UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-31747
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, Maryland 21117 (Address of principal executive offices) (Zip Code) |
Registrant's telephone number, including area code: (410) 363-3000
Inapplicable
(Former name, former address and former fiscal year if
changed from last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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 such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes |_| No |X|
At November 14, 2005, the number of shares outstanding of the registrant's common stock was 1,673,498.
TABLE OF CONTENTS Part I - Financial Information Page ---- Item 1. Consolidated Financial Statements (unaudited): Consolidated Balance Sheets at September 30, 2005 and March 31, 2005 3 Consolidated Statements of Earnings for the Three Months Ended September 30, 2005 and 2004 4 Consolidated Statements of Earnings for the Six Months Ended September 30, 2005 and 2004 5 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2005 and 2004 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 Item 4. Controls and Procedures 13 Part II - Other Information Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits 16 Signatures 17 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS September 30, 2005 March 31, 2005 ------------------ -------------- CURRENT ASSETS Cash $ 131,833 $ 59,287 Accounts receivable: Trade (less allowance for doubtful accounts of $15,000) 1,168,005 1,014,757 Employees 22,283 21,503 ------------------ -------------- 1,190,288 1,036,260 Amount due from factor 4,806,123 3,394,084 Inventory 3,963,827 4,834,486 Prepaid expenses 286,798 145,394 ------------------ -------------- TOTAL CURRENT ASSETS 10,378,869 9,469,511 DEFERRED TAX ASSET 551,780 351,780 INVESTMENT IN JOINT VENTURE 6,869,364 6,131,481 PROPERTY AND EQUIPMENT - NET 71,882 81,690 OTHER ASSETS 15,486 15,486 TOTAL ASSETS $ 17,887,381 $ 16,049,948 ================== ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,819,248 $ 1,725,402 Accrued liabilities: Patent litigation reserve 635,318 806,679 Payroll, commissions and other 436,365 620,199 ------------------ -------------- TOTAL CURRENT LIABILITIES 2,890,931 3,152,280 ------------------ -------------- COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 1,673,498 and 1,652,998 shares at September 30, 2005 and March 31, 2005, respectively 16,735 16,530 Additional paid-in capital 11,515,556 11,469,444 Retained earnings 3,464,159 1,411,694 ------------------ -------------- TOTAL SHAREHOLDERS' EQUITY 14,996,450 12,897,668 ------------------ -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,887,381 $ 16,049,948 ================== ============== |
See accompanying notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended September 30, -------------------------- 2005 2004 ----------- ----------- Net sales $ 7,119,100 $ 6,622,221 Cost of goods sold 4,840,262 4,500,443 ----------- ----------- GROSS PROFIT 2,278,838 2,121,778 Research and development expense 49,636 79,995 Selling, general and administrative expense 1,700,809 1,641,124 ----------- ----------- Operating income 528,393 400,659 Other expense: Interest expense (15,103) (18,683) ----------- ----------- INCOME BEFORE EARNINGS FROM JOINT VENTURE 513,290 381,976 Earnings from Joint Venture: Equity in earnings of Joint Venture 549,405 661,860 ----------- ----------- NET INCOME BEFORE TAXES 1,062,695 1,043,836 Provision for income tax (benefit) expense (100,000) -- ----------- ----------- NET INCOME $ 1,162,695 $ 1,043,836 =========== =========== Net income per common share amounts: Basic $ 0.69 $ 0.66 Diluted $ 0.64 $ 0.59 Weighted average number of common shares outstanding: Basic 1,673,498 1,580,149 Diluted 1,824,937 1,757,998 |
See accompanying notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Six Months Ended September 30, ---------------------------- 2005 2004 ------------ ------------ Net sales $ 14,042,910 $ 11,497,003 Cost of goods sold 9,715,118 7,890,512 ------------ ------------ GROSS PROFIT 4,327,792 3,606,491 Research and development expense 101,814 146,221 Selling, general and administrative expense 3,588,869 2,822,482 ------------ ------------ Operating income 637,109 637,788 Other expense: Interest expense (23,377) (31,454) ------------ ------------ INCOME BEFORE EARNINGS FROM JOINT VENTURE 613,732 606,334 Earnings from Joint Venture: Equity in earnings of Joint Venture 1,251,305 1,171,281 ------------ ------------ NET INCOME BEFORE TAXES $ 1,865,037 $ 1,777,615 Provision for income tax (benefit) expense (187,428) -- ------------ ------------ $ 2,052,465 $ 1,777,615 ============ ============ Net income per common share amounts: Basic $ 1.23 $ 1.13 Diluted $ 1.13 $ 1.01 Weighted average number of common shares outstanding: Basic 1,663,318 1,572,558 Diluted 1,817,759 1,761,141 |
See accompanying notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended September 30, 2005 2004 ----------- ----------- OPERATING ACTIVITIES Net income $ 2,052,465 $ 1,777,615 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,818 12,363 Earnings of the Joint Venture (1,251,303) (1,171,281) Changes in operating assets and liabilities: (Increase) in accounts receivable and amounts due from factor (1,566,067) (1,369,578) Decrease (increase) in inventories and prepaid expenses 729,255 (267,468) (Decrease) increase in accounts payable and accrued expenses (261,349) 861,294 (Increase) in deferred tax asset (200,000) -- ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (483,181) (157,055) INVESTING ACTIVITIES: Dividends received from Joint Venture 513,420 -- Purchase of property and equipment (4,010) (1,901) ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 509,410 (1,901) FINANCING ACTIVITIES: Proceeds from issuance of common stock from exercise of employee stock options 46,317 55,842 Principal payments on capital lease -- (4,474) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 46,317 51,368 ----------- ----------- INCREASE (DECREASE) IN CASH 72,546 (107,588) Cash at beginning of period 59,287 188,190 ----------- ----------- CASH AT END OF PERIOD $ 131,833 $ 80,602 =========== =========== Supplemental information: Interest paid $ 23,377 $ 31,454 Income tax paid -- -- Non-cash financing activities: Repayment of trade payables due the Joint Venture in lieu of cash distribution -- 458,940 |
See accompanying notes to consolidated financial statements.
