UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 2002
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ________________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7-A Gwynns Mill Court, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for at least the
past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 19, 2002:
Common Stock, $.01 Par Value - $2,188,951
The number of shares outstanding of the issuer's classes of common
stock as of June 19, 2002:
Common Stock, $.01 Par Value - 1,009,770 shares
ITEM 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the federal securities laws. These statements
can be identified by the use of forward-looking terminology such as
"believes", "expects", "may", "will", "should", or "anticipates" or
similar terminology, or by discussions of strategy. These statements
reflect the reasonable judgment of our management with respect to
future events and are subject to risks and uncertainties that could
cause actual results to differ materially from those in the forward-
looking statements. We cannot guarantee that our forward-looking
statements will turn out to be correct or that our beliefs or goals
will not change. Our actual results could be very different from, and
worse than, our expectations for various reasons, including factors
that may affect future results discussed in Management's Discussion
and Analysis of Financial Condition and Results of Operations. Under
the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, an SEC-reporting company that identifies forward-looking
statements and warns investors that actual results could differ
materially from those in the forward-looking statements, will not be
liable for any private action arising under the Securities Act of 1933
based on such forward-looking statements.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company" or "USI") was
incorporated in the State of Maryland in 1969. Its principal offices
are located at 7-A Gwynns Mill Court, Owings Mills, MD 21117 and its
telephone number is 410-363-3000.
The Company designs and markets a variety of popularly-priced security
and private label products which currently consist primarily of smoke
alarms and related products. Most of the Company's products require
minimal installation, or are designed for easy installation by
the consumer without professional assistance.
Prior to 2000, the Company also designed and marketed a variety of
telecommunication and video products. Due to the low margins realized
on its telecommunications and video products, the Company has since
focused its business primarily on security products. As a result, the
Company (i) changed its marketing of telecommunications and video
products to concentrate virtually exclusively on made-to-order private
label sales, and (ii) entered into the electrical distribution market
with an enhanced and newly packaged line of smoke alarms as well as
its other security products.
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The Company imports virtually all of its products from various
suppliers overseas. For the fiscal year ended March 31, 2002,
approximately 78% of the Company's purchases are bought from a Joint
Venture with a Hong Kong corporation (Hong Kong Joint Venture), in
which the Company owns a 50% interest. The Hong Kong Joint Venture has
manufacturing facilities in the People's Republic of China.
The Company's sales for the year ended March 31, 2002 were $10,480,829
compared to $7,731,501 for the year ended March 31, 2001, an increase
of approximately 36%.
The Company reported net income of $261,625 in fiscal 2002 compared
to a net loss of $758,940 in fiscal 2001. The main reason for the
increase in earnings was higher Hong Kong Joint Venture earnings.
SECURITY PRODUCTS
The Company markets a complete line of smoke alarms under the
trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signal(TM)"
all of which are manufactured by the Hong Kong Joint Venture.
The line of smoke alarms consists of battery, electrical and
electrical with battery backup alarms. The Company's products contain
different types of batteries with different battery lives, and some
with alarm silencers. The smoke alarms marketed to the electrical
distribution trade also include hearing impaired and heat alarms with
a variety of additional features. The Company also markets a line of
electronically advanced outdoor floodlights under the name "Lite
Aide (TM)," carbon monoxide alarms, door chimes and ground fault
circuit interrupters.
Sales of the Company's security products aggregated $10,054,979 or
approximately 96% of total sales in the fiscal year ended March 31,
2002 and $6,487,456 or approximately 84% of total sales in the fiscal
year ended March 31, 2001. This increase in sales volume was due
primarily to higher USI ELECTRIC sales.
The Company is focusing its sales and marketing efforts to maximize
security product sales, especially smoke alarms manufactured by its
Hong Kong Joint Venture and marketed to the electrical distribution
trade. The electrical distribution trade covers electrical and
lighting distributors as well as manufactured housing companies.
OTHER PRODUCTS
The Company markets a variety of private label products on a made-to-
order basis, such as telephones and video products. The majority of
these products are produced by the Hong Kong Joint Venture.
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For the fiscal year ended March 31, 2002, sales of the Company's
private label products aggregated $425,850 or 4% of total sales. For
the fiscal year ended March 31, 2001, sales of these products were
$1,244,045 or 16% of total sales. The primary reason for the decrease
in sales was fewer private label customers.
IMPORT MATTERS
The Company imports virtually all of its security and other products.
The Company, as an importer, is subject to numerous tariffs which vary
depending on types of products and country of origin, changes in
economic and political conditions in the country of manufacture,
potential trade restrictions and currency fluctuations. The Company
has attempted to protect itself from fluctuations in currency exchange
rates to the extent possible by negotiating most commitments in U.S.
dollars.
The Company's purchases are subject to delays in delivery due to
problems with shipping and docking facilities, as well as other
problems associated with purchasing products abroad. The Company
imports a majority of its products from the People's Republic of
China.
SALES AND MARKETING
The Company's products are generally marketed to retailers, wholesale
distributors, home centers, catalog and mail order companies and
to other distributors. Sales are made both by the Company and by
approximately 12 independent sales organizations (for Universal
Security Instruments, Inc.) which are compensated by commissions. The
Company has agreements with the sales organizations which are
cancelable by either party upon 30 days notice. The Company does not
believe that the loss of any one of these organizations would have a
material adverse effect upon its business.
The Company also promotes its products through its own sales catalogs
and brochures, which are mailed directly to trade customers. The
Company's customers, in turn, may advertise the Company's products in
their own catalogs and brochures and in their ads in newspapers and
other media. The Company also exhibits and sells its products at
various trade shows, including the annual National Hardware Show in
Chicago, Illinois. The Company's domestic retail marketing strategy is
designed to attract retailing customers outside the consumer
electronics industry, such as variety stores and home centers.
Sales by the Company are also made by officers and full-time employees
of the Company, five of whom are also engaged in sales management and
training. Sales outside the United States, which are made by officers
of the Company and through exporters, were less than 1% of total
sales in fiscal 2002.
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The Company's products have historically been retailed to
"do-it-yourself" consumers by chain, discount, electrical, building
supply, electrical distributors and hardware stores, as well as
through catalogs. The Company also distributes its products through
specialty markets such as premium/incentive and direct mail. The
Company does not currently market any significant portion of its
products directly to end users.
In 1999, the Company formed a new subsidiary, USI ELECTRIC, INC. for
the purpose of selling security products to the electrical
distribution trade and the manufactured home industry manufacturers.
USI ELECTRIC has established a national distribution system with 12
regional stocking warehouses throughout the United States which
enables customers to receive their orders the next day without paying
for overnight freight charges. The subsidiary (USI ELECTRIC) has hired
sales personnel from the electrical distribution trade and has engaged
28 independent sales organizations which represent approximately 200
sales representatives, some of which have warehouses where USI
ELECTRIC products are maintained for sale.
The Company and its subsidiary's backlog of orders believed to be firm
as of March 31, 2002 was approximately $714,085. The Company's backlog
as of March 31, 2001 was approximately $229,350. The increase in
backlog is a function of the timing of orders received from its
customers.
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has a 50% interest in a Hong Kong Joint Venture which has
manufacturing facilities in the People's Republic of China, for the
manufacturing of certain electronic and electrical products sold by
the Company.
The Company believes that this Hong Kong Joint Venture arrangement
will ensure a continuing source of supply for a majority of the
Company's security products at competitive prices. During fiscal year
2002, the Company made 78% of total purchases from the Hong Kong Joint
Venture, with the Company's purchases representing 43% of the Hong
Kong Joint Venture's sales. The products produced by the Hong Kong
Joint Venture include smoke alarms and certain other products. The
Company is currently pursuing the development of additional products
by the Hong Kong Joint Venture such as photoelectric smoke alarms and
carbon monoxide alarms. Changes in economic and political conditions
in China or any other adversity to the Hong Kong Joint Venture will
unfavorably affect the value of the Company's investment in the Hong
Kong Joint Venture and would have a material adverse effect on the
Company. Refer to NOTE C of the Financial Statements for a comparison
of annual sales and earnings of the Hong Kong Joint Venture. In the
past two fiscal years, the Hong Kong Joint Venture has increased its
sales to customers other than the Company.
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SUPPLIERS - OTHERS
Certain private label products, not manufactured for the Company by
the Hong Kong Joint Venture, are manufactured by other foreign
suppliers. The Company believes that its relationships with its
suppliers are good. The Company believes that the loss of its ability
to purchase products from the Hong Kong Joint Venture would have a
material adverse effect on the Company. The loss of any of its other
suppliers could have a short-term adverse effect on its operations,
but the Company believes that replacement sources for these other
suppliers could be developed.
COMPETITION
In fiscal year 2002, sales of security products accounted for
approximately 96% of total sales. In the sale of smoke alarms, the
Company competes in all of its markets with First Alert, Firex and
Walter Kidde. All of these companies have greater financial resources
and financial strength than the Company. The Company believes that its
security products compete favorably with other such products in the
market primarily on the basis of styling, features and pricing.
The security industry in general involves changing technology. The
success of the Company's products may depend on the Company's ability
to improve and update its products in a timely manner and to adapt to
new technological advances.
EMPLOYEES
The Company has 17 employees, 9 of whom are engaged in administration
and sales, and the balance of whom are engaged in product development
and servicing.
The Company's employees are not unionized. The Company believes that
its relations with its employees are satisfactory.
ITEM 2.
PROPERTIES
Effective December 1999, the Company entered into an operating lease
for a 9,000 square foot office and warehouse located in Baltimore
County, Maryland. This lease, which expires in October 2002, is
subject to renewal for an additional six years with increasing rentals
at 3% per year. The monthly rental approximates $4,500 per month
during the initial term. The Company intends to renew for its first
three year option.
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The Hong Kong Joint Venture's manufacturing facility consists of six
buildings totaling 100,000 square feet. Three of the buildings
(totaling 31,000 square feet) are leased pursuant to a long-term lease
which expires in 2010. The other three buildings (69,000 square feet)
are owned by the Hong Kong Joint Venture and were built on property
leased for a 48 year term, which expires in 2041.
On June 16, 1999, the Company sold its headquarters facility, located
in Baltimore County, Maryland for a price of $2.2 million. After
deducting the mortgage and settlement charges, the Company received
cash of approximately $830,000. The Company recorded a gain on the
sale of this property of approximately $805,000.
The Company retained ownership of approximately 1-1/2 acres of
undeveloped land adjacent to the Company's former headquarter's
property which the Company sold. This property is held as collateral
by the Company's factor. The Company is currently negotiating for the
sale of this property and expects the sale to be complete in early
2003.
The Company believes that its current facilities, and those of the
Hong Kong Joint Venture, are suitable and adequate.
ITEM 3.
LEGAL PROCEEDINGS
In December 2001, Leviton Manufacturing Company filed a civil action
in the United States District Court for the District of Maryland (Case
No. 01CV3855), alleging that, subsequent to December 11, 2001, the
Company's ground fault circuit interrupters infringe on the
plaintiff's patents and service marks. The plaintiff is seeking
injunctive relief and damages to be determined at trial. The Company
and its counsel believe that the Company has meritorious defenses to
the claim and is aggressively defending the suit.
From time to time, the Company is involved in various lawsuits and
legal matters. It is the opinion of management and, on the advice of
legal counsel, that these matters will not have a material adverse
effect on the Company's financial statements.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Over-The-Counter Bulletin
Board (OTCBB). The OTCBB is a regulated quotation service that
displays real-time quotes, last sales prices and volume information on
over-the-counter equity securities.
The following table shows the fiscal 2002 and 2001 quarterly high and
low bid prices for the Company's common stock as reported by the
OTCBB. The bid quotations represent prices between dealers and do not
reflect the retailer markups, markdowns or commissions and may not
represent actual transactions.
Fiscal year ended March 31, 2002
Bid Prices
High Low
First Quarter 1.25 0.90
Second Quarter 1.65 0.95
Third Quarter 3.95 0.90
Fourth Quarter 4.40 2.20
Fiscal year ended March 31, 2001
Bid Prices
High Low
First Quarter 3.63 2.13
Second Quarter 4.13 2.25
Third Quarter 3.88 2.00
Fourth Quarter 2.25 1.25
On June 19, 2002, the closing quotation for our common stock as
reported on the OTC Bulletin Board was $3.52. You should obtain
current market quotations for our common stock because the market
price of our stock may fluctuate greatly. You can obtain these
quotations from various websites or by calling your broker.
As of March 31, 2002, there were approximately 160 holders of record
of the Company's common stock. Approximately 57% of the Company's
1,009,770 outstanding shares of common stock were held in street name
by an unknown number of beneficial owners since it does not reflect
persons or entities that hold our stock in "Street" name or through
various brokerage firms.
The Company has not paid any cash dividends on its common stock in the
last three years. It is the Company's present intention to retain all
earnings for use in its future operations.
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ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the five years ended March
31, 2002 have been derived from the audited consolidated financial statements.
The information set forth below in not necessarily indicative of results of
future operations.
Years Ended March 31,
2002 2001 2000 1999 1998
Consolidated Statement of Operations Data:
Net sales $10,480,829 $ 7,731,501 $ 7,667,530 $ 9,071,628 $11,566,317
Loss before
equity
in earnings
(loss) of
Hong Kong
Joint Venture
and income
taxes (976,063) (799,183) (95,925) (1,119,154) (414,351)
Net income
(loss) 261,625 (758,940) 41,056 (806,552) (445,126)
Per common
share:
Loss before
equity in
earnings
(loss) of
Hong Kong
Joint Venture
and income
taxes
- basic and
diluted (1) (1.03) (.88) (.11) (1.30) (.51)
Net income
(loss) -
- basic (1) .28 (.83) .05 (.93) (.55)
- diluted(1) .28 (.83) .04 (.93) (.55)
Weighted average
number of common
shares outstanding
- basic(1) 938,624 912,270 903,495 863,706 811,397
- diluted(1) 945,770 912,270 938,807 863,706 811,397
Consolidated Balance Sheet Data:
Total assets 5,182,462 5,945,690 5,476,545 6,402,120 7,705,310
Long-term debt
(non-current) 29,916 45,088 60,260 -0- 1,246,861
Working capital 409,945 585,032 1,368,513 1,514,425 2,130,408
Current ratio(2) 1.28 to 1 1.23 to 1 2.01 to 1 1.63 to 1 2.25 to 1
Shareholders'
equity 3,681,273 3,303,304 4,062,244 3,987,072 4,747,351
(1) All per share amounts and number of outstanding shares have been restated to
reflect the one-for-four reverse stock split as of February 27, 1998.
(2) The current ratio is calculated by dividing current assets by current
liabilities.
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Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years 2002 and
2001 are summarized as follows:
Quarter Ended
2002 June 30, September 30, December 31, March 31,
Net sales $2,255,130 $2,653,482 $2,965,386 $2,606,831
Gross profit 552,282 748,584 790,350 721,436
Net earnings 62,359 23,543 36,433 139,290
Earnings
per share-basic .07 .03 .04 .14
Earnings
per share-diluted .07 .03 .04 .13
Quarter Ended
2001 June 30, September 30, December 31, March 31,
Net sales $2,051,116 $1,740,167 $2,522,377 $1,417,841
Gross profit 560,396 621,451 710,079 186,959
Net earnings (loss) 32,473 5,490 (196,270) (600,633)
Earnings (loss)
per share-basic .04 .01 (.22) (.66)
Earnings (loss)
per share-diluted .03 .01 (.22) (.66)
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 2002, sales increased by $2,749,328 (36%) from the prior
year. The Company's focus on marketing to the electrical distribution
trade through USI ELECTRIC generated an increase in sales to this market
of approximately $4,000,000, from approximately $4,300,000 in 2001 to
approximately $8,300,000 in 2002. The Company experienced a decrease of
approximately $1,210,000 in sales from its retail and wholesale
distribution customers. This is consistent with the Company's change in
marketing focus discussed in Item 1.
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In fiscal year 2001, sales increased by $63,971 (1%) from fiscal year
2000. While the Company's sales remained relatively constant with the
prior year, the focus on marketing to the electrical distribution trade
through USI ELECTRIC generated an increase in sales to this market of
approximately $2,500,000, from approximately $1,800,000 in 2000 to
approximately $4,300,000 in 2001. The Company experienced a corresponding
decrease in sales from its retail and wholesale distribution customers.
This is consistent with the Company's change in marketing focus discussed
above.
GROSS PROFIT
The gross profit was 27% for fiscal year 2002 and fiscal year 2001. The
gross profit was 22% for fiscal year 2000. The principal cause of the
lower gross profit in fiscal year 2000 is due to a $495,000 write-off for
abandoned and slow-moving inventory.
EXPENSES
In fiscal year 2002, selling, general and administrative expenses
increased by approximately $924,466 (38%), from $2,453,381 in 2001 to
$3,377,847 in 2002. As a percentage of sales, selling, general and
administrative expenses were 32% for both fiscal years 2002 and 2001. The
increase in the amount of these expenses resulted from higher costs,
including sales commissions and freight, associated with the Company's
subsidiary, USI ELECTRIC, INC. and higher legal costs partly associated
with defending the patent suit described in Part I, ITEM 3.
