial statements.
- 20 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
2003 2002
CURRENT LIABILITIES
Amount due to factor $ - $ 216,959
Accounts payable 1,173,175 787,492
Accrued liabilities 684,979 451,092
Current obligations under
capital lease 23,250 23,250
TOTAL CURRENT LIABILITIES 1,881,404 1,478,793
LONG-TERM OBLIGATIONS UNDER
CAPITAL LEASE 7,224 22,396
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
1,121,982 shares and 1,009,770
shares at March 31, 2003
and 2002, respectively 11,220 10,098
Additional paid-in capital 11,059,381 10,648,679
Accumulated deficit (4,577,186) (6,977,504)
TOTAL SHAREHOLDERS' EQUITY 6,493,415 3,681,273
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 8,382,043 $ 5,182,462
See notes to consolidated financial statements.
- 21 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
2003 2002 2001
Net sales $15,953,883 $10,480,829 $7,731,501
Cost of goods sold 10,980,067 7,668,177 5,652,616
GROSS PROFIT 4,973,816 2,812,652 2,078,885
Research and development
expense 284,552 222,817 176,767
Selling, general and
administrative expense 4,040,774 3,377,847 2,453,381
Operating income (loss) 648,490 (788,012) (551,263)
Other income (expense):
Interest income - - 233
Interest expense (153,168) (188,020) (248,135)
Other 9,100 (31) (18)
(144,068) (188,051) (247,920)
INCOME (LOSS) BEFORE EQUITY
IN EARNINGS OF HONG KONG
JOINT VENTURE 504,422 (976,063) (799,183)
Earnings from Hong Kong
Joint Venture:
Equity in earnings of
Hong Kong Joint
Venture 2,120,703 1,237,688 40,243
Cost allocable to
Joint Venture (224,807) - -
NET INCOME (LOSS) $ 2,400,318 $ 261,625 $ (758,940)
Net income (loss) per share
Basic $ 2.23 $ .28 $ (.83)
Diluted $ 2.05 $ .28 $ (.83)
Shares used in computing net
income (loss) per share:
Basic 1,075,079 938,624 912,270
Diluted 1,171,309 945,770 912,270
See notes to consolidated financial statements.
- 22 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
Balance at
March 31,
2000 912,270 $ 9,123 $10,533,310 $(6,480,189) $4,062,244
Net loss (758,940) (758,940)
Balance at
March 31,
2001 912,270 9,123 10,533,310 (7,239,129) 3,303,304
Issuance of
common
stock from
the
exercise
of
employee
stock
options 97,500 975 115,369 116,344
Net income 261,625 261,625
Balance at
March 31,
2002 1,009,770 10,098 10,648,679 (6,977,504) 3,681,273
Issuance
of common
stock
from the
exercise
of
employee
stock
options 40,750 407 92,218 92,625
Issuance
of
common
stock 51,000 510 249,490 250,000
Stock
issued
in lieu
of
directors
fees 6,974 70 29,930 30,000
Stock
issued
in
satis-
faction
of
accrued
liabil-
ities 13,488 135 39,064 39,199
Net income 2,400,318 2,400,318
Balance at
March 31,
2003 1,121,982 $11,220 $11,059,381 $(4,577,186) $6,493,415
See notes to consolidated financial statements.
- 23 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
CASH FLOWS FROM
OPERATING ACTIVITIES 2003 2002 2001
Net income (loss) $ 2,400,318 $ 261,625 $ (758,940)
Adjustments to reconcile
net income (loss) to
net cash used in
operating activities:
Depreciation and
amortization 38,077 30,483 45,858
Stock issued to
directors in lieu
of fees 30,000 - -
Change in allowance
for doubtful
accounts (58,358) (31,642) -
Inventory reserve
write-down (10,000) 61,741 -
Earnings of Hong Kong
Joint Venture (2,120,703) (1,237,688) (40,243)
Changes in operating
assets and
liabilities:
Increase in
accounts
receivable and
amount due from
factor (594,447) (106,494) (345,499)
(Increase) decrease
in inventories (1,656,235) 524,058 (205,735)
(Increase) decrease
in prepaid
expenses (27,105) (51,567) 34,083
Increase in accounts
payable and
accrued expenses 1,937,597 1,114,087 269,529
(Increase) decrease
in other assets (1,377) 6,012 (3,802)
Decrease in amount
due to factor - (684,726) -
NET CASH USED IN
OPERATING ACTIVITIES (61,873) (114,109) (1,004,749)
INVESTING ACTIVITIES
Purchase of equipment (16,892) (2,322) (11,182)
NET CASH USED IN
INVESTING ACTIVITIES (16,892) (2,322) (11,182)
FINANCING ACTIVITIES
Net (repayments)
borrowings of
short-term debt (216,959) - 973,728
Principal payments of
capital lease
obligations (15,172) (15,172) (15,172)
Proceeds from issuance
of common stock from
exercise of employee
stock options 92,625 - -
Proceeds from issuance
of common stock 250,000 116,344 -
NET CASH PROVIDED BY
FINANCING ACTIVITIES 110,494 101,172 958,556
INCREASE (DECREASE)
IN CASH 31,729 (15,259) (57,375)
Cash at beginning of
period 19,383 34,642 92,017
CASH AT END OF PERIOD $ 51,112 $ 19,383 $ 34,642
Supplemental information:
Interest paid $ 153,168 $ 188,020 $ 248,135
Income taxes paid - - -
Non-cash investing
transactions:
Issuance of 13,488
shares of common
stock in
satisfaction of
accrued liabilities 39,199 - -
Repayment of trade
payables due the
Hong Kong Joint
Venture in lieu of
cash distributions 1,279,187 665,631 -
See notes to consolidated financial statements.
