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)
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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
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.
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.
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.
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.
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.
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.
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
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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
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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.
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)
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Per common share:
Net income (loss) - basic
2.23 .28 (.83) .05 (.93)
- diluted
2.05 .28 (.83) .04 (.93)
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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
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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.
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.
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.
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.
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.
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.
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
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 |
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 |
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.
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.
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
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See notes to consolidated financial statements.
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
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See notes to consolidated financial statements.
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 -
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See notes to consolidated financial statements.
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.
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)
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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
$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.
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.
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
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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.
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.
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).
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
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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
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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-
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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:
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
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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
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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
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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.
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.
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
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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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
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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
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(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.
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
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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
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.
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.
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)
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(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
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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.
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.
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.
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)
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)*
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
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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
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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
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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.
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). The Parties shall promptly purchase (name withheld and filed separately with the Securities and Exchange Commission) ("Parent Company"), a private company limited by shares, duly organized, validly existing and properly registered in Hong Kong. The Parties shall share equally all costs with regard to the purchase of (name withheld and filed separately with the Securities and Exchange Commission). The initial capital of (name withheld and filed separately with the Securities and Exchange Commission) shall be the normal minimums permissible in Hong Kong.
1.2 Memorandum and Articles of Association (name withheld and filed separately with the Securities and Exchange Commission). It is recognized that, upon the acquisition of (name withheld and filed separately with the Securities and Exchange Commission), there will be inconsistencies between this Agreement and the Memorandum and Articles of Association of (name withheld and filed separately with the Securities and Exchange Commission). The Parties agree promptly, with the assistance of counsel, to cause the Memorandum and Articles of Association of (name withheld and filed separately with the Securities and Exchange Commission) to be amended so that they will be consistent with terms and conditions of this Agreement.
In all cases, before and after the amendment of the Memorandum and Articles of Association, in the event of conflict between the provisions of this Agreement and the Memorandum and Articles of Association of (name withheld and filed separately with the Securities and Exchange Commission), the provisions of this Agreement shall prevail.
1.3 Transfer of (name withheld and filed separately with the Securities and Exchange Commission) Shares to (name withheld and filed separately with the Securities and Exchange Commission). The Parties are the beneficial owners of fifty percent (50%) each of the share capital of (name withheld and filed separately with the Securities and Exchange Commission). Upon the formation of (name withheld and filed separately with the Securities and Exchange Commission), each of the Parties shall promptly transfer all of their shares in (name withheld and filed separately with the Securities and Exchange Commission) to (name withheld and filed separately with the Securities and Exchange Commission) in exchange for fully paid-up shares of (name withheld and filed separately with the Securities and Exchange Commission). The transfer of (name withheld and filed separately with the Securities and Exchange Commission) shares of the Parties shall be completed simultaneously, and each Party (or its nominees) shall receive fifty percent (50%) of the share capital of (name withheld and filed separately with the Securities and Exchange Commission) immediately upon completion of the transaction. The (name withheld and filed separately with the Securities and Exchange Commission) shares transferred shall be free from all encumbrances, liens and third party rights. Neither Party shall be obligated to carry out the transfer of its interest in(name withheld and filed separately with the Securities and Exchange Commission) unless the other Party demonstrates that it can fully comply with its obligations with respect to this transfer.
1.4 Stamp Duty. Any stamp duty or similar excise taxes imposed in Hong Kong as a result of the transactions stated in Paragraph 1.3 shall be shared equally by the Parties.
1.5 Right of First Refusal. Each shareholder (name withheld and filed separately with the Securities and Exchange Commission) shall have a right of first refusal for the purchase of any or all shares in Parent Company (name withheld and filed separately with the Securities and Exchange Commission) proposed to be transferred by the other shareholder. This right of first refusal shall be exercised within thirty (30) days of notice to the other shareholder of the proposed transfer of shares.
1.6 Transferee to Accept This Agreement. In addition to the requirements of Paragraph 1.5, in the event either shareholder (name withheld and filed separately with the Securities and Exchange Commission) proposes to transfer any of its shares in (name withheld and filed separately with the Securities and Exchange Commission) to a third party, such transferring Party shall not transfer such shares until it has secured the written agreement of the proposed transferee to assume all the rights and obligations of a Party to this Agreement.
1.7 No Pledge. Neither(name withheld and filed separately with the Securities and Exchange Commission) shareholder may pledge or encumber its shares in (name withheld and filed separately with the Securities and Exchange Commission) without prior written consent of (name withheld and filed separately with the Securities and Exchange Commission) shareholder.
1.8 Board (name withheld and filed separately with the
Securities and Exchange Commission). The board of
directors of (name withheld and filed separately with the
Securities and Exchange Commission) (the "Board") shall
consist of four (4) members, two (2) to be nominated by
Universal and two (2) to be nominated by (name withheld
and filed separately with the Securities and Exchange
Commission). The Parties shall vote their shares for the
nominees. The nominating Party shall have the right to
remove and replace its directors. The quorum required for
a meeting of the Board (name withheld and filed separately
with the Securities and Exchange Commission) shall be two
(2) members, provided that at least one director nominated
by (name withheld and filed separately with the Securities
and Exchange Commission) and at least one director
nominated by Universal is present.
1.9 Chairman (name withheld and filed separately with the with the Securities and Exchange Commission). The chairman of the Board (name withheld and filed separately with the Securities and Exchange Commission)(the "Chairman") shall be nominated by (name withheld and filed separately with the Securities and Exchange Commission). The Board (name withheld and filed separately with the Securities and Exchange Commission) shall appoint such Board (name withheld and filed separately with the Securities and Exchange Commission) member nominated by (name withheld
and filed separately with the Securities and Exchange
Commission) as the Chairman (name withheld and filed
separately with the Securities and Exchange Commission).
For as long as (name withheld and filed separately
with the Securities and Exchange Commission) provides
operations and management services to (name withheld and
filed separately with the Securities and Exchange
Commission), the Chairman (name withheld and filed
separately with the Securities and Exchange Commission)
shall have a casting vote on all matters, except for the
matters specifically set out in Paragraph 1.11, presented
to the Board (name withheld and filed separately with the
Securities and Exchange Commission).
1.10 Management of (name withheld and filed separately with the
Securities and Exchange Commission). Day-to-day
operations and management of (name withheld and filed
separately with the Securities and Exchange Commission)
and its subsidiaries, if any, and companies controlled
directly or indirectly by (name withheld and filed
separately with the Securities and Exchange Commission)
shall be under the control of (name withheld and filed
separately with the Securities and Exchange Commission),
save as specifically set out in Paragraph 1.11 below.
1.11 Major Decisions. The following matters shall require
approval of the Board (name withheld and filed separately
with the Securities and Exchange Commission): (i) approval
of annual financial statements/reports of (name withheld
and filed separately with the Securities and Exchange
Commission); (ii) determination on remuneration of (name
withheld and filed separately with the Securities and
Exchange Commission) for providing operations and
management services to (name withheld and filed separately
with the Securities and Exchange Commission); (iii)
declaration of dividends of (name withheld and filed
separately with the Securities and Exchange Commission);
(iv) the merger of (name withheld and filed separately
with the Securities and Exchange Commission) with any
other entity or the acquisition of any other entity by
(name withheld and filed separately with the Securities
and Exchange Commission); (v) the sale, lease or disposal
of the whole or a substantial part of the business or
assets of (name withheld and filed separately with the
Securities and Exchange Commission); (vi) any capital
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increase or any request for shareholder contribution to
provide additional funding to (name withheld and filed
separately with the Securities and Exchange Commission),
including additional capital or shareholder loans; (vii)
capital investment of (name withheld and filed separately
with the Securities and Exchange Commission) in excess of
One Million Hong Kong Dollars (HKD1,000,000); (viii) any
amendment to the Memorandum and Articles of Association of
(name withheld and filed separately with the Securities
and Exchange Commission); (ix) any mortgage of the assets
of (name withheld and filed separately with the Securities
and Exchange Commission); (x) change of the Company
auditor; and (xi) any business transaction, excluding the
sales transactions of the products of (name withheld and
filed separately with the Securities and Exchange
Commission) which are the subject of Appendix I and II
hereof, between (name withheld and filed separately with
the Securities and Exchange Commission) and any Company
owned or controlled, directly or indirectly, by one of the
shareholders of (name withheld and filed separately with
the Securities and Exchange Commission).
1.12 Management Obligations. (name withheld and filed
separately with the Securities and Exchange Commission)
shall not be obligated to provide operations and
management services to (name withheld and filed separately
with the Securities and Exchange Commission) and its
subsidiaries specified in Paragraph 1.10 above, in the
event that (name withheld and filed separately with the
Securities and Exchange Commission) ceases to be a
shareholder of (name withheld and filed separately with
the Securities and Exchange Commission) or the composition
or procedures of the (name withheld and filed separately
with the Securities and Exchange Commission) Board as set
forth in this Agreement are changed so as to be less
favorable to (name withheld and filed separately with the
Securities and Exchange Commission).
1.13 Fiscal Year. (name withheld and filed separately with the
Securities and Exchange Commission) shall have a fiscal
year ending March 31.
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1.14 Financial Statements. (name withheld and filed separately
with the Securities and Exchange Commission). (name
withheld and filed separately with the Securities and
Exchange Commission) shall, at its expense, have its
financial statements audited once a year by an independent
auditor. Until otherwise determined by the (name withheld
and filed separately with the Securities and Exchange
Commission) Board, Ernst and Young shall remain the
company auditor of (name withheld and filed separately
with the Securities and Exchange Commission). (name
withheld and filed separately with the Securities and
Exchange Commission) shall also produce unaudited monthly
financial statements to be promptly distributed to the
shareholders.
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ARTICLE TWO
PRODUCT DISTRIBUTION AGREEMENTS
Immediately upon the signing of this Agreement, Universal and (name withheld and filed separately with the Securities and Exchange Commission) shall enter into a product distribution agreement with terms and conditions identical to Appendix I of this Agreement, and (name withheld and filed separately with the Securities and Exchange Commission) and (name withheld and filed separately with the Securities and Exchange Commission) shall enter into a product distribution agreement with terms and conditions identical to Appendix II of this Agreement.
ARTICLE THREE
LISTING
3.1 Potential Listing. It is the intention of the Parties that, provided both Parties agree the prevailing conditions are suitable and confirm this agreement in writing, (name withheld and filed separately with the Securities and Exchange Commission) will seek the listing of (name withheld and filed separately with the Securities and Exchange Commission) shares or, where appropriate, a listing of a special purpose vehicle formed to become the holding company of (name withheld and filed separately with the Securities and Exchange Commission) or its business on the Stock Exchange (the "Listing").
3.2 An Ownership Company. (name withheld and filed separately with the Securities and Exchange Commission), or a specially formed holding company of (name withheld and filed separately with the Securities and Exchange Commission) or its business, is referred to herein as "Ownership Company." (name withheld and filed separately with the Securities and Exchange Commission) and its subsidiaries are collectively referred to herein as the "Group." (name withheld and filed separately with the Securities and Exchange Commission) shall be set up as a subsidiary of (name withheld and filed separately with the Securities and Exchange Commission). The rules applicable to the Listing of (name withheld and filed separately with the Securities and Exchange Commission) on the Stock Exchange are herein referred to as the "Listing Rules."
3.3 Board (name withheld and filed separately with the
Securities and Exchange Commission). Prior to the Listing,
(name withheld and filed separately with the Securities
and Exchange Commission) shall be structured or its
structure amended so that the board of directors of (name
withheld and filed separately with the Securities and
Exchange Commission) (the "Board") shall consist of three
types of directors: Executive Directors, Non-Executive
Directors, and Independent (Non-Executive) Directors. Two
(2) Non-executive Directors and one (1) Independent
(Non-Executive) Director shall be nominated by Universal.
Subject to the ability of the post-Listing public
shareholders to elect one or more directors, all the
remaining directors shall be nominated by (name withheld
and filed separately with the Securities and Exchange
Commission) so that (name withheld and filed separately
with the Securities and Exchange Commission) shall be able
at all times to nominate one more director than Universal.
The number of directors shall be determined by the Parties
according to the need of operations from time to time, and
the agreements set forth in this Paragraph 3.3. (name
withheld and filed separately with the Securities and
Exchange Commission) shall vote its shares for the
nominees determined in accordance with this Paragraph 3.3.
The nominating Party shall have the right to remove and
replace its directors subject to any applicable laws and
Listing Rules.
3.4 Major Decisions (name withheld and filed separately with
the Securities and Exchange Commission). Prior to a
Listing, no board resolution on the following matters
shall be passed by the (name withheld and filed separately
with the Securities and Exchange Commission) Board unless
approved by at least one Non-executive Director of the
(name withheld and filed separately with the Securities
and Exchange Commission) Board nominated by Universal and
at least one Executive Director of the (name withheld and
filed separately with the Securities and Exchange
Commission) Board nominated by (name withheld and filed
separately with the Securities and Exchange Commission):
(i) approval of annual financial statements/reports of
(name withheld and filed separately with the Securities
and Exchange Commission); (ii) determination on
remuneration of (name withheld and filed separately with
the Securities and Exchange Commission) for providing
operations and management services to (name withheld and
filed separately with the Securities and Exchange
Commission); (iii) declaration of dividends of (name
withheld and filed separately with the Securities and
Exchange Commission); (iv) the merger of (name withheld
and filed separately with the Securities and Exchange
Commission) with any other entity or the acquisition of
any other entity by (name withheld and filed separately
with the Securities and Exchange Commission); (v) the
sale, lease or disposal of the whole or a substantial part
of the business or assets of (name withheld and filed
separately with the Securities and Exchange Commission);
(vi) any capital increase or any request for shareholder
contribution to provide additional funding to (name
withheld and filed separately with the Securities and
Exchange Commission), including additional capital or
shareholder loans; (vii) capital investment of (name
withheld and filed separately with the Securities and
Exchange Commission) in excess of One Million Hong Kong
Dollars (HKD1,000,000); (viii) any amendment to the
Memorandum and Articles of Association of (name withheld
and filed separately with the Securities and Exchange
Commission); (ix) any mortgage of the assets of (name
withheld and filed separately with the Securities and
Exchange Commission); (x) appointment or change of the
company auditor; and (xi) any business transaction,
excluding the sales transactions of the products of
(name withheld and filed separately with the Securities
and Exchange Commission), which are the subject of
Appendix I and II hereof, between (name withheld and filed
separately with the Securities and Exchange Commission)
and any company owned or controlled, directly or
indirectly, by one of the shareholders of (name withheld
and filed separately with the Securities and Exchange
Commission).
3.5 Dividends (name withheld and filed separately with the Securities and Exchange Commission). (name withheld and filed separately with the Securities and Exchange Commission) shall, to the extent permissible under applicable law, pay quarterly dividends to (name withheld and filed separately with the Securities and Exchange Commission) with a total amount equal to at least fifty percent (50%) of the quarterly after-tax net profit determined after the quarterly review of the unaudited quarterly financial statements by the (name withheld and filed separately with the Securities and Exchange Commission) Board.
3.6 Dividends. (name withheld and filed separately with the Securities and Exchange Commission) shall, to the extent permissible under applicable law, pay as quarterly dividends to its shareholders all of the dividends received from (name withheld and filed separately with the Securities and Exchange Commission) less any normal and customary deductions necessary to cover the operational expenses of (name withheld and filed separately with the Securities and Exchange Commission).
3.7 Management of the Listing. The Listing shall be managed by (name withheld and filed separately with the Securities and Exchange Commission), which shall be responsible for all negotiations and determinations, including, without limitation determining the overall policy, structure, manner and arrangements of the Listing and in carrying out the application for the Listing, including, but not limited, to:
(a) the appointment of sponsor(s), legal advisers, reporting accountants, valuers and other professional advisers of (name withheld and filed separately with the Securities and Exchange Commission) and/or (name withheld and filed separately with the Securities and Exchange Commission) incidental to the Listing;
(b) all liaison with the Stock Exchange; (c) allowing for the disclosure of all relevant information about the Group to the public and the Stock Exchange as required by the applicable laws, regulations and rules incidental to the Listing, and to all professional parties to facilitate their provision of advice and service to (name withheld and filed separately with the Securities and Exchange Commission) and/or (name withheld and filed separately with the Securities and Exchange Commission) for the purpose of the Listing, including without limitation, its corporate and shareholders information, financial, business and customers information and material contracts;
(d) amending and/or restructuring the Group's and/or (name withheld and filed separately with the Securities and Exchange Commission) memorandum, article of association, corporate structure and business arrangements to comply with the applicable Listing Rules or otherwise to facilitate the Listing and/or public issue and/or placing of shares of (name withheld and filed separately with the Securities and Exchange Commission) incidental to the Listing as the sponsor(s) and/or other professional advisers appointed under sub-clause (a) above may advise to be necessary or desirable.
The Parties hereby acknowledge that the restructuring of the Group in preparation for the Listing may involve inter-company transfer of assets, merger and acquisition of new intermediary holding vehicle(s).
3.8 Final Approval. Notwithstanding the provisions of Paragraph 3.7, the arrangements for the offering and the timing of the Listing application shall be subject to the prior written approval of each of the Parties.
ARTICLE FOUR
SHAREHOLDER SALES
4.1 Request for Sale. After the expiration of any lock-up period required by the Listing Rules or agreed with the Stock Exchange, (name withheld and filed separately with the Securities and Exchange Commission) shall, at any time after the Listing, upon written request from either of the Parties, use its reasonable endeavors to dispose of such number of shares in (name withheld and filed separately with the Securities and Exchange Commission) as the requesting Party may request, provided that:
(a) (name withheld and filed separately with the Securities and Exchange Commission) shall not dispose more than five percent (5%) of the issued share capital of (name withheld and filed separately with the Securities and Exchange Commission) under any request at any time;
(b) (name withheld and filed separately with the
Securities and Exchange Commission) shall not made
any disposal if it has disposed of any interest in
shares in (name withheld and filed separately with
the Securities and Exchange Commission) in the ten
(10) weeks immediately preceding the date of the
request;
(c) (name withheld and filed separately with the Securities and Exchange Commission) shall not dispose any shares if, immediately following the disposal, (name withheld and filed separately with the Securities and Exchange Commission) would cease to hold at least fifty point one percent (50.1%) of the issued share capital of (name withheld and filed separately with the Securities and Exchange Commission);
(d) (name withheld and filed separately with the Securities and Exchange Commission) shall not make any disposal to the extent and at any time where it is prohibited or restricted by law or applicable rules and regulations from making such disposal and shall comply with all applicable laws, rules and regulations in making such disposal;
(e) (name withheld and filed separately with the Securities and Exchange Commission) shall dispose of such shares in the manner set out in Paragraph 4.2 below; and
(f) (name withheld and filed separately with the Securities and Exchange Commission) shall exercise its best endeavors to make such disposal in a manner so as to maintain an orderly market for the shares of (name withheld and filed separately with the Securities and Exchange Commission).
4.2 First Offer. Provided that it raises no issues under the Takeover Code of Hong Kong, (name withheld and filed separately with the Securities and Exchange Commission) shall dispose of shares in (name withheld and filed separately with the Securities and Exchange Commission) under Paragraph 4.1 above by:
(a) first offering (the "First Offer") such shares to the Party which did not request the sale pursuant to Clause 4.1 above (the "Non-Requesting Party");
(b) the First Offer shall be made to the Non-Requesting Party at a price equivalent to the average closing price less five percent (5%) for such shares on the Stock Exchange on which they are primarily listed for the ten (10) consecutive trading days ending on the trading day immediately preceding the date of the request and on which there was trading in the shares (the "Sale Price"). Such offer shall remain open for a minimum of three (3) working days for acceptance (the "Offer Period") and can be accepted in whole or in part;
(c) (name withheld and filed separately with the Securities and Exchange Commission) shall only offer to sell and make arrangements for the disposal of such shares to third parties (the "Open Offer") if and to the extent the Non-Requesting Party does not accept or reply to the First Offer made in subparagraph (b) above prior to the expiry of the Offer Period;
(d) the Open Offer shall be made at a price no less than the Sale Price; and
(e) the Open Offer shall remain open for a period of fifteen (15) trading days (the "Open Offer Period"). If (name withheld and filed separately with the Securities and Exchange Commission) fails to conclude any definite agreement for the sale or placing of all or any part of such shares during the Open Offer Period, the request in the above Paragraph 4.1 and the Open Offer in respect of all or such part of the shares, as the case may be, shall both be deemed to have lapsed.
4.3 Sales Proceeds. The net proceeds arising from the disposal of shares in (name withheld and filed separately with the Securities and Exchange Commission) under Paragraphs 4.1 and 4.2 above shall, to the extent distributable under applicable law, be distributed to the shareholders of (name withheld and filed separately with the Securities and Exchange Commission) as dividends as soon as practicable.
ARTICLE FIVE
1989-2001 AGREEMENTS SUPERSEDED
Upon being duly signed by both Parties, this Agreement shall supersede the 1989-2001 Agreements and the 1989-2001 Agreements shall cease to have legal effect. The Parties hereby waive and release against each other and forever discharge any claims arising out of or in connection with the 1989-2001 Agreements.
ARTICLE SIX
GENERAL PROVISIONS
6.1 Term. This Agreement shall be of unlimited duration unless terminated by mutual agreement. Termination does not release either Party from liability already accrued.
6.2 Breach. This Agreement may be terminated for breach. In the event of termination for breach, the non-breaching Party shall have all rights and remedies available at law.
6.3 Disputes. Any dispute or difference arising out of or in connection with this Agreement shall be referred to and determined by arbitration in Hong Kong in accordance with the UNCITRAL Arbitration Rules in force at the date of this Agreement. In the event of arbitration, the appointing authority shall be the Hong Kong International Arbitration Centre (the "HKIAC"). The place of arbitration shall be in Hong Kong at the HKIAC. The language to be used in the arbitral proceedings shall be English. Any such arbitration shall be administered by HKIAC in accordance with HKIAC Procedures for Arbitration. The Parties agree to exclude any right of application or appeal to any courts in connection with any question of law arising in the course of the arbitration or with respect to any award made.
6.4 Entire Agreement; Amendment; Waiver. This Agreement constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations, and understandings of the Parties. No supplement, modification, or amendment of this Agreement shall be binding unless executed by both Parties in writing. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the Party making the waiver.
6.5 Assignment. This Agreement may not be assigned or transferred without the prior written approval of the other Party and shall be binding on, and shall inure to the benefit of, the Parties and their respective heirs, legal representatives, successors, and assigns.
6.6 Assignment. All notices, request, demands, and other communications under this Agreement shall be in writing, in English, and shall be deemed to have been duly given to a Party when received, addressed as below. A Party may change its address for purposes of this Paragraph by giving the other Party its written notice of the new address in the manner set forth above.
To Universal:
Universal Security Instruments, Inc.
7-A Gwynns Mill Court
Owings Mills, Maryland 21117, U.S.A.
Telephone: 1 410 363 3000
Facsimile: 1 410 363 2218
To (name withheld and filed separately with the Securities and Exchange Commission):
(name withheld and filed separately with the Securities and Exchange Commission)
6.7 Savings. Should any provision of this Agreement be judicially declared invalid, unenforceable, or void, in whole or in part, such decision shall not have the effect of invalidating or voiding the remainder of this Agreement, and the Parties agree that the provision of this Agreement so held to be invalid, unenforceable, or void shall be deemed to have been stricken herefrom, and the remainder shall have the same force and effect as if such provision had never been included herein. With respect to any provision of this Agreement declared invalid, unenforceable or void, the Parties agree to negotiate in good faith for the purpose of replacing such clause, sentence or paragraph with a provision which is as near in substance as possible to that declared invalid,
unenforceable or void without itself being so declared.
6.8 Time of the Essence. Time is of the essence with respect
to all matters related to this Agreement.
6.9 Counterparts. This Agreement may be executed by the
Parties in any number of counterparts, each of which when
so executed and delivered shall be an original but all
counterparts together shall constitute one and the same
instrument.
6.10 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of Hong Kong.
6.11 Headings. The titles and headings used in this Agreement
are for the convenience of the Parties only and shall not
be used in interpreting or construing this Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly entered into by the Parties the day and year first above written.
Universal Security Instruments, Inc. (name withheld and filed
separately with the
Securities and Exchange
Commission)
By: /s/ Stephen Knepper By: /s/
Stephen Knepper (name withheld and filed
Chairman and Chief Executive Officer separately with the
Securities and Exchange
Commission)
Director
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EXHIBIT 10.8
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of April 1, 2003, by and between UNIVERSAL SECURITY INSTRUMENTS, INC., a Maryland corporation (the "Company"), and HARVEY B. GROSSBLATT (the "Executive").
RECITALS
WHEREAS, the Company is engaged in the business of designing, manufacturing and marketing security products (the "Business"); and
WHEREAS, the Executive is the President of the Company; and
WHEREAS, the Company desires to continue to employ the Executive to perform services as the President and Chief Operating Officer of the Company, and to perform other duties which may be assigned from time to time by the Board of Directors of the Company (the "Board") or the Chairman of the Board of the Company (the "Chairman") from time to time at its discretion;
WHEREAS, the Company and Executive entered into an Employment Agreement dated as of April 1, 2002, as amended by Addendum to Employment Agreement dated October 21, 2002 (the "Original Agreement");
WHEREAS, the parties desire to extend the term of the Original Agreement, amend certain other provisions of the Original Agreement to be effective from and after April 1, 2003, and in furtherance thereof, the parties have agreed to amend and restate the Original Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree that the Original Agreement is hereby amended and restated in its entirety as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions of this Agreement, the Company shall hereby employ the Executive and the Executive hereby agrees to be
employed by Company.
(b) Term of Employment. Subject to Section 7, the Company shall employ the Executive pursuant to the terms hereof for the period commencing as of the date hereof and ending on July 31, 2008 (the "Term"). The period during which the Executive is employed pursuant to this Agreement, including any renewal thereof shall be referred to as the "Employment Period."
2. Position and Duties. During the Employment Period, the Executive shall serve as, and have responsibilities and authority consistent with the position of, President and Chief Operating Officer of the Company, which shall be subject to the discretion of the Board. The Executive shall diligently and conscientiously devote his full and exclusive business time and attention and best efforts in discharging his duties. The Company shall provide appropriate office space and services to allow the Executive to discharge his duties, consistent with policies established by the Board from time to time.
3. Compensation.
(a) Salary. The Company shall initially pay the Executive an annual base salary ("Annual Base Salary") of $180,000. The Annual Base Salary during any year of the Employment Period shall be an amount determined by the Board. The Annual Base Salary shall be subject to periodic review at least annually by the Board or by a committee established by the Board for increases based on the policies of the Company in effect from time to time. There shall be an annual increase in the Annual Base Salary, effective as of each anniversary date of this Agreement, equal to any increase, up to 4%, in the Consumer Price Index for the Greater Baltimore Area (as determined by the U.S. Bureau of Labor Statistics) for the immediately preceding four calendar quarters (the "COL Adjustment"). Once established, the Annual Base Salary shall not be reduced without the prior written consent of the Executive. The Annual Base Salary shall be payable according to the Company's regular payroll practices and shall be subject to all applicable federal, state and local withholding taxes.
(b) Bonus.
(i) In addition to the Annual Base Salary, the Executive shall receive an annual bonus equal to the amount determined pursuant to Exhibit A attached hereto and incorporated herein by reference ("Bonus"), which shall be paid by the Company within 30 days following the filing with the United States Securities and Exchange Commission of the Company's Annual Report on Form 10-K for the fiscal year with respect to which the Bonus is earned. The Bonus shall be deemed fully earned by the Executive with respect to any fiscal year of the Company during which the Executive has been employed by the Company for at least nine months. The Bonus shall be subject to all applicable federal, state and local withholding taxes.
(ii) To the extent the Company reports income from both its domestic operations (currently shown on the Company's annual consolidated statements of operations as "Operating income") and Hong Kong Joint Venture (currently shown on the Company's annual consolidated statements of operations as "Equity in earnings of Hong Kong joint venture"), the Bonus expense shall be allocated between such two components in the respective proportions as such components bear to the consolidated Net Income (currently shown on the Company's annual audited consolidated statements of operations).
(c) Stock Options. In addition to the Annual Base Salary and any Bonus, the Executive shall be eligible to receive grants of options to acquire shares of the Company's Common Stock, as may be granted from time to time by the Board or a committee thereof. The parties acknowledge that on the effective date of the Original Agreement, the Board granted to the Executive options to purchase 20,000 shares of the Company's Common Stock, at an exercise price of $4.50 per share, exercisable immediately, pursuant to the Company's Non-Qualified Stock Option Plan.
4. Benefits. During the Employment Period, the Company shall provide the Executive with the following benefits:
(a) Participation by the Executive, and his wife and dependant children in any group health plans sponsored or arranged by the Company for its employees. The full amount of all premiums for such insurance will be paid by the Company. In the event the Executive declines or is ineligible to participate in such group health plans, the Company shall pay to the Executive, no less frequently than quarterly, additional compensation equal to the amount of such premiums which the Company would have paid for such period had the Executive accepted such participation for himself, his wife and dependant children. Nothing herein shall obligate the Company to continue any health plan currently offered to employees or offered to employees in the future. The Executive agrees to cooperate with the Company and to take all steps reasonably necessary to assist the Company in obtaining such insurance. The Executive represents that he currently has no significant health condition which would make it commercially unreasonable to obtain such insurance.
(b) Participation in any retirement plans, disability income insurance and term life insurance policies sponsored or arranged by the Company for its employees from time to time. Nothing herein shall obligate the Company to continue any plan or policy currently offered to employees or offered to employees in the future.
(c) For each calendar year during the Term, the Company shall contribute the maximum amount permitted by applicable law on behalf of the Executive to the Company's 401(k) Plan. The Executive shall be entitled to the full amount of this benefit with respect to any calendar year during which the Executive has been employed by the Company for at least 60 days.