In fiscal year 2001, selling, general and administrative expenses
increased by approximately $214,013 (10%) from fiscal year 2000. As a
percentage of sales, selling, general and administrative expenses
were 32% for fiscal year 2001 and 29% for fiscal year 2000. The increase
resulted from higher costs, including sales commissions and freight,
associated with the Company's subsidiary, USI ELECTRIC, INC.
Management believes that as sales continue to increase, selling,
general and administrative expenses will continue to increase.
INTEREST EXPENSE
Interest expense for fiscal year 2002 decreased to $188,020 from $248,135
in fiscal year 2001 due primarily to lower levels of borrowings and lower
interest rates.
Interest expense for fiscal year 2001 increased to $248,135 from $140,635
in fiscal year 2000 due primarily to higher levels of borrowings and
higher interest rates.
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INCOME TAX
The Company did not make any provision for federal or state income taxes
in each of the three years in the period ended March 31, 2002 due to the
operating loss carry forward for income tax purposes. A valuation
allowance has been established and, accordingly, no benefit has been
recognized for the tax benefit of our net operating losses or other
deferred tax assets.
NET INCOME
The Company reported net income of $261,625 for fiscal year 2002 compared
to a net loss of $758,940 for fiscal year 2001. The increase in net income
resulted from higher Hong Kong Joint Venture earnings, partially offset by
higher selling, general and administrative expenses for the Company's
subsidiary, USI ELECTRIC, INC. and higher legal costs partly associated
with defending the patent suit described in Part I, ITEM 3.
The Company reported a net loss of $758,940 for fiscal year 2001 compared
to net income of $41,056 for fiscal year 2000. Included in net income for
fiscal year 2000 was a gain on the sale of real estate of approximately
$805,000.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated from
operations and from the Company's Factoring Agreement, which supplies both
short-term borrowings and letters of credit to finance foreign inventory
purchases. The Company's maximum borrowing under this Agreement is
$7,500,000. However, based on specified percentages of the Company's
accounts receivable and inventory and letter of credit commitments, at
March 31, 2002, the borrowings were limited to $670,959. Of this amount,
$216,959 had been utilized in short-term borrowings, leaving $454,000
available under the Agreement as of March 31, 2002. The outstanding
principal balance of the Agreement is payable upon demand. The interest
rate on the Factoring Agreement on the uncollected factored accounts
receivable and any additional borrowings is equal to 1-1/4% in excess of
the prime rate of interest charged by the Company's lender, which was
6-1/4% at March 31, 2002. The borrowings are collateralized by all the
Company's accounts receivable, inventory and a 1.5 acre parcel of land
which is adjacent to the Company's prior headquarters. During the year
ended March 31, 2002, working capital decreased by $175,087, from $585,032
on March 31, 2001, to $409,945 on March 31, 2002.
Operating activities used cash of $779,740 for the year ended March 31,
2002. For the prior fiscal year, operating activities used cash of
$1,004,749 for the year ended March 31, 2001. An increase of $225,009
from 2001 was primarily due to lower levels of accounts receivable and
inventory, primarily offset by undistributed Joint Venture earnings.
Investing activities provided cash of $663,309 for fiscal 2002. Investing
activities used cash of $11,182 in 2001. The primary reason for the change
was Joint Venture dividends.
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Financing activities in 2002 provided cash of $101,172, primarily due to
the sale of common stock pursuant to the exercise of employee stock
options. Financing activities in 2001 provided cash of $958,556, due to
short-term borrowings used to finance higher levels of accounts receivable
and inventory.
HONG KONG JOINT VENTURE
In fiscal year 2002, sales of the Hong Kong Joint Venture were $11,410,035
compared to $6,053,815 and $5,517,170 in fiscal years 2001 and 2000,
respectively.
Net income was $2,475,376 for fiscal year 2002 compared to net income of
$80,487 and $273,962 in fiscal years 2001 and 2000, respectively. The
increase in income for the year ended March 31, 2002 was due primarily to
higher sales to customers other than the Company.
Selling, general and administrative expenses were $1,530,579, $1,448,320
and $1,176,392 for fiscal years 2002, 2001 and 2000, respectively. As a
percentage of sales, expenses were 13%, 24% and 21% for fiscal years 2002,
2001 and 2000, respectively. The decrease in expenses as a percentage of
sales, in fiscal 2002 was primarily due to higher sales volume.
Interest income net of interest expense was $54,164 for fiscal year 2002,
compared to $158,098 and $140,425 in fiscal years 2001 and 2000,
respectively. The decrease in interest income is due to the decrease in
the loan receivable balance from the Company.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During fiscal year 2002, working capital
increased by $1,223,521 from $2,621,133 on March 31, 2001 to $3,844,654 on
March 31, 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
During fiscal year 2002, the Financial Accounting Standards Board issued
Statement of Financial Account Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets,"
SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No.
144, "Accounting for Impairment or Disposal of Long-Lived Assets." The
Company does not expect these new pronouncements to impact the preparation
of the financial statements.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is its Factoring Agreement
which provides for interest at the prime rate plus 1-1/4%. The Company is
affected by market risk exposure primarily through the effect of changes
in interest rates on amounts payable by the Company under its credit
facility. A significant rise in the prime rate could materially adversely
affect the Company's business, financial condition and results of
operations. At March 31, 2002, an aggregate principal amount of $216,959
was outstanding under the facility bearing interest at an annual rate of
6-1/4%. If principal amounts outstanding under the Company's Factoring
Agreement remained at this year-end level for an entire year and the prime
rate increased or decreased, respectively, by 0.5%, the Company would pay
or save, respectively, an additional $8,500.00 in interest in that year.
The Company does not utilize derivative financial instruments to hedge
against changes in interest rates or for any other purpose.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description
Page
Report of Independent Certified Public Accountants 15
Consolidated balance sheets, March 31, 2002 and 2001 16
Consolidated statements of operations for the years ended 18
March 31, 2002, 2001 and 2000
Consolidated statements of shareholders' equity for the 19
years ended March 31, 2002, 2001 and 2000
Consolidated statements of cash flows for the years ended 20
March 31, 2002, 2001 and 2000
Notes to consolidated financial statements 21
Schedule II - Valuation and Qualifying Accounts 40
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors of
Universal Security Instruments, Inc.
We have audited the accompanying consolidated balance sheets of
Universal Security Instruments, Inc. and subsidiaries (the Company) as
of March 31, 2002 and 2001, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three
years in the period ended March 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of the Hong Kong Joint Venture,
the Company's investment, which is accounted for using the equity method.
The Company's investment of $2,990,067 and $2,418,010 in the Hong Kong
Joint Venture's net assets at March 31, 2002 and 2001, and equity in
earnings of $1,237,688, $40,243 and $136,981 for each of the three years
in the period ended March 31, 2002 are included in the accompanying
consolidated financial statements. The financial statements of the Hong
Kong Joint Venture were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for the Hong Kong Joint Venture, is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
and the report of the other auditors provide a reasonable basis for
our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Universal
Security Instruments, Inc. and subsidiaries as of March 31, 2002 and
2001, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended March 31, 2002,
in conformity with accounting principles generally accepted in the United
States of America.
We have also audited the financial statement schedule of Universal
Security Instruments, Inc. and subsidiaries for each of the three years in
the period ended March 31, 2002 as listed in the index at Item 14. In our
opinion, this schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects,
the information required to be set forth therein.
GRANT THORNTON LLP
Baltimore, Maryland
May 31, 2002 - 15 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2002 2001
CURRENT ASSETS
Cash $ 19,383 $ 34,642
Accounts receivable:
Trade, less allowance for doubtful
accounts of $68,358 and $100,000
in 2002 and 2001, respectively 193,488 939,176
Officers and employees 1,115 7,048
194,603 946,224
Inventory 1,557,994 2,143,793
Prepaid expenses 109,238 57,671
TOTAL CURRENT ASSETS 1,881,218 3,182,330
INVESTMENT IN HONG KONG JOINT VENTURE 2,990,067 2,418,010
PROPERTY AND EQUIPMENT, NET 301,082 329,243
OTHER ASSETS 10,095 16,107
TOTAL ASSETS $5,182,462 $5,945,690
See notes to consolidated financial statements.
- 16 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
2002 2001
CURRENT LIABILITIES
Amount due factor $ 216,959 $ 1,791,442
Accounts payable 787,492 652,615
Accrued liabilities 451,092 137,511
Current obligations under capital lease 15,730 15,730
TOTAL CURRENT LIABILITIES 1,471,273 2,597,298
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASE 29,916 45,088
COMMITMENTS - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
1,009,770 shares and 912,270
shares at March 31, 2002
and 2001, respectively 10,098 9,123
Additional paid-in capital 10,648,679 10,533,310
Accumulated deficit (6,977,504) (7,239,129)
TOTAL SHAREHOLDERS' EQUITY 3,681,273 3,303,304
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,182,462 $ 5,945,690
See notes to consolidated financial statements.
- 17 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
2002 2001 2000
Net sales $10,480,829 $7,731,501 $7,667,530
Cost of goods sold 7,668,177 5,652,616 5,982,314
GROSS PROFIT 2,812,652 2,078,885 1,685,216
Research and development expense 222,817 176,767 191,651
Selling, general and
administrative expense 3,377,847 2,453,381 2,239,368
Operating loss (788,012) (551,263) (745,803)
Other income (expense):
Interest income - 233 301
Interest expense (188,020) (248,135) (140,635)
Gain from sale of building - - 804,861
Other (31) (18) (14,649)
(188,051) (247,920) 649,878
LOSS BEFORE EQUITY IN EARNINGS
OF HONG KONG JOINT VENTURE (976,063) (799,183) (95,925)
Equity in earnings of Hong Kong
joint venture 1,237,688 40,243 136,981
NET INCOME (LOSS) $ 261,625 $ (758,940) $ 41,056
Net income (loss) per share
Basic $ .28 $ (.83) $ .05
Diluted $ .28 $ (.83) $ .04
Shares used in computing net
income (loss) per share:
Basic 938,624 912,270 903,495
Diluted 945,770 912,270 938,807
See notes to consolidated financial statements.
- 18 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
Balance at
March 31, 1999 887,270 $8,873 $10,499,444 $(6,521,245) $3,987,072
Common stock issued
to employees 25,000 250 33,866 34,116
Net income 41,056 41,056
Balance at
March 31, 2000 912,270 9,123 10,533,310 (6,480,189) 4,062,244
Net loss (758,940) (758,940)
Balance at
March 31, 2001 912,270 9,123 10,533,310 (7,239,129) 3,303,304
Issuance of common
stock from
exercise of
employee stock
options 97,500 975 115,369 116,344
Net income 261,625 261,625
Balance at
March 31, 2002 1,009,770 $10,098 $10,648,679 $(6,977,504) $3,681,273
See notes to consolidated financial statements.
- 19 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
CASH FLOWS FROM 2002 2001 2000
OPERATING ACTIVITIES
Net income (loss) $ 261,625 $ (758,940) $ 41,056
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and amortization 30,483 45,858 31,736
Change in allowance for
doubtful accounts (31,642) - -
Undistributed earnings of Hong
Kong Joint Venture (1,237,688) (40,243) (136,981)
Gain on sale of building - - (804,861)
Issuance of common stock to
employee for services - - 34,116
Inventory reserve write-down 61,741 - 495,000
Changes in operating assets and
liabilities:
Increase in accounts receivable (106,494) (345,499) (51,255)
Decrease (increase) in inventories
and prepaid expenses 472,491 (171,652) (612,840)
Increase in accounts payable
and accrued liabilities 448,458 269,529 139,006
Decrease (increase) in other assets 6,012 (3,802) (6,305)
Decrease in amount due factor (684,726) - -
NET CASH USED IN OPERATING ACTIVITIES (779,740) (1,004,749) (871,328)
INVESTING ACTIVITIES
Distribution by Hong Kong Joint Venture 665,631 - -
Proceeds from sale of building - - 2,079,785
Purchases of property and equipment (2,322) (11,182) (88,844)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 663,309 (11,182) 1,990,941
FINANCING ACTIVITIES
Net borrowings of short-term debt - 973,728 31,230
Principal payments of capital lease
obligations (15,172) (15,172) (4,960)
Payment of debt related to the sale of
the building - - (1,246,973)
Issue of common stock from exercise of
employee stock options 116,344 - -
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 101,172 958,556 (1,220,703)
NET (DECREASE) INCREASE IN CASH (15,259) (57,375) (101,090)
CASH AT BEGINNING OF YEAR 34,642 92,017 193,107
CASH AT END OF YEAR $ 19,383 $ 34,642 $ 92,017
Supplemental information:
Interest paid $ 188,020 $ 248,135 $ 140,635
Income taxes paid - - -
Non-cash investing and financing activity:
The Company acquired equipment under capital lease obligations totaling
$80,950 during the year ended March 31, 2000.
See notes to consolidated financial statements.
- 20 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Company's primary business is the sale of smoke
alarms and other security products to retailers, wholesale distributors
and to the electrical distribution trade which includes electrical and
lighting distributors as well as manufactured housing companies. The
Company imports virtually all of its security and other products. The
Company, as an importer, is subject to numerous tariffs which vary
depending on types of products and country of origin, changes in
economic and political conditions in the country of manufacture,
potential trade restrictions and currency fluctuations.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates: In preparing financial statements in conformity with
accounting principles generally accepted in the United States of
America (US GAAP), management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition: The Company recognizes sales upon the shipment of
its products net of applicable provisions for discounts and allowances.
Stock-Based Compensation: The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Bases Board Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees, and complies with the disclosure
provisions of Statement of Financial Accounting Standard No. 123 (SFAS
No. 123), Accounting for Stock-Based Compensation. Under APB 25,
compensation expense is based on the difference, if any, on the date of
grant, between the market value of the Company's stock and the exercise
value of the option granted.
Research and Development: Research and development costs are charged
to operations as incurred.
Accounts Receivable: In September, 2000, the Financial Accounting
Standard Board issued Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 140), which is effective for
transfers of financial assets occurring after March 31, 2001.
- 21 -
In fiscal year 2002, the Company achieved the sales criteria of
Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and, as such, amounts transferred under
the Company's Factoring Agreement are treated as a sale of the asset.
The Company sells trade receivables on a pre-approved non-recourse
basis to the Factor under the Factoring Agreement on an ongoing basis.
Net discounts recognized on sales of receivables are included in
selling, general and administrative expenses in the consolidated
statements of income and amounted to $103,490 for the year ended March
31, 2002. The Agreement for the sale of accounts receivable provides
for continuation of the program on a revolving basis until terminated
by one of the parties to the Agreement.
Beginning in fiscal year 2002, with the achievement of SFAS 140 sales
criteria, the Company nets the factored accounts receivable with the
corresponding advance from the Factor, showing the amount net in its
consolidated balance sheet. Prior to the achievement of SFAS 140, the
amounts were not netted, but rather shown gross.
Shipping and Handling Fees and Costs: The Company includes shipping and
handling fees billed to customers in net sales. Shipping and handling
costs associated with inbound freight are included in cost of goods
sold. Shipping and handling costs associated with outbound freight are
included in selling, general and administrative expenses and totaled
$376,359, $244,149 and $90,457 in fiscal years 2002, 2001 and 2000.
Inventories: Inventories (consisting primarily of finished goods) are
stated at the lower of cost (first-in, first-out method) or market.
Included as a component of finished goods inventory are additional
non-material costs. These costs include freight, import duty and
inspection fees of $186,470 and $289,121 at March 31, 2002 and 2001,
respectively.
The Company reviews inventory periodically to identify slow moving
products.
Property and Equipment: Property and equipment are recorded at cost,
less accumulated depreciation and amortization. Depreciation and
amortization is provided by using the straight-line method for
financial reporting purposes and accelerated methods for income tax
purposes. The estimated useful lives for financial reporting purposes
are as follows:
Leasehold improvements - Term of lease
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Accounting for Hong Kong Joint Venture: The Company has a 50%
investment in a Hong Kong manufacturing facility. The Hong Kong Joint
Venture investment is accounted for using the equity method.
- 22 -
Income Taxes: The Company recognizes a liability or asset for the
deferred tax consequences of temporary differences between the tax
basis of assets or liabilities and their reported amounts in the
financial statements. These temporary differences will result in
taxable or deductible amounts in future years when the reported amounts
of the assets or liabilities are recovered or settled. The deferred tax
assets are reviewed periodically for recoverability and valuation
allowances are provided, as necessary.
Net Income (Loss) per Share: The Company reports basic and diluted
earnings per share. Basic earnings per share exclude dilution and are
computed by dividing net income (loss) by the weighted-average number
of common shares outstanding for the period. Diluted earnings per
share is computed by dividing net income (loss), adjusted by the
assumed conversion of any potential common share equivalents, including
stock options, by the weighted number of common shares and common share
equivalents outstanding (unless their effect is anti-dilutive). Common
stock equivalents totaling 912,270 at March 31, 2001 were not included
in the computation of diluted loss per share, because to do so would
have been anti-dilutive.