- 24 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Company's primary business is the sale of
smoke alarms and other safety products to retailers, wholesale
distributors and to the electrical distribution trade which
includes electrical and lighting distributors as well as
manufactured housing companies. The Company imports all of its
safety and other products from foreign manufacturers. 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 and currency
fluctuations.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: In preparing financial statements in conformity
with accounting principles generally accepted in the United
States of America (US GAAP), management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the 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.
Revenue Recognition: The Company recognizes sales upon the
shipment of its products net of applicable provisions for any
discounts or allowances.
Stock-Based Compensation: For fiscal 2003 and prior years the
Company used the intrinsic value method as defined by Accounting
Principles Board Opinion No. 25 to account for stock-based
employee compensation in each period presented. The Company
intends to adopt SFAS No. 123 as amended by SFAS No. 148 during
fiscal 2003 but has not yet made a determination as to the
transition method to use or completed the valuation of the
options granted during January 2003.
The following table illustrates the effect on net income (loss)
and net income (loss) per share had compensation costs for the
stock-based compensation plan been determined based on the grant
date fair values of awards under the provisions of SFAS No. 123,
for the fiscal years.
- 25 -
Year Ended March 31
2003 2002 2001
Net income, as reported $2,400,318 $261,625 $(758,940)
Deduct: Total stock-based
employee compensation
expense determined under
fair value, net of
related tax effects. (83,939) (48,729) 23,634
Pro forma net income 2,316,379 212,896 (782,574)
Earnings per share:
Basic - as reported 2.23 .28 (.83)
Basic - pro forma 2.15 .23 (.86)
Diluted - as reported 2.05 .28 (.83)
Diluted - pro forma 1.98 .23 (.86)
Research and Development: Research and development costs are
charged to operations as incurred.
Accounts Receivable: In September, 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS No.
140), which is effective for transfers of financial assets
occurring after March 31, 2001.
In fiscal year 2002, the Company achieved the sales criteria of
Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and, as such, amounts transferred
under the Company's Factoring Agreement are treated as a sale of
the asset.
Beginning in fiscal year 2002, with the achievement of SFAS 140
sales criteria, the Company nets the factored accounts receivable
with the corresponding advance from the Factor, showing the
amount net in its consolidated balance sheet.
The Company sells trade receivables on a pre-approved non-
recourse basis to the Factor under the Factoring Agreement on an
ongoing basis. Factoring charges recognized on sales of
receivables are included in selling, general and administrative
expenses in the consolidated statements of income and amounted to
- 26 -
$160,125 and $104,164 for the years ended March 31, 2003 and
2002, respectively. The Agreement for the sale of accounts
receivable provides for continuation of the program on a
revolving basis until terminated by one of the parties to the
Agreement.
Shipping and Handling Fees and Costs: The Company includes
shipping and handling fees billed to customers in net sales.
Shipping and handling costs associated with inbound freight are
included in cost of goods sold. Shipping and handling costs
associated with outbound freight are included in selling, general
and administrative expenses and totaled $498,179, $376,359 and
$244,149 in fiscal years 2003, 2002 and 2001, respectively.
Inventories: Inventories (consisting primarily of finished goods)
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 and inspection fees of $376,899 and $186,470 at March
31, 2003 and 2002, respectively.
The Company reviews inventory quarterly to identify slow moving
products and valuation allowances are provided when deemed
necessary.
Property and Equipment: Property and equipment are recorded at
cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided by using the
straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. The estimated useful
lives for financial reporting purposes are as follows:
Leasehold improvements - Term of lease
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Accounting for Hong Kong Joint Venture: The Company has a 50%
investment in a Hong Kong manufacturing facility. The Hong Kong
Joint Venture investment is accounted for using the equity
method. The investment and earnings are adjusted to eliminate
intercompany profits.
- 27 -
Income Taxes: The Company recognizes a liability or asset for
the deferred tax consequences of temporary differences between
the tax basis of assets or liabilities and their reported amounts
in the financial statements. These temporary differences will
result in taxable or deductible amounts in future years when the
reported amounts of the assets or liabilities are recovered or
settled. The deferred tax assets are reviewed periodically for
recoverability and valuation allowances are provided, as
necessary.
Net Income (Loss) per Share: The Company reports basic and
diluted earnings per share. Basic earnings per share exclude
dilution and are computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net
income (loss), adjusted by the assumed conversion of any
potential common share equivalents, including stock options, by
the weighted number of common shares and common share equivalents
outstanding (unless their effect is anti-dilutive). Common stock
equivalents totaling 14,750 at March 31, 2001 were not included
in the computation of diluted loss per share, because to do so
would have been anti-dilutive.
Recently Issued Accounting Standards: During fiscal year 2003,
the Financial Accounts Standards Board issued Statement of
financial Account Standards (SFAS) No. 145, "Rescission of FASB
Statements 4, 44, and 64, and Amendment of FASB Statement 13, and
Technical Corrections," SFAS No. 146, "Accounting for Costs
Associated with Exit and Disposal Activities," SFAS No. 147,
"Acquisition of Financial Institutions," and FASB Interpretations
(FIN) 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." The Company does not expect these new pronouncements
to impact the preparation of financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure: an amendment
of FASB Statement No. 123." SFAS 148 allows alternative methods
of transition for an entity to report a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on the reported results. SFAS 148 is effective for fiscal
years ending after December 15, 2002. The Company is evaluating
both whether to adopt a fair-value based method and the
transition methods allowed under this standard and accordingly,
cannot determine the impact of adoption at this time.