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statement of Management
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the interim consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted. The interim consolidated financial statements should be read in conjunction with the Company's March 31, 2005 audited financial statements filed with the Securities and Exchange Commission on Form 10-K. The interim operating results are not necessarily indicative of the operating results for the full fiscal year.
Income Taxes
No income tax expense has been provided for in the three and six month periods ended September 30, 2005, principally as a result of the carryforward of prior years' operating losses. The valuation allowance previously established to offset tax benefits associated with our net operating loss carryforwards and other deferred tax assets was reduced during the six month period ended September 30, 2005 by $200,000, resulting in a net income tax benefit of $187,428. The valuation allowance is heavily influenced by historical results of operations and management believes recent operating results support the recognition of a portion of the income tax benefits associated with realization of net operating loss carryforwards and other deferred tax assets. We will continue to monitor the remaining valuation allowance of $576,523 which offsets future tax benefits associated with net operating loss carryforwards and other deferred tax assets until circumstances indicate the allowance is no longer required.
Joint Venture
The Company maintains a 50% interest in a joint venture with a Hong Kong corporation ("Joint Venture") that has manufacturing facilities in the Peoples' Republic of China, for the manufacturing of consumer electronic products. The following represents summarized balance sheet and income statement information of the Hong Kong Joint Venture for the six months ended September 30, 2005 and 2004:
2005 2004 ----------- ----------- Net sales $11,603,563 $13,058,422 Gross profit 3,993,796 4,223,978 Net income 2,222,036 2,561,766 Total current assets 7,227,911 6,994,456 Total assets 16,665,745 14,507,826 Total current liabilities 4,630,962 4,798,055 |
During the six months ended September 30, 2005 and 2004, respectively, the Company purchased $6,014,577 and $4,699,666 of products from the Hong Kong Joint Venture. At September 30, 2005 and 2004, the Company had amounts payable to the Hong Kong Joint Venture of $500,000. For the six month period ended September 30, 2005, the Company has adjusted its equity in earnings of the Joint Venture to reflect a reduction of $135,149 in inter-company profit in inventory as required by US GAAP.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 154, "Accounting for Changes and Error Corrections - a replacement of Accounting Opinions Board ("APB") Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective application to changes in accounting principles for prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, and earlier adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after this statement was issued. The Company has adopted SFAS No. 154 as of its issuance and will apply its provisions to any changes in accounting principle that occur in future periods. The Company's adoption of SFAS No. 154 is not expected to have an impact on the Company's financial condition or results of operations.
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 123R, "Share-Based Payment," which requires companies to expense the value of employee stock options and similar awards. The effective date of FASB 123R is for interim and annual periods beginning after June 15, 2005.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"), which provides guidance on the implementation of SFAS No. 123R, including guidance related to share-based payment transactions with nonemployees, valuation methods, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, and the accounting for income tax effects of share-based payment arrangements under SFAS No. 123R.
In April 2005, the SEC delayed the implementation date for SFAS No. 123R until an issuer's first annual period that begins after June 15, 2005. Therefore, the Company is required to adopt SFAS No. 123R effective April 1, 2006, using one of three implementation alternatives. The Company anticipates that the adoption of SFAS No. 123R may have a significant impact on the Company's financial statements. The Company is currently in the process of determining which implementation alternative to use and what the overall accounting impact of adopting SFAS No. 123R may be.
Reclassifications
Certain prior year amounts have been reclassified in order to conform with current year presentation.
Net Income Per Common Share
Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the periods presented. Diluted earnings per common share is computed based on the weighted average number of common shares outstanding plus the effect of stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on the Company's average stock price.
A reconciliation of the weighted average shares of common stock utilized in the computation of basic and diluted earnings per share for the three and six month periods ended September 30, 2005 and 2004 is as follows:
Three Months Ended Six months Ended September 30, September 30, --------------------- --------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Weighted average number of common shares outstanding for basic EPS 1,673,498 1,580,149 1,663,318 1,572,558 Shares issued upon the assumed exercise of outstanding stock options 151,439 177,849 154,441 188,583 --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding for diluted EPS 1,824,937 1,757,998 1,817,759 1,761,141 ========= ========= ========= ========= |
Basic and diluted weighted average number of common shares outstanding for the three and six month periods ended September 30, 2004 have been restated to show the effect of a 4-for-3 stock dividend paid on April 5, 2004 to shareholders of record on March 15, 2004.
At September 30, 2005, and 2004 there were no securities outstanding whose issuance would have an anti-dilutive effect on the earnings per share calculation.
Stock Based Compensation
During the period ended September 30, 2005 and 2004, the Company granted options for the purchase of 0 and 1,000 shares, respectively, to employees. The options issued during the six months ended September 30, 2004, are exercisable at an average price of $13.00 per share, expiring in 2009, and vest over a four year period from the date of grant.
On July 12, 2005, the Company settled the litigation with a former director. As a part of this settlement, the Company accepted the June 6, 2002 exercise by the former director of the option to purchase 20,000 shares at an exercise price of $2.25 per share. The exercise price for these shares was paid simultaneously with the closing of the settlement agreement.
The Company uses the intrinsic value method as defined by Accounting Principles Board Opinion No. 25 to account for stock-based employee compensation. The Company has adopted the disclosure requirements of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, as amended by FASB No. 148. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.