Recently Issued Accounting Standards: During fiscal year 2002, the
Financial Accounting Standards Board issued Statement of Financial
Account Standards (SFAS) No. 141, "Business Combinations," and SFAS No.
142 "Goodwill and Other Intangible Assets," SFAS No. 143, "Accounting
for Asset Retirement Obligations" and SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." The Company does not
expect these new pronouncements to impact the preparation of the
financial statements.
Reclassifications: Certain prior year amounts have been reclassified in
order to conform with current year presentation.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
2002 2001
Land and improvements $174,034 $174,034
Leasehold improvements 71,885 71,885
Machinery and equipment 157,626 157,626
Furniture and fixtures 155,154 154,533
Computer equipment 65,955 64,254
Equipment held under capital lease 80,950 80,950
705,604 703,282
Less accumulated depreciation
and amortization 404,522 374,039
$301,082 $329,243
- 23 -
NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE
The Company holds a 50% interest in a Joint Venture with a Hong Kong
Corporation, which has manufacturing facilities in the People's
Republic of China, for the manufacturing of consumer electronic
products. As of March 31, 2002, the Company has an investment balance
of $2,990,067 for its 50% interest in the Hong Kong Joint Venture.
The following represents summarized financial information is derived
from the audited financial statements of the Hong Kong Joint Venture as
of March 31, 2002 and 2001 and for the years ended March 31, 2002, 2001
and 2000. This information was audited by other accountants and their
report is included at March 31, 2002 and 2001.
March 31,
2002 2001
Current assets $ 5,897,705 $3,683,048
Property and other assets 2,117,443 2,205,082
Total $ 8,015,148 $5,888,130
Current liabilities $ 2,053,051 $1,061,915
Non-current liabilities 43,047 43,047
Equity 5,919,050 4,783,168
Total $ 8,015,148 $5,888,130
For the Year Ended March 31,
2002 2001 2000
Net sales $11,410,035 $6,053,815 $5,517,170
Gross profit 3,717,474 1,305,164 1,248,979
Net income 2,475,376 80,487 273,962
During the years ended March 31, 2002, 2001 and 2000, the Company
purchased $4,895,903, $3,841,325 and $4,567,052, respectively, of
finished product from the Hong Kong Joint Venture, which represents
78%, 66% and 79%, respectively, of the Company's total finished product
purchases for the years ended at March 31, 2002, 2001 and 2000. Amounts
due the Hong Kong Joint Venture included in Accounts Payable totaled
$199,917 and $368,511 at March 31, 2002 and 2001, respectively. Amounts
due from the Hong Kong Joint Venture included in Accounts Receivable
totaled $53,676 and $37,871 at March 31, 2002 and 2001, respectively.
The Company incurred interest costs charged by the Hong Kong Joint
Venture of $27,659, $26,762 and $7,301 during the years ended March 31,
2002, 2001 and 2000, respectively related to its purchases.
- 24 -
NOTE D - AMOUNTS DUE TO FACTOR
The Company sells certain of its trade receivables on a pre-approved,
non-recourse basis to a Factor. Since these are sold on a non-recourse
basis, the factored trade receivables and related repayment obligations
are not recorded in the Company's consolidated balance sheet at March
31, 2002. The financing from the factoring of the Company's trade
receivables totaled $1,426,751 at March 31, 2002. Prior to the
achievement of SFAS 140 sales criteria, on April 1, 2001, the Company
recorded the full amount of the factored receivables and related
repayment obligation as an asset and liability.
The Company's Factoring Agreement provides for financing of up to a
maximum of $7,500,000 with the amount available at any one time based
on 85% of uncollected non-recourse receivables sold to the factor and
45% of qualifying inventory.
At March 31, 2002 and 2001 the Company owed $216,959 and $1,791,442 to
its factor under the Agreement. The amounts due to its factor at March
31, 2002 relates to amounts advanced to the Company under the Agreement
in excess of amount allowed to be advanced related to the Company's
factored accounts receivable. In addition to the factored accounts
receivable, this excess amount is secured by the Company's inventory
and real property owned by the Company. The balance due at March 31,
2001 was secured by the Company's factored accounts receivable and
inventory and real property owned by the Company.
Under this Factoring Agreement, the Company sold receivables
approximately $10,300,000 during fiscal year 2002. Gains and losses
recognized on the sale of factored receivables include the fair value
of the limited recourse obligation. The uncollected balance of
factored receivables held by the factor amounted to $1,426,751 at March
31, 2002.
The outstanding amount due to the factor is payable upon demand. The
interest rate on this amount, plus the balance of the uncollected
factored trade receivables is equal to 1-1/4% in excess of the prime
rate of interest charged by the Company's lender (6-1/4% at March 31,
2002).
NOTE E - LEASES
The Company entered into capital lease agreements for various
equipment, with an outstanding balance of $45,646 as of March 31, 2002.
The leases have imputed interest rates ranging from 7.6% to 10%, with
monthly payments aggregating $1,810 per month.
- 25 -
Year Ended March 31,
2002 2001
Obligations under capital lease $45,646 $60,818
Less current maturities 15,730 15,730
$29,916 $45,088
Maturities of long term capital lease obligations for the three years
following March 31, 2002 are as follows:
Year
2003 $21,719
2004 18,193
2005 7,435
Total 47,347
Less amounts representing interest 1,701
Obligations under capital lease $45,646
During December 1999, the Company entered into an operating lease for
its office and warehouse expiring in October 2002, subject to renewal.
The Company intends to renew for its first three year option.
Rental expenses recognized under the lease totaled $57,164 and $51,369
for the years ended March 31, 2002 and 2001. Future obligations for the
years ended March 31, under this lease are as follows:
Year Amount
2003 $31,970
NOTE F - INCOME TAXES
No provision for US federal or state income taxes have been recorded in
any period presented, as the Company has incurred domestic operating
losses in all such periods.
Realization of deferred tax assets is dependent upon future earnings,
if any. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes it is more likely than
not that these assets may not be realized. No income tax benefit has
been recorded for all periods presented because of the valuation
allowance.
At March 31, 2002, the Company has net operating loss (NOL)
carryforwards in the United States of America of approximately
$6,970,000 for income tax purposes that expire in years 2009 through
2020.
- 26 -
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows:
March 31,
2002 2001 2000
Deferred tax liabilities:
Unremitted Hong Kong
Joint Venture earnings
not considered
permanently reinvested $ 1,054,553 $ 836,800 $ 818,920
Gross deferred tax
liabilities 1,054,553 836,800 818,920
Deferred tax assets:
Financial statement
accruals and allowances 170,990 75,070 102,313
Inventory uniform
capitalization 72,200 72,200 72,200
Other 47,367 39,650 34,361
NOL carryforwards and
tax credits 2,612,451 2,611,908 2,295,812
Gross deferred tax assets 2,903,008 2,798,828 2,504,686
Valuation allowance (1,848,455) (1,962,028) (1,685,766)
Net deferred tax assets $ -0- $ -0- $ -0-
The reconciliation of the income tax computed at the U.S. federal
statutory tax rates to income tax expense is as follows:
Years ended March 31,
2002 2001 2000
Federal tax expense (benefit)
at statutory rate on domestic
income (loss) (34%) $(331,981) $(271,722) $(32,615)
State Tax Expense (Benefit) 10,451 (30,357) 1,642
Equity in (earnings) loss from
Hong Kong Joint Venture 420,814 13,683 46,894
Change in valuation allowance (113,573) 276,262 (22,831)
Other 14,289 12,134 6,910
$ -0- $ -0- $ -0-
- 27 -
NOTE G - SHAREHOLDERS' EQUITY
Common Stock - During the year ended March 31, 2000, the Company issued
25,000 shares of its common stock to a new employee. As part of the
issuance, the Company recognized $34,116 of compensation expense.
During the year ended March 31, 2002, the Company issued 97,500 shares
of its common stock on the exercise by employees of employee stock
options and received proceeds of $116,344.
Employee Stock Purchase Plan - Under the terms of the Company's 1988
Employee Stock Purchase Plan, eligible employees can purchase shares of
the Company's common stock through payroll deductions at a price equal
to 90% of the price of the shares. The Company has reserved 25,000
shares of common stock for issuance under the Plan. No member of the
Board of Directors who is not an employee of the Company, and no member
of the committee administering the Plan, can participate in the Plan.
At March 31, 2002, approximately 16,250 shares remain reserved for
issuance under this Plan.
Stock Options - Under terms of the Company's 1978 Non-Qualified Stock
Option Plan, as amended, 493,750 shares of common stock are reserved
for the granting of stock options, of which 109,019 shares have been
issued as of March 31, 2002, leaving 384,731 available for issuance
upon exercise of options granted, or available for future grants to
employees and directors. Under provisions of the Plan, a committee of
the Board of Directors determines the option price and the dates
exercisable. All options expire five years from the date of grant and
have an exercise price at least equal to the market price at the date
of grant. The options usually vest at 25% a year over four years.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 2002 and option
transactions for the three years then ended:
Status as of March 31, 2002 Number of Shares
Presently exercisable 180,500
Exercisable in future years 48,750
Total outstanding 229,250
Available for future grants 155,481
Shares of common stock reserved 384,731
Outstanding options:
Number of holders 17
Average price per share $2.58
Expiration dates June 2002 to February 2007
- 28 -
Transactions for the Three Years Ended March 31, 2002:
Number of Weighted Average
Shares Exercise Price
Outstanding at March 31, 1999 224,500
Granted 73,500 1.79
Canceled (60,125) 7.55
Outstanding at March 31, 2000 237,875
Granted 5,000 4.50
Canceled (4,500) 2.56
Outstanding at March 31, 2001 238,375
Granted 149,000 2.23
Canceled (60,625) 4.11
Exercised (97,500) 1.19
Outstanding at March 31, 2002 229,250
The following table summarizes information about stock options
outstanding at March 31, 2002:
Options Outstanding Options Exercisable
Weighted
Weighted Weighted Average
Average Average Exercise
Range of Exercise Number of Exercise Contract Number of Price
Price Shares Price Life (Yrs) Shares Exercise
$0.66 to $1.29 6,250 0.66 1.61 6,250 0.66
$1.30 to $2.99 117,500 2.09 4.52 107,000 2.09
$3.00 to $3.99 100,500 3.06 1.14 66,000 3.01
$4.00 to $5.99 5,000 4.50 3.17 1,500 4.50
Totals 229,250 180,750
The Company accounts for stock options granted to employees in
accordance with APB 25. Under APB 25, when the exercise price of the
Company's stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. The
Company has provided additional pro forma disclosures as required by
SFAS No. 123, "Accounting for Stock-Based Compensation."
For disclosure purposes, the fair value of each stock option is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for stock
options and rights to receive stock in 2002, 2001 and 2000; no annual
dividends, expected volatility of 80%, 80% and 85%, respectively,
risk-free interest rate ranging from 4.0% to 6.5% and expected life of
five years. The weighted-average fair values of the stock options
granted in 2002, 2001 and 2000 were $1.16, $1.44 and $1.01,
respectively.
- 29 -
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
normal publicly traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
Had compensation cost been based upon the fair value of the option on
the date of grant, as prescribed by SFAS No. 123, the Company's pro
forma net income/(loss) and net income/(loss) per share for the years
ended March 31, 2002, 2001 and 2000 using the Black-Scholes option
pricing model would have been $212,896 and $0.23, $(782,574) and
$(.86) and $18,527 and $0.02, respectively.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company entered into a three year employment agreement with the
President of its USI ELECTRIC, INC. subsidiary with fixed annual
remuneration amounts for three years which was extended in April, 2001.
In addition, the agreement provides incentive compensation based on the
Company achieving certain levels of sales. The agreement expires in
December, 2003. Subsequent to March 31, 2002, the Company entered into
a three-year employment agreement with its President with annual
remuneration amounts and incentive compensation based on the Company
achieving certain levels of profitability. The agreement expires March
2005.
In December 2001, Leviton Manufacturing Company filed a civil action
in the United States District Court for the District of Maryland (Case
No. 01CV3855), alleging that, subsequent to December 11, 2001, the
Company's ground fault circuit interrupters infringe on the plaintiff's
patents and service marks. The plaintiff is seeking injunctive relief
and damages to be determined at trial. The Company and its legal
counsel believe that the Company has meritorious defenses to the claim
and is aggressively defending the suit.
From time to time, the Company is involved in various lawsuits and
legal matters. It is the opinion of management and, on the advice of
its legal counsel, that these matters will not have a material adverse
effect on the Company's financial statements.
NOTE I - MAJOR CUSTOMERS
The Company is primarily a distributor of security products for use in
home and business under both its tradenames and private labels for
other companies. The Company's 50% owned Hong Kong Joint Venture
manufactures the majority of the Company's products.
- 30 -
Customers that represented in excess of 10% of the Company's product
sales are as follows:
March 31, 2002 March 31 2001 March 31, 2000
Customer A - - 17%
Customer B - - 15%
Customer C - - -
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
- 31 -
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of three directors. The
following is a list of individuals currently serving as directors of
the Company until the Company's next annual stockholders meeting and
individuals currently serving as executive officers of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper....58 Director; Chairman of the Board 1970
of the Company since October 2001;
Vice Chairman of the Board of the
Company since September 1996;
Chairman of the Board of the Company
from 1970 to September 1996.
Michael Kovens.....59 Director; Chairman of the Board 1970
of the Company from September
1996 to October 2001; President
of the Company from 1970 to
September 1996.
Harvey Grossblatt..55 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
April 1997; Vice President
of the Company from December
1986 to June 1996; Secretary and
Treasurer of the Company since
September, 1988; Vice President
and Chief Financial Officer of
the Company from October 1983
through May 1995.
- 32 -
ITEM 11.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table reflects the aggregate amount paid or accrued by the Company
in its three most recent fiscal years, for each executive officer whose
compensation exceeded $100,000 in that year.
Long-Term Compensation
Name and Awards Payouts
Principal Annual Compensation Stock LTIP All Other
Position Year Salary Bonus Other Awards Options Payouts Compensation
Stephen
Knepper 2002 $ 87,676 - - - 42,500 - $16,153
Chairman
of the
Board
and
Chief
Executive
Officer(1)
Michael
Kovens 2002 $125,740 - - - 17,500 - $16,819
Former
Chairman
of the 2001 179,701 - - - 23,750 - 20,663
Board
and
Chief 2000 179,701 75,000 - - 12,500 - 16,338
Executive
Officer(1)
Harvey
Grossblatt 2002 $143,202 - - - 47,750 - $ 5,519
President,
Secretary 2001 124,780 - - - 5,000 - -0-
and
Treasurer 2000 130,258 10,000 - - - - -0-
(1) On October 23, 2001, Mr. Knepper was elected Chairman and Chief Executive
Officer
Option Grants in Last Fiscal Year
The following table sets forth information with respect to the grant of stock
options during the Company's fiscal year ended March 31, 2002 to the executive
officers named in the Summary Compensation Table:
Potential
Realizable Value
% of Total at Assumed Annual
Options Exercise Rates of Stock
No. of Granted to or Base Expi- Price Appreciation
Options Employees in Price ration for Option Term(1)
Name Granted Fiscal Year ($/Share) Date 0%(2) 5% 10%
Stephen
Knepper 17,500(3) 11.75% $2.35 02/07/07 - $2,056 $4,112
Stephen
Knepper(4) 25,000(3) 16.78% $1.50 11/02/06 - $1,875 $3,750
Michael
Kovens 17,500(3) 11.75% $2.35 02/07/07 - $2,056 $4,112
Harvey
Grossblatt 13,250(5) 8.89% $3.00 07/01/06 - $1,988 $3,975
Harvey
Grossblatt 15,000(3) 10.07% $1.30 11/02/06 - $ 975 $1,950
Harvey
Grossblatt 15,000(3) 10.07% $1.70 11/02/06 - $1,275 $2,550
Harvey
Grossblatt 4,500(3) 3.02% $2.35 02/07/07 - $ 529 $1,058
- 33 -
(1) The 5% and 10% assumed rates of compensation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price.
(2) Denotes realizable value at the date of grant which reflected a market value
or higher valuation per share.
(3) Five year option fully exercisable and vested.
(4) Exercised January 2002.
(5) Five year option exercisable 25% per year beginning July 2002.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number Value
of Unexercised of Unexercised
Shares Options at FY-End Options at FY-End
Acquired Value Exerci-/Unexerci- Exerci-/Unexerci-
Name In Exercise Realized sable/sable sable/sable
Stephen Knepper 61,250 $76,203 32,500/ -0- $32,500/ -0-
Michael Kovens 36,250 $ 7,375 32,500/ -0- -0- / -0-
Harvey Grossblatt - - 42,000/17,000 $42,000/$13,250
Employment Agreements
Harvey Grossblatt entered into an employment agreement with the Company
effective April 1, 2002. The employment agreement provides that Mr. Grossblatt
is employed for a term ending March 31, 2005 at an initial base annual salary of
$122,500, subject to automatic annual cost of living increases and further
subject to increases in the Board's discretion. Additionally, Mr. Grossblatt is
entitled to bonus compensation for each fiscal year of the Company in which the
Company earned pre-tax net income of at least $100,000, in an amount equal to 5%
of pre-tax net income up to $1,000,000, 4% of pre-tax net income over $1,000,000
up to $2,000,000, 3% of pre-tax net income over $2,000,000 up to $3,000,000, and
1% of pre-tax net income over $3,000,000.