- 28 -
On January 31, 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities," which clarifies existing accounting
for whether interest entities should be consolidated in financial
statements based upon the investees' ability to finance its
activities without additional financial support and whether
investors possess characteristics of a controlling financial
interest. FIN 46 applies to years or interim periods beginning
after June 15, 2003 with certain disclosure provisions required
for financial statements issued after January 31, 2003. We are
currently evaluating the applicability of FIN 46 to our
investments in our Hong Kong Joint Venture and have complied with
the disclosure provisions of FIN 46 in these financial
statements.
Reclassifications: Certain prior year amounts have been
reclassified in order to conform with current year presentation.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
2003 2002
Land and improvements $174,034 $174,034
Leasehold improvements 71,885 71,885
Machinery and equipment 77,746 157,626
Furniture and fixtures 166,344 155,154
Computer equipment 69,830 65,955
Equipment held under capital lease 80,950 80,950
640,789 705,604
Less accumulated depreciation
and amortization 360,893 404,522
$279,896 $301,082
NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE
The Company holds a 50% interest in 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, 2003, the Company has an
investment balance of $3,831,583 for its 50% interest in the Hong
Kong Joint Venture.
- 29 -
The following represents summarized financial information
derived from the audited financial statements of the Hong Kong
Joint Venture as of March 31, 2003 and 2002 and for the years
ended March 31, 2003, 2002 and 2001. This information was audited
by other accountants and their report is included at March 31,
2003 and 2002. (See Page 101 for additional details.)
March 31,
2003 2002
Current assets $ 8,343,860 $5,897,705
Property and other assets 2,500,674 2,117,443
Total $10,844,534 $8,015,148
Current liabilities $ 2,761,078 $2,053,051
Non-current liabilities 3,846 43,047
Equity 8,079,610 5,919,050
Total $10,844,534 $8,015,148
For the Year Ended March 31,
2003 2002 2001
Net sales $23,365,301 $11,410,035 $6,053,815
Gross profit 7,870,436 3,717,474 1,305,164
Net income 4,755,540 2,475,376 80,487
During the years ended March 31, 2003, 2002 and 2001, the Company
purchased $7,329,221, $4,895,903 and $3,841,325, respectively, of
finished product from the Hong Kong Joint Venture, which
represents 66%, 78% and 66%, respectively, of the Company's total
finished product purchases for the years ended at March 31,
2003, 2002 and 2001. Amounts due the Hong Kong Joint Venture
included in Accounts Payable totaled $480,546 and $199,917 at
March 31, 2003 and 2002, respectively. Amounts due from the Hong
Kong Joint Venture included in Accounts Receivable totaled
$40,000 and $53,676 at March 31, 2003 and 2002, respectively.
The Company incurred interest costs charged by the Hong Kong
Joint Venture of $16,585, $27,659 and $26,762 during the years
ended March 31, 2003, 2002 and 2001, respectively, related to its
purchases.
- 30 -
In 2002, the Company has amended its employment agreements so
that bonuses are based on the domestic and joint venture
operating performance and, as a result, payments are allocable
between domestic operations and joint venture operations. The
Company recorded $224,807 of costs allocatable to the joint
venture in the accompanying statement of operations for the year
ended March 31, 2003.
NOTE D - AMOUNTS DUE TO FACTOR
The Company sells certain of its trade receivables on a
pre-approved, non-recourse basis to a Factor. Since these are
sold on a non-recourse basis, the factored trade receivables and
related repayment obligations are not recorded in the Company's
consolidated balance sheets. The financing from the factoring of
the Company's trade receivables totaled $1,691,139 and
$1,426,751 at March 31, 2003 and 2002, respectively.
The Company's Factoring Agreement provides for financing of up to
a maximum of $7,500,000 with the amount available at any one time
based on 85% of uncollected non-recourse receivables sold to the
factor and 45% of qualifying inventory, which at March 31, 2003
was $1,696,000.
At March 31, 2003 and 2002 the Company owed $0 and $216,959 to
its factor under the Agreement. The amounts due to its factor at
March 31, 2002 relates to amounts advanced to the Company under
the Agreement in excess of amount allowed to be advanced related
to the Company's factored accounts receivable. In addition to the
factored accounts receivable, this excess amount is secured by
the Company's inventory and real property owned by the Company.
Under this Factoring Agreement, the Company sold receivables of
approximately $15,500,000 and $10,300,000 during the years ended
March 31, 2003 and 2002, respectively. Gains and losses
recognized on the sale of factored receivables include the
fair value of the limited recourse obligation. The uncollected
balance of non-recourse receivables held by the factor amounted
to $2,171,324 and $1,426,751 at March 31, 2003 and 2002,
respectively.
Any outstanding amounts due to the factor are payable upon
demand. The interest rate on this amount is the prime rate of
interest plus 1% (5.25% at March 31, 2003).
- 31 -
NOTE E - LEASES
The Company entered into capital lease agreements for various
equipment, with an outstanding balance of $30,474 as of March 31,
2003. The leases have imputed interest rates ranging from 7.6% to
10%, with monthly payments aggregating $1,810 per month.
Year Ended March 31,
2003 2002
Obligations under capital lease $30,474 $45,646
Less current maturities 23,250 23,250
$ 7,224 $22,396
Maturities of long term capital lease obligations for the three
years following March 31, 2003 are as follows:
Year
2004 $24,487
2005 7,435
Total 31,922
Less amounts representing interest 1,448
Obligations under capital lease $30,474
During December 1999, the Company entered into an operating lease
for its office and warehouse which expires in October 2005. This
lease is subject to renewal for an additional three years and
has increasing rentals at 3% per year.
Effective March 2003, the Company entered into an operating lease
for an approximately 1,800 square foot office in Naperville,
Illinois. This lease, which expires in February 2006, is subject
to renewal for an additional six years with increasing rentals
at 3% per year.