Three Months Ended Six months Ended September 30, September 30, ----------------------- ------------------------ 2005 2004 2005 2004 ---------- ---------- ---------- ----------- Net income, as reported $1,162,695 $1,043,836 $2,052,465 $ 1,777,615 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (25,962) (15,520) (51,924) (31,040) ---------- ---------- ---------- ----------- Pro forma net income $1,136,733 $1,028,316 $2,000,541 $ 1,746,575 ========== ========== ========== =========== Earnings per share: Basic - as reported $ 0.69 $ 0.66 $ 1.23 $ 1.13 ========== ========== ========== =========== Basic - pro forma $ 0.68 $ 0.65 $ 1.20 $ 1.11 ========== ========== ========== =========== Diluted - as reported $ 0.64 $ 0.59 $ 1.13 $ 1.01 ========== ========== ========== =========== Diluted - pro forma $ 0.62 $ 0.58 $ 1.10 $ 0.99 ========== ========== ========== =========== |
All share and per share amounts included in the consolidated financial statements have been retroactively adjusted to reflect the 4-for-3 stock dividend paid on April 5, 2004 to shareholders of record on March 15, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used throughout this Report, "we," "our," "the Company" and similar words refers to Universal Security Instruments, Inc.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements reflecting our current expectations with respect to our operations,
performance, financial condition, and other developments. These forward-looking
statements may generally be identified by the use of the words "may", "will",
"believes", "should", "expects", "anticipates", "estimates", and similar
expressions. These statements are necessarily estimates reflecting management's
best judgment based upon current information and involve a number of risks and
uncertainties. We caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and readers
are advised that various factors could affect our financial performance and
could cause our actual results for future periods to differ materially from
those anticipated or projected. While it is impossible to identify all such
factors, such factors could include: (i) our and our Hong Kong Joint Venture's
respective ability to maintain operating profitability, (ii) competitive
practices in the industries in which we compete, (iii) our dependence on current
management, (iv) the impact of current and future laws and governmental
regulations affecting us and our Hong Kong Joint Venture, (v) general economic
conditions, (vi) other factors which may be identified from time to time in our
Securities and Exchange Commission filings and other public announcements, and
(vii) currency fluctuations. We do not undertake and specifically disclaim any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2005 and 2004
Sales. Net sales for the three months ended September 30, 2005 were $7,119,100 compared to $6,622,221 for the comparable three months in the prior fiscal year, an increase of $496,879 (7.5%). The primary reason for the increase in sales was an increase in volume of sales of smoke alarm, GFCI and carbon monoxide alarm units.
Gross Profit Margin. The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. Our gross profit margin was 32% of sales for the quarters ended September 30, 2005 and 2004.
Expenses. Research and development, and selling, general and administrative expenses increased by $29,326 from the comparable three months in the prior year. As a percentage of net sales, these expenses were reduced to 25% for the three month period ended September 30, 2005, from 26% for the comparable 2004 period. The decrease in research, selling and general administrative expense as a percent of sales was due to higher sales volume and variable costs that did not increase at the same rate as sales.
Interest Expense and Income. Our interest expense, net of interest income, decreased to $15,103 for the quarter ended September 30, 2005 from $18,683 for the quarter ended September 30, 2004. The lower interest expenses resulted primarily from a reduction in the average balance of borrowings.
Net Income. We reported net income of $1,162,695 for the quarter ended September 30, 2005 compared to net income of $1,043,836 for the corresponding quarter of the prior fiscal year. The primary reason for the increase in net income is our increased earnings from domestic operations and income tax benefits totaling $231,314, offset by a decrease in earnings from our Hong Kong Joint Venture of $112,455 from the same period of the prior year.
Six Months Ended September 30, 2005 and 2004
Sales. Net sales for the six months ended September 30, 2005 were $14,042,910 compared to $11,497,003 for the comparable six months in the prior fiscal year, an increase of $2,545,907 (22%). The primary reason for the increase in sales was an increase in volume of sales of smoke alarm, GFCI and carbon monoxide alarm units.
Gross Profit Margin. The gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales. The Company's gross profit margin decreased 0.6% from 31.4% for the period ended September 30, 2004 to 30.8% for the current period ended September 30, 2005. The primary reason for this was higher costs of goods sold which costs were not reflected in the pricing of our products.
Expenses. Research and development, and selling, general and administrative expenses increased by $721,980 from the comparable six months in the prior year. As a percentage of sales, these expenses were 26.3% for the six month period ended September 30, 2005 from 25.8% for the comparable 2004 period. Various expense categories contributed to the increased dollar amount of the expense, but the following major account classifications were significant factors in this dollar increase: (i) Commissions and freight charges vary directly with sales volume and, therefore, of the $721,980 increase in expenses, commissions and freight expense of $371,729 is attributable to higher sales volume during the 2005 period. (ii) Professional fees associated with litigation and auditing costs increased by $339,929 for the 2005 period as compared to the same period in the previous year. The Company believes professional fees will decrease during the remainder of the current fiscal year as outstanding litigation issues are resolved.
Interest Expense and Income. Our interest expense, net of interest income, decreased to $23,377 for the six months ended September 30, 2005, from $31,454 for the six months ended September 30, 2004. The lower interest expenses resulted primarily from a reduction in the average balance of borrowings.
Net Income. We reported net income of $2,052,465 for the six months ended September 30, 2005 compared to net income of $1,777,615 for the corresponding period of the prior fiscal year. The primary reason for the increase in net income is increased sales without a corresponding increase in associated expenses (i.e., while the expenses increased, they did not increase at the same rate as sales), an increase in earnings of the Hong Kong Joint Venture of $80,024 from the same period of the prior year, and income tax benefits from the reduction in the valuation allowance provided on deferred tax assets.