Under the Employment Agreement, Mr. Grossblatt has been granted an option to
purchase 20,000 shares of common stock at an exercise price of $4.50 per share
pursuant to the Company's Non-Qualified Stock Option Plan, and is also entitled
to life, health and disability insurance benefits, medical reimbursement,
automobile allowance, and Company paid retirement plan contributions.
If the employment agreement is terminated by the Company other than for cause or
Mr. Grossblatt's death or disability, Mr. Grossblatt is entitled to receive a
lump sum payment equal to Mr. Grossblatt's base salary for the balance of the
employment agreement's term plus the amount of Mr. Grossblatt's last bonus and
an additional lump sum payment payable on the date the term of the employment
agreement would have expired equal to two times Mr. Grossblatt's base salary for
the last 12 months plus the amount of Mr. Grossblatt's last bonus. In addition,
Mr. Grossblatt would be entitled to receive the health insurance and medical
reimbursement benefits for the balance of the term and a period of three years
thereafter.
- 34 -
If Mr. Grossblatt's employment is terminated following or in anticipation of a
"change of control" of the Company, Mr. Grossblatt will be entitled to receive a
lump sum payment equal to Mr. Grossblatt's base salary for the balance of the
employment agreement's term and the amount of Mr. Grossblatt's last bonus, plus
an amount equal to three times Mr. Grossblatt's base salary for the last 12
months and the amount of Mr. Grossblatt's last bonus, limited to 2.99 times Mr.
Grossblatt's average annual taxable compensation from the Company which is
included in his gross income for the five taxable years of the Company ending
before the date on which the change of control occurs.
If the employment agreement is terminated by the Company due to Mr. Grossblatt's
death or disability, Mr. Grossblatt (or his estate) is entitled to the
continuation of the payment of his base salary for the balance of the term,
reduced, in the event of death, by any individual life insurance benefits the
premiums for which are paid for by the Company, and in the event of disability,
by any group or individual disability income insurance benefits the premiums for
which are paid for by the Company. In addition, Mr. Grossblatt (or his estate)
is entitled to the health insurance and medical reimbursement benefits for the
longer of balance of the term or three years following the date of death or
disability.
The employment agreement generally prohibits Mr. Grossblatt from competing with
the Company during the term and during any subsequent period during which he
receives compensation from the Company.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of May 28, 2002, the following persons were "beneficial owners" (as that term
is defined under Rule 13d-3 promulgated by the Securities and Exchange
Commission) of more than five percent of the Company's common stock.
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 317,764(2) 30.5%
6 Regency Court
Baltimore, MD 21208
Stephen Knepper 127,873(3) 12.3%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Bruce Paul 104,500 9.5%
One Hampton Road
Purchase, NY 10577
(1) For the purpose of determining the percentages of stock beneficially owned,
shares of stock subject to options exercisable within 60 days of May 28,
2002 are deemed to be outstanding.
- 35 -
(2) Includes 32,500 shares which Mr. Kovens presently has the right to acquire
through the exercise of stock options.
(3) Includes 32,500 shares which Mr. Knepper presently has the right to acquire
through the exercise of stock options and 2,000 shares held by a trust in
which Mr. Knepper has voting control.
As of May 28, 2002, the shares of the Company's common stock owned beneficially
by each director, by each executive officer and by all directors and officers as
a group were as follows:
Shares Percent
Name of beneficial owner Beneficially Owned(1) of class
Michael Kovens 317,764(2) 30.5%
Stephen Knepper 127,873(3) 12.3%
Harvey Grossblatt 49,272(4) 4.7%
All directors and officers as 590,659 50.0%
a group (4 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Includes 42,000 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
Equity Compensation Plan Information
Number of
Number of securities remaining
Securities to available for future
be issued issuance under
upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding outstanding securities reflected
options options in column(a)]
Plan Category (a) (b) (c)
Equity compensation 229,250 $2.58 155,481
plans approved by
security holders
Equity compensation - - -
plans not approved
by security holders
Total 229,250 $2.58 155,481
- 36 -
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had several related party transactions with its Hong Kong
Joint Venture in its normal course of business. See NOTE C to the
Consolidated Financial Statements for a description of these
transactions.
- 37 -
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in
Part II, Item 8.
Consolidated balance sheets, March 31, 2002 and 2001
Consolidated statements of operations for the years ended
March 31, 2002, 2001 and 2000.
Consolidated statements of shareholders' equity for the
years ended March 31, 2002, 2001 and 2000.
Consolidated statements of cash flows for the years
ended March 31, 2002, 2001 and 2000.
Notes to consolidated financial statements.
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, are
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibit No.
3.1 Articles of Incorporation, as amended (incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the period
ended December 31, 1988, File No. 0-7885)
3.2 Bylaws, as amended
10.1 Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended March 31, 1999, File No. 0-7885)
10.2 Hong Kong Joint Venture Agreement, as amended (confidential
treatment of Name requested and filed separately with the
Commission) (incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1994, and Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2001, File No.
0-7885)
- 38 -
10.3 Amended Factoring Agreement with CIT Group (successor to Congress
Talcott, Inc.) dated November 14, 1999
10.4 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)
10.5 Employment Agreement dated April 1, 2002 between the Company and
Harvey B. Grossblatt
21 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 to the Company's Annual Report on Form 10-K for the Fiscal
Year Ended March 31, 2001, File No. 0-7885)
23.1 Consent of Grant Thornton LLP
23.2 Consent of Ernst & Young (Hong Kong)
(b) Reports on Form 8-K
On February 14, 2002, the Company filed a Form 8-K containing a
press release issued on February 13, 2002
(d) Financial Statements Required by Regulation S-X
Separate financial statements of the Hong Kong Joint Venture
(confidential treatment of name requested and filed separately
with the Commission.
Page
Independent auditor's report 88
Consolidated profit and loss account, 89
March 31, 2002 and 2001
Consolidated balance sheets, March 31, 2002 and 2001 90
Consolidated cash flow statements, March 31, 2002 91
and 2001
Notes to consolidated financial statements 94
- 39 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED March 31, 2002, 2001 and 2000
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions of year
Year ended
March 31, 2002
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ 31,642 $ 68,358
Year ended
March 31, 2001
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 2000
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 2002
Allowance for
inventory reserve $ 50,000 $ 61,741 $-0- $ -0- $111,741
Year ended
March 31, 2001
Allowance for
inventory reserve $ 92,000 $ -0- $-0- $ 42,000 $ 50,000
Year ended
March 31, 2000
Allowance for
inventory reserve $100,000 $495,000 $-0- $503,000 $ 92,000
- 40 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By: Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: June , 2002 By: Stephen Knepper
Stephen Knepper
Chairman of the Board, Director
Date: June , 2002 By: Harvey Grossblatt
Harvey Grossblatt, President,
Director, Chief Accounting Officer
Date: June , 2002 By: Michael Kovens
Michael Kovens
Director
- 41 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By:
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: By:
Stephen Knepper
Chairman of the Board, Director
Date: By:
Harvey Grossblatt, President,
Director, Chief Accounting Officer
Date: By:
Michael Kovens
Director
- 41 -
Exhibit 3.2
BY-LAWS
UNIVERSAL SECURITY INSTRUMENTS, INC.
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
The annual meeting of the stockholders of the Corporation
shall be held at the principal office of the Corporation in
Owings Mills, Maryland, on such date in the month of September as
may be selected by the Board of Directors at 10:30 o'clock a.m.
(or such other time and place as may be fixed by the Board of
Directors) for the election of directors and for the transaction
of general business. Such annual meetings shall be general
meetings, that is to say, open for the transaction of any
business within the powers of the Corporation without special
notice of such business, except in any case in which special
notice is required by statute.
Section 2. Special Meetings.
Special meetings of the stockholders of the Corporation may
be called at any time by either the Chairman of the Board or the
President and shall be called by the President or the Secretary
at the request in writing of a majority of the Board of
Directors, or at the request in writing of the holders of a
majority of all the shares outstanding and entitled to vote.
Such request shall state the purpose of the meeting and notice
thereof shall be given as provided in Section 3 of this Article
I. No business other than that stated in the notice of the
meeting shall be transacted at any special meeting of the
stockholders, however called. Special meetings of the
stockholders shall be held at the principal office of the
Corporation, or at such other place designated in the notice to
stockholders.
- 42 -
Section 3. Notice of Meetings.
Not less than ten (10) days and not more than ninety (90)
days written or printed notice of every annual meeting and of
every special meeting of the stockholders shall be given to each
holder of stock having voting rights whose name appears as a
holder of record upon the books of the Corporation at the close
of business on the date fixed by the Board of Directors for the
determination of stockholders entitled to notice of such meeting,
and, if no such date shall have been fixed by the Board for such
purpose, then to the holders of record on the date when such
notice shall be given. Such notices of annual or special
meetings shall state the place, day and hour of such meeting,
and, in the case of special meetings, shall also state the
business proposed to be transacted thereat. Such notice shall be
given to each stockholder by mailing it postage prepaid and
addressed to him at his address as it appears upon the records of
the Corporation. No notice of the time, place or purpose of any
meeting of stockholders, whether prescribed by law, by the
Charter, or by these By-Laws, need be given to any stockholder
who attends in person, or by proxy, or who, in writing executed
and filed with the records of the meeting either before or after
the holding thereof, waives such notice. No notice of any
meeting, regular or special, be given to any stockholder who is
not entitled to vote thereat.
Section 4. Quorum.
At any meeting of stockholders, the presence, in person or
by proxy, of shareholders entitled to cast a majority of votes
thereat shall constitute a quorum for the election of directors
or for the transaction of other business; but, in the absence of
a quorum, the stockholders entitled to vote who shall be present
in person or by proxy at any meeting (or adjournment thereof),
may, by vote of a majority of shares so present and entitled to
vote, adjourn the meeting from time to time, but not for a period
of over thirty (30) days at any one time, by announcement at the
meeting until a quorum shall attend. At any such adjourned
meeting at which a quorum shall be present, any business may be
transacted at the meeting as originally notified.
Section 5. Organization.
- 43 -
The Chairman of the Board shall call meetings of the
Stockholders to order and shall act as Chairman of such meetings
The Board of Directors or Stockholders may appoint any
stockholder to act as Chairman of any meeting in the absence of
the Chairman of the Board and President. The Secretary of the
Corporation shall act as Secretary at all meetings of
Stockholders, but, in the absence of the Secretary, the presiding
officer may appoint any person to act as Secretary of the
meeting.
Section 6. Proxies.
Stockholders may vote either in person or by proxy, but no
proxy which is dated more than eleven months before the meeting
at which it is offered shall be accepted unless such proxy shall
on its face name a longer period for which it is to remain in
force. Every proxy shall be in writing subscribed by a
stockholder, or by his duly authorized attorney, and shall be
dated; but need not be sealed, witnessed or acknowledged.
Section 7. Voting.
At every meeting of the stockholders, every stockholder of
the Corporation shall be entitled to one (1) vote for each share
of voting stock registered in his name on the books of the
Corporation on the date for the determination of voting rights
thereat. The affirmative vote of the holders of a majority of
the stock issued and entitled to vote shall be sufficient and
necessary to elect directors or for the taking or authorization
of any action by the stockholders.
Section 8. List of Stockholders.
Prior to each meeting of the stockholders, the Secretary
shall prepare a full, true and complete list in alphabetical
order of all stockholders entitled to vote at such meeting,
indicating the number of shares held by each, and shall be
responsible for the production of such list at the meeting.
Section 9. Stockholder Proposals.
- 44 -
Nominations by stockholders of persons for election to the
Board of Directors of the Corporation and the proposal by
stockholders of business to be considered by the stockholders at
an annual meeting of stockholders may be made by any stockholder
of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this By-Law, who is entitled to
vote at the meeting and who complies with the notice procedures
set forth in this By-Law.
For nominations or other business to be properly brought
before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of
the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the
close of business on the 120th day prior to the first anniversary
of the mailing of the proxy statement with respect to preceding
year's annual meeting; provided, however that in the event that
the date of the annual meeting is more than 30 days before or
after the first anniversary date of the preceding year's annual
meeting, notice by the stockholder to be timely must be so
delivered not later than the close of business on the 90th day
prior to such annual meeting. In no event shall be public
announcement of an adjournment of an annual meeting commence a
new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder
proposed to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons
for conducting such business at the meeting and any material
interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made; (i) the
name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the
class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such
beneficial owner.
- 45 -
Notwithstanding anything in the second sentence of the
previous paragraph of this By-Law to the contrary, in the event
that the number of directors to be elected to the Board of
Directors of the Corporation is increased and there is no public
announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of
Directors at least 100 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required
by this By-Law shall also be considered timely, but only with
respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the
close of business on the 10th day following the day on which such
public announcement is first made by the Corporation.
Only such persons who are nominated in accordance with the
procedures set forth in these By-Laws shall be eligible to serve
as directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the
meeting in accordance with the procedures set forth in these
By-Laws. Except as otherwise provided by law, the Charter or
these By-Laws, the Chairman of the meeting shall have the power
and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed,
as the case may be, in accordance with the procedures set forth
in these By-Laws and, if any proposed nomination or business is
not in compliance with these By-Laws, to declare that such
defective proposal or nomination shall be disregarded.
Notwithstanding the foregoing provisions of these By-Laws, a
stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in these By-Laws. Nothing in
these By-Laws shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
For purposes of these By-Laws, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News
Services, Associated Press or comparable national news service or
in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or
15(d) of the Exchange Act.
- 46 -
ARTICLE II
BOARD OF DIRECTORS
Section 1. Election and Powers.
The business and property of the Corporation shall be
conducted and managed by its Board of Directors which shall
consist of not less than three (3) members nor more than fifteen
(15) members. The Board of Directors may increase or decrease
the number of directors (but the number of Directors shall not be
more than 15 or less than 3) at any meeting called for that
purpose. The members of the Board of Directors shall be elected
at the annual meeting of stockholders by holders of stock
represented in person or by proxy at such meeting and entitled to
vote thereat. Each director elected at any annual meeting shall
hold office until his successor shall have been elected and
qualified or until he shall die or resign, or shall have been
removed.
Section 2. First Regular Meeting.
After each meeting of stockholders at which a Board of
Directors shall have been elected, the Board of Directors so
elected shall meet for the purpose or organization and the
transaction of other business, at such time and place as may be
designated by the Chairman of the Board.
Section 3. Additional Regular Meetings.
Regular meetings of the Board of Directors shall be held at
such times as may be fixed by resolution of the Board.
Section 4. Special Meetings.
Special meetings of the Board of Directors shall be held
whenever called by the Chairman of the Board, the President, or
by a majority of the Directors either in writing or by vote.
Section 5. Place of Meetings.
Subject to the provisions of Section 2 of this Article II,
the Board of Directors may hold its regular meetings at such
place or places as it may from time to time determine. Each
special meeting of the Board of Directors shall be held at such
place as shall be designated in the notice of the meeting.
- 47 -
Section 6. Notice of Meeting.
Notice of the place, day and time of every regular and
special meeting shall be given to each director, either:
1. By notice in writing mailed to him postage prepaid not
later than the second day before the day set for the
meeting and addressed to him at his last known post
office address according to the records of the
Corporation; or
2. By notice in writing delivered personally or at his
usual place of business not later than the day before
the day fixed for the meeting; or
3. By oral personal or telephone communication or by fax
not later than the day before the day set for the
meeting.
provided, however, that no notice need be given to any director
with respect to the first regular Board of Directors meeting
following the meeting of the stockholders at which a Board of
Directors shall be elected. No notice of any meeting need be
given to any director, who, in writing executed and filed with
the records of the meeting either before or after the holding
thereof, waives such notice.
Section 7. Quorum.
A majority of the Board of Directors shall be necessary and
sufficient to constitute a quorum for the transaction of business
at every meeting of the Board of Directors.
Section 8. Voting.
The affirmative vote of a majority of the directors present
at any meeting of the Board of Directors at which a quorum is
present shall be sufficient and necessary for the taking or
authorization of any action by the Board of Directors.
Section 9. Organization.
At all meetings of the Board of Directors the Chairman of
the Board, or in his absence, the President shall preside. The
Secretary of the Corporation shall act as Secretary at all
meetings of the Board, and in his absence the Chairman of the
meeting may designate any person to act as Secretary.
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Section 10. Removal.
At any meeting of the stockholders called for the purpose,
any director may, by the vote of a majority of all the shares of
stock outstanding and entitled to vote, be removed from office,
with or without cause, and another may be appointed in the place
of the person so removed, to serve for the remainder of his term.