Rental expenses totaled $67,886 and $57,164 for the years ended
March 31, 2003 and 2002. Future obligations for the years ended
March 31, under these non-cancelable operating leases are as
follows:
Year Amount
2004 $ 95,685
2005 98,184
2006 31,048
$224,917
- 32 -
NOTE F - INCOME TAXES
No provision for US federal or state income taxes have been
recorded in any period presented, as the Company has incurred
domestic operating losses in prior periods.
Realization of deferred tax assets is dependent upon future
earnings, if any. The Company has recorded a full valuation
allowance against its deferred tax assets since management
believes it is more likely than not that these assets may not be
realized. No income tax benefit has been recorded for all periods
presented because of the valuation allowance.
At March 31, 2003, the Company has net operating loss (NOL)
carryforwards in the United States of America of approximately
$5,346,359 for income tax purposes that expire in 2009 through
2020.
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,
2003 2002 2001
Deferred tax liabilities:
Unremitted Hong Kong
Joint Venture
earnings not
considered
permanently
reinvested $ 1,465,270 $ 1,054,553 $ 836,800
Gross deferred tax
liabilities 1,465,270 1,054,553 836,800
- 33 -
March 31,
2003 2002 2001
Deferred tax assets:
Financial statement
accruals and
allowances 232,167 170,990 75,070
Inventory uniform
capitalization 72,200 72,200 72,200
Other 41,983 47,367 39,650
NOL carryforwards
and tax credits 2,031,616 2,612,451 2,611,908
Gross deferred
tax assets 2,377,966 2,903,008 2,798,828
Valuation allowance (912,696) (1,848,455) (1,6962,028)
Net deferred tax assets $ -0- $ -0- $ -0-
The reconciliation of the income tax computed at the U.S. federal
statutory tax rates to income tax expense is as follows:
Years ended March 31,
2003 2002 2001
Federal tax expense (benefit)
at statutory rate on
domestic income (loss)(34%) $ 95,056 $(331,981) $(271,722)
State tax expense (Benefit) 96,013 10,451 (30,357)
Equity in (earnings) loss from
Hong Kong Joint Venture 721,039 420,814 13,683
Change in valuation allowance (935,758) (113,573) 276,262
Other 23,650 14,289 12,134
$ -0- $ -0- $ -0-
- 34 -
NOTE G - SHAREHOLDERS' EQUITY
Common Stock - During the year ended March 31, 2003, the Company
issued 112,212 shares of its common stock of which 40,750 were
issued on the exercise of employee stock options for total
proceeds of $92,625; 51,000 shares were sold for $250,000;
6,974 shares were issued to directors in lieu of directors fees
and 13,488 shares were issued in satisfaction of previously
accrued amounts. During the year ended March 31, 2002, the
Company issued 97,500 shares of its common stock on the exercise
of employee stock options and received proceeds of $92,625.
Employee Stock Purchase Plan - 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 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,
2003, approximately 16,250 shares remain reserved for issuance
under this Plan.
Stock Options - Under terms of the Company's 1978 Non-Qualified
Stock Option Plan, as amended, 493,750 shares of common stock are
reserved for the granting of stock options, of which 109,019
shares have been issued as of March 31, 2003, leaving 343,981
available for issuance upon exercise of options granted, or
available for future grants to employees and directors. Under
provisions of the Plan, a committee of the Board of Directors
determines the option price and the dates exercisable. All
options expire five years from the date of grant and have an
exercise price at least equal to the market price at the date of
grant. The options usually vest at 25% a year over four years.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 2003 and option
transactions for the three years then ended:
- 35 -
Status as of March 31, 2003 Number of Shares
Presently exercisable 206,875
Exercisable in future years 39,625
Total outstanding 246,500
Available for future grants 97,481
Shares of common stock reserved 343,981
Outstanding options:
Number of holders 18
Average price per share $3.43
Expiration dates December 2003 to September 2007
Transactions for the Three Years Ended March 31, 2003:
Number of Weighted Average
Shares Exercise Price
Outstanding at March 31, 2000 237,875
Granted 5,000 $4.50
Canceled (4,500) 2.56
Outstanding at March 31, 2001 238,375
Granted 149,000 2.23
Canceled (60,625) 4.11
Exercised (97,500) 1.19
Outstanding at March 31, 2002 229,250
Granted 89,000 4.96
Canceled (31,000) 3.02
Exercised (40,750) 2.17
Outstanding at March 31, 2003 246,500
The following table summarizes information about stock options
outstanding at March 31, 2003:
Options
Options Outstanding Exercisable
Weighted Weighted Weighted
Average Average Number Average
Range of Number of Exercise Contract of Exercise
Exercise Price Shares Price Life (Yrs) Shares Price
$1.30 to $2.99 76,250 $1.93 3.50 70,250 $2.06
$3.00 to $3.99 101,250 3.23 2.75 75,125 3.18
$4.00 to $5.99 45,000 4.50 3.96 42,500 4.50
$6.00 to $7.20 24,000 6.97 4.50 19,000 7.20
- 36 -
The Company accounts for stock options granted to employees in
accordance with APB 25. Under APB 25, when the exercise price of
the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. The Company has provided additional pro forma
disclosures as required by SFAS No. 123, "Accounting for
Stock-Based Compensation."
For disclosure purposes, the fair value of each stock option is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions used for stock options and rights to receive stock in
2003, 2002 and 2001; no annual dividends, expected volatility of
80%, 80% and 85%, respectively, risk-free interest rate ranging
from 4.0% to 6.5% and expected life of five years. The
weighted-average fair values of the stock options granted in
2003, 2002 and 2001 were $5.00, $1.16 and $1.44, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of normal publicly traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
The following disclosures for the financial statements for the
year ended March 31, 2003, assume that the Company continues to
account for stock-based employee compensation using the intrinsic
value method under Opinion 25. For simplicity, this illustration
also assumes that all previous awards were fixed stock options
with no intrinsic value at the date of grant.