FINANCIAL CONDITION AND LIQUIDITY
Our cash needs are currently met by funds from our Factoring Agreement which supplies both short-term borrowings and letters of credit to finance foreign inventory purchases. The maximum amount available under the Factoring Agreement is currently $7,500,000. However, based on specified percentages of our accounts receivable and inventory and letter of credit commitments, we had $6,122,000 available under the Factoring Agreement (including the amount due from factor of $4,806,123), of which $0 was borrowed as of September 30, 2005. The interest rate under the Factoring Agreement on the uncollected factored accounts receivable and any additional borrowings is equal to the prime rate of interest charged by our lender. At September 30, 2005, the prime rate was 6.5%. Borrowings are collateralized by all of our accounts receivable and inventory.
Our non-factored accounts receivable as of the end of our last fiscal year (net of allowances for doubtful accounts) were $1,014,757, and were $1,168,005 as of September 30, 2005. The increase in non-factored trade accounts receivable during the first six months of the current fiscal year is due to increased sales to customers for which we bear the credit risk. Our prepaid expenses as of the end of our last fiscal year were $145,394, and were $286,798 as of September 30, 2005. The increase in prepaid expenses during the first six months of the current fiscal year is due to the timing of premium payments to various insurance carriers.
Operating activities used cash of $483,181 for the six months ended September 30, 2005. This was primarily due to net income being offset by an increase in accounts receivable and amounts due from factor of $1,566,067, an increase in accounts payable and accrued expenses of $261,349, and an increase in the deferred tax asset of $200,000, offset by a decrease in inventories and prepaid expenses of $729,255.
Investing activities provided cash of $509,410 in the current quarter primarily as a result of dividends received from the Joint Venture. For the same period last year, investing activities used cash of $1,901.
Financing activities provided cash of $46,317 from the exercise of employee stock options. For the same period last year, financing activities provided cash of $51,368, primarily from the exercise of employee stock options.
We believe that funds available under the Factoring Agreement, distributions from the Hong Kong Joint Venture, and working capital provide us with sufficient resources to meet our requirements for liquidity and working capital in the ordinary course of our business over the next twelve months and over the long term.
HONG KONG JOINT VENTURE
Net Sales. Net sales of the Hong Kong Joint Venture for the three and six months ended September 30, 2005 were $5,590,351 and $11,603,563, respectively, compared to $6,216,118 and $13,058,422, respectively, for the comparable periods in the prior fiscal year. The 10.1% and 11.1% respective decreases in net sales for the three and six month periods were due to reduced volume of product shipped due to a temporary reduction in manufacturing capacity arising as a result of a lack of available trained labor.
Net Income. Net income for the three and six months ended September 30, 2005 was $1,021,841 and $2,222,036, respectively, compared to $1,323,720 and $2,561,766, respectively, in the comparable periods last year. The 22.8% and 13.2% respective decreases in net income for the three and six month periods were due to reduced sales volume as noted above.
Gross Margins. Gross margins of the Hong Kong Joint Venture for the three month period ended September 30, 2005 increased to 33.5% from 32% for the 2004 period. For the six month period ended September 30, 2005, gross margins were 34.4% which was an increase over the 32.3% gross margin of the prior period. Since gross margins depend on sales volume of various products, changes in product sales mix caused these changes in gross margins.
Expenses. Selling, general and administrative expenses were $821,963 and $1,708,232, respectively, for the three and six month periods ended September 30, 2005, compared to $758,793 and $1,623,462, in the prior year's respective periods. As a percentage of sales, expenses were 14.7% for the three and six month periods ended September 30, 2005, compared to 12% for the three and six month periods ended September 30, 2004. The increase in selling, general and administrative expense was due to increased costs.
Interest Income and Expense. Interest expense, net of interest income, was $4,648 and $11,498, respectively, for the three and six month periods ended September 30, 2005, compared to interest expense of $11,714 and $21,494, respectively, for the prior year's periods. The decrease in net interest expense is primarily due to increased interest income from bonds owned by the Hong Kong Joint Venture.
Liquidity. Cash needs of the Hong Kong Joint Venture are currently met by funds generated from operations. During the six months ended September 30, 2005, working capital increased by $1,003,182 from $1,593,767 on March 31, 2005 to $2,596,949 on September 30, 2005.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our consolidated financial statements and results of operations are based on our Consolidated Financial Statements 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, we evaluate these estimates, including those related to bad debts, inventories, income taxes, and contingencies and litigation. We base 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.
We believe 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 consolidated financial statements included in Item 8 of the Form 10-K for the year ended March 31, 2005. 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:
Our revenue recognition policies are in compliance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" issued by the Securities and Exchange Commission. We recognize sales upon shipment of products net of applicable provisions for any discounts or allowances. We believe that the shipping date from our warehouse is the appropriate point of revenue recognition since upon shipment we have substantially completed our obligations which entitle us to receive the benefits represented by the revenues, and the shipping date provides a consistent point within our control to measure revenue. Customers may not return, exchange or refuse acceptance of goods without our approval. We have established 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. We have 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. Accordingly, based on current results of operations, the balance of the valuation allowance for our remaining net deferred tax assets at September 30, 2005 has been reduced to $576,523.
We are subject to lawsuits and other claims, related to patents and other matters. Management is 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.