Section 11. Vacancies.
In case of any vacancy in the Board of Directors through
death, resignation, or any cause other than removal by the
stockholders, the remaining directors may elect a successor to
hold office for the unexpired portion of the term of the person
whose place shall be vacant and until his successor shall have
been duly chosen and qualified.
Section 12. Compensation.
Directors, as such, shall not receive any stated
compensation for their services, but by resolution of the Board
of Directors and a fixed sum and expenses of attendance, if any,
may be allowed for attendance at any regular or special meeting
thereof. Nothing in this Section shall be construed to preclude
a director from serving the Corporation in any other capacity and
receiving compensation therefor.
Section 13. Executive Committee.
The Board of Directors may designate by vote of a majority
of the whole Board, three or more directors to constitute an
executive committee, and may designate one of such members to act
as Chairman. Vacancies in the Executive Committee may be filled
by the remaining members of the Executive Committee at a meeting
at which a quorum is present. The Executive Committee may
exercise such powers of the Board of Directors in the management
of business and affairs of the Corporation as the Board may from
time to time confer upon it, and shall have the power to
authorize the seal of the Corporation to be affixed to all papers
which may require it. A majority of the members of the Executive
Committee may determine its action and fix the time and place of
its meetings unless otherwise provided by the Board of Directors.
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Section 14. Other Committees.
The Board of Directors may designate, by resolution, one or
more directors to constitute a committee, other than an executive
committee, such other committee to serve at the pleasure of the
Board of Directors.
Section 15. Nomination of Directors.
Nominations for directors to be elected at the Corporation's
annual meeting of stockholders shall be made by the Board of
Directors of the Corporation. Nominations for directors to be
elected at the Corporation's annual meeting of stockholders may
be made by stockholders in accordance with the procedures set
forth in Article I Section 9 of these By-Laws. Only such persons
who are nominated in accordance with the procedures set forth in
these By-Laws shall be eligible to serve as directors.
ARTICLE III
OFFICERS
Section 1. Officers.
The officers of the Corporation shall be a Chairman of the
Board, a Vice Chairman of the Board (if elected by the Board of
Directors), a President, one or more Vice Presidents (if elected
by the Board of Directors), a Secretary and a Treasurer, all of
whom shall be elected by, and be subject to the control of, the
Board of Directors. The officers shall be elected annually by
the Board of Directors at its first meeting following the annual
meeting of stockholders, subject to changes or additions at other
regular or special meetings of the Board of Directors. Each of
such officers shall hold office for a term of one year, and
thereafter until his successor is elected and qualified or until
his death, resignation or removal. The Board of Directors may
appoint such other officers and assistant officers as it deems
necessary, who shall have such authority and perform such duties
as the Board may from time to time prescribe.
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Section 2. Chairman of the Board.
The Chairman of the Board shall be a director of the
Corporation and the chief executive officer of the Corporation.
He shall preside at all meetings of the stockholders and of the
Board of Directors. He shall supervise, control and direct all
of the business and affairs of the Corporation. He shall have
authority to sign and execute in the name of the Corporation all
authorized deeds, contracts and other instruments.
Section 3. Vice Chairman of the Board.
The Vice Chairman of the Board shall be a director of the
Corporation. In the event of the absence of the Chairman of the
Board, the Vice Chairman shall perform all of the duties of the
Chairman and when so acting have all of the powers of the
Chairman. He shall have authority to sign and execute in the
name of the Corporation all authorized deeds, contracts and other
instruments.
Section 4. President.
In the absence of the Chairman and Vice Chairman of the
Board, he shall preside at all meetings of the stockholders and
of the Board of Directors. He shall be responsible for the
day-to-day operations of the Corporation subject to the
supervision and control of the Board of Directors and the
Chairman of the Board. He shall have authority to sign and
execute in the name of the Corporation all authorized deeds,
contracts and other instruments.
Section 5. Vice President.
In the absence of the President, the Vice Presidents (in the
order designated at the time of their election, or in the absence
of any designation, in the order of their election) shall perform
all the duties of the President and when so acting, shall have
the powers of the President. The Vice Presidents shall also have
such additional powers and duties as may be assigned to each of
them by the Board of Directors.
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Section 6. Secretary.
The Secretary shall keep the minutes of the meetings of the
stockholders and of the Board of Directors in books provided for
the purpose; he shall see that all notices are duly given in
accordance with the provisions of the By-Laws or as required by
law; he shall be the custodian of the records and of the
corporate seal or seals of the Corporation; he shall see that the
corporate seal is affixed to all documents, the execution of
which on behalf of the Corporation under its seal is duly
authorized, and when so affixed may attest the same; he may sign,
with the President or Chairman of the Board, certificates of
stock of the Corporation; and, in general, he shall perform all
duties ordinarily incident to the office of a Secretary of a
corporation, and such other duties as, from time to time, may be
assigned to him by the Board of Directors, or by the President.
Section 7. Treasurer.
The Treasurer shall have charge of and be responsible for
all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the
name of the Corporation all moneys or other valuable effects in
such banks, trust companies, or other depositories as shall, from
time to time, be selected by the Board of Directors; he shall
render to the President and to the Board of Directors, whenever
requested, an account of the financial condition of the
Corporation; he may sign, with the President, or Chairman of the
Board, certificates of stock of the Corporation; and, in general,
shall perform all duties ordinarily incident to the office of a
treasurer of a corporation, and such other duties as may be
assigned to him by the Board of Directors or by the President.
Section 8. Assistant Officers.
The Board of Directors may elect one or more Assistant
Secretaries and one or more Assistant Treasurers. Each such
Assistant Secretary and Assistant Treasurer shall hold office for
such period and shall have such authority and perform such duties
as the Board of Directors may prescribe.
Section 9. Compensation.
The Board of Directors shall have power to fix the
compensation of all officers of the Corporation. It may
authorize any officer upon whom the power of appointing
subordinate officers may have been conferred to fix the
compensation of such subordinate officers.
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Section 10. Reimbursement.
Any payments made to an officer of the Corporation such as a
salary, commission, bonus, interest or rent, or entertainment
expense incurred by him, which shall be disallowed in whole or in
part as a deductible expense by the Internal Revenue Service,
shall be reimbursed by such officer to the Corporation to the
full extent of such disallowance. It shall be the duty of the
directors, as a Board, to enforce payment of each amount
disallowed. In lieu of payment by the officer, subject to the
determination of the directors, proportionate amounts may be
withheld from his future compensation payments until the amount
owed to the Corporation has been recovered.
Section 11. Officers Holding More Than One Office.
Two or more officers (except that of President and Vice
President, Secretary and Assistant Secretary, and Treasurer and
Assistant Treasurer) may be held by the same person, but
no officer shall execute, acknowledge or verify any instrument in
more than one capacity.
Section 12. Removal.
The Board of Directors shall have power at any regular or
special meeting to remove any officer with or without cause, and
such action shall be conclusive on the officer so removed. The
Board of Directors may authorize any officer to remove
subordinate officers.
Section 13. Vacancies.
The Board of Directors at any regular or special meeting
shall have power to fill a vacancy occurring in any office for
the unexpired portion of the term.
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ARTICLE IV
STOCK
Section 1. Certificates.
Each stockholder shall be entitled to a stock certificate or
certificates certifying the number and kind of shares owned. The
certificates shall be signed by the President or Chairman of the
Board and by the Secretary or Treasurer and shall be sealed with
the seal of the Corporation.
The Corporation may treat the holder of record of any share
or shares of stock as the holder in fact thereof and shall not be
bound to recognize any equitable or other claim to or interest in
any such share or shares on the part of any other person, save as
expressly provided by the laws of Maryland.
The name and address of the person to whom the shares
represented thereby are issued with the number of shares and date
of issue shall be entered on the records of the Corporation.
All certificates surrendered to the Corporation shall be
cancelled and no new certificate shall be issued until the former
certificate for a like number of shares shall have been
surrendered and cancelled, except that in the case of a lost,
destroyed or mutilated certificate a new one may be issued
therefor upon such terms and indemnity to the Corporation as may
be prescribed by the Board of Directors.
Section 2. Transfer.
Transfer of shares of the Corporation shall be made only on
the stock transfer books of the Corporation by the holder of
record thereof or by his legal representative, or by his attorney
thereunto authorized by power of attorney duly exercised and
filed with the Secretary of the Corporation, and on surrender for
cancellation of the certificate for such shares.
Section 3. Rules and Regulations.
The Board of Directors shall have authority to make all such
rules and regulations as they may deem expedient concerning the
issue, transfer and registration of stock certificates and may
appoint a transfer agent and a registrar of transfers.
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Section 4. Closing of Transfer Books or Fixing of Record Date.
The Board of Directors may fix, in advance, a date as the
record date for the purpose of determining shareholders entitled
to notice of, or to vote at, any meeting of shareholders, or
shareholders entitled to receive payment of any dividend or the
allotment of any rights, or in order to make a determination of
shareholders for any other proper purpose. Such date, in any
case, shall not be more than sixty (60) days, and in case of a
meeting of shareholders not less than ten (10) days, prior to the
date on which the meeting or particular action requiring such
determination of shareholders is to be held or taken.
ARTICLE V
SUNDRY PROVISIONS
Section 1. Dividends.
Subject to the applicable provisions of law and of the
Charter, the Board of Directors may in its discretion declare
what, if any, dividends shall be paid or upon any class of such
stock, the date when such dividends shall be payable, and the
date for the determination of holders of record to whom such
dividends shall be payable.
Section 2. Working Capital.
The Board of Directors shall, from time to time, and in its
discretion, fix and vary the amount of working capital of the
Corporation and determine what portion of the surplus shall be
reserved as working capital or declared as dividends and
distributed to the stockholders.
Section 3. Negotiable Instruments and Other Evidences of
Indebtedness.
All checks, drafts or orders for the payment of money, notes
and other evidences of indebtedness, issued in the name of the
Corporation, shall be signed by such officer or officers as may
be designated from time to time by resolution of the Board of
Directors. No checks shall be signed in blank.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as provided by
the Board of Directors.
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Section 5. Seal.
The seal of the Corporation shall be circular in form, with
the name of the Corporation inscribed around the outer edge, and
in the center shall inscribed the words "MARYLAND" and the year
of incorporation.
Section 6. Amendments.
The Board of Directors shall have power to make, amend and
repeal the By-Laws of the Corporation, by vote of a majority of
all of the directors, at any regular or special meeting of the
Board; provided, however, that any By-Laws made by the Board of
Directors may be amended, altered, or repealed by the
stockholders as hereinafter provided.
The stockholders, by the affirmative vote of the majority of
the stock issued, outstanding and entitled to vote, may make,
alter or amend the By-Laws at any annual meeting, or any special
meeting if notice thereof is contained in the notice of such
meeting.
Section 7. Contracts.
No contract or other transaction between this Corporation
and any other corporation and no act of this Corporation shall in
any way be affected or invalidated by the fact that any of the
directors of this Corporation are pecuniarily or otherwise
interested in or are directors or officers of such other
corporation; any director, individually or any firm of which any
director may be a member, may be a party to, or may be
pecuniarily or otherwise interested in, any contract or
transaction of this Corporation, provided that the fact that he
or such firm is so interested shall be disclosed or shall have
been known to the Board of Directors or a majority thereof; and
any director of this Corporation who is also a director or
officer of such other corporation or who is so interested may be
counted in determining the existence of a quorum at any meeting
of the Board of Directors of this Corporation, which shall
authorize any such contract or transaction, and may vote thereat
to authorize any such contract or transaction, with the like
force and effect as if he were not such director or officer of
such other corporation or not so interested.
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Section 8. Voting Upon Stocks or Other Ownership Interests.
Unless otherwise ordered by the Board of Directors, the
President and the Chairman of the Board, or either of them, shall
have full power and authority on behalf of the Corporation to
attend and to vote and to grant proxies to be used at any
meetings, or for written consents, of stockholders or other
equity owners of any corporation or other entity in which the
corporation may own an interest.
ARTICLE VI
INDEMNIFICATION
Section l. Definitions.
As used in this Article VI, any word or words that are
defined in Section 2-418 of the Corporations and Associations
Article of the Annotated Code of Maryland (the "Indemnification
Section"), as amended from time to time, shall have the same
meaning as provided in the Indemnification Section.
Section 2. Indemnification of Directors and Officers.
The Corporation shall indemnify and advance expenses to a
director or officer of the Corporation in connection with a
proceeding to the fullest extent permitted by and in accordance
with the Indemnification Section.
Section 3. Indemnification of Other Agents and Employees.
With respect to an employee or agent, other than a director
or officer of the Corporation, the Corporation may, as determined
by and in the discretion of the Board of Directors of the
Corporation, indemnify and advance expenses to such employees or
agents in connection with a proceeding to the extent permitted by
and in accordance with the Indemnification Section.
END OF BY-LAWS
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Exhibit 10.3
The CIT Group/
Commercial Services, Inc.
1211 Avenue of the Americas
New York, NY 10036
November 14, 1999
USI Electric, Inc.
10324 South Dolfield Road
Owings Mills, Maryland 21117-3586
FACTORING AGREEMENT
Ladies and Gentlemen:
We are pleased to confirm the terms and conditions that will
govern our funds in use accounting, notification factoring
arrangement with advances (the "Agreement").
1. SALE OF ACCOUNTS
You sell and assign to us, and we purchase as absolute
owner, all accounts receivable arising from your sales of
inventory or rendition of services, including those under any
trade names, through any divisions and through any selling agent
(collectively, the "Accounts" and individually, an "Account").
2. CREDIT APPROVAL
2.1 Requests for credit approval for all of your orders
must be submitted to our Credit~ Department via computer by
either: (a) On-Line Terminal Access, or (b) Electronic Batch
Transmission. If you are unable to submit orders via computer,
then orders can be submitted over the phone, by fax or in
writing. All credit decisions by our Credit Department (including
approvals, declines and holds) will be sent to you daily by a
Credit Decisions Report, which constitutes the official record of
our credit decisions. Credit approvals will be effective only if
shipment is made or services are rendered within thirty (30) days
from the completion date specified in our credit approval. Credit
approval of any Account may be withdrawn by us any time before
delivery is made or services are rendered.
2.2 We assume the Credit Risk on each Account approved
in the Credit Decision Report. "Credit Risk" means the customer s
failure to pay the Account in full when due on its longest
maturity solely because of its financial inability to pay. If
there is any change in the amount, terms, shipping date or
delivery date for any shipment of goods or rendition of services
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(other than accepting returns and granting allowances as provided
in section 8 below), you must submit a change of terms request to
us, and, if such pertains to a Factor Risk Account, then we shall
advise you of our decision either to retain the Credit Risk or to
withdraw the credit approval. Accounts on which we bear the
Credit Risk are referred to collectively as "Factor Risk
Accounts", and individually as a "Factor Risk Account". Accounts
on which you bear some or all of the risk as to credit are
referred to collectively as "Client Risk Accounts", and
individually as a "Client Risk Account".
2.3 We shall have no liability to you or to any person,
firm or entity for declining, withholding or withdrawing credit
approval on any order. If we decline to credit approve an order
and furnish to you any information regarding the credit standing
of that customer, such information is confidential and you agree
not to reveal same to the customer, your sales agent or any third
party. You agree that we have no obligation to perform, in any
respect, any contracts relating to any Accounts.
3. INVOICING
You agree to place a notice (in form and content
acceptable to us) on each Invoice and invoice equivalent that the
Account is sold, assigned and payable only to us, and to take all
necessary steps so that payments and remittance information are
directed to us. All invoices, or their equivalents, will be
promptly mailed or otherwise transmitted by you to your customers
at your expense. You will provide us with copies of all invoices
(or the equivalent thereof If the invoices were sent
electronically), confirmation of the sale of the Accounts to us
and proof of shipment or delivery, all as we may reasonably
request. If you fail to provide us with copies of such invoices
(or equivalents) or such proofs when requested by us, we will not
bear any Credit Risk as to those Accounts.
4. REPRESENTATIONS AND WARRANTIES
4.1 You represent and warrant that: each Account is
based upon a bona fide sale and delivery of inventory or
rendition of services made by you in the ordinary course of
business; the inventory being sold and the Accounts created are
your exclusive property and are not, and will not be, subject to
any lien, consignment arrangement, encumbrance or security
interest other than in our favor; all amounts are due in United
States Dollars; all original invoices bear notice of the sale and
assignment to us; any taxes or fees relating to your Accounts or
inventory are solely your responsibility; and none of the
Accounts factored with us hereunder represent sales to any
subsidiary, affiliate or parent company. You also warrant and
represent that: your customers have accepted the goods or
services and owe and are obligated to pay the full amounts stated
in the invoices according to their terms, without dispute, claim,
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offset, defense, deduction, rejection, recoupment, counterclaim
or contra account, other than as to returns and allowances as
provided in section 8 below (the foregoing being referred to in
this Agreement as "Customer Claims").