At March 31, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in Note G. The
Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for
Stock Issues to Employees, and related interpretations. No stock-
based employee compensation cost is reflected in net income, as
all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
- 37 -
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company entered into a three year employment agreement with
the President of its USI ELECTRIC, INC. subsidiary with fixed
annual remuneration amounts for three years and expires in March
2006. The agreement provides, among other things, incentive
compensation based on the Company achieving certain levels of
profitability from certain levels of sales for the year ended
March 31, 2003. The Company also entered into a three-year
employment agreement with its President with annual remuneration
amounts and incentive compensation based on the Company achieving
certain levels of profitability. The agreement was extended
effective April 1, 2003, and expires in July 2008.
In December 2001, Leviton Manufacturing Company filed a civil
action in the United States District Court for the District of
Maryland (Case No. 01CV3855), alleging that, subsequent to
December 11, 2001, the Company's ground fault circuit
interrupters infringe on the plaintiff's patents and service
marks. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company and its counsel believe that
the Company has meritorious defenses to the claim and is
aggressively defending the suit. The Company believes it has
adequately reserved for this case.
On June 13, 2003, Leviton Manufacturing Co., Inc. filed a second
civil suit against the Company in the United States District
Court for the District of Maryland (Case No. 03-CV-1701),
alleging this time that the Company's ground fault circuit
interrupters infringe on several more patents issued to the
plaintiff with respect to reset lockout technology mandated
by the revision of UL Standard 943 for ground fault circuit
interrupters, effective January 2003. Leviton has also asserted
various trade dress and unfair competition claims many of which
correspond to the claims in the previously identified pending
suit. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
On June 11, 2003, Walter Kidde Portable Equipment Inc. filed a
civil suit against the Company in the United States District
Court for the Middle District of North Carolina (Case No.
1:03CV00537), alleging that certain of the Company's battery
powered smoke detectors infringe a patent acquired by Kidde. The
plaintiff is seeking injunctive relief and damages to be
determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company and its
counsel believe that the Company has meritorious defenses to the
claims and will aggressively defend the suit.
- 38 -
From time to time, the Company is involved in various lawsuits
and legal matters. It is the opinion of management, based on the
advice of legal counsel, that these matters will not have a
material adverse effect on the Company's financial statements.
NOTE I - MAJOR CUSTOMERS
The Company is primarily a distributor of safety products for
use in home and business under both its tradenames and private
labels for other companies. The Company's purchased a majority of
its products from its 50% owned Hong Kong Joint Venture.
There were not any customers that represented in excess of 10% of
the Company's product sales during the three years in the period
ended March 31, 2003.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years
2003 and 2002 are summarized as follows:
Quarter Ended
2003 June 30, September 30, December 31, March 31,
Net sales $3,750,926 $4,091,272 $4,252,447 $3,859,238
Gross profit 1,083,225 1,286,147 1,289,601 1,314,843
Net income 576,940 630,129 673,365 519,883
Net income
per share
- basic .57 .60 .61 .46
Net income
per share
- diluted .55 .55 .55 .42
Quarter Ended
2002 June 30, September 30, December 31, March 31,
Net sales $2,255,130 $2,653,482 $2,965,386 $2,606,831
Gross profit 552,282 748,584 790,350 721,436
Net income 62,359 23,543 36,433 139,290
Net income
per share
- basic .07 .03 .04 .14
Net income
per share
- diluted .07 .03 .04 .13
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
- 39 -
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of six 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....59 Director; Chairman of the Board 1970
of the Company since October 2001;
Vice Chairman of the Board of the
Company since September 1996;
Chairman of the Board of the Company
from 1970 to September 1996.
Michael Kovens.....60 Director; Chairman of the Board 1970
of the Company from September
1996 to October 2001; President
of the Company from 1970 to
September 1996.
Harvey Grossblatt..56 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
October 1983; Vice President
of the Company from December
1986 to June 1996; Secretary and
Treasurer of the Company since
September, 1988.
Cary Luskin........46 President of The Big Screen Store, 2002
Inc., a chain of large-screen
television retail stores.
Howard Silverman...61 Vice President, Magellan Health
2002
Service from 1990 to 2001. Self-
employed as a consultant since
2001.
Ronald Seff........55 Ophthalmologist since 1977. 2002
- 40 -
ITEM 11.
EXECUTIVE COMPENSATION
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:
All
Long-Term Compensation Other
Annual Compensation Stock LTIP compen-
Year Salary Bonus Other Awards Options Payouts sation
Name and Principal Position
Stephen Knepper, Chairman of the Board and Chief Executive
Officer(1)
2003 $ 97,832 $110,219 $22,271(2) - 35,000 - $15,024(3)
2002 87,676 13,081 17,503(2) - 42,500 - 12,762(3)
2001 55,132 - 15,116(2) - - - 846(3)
Harvey Grossblatt, President, CFO, Secretary & Treasurer
2003 $123,928 $120,219 $ - - 20,000 - $15,655(4)
2002 128,849 13,081 - - 47,750 - 15,261(4)
2001 124,780 - - - 5,000 - 2,890(4)
(1) On October 23, 2001, Mr. Knepper was elected Chairman and
Chief Executive Officer.
(2) Includes an automobile allowance of $12,000 for the fiscal
year ended March 31, 2003, reimbursement of medical expenses
in the amount of $11,292 for the fiscal year ended March
31, 2002, and payment of life insurance premiums in the
amount of $4,861 for the fiscal year ended March 31, 2001.
(3) Represents: payment of term life insurance premiums in the
amount of $1,624, $1,012, and $846 for the fiscal years ended
March 31, 2003, 2002 and 2001, respectively; and Company
contributions on behalf of the named officer to the Company's
401(k) Plan in the amount of $12,650 and $12,500 for the
fiscal years ended March 31, 2003 and 2002, respectively.
(4) Represents: payment of term life insurance premiums in the
amount of $2,255, $2,761, and $2,890 for the fiscal years
ended March 31, 2003, 2002 and 2001, respectively; and
Company contributions on behalf of the named officer to the
Company's 401(k) Plan in the amount of $12,650 and $12,500
for the fiscal years ended March 31, 2003 and 2002,
respectively.
Option Grants in Last Fiscal Year
The following table sets forth information with respect to the
grant of stock options during the Company's fiscal year ended
March 31, 2003 to the executive officers named in the Summary
Compensation Table:
Potential
Individual Grants Realized Value
% of Total at Assumed Annual
Options to Exercise Rates of Stock
No. of Granted in or Base Price Appreciation
Options Employees in Price Expiration for Option Term(1)
Granted Fiscal Year ($/Share) Date 0%(2) 5% 10%
Name
Stephen Knepper
20,000(3) 22.47% $4.50 06/27/07 - $4,500 $9,000
Stephen Knepper
15,000(3) 16.85% $3.75 06/27/07 - $1,875 $3,750
Harvey Grossblatt
20,000(3) 22.47% $4.50 03/31/07 - $4,500 $9,000
(1) The 5% and 10% assumed rates of compensation are mandated by
the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the
future Common Stock price.
(2) Denotes realizable value at the date of grant which reflected
a market value or higher valuation per share.
(3) Five year option fully exercisable and vested.
- 41 -
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
Number Value
of Unexercised of Unexercised
Shares Options at FY-End Options at FY-End
Acquired Value Exerci/Unexerci- Exerci/Unexerci-
Name In Exercise Realized sable/sable sable/sable
Stephen
Knepper - $ - 52,500/ - $233,150/ -
Harvey
Gross-
blatt 6,250 18,188 60,312/12,438 $290,868/$58,564
Employment Agreements
Harvey Grossblatt entered into an employment agreement with the
Company effective April 1, 2002. The employment agreement
provides that Mr. Grossblatt is employed for a term ending June
30, 2005 at an initial base annual salary of $122,500, subject to
automatic annual cost of living increases and further subject to
increases in the Board's discretion. Additionally, Mr. Grossblatt
is entitled to bonus compensation for each fiscal year of the
Company in which the Company earned pre-tax net income of at
least $100,000, in an amount equal to 5% of pre-tax net income up
to $1,000,000, 4% of pre-tax net income over $1,000,000 up to
$2,000,000, 3% of pre-tax net income over $2,000,000 up to
$3,000,000, and 1% of pre-tax net income over $3,000,000.
Effective April 1, 2003, Mr. Grossblatt's Employment Agreement
was amended to: (i) extend the term until July 31, 2008; (ii)
increase the annual base salary to $180,000 subject to automatic
annual cost of living increases up to 4%; and (iii) revising the
annual bonus compensation to provide that the bonus is paid on
pre-tax net income in excess of an amount equal to 8% of
shareholders' equity as of the start of the fiscal year, as
follows: 3% of all (after the 8% threshold) pre-tax net income up
to $1 million, 4% of pre-tax net income from $1-$2 million, 5%
of pre-tax net income from $2-$3 million, 6% of pre-tax net
income from $3-$4 million, 7% of pre-tax net income over $4
million.
Under the Employment Agreement, Mr. Grossblatt has been granted
an option to purchase 20,000 shares of common stock at an
exercise price of $4.50 per share pursuant to the Company's
Non-Qualified Stock Option Plan, and is also entitled to life,
health and disability insurance benefits, medical reimbursement,
automobile allowance, and Company paid retirement plan
contributions.
If the employment agreement is terminated by the Company other
than for cause or Mr. Grossblatt's death or disability, Mr.
Grossblatt is entitled to receive a lump sum payment equal to Mr.
Grossblatt's base salary for the balance of the employment
agreement's term plus the amount of Mr. Grossblatt's last bonus
- 42 -
and an additional lump sum payment payable on the date the term
of the employment agreement would have expired equal to two times
Mr. Grossblatt's base salary for the last 12 months plus the
amount of Mr. Grossblatt's last bonus. In addition, Mr.
Grossblatt would be entitled to receive the health insurance and
medical reimbursement benefits for the balance of the term and a
period of three years thereafter.
If Mr. Grossblatt's employment is terminated following or in
anticipation of a "change of control" of the Company, Mr.
Grossblatt will be entitled to receive a lump sum payment equal
to Mr. Grossblatt's base salary for the balance of the employment
agreement's term and the amount of Mr. Grossblatt's last bonus,
plus an amount equal to three times Mr. Grossblatt's base salary
for the last 12 months and the amount of Mr. Grossblatt's last
bonus, limited to 2.99 times Mr. Grossblatt's average annual
taxable compensation from the Company which is included in his
gross income for the five taxable years of the Company ending
before the date on which the change of control occurs.
If the employment agreement is terminated by the Company due to
Mr. Grossblatt's death or disability, Mr. Grossblatt (or his
estate) is entitled to the continuation of the payment of his
base salary for the balance of the term, reduced, in the event of
death, by any individual life insurance benefits the premiums for
which are paid for by the Company, and in the event of
disability, by any group or individual disability income
insurance benefits the premiums for which are paid for by the
Company. In addition, Mr. Grossblatt (or his estate) is entitled
to the health insurance and medical reimbursement benefits for
the longer of balance of the term or three years following the
date of death or disability.