(d) Three weeks per year of paid vacation time plus sick leave and personal leave in accordance with the Company's policies for senior executive officers. The Executive shall be entitled to the full amount of this benefit with respect to any fiscal year of the Company during which the Executive has been employed by the Company for 60 days.
(e) Use of a Company owned or leased automobile or, at the Executive's option, an automobile payment allowance of $800 per month. In addition, the Company shall pay for the insurance, fuel and service for such automobile.
(f) All costs and expenses of a mobile phone for the Executive's use in connection with the performance of his duties, in accordance with the terms and conditions that the Board shall determine from time to time.
(g) In addition to the benefit provided under
Section 4(a), reimbursement up to a maximum of $25,000 per annum
for expenses incurred by the Executive, his wife and dependant
children for medical, dental, optical and long-term care and
prescription drugs, or third-party payor coverage therefor, which
are not reimbursable under any medical coverage for which the
premiums are paid by the Company. This amount shall be increased
annually by an amount equal to the then-current medical expense
reimbursement benefit multiplied by the COL Adjustment. All
requests by the Executive for such reimbursement must be in
writing accompanied by receipts for such amounts.
(h) Participation in the Company's Cafeteria Plan/Flexible Spending Plan.
(i) Any other group employee benefit plans or programs to the extent that he is qualified under the requirements relating to participation in any such plan or program.
5. Business Expenses. The Company shall pay or reimburse the Executive for business expenses incurred by the Executive during the Employment Period in connection with his employment.
6. Termination of Employment. Executive's employment will be terminated in accordance with Sections 6(a), or may be terminated in accordance with Sections 6(b) - (e), as follows:
(a) Upon the last day of a Term.
(b) By the Company for "Cause". For the purpose of this Section, "Cause" shall mean a determination by a court of competent jurisdiction that:
(i) The Executive committed a willful act against the interest of the Company resulting in material harm to the Company's interests; or
(ii) The Executive committed a material act of dishonesty or fraud against the Company, unless it is determined by such court that the Executive acted in a manner which he believed, in good faith, to be in the interest of the Company.
(c) By the Executive after 15-days written notice to the Company of the Company's material breach of this Agreement unless the Company cures such breach during such notice period. If the Executive terminates employment hereunder, the Executive's employment shall be deemed to have been terminated by the Company without Cause.
(d) Upon the death of the Executive, or by the Company if the Executive is Permanently Disabled (as hereafter defined). For purposes of this Agreement, the term "Permanently Disabled" or "Permanent Disability" shall mean (i) becoming permanently disabled as provided in any permanent disability income policy provided by the Company under this Agreement insuring the Executive or (ii) in the absence of any such disability income policy, the inability for a period of six consecutive months, with reasonable accommodation, due to a mental or physical injury, illness or disorder, of Executive to provide substantially all of the services required pursuant to this Agreement to be provided by Executive. Whether or not Executive is Permanently Disabled under subsection (ii) shall be determined by a medical doctor agreed to by Company and Executive. If Company and the Executive cannot agree on such a medical doctor, they shall each, at their own expense, designate an unrelated medical doctor and such medical doctors shall in turn designate a third unrelated medical doctor, whose fee shall be shared equally by Company and Executive. Such medical doctor(s) shall determine whether Executive is Permanently Disabled and shall also determine the date of the commencement and termination, if any, of such Permanent Disability. Such determinations (whether made by unanimous or majority vote of the medical doctors) shall be binding on the parties hereto. If any party (the "Second Party") fails to select its medical doctor within 30 days after written notice from the other party (the "First Party") of the appointment of the First Party's medical doctor, then the First Party's medical doctor shall determine whether Executive is Permanently Disabled and shall also determine the date of the commencement and termination, if any, of such Permanent Disability.
(e) By the Executive on 30 days advance written notice at any time within 24 months following a "Change of Control", as defined in Exhibit B attached hereto and incorporated herein by reference (a "Change of Control").
7. Effect of Termination.
(a) In the event that Executive's employment is terminated for any reason, Executive shall be paid on the payroll date next following the date of termination, all compensation, and reimbursement of all expenses, for the applicable Term accruing through the effective date of termination of employment.
(b) In the event of the termination of the Executive's employment hereunder pursuant to Section 6(c), the Executive shall be entitled to receive in addition to the payment under Section 7(a):
(i) A lump sum severance payment in an amount equal to the Annual Base Salary for the balance of the Term plus the amount of the last Bonus, payable concurrently with the delivery by the Company to the Executive of the written notice of termination, and, on the date on which the Term would have expired, a lump sum severance payment in an amount equal to two times the previous 12 months' Annual Base Salary and last Bonus, in each instance subject to all applicable federal, state and local withholding taxes; and
(ii) For the balance of the Term and a period of three years following the end of the Term, the benefits set forth in Sections 4(a) and 4(g).
(c) In the event the Executive's employment is
terminated by the Company or its successor following or in
anticipation of a Change of Control, or in the event the
Executive's employment is terminated by the Executive pursuant to
Section 6(e) above, the Executive shall be entitled to receive in
addition to the payment under Section 7(a):
(i) A lump sum severance payment in an amount equal to (A) the Annual Base Salary for the balance of the Term, (B) the amount of the last Bonus, and (C) three times the previous 12 months' Annual Base Salary and last Bonus, payable concurrently with the delivery by the Company or its successor to the Executive of the written notice of termination or within 30 days following termination by the Executive, as the case may be, subject to all applicable federal, state and local withholding taxes; and
(ii) For a period of three years following the end of the Term of this Agreement, the benefits set forth in Sections 4(a) and 4(g); provided, however, the aggregate present value of payments pursuant to this Section 7(c) (plus any payments under any other plan of the Company and its affiliates which are contingent on a change of control), determined in accordance with Section 280G of the Internal Revenue Code of 1986, as amended, or any corresponding provision of any succeeding law, may not exceed 2.99 times the Executive's average annual taxable compensation from the Company or its affiliates which is included in the Executive's gross income for the five taxable years of the Company ending before the date on which the change of control occurs.
(d) In the event the Executive's employment is terminated pursuant to Section 6(d), the Executive (or his estate) shall be entitled to receive in addition to the payment under Section 7(a):
(i) The continuation of the payment of the Executive's then current Annual Base Salary for the balance of the Term, reduced, in the event of the Executive's death, by any individual life insurance benefits the premiums for which are paid for by the Company, and in the event of the Executive's Permanent Disability, by any group or individual disability income insurance benefits the premiums for which are paid for by the Company and Social Security disability benefits paid to the Executive. The net amount payable hereunder shall be paid according to the Company's regular payroll practices, subject to all applicable federal, state and local withholding taxes; and
(ii) The continuation of the benefits set forth in Sections 4(a) and 4(g) for the longer of (A) the balance of the Term, or (B) three years following the date of the Executive's death or Permanent Disability; provided, however, that if the terms of the group health plans sponsored or arranged by the Company for its employees limit the length of time during which the benefit set forth in Section 4(a) may be provided, the Company shall pay to the Executive (or his estate) with respect to any period during which such benefit may not be provided, no less frequently than quarterly, a sum equal to the amount of the premiums which the Company would have paid for such period had the benefit set forth in Section 4(a) continued.
8. Company Obligations. The amounts payable to the Executive pursuant to Section 7 following termination of his employment shall be in addition to any rights the Executive may have with respect to previously granted stock options and any rights the Executive may have arising from claims of breaches by the Company of the terms of this Agreement.
9. Restrictive Covenants.
(a) Noncompetition. During the Employment Period and any additional period during which the Executive receives compensation from the Company pursuant to Section 7, the Executive will not directly or indirectly, either as principal, agent, employee, or in any other capacity, enter into or engage in any business in which the Company is engaged during the Term hereof.
(b) CONFIDENTIALITY. DURING THE EMPLOYMENT PERIOD AND AT ALL TIMES AFTER THE TERMINATION OF THIS AGREEMENT FOR ANY REASON, THE EXECUTIVE WILL NOT DISCLOSE TO ANY THIRD PARTY ANY TRADE SECRETS, CUSTOMER LISTS OR OTHER CONFIDENTIAL INFORMATION PERTAINING TO THE BUSINESS.
(c) Company Property. Promptly following the Executive's termination of employment for any reason, the Executive shall return to the Company all property of such entity, and originals and any copies thereof in the Executive's possession or under his control, including all confidential information and trade secrets, in whatever media or in whatever form.
(d) Nonsolicitation of Employees. During the
Employment Period and any additional period during which the
Executive receives compensation from the Company pursuant to
Section 7, the Executive shall not directly or indirectly induce
any management or supervisor-level employee of the Company or any
of its affiliates to terminate employment with such entity, and
will not directly or indirectly, either individually or as owner,
agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or
a subsidiary thereof as a management or supervisor-level employee
unless such person shall have ceased to be employed by such
entity for a period of at least three months.
(e) INJUNCTIVE RELIEF WITH RESPECT TO COVENANTS. THE EXECUTIVE ACKNOWLEDGES AND AGREES THAT THE COVENANTS AND OBLIGATIONS OF THE EXECUTIVE WITH RESPECT TO NONCOMPETITION, NONSOLICITATION, CONFIDENTIALITY AND COMPANY PROPERTY RELATE TO SPECIAL, UNIQUE AND EXTRAORDINARY MATTERS AND THAT A VIOLATION OF ANY OF THE TERMS OF SUCH COVENANTS AND OBLIGATIONS WILL CAUSE THE COMPANY AND ITS SUBSIDIARIES IRREPARABLE INJURY FOR WHICH ADEQUATE REMEDIES ARE NOT AVAILABLE AT LAW. THEREFORE, THE EXECUTIVE AGREES THAT THE COMPANY AND ITS SUBSIDIARIES SHALL BE ENTITLED TO AN INJUNCTION, RESTRAINING ORDER OR SUCH OTHER EQUITABLE RELIEF AS A COURT OF COMPETENT JURISDICTION MAY DEEM NECESSARY OR APPROPRIATE TO RESTRAIN THE EXECUTIVE FROM COMMITTING ANY VIOLATION OF THE COVENANTS AND OBLIGATIONS CONTAINED IN THIS SECTION. THESE INJUNCTIVE REMEDIES ARE CUMULATIVE AND ARE IN ADDITION TO ANY OTHER RIGHTS AND REMEDIES THE COMPANY OR ITS SUBSIDIARIES MAY HAVE AT LAW OR IN EQUITY. IN THE EVENT (I) THE ENFORCEABILITY OF ANY OF THE COVENANTS CONTAINED IN THIS SECTION IS CHALLENGED BY EXECUTIVE IN ANY JUDICIAL PROCEEDING, (II) EXECUTIVE IS NOT ENJOINED IN SUCH PROCEEDING FROM BREACHING SUCH COVENANT, AND (III) EXECUTIVE DOES, IN FACT BREACH SUCH COVENANT, THEN, IF A COURT OF COMPETENT JURISDICTION DETERMINES THAT THE CHALLENGED COVENANT IS ENFORCEABLE, THE TIME PERIOD SET FORTH IN SUCH COVENANT SHALL BE DEEMED TOLLED UPON THE INITIATION OF SUCH PROCEEDING UNTIL THE DISPUTE IS FINALLY RESOLVED AND ALL PERIODS OF APPEAL HAVE EXPIRED.
10. Miscellaneous.
(a) Binding Effect. This Agreement shall be binding on the Company and any person or entity which succeeds to the interest of the Company (regardless of whether such succession occurs by operation of law, by reason of the sale of all or a portion of the Company's stock or assets or a merger, consolidation or reorganization involving the Company). This Agreement shall also inure to the benefit of the Executive's heirs, executors, administrators and legal representatives.
(b) Assignment. Neither this Agreement nor any of the rights or obligations hereunder shall be assigned or delegated by either party hereto without the prior written consent of the other party.
(c) Entire Agreement. This Agreement supersedes any and all prior agreements between the parties hereto, and constitutes the entire agreement between the parties hereto with respect to the matters referred to herein, and no other agreement, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. THE EXECUTIVE ACKNOWLEDGES THAT HE IS ENTERING INTO THIS AGREEMENT OF HIS OWN FREE WILL AND ACCORD, AND WITH NO DURESS, THAT HE HAS READ THIS AGREEMENT AND THAT HE UNDERSTANDS IT AND ITS LEGAL CONSEQUENCES. No parol or other evidence may be admitted to alter, modify or construe this Agreement, which may be changed only by a writing signed by the parties hereto.
(d) Severability; Reformation. In the event that
one or more of the provisions of this Agreement shall become
invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained
herein shall not be affected thereby. In the event any of Section
9(a), (b), (c), (d) or (e) is not enforceable in accordance with
its terms, the Executive and the Company agree that such Section,
or such portion of such Section, shall be reformed to make it
enforceable in a manner which provides the Company the maximum
rights permitted under applicable law.
(e) Waiver. Waiver by either party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions.
(f) Notices. Any notice required or desired to be delivered under this Agreement shall be in writing and shall be delivered personally, by courier service, by registered mail, return receipt requested, or by telecopy and shall be effective upon dispatch to the party to whom such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof):
If to the Company: Universal Security Instruments, Inc.
7-A Gwynns Mill Court
Owings Mills, Maryland 21117
Fax (410) 363-2218
Attention: Chairman of the Board
If to the Executive: Harvey B. Grossblatt
28 Westspring Way
Lutherville, Maryland 21093
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(g) Amendments. This Agreement may not be altered, modified or amended except by a written instrument signed by each of the parties hereto.
(h) Headings. Headings to sections in this Agreement are for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation hereof.
(i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but both of which together shall constitute one and the same Agreement.
(j) Withholding. Any payments provided for herein shall be reduced by any amounts required to be withheld by the Company from time to time under applicable federal, state or local income or employment tax laws or similar statutes or other provisions of law then in effect.
(k) Governing Law. This Agreement shall be governed by the laws of the State of Maryland, without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply.
(l) Context. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, to the singular include the plural, to the part include the whole, and to the male gender shall also pertain to the female and neuter genders and vice versa. The term "including" is not limiting, and the term "or" has the inclusive meaning represented by the phrase "and/or". The words "hereof," "herein," "hereby", "hereto", "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section and Exhibit and clause references are to this Agreement unless otherwise specified.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has hereunto set his hand as of the day and year first above written.
WITNESS: THE COMPANY:
UNIVERSAL SECURITY INSTRUMENTS, INC.
_________________________ By: /s/ Stephen Knepper
Stephen Knepper
Chairman of the Board
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THE EXECUTIVE:
_________________________ /s/ Harvey B. Grossblatt
Harvey B. Grossblatt
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EXHIBIT A
BONUS FORMULA
For purposes of the Bonus calculation, the Company's "Pre-Tax Net Income" with respect to any fiscal year means the amount of net income before income taxes and before Bonus calculation which will be reported by the Company in its annual audited consolidated financial statements with respect to such fiscal year.
With respect to any fiscal year of the Company in which the Company has achieved Pre-Tax Net Income, the amount of Pre-Tax Net Income equal to 8% of shareholders' equity as of the start of the fiscal year shall be excluded from the Bonus calculation (the "Bonus Threshold"). Thereafter, the Executive shall be entitled to receive as a Bonus an amount equal to the aggregate of the percentages of such Pre-Tax Net Income in excess of the Bonus Threshold, as specified below:
On Pre-Tax Net Income up to and including $1 million 3% On all portions of Pre-Tax Net Income from over $1 million up to and including $2 million 4% On all portions of Pre-Tax Net Income from over $2 million up to and including $3 million 5% On all portions of Pre-Tax Net Income from over $3 million up to and including $4 million 6% On all portions of Pre-Tax Net Income over $4 million 7% |
EXHIBIT B
CHANGE OF CONTROL
For the purposes of this Agreement, a "Change of Control" means the occurrence of any one or more of the following events, provided that the Chief Executive Officer of the Company as of the date of this Agreement either exercises his/her rights under a Change of Control pursuant to his/her employment agreement with the Company, or consents to the exercise by the Executive:
(i) The acquisition or attainment of "beneficial ownership" by a person or entity, including any "group", as such terms are defined under Section 13(d) of the Securities Exchange Act of 1934, including any of the equity owners of the Company as of the date hereof, of 50% or more (on a primary and not a fully diluted basis) of the outstanding common equity of the Company. *
(ii) The sale or other disposition of all or substantially all of the assets of the Company in one transaction or a series of transactions (other than financing arrangements), unless approved by the Board.
(iii) A merger, consolidation or share exchange involving the Company and any other person or entity, including any of the equity owners as of the date hereof, in which the Company or one of its subsidiaries is not the surviving entity, unless approved by the Board.
(iv) Any other "business combination" (as defined in Section 3-601(e) of the Maryland General Corporation Law) involving the Company and any person or entity, including any of the equity owners as of the date hereof, whether or not such person or entity is an "interested stockholder" under that statute, unless approved by the Board.
(v) The deadlock of the Board with respect to the management of the Company's affairs that a majority vote for action by the Board cannot be obtained either within a reasonable time or, if shorter, for two consecutive Board meetings.
(vi) The filing by the Company or any other party with the Securities and Exchange Commission ("SEC") of proxy materials with respect to the election to the Board of individuals other than those nominated by the Board and who, if elected would constitute, together with other directors serving on the Board who were not nominated by the Board, a majority of the Board.
(vii) The filing by any party or group (other than the Executive or a group which includes the Executive) with the SEC of information disclosing the plan or proposal of such party or group to accomplish any of the following:
1. The acquisition by such party or group of additional securities of the Company which, if accomplished, would result in the occurrence of the event(s) specified in paragraphs (i) or (ii), above;
2. An extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries;
3. A sale or transfer of a material amount of assets of the Company or any of its subsidiaries (other than financing arrangements);
4. Any change in the present Board or management of the Company, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the Board;
5. Changes in the Company's charter, bylaws or instruments corresponding thereto or other actions which may impede or advance the acquisition of control of the Company by any person;
6. Causing a class of securities of the Company to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system sponsored or maintained by a registered national securities association;
7. A class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934, as amended; or
8. Any action similar to any of those enumerated above.
* For purposes of this definition, the transfer in a single or series of transactions of 30% or more of the voting control of any equity owner of the Company shall be deemed to be a transfer of beneficial ownership of the common equity of the Company owned by such equity owner.
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statement of Universal Security Instruments, Inc. and subsidiaries on Form S-8 (No. 333-81930 dated February 1, 2002) pertaining to the Non-Qualified Stock Option Plan as Amended, Registration Statements on Form S-8 (No. 2-83323 dated May 4, 1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April 13, 1988) pertaining to the Non-Qualified Stock Option Plan and in the Registration Statement on Form S-8 (No. 33-21225 dated April 13, 1988) pertaining to the 1988 Employee Stock Purchase Plan, of our report dated June 13, 2003, included in the Annual Report of Universal Security Instruments, Inc. and subsidiaries on Form 10-K for the year ended March 31, 2003 filed with the Securities and Exchange Commission.
GRANT THORNTON LLP
Baltimore, Maryland
June 13, 2003
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-81930 dated February 1, 2002) pertaining to the Non-Qualified Stock Option Plan as Amended, Registration Statements on Form S-8 (No. 2-83323 dated May 4, 1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April 13, 1988) pertaining to the Non-Qualified Stock Option Plan and in the Registration Statement on Form S-8 (No. 33-21225 dated April 13, 1988) pertaining to the 1988 Employee Stock Purchase Plan of our report dated May 9, 2003 with respect to the consolidated financial statements of The Joint Venture (Name withheld and filed separately with the Securities and Exchange Commission), included in the Annual Report (Form 10-K) of Universal Security Instruments, Inc. for the year ended March 31, 2003, filed with the Securities and Exchange Commission.
ERNST & YOUNG
Hong Kong
June 23, 2003
EXHIBIT 99.1
RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Stephen C. Knepper, certify that:
1. I have reviewed this Annual Report on Form 10-K of Universal Security Instruments. Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 26, 2003 /s/ Stephen C. Knepper
Stephen C. Knepper
Chief Executive Officer
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EXHIBIT 99.2
RULE 15d-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Harvey Grossblatt, certify that:
1. I have reviewed this Annual Report on Form 10-K of Universal Security Instruments. Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 26, 2003 /s/ Harvey Grossblatt
Harvey Grossblatt
Chief Financial Officer
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Exhibit 99.3
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Universal Security Instruments, Inc. (the "Company") on Form 10-K for the period ending March 31, 2003 as filed with the Securities and Exchange Commission and to which this Certification is an exhibit (the "Report"), the undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this Form 10-K fairly presents, in all material respects, the financial condition and result of the Company as of, and for, the periods reflected therein.
Date: June 26, 2003 /s/ Stephen C. Knepper
Stephen C. Knepper
Chairman,
Chief Executive Officer
/s/ Harvey B. Grossblatt
Harvey B. Grossblatt
President,
Chief Financial Officer
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EXHIBIT 99.4
June 26, 2003
Dear Partners/Shareholders:
I am very pleased to have an opportunity to share with you our results for the fourth quarter and fiscal year ended March 31, 2003. The first full fiscal year under our new leadership team has been one of important operational progress and top and bottom-line success.
While many factors have contributed to our growth of the past year, overall we must credit a Company-wide commitment to strong execution of our strategic plan. In late 2001, we were determined to return to our roots as an aggressive, innovative Company that puts the customer first. We focused on building market share across the board, developing new products and becoming more service-driven and efficient.
Our financial performance reflects the results of this focus. For the quarter, sales rose 48% to $3,859,238 versus $2,606,831 a year ago while earnings increased to $519,883 or $0.46 per basic share, ($.42 per diluted share), versus last year's $139,290, or $0.14 per basic share ($0.13 per diluted share). As the fourth quarter is typically our softest, we are very encouraged by these results and our momentum heading into the first quarter.
For our fiscal year, earnings were $2,400,318, or $2.23 per basic share, ($2.05 per diluted share), the highest in your Company's history, versus last year's $261,625, or $0.28 per basic share and diluted share, and a sales increase for the 12 months of 52% to $15,953,883 versus $10,480,829 for the same period a year ago.
I cannot point to just one operational area as the reason for our progress this year. We have seen domestic market share growth in our wholesale and electrical distribution business. Our 50-percent-owned Hong Kong joint venture continues to provide us with outstanding manufacturing in a highly efficient manner. Our joint venture is also performing well in expanding sales in international markets and continues to explore new markets.
In addition, new products such as our smoke alarms with side-loading battery drawer and carbon monoxide alarms have been introduced to our marketplace. We expect to continue to introduce other new products this year.
Looking back over the past four quarters, our story has been remarkably consistent despite an unpredictable economy. While our progress has been good, be assured we will continue to focus on building our business and generating shareholder value for the long term. Universal has worked hard over the past year and is well positioned to take advantage of the opportunities we see in the market.
As always, should you have any questions, please don't hesitate to contact me. Thank you for your continued support.
Respectfully,
Statements contained in this document that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Although UNIVERSAL SECURITY INSTRUMENTS, INC. believes that the expectations reflected in such forward-looking statements are reasonable, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projections.
EXHIBIT 99.4
For Immediate Release
Contact: Harvey Grossblatt, President
Universal Security Instruments, Inc.
410-363-3000, Ext. 224
or
Don Hunt, Jeff Lambert
Lambert, Edwards & Associates, Inc.
616-233-0500
Universal Security Instruments Announces Sharply Higher Sales & Earnings For Fourth Quarter and Fiscal Year
Annual Sales Increase 52%; Earnings Per Share Rise to $2.23 Vs. $0.28
OWINGS MILLS, MD, June 26, 2003: Universal Security Instruments, Inc. (OTC-BB: USEC) today announced significant sales and earnings growth for the fourth quarter and fiscal year ended March 31, 2003. The Company cited continued market share expansion, successful new product launches and solid growth at its Hong Kong joint venture.
The Owings Mills, MD-based designer and marketer of safety and security equipment reported fourth quarter net earnings rose to $519,883, or $0.46 per basic share ($0.42 per diluted share), and sales rose 48% to $3,859,238, compared with net earnings of $139,290, or $0.14 per basic share (0.13 per diluted share), and sales of $2,606,831 for last year's fourth quarter.
For the 12 months ended March 31, 2003 sales rose 52% to $15,953,883, versus $10,480,829 for the same period last year. The Company reported net earnings rose to $2,400,318, or $2.23 per basic share ($2.05 per diluted share), compared to net earnings of $261,625, or $0.28 per basic and diluted share, for the same period last year.
The Company said the annual results, the best in Universal's
33-year history, reflect consistent performance, efficiency and
growth in all areas of the Company's business. The Company's
50-percent-owned Hong Kong manufacturing joint venture continues
to focus on outstanding quality and efficiency and has expanded
sales in international markets as it continues to explore new
opportunities. In addition, the Company's wholesale and
electrical distribution businesses have increased their domestic
market share.
"We are very pleased with our results for the fourth quarter and fiscal 2003. As the fourth quarter is traditionally one of the softest periods for our industry, it was highly rewarding to close our year on such a positive note. We have aggressively gained market share across the board, introduced new products and kept costs in check," said Harvey Grossblatt, President and Chief Operating Officer of Universal Security Instruments, Inc.
"Looking back over the past 12 months, it is clear that the plan we began implementing in late 2001 to improve all levels of our operation has taken hold. While aggressively pursuing the many opportunities present in our markets today, we have not lost our focus on remaining efficient, service-oriented and quality-driven. Gross margins rose 16% from 27% to 31% during the past year, sales per employee are up and customer retention and satisfaction are strong. We are very enthusiastic about the work that's been done this year and believe we are well-positioned heading into 2004," Grossblatt added.
UNIVERSAL SECURITY INSTRUMENTS, INC., founded in 1969, is a Maryland-based manufacturer and worldwide marketer of safety and security products directly and through its 50%-owned Hong Kong joint venture.
-- more --
Universal/Page 2
UNIVERSAL SECURITY INSTRUMENTS, INC.
ANNOUNCES RESULTS FOR THE
FOURTH QUARTER ENDED MARCH 31:
UNAUDITED
2003 2002
Sales $3,859,238 $2,606,831
Net income* 519,883 139,290
Income per share:
Basic .46 .14
Diluted .42 .13
Weighted average number of
common shares outstanding:
Basic 1,121,191 999,562
Diluted 1,248,880 1,055,769
|
RESULTS FOR THE FISCAL YEAR ENDED MARCH 31:
AUDITED
2003 2002
Sales $15,953,883 $10,480,829
Net income* 2,400,318 261,625
Income per share:
Basic 2.23 .28
Diluted 2.05 .28
Weighted average number of
common shares outstanding:
Basic 1,075,079 938,624
Diluted 1,171,309 945,770
|
*Due to the tax benefit carryforward of prior years' operating losses, no tax liability was incurred.
OTC:USEC
Statements contained in this press release that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Although UNIVERSAL SECURITY INSTRUMENTS, INC. believes that the expectations reflected in such forward-looking statements are reasonable; the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projections.
Audited Financial Statements
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
31 March 2003
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONTENTS
Pages
REPORT OF INDEPENDENT AUDITORS 103
AUDITED FINANCIAL STATEMENTS
Consolidated profit and loss account 104
Consolidated balance sheet 105
Consolidated statement of changes in equity 106
Consolidated cash flow statement 107-109
Notes to consolidated financial statements 110-127
|
Report of Independent Auditors
To the board of directors
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of (name withheld and filed separately with the Securities and Exchange Commission) (the "Company") and its subsidiaries as of 31 March 2003 and 2002, and the related consolidated profit and loss accounts, consolidated statements of changes in equity and cash flows for each of the two years in the period ended 31 March 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 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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of 31 March 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the two years in the period ended 31 March 2003 in conformity with accounting principles generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in certain significant respects from accounting principles generally accepted in the United States of America. Application of generally accepted accounting principles in the United States of America would not have had a significant effect on the consolidated results of operations of the Company and its subsidiaries for each of the two years ended 31 March 2003 and the financial position of the Company and its subsidiaries as of 31 March 2003 and 2002.
Ernst & Young
Hong Kong
9 May 2003
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
TURNOVER 4 182,256,085 88,449,887
Cost of sales (120,864,232) (59,632,260)
Gross profit 61,391,853 28,817,627
Other revenue 4 1,221,670 1,345,281
Administrative and
operating expenses ( 21,819,089) (11,864,956)
PROFIT FROM OPERATING ACTIVITIES 5 40,794,434 18,297,952
Finance costs 6 ( 355,013) ( 145,454)
PROFIT BEFORE TAX 40,439,421 18,152,498
Tax 7 ( 3,344,724) 1,036,461
NET PROFIT FOR THE YEAR 37,094,697 19,188,959
INTERIM DIVIDENDS 8 19,955,322 10,383,672
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET
31 March 2003
Notes 2003 2002
HK$ HK$
ASSETS
Non-current assets:
Fixed assets 9 19,506,034 16,414,287
Long term investment 10 - -
19,506,034 16,414,287
Current assets:
Due from a shareholder 1 4,204,766 2,208,332
Inventories 11 15,122,141 12,768,297
Trade receivables 3,982,562 1,698,965
Prepayments, deposits and
other receivables 881,514 371,644
Pledged time deposit 12 - 1,676,441
Cash and cash equivalents 13 40,893,730 26,994,967
65,084,713 45,718,646
TOTAL ASSETS 84,590,747 62,132,933
EQUITY AND LIABILITIES
Current liabilities:
Due to a related Company 1 3,435,335 900,000
Tax payable 2,366,798 1,379,000
Other payables and accruals 2,387,135 1,447,572
Trade payables 13,347,999 12,188,556
21,537,267 15,915,128
Non-current liabilities:
Loans from shareholders 14 2,868,954 2,868,954
Deferred tax 15 30,000 333,700
2,898,954 3,202,654
TOTAL LIABILITIES 24,436,221 19,117,782
Capital and reserve:
Issued capital 16 200 200
Retained profits 60,154,326 43,014,951
60,154,526 43,015,151
TOTAL EQUITY AND LIABILITIES 84,590,747 62,132,933
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 March 2003
Issued Retained
capital profits Total
HK$ HK$ HK$
At 1 April 2001 200 34,209,664 34,209,864
Net profit for the year - 19,188,959 19,188,959
Interim dividends - (10,383,672) (10,383,672)
At 31 March 2002 and
1 April 2002 200 43,014,951 43,015,151
Net profit for the year - 37,094,697 37,094,697
Interim dividends - (19,955,322) (19,955,322)
At 31 March 2003 200 60,154,326 60,154,526
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit before tax 40,439,421 18,152,498
Adjustments for:
Finance costs 6 355,013 145,454
Interest income 4 ( 373,074) ( 565,330)
Depreciation 5 3,455,158 2,934,708
Loss on disposal
of fixed assets 5 120,708 29
Operating profit before
working capital changes 43,997,226 20,667,359
Increase in amount due
from a shareholder (11,974,095) ( 3,409,298)
Increase in inventories ( 2,353,844) ( 6,109,953)
Increase in trade
receivables ( 2,283,597) ( 1,698,965)
Decrease/(increase) in
prepayments, deposits
and other receivables ( 509,870) 282,502
Increase in amount due
to a related Company 2,535,335 900,000
Increase/(decrease) in
other payables and
accruals 939,563 ( 1,031,455)
Increase in trade payables 1,159,443 8,795,015
Cash generated from operations 31,510,161 18,395,205
Interest received 373,074 565,330
Interest paid ( 355,013) ( 145,454)
Dividends paid ( 9,977,661) ( 5,191,836)
Hong Kong profits tax
refunded/(paid) ( 2,660,626) 83,458
Net cash inflow from operating
activities 18,889,935 13,706,703
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of fixed assets ( 6,738,013) ( 2,271,477)
Proceeds from disposal
of fixed assets 70,400 16,113
Decrease/(increase) in
pledged time deposit 1,676,441 ( 44,509)
Net cash outflow from
investing activities ( 4,991,172) ( 2,299,873)
CASH FLOWS FROM FINANCING
ACTIVITY
Repayment of loan from
a related Company - ( 27,329)
Net cash outflow from
financing activity - ( 27,329)
NET INCREASE IN CASH AND
CASH EQUIVALENTS 13,898,763 11,379,501
Cash and cash equivalents
at beginning of year 26,994,967 15,615,466
CASH AND CASH EQUIVALENTS
AT END OF YEAR 40,893,730 26,994,967
NET INCREASE IN CASH AND
CASH EQUIVALENTS 13,898,763 11,379,501
Cash and cash equivalents
at beginning of year 26,994,967 15,615,466
CASH AND CASH EQUIVALENTS
AT END OF YEAR 40,893,730 26,994,967
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
ANALYSIS OF BALANCES OF CASH
AND CASH EQUIVALENTS
Cash and bank balances 13 33,066,829 14,962,374
Time deposits with original
maturity of less than
three months when acquired 13 7,826,901 12,032,593
40,893,730 26,994,967
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
1. CORPORATE INFORMATION
The registered office of the Company is at (address withheld and filed separately with the SEC).
The Company was incorporated under the laws of Hong Kong on 7 July 1989. It operates under a joint venture agreement entered into on 23 October 1989 between Universal Security Instruments, Inc. ("USI"), a company incorporated in the United States, and The Original Joint Venture Owner (name withheld and filed separately with the SEC). The Company is economically dependent on USI with which it transacts a significant portion of its business and the financial statements reflect the effect of these transactions that are conducted on bases determined between the parties.
During the year, the following significant related party transactions were recorded:
Notes 2003 2002
HK$ HK$
Sales made to USI (i) 57,170,207 37,952,734
Purchases from USI (i) 7,279,138 5,323,216
Sales commission to USI (ii) 335,090 -
Rentals paid to:
An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (iii) 840,000 840,000
A Director of the
Company (name
withheld and filed
separately with the
SEC) (iii) 240,000 240,000
Management fee paid to
(name withheld and
filed separately
with the SEC) (iv) 2,160,000 1,620,000
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
1. CORPORATE INFORMATION (continued)
Management bonus paid to
(name withheld and filed
separately with the
SEC) (v) 3,435,335 900,000
Interest income from USI (vi) 169,260 214,409
Notes:
(i) Sales and purchases were made according to published prices and conditions similar to those offered to other customers or by other suppliers of the Group.
(ii) Sales commission was charged at mutually agreed terms between the Group and USI for the Group's sales to customers referred by USI.
(iii) Rental expenses were charged for the office premises owned by (name withheld and filed separately with the SEC) and (name withheld and filed separately with the SEC) in Hong Kong and the People's Republic of China (the "PRC") with reference to the prevailing market rate and area occupied by the Group.
(iv) Management fee was charged at a monthly basis of HK$180,000 (2002: HK$120,000 for the months from January to December 2001 and HK$180,000 for the months from January to March 2002) for the provision of management services rendered in planning, execution and operation of electronics manufacturing plant in the PRC.
(v) Management bonus was calculated at 10% (2002: 10%) on the portion of the Company's annual pre-tax profit in excess of HK$10 million.
(vi) Interest income from USI was charged at 6% (2002: 6%
- 12%) per annum of the overdue trading balance
during the year.
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
1. CORPORATE INFORMATION (continued)
Notes (continued):
(name withheld and filed separately with the SEC) is a company of which (name withheld and filed separately with the SEC) and (name withheld and filed separately with the SEC), beneficial shareholders of (name withheld and filed separately with the SEC), are also directors. The amount due to (name withheld and filed separately with the SEC) of HK$3,435,335 (2002: HK$900,000) as at 31 March 2003 is unsecured, interest-free and has no fixed terms of repayment.
Except for the trading balance of HK$3,748,182 (2002:
HK$1,512,801) with USI included as due from a shareholder of
HK$4,204,766 (2002: HK$2,208,332) under current assets at 31
March 2003 which is interest-bearing at 6% (2002: 6% - 12%)
per annum, the remaining balance with USI is unsecured,
interest-free, and has no fixed terms of repayment.
2. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD ACCOUNTING PRACTICE ("SSAPS")
The following new and revised SSAPs are effective for the first time for the current year's consolidated financial statements:
* SSAP 1 (Revised): "Presentation of financial statements"
* SSAP 15 (Revised): "Cash flow statements"
* SSAP 34: "Employee benefits"
These SSAPs prescribe new accounting measurement and disclosure practices. The major effects on the Group's accounting policies and on the amounts disclosed in these financial statements of adopting these SSAPs are summarised as follows:
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
2. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD ACCOUNTING PRACTICE ("SSAPS") (continued)
SSAP 1 prescribes the basis for the presentation of financial statements and sets out guidelines for their structure and minimum requirements for the content thereof. The principal impact of the revision to this SSAP is that a consolidated statement of changes in equity is now presented on page 106 of the consolidated financial statements in place of the consolidated statement of recognised gains and losses that was previously required.
SSAP 15 (Revised) prescribes the revised format for the cash flow statement. The principal impact of the revision of this SSAP is that the consolidated cash flow statement now presents cash flows under three headings, cash flows from operating, investing and financing activities, rather than the five headings previously required.
SSAP 34 prescribes the recognition and measurement criteria to apply to employee benefits, together with the required disclosures in respect thereof. The adoption of this SSAP has resulted in no material change to the previously adopted accounting treatments for employee benefits.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance
with Hong Kong Statements of Standard Accounting Practice
and accounting principles generally accepted in Hong Kong.
They have been prepared under the historical cost
convention.
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries for the year
ended 31 March 2003. The results of subsidiaries acquired
or disposed of during the year are consolidated from or to
their effective dates of acquisition or disposal,
respectively. All significant intercompany transactions and
balances within the Group are eliminated on consolidation.
Subsidiaries
A subsidiary is a company in which the Company, directly or
indirectly, controls more than half of its voting power or
issued share capital or controls the composition of its
board of directors.
Long term investment
Investment held on a long-term basis is stated at cost less
any impairment loss.
Related parties
Parties are related if one party has the ability, directly
or indirectly, to control the other party or exercise
significant influence over the other party in making
financial and operating decisions. Parties are also related
if they are subject to common control or common significant
influence. Related parties may be individuals or corporate
entities.
Impairment of assets
An assessment is made at each balance sheet date of whether
there is any indication of impairment of any asset, or
whether there is any indication that an impairment loss
previously recognised for an asset in prior years may no
longer exist or may have decreased. If any such indication
exists, the asset's recoverable amount is estimated. An
asset's recoverable amount is calculated as the higher of
the asset's value in use or its net selling price.
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the consolidated profit and loss account in the period in which it arises.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated
depreciation and any impairment losses. The cost of an
asset comprises its purchase price and any directly
attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditure
incurred after fixed assets have been put into operation,
such as repairs and maintenance, is normally charged to the
profit and loss account in the period in which it is
incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be
obtained from the use of the fixed asset, the expenditure is
capitalised as an additional cost of that asset.
Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows:
Land held on medium term lease Over the lease term Buildings 5% Leasehold improvements 20% Plant and machinery 10% Furniture and fixtures 20% Motor vehicles 20% Computer equipment and software 50% |
The gain or loss on disposal or retirement of a fixed asset recognised in the consolidated profit and loss account is the difference between the net sales proceeds and the carrying amount of the relevant asset.
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost and net
realisable value. Cost is determined on the first-in,
first-out basis and, in the case of work in progress and
finished goods, comprises direct materials, direct labour
and an appropriate proportion of overheads. Net realisable
value is based on the estimated selling prices less any
estimated costs to be incurred to completion and disposal.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement,
cash and cash equivalents comprise cash on hand and demand
deposits, and short term highly liquid investments which are
readily convertible into known amounts of cash and which are
subject to an insignificant risk of changes in value, and
have a short maturity of generally within three months when
acquired, less bank overdrafts which are repayable on demand
and form an integral part of the Group's cash management.
For the purpose of the consolidated balance sheet, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use.
Revenue recognition
Revenue is recognised when it is probable that the economic
benefits will flow to the Group and when the revenue can be
measured reliably, on the following bases:
(a) from the sales of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold, net of discounts and returns;
(b) rental income, on the straight-line basis over the lease term;
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) management fee income, when the services are rendered; and
(d) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable.
Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the lessor are accounted for
as operating leases. Where the Group is the lessor, assets
leased by the Group under operating leases are included in
non-current assets and rentals receivable under the
operating leases are credited to the consolidated profit and
loss account on the straight-line basis over the lease
terms. Where the Group is the lessee, rentals payable under
the operating leases are charged to the consolidated profit
and loss account on the straight-line basis over the lease
terms.
Deferred tax
Deferred tax is provided, using the liability method, on all
significant timing differences to the extent it is probable
that the liability will crystallise in the foreseeable
future. A deferred tax asset is not recognised until its
realisation is assured beyond reasonable doubt.
Foreign currencies
Foreign currency transactions are recorded at the applicable
exchange rates ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign currencies at
the balance sheet date are translated at the applicable
exchange rates ruling at that date. Exchange differences
are dealt with in the consolidated profit and loss account.
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee benefits
Pension Scheme
The Group operates a defined contribution Mandatory
Provident Fund retirement benefits scheme (the "MPF Scheme")
under the Mandatory Provident Fund Schemes Ordinance for all
of its employees. Contributions are made based on a
percentage of the employees' basic salaries and are charged
to the consolidated profit and loss account as they become
payable in accordance with the rules of the MPF Scheme. The
assets of the MPF Scheme are held separately from those of
the Group in an independently administered fund. The
Group's employer contributions vest fully with the employees
when contributed into the MPF Scheme.
4. REVENUE AND GAINS
Turnover represents the invoiced value of goods sold, net of discounts and returns. An analysis of turnover, revenue and gains is as follows:
2003 2002
HK$ HK$
Turnover
Sale of goods 182,256,085 88,449,887
Other revenue
Gross rental income 295,200 316,400
Management fee income - 19,890
Interest income 373,074 565,330
Sundry income 314,918 267,041
983,192 1,168,661
Gains
Exchange gains, net 238,478 176,620
1,221,670 1,345,281
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
5. PROFIT FROM OPERATING ACTIVITIES
Profit from operating activities is arrived at after charging/(crediting):
2003 2002
HK$ HK$
Cost of inventories sold 120,864,232 59,632,260
Depreciation 3,455,158 2,934,708
Less: Amount included in
cost of sales (2,400,072) (2,278,081)
1,055,086 656,627
Auditors' remuneration 168,000 168,000
Staff costs:
Wages and salaries 9,433,055 7,105,704
Pension scheme contributions 162,751 148,629
9,595,806 7,254,333
Less: Amount included in
cost of sales (5,012,585) (3,301,487)
4,583,221 3,952,846
Directors' remuneration - -
Minimum lease payments under
operating leases in respect
of land and buildings 1,175,993 1,120,605
Gross and net rental income ( 295,200) ( 316,400)
Loss on disposal of fixed assets 120,708 29
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
6. FINANCE COSTS
2003 2002
HK$ HK$
Interest on inward bills 286,947 101,991
Interest to (name withheld and
filed separately with the SEC) - 667
Others 68,066 42,796
Total interest 355,013 145,454
7. TAX
|
Hong Kong profits tax has been provided at the rate of 16% (2002: 16%) on the estimated assessable profits arising in
Hong Kong during the year.
2003 2002
HK$ HK$
Provision for the year 3,700,000 1,379,000
Overprovision in prior years ( 51,576) (2,415,461)
Deferred tax - note 15 ( 303,700) -
Tax charge/(credit) for the year 3,344,724 (1,036,461)
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THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
8. INTERIM DIVIDENDS
2003 2002
HK$ HK$
First interim - HK$2,834,679
(2002: HK$4,680,000) per
ordinary share 5,669,358 9,360,000
Second interim - HK$2,692,134
(2002: HK$511,836) per
ordinary share 5,384,268 1,023,672
Third interim - HK$2,526,524
(2002: Nil) per ordinary share 5,053,048 -
Fourth interim - HK$1,924,324
(2002: Nil) per ordinary share 3,848,648 -
19,955,322 10,383,672
9. FIXED ASSETS (continued)
Cost:
At beginning
of Year Additions Disposals At 31 March 2003
Medium
term
leasehold
land
HK$ 2,102,686 - - 2,102,686
Buildings
HK$ 13,711,906 - - 13,711,906
Leasehold
improve-
ments
HK$ 7,789,993 2,487,245 - 10,277,238
Plant and
machinery
HK$ 31,128,422 2,566,240 (2,398,412) 31,296,250
Furniture
and
fixtures
HK$ 3,491,267 357,579 - 3,848,846
Motor
vehicles
HK$ 1,577,130 927,603 - 2,504,733
Computer
equipment
and
software
HK$ 673,322 399,346 - 1,072,668
Total HK$ 60,474,726 6,738,013 (2,398,412) 64,814,327
Accumulated depreciation:
Provided
At beginning during
of Year the year Disposals At 31 March 2003
Medium
term
leasehold
land
HK$ 471,352 43,806 - 515,158
Buildings
HK$ 5,725,416 636,602 - 6,362,018
Leasehold
improve-
ments
HK$ 6,946,693 503,475 - 7,450,168
Plant and
machinery
HK$ 27,139,535 1,216,189 (2,207,304) 26,148,420
Furniture
and
fixtures
HK$ 2,870,577 213,433 - 3,084,010
Motor
vehicles
HK$ 720,555 405,809 - 1,126,364
Computer
equipment
and
software
HK$ 186,311 435,844 - 622,155
Total HK$ 44,060,439 3,455,158 (2,207,304) 45,308,293
Net book value:
At 31 March 2003 At 31 March 2003
Medium term leasehold
land HK$ 1,587,528 1,631,334
Buildings HK$ 7,349,888 7,986,490
Leasehold
improvements HK$ 2,827,070 843,300
Plant and machinery HK$ 5,147,830 3,988,887
Furniture and fixtures HK$ 764,836 1,378,369
Motor vehicles HK$ 1,378,369 856,575
|
Computer equipment and
software HK$ 450,513 487,011
Total HK$ 19,506,034 16,414,287
In 1991, the Group entered an agreement to lease certain land located in the PRC for the building of factory premises and staff quarters for a term of 50 years at a consideration of HK$2,102,686. However, the Group has not obtained the land use right from the relevant authority in the PRC. This land is amortised over the lease term of 50 years.
10. LONG TERM INVESTMENT
2003 2002
HK$ HK$
Unlisted investment, at cost 9,305,588 9,305,588
Amount due from the investee
Company 1,158,675 1,158,675
10,464,263 10,464,263
Less: Provision for impairment (9,305,588) (9,305,588)
Provision against an
amount due from the
investee Company (1,158,675) (1,158,675)
- -
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THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
10. LONG TERM INVESTMENT (continued)
Particulars of the investee company are as follows:
Percentage
Place of Nominal of equity
registration value of attributable
and registered to the Group Principal
|
Name operation capital 2002 2001 activity
An Affiliate
of the Company
(name withheld
and filed
separately
with the SEC) PRC US$4,000,000 30 30 Dormant
The Group does not have significant influence on the financial and operating policy decisions of the investee company and, accordingly, the investment is classified as long-term investment. The amount due from the investee company is unsecured, interest-free and has no fixed terms of repayment.
11. INVENTORIES
2003 2002
HK$ HK$
Raw materials 8,294,473 8,615,554
Work in progress 3,224,558 1,779,372
Finished goods 3,603,110 2,373,371
15,122,141 12,768,297
|
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
12. PLEDGED TIME DEPOSIT
At 31 March 2002, time deposit of HK$1,676,441 was pledged to a bank for credit facilities of HK$3,329,000 granted to the Group. The pledge was released during the year.
13. CASH AND CASH EQUIVALENTS
2003 2002
HK$ HK$
Cash and bank balances 33,066,829 14,962,374
Time deposits 7,826,901 12,032,593
40,893,730 26,994,967
|
14. LOANS FROM SHAREHOLDERS
2003 2002
HK$ HK$
USI 1,434,477 1,434,477
(name withheld and filed
separately with the SEC) 1,434,477 1,434,477
2,868,954 2,868,954
|
The loans are unsecured, interest-free and repayable on demand by the respective shareholders with the consent of the other. The directors of the Company consider that these liabilities to be non-current.
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
15. DEFERRED TAX
2003 2002
HK$ HK$
Balance at beginning of year 333,700 333,700
Credit for the year - note 7 (303,700) -
Balance at end of year 30,000 333,700
|
The principal component of deferred tax liability calculated at 17.5% (2002: 16%) of the cumulative timing differences comprises accelerated depreciation allowances at the balance sheet date.
16. SHARE CAPITAL
Company
2003 2002
HK$ HK$
Authorised:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
|
17. NOTE TO THE CONSOLIDATED CASH FLOW STATEMENT
Major non-cash transactions
During the year, interim dividends of HK$9,977,661 were settled through the current account with a shareholder.
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
18. OPERATING LEASE ARRANGEMENTS
The Group leases certain of its office premises and factory premises under operating lease arrangements for terms ranging from 1 to 5 years.
At 31 March 2003, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:
2003 2002
HK$ HK$
Within one year 913,500 -
In the second to fifth years,
inclusive 2,660,000 -
3,573,500 -
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19. COMMITMENTS
In addition to the operating lease commitments detailed in note 18 above, the Group had the following contracted commitments at the balance sheet date:
2003 2002
HK$ HK$
Purchase of fixed assets 128,181 162,000
Capital contribution payable to
a PRC wholly-owned subsidiary 117,000,000 -
117,128,181 162,000
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THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
20. COMPARATIVE AMOUNTS
As further explained in note 2 to the financial statements, due to the adoption of certain new and revised SSAPs during the current year, the presentation of certain items and balances in the financial statements have been revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified to confirm with the current year's presentation.
21. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA
The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong, which differ in certain significant respects from accounting principles generally accepted in the United States of America. However, the application of generally accepted accounting principles in the United States of America would not have a significant effect on either the operation results of the Group for each of the two years in the period ended 31 March 2003 or the financial position of the Group as of 31 March 2003 and 2002.