4.2 You further represent and warrant that: you are a
duly organized and validly existing business organization
qualified to do business in all states where required; the most
recent financial statements provided by you to us accurately
reflect your financial condition as of that date and there has
been no material adverse change in your financial condition since
the date of those financial statements. You agree to furnish us
with such information concerning your business affairs and
financial condition as we may reasonably request from time to
time. You will furnish to us as soon as possible, but not later
than one hundred twenty (120) days after the dose of each of your
fiscal years, your and your consolidated subsidiaries financial
statements as of the end of such year, on a consolidated and
consolidating basis, audited by a firm of independent, certified
public accountants, selected by you and acceptable to us.
4.3 You agree that you will promptly notify us of any
change in your: name, location of your chief executive office,
place(s) of business, use of trade names and divisions, and legal
or business structure. Further, you agree that you will promptly
notify us of any change in control of the ownership of your
business organization, and of significant law suits or
proceedings against you.
5. PURCHASE OF ACCOUNTS
We shall purchase the Accounts for the gross amount of the
respective invoices, less: factoring fees or charges, trade and
cash discounts allowable to, or taken by, your customers,
credits, cash on account and allowances ("Purchase Price"). Our
purchase of the Accounts will be reflected on the Statement of
Account (defined in section 10 below), which we shall render to
you, which will also reflect all credits and discounts made
available to your customers.
6. ADVANCES
At your request, and in our sole discretion, we may advance
funds to you of up to seventy-five percent (75%) of your Factor
Risk Accounts, prior to the collection of the Accounts. We have
the right, at any time and from time to time, to hold any
reserves we deem reasonably necessary as security for the payment
and performance of any and all of your-obligations (defined in
section 12 below). All amounts you owe us, including all advances
to you and any debit balance in your Client Position Account
(defined in section 10 below), and any Obligations, are payable
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on demand and may be charged to your account at any time.
7. PAYMENT OF ACCOUNTS
7.1 All payments received by us on the Accounts will be
promptly applied to your account with us after crediting your
customer s account. In exchange for such application, we shall
charge your account monthly with the cost of ten (10) additional
business days on all such payments at the rate charged by us in
section 14.1 below on debit balances. No checks, drafts or other
instruments received by us will constitute final payment of an
Account unless and until such items have actually been collected.
7.2 The amount of the Purchase Price of any Factor Risk
Account which remains unpaid will be deemed collected and will be
credited to your account as of the earlier of the following
dates:
(a) the date of the Account s longest maturity if a
proceeding or petition is filed by or against the customer under
any state or federal bankruptcy or insolvency law, or if a
receiver or trustee is appointed for the customer; or
(b) the last day of the third month following the
Account s longest maturity date if such Account remains unpaid as
of said date without the occurrence of any of the events
specified in clause (a) above.
If any Factor Risk Account credited to you was not paid for
any reason other than Credit Risk, we shall reverse the credit
and charge your account accordingly, and such Account is then
deemed to be a Client Risk Account.
8. CUSTOMER CLAIMS AND CHARGE BACKS
8.1 You must notify us promptly of any matter affecting
the value, enforceability or collectibility of any Account and of
all Customer Claims. You agree to promptly issue credit memoranda
or otherwise adjust the customer s account upon accepting returns
or granting allowances. For full invoice credit memoranda, you
agree to send duplicate copies thereof to us and to confirm their
assignment to us. You may continue to do so until we have advised
you that all such credits or allowances on Factor Risk Accounts
require our prior written approval. We shall cooperate with you
in the adjustment of Customer Claims, but we retain the right to
adjust Customer Claims on Factor Risk Accounts directly with
customers, upon such terms as we in our sole discretion may deem
advisable.
8.2 We may at any time charge back to your account the
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amount of: (a) any Factor Risk Account which is not paid in full
when due for any reason other than Credit Risk; (b) any Factor
Risk Account which is not paid In full when due because of an act
of God, civil strife, or war; (c) anticipation (interest)
deducted by a customer on any Account; (d) Customer Claims; (e)
any Client Risk Account which is not paid in full when due; and
(f) any Account for which there is a breach of any representation
or warranty. A charge back does not constitute a reassignment of
an Account. We shall immediately charge any deduction taken by a
customer to your account.
8.3 We may at any time charge to your account the amount
of: (a) payments we receive on Client Risk Accounts which we are
required at any time to turnover or return (including preference
claims); (b) all remittance expenses (including incoming wire
charges, currency conversion fees and stop payment fees), other
than stop payment fees on Factor Risk Accounts; (c) expenses,
collection agency fees and attorneys fees incurred by us in
collecting or attempting to collect any Client Risk Account or
any Obligation (defined in section 12 below); and (d) our fees
for handling collections on Client Risk Accounts which you have
requested us to process, as provided in the Guide (see section
18.2 below).
8. HANDLING AND COLLECTING ACCOUNTS; RETURNED GOODS
9.1 As owners of the Factor Risk Accounts, we have the
right to: (a) bring suit, or otherwise enforce collection, in
your name or ours; (b) modify the terms of payment, (c) settle,
compromise or release, in whole or in part, any amounts owing,
and (d) issue credits in your name or ours. To 'the extent
applicable, you waive any and all claims and defenses based on
suretyship. If moneys are due and owing from a customer for both
Factor Risk Accounts and Client Risk Accounts, you agree that any
payments or recoveries received on such Accounts will be applied
using our normal procedures. If at the time of a customer
liquidation, we each have Accounts at our respective risk, we
agree that all payments, dividends, recoveries or proceeds will
be shared pro rate in proportion to our respective Credit Risk
for that customer. Once you have granted or issued a discount,
credit or allowance on any Account, you have no further interest
therein. Any checks, cash, notes or other documents or
instruments, proceeds or property received with respect to the
Accounts must be held by you in trust for us, separate from your
own property, and immediately turned over to us with proper
endorsements. We may endorse your name or ours on any such check,
draft, instrument or document.
9.2 As owners and assignees of the Accounts and all
proceeds thereof, upon our written notice, you will, at your
expense, set aside, mark with our name and hold in trust for us,
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any and all returned, rejected, reclaimed or repossessed
inventory ("Returned Goods"). Further, upon such notice, you
agree promptly: to notify us of all Returned Goods and, at our
request, either to deliver same to us, or to pay us the invoice
price thereof, or to sell the same for our account.
10. STATEMENT OF ACCOUNT
After the end of each month, we shall send you certain
reports reflecting Accounts purchased, advances made, fees and
charges and all other financial transactions between us during
that month ("Reports"). The Reports sent to you each month
include a Statement of Account reflecting transactions in three
sections: Accounts Receivable, Client Position Account and Funds
In Use. The Reports shall be deemed correct and binding upon you
and shall constitute an account stated between us unless we
receive your written statement of exceptions within thirty (30)
days after same are mailed to you.
11. GRANT OF SECURITY INTEREST
11.1 You hereby assign and grant to us a continuing
security interest In all of your right, title and interest in and
to all of your now existing and future: (a) accounts receivable
(including Accounts), instruments, documents, chattel paper,
general intangibles, and any other obligations owing to you; (b)
unpaid seller s rights (including rescission, repossession,
replevin, reclamation and stoppage in transit); (c) rights to any
inventory represented by the foregoing, including Returned Goods;
(d) reserves and credit balances arising hereunder; (e)
guarantees or collateral for the foregoing (including rights
under any letters of credit or other credit enhancements in your
favor); (f) insurance policies, proceeds or rights relating to
the foregoing; (g) federal, state and local income tax refunds;
(h) cash and non-cash proceeds of the foregoing; and (I) Books
and Records (defined in section 13 below) evidencing or
pertaining to the foregoing.
11.2 You agree to comply with all applicable laws to
perfect our security interest in collateral pledged to us
hereunder, and to execute financing statements and other
documents as we may require to effectuate the foregoing and to
implement this Agreement. To the extent permitted by applicable
law, you authorize us to sign your name, or to file financing
statements or continuations without your signature, all in order
to create, perfect or maintain our security interest in the
collateral.
12. OBLIGATIONS SECURED
The security Interest granted hereunder and any lien or
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security interest that we now or hereafter have in any of your
other assets, collateral or property, secure the payment and
performance of all of your now existing and future indebtedness
and obligations to us, whether absolute or contingent, whether
arising under this Agreement or any other agreement or
arrangement between us, by operation of law or otherwise
("Obligations"). Obligations also includes ledger debt (which
means indebtedness for goods and services purchased by you from
any party whose accounts receivable are factored or financed by
us), and indebtedness arising under any guaranty, credit
enhancement or other credit support granted by you in our favor.
Any reserves or balances to your credit and any other assets,
collateral or property of yours in our possession constitutes
security for any and all Obligations.
13. BOOKS AND RECORDS AND EXAMINATION
13.1 You agree to maintain such Books and Records
concerning the Accounts as we may reasonably request and to
reflect our ownership of the Accounts therein. "Books and
Records" means your accounting and financial records (whether
paper, computer or electronic), data, tapes, discs, or other
media, and all programs, files, records and procedure manuals
relating thereto, wherever located.
13.2 Upon our reasonable request, you agree to make your
Books and Records available to us for examination and to permit
us to make copies or extracts thereof. Also, you agree to permit
us to visit your premises during your business hours and to
conduct such examinations as we deem reasonably necessary. To
cover our costs and expenses of any such examinations, we shall
charge you a fee for each day, or part thereof, during which such
examination is conducted, plus any out-of-pocket costs and
expenses incurred by us, as provided in the Guide (see section
18.2 below).
14. INTEREST
14.1 Interest is charged as of the last day of each month
based on the daily debit balances in your Funds In Use account
for that month, at a rate equal to the sum of one and one-half
percent (1-1/2%) per annum, plus the Chase Prime Rate (defined
below). The Chase Prime Rate is the per annum rate of interest
publicly announced by The Chase Manhattan Bank (or its successor)
in New York, New York from time to time as Its prime rate, and Is
not intended to be the lowest rate of interest charged by The
Chase Manhattan Bank to its borrowers. Any change in the rate of
interest hereunder due to a change in the Chase Prime Rate will
take effect as of the first of the month following such change in
the Chase Prime Rate. Interest will be credited as of the last
day of each month based on the daily credit balances in your
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Funds In Use account for that month, at a rate four percent (4%)
per annum below the Chase Prime Rate being used to calculate
Interest for the period. All interest is calculated on a 360 day
year.
14.2 In no event will interest charged hereunder exceed
the highest lawful rate. In the event, however, that we do
receive interest in excess of the highest lawful rate, you agree
that your sole remedy would be to seek repayment of such excess,
and you irrevocably waive any and all other rights and remedies
which may be available to you under law or in equity.
15. FACTORING FEES AND OTHER CHARGES
15.1 For our services hereunder, you will pay us a
factoring fee or charge of one percent (1%) of the gross face
amount of all Accounts factored with us, but in no event less
than $4.50 per invoice. In addition, you will pay a fee of one-quarter
of one percent (1/4 of 1%) of the gross face amount of
each Account for each thirty (30) day period or part thereof by
which the longest terms of sale applicable to such Account exceed
ninety (90) days (whether as originally stated or as a result of
a change of terms requested by you or the customer). For Accounts
arising from sales to customers located outside the fifty states
of the United States of America and the Commonwealth of Puerto
Rico, you will pay us an additional factoring fee of one percent
(1%) of the gross face amount of all such Accounts. All factoring
fees or charges are due and charged to your account upon our
purchase of the underlying Account. In the event the actual
factoring fees or charges paid to us during any twelve-month
period, or part thereof, commencing on October 1, 1999, and each
consecutive twelve-month period or part thereof thereafter
(herein referred to as a "Period"), by you and Universal Security
Instruments, Inc. ("Universal") under its separate factoring
agreement with us, is less than Forty-Eight Thousand Dollars
($48,000.00) (herein referred to as the "Minimum Factoring
Fees"), we shall charge Universal s account as of the end of such
Period with an amount equal to the difference between the actual
factoring fees or charges paid during such Period and said
Minimum Factoring Fees.
15.2 You agree to pay all costs and expenses incurred by
us in connection with the administration and enforcement of this
Agreement, including all reasonable fees and expenses
attributable to the services of our attorneys (whether in-house
or outside), search fees and public record filing fees.
Furthermore, you agree to pay to us our fees (as more fully set
forth in the Guide, see section 18.2 below) including fees for:
(a) special reports prepared by us at your request; (b) wire
transfers; (c) handling change of terms requests relating to
Accounts; and (d) your usage of our on-line computer services.
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Beginning on the first of the month six months from the date
hereof, you also agree to pay us our fees for: (i) each new
customer setup on our customer accounts receivable data base and
each new customer relationship established for you; (ii)
crediting your account with proceeds of non-factored invoices
received by us; and (iii) charge backs of invoices factored with
us that were paid directly to you. All such fees will be charged
to your account when incurred. Our fees may be changed by us from
time to time upon notice to you; however, any failure to give you
such notice does not constitute a breach of this Agreement and
does not impair our ability to institute any such change.
15.3 Any tax or fee of any governmental authority imposed
on or arising from any transactions between us, any sales made by
you, or any inventory relating to such sales Is your sole
responsibility (other than income and franchise taxes imposed on
us which are not related to any specific transaction between us).
If we are required to withhold or pay any such tax or fee, or any
interest or penalties thereon, you hereby indemnify and hold us
harmless therefor and we shall charge your account with the full
amount thereof.
16. TERMINATION
16.1 You may terminate this Agreement only as of an
Anniversary Date and then only by giving us at least sixty (60)
days prior written notice of termination. "Anniversary Date"
means September 30, 2000, and the same month and date in each
year thereafter; however, you may terminate this Agreement at any
time by giving us at least sixty (60) days prior written notice
of termination if you shall have presented to us a bona fide
written proposal for you to obtain from, and as issued by,
another lender or factor, a factoring or financing arrangement
and we, in our discretion, shall have elected not to provide you
with a factoring or financing arrangement on similar or more
favorable terms and conditions. In the event that this Agreement
is terminated by you prior to an Anniversary Date, we shall be
entitled to the unpaid portion of the Minimum Factoring Fees, if
any, for such Period, as provided in section 15.1 above, as of
the effective date of termination, calculated by multiplying the
number of days during the Period for which this Agreement shall
have been in effect by the Minimum Factoring Fees, and dividing
such amount by 360 days. Except as otherwise provided, we may
terminate this Agreement at any time by giving you at least sixty
(60) days prior written notice of termination. However, we may
terminate this Agreement immediately, without prior notice to
you, upon the occurrence of an Event of Default (defined in
section 17.1 below).
16.2 This Agreement remains effective between us until
terminated as herein provided. Unless sooner demanded, all
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Obligations will become immediately due and payable upon any
termination of this Agreement.
16.3 All of our rights, liens and security interests
hereunder continue and remain in full force and effect after any
termination of this Agreement and pending a final accounting, we
may withhold any balances in your account unless we are supplied
with an indemnity satisfactory to us to cover all Obligations.
You agree to continue to assign accounts receivable to us and to
remit to us all collections on accounts receivable, until all
Obligations have been paid in full or we have been supplied with
an indemnity satisfactory to us to cover all Obligations.
17. EVENTS OF DEFAULT AND REMEDIES UPON DEFAULT
17.1 It is an "Event of Default" under this Agreement if:
(a) your business ceases or a meeting of your creditors is
called; (b) any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceeding is commenced
by or against you under any federal or state law and which
proceeding shall not have been dismissed within thirty (30) days
of commencement; (c) you breach any representation, warranty or
covenant contained in this Agreement; or (d) you fail to pay any
Obligation when due.
17.2 After the occurrence of an Event of Default which is
not waived by us, we may terminate this Agreement without notice
to you. We shall then have immediate access to, and may remove
from any premises where same may be located, any and all Books
and Records as may pertain to the Accounts, Returned Goods and
any other collateral hereunder. Furthermore, as may be necessary
to administer and enforce our rights in the Accounts, Returned
Goods and any other collateral hereunder, or to facilitate the
collection or realization thereof, we have your permission to:
(a) use (at your expense) your personnel, supplies, equipment,
computers and space, at your place of business or elsewhere; and
(b) notify postal authorities to change the address for delivery
of your mail to such address as we may designate and to receive
and open your mail. We agree to turn over to you or your
representative all mail not related to the aforesaid purposes.
17.3 After the occurrence of an Event of Default which is
not waived by us, with respect to any other property or
collateral in which we have a security interest, we shall have
all of the rights and remedies of a secured party under Article 9
of the Uniform Commercial Code. If notice of intended disposition
of any such property or collateral is required by law, it is
agreed that five (5) days notice constitutes reasonable notice.
The net cash proceeds resulting from the exercise of any of the
foregoing rights, after deducting all charges, costs and expenses
(including reasonable attorneys fees) will be applied by us to
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the payment or satisfaction of the Obligations, whether due or to
become due, in such order as we may elect. You remain liable to
us for any deficiencies. With respect to Factor Risk Accounts and
Returned Goods relating thereto, you hereby confirm that we are
the owners thereof, and that our rights of ownership permit us to
deal with this property as owner and you confirm that you have no
interest therein.