We generally provide warranties from one to ten years to the non-commercial end user on all products sold. The manufacturers of our products provide us with a one-year warranty on all products we purchase for resale. Claims for warranty replacement of products beyond the one-year warranty period covered by the manufacturers are immaterial and we do not record estimated warranty expense or a contingent liability for warranty claims.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
No material changes have occurred in our quantitative and qualitative market risk disclosures as presented in our Annual Report Form 10-K for the year ended March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and believe that the system is effective. There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation are insignificant and the potential benefits of adding employees to clearly segregate duties do not justify the expenses associated with such increases. Management will periodically reevaluate this situation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 10, 2003, Leviton Manufacturing Co., Inc. filed a second civil suit against the Company and its USI Electric subsidiary in the United States District Court for the District of Maryland (Case No. 03cv1701), alleging this time that the Company's GFCI units infringe one or more of its more recently issued patents for reset lockout technology related to but not required by UL Standard 943 for ground GFCI units, effective January 2003 ("Leviton II"). Leviton also asserted trade dress and unfair competition claims which largely correspond to the claim in the previously reported "Leviton l" suit. On July 23, 2003, the GFCI manufacturer, Shanghai Meihao Electric, Inc., filed an action for Declaratory Judgment of non-infringement, invalidity, and unenforceability of the asserted patents. The Court has bifurcated the action into liability and damage phases, linked the supplier's Declaratory Judgment action with the action against the Company, and consolidated Leviton I with Leviton II. In March 2005, the court dismissed one of the Leviton patents from the suit and in April 2005, issued a claims construction order that favors the position of the Company. Discovery has closed and summary judgment motions have been fully briefed and are pending disposition by the Court. The Company moved for summary judgment of noninfringement of the five remaining patents and for judgment on the trade dress claims. Leviton opposed summary judgment on the trade dress claims and cross-moved for a judgment of infringement on two claims from one of its asserted patents.
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. 03cv00537), alleging that certain of the Company's AC powered/battery backup smoke detectors infringe on a patent acquired by Kidde. The plaintiff is seeking injunctive relief and damages to be determined at trial. Summary judgment motions have been fully briefed and the case was scheduled for a jury trial in October. At the pretrial conference, the Judge ordered a continuance for Kidde to make a showing of ownership of the patent at the time the suit was filed. All other proceedings are stayed pending a determination of whether Kidde had a standing to sue the Company at the time the suit was filed. The Company and its counsel believe that the Company has significant defenses relating to the patent in suit. In the event of an unfavorable outcome, the amount of any potential loss to USI is not yet determinable.
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.
On October 5, 2005, the Company held its Annual Meeting of Stockholders. The only matter submitted to the stockholders for a vote was the election of one director in the Class of 2008. The nominee was Harvey B. Grossblatt. At the Meeting, at least 1,219,905 shares were voted in favor of the nominee, no more than 335,535 shares were voted to withhold approval of any nominee's election, and 36,738 shares abstained. As a result, the nominee was elected.
Directors not up for re-election and continuing in office after the Meeting are: Cary Luskin, Ronald A. Seff, M.D. and Howard Silverman, Ph.D.
ITEM 6. EXHIBITS.
3.1 Articles of Incorporation (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 June 30, 2004, File No. 0-7885) 10.1 Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2003, File No. 0-7885) 10.2 Hong Kong Joint Venture Agreement, 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, 2003, File No. 0-7885) 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 Amendment to Factoring Agreement with CIT Group dated September 28, 2004 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004, File No. 1-31747) 10.6 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) 10.7 Amended and Restated Employment Agreement dated July 18, 2005 between the Company and Harvey B. Grossblatt* 10.8 Settlement Agreement with respect to Michael Kovens vs. Universal Security Instruments, Inc. et al (incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2005, File No. 1-31747) 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer* 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer* 32.1 Section 1350 Certifications* 99.1 Press Release dated November 14, 2005* |
*Filed herewith
SIGNATURES
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.
(Registrant)
Date: November 14, 2005 By: /s/ Harvey B. Grossblatt ----------------------------------- Harvey B. Grossblatt President, Chief Executive Officer By: /s/ James B. Huff ----------------------------------- James B. Huff Chief Financial Officer |
Exhibit 10.7
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of July 18, 2005, 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 has served as the President and Chief Operating Officer of the Company and, in August 2004 assumed the additional duties of Chief Executive Officer of the Company; and
WHEREAS, the Company desires to continue to employ the Executive to perform services as the President and Chief Executive 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") from time to time at its discretion;
WHEREAS, the Company and Executive entered into an Amended and Restated Employment Agreement dated as of April 1, 2003 (the "Original Agreement");
WHEREAS, the parties desire to amend certain other provisions of the Original Agreement to be effective from and after the date hereof, 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 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 Executive Officer of the Company, which shall be subject to the discretion of the Board. At the request of the Board, the Executive shall serve as a director, officer or consultant of any subsidiary of the Company, the Company's 50% owned Hong Kong Joint Venture or its successor (the "Joint Venture") or of any other entity in which the Company has an interest, provided that the Executive is indemnified for such service to the same extent as he is indemnified for serving in his capacities on behalf of the Company. The Executive shall diligently and conscientiously devote his full and exclusive business time and attention and best efforts in discharging his duties. Nothing herein shall restrict the Executive from devoting reasonable time and his expertise to charitable or communal activities. 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 pay the Executive at the following minimum rates of annual base salary ("Annual Base Salary") for the following periods:
The date hereof through July 31, 2006 - $300,000 August 1, 2006 through July 31, 2007 - $325,000 August 1, 2007 through July 31, 2008 - $350,000 |
The Annual Base Salary for periods subsequent to July 31, 2008 shall be an amount determined by the Compensation Committee of the Board and approved by the Board. 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 60 days. 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.
(d) Compensation for Other Services. The Executive shall be entitled to retain all cash, stock, options or other compensation paid for his services as a director or officer of the Joint Venture to the same extent such cash, stock, options or other compensation is paid to all similarly situated officers or directors (as the case may be) of the Joint Venture.
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, 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.
(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 Employment Period, 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 $1,000 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 $30,000 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 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. 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.
(j) All reasonable legal, accounting and financial planning costs and expenses in connection with estate planning and annual tax return preparation for the Executive and his wife, not to exceed $10,000 in any three year period.
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) and 6(d), or may be terminated in accordance with Sections 6(b), (b), (c) and (f), as follows:
(a) The Executive's employment will be terminated upon the last day of the Employment Period without a renewal.
(b) The Company may terminate the Executive's employment hereunder
for Cause. For purposes of this Agreement, the Company shall have "Cause" to
terminate the Executive's employment hereunder upon (i) the willful and
continued failure by the Executive to substantially perform his duties hereunder
(other than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure after
notice of termination given by the Executive pursuant to Section 6(c)), after
written demand for substantial performance is delivered by the Company that
specifically identifies the manner in which the Company believes the Executive
has not substantially performed his duties, which is not cured within 30 days
after notice of such failure has been given to the Executive by the Company, or
(ii) the willful engaging by the Executive in misconduct which is materially
injurious to the Company, monetarily or otherwise (including conduct that
constitutes competitive activity pursuant to Section 9 hereof). For purposes of
this paragraph, no act, or failure to act, on the Executive's part shall be
considered "willful" unless done, or omitted to be done, by him not in good
faith and without reasonable belief that his action or omission was in the best
interest of the Company.
(c) The Executive may terminate his employment hereunder for Good Reason for purposes of this Agreement, "Good Reason" shall mean:
(i) A failure by the Company to comply with any material provision of this Agreement which his not been cured within fifteen (15) days after written notice of such noncompliance has been given by the Executive to the Company;
(ii) Any purported termination by the Company of the Executive's employment other than as permitted under this Agreement (and for purposes of this Agreement no such purported termination shall be effective);
(iii) The assignment to the Executive of any duties materially inconsistent with his status as the Chief Executive Officer of the Company or a material adverse alteration in the nature or status of his responsibilities in connection with such offices. For purposes of this Agreement, such alteration of the Executive's duties shall be deemed to have occurred in connection with any reorganization, merger, acquisition or other business combination of the Company unless, in each such instance, the Executive will be the Chief Executive Officer of (A) the Company if it is the surviving entity in any merger, reorganization, acquisition or other business combination with the Company, or (B) the successor entity to the Company in any merger, acquisition or other business combination with the Company.
(iv) Relocation of the Executive to a location which is not within Baltimore County or the Baltimore City Metropolitan area, except for required travel on the Company's business to an extent substantially consistent with the Executive's duties;
(v) The failure by the Company to continue in effect any compensation or benefit plan in which the Executive participated as of the date hereof and which is material to the Executive's aggregate compensation and benefits hereunder, unless an equitable arrangement (embodied in an on-going substitute or alternative plan) has been made with respect to such plan, or failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed on the date hereof.
(d) The employment of the Executive hereunder will terminate upon his death.
(e) The Company may terminate the Executive's employment hereunder 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.
(f) The Executive may terminate his employment hereunder 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").
(g) The Executive may terminate his employment hereunder on six months' advance written notice at any time.
(h) Any termination of the Executive's employment hereunder by the Company or the Executive (other than termination by reason of the Executive's death) shall be communicated by written notice to the other party in accordance with Section 10(f). Each such notice shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. If, within thirty (30) days following any written notice of termination, the party receiving the notice notifies the other party in writing that a dispute exists concerning the termination, which notice sets forth in reasonable detail the basis for such dispute, the termination will not be effective until the date when the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected).
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 Employment Period accruing through the effective date of termination of employment.
(b) In the event the Company elects to not renew the Executive's employment hereunder at the end of the Employment Period and the Executive's employment hereunder is terminated pursuant to Section 6(a), the Executive shall be entitled to receive (A) a lump sum severance payment in an amount equal to the previous 12 months' Annual Base Salary and last Bonus, and (B) for a period of three years following the termination, the benefits set forth in Sections 4(a) and 4(g) and an amount in cash, payable on the first, second and third anniversaries of the termination, equal to the benefit which would have been payable under Section 4(c) had such benefit continued.
(c) In the event the Executive's employment hereunder is terminated pursuant to Section 6(c), the Executive shall be entitled to receive in addition to the payment under Section 7(a), (A) a lump sum severance payment in an amount equal to the previous 12 months' Annual Base Salary and last Bonus, and (B) for a period of three years following the termination, the benefits set forth in Sections 4(a) and 4(g) and an amount in cash, payable on the first, second and third anniversaries of the termination, equal to the benefit which would have been payable under Section 4(c) had such benefit continued.
(d) 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(f), the Executive shall be entitled to receive, in addition to the payment under Section 7(a), a lump sum payment in an amount equal to (A) the Annual Base Salary for the balance of the Employment Period, and (B) the amount of the last Bonus. For a period of three years following the end of the Employment Period, the Executive shall also receive the benefits set forth in Sections 4(a) and 4(g) and an amount in cash, payable on the anniversary of the termination, equal to the benefit which would have been payable under Section 4(c) had such benefit continued. In addition, the Executive shall be entitled to receive three times the previous 12 months' Annual Base Salary and last Bonus, provided, however, the aggregate present value of severance payments pursuant to this Section 7(d) (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 ss.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. All amounts to be paid pursuant to this Section 7(d) shall be 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.
(e) In the event the Executive's employment is terminated pursuant to Section 6(d), the Executive's estate shall be entitled to receive:
(i) A lump sum payment in an amount equal to the sum of (i)
the Executive's then current Annual Base Salary for the
greater of (A) the balance of the Employment Period or (B) one
year, in either case reduced by any individual life insurance
benefits the premiums for which are paid for by the Company,
(ii) the amount of the last Bonus, and (iii) an amount in cash
equal to the benefit under Section 4(c) for the last completed
fiscal year of the Company, payable within 15 days following
receipt by the Company of insurance proceeds on the life of
the Executive or, if there is no such insurance, within 30
days following the date of death. The Company will exercise
its best efforts to promptly collect any such insurance
proceeds.
(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; 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's 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.
In the event the Executive's employment is terminated pursuant to Sections 6(a)
or (c) and thereafter the Executive dies, the provisions of Sections 7(b) or
7(c), as the case may be, shall control.
(f) In the event the Executive's employment is terminated pursuant to Section 6(e), the Executive shall be entitled to receive:
(i) The continuation of the payment of the Executive's then current Annual Base Salary for the balance of the Employment Period, reduced 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; and
(ii) The continuation of the benefits set forth in Sections 4(a) and 4(g), and an amount in cash, payable on the anniversary of the termination, equal to the benefit which would have been payable under Section 4(c) had such benefit continued, for the longer of (A) the balance of the Employment Period, or (B) three years following the date of the Executive's 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 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.
(g) All amounts paid under Sections 7(c) or (d) shall be increased by an amount so that when the total amount paid is reduced by federal, state, and local income taxes computed at the highest marginal rates applicable to an individual residing in the state in which the Executive resided at the time of termination, the net amount is equal to the amount contemplated by Sections 7(c) or (d), as the case may be.
(h) As a condition, and in consideration, of the payment of any amounts under Sections 7(b) - (g), the Executive or his estate, as the case may be, shall execute a release which shall fully, forever, irrevocably and unconditionally release, remise and discharge the Company, its subsidiaries and successors-in-interest, and its officers, directors, stockholders, predecessors, corporate affiliates, agents and employees (each in their individual and corporate capacities) (hereinafter, the "Released Parties") from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities, and expenses (including reasonable attorneys' fees and costs), of every kind and nature which the Executive or his estate, as the case may be, ever had or then has against the Released Parties arising out of the Executive's employment with the Company, including, but not limited to, all employment discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.2000e, et seq., the Age Discrimination in Employment Act, 29 U.S.C. ss.621 et seq., the Americans With Disabilities Act of 1990, 42 U.S.C., ss.12101 et seq., the Rehabilitation Act of 1973, 29 U.S.C. ss.701 et seq., the Fair Employment Practices Act, and the Human Rights Act, all as amended and all claims arising out of the Fair Credit Reporting Act, 15 U.S.C. ss.1681 et seq., and the Employee Retirement Income Security Act of 1974, 29 U.S.C. ss.1001.
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) Non-competition. 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 Employment Period.
(b) CONFIDENTIALITY. DURING THE EMPLOYMENT PERIOD AND AT ALL TIMES AFTER THE TERMINATION OF THIS AGREEMENT FOR ANY REASON, PROVIDED THE COMPANY FULFILLS ITS POST TERMINATION OBLIGATIONS TO THE EXECUTIVE AS SET FORTH HEREIN, THE EXECUTIVE WILL NOT DISCLOSE TO ANY THIRD PARTY ANY TRADE SECRETS, CUSTOMER LISTS OR OTHER CONFIDENTIAL INFORMATION PERTAINING TO THE BUSINESS OF THE COMPANY.
(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) Non-solicitation 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 NON-COMPETITION, NON-SOLICITATION, 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. Arbitration. Any dispute to be submitted to binding arbitration pursuant to the terms of this Agreement shall be submitted to binding arbitration in Baltimore, Maryland, in accordance with the rules and procedures of the American Arbitration Association. The arbitrator's decision will be final and may be enforced through any court having jurisdiction. All proceedings before the arbitrator(s) shall be confidential and neither arbitrating party shall comment to any third party on the arbitration or subject matter of the arbitration except as required to permit the conduct of the arbitration. The arbitrator(s) shall award to a prevailing party in the arbitration the cost of such prevailing party's reasonable attorneys' fees, arbitration expenses and other expenses reasonably incurred in connection with the dispute or disputes being reviewed by the arbitrator(s). Furthermore, if a party files a judicial action alleging claims subject to arbitration under this Agreement, and another arbitrating party successfully stays the judicial action and/or compels arbitration of the claims, the party bringing the claims in court will pay the other party's costs and expenses, including attorneys' fees. THE PARTIES HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR OTHER PROCEEDING BROUGHT TO ENFORCE OR OTHERWISE RELATING TO THIS AGREEMENT.
11. 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 Compensation Committee If to the Executive: Harvey B. Grossblatt 28 Westspring Way Lutherville, Maryland 21093 |
(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/ James B. Huff --------------------------------- James B. Huff Vice President THE EXECUTIVE: ____________________________ /s/ Harvey B. Grossblatt ------------------------------------ HARVEY B. GROSSBLATT |
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, as determined pursuant to Generally Accepted Accounting Principles as in effect of the date of this Agreement.
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:
(i) The direct or indirect acquisition of ownership, holding or power to vote more than 25% of the Company's voting stock.
(ii) The acquisition of the ability to control the election of a majority of the Company's directors.
(iii) The acquisition of a controlling influence over the management or policies of the Company by any person or by persons acting as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934).
(iv) During any period of two consecutive years, individuals (the "Continuing Directors") who at the beginning of such period constitute the Board of Directors of the Company (the "Existing Board") cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Existing Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director. The decision of the Continuing Directors as to whether or not a Change in Control has occurred shall be conclusive and binding on all parties.
(v) 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).
(vi) 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.
(vii) 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.
Exhibit 31.1
CERTIFICATION
I, Harvey B. Grossblatt, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Universal Security Instruments, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: November 14, 2005 /s/ Harvey B. Grossblatt -------------------------- Harvey B. Grossblatt Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, James B. Huff, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Universal Security Instruments, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
(c) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(d) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: November 14, 2005 /s/ James B. Huff -------------------------- James B. Huff Chief Financial Officer |
Exhibit 32.1
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Universal Security Instruments, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2004 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 the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods reflected therein.
Date: November 14, 2005 /s/ Harvey B. Grossblatt --------------------------- Harvey B. Grossblatt Chief Executive Officer /s/ James B. Huff --------------------------- James B. Huff Chief Financial Officer |
Exhibit 99.1
[USI Logo] 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 Reports Record Earnings for Second Quarter Sales Increase 8%; Net Earnings Rise 11%
OWINGS MILLS, MD, November 14, 2005: Universal Security Instruments, Inc. (AMEX:
UUU) today announced its highest quarterly earnings in the company's 36-year
history for its fiscal second quarter ended September 30, 2005.
The Company reported its net sales rose 8% to $7,119,100 in the second quarter of fiscal 2006, compared to net sales of $6,622,221 for the same period last year. Net earnings were $1,162,695, or $0.69 per basic share ($0.64 per diluted share) compared to $1,043,836, or $0.66 per basic share ($0.59 per diluted share) for the comparable period last year. Included in the results was a net tax benefit of $100,000 for the Company's quarter ended September 30, 2005.
For the six months ended September 30, 2005, sales rose 22% to $14,042,910 versus $11,497,003 for the same period last year. The Company reported net earnings of $2,052,465, or $1.23 per basic share ($1.13 per diluted share) compared to net earnings of $1,777,615, or $1.13 per basic share ($1.01 per diluted share) last year. Included in the results for the six months ended September 30, 2005 was a net tax benefit of $187,428.
"We continue to grow our top and bottom lines by gaining market share for our core smoke and carbon monoxide alarm products while improving our domestic operational results. Overall, we continue to execute our strategy to build market share in a quality-focused manner and I believe we are well-positioned heading into the second half of our fiscal year," said Harvey Grossblatt, chief executive officer of Universal.
Universal's Hong Kong manufacturing joint venture will begin production in its new state-of-the-art 250,000-square-foot manufacturing facility in the Fujian province of Southern China this month in response to anticipated growth.
"Our Hong Kong operation continued to perform well, though their contribution for the period was reduced by capacity and labor constraints and we are confident their added manufacturing space will help drive future sales and earnings," Grossblatt said.
UNIVERSAL SECURITY INSTRUMENTS, INC. is a U.S.-based manufacturer (through its Hong Kong Joint Venture) and distributor of safety and security devices. Founded in 1969, the Company has a 36-year heritage of developing innovative and easy-to-install products, including smoke, fire and carbon monoxide alarms. For more information on Universal Security Instruments, visit our website at www.universalsecurity.com.
* more *
7-A GWYNNS MILL COURT o OWINGS MILLS, MARYLAND 21117, USA
(410) 363-3000 o www.universalsecurity.com
Universal/Page 2
UNIVERSAL SECURITY INSTRUMENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED) Three Months Ended September 30, --------------------------- 2005 2004 ------------ ------------ Sales $ 7,119,100 $ 6,622,221 Net income* 1,162,695 1,043,836 Income per share Basic 0.69 0.66 Diluted 0.64 0.59 Weighted average number of common shares outstanding Basic 1,673,498 1,580,149 Diluted 1,824,937 1,757,998 (UNAUDITED) Six Months Ended September 30, --------------------------- 2005 2004 ------------ ------------ Sales $ 14,042,910 $ 11,497,003 Net income* 2,052,465 1,777,615 Income per share Basic $ 1.23 $ 1.13 Diluted $ 1.13 $ 1.01 Weighted average number of common shares outstanding Basic 1,663,318 1,572,558 Diluted 1,817,759 1,761,141 |
Net tax benefit of $100,000 was recorded for the quarter ended September 30, 2005 and $187,428 for the six months ended September 30, 2005, respectively. This tax benefit is due to a reduction in the valuation allowance previously established associated with our deferred tax assets. Due to the tax benefit carryforward of prior years' operating losses, no tax liability was incurred for the quarter and six months ended September 30, 2005.
CONSOLIDATED BALANCE SHEET
ASSETS September 30, --------------------------- 2005 2004 ------------ ------------ Cash $ 131,833 $ 80,602 Accounts receivable and amount due from factor 5,996,411 4,595,203 Inventory 3,963,827 2,928,642 Prepaid expenses 286,798 313,528 ------------ ------------ TOTAL CURRENT ASSETS 10,378,869 7,917,975 INVESTMENT IN HONG KONG JOINT VENTURE 6,869,364 5,544,627 PROPERTY AND EQUIPMENT - NET 71,882 82,969 OTHER ASSETS AND DEFERRED TAX ASSET 567,266 72,385 ------------ ------------ TOTAL ASSETS $ 17,887,381 $ 13,617,956 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,819,248 $ 1,860,574 Accrued liabilities 1,071,683 722,903 Current obligations under capital lease -- 2,750 ------------ ------------ TOTAL CURRENT LIABILITIES 2,890,931 2,586,227 ------------ ------------ LONG TERM DEBT SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding 1,673,498 and 1,580,729 shares at September 30, 2005 and September 30, 2004, respectively 16,735 15,809 Additional paid-in capital 11,515,556 11,244,465 Retained earnings (accumulated deficit) 3,464,159 (228,545) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 14,996,450 11,031,729 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,887,381 $ 13,617,956 ============ ============ |
All shares have been adjusted to reflect the 4-for-3 stock split payable on April 5, 2004.
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.