The employment agreement generally prohibits Mr. Grossblatt from
competing with the Company during the term and during any
subsequent period during which he receives compensation from the
Company.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 19, 2003, 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.
- 43 -
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 285,795 25.5%
6 Regency Court
Baltimore, MD 21208
Stephen Knepper 151,631(2) 12.9%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Ronald Lazarus 128,850(3) 10.7%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Bruce Paul 104,500 9.3%
One Hampton Road
Purchase, NY 10577
Harvey B. Grossblatt 78,396(4) 6.6%
7-A Gwynns Mill Court
Owings Mills, MD 21117
(1) For the purpose of determining the percentages of stock
beneficially owned, shares of stock subject to options
exercisable within 60 days of June 19, 2003 are deemed to be
outstanding.
(2) Includes 52,500 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options and
2,000 shares held by a trust in which Mr. Knepper has voting
control.
(3) Includes 82,000 shares which Mr. Lazarus presently has the
right to acquire through the exercise of stock options.
(4) Includes 64,874 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
- 44 -
As of June 19, 2003, 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 285,795 25.5%
Stephen Knepper 151,631(2) 12.9%
Harvey Grossblatt 78,396(3) 6.6%
Cary Luskin 30,167(4) 2.7%
Ronald A. Seff 39,515 3.5%
Howard Silverman 6,167(4) 0.3%
All directors and officers as 720,596(5) 54.3%
a group (6 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) Includes 64,874 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
(4) Includes 2,500 shares which Mr. Luskin and Dr. Silverman each
presently has the right to acquire through the exercise of
stock options.
(5) See footnotes 1 through 4 on previous table.
Equity Compensation Plan Information
Number of
securities
remaining
available for
for future
issuance
Number of under equity
Securities Weighted- compensation
to be average plans
issued upon exercise (excluding)
exercise of price of securities
outstanding outstanding reflected
Plan options options in column(a)]
Category (a) (b) (c)
Equity 246,500 $3.43 97,481
compensation
plans approved
by security
holders
Equity - - -
compensation
plans not
approved by
security
holders
Total 246,500 $3.43 97,481
- 45 -
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that the Company's directors and executive officers and
each person who owns more than 10% of the Company's Common Stock,
file with the Securities and Exchange Commission an initial
report of beneficial ownership and subsequent reports of
changes in beneficial ownership of the Shares. To our knowledge,
based solely upon the review of the copies of such reports
furnished to us, all of these reporting persons complied with the
Section 16(a) filing requirements applicable to them with respect
to transactions during the fiscal year ended March 31, 2003,
other than Mr. Kovens, who filed one Form 4 late with respect to
a disposition of shares of Common Stock.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had several related party transactions with its Hong
Kong Joint Venture in its normal course of business. See NOTE C
to the Consolidated Financial Statements for a description of
these transactions.
ITEM 14.
CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and
procedures by Stephen C. Knepper, the Company's Chief Executive
Officer, and Harvey B. Grossblatt, the Company's Chief Financial
Officer, as of a date within 90 days of the filing date of this
annual report, such officers have concluded that the Company's
disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time period specified by the
Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
- 46 -
ITEM 15.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
The following is a description of the fees billed to the Company
by Grant Thornton LLP (the "Auditor") during the fiscal years
ended March 31, 2003 and 2002:
Audit Fees. Audit fees include fees paid by the Company to the
Auditor in connection with the annual audit of the Company's
consolidated financial statements, and review of the Company's
interim financial statements. Audit fees also include fees for
services performed by the Auditor that are closely related to the
audit and in many cases could only be provided by the Auditor.
Such services include consents related to SEC and other
regulatory filings. The aggregate fees billed to the Company by
the Auditor for audit services rendered to the Company for the
years ended March 31, 2003 and 2002 totaled $69,500 and $42,250,
respectively.
Audit Related Fees. Audit related services include due diligence
services related to accounting consultations, internal control
reviews, and employee benefit plan audits. The aggregate fees
billed to the Company by the Auditor for audit related services
rendered to the Company for the years ended March 31, 2003 and
2002 totaled $0 and $0, respectively.
Tax Fees. Tax fees include corporate tax compliance, counsel and
advisory services. The aggregate fees billed to the Company by
the Auditor for the tax related services rendered to the Company
for the years ended March 31, 2003 and 2002 totaled $5,000 and
$5,000, respectively.
All Other Fees. There were no other audit services provided in
both years.
- 47 -
Approval of Independent Auditor Services and Fees
The Company's Audit Committee reviews all fees charged by the
Company's independent auditors, and actively monitors the
relationship between audit and non-audit services provided.
Effective April 1, 2003, the Audit Committee must pre-approve all
services provided by the Company's independent auditors and fees
charged. The Audit Committee has further mandated that all
independent auditor services strictly adhere to the limitations
contained within the SEC's release, "Strengthening the
Commission's Requirements Regarding Auditor Independence," which
was issued in final form in January 2003. The release restricts
engagement of the independent auditors to perform non-audit
services; requires Audit Committee pre-approval of all audit
and non-audit services; addresses the duration of time certain
independent auditor partners can serve on the audit engagement
and the manner of the partners' compensation; restricts
employment by the Company of senior engagement team personnel;
requires the independent auditor to report certain matters to the
Audit Committee; and requires certain disclosures to investors of
information related to the nature of audit and non-audit services
provided and associated fees. The Company's senior corporate
financial management administers these requirements, and will
report throughout the year to the Audit Committee.
- 48 -
PART IV
ITEM 16.
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, 2003 and 2002
Consolidated statements of operations for the years
ended March 31, 2003, 2002 and 2001.
Consolidated statements of shareholders' equity for the
years ended March 31, 2003, 2002 and 2001.
Consolidated statements of cash flows for the years
ended March 31, 2003, 2002 and 2001.
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.
3.1 Articles of Incorporation, as amended (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1988, File No. 0-7885)
3.2 Articles Supplementary, filed October 14, 2003 (incorporated
by reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K filed October 31, 2002, file No. 0-7885)
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3.3
to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2002, file No. 0-7885)
- 49 -
10.1 Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1999, File No.
0-7885)
10.2 Hong Kong Joint Venture Agreement, as amended (confidential
treatment of Name requested and filed separately with the
Commission)*
10.3 Amended Factoring Agreement with CIT Group (successor to
Congress Talcott, Inc.) dated November 14, 1999
(incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended March 31,
2003, File No. 0-7885)
10.4 Amendment to Factoring Agreement with CIT Group
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2002, File No.
0-7885)
10.5 Lease between Universal Security Instruments, Inc. and
National Instruments Company dated October 21, 1999 for its
office and warehouse located at 7-A Gwynns Mill Court,
Owings Mills, Maryland 21117 (incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended March 31, 2000, File No. 0-7885)
10.6 Employment Agreement dated April 1, 2002 between the Company
and Harvey B. Grossblatt (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended March 31, 2002, File No. 0-7885)
10.7 Amendment to Employment Agreement dated as of April 1, 2002
between the Company and Harvey B. Grossblatt (incorporated
by reference to Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 2002,
File No. 0-7885)
10.8 Amended and Restated Employment Agreement dated April 1,
2003 between the Company and Harvey B. Grossblatt*
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended March 31, 2001, File No. 0-7885)
23.1 Consent of Grant Thornton LLP*
23.2 Consent of Ernst & Young (Hong Kong)*
- 50 -
99.1 Rule 15d-14(a) Certification of Chief Executive Officer*
99.2 Rule 15d-14(a) Certification of Chief Financial Officer*
99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99.4 June 26, 2003 Letter to Stockholders and Press Release*
*Filed herewith
(b) Reports on Form 8-K
None
(d) Financial Statements Required by Regulation S-X
Separate financial statements of the Hong Kong Joint Venture
(confidential treatment of name requested and filed
separately with the Commission.
Pages
Independent auditor's report 103
Consolidated profit and loss account, March 31,
2003 and 2002 104
Consolidated balance sheets, March 31, 2003
and 2002 105
Consolidated cash flow statements, March 31,
2003 and 2002 107-109
Notes to consolidated financial statements 110-127
- 51 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED March 31, 2003, 2002 and 2001
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions of year
Year ended
March 31, 2003
Allowance for
doubtful accounts $ 68,358 $ 10,000 $-0- $ 68,358 $ 10,000
Year ended
March 31, 2002
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ 31,642 $ 68,358
Year ended
March 31, 2001
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 2003
Allowance for
inventory reserve $111,741 $ -0- $-0- $ 10,000 $101,741
Year ended
March 31, 2002
Allowance for
inventory reserve $ 50,000 $ 61,741 $-0- $ -0- $111,741
Year ended
March 31, 2001
Allowance for
inventory reserve $ 92,000 $ -0- $-0- $ 42,000 $ 50,000
- 52 -
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: /s/ Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated.
Date: June 26, 2003 By: /s/ Stephen Knepper
Stephen Knepper
Chairman of the Board, Director
Date: June 26, 2003 By: /s/ Harvey Grossblatt
Harvey Grossblatt, President,
Director, Chief Accounting Officer
Date: By:
Michael Kovens
Director
Date: June 26, 2003 By: /s/ Cary Luskin
Cary Luskin
Director
Date: June 26, 2003 By: /s/ Ronald Seff
Ronald Seff
Director
Date: June 26, 2003 By: /s/ Howard Silverman
Howard Silverman
Director
- 53 -
EXHIBIT 10.2
2002 JOINT VENTURE AGREEMENT
This 2002 Joint Venture Agreement (the "Agreement") is made on
this 22nd day of October 2002, by and between Universal Security
Instruments, Inc. ("Universal") of 7-A Gwynns Mill Court, Owings
Mills, Maryland 21117-3586, United States of America ("USA"), a
corporation organized and existing under the laws of the State of
Maryland, USA, and The Original Joint Venture Owner (name
withheld and filed separately with the SEC) ("Original Owner"), a
limited liability company organized and existing under the laws
of Hong Kong.
WHEREAS
A. The parties hereto (the "Parties") are parties to a Joint
Venture Agreement dated 23 October 1989 as supplemented by a
Supplementary Agreement dated 21 August 2001 and a memorandum
letter dated 8 October 2001 (collectively referred to as the
"1989-2001 Agreements") relating to the business, management
and operation of (name withheld and filed separately with the
Securities and Exchange Commission) ("The Joint Venture"), a
limited liability company organized and existing under the
laws of Hong Kong.
B. The Parties have concluded that certain provisions of the
1989-2001 Agreements are redundant, obsolete and no longer
appropriate.
C. The Parties are also considering a listing of (name withheld
and filed separately with the Securities and Exchange
Commission) or its business on The Stock Exchange of Hong Kong
Limited or another stock exchanges of equivalent international
standing (the "Stock Exchange").
D. In view of these considerations, the Parties have agreed to
enter into this Agreement and thereby to terminate the
1989-2001 Agreements.
- 54 -
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, IT IS HEREBY
AGREED AS FOLLOWS:
ARTICLE ONE
ESTABLISHMENT AND OPERATION OF A PARENT COMPANY
(NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES A
EXCHANGE COMMISSION)
1.1 Establishment of A Parent Company (name withheld and filed
separately with the Securities and Exchange Commission).