18. MISCELLANEOUS PROVISIONS
18.1. This Agreement, and all attendant documentation, as
the same may be amended from time to time, constitutes the entire
agreement between us with regard to the subject matter hereof, and
supersedes any prior agreements or understandings. This Agreement
can be changed only by a writing signed by both of us. Our failure
or delay in exercising any right hereunder will not constitute a
waiver thereof or bar us from exercising any of our rights at any
time. The validity, interpretation and enforcement of this
Agreement is governed by the laws of the State of New York,
excluding the conflict laws of such State.
18.2 The Client Service Guide, as supplemented and amended
from time to time (the "Guide") has been furnished to you or is
being furnished to you concurrently with the signing of this
Agreement, and by your signature below you acknowledge receipt
thereof. The Guide provides information on credit approval
processes, accounting procedures and fees. The procedures for
Electronic Batch Transmission are covered in supplemental
instructions to the Guide. From time to time, we may provide you
with amendments, additions, modifications, revisions or supplements
to the Guide, which will be operative for transactions between us.
All information and exhibits contained in the Guide, on any screen
accessed by you, and on any print-outs, reports, statements or
notices received by you are, and will be, our exclusive property
and are not to be disclosed to, or used by, anyone other than you,
your employees or your professional advisors, in whole or in part,
unless we have consented in writing.
18.3 This Agreement binds and benefits each of us and our
respective successors and however, assigns, provided, that you may
not assign this Agreement or your rights hereunder without our
prior written consent.
18.4 Section headings are for convenience only and are not
controlling. The use of "including" means "including without
limitation".
18.5 If any provision of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable laws or
regulations, such provision will be inapplicable and deemed omitted
to such extent, but the remainder will not be invalidated thereby
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and will be given effect so far as possible.
18.6 You shall take all action reasonably necessary to
assure that your computer-based systems are able to effectively
process date-sensitive data functions. You represent and warrant
that the "Year 2000" problem (that is, the inability of certain
computer applications to recognize and properly perform date-sensitive
functions involving certain dates on or about or
subsequent to December 31, 1999) will not result in a material
adverse effect on your business, assets, or operations. You
reasonably anticipate that all computer applications which are
material to your business will, on a timely basis, be able to
properly perform date-sensitive functions for all dates on and
after January 1, 2000. Upon our request, from time to time you
shall provide to us assurances that your computer systems and
software are or will be Year 2000 compliant on a timely basis, all
in form and substance reasonably satisfactory to us.
19. JURY TRIAL WAIVER
To the extent permitted by applicable law, we each hereby
waive any right to a trial by jury In any action or proceeding
arising directly or indirectly out of this Agreement, or any other
agreement or transaction between us or to which we are parties.
If the foregoing is in accordance with your understanding,
please so indicate by signing and returning to us the original and
one copy of this Agreement. This Agreement will take effect as of
the date set forth above but only after being accepted below by one
of our officers in New York, after which we shall forward a fully
executed copy to you for your files.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By Steven Forleiter
Name: Steven Forleiter
Title: VP
Read and Agreed to:
USI ELECTRIC, INC.
By Harvey Grossblatt
Name: Harvey Grossblatt
Title: Secretary
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EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of April 1, 2002, by and between UNIVERSAL
SECURITY INSTRUMENTS, INC., a Maryland corporation (the
"Company"), and HARVEY B. GROSSBLATT (the "Executive").
RECITALS
WHEREAS, the Company is engaged in the business of
designing, manufacturing and marketing security products (the
"Business"); and
WHEREAS, the Executive is the Executive of the Company; and
WHEREAS, the Company desires to continue to employ the
Executive to perform services as the Executive of the company,
and to perform other duties which may be assigned from time to
time by the Board of Directors of the Company (the "Board") or
the Chairman of the Board of the Company (the "Chairman") from
time to time at its discretion;
WHEREAS, the Company and Executive desire to set forth in
writing the terms and conditions of their agreement and
understanding.
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 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 the
day immediately preceding the third anniversary of the date
hereof (the "Term"). The period during which the Executive is
employed pursuant to this Agreement, including any renewal
thereof shall be referred to as the "Employment Period."
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2. Position and Duties. During the Employment Period, the
Executive shall serve as, and have responsibilities and authority
consistent with the position of, President of the Company, which
shall be subject to the discretion of the Board. The Executive
shall diligently and conscientiously devote his full and
exclusive business time and attention and best efforts in
discharging his duties. The Company shall provide appropriate
office space and services to allow the Executive to discharge his
duties, consistent with policies established by the Board from
time to time.
3. Compensation.
(a) Salary. The Company shall initially pay the
Executive an annual base salary ("Annual Base Salary") of
$122,500.00. The Annual Base Salary during any year of the
Employment Period shall be an amount determined by the Board.
The Annual Base Salary shall be subject to periodic review at
least annually by the Board or by a committee established by the
Board for increases based on the policies of the Company in
effect from time to time. There shall be a minimum annual
increase in the Annual Base Salary, effective as of each
anniversary date of this Agreement, equal to or any increase 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. Once established,
the Annual Base Salary shall not be reduced without the prior
written consent of the Executive. The Annual Base Salary shall
be payable according to the Company's regular payroll practices
and shall be subject to all applicable federal, state and local
withholding taxes.
(b) Bonus. 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 120 days after the end of the fiscal year with respect to
which it 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
60 days. The Bonus shall be subject to all applicable federal,
state and local withholding taxes.
(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. Effective the date hereof, the Board hereby
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grants to the Executive options to purchase 20,000 shares of the
Company's Common Stock, at an exercise price of $4.50 per share,
exercisable immediately, pursuant to the Company's Non-Qualified
Stock Option Plan.
4. Benefits. During the Employment Period, the Company
shall provide the Executive with the following benefits:
(a) Participation by the Executive, and his wife and
dependant children in any group health plans sponsored or
arranged by the Company for its employees. The full amount of
all premiums for such insurance will be paid by the Company. In
the event the Executive declines or is ineligible to participate
in such group health plans, the Company shall pay to the
Executive, no less frequently than quarterly, additional
compensation equal to the amount of such premiums which the
Company would have paid for such period had the Executive
accepted such participation for himself, his wife and dependant
children. Nothing herein shall obligate the Company to continue
any health plan currently offered to employees or offered to
employees in the future. The Executive agrees to cooperate with
the Company and to take all steps reasonably necessary to assist
the Company in obtaining such insurance. The Executive
represents that he currently has no significant health condition
which would make it commercially unreasonable to obtain such
insurance.
(b) Participation in any retirement plans, disability
income insurance and term life insurance policies sponsored or
arranged by the Company for its employees from time to time.
Nothing herein shall obligate the Company to continue any plan or
policy currently offered to employees or offered to employees in
the future.
(c) For each calendar year during the Term, the Company
shall contribute the maximum amount permitted by applicable law
on behalf of the Executive to the Company's 401(k) Plan. The
Executive shall be entitled to the full amount of this benefit
with respect to any fiscal year of the Company during which the
Executive has been employed by the Company for 60 days.
(d) Four 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.
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(e) Use of a Company owned or leased automobile or, at
the Executive's option, an automobile payment allowance of $800
per month, and shall pay for the insurance, fuel and service for
such automobile.
(f) All costs and expenses of a mobile phone for the
Executive's use in connection with the performance of his duties,
in accordance with the terms and conditions that the Board shall
determine from time to time.
(g) In addition to the benefit provided under Section
4(a), reimbursement up to a maximum of $25,000 per annum for
expenses incurred by the Executive, his wife and dependant
children for medical, dental, optical and long-term care and
prescription drugs, or third-party payor coverage therefor, which
are not reimbursable under any medical coverage for which the
premiums are paid by the Company. All requests by the Executive
for such reimbursement must be in writing accompanied by receipts
for such amounts.
(h) Participation in the Company's Cafeteria
Plan/Flexible Spending Plan.
(i) Any other group employee benefit plans or programs
to the extent that he is qualified under the requirements
relating to participation in any such plan or program.
5. Business Expenses. The Company shall pay or reimburse
the Executive for business expenses incurred by the Executive
during the Employment Period in connection with his employment.
6. Termination of Employment. Executive's employment will
be terminated in accordance with Sections 6(a), or may be
terminated in accordance with Sections 6(b) - (c), as follows:
(a) Upon the last day of a Term.
(b) By the Company for "Cause". For the purpose of
this Section, "Cause" shall mean a determination by a court of
competent jurisdiction that:
(i) The Executive committed a willful act against
the interest of the Company resulting in material harm to the
Company's interests; or
(ii) The Executive committed a material act of
dishonesty or fraud against the Company, unless it is determined
by such court that the Executive acted in a manner which he
believed, in good faith, to be in the interest of the Company.
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(c) By the Executive after 15-days written notice to
the Company of the Company's material breach of this Agreement
unless the Company cures such breach during such notice period.
If the Executive terminates employment hereunder, the Executive's
employment shall be deemed to have been terminated by the Company
without Cause.
(d) Upon the death of the Executive, or by the Company
if the Executive is Permanently Disabled (as hereafter defined).
For purposes of this Agreement, the term "Permanently Disabled"
or "Permanent Disability" shall mean (i) becoming permanently
disabled as provided in any permanent disability income policy
provided by the Company under this Agreement insuring the
Executive or (ii) in the absence of any such disability income
policy, the inability for a period of six consecutive months,
with reasonable accommodation, due to a mental or physical
injury, illness or disorder, of Executive to provide
substantially all of the services required pursuant to this
Agreement to be provided by Executive. Whether or not Executive
is Permanently Disabled under subsection (ii) shall be determined
by a medical doctor agreed to by Company and Executive. If
Company and the Executive cannot agree on such a medical doctor,
they shall each, at their own expense, designate an unrelated
medical doctor and such medical doctors shall in turn designate a
third unrelated medical doctor, whose fee shall be shared equally
by Company and Executive. Such medical doctor(s) shall determine
whether Executive is Permanently Disabled and shall also
determine the date of the commencement and termination, if any,
of such Permanent Disability. Such determinations (whether made
by unanimous or majority vote of the medical doctors) shall be
binding on the parties hereto. If any party (the "Second Party")
fails to select its medical doctor within 30 days after written
notice from the other party (the "First Party") of the
appointment of the First Party's medical doctor, then the First
Party's medical doctor shall determine whether Executive is
Permanently Disabled and shall also determine the date of the
commencement and termination, if any, of such Permanent
Disability.
(e) By the Executive on 30 days advance written notice
at any time within 24 months following a "Change of Control", as
defined in Exhibit B attached hereto and incorporated herein by
reference (a "Change of Control").
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7. Effect of Termination.
(a) In the event that Executive's employment is
terminated for any reason, Executive shall be paid on the payroll
date next following the date of termination, all compensation,
and reimbursement of all expenses, for the applicable Term
accruing through the effective date of termination of employment.
(b) In the event of the termination of the Executive's
employment hereunder by the Company for any reason other than
pursuant to Sections 6(a), 6(b) or 6(d), the Executive shall be
entitled to receive in addition to the payment under Section
7(a):
(i) A lump sum severance payment in an amount
equal to the Annual Base Salary for the balance of the Term plus
the amount of the last Bonus, payable concurrently with the
delivery by the Company to the Executive of the written notice of
termination, and, on the date on which the Term would have
expired, a lump sum severance payment in an amount equal to two
times the previous 12 months' Annual Base Salary and last Bonus,
in each instance subject to all applicable federal, state and
local withholding taxes; and
(ii) For the balance of the Term and a period of
three years following the end of the Term, the benefits set forth
in Sections 4(a) and 4(g).
(c) In the event the Executive's employment is
terminated by the Company or its successor following or in
anticipation of a Change of Control, or in the event the
Executive's employment is terminated by the Executive pursuant to
Section 6(e) above, the Executive shall be entitled to receive in
addition to the payment under Section 7(a):
(i) A lump sum severance payment in an amount
equal to (A) the Annual Base Salary for the balance of the Term,
(B) the amount of the last Bonus, and (C) three times the
previous 12 months' Annual Base Salary and last Bonus, payable
concurrently with the delivery by the Company or its successor to
the Executive of the written notice of termination or within 30
days following termination by the Executive, as the case may be,
subject to all applicable federal, state and local withholding
taxes; and
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(ii) For a period of three years following the end
of the Term of this Agreement, the benefits set forth in Sections
4(a) and 4(g); provided, however, the aggregate present value of
payments pursuant to this Section 7(c) (plus any payments under
any other plan of the Company and its affiliates which are
contingent on a change of control), determined in accordance with
Section 280G of the Internal Revenue Code of 1986, as amended, or
any corresponding provision of any succeeding law, may not exceed
2.99 times the Executive's average annual taxable compensation
from the Company or its affiliates which is included in the
Executive's gross income for the five taxable years of the
Company ending before the date on which the change of control
occurs.
(d) In the event the Executive's employment is
terminated pursuant to Section 6(d), the Executive (or his
estate) shall be entitled to receive in addition to the payment
under Section 7(a):
(i) The continuation of the payment of the
Executive's then current Annual Base Salary for the balance of
the Term, reduced, in the event of the Executive's death, by any
individual life insurance benefits the premiums for which are
paid for by the Company, and in the event of the Executive's
Permanent Disability, by any group or individual disability
income insurance benefits the premiums for which are paid for by
the Company. The net amount payable hereunder shall be paid
according to the Company's regular payroll practices, subject to
all applicable federal, state and local withholding taxes; and
(ii) The continuation of the benefits set forth in
Sections 4(a) and 4(g) for the longer of (A) the balance of the
Term, or (B) three years following the date of the Executive's
death or Permanent Disability; provided, however, that if the
terms of the group health plans sponsored or arranged by the
Company for its employees limit the length of time during which
the benefit set forth in Section 4(a) may be provided, the
Company shall pay to the Executive (or his estate) with respect
to any period during which such benefit may not be provided, no
less frequently than quarterly, a sum equal to the amount of the
premiums which the Company would have paid for such period had
the benefit set forth in Section 4(a) continued.
8. Company Obligations. The amounts payable to the
Executive pursuant to Section 7 following termination of his
employment shall be in addition to any rights the Executive may
have with respect to previously granted stock options and any
rights the Executive may have arising from claims of breaches by
the Company of the terms of this Agreement.
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9. Restrictive Covenants.
(a) Noncompetition. During the Employment Period and
any additional period during which the Executive receives
compensation from the Company pursuant to Section 7, the
Executive will not directly or indirectly, either as principal,
agent, employee, or in any other capacity, enter into or engage
in any business in which the Company is engaged during the Term
hereof.
(b) CONFIDENTIALITY. DURING THE EMPLOYMENT PERIOD AND
AT ALL TIMES AFTER THE TERMINATION OF THIS AGREEMENT FOR ANY
REASON, THE EXECUTIVE WILL NOT DISCLOSE TO ANY THIRD PARTY ANY
TRADE SECRETS, CUSTOMER LISTS OR OTHER CONFIDENTIAL INFORMATION
PERTAINING TO THE BUSINESS.
(c) Company Property. Promptly following the
Executive's termination of employment for any reason, the
Executive shall return to the Company all property of such
entity, and originals and any copies thereof in the Executive's
possession or under his control, including all confidential
information and trade secrets, in whatever media or in whatever
form.
(d) Nonsolicitation of Employees. During the
Employment Period and any additional period during which the
Executive receives compensation from the Company pursuant to
Section 7, the Executive shall not directly or indirectly induce
any management or supervisor-level employee of the Company or any
of its affiliates to terminate employment with such entity, and
will not directly or indirectly, either individually or as owner,
agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or
a subsidiary thereof as a management or supervisor-level employee
unless such person shall have ceased to be employed by such
entity for a period of at least three months.
(e) INJUNCTIVE RELIEF WITH RESPECT TO COVENANTS. THE
EXECUTIVE ACKNOWLEDGES AND AGREES THAT THE COVENANTS AND
OBLIGATIONS OF THE EXECUTIVE WITH RESPECT TO NONCOMPETITION,
NONSOLICITATION, CONFIDENTIALITY AND COMPANY PROPERTY RELATE TO
SPECIAL, UNIQUE AND EXTRAORDINARY MATTERS AND THAT A VIOLATION OF
ANY OF THE TERMS OF SUCH COVENANTS AND OBLIGATIONS WILL CAUSE THE
COMPANY AND ITS SUBSIDIARIES IRREPARABLE INJURY FOR WHICH
ADEQUATE REMEDIES ARE NOT AVAILABLE AT LAW. THEREFORE, THE
EXECUTIVE AGREES THAT THE COMPANY AND ITS SUBSIDIARIES SHALL BE
ENTITLED TO AN INJUNCTION, RESTRAINING ORDER OR SUCH OTHER
- 77 -
EQUITABLE RELIEF AS A COURT OF COMPETENT JURISDICTION MAY DEEM
NECESSARY OR APPROPRIATE TO RESTRAIN THE EXECUTIVE FROM
COMMITTING ANY VIOLATION OF THE COVENANTS AND OBLIGATIONS
CONTAINED IN THIS SECTION. THESE INJUNCTIVE REMEDIES ARE
CUMULATIVE AND ARE IN ADDITION TO ANY OTHER RIGHTS AND REMEDIES
THE COMPANY OR ITS SUBSIDIARIES MAY HAVE AT LAW OR IN EQUITY. IN
THE EVENT (I) THE ENFORCEABILITY OF ANY OF THE COVENANTS
CONTAINED IN THIS SECTION IS CHALLENGED BY EXECUTIVE IN ANY
JUDICIAL PROCEEDING, (II) EXECUTIVE IS NOT ENJOINED IN SUCH
PROCEEDING FROM BREACHING SUCH COVENANT, AND (III) EXECUTIVE
DOES, IN FACT BREACH SUCH COVENANT, THEN, IF A COURT OF COMPETENT
JURISDICTION DETERMINES THAT THE CHALLENGED COVENANT IS
ENFORCEABLE, THE TIME PERIOD SET FORTH IN SUCH COVENANT SHALL BE
DEEMED TOLLED UPON THE INITIATION OF SUCH PROCEEDING UNTIL THE
DISPUTE IS FINALLY RESOLVED AND ALL PERIODS OF APPEAL HAVE
EXPIRED.
10. Miscellaneous.
(a) Binding Effect. This Agreement shall be binding on
the Company and any person or entity which succeeds to the
interest of the Company (regardless of whether such succession
occurs by operation of law, by reason of the sale of all or a
portion of the Company's stock or assets or a merger,
consolidation or reorganization involving the Company). This
Agreement shall also inure to the benefit of the Executive's
heirs, executors, administrators and legal representatives.
(b) Assignment. Neither this Agreement nor any of the
rights or obligations hereunder shall be assigned or delegated by
either party hereto without the prior written consent of the
other party.
(c) Entire Agreement. This Agreement supersedes any
and all prior agreements between the parties hereto, and
constitutes the entire agreement between the parties hereto with
respect to the matters referred to herein, and no other
agreement, oral or otherwise, shall be binding between the
parties unless it is in writing and signed by the party against
whom enforcement is sought. There are no promises,
representations, inducements or statements between the parties
other than those that are expressly contained herein. THE
EXECUTIVE ACKNOWLEDGES THAT HE IS ENTERING INTO THIS AGREEMENT OF
HIS OWN FREE WILL AND ACCORD, AND WITH NO DURESS, THAT HE HAS
READ THIS AGREEMENT AND THAT HE UNDERSTANDS IT AND ITS LEGAL
CONSEQUENCES. No parol or other evidence may be admitted to
alter, modify or construe this Agreement, which may be changed
only by a writing signed by the parties hereto.
- 78 -
(d) Severability; Reformation. In the event that one
or more of the provisions of this Agreement shall become invalid,
illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein
shall not be affected thereby. In the event any of Section 9(a),
(b), (c), (d) or (e) is not enforceable in accordance with its
terms, the Executive and the Company agree that such Section, or
such portion of such Section, shall be reformed to make it
enforceable in a manner which provides the Company the maximum
rights permitted under applicable law.
(e) Waiver. Waiver by either party hereto of any
breach or default by the other party of any of the terms of this
Agreement shall not operate as a waiver of any other breach or
default, whether similar to or different from the breach or
default waived. No waiver of any provision of this Agreement
shall be implied from any course of dealing between the parties
hereto or from any failure by either party hereto to assert its
or his rights hereunder on any occasion or series of occasions.
(f) Notices. Any notice required or desired to be
delivered under this Agreement shall be in writing and shall be
delivered personally, by courier service, by registered mail,
return receipt requested, or by telecopy and shall be effective
upon dispatch to the party to whom such notice shall be directed,
and shall be addressed as follows (or to such other address as
the party entitled to notice shall hereafter designate in
accordance with the terms hereof):
If to the Company: Universal Security Instruments, Inc.
7-A Gwynns Mill Court
Owings Mills, Maryland 21117
Fax (410) 363-2218
Attention: Chairman of the Board
If to the Executive: Harvey B. Grossblatt
28 Westspring Way
Lutherville, Maryland 21093
(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.
- 79 -
(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.
/s/ By: /s/ Stephen Knepper
Stephen Knepper
Chairman of the Board
THE EXECUTIVE:
/s/ /s/ Harvey B. Grossblatt
Harvey B. Grossblatt
- 80 -
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 reported by the Company in its annual audited
consolidated financial statements with respect to such fiscal
year.
With respect to any fiscal year of the Company in which the
Company has achieved at least $100,000 of Pre-Tax Net Income, 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
specified below:
On all portions of Pre-Tax Net Income up to
and including $1 million 5%
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 3%
On all portions of Pre-Tax Net Income over
$3 million 1%
- 81 -
EXHIBIT B
CHANGE OF CONTROL
For the purposes of this Agreement, a "Change of Control"
means the occurrence of any one or more of the following events,
provided that the Chief Executive Officer of the Company as of
the date of this Agreement either exercises his/her rights under
a Change of Control pursuant to his/her employment agreement with
the Company, or consents to the exercise by the Executive:
(i) The acquisition or attainment of "beneficial ownership"
by a person or entity, including any "group", as such terms are
defined under Section 13(d) of the Securities Exchange Act of
1934, including any of the equity owners of the Company as of the
date hereof, of 50% or more (on a primary and not a fully diluted
basis) of the outstanding common equity of the Company. *
(ii) The sale or other disposition of all or substantially
all of the assets of the Company in one transaction or a series
of transactions (other than financing arrangements).
(iii) A merger, consolidation or share exchange involving the
Company and any other person or entity, including any of the
equity owners as of the date hereof, in which the Company or one
of its subsidiaries is not the surviving entity.
(iv) Any other "business combination" (as defined in Section
3-601(e) of the Maryland General Corporation Law) involving the
Company and any person or entity, including any of the equity
owners as of the date hereof, whether or not such person or
entity is an "interested stockholder" under that statute.
(v) The deadlock of the Board with respect to the
management of the Company's affairs that a majority vote for
action by the Board cannot be obtained either within a reasonable
time or, if shorter, for two consecutive Board meetings.
(vi) The filing by the Company or any other party with the
Securities and Exchange Commission ("SEC") of proxy materials
with respect to the election to the Board of individuals other
than those nominated by the Board and who, if elected, would
constitute a majority of the Board.
(vii) The filing by any party or group (other than the
Executive or a group which includes the Executive) with the SEC
of information disclosing the plan or proposal of such party or
group to accomplish any of the following:
- 82 -
1. The acquisition by such party or group of
additional securities of the Company which, if accomplished,
would result in the occurrence of the event(s) specified in
paragraphs (i) or (ii), above;
2. An extraordinary corporate transaction, such as a
merger, reorganization or liquidation, involving the Company or
any of its subsidiaries;
3. A sale or transfer of a material amount of assets
of the Company or any of its subsidiaries (other than financing
arrangements);
4. Any change in the present Board or management of
the Company, including any plans or proposals to change the
number or term of directors or to fill any existing vacancies on
the Board;
5. Changes in the Company's charter, bylaws or
instruments corresponding thereto or other actions which may
impede or advance the acquisition of control of the Company by
any person;
6. Causing a class of securities of the Company to be
delisted from a national securities exchange or to cease to be
authorized to be quoted in an inter-dealer quotation system
sponsored or maintained by a registered national securities
association;
7. A class of equity securities of the Company
becoming eligible for termination of registration pursuant to
Section 12(g)(4) of the Securities Exchange Act of 1934, as
amended; or
8. Any action similar to any of those enumerated
above.
* For purposes of this definition, the transfer in a single or
series of transactions of 30% or more of the voting control of
any equity owner of the Company shall be deemed to be a transfer
of beneficial ownership of the common equity of the Company owned
by such equity owner.
- 83-
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration
Statement of Universal Security Instruments, Inc. and subsidiaries on Form
S-8 (No. 333-81930 dated February 1, 2002) pertaining
to the Non-Qualified Stock Option Plan as Amended, Registration
Statements on Form S-8 (No. 2-83323 dated May 4, 1983, No. 33-6953 dated
July 2, 1986, No. 33-21226 dated April 13, 1988) pertaining to the Non-
Qualified Stock Option Plan and in the Registration Statement on
Form S-8 (No. 33-21225 dated April 13, 1988) pertaining to the 1988
Employee Stock Purchase Plan, of our report dated May 31, 2002, included
in the Annual Report of Universal Security Instruments, Inc. and
subsidiaries on Form 10-K for the year ended March 31, 2002 filed with the
Securities and Exchange Commission.
GRANT THORNTON LLP
Baltimore, Maryland
May 31, 2002
- 84 -
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-81930 dated February 1, 2002) pertaining
to the Non-Qualified Stock Option Plan as Amended, Registration
Statements on Form S-8 (No. 2-83323 dated May 4, 1983, No. 33-6953 dated
July 2, 1986, No. 33-21226 dated April 13, 1988) pertaining to the Non-
Qualified Stock Option Plan and in the Registration Statement on
Form S-8 (No. 33-21225 dated April 13, 1988) pertaining to the 1988
Employee Stock Purchase Plan of our report dated June 14, 2002 with
respect to the consolidated financial statements of The Joint Venture
(Name withheld and filed separately with the Securities and Exchange
Commission), included in the Annual Report (Form 10-K) of Universal
Security Instruments, Inc. for the year ended March 31, 2002, filed with
the Securities and Exchange Commission.
Ernst & Young
Hong Kong
June 25, 2002
- 85 -
Audited Financial Statements
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
31 March 2002
- 86 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONTENTS
Pages
REPORT OF INDEPENDENT AUDITORS 88
AUDITED FINANCIAL STATEMENTS
Consolidated profit and loss account 89
Consolidated balance sheet 90-91
Consolidated cash flow statement 92
Notes to consolidated financial statements 94-108
- 87 -
Report of Independent Auditors
To the board of directors
THE JOINT VENTURE ((NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION) (the "Company") and its
subsidiaries as of 31 March 2002 and 2001, and the related
consolidated profit and loss accounts and cash flows for each of
the two years in the period ended 31 March 2002. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of 31
March 2002 and 2001, and the consolidated results of their
operations and their cash flows for each of the two years in the
period ended 31 March 2002 in conformity with accounting
principles generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in
certain significant respects from accounting principles generally
accepted in the United States of America. Application of
generally accepted accounting principles in the United States of
America would not have had a significant effect on the
consolidated results of operations of the Company and its
subsidiaries for each of the two years in the period ended 31
March 2002 and the financial position of the Company and its
subsidiaries as of 31 March 2002 and 2001.
Ernst & Young
Hong Kong
14 June 2002
- 88 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Years ended 31 March 2002 and 2001
Notes 2002 2001
HK$ HK$
TURNOVER 4 88,449,887 46,928,800
Cost of sales (59,632,260) (36,811,248)
Gross profit 28,817,627 10,117,552
Other revenue 4 1,345,281 1,900,140
Administrative and
operating expenses (11,864,956) (11,341,896)
PROFIT FROM OPERATING ACTIVITIES 5 18,297,952 675,796
Finance costs 6 (145,454) (49,055)
PROFIT BEFORE TAX 18,152,498 626,741
Tax 7 1,036,461 (2,814)
NET PROFIT ATTRIBUTABLE TO
SHAREHOLDERS 19,188,959 623,927
Retained profits at beginning
of year 34,209,664 33,585,737
RETAINED PROFITS AVAILABLE
FOR DISTRIBUTION 53,398,623 34,209,664
Dividends 8 (10,383,672) -
RETAINED PROFITS AT END OF YEAR 43,014,951 34,209,664
Other than the net profit attributable to shareholders, the Group had no
recognised gains or losses. Accordingly, a Consolidated Statement of
Recognised Gains and Losses is not presented in the financial statements.
- 89 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET
31 March 2002 and 2001
Notes 2002 2001
HK$ HK$
ASSETS
Non-current assets:
Fixed assets 9 16,414,287 17,093,660
Long term investment 10 - -
16,414,287 17,093,660
Current assets:
Due from a shareholder 1 2,208,332 3,990,870
Inventories 11 12,768,297 6,658,344
Trade receivables 1,698,965 -
Prepayments, deposits and
other receivables 371,644 654,146
Pledged time deposit 12 1,676,441 1,631,932
Cash and cash equivalents 13 26,994,967 15,615,466
45,718,646 28,550,758
TOTAL ASSETS 62,132,933 45,644,418
EQUITY AND LIABILITIES
Current liabilities:
Loan from a related company 1 - 27,329
Due to a related company 1 900,000 -
Tax payable 1,379,000 2,332,003
Other payables and accruals 1,447,572 2,479,027
Trade payables 12,188,556 3,393,541
15,915,128 8,231,900
Non-current liabilities:
Loans from shareholders 14 2,868,954 2,868,954
Deferred tax 15 333,700 333,700
3,202,654 3,202,654
TOTAL LIABILITIES - page 6 19,117,782 1,434,554
- 90 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET (continued)
31 March 2002 and 2001
Notes 2002 2001
HK$ HK$
TOTAL LIABILITIES - page 5 19,117,782 11,434,554
Capital and reserve:
Issued capital 16 200 200
Retained profits 43,014,951 34,209,664
43,015,151 34,209,864
TOTAL EQUITY AND LIABILITIES 62,132,933 45,644,418
- 91 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT
Years ended 31 March 2002 and 2001
Notes 2002 2001
HK$ HK$
NET CASH INFLOW/(OUTFLOW)
FROM OPERATING ACTIVITIES 17(a) 18,395,205 (534,489)
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 565,330 1,274,622
Interest paid (145,454) (49,055)
Dividends paid (5,191,836) -
Net cash inflow/(outflow)
from returns on investments
and servicing of finance (4,771,960) 1,225,567
TAX
Hong Kong profits tax refunded 83,458 106,552
INVESTING ACTIVITIES
Purchases of fixed assets (2,271,477) (2,040,643)
Proceeds from disposal of
fixed assets 16,113 8,000
Increase in pledged time deposit (44,509) (61,893)
Net cash outflow from investing
activities (2,299,873) (2,094,536)
NET CASH INFLOW/(OUTFLOW)
BEFORE FINANCING ACTIVITY 11,406,830 (1,296,906)
FINANCING ACTIVITY 17(b)
Repayment of loan from a
related company (27,329) (164,004)
Net cash outflow from
financing activity (27,329) (164,004)
INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 11,379,501 (1,460,910)
Cash and cash equivalents at
beginning of year 15,615,466 17,076,376
- 92 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
Years ended 31 March 2002 and 2001
Notes 2002 2001
HK$ HK$
CASH AND CASH EQUIVALENTS
AT END OF YEAR 26,994,967 15,615,466
ANALYSIS OF THE BALANCES OF
CASH AND CASH EQUIVALENTS
Cash and bank balances 14,962,374 4,493,074
Time deposits with original
maturity of less than
three months when acquired 12,032,593 11,122,392
26,994,967 15,615,466
- 93 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
1. CORPORATE INFORMATION
The registered office of the Company is at (address withheld
and filed separately with the SEC).
The Company was incorporated under the laws of Hong Kong on
7 July 1989. It operates under a joint venture agreement
entered into on 23 October 1989 between Universal Security
Instruments, Inc. ("USI"), a company incorporated in the
United States, and The Original Joint Venture Owner (name
withheld and filed separately with the SEC), a company
incorporated in Hong Kong. The Company is economically
dependent on USI with which it transacts a significant
portion of its business and the financial statements reflect
the effect of these transactions that are conducted on bases
determined between the parties.
During the year, the following significant related party
transactions were recorded:
2002 2001
Notes HK$ HK$
Sales made to USI (i) 37,952,734 29,777,716
Purchases from USI (i) 5,323,216 1,996,268
Rentals paid to:
An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (ii) 840,000 840,000
A Director of the
Company (name
withheld and filed
separately with the
SEC) (ii) 240,000 240,000
Management fee paid to
An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (iii) 1,620,000 1,440,000
- 94 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
1. CORPORATE INFORMATION (continued)
Management bonus paid
to An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (iv) 900,000 -
Interest income from USI (v) 214,409 238,359
Purchase of a fixed asset
from An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (vi) - 400,000
Notes:
(i) Sales and purchases were made according to published
prices and conditions similar to those offered to
other customers or by other suppliers of the Group.
(ii) Rental expenses were charged for the office premises
owned by An Affiliate of the Company (name withheld
and filed separately with the SEC) and A Director of
the Company (name withheld and filed separately with
the SEC) in Hong Kong and the People's Republic of
China (the "PRC") based on the prevailing market rate
and area occupied by the Group.
(iii) Management fee was charged at a monthly basis of
HK$120,000 (2001: HK$120,000) and HK$180,000 (2001:
HK$120,000) for the months from January to December
2001 and from January to March 2002, respectively, for
the provision of management services rendered in
planning, execution and operation of electronics
manufacturing plant in the PRC.
(iv) Management bonus was calculated at 10% on the portion
of annual pre-tax profit in excess of HK$10 million.
- 95 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
1. CORPORