UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter ended December 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
State of Incorporation I.R.S. Employer Identification Number
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Registrant's telephone number, including area code 410-363-3000
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days.
YES X NO _____
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Date Class Shares Outstanding
February 12, 1999 Common Stock, $.01 par value 887,083
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UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets at December 31, 1998 and March 31, 1998
Consolidated statements of operations for the nine months ended December 31, 1998 and 1997 and three months ended December 31, 1998 and 1997
Consolidated statements of cash flows for the nine months ended December 31, 1998 and 1997
Notes to consolidated financial statements
Item 2. Management's discussion and analysis of results of
operations and financial condition
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
Dec 31, 1998 March 31, 1998
CURRENT ASSETS
Cash $ 100,981 $ 133,377
Accounts receivable:
Trade (less allowance for doubtful
accounts of $100,000 at December 31,
1998 and March 31, 1998) 608,870 1,248,023
Officers and employees 3,532 5,515
612,402 1,253,538
Inventories:
Finished goods 1,952,766 2,228,070
Raw materials-foreign locations 19,911 83,728
1,972,677 2,311,798
Prepaid expenses 132,340 142,793
TOTAL CURRENT ASSETS 2,818,400 3,841,506
INVESTMENT IN JOINT VENTURE 2,269,026 2,228,182
PROPERTY AND EQUIPMENT 1,544,812 1,613,222
OTHER ASSETS 8,002 22,400
$6,640,240 $7,705,310
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See notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Dec 31, 1998 March 31, 1998
CURRENT LIABILITIES
Short-term borrowings $ 545,217 $ 969,326
Current maturity of long-term debt 34,940 91,190
Accounts payable 380,994 583,910
Accrued liabilities 48,803 66,672
TOTAL CURRENT LIABILITIES 1,009,954 1,711,098
LONG-TERM DEBT, less current portion 1,234,957 1,246,861
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per share;
authorized 20,000,000 shares; issued
887,083 shares at December 31, 1998
and 811,397 shares at March 31, 1998 8,870 8,114
Additional paid-in capital 10,499,447 10,453,930
Retained deficit (6,112,988) (5,714,693)
TOTAL SHAREHOLDERS' EQUITY 4,395,329 4,747,351
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,640,240 $ 7,705,310
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See notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Nine Months Ended
Dec 31, 1998 Dec 31, 1997
Net sales $ 7,657,038 $ 8,979,319
Cost of goods sold 6,597,185 7,440,586
1,059,853 1,538,733
Research and development expense 114,223 214,043
Selling, general and administrative expense 1,505,557 1,541,812
Operating loss (559,927) (217,122)
Other income (expense):
Interest income 2,705 2,287
Interest expense (181,670) (210,176)
Other (247) (3,477)
(179,212) (211,366)
LOSS BEFORE EQUITY IN EARNINGS
OF JOINT VENTURE (739,139) (428,488)
Equity in earnings of joint venture 340,844 82,883
NET LOSS $ (398,295) $ (345,605)
Per common share amounts:
Basic and diluted $ (.46) $ (.43)
Weighted average number of common
shares outstanding
Basic and diluted 857,341 811,397
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See notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
Dec 31, 1998 Dec 31, 1997
Net sales $2,019,608 $2,326,044
Cost of goods sold 1,707,575 2,059,124
312,033 266,920
Research and development expense 47,860 71,649
Selling, general and administrative expense 516,658 499,156
Operating loss (252,485) (303,885)
Other income (expense):
Interest income 176 345
Interest expense (65,684) (63,294)
Other 3 (4,901)
(65,505) (67,850)
LOSS BEFORE EQUITY IN EARNINGS (LOSS)
OF JOINT VENTURE (317,990) (371,735)
Equity in earnings (loss) of joint venture 122,282 (13,281)
NET LOSS $ (195,708) $ (385,016)
Per common share amounts:
Basic and diluted $ (.21) $ (.47)
Weighted average number of common
shares outstanding
Basic and diluted 911,351 811,397
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See notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended
Dec 31, 1998 Dec 31, 1997
OPERATING ACTIVITIES
Net loss $(398,295) $ (345,605)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 106,984 117,155
(Undistributed) distributed earnings of
joint venture (40,844) 167,117
Changes in operating assets and liabilities:
Decrease in accounts receivable 641,136 649,937
Decrease in inventories and prepaid expenses 349,574 581,301
Decrease in accounts payable and
and accrued expenses (220,785) (628,581)
Decrease (increase) in other assets 14,398 (2,000)
NET CASH PROVIDED BY OPERATING ACTIVITIES 452,168 539,324
INVESTING ACTIVITIES
Purchases of property and equipment (38,574) (1,785)
FINANCING ACTIVITIES
Net repayment of short-term debt (424,109) (521,969)
Principal payments on long-term debt (11,904) (10,794)
Payment on legal settlement (56,250) (56,250)
Sale of common stock 100,000
Purchase of common stock (53,727)
NET CASH USED IN FINANCING ACTIVITIES (445,990) (589,013)
DECREASE IN CASH AND CASH EQUIVALENTS (32,396) (51,474)
Cash and cash equivalents at beginning of period 133,377 150,452
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 100,981 $ 98,978
Supplemental information:
Interest paid $ 181,670 $ 340,780
Income taxes paid - -
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See notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Statement of Management - The financial information included herein is unaudited and does not include all disclosures normally included in financial statements presented in accordance with generally accepted accounting principles. The interim financial information should be read in connection with the financial statements and related notes in the Company's annual report on Form 10-K for the year ended March 31, 1998. The results for the interim period are not necessarily indicative of the results expected for the year. The accompanying interim information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods.
Per Share Data - The Company implemented Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" for all periods presented which requires presentation of basic and diluted earnings per share amounts and a reconciliation for all periods presented of the respective calculations. Basic and diluted net income per share are computed by dividing net income (loss) by the weighted average number of common and potential dilutive common (if any) shares outstanding during the period. The weighted average number of common shares outstanding for the 1997 periods have been restated to reflect the one-for-four reverse stock split effective March 9, 1998.
New Accounting Pronouncements - The Company implemented SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information" effective April 1, 1998. These standards specify the presentation and disclosure requirements for comprehensive income and segment information.
Common Stock - On September 2, 1998, the Company sold 113,636 shares of common stock to the Chairman of the Board of the Company at a price of $.88 cents per share (the mean between the closing bid and asked prices on NASDAQ) or an aggregate of $100,000. On November 12, 1998, the Board of Directors authorized the Company to purchase up to 100,000 shares of the Company's common stock. During the quarter ended December 31, 1998, pursuant to the stock purchase program, the Company repurchased 37,950 shares at a cost of $53,727.
Income Taxes - No income tax provision has been provided for the quarter and nine months ended December 31, 1998 because of the Company's unrecognized deferred income tax benefits related to the carryforward of prior years' operating losses.
Joint Venture - The Company maintains a 50% interest in a joint venture with a Hong Kong corporation (Hong Kong joint venture) which has manufacturing facilities in the People's Republic of China, for the manufacturing of consumer electronic products. The following represents summarized income statement information of the Hong Kong joint venture for the nine months ended December 31, 1998 and 1997:
1998 1997
Net sales $5,691,106 $5,420,912
Gross profit 1,432,620 1,084,021
Net income 681,689 165,767
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Nine Months Ended December 31, 1998 Compared to Nine Months Ended December 31, 1997
Sales - Net sales for the nine months ended December 31, 1998 were $7,657,038 compared to $8,979,319 for the comparable nine months in the prior fiscal year, a decrease of $1,322,281. Net sales of telecommunications products decreased by $1,589,983 and security products decreased by $258,489 while net sales of video products increased by $526,191 from the comparable period of the previous year. The decrease in telecommunications products sales was due to lower sales of certain of the Company's Caller ID products. The decrease in security sales was due to a decreased demand by certain of its private label customers. The increase in video sales was due to increased demand for certain of the Company's video products by a private label customer.
Net Income - The Company reported a net loss of $398,295 for the nine months ended December 31, 1998 compared to a net loss of $345,605 for the corresponding nine months of the prior fiscal year. The Company's gross margin declined by $478,880, which was due to the decline in sales described above. Additionally, expenses declined by $136,075 and increased equity in earnings of the Hong Kong Joint Venture as described below.
Expenses - Research, selling, general and administrative expenses decreased by $136,075 from the comparable nine months in the prior year. As a percentage of sales, research, selling, general and administrative expenses were 21% for the nine months ended December 31, 1998 and 20% for the same period in the prior fiscal year. The most significant reason for the decrease in expenses was the savings resulting from the implementation of the Company's cost reduction program.
Interest Expense and Income - The Company's interest expense, net of interest income, decreased to $178,965 for the nine months ended December 31, 1998 from $207,889 for the comparable period in 1997. The decrease in interest expense is due largely to a decrease in short-term debt.
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31, 1997
Sales - Net sales for the three months ended December 31, 1998 were $2,019,608 compared to $2,326,044 for the comparable three months in the prior fiscal year, a decrease of $306,436. Net sales of security products decreased by $505,255, as compared to the quarter ended December 31, 1997. Net sales of telecommunications products increased by $158,515 and video products increased by $40,304 from the same quarter last year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The increase in telecommunications sales was due to an increased demand for certain of the Company's telecommunications products by a private label customer. The increase in video sales was due to higher demand for certain of the Company's video products to a private label customer. The decrease in security products was due to decreased demand for certain of the Company's security products.
Net Income - The Company reported a net loss of $195,708 for the quarter ended December 31, 1998 compared to a net loss of $385,016 for the corresponding quarter of the prior fiscal year. The primary reason for the decrease in net loss was higher gross margins and increased equity in earnings of the Hong Kong Joint Venture.
Expenses - Research, selling, general and administrative expenses decreased by $6,287 from the comparable three months in the prior year. As a percentage of sales, research, selling, general and administrative expenses were 28% for the three months ended December 31, 1998 and 25% for the same period in the last fiscal year.
Interest Expense and Income - The Company's interest expense, net of interest income, increased from $62,949 for the three months ended December 31, 1997 to $65,508 for the current quarter in 1998.
Financial Condition and Liquidity - Cash needs of the Company are currently met by funds generated from operations and its line of credit with a financial institution, which supplies both short-term borrowings and letters of credit to finance foreign inventory purchases. The Company's line of credit is based on specified percentages of the Company's accounts receivable and inventory. Approximately $611,776 has been utilized in letter of credit commitments and short-term borrowings as of December 31, 1998. As of December 31, 1998, the amount available for borrowings under the line was approximately $150,000, based on the specified percentages.
The outstanding principal balance of the revolving credit line is payable upon demand. The interest rate on the revolving credit line is equal to 1.5% in excess of the prime rate of interest charged by the Company's lender. The loan is collateralized by the Company's accounts receivable and inventory and a parcel of undeveloped real estate. During the nine months ended December 31, 1998, working capital decreased by $321,962.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating activities provided cash of $452,168 for the nine months ended December 31, 1998. This was primarily due to the reduction of inventories and prepaid expenses of $349,574 and accounts receivable of $641,136, partially offset by a decrease in accounts payable of $220,785. For the same period last year, operating activities provided cash of $539,324.
Investing activities used cash of $38,574 in the current period and used cash of $1,785 in the same period last year. The increase resulted from purchases of equipment.
Financing activities used cash of $455,990, primarily due to net repayment of short-term debt of $424,109. For the same period last year, financing activities used cash of $589,013, primarily due to the net repayment of short-term debt of $521,969.
The Company believes that its line of credit and its working capital provide it with sufficient resources to meet its requirements for liquidity and working capital in the ordinary course of its business over the next twelve months, depending on the ability of the Company to retain its financing, which may be dependent upon the Company's results of operations.
Hong Kong Joint Venture - Net sales of the joint venture for the nine months and three months ended December 31, 1998 were $5,691,106 and $1,713,140, respectively, compared to $5,420,912 and $1,247,285, respectively, for the comparable nine months and three months in the prior fiscal year.
The net income for the nine months and three months ended December 31, 1998 was $681,689 and $244,564, compared to net income of $165,767 and net loss of $26,562, respectively, in the comparable nine months and three months last year.
Selling, general and administrative expenses were $958,095 (17% of sales) and $326,262 (19% of sales), respectively, for the nine months and three months ended December 31, 1998 and were $1,066,267 (20% of sales) and $377,900 (30% of sales) for the comparable periods last year.
Cash needs of the Hong Kong joint venture are currently met by funds generated from operations. During the nine months ended December 31, 1998, working capital increased by $754,800 from $1,760,188 on March 31, 1998 to $2,514,988 on December 31, 1998.
Year 2000 Compliance - The Company believes that the impact of the year 2000 issue will not have a material effect on results of operations. However, the Company is in the process of hiring a consultant to review its computer operations and anticipates completing any required changes during calendar year 1999. The Company relies on a third-party vendor for its EDI operations and has been informed that their system is Year 2000 Compliant. The Company has been advised by its major supplier that its manufacturing facilities are Year 2000 Compliant. The majority of the Company's customers are publicly- traded retailers.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
PART II
Item 4. Submission of Matters to a Vote of Security Holders
On October 29,1998, the Company held its Annual Meeting of Shareholders. The only matter submitted to the shareholders for a vote was the election of directors.
The nominees submitted for election as directors were Michael L. Kovens, Steven C. Knepper, Harvey Grossblatt, Gary Goldberg and Ronald Frank. At least 669,657 shares were voted in favor of each director, and no more than 8,320 shares were voted to withhold approval of any director. As a result, Messrs. Kovens, Knepper, Grossblatt, Goldberg and Frank were elected to serve as directors until the next annual meeting of shareholders of the Company and until their successors are duly elected and qualified.
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed during the quarter for which this report is filed.
UNIVERSAL SECURITY INSTRUMENTS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNIVERSAL SECURITY
INSTRUMENTS, INC.
Dated: February 12, 1999 Harvey Grossblatt
HARVEY GROSSBLATT
President, Chief Financial Officer
| ARTICLE 5 |
| PERIOD TYPE | 3 MOS | 9 MOS |
| FISCAL YEAR END | MAR 31 1999 | MAR 31 1998 |
| PERIOD END | DEC 31 1998 | DEC 31 1998 |
| CASH | 100,981 | 100,981 |
| SECURITIES | 0 | 0 |
| RECEIVABLES | 712,402 | 712,402 |
| ALLOWANCES | 100,000 | 100,000 |
| INVENTORY | 1,972,677 | 1,972,677 |
| CURRENT ASSETS | 2,818,400 | 2,818,400 |
| PP&E | 1,544,812 | 1,544,812 |
| DEPRECIATION | 106,984 | 106,984 |
| TOTAL ASSETS | 6,640,240 | 6,640,240 |
| CURRENT LIABILITIES | 1,009,954 | 1,009,954 |
| BONDS | 0 | 0 |
| PREFERRED MANDATORY | 0 | 0 |
| PREFERRED | 0 | 0 |
| COMMON | 8,870 | 8,870 |
| OTHER SE | 4,386,459 | 4,386,459 |
| TOTAL LIABILITY AND EQUITY | 6,640,240 | 6,640,240 |
| SALES | 2,019,608 | 7,657,038 |
| TOTAL REVENUES | 2,019,608 | 7,657,038 |
| CGS | 1,707,575 | 6,597,185 |
| TOTAL COSTS | 1,707,575 | 6,597,185 |
| OTHER EXPENSES | 564,518 | 1,619,780 |
| LOSS PROVISION | 0 | 0 |
| INTEREST EXPENSE | 65,684 | 181,670 |
| INCOME PRETAX | (195,708) | (398,295) |
| INCOME TAX | 0 | 0 |
| INCOME CONTINUING | (195,708) | (398,295) |
| DISCONTINUED | 0 | 0 |
| EXTRAORDINARY | 0 | 0 |
| CHANGES | 0 | 0 |
| NET INCOME | (195,708) | (398,295) |
| EPS PRIMARY | (.21) | (.46) |
| EPS DILUTED | (.21) | (.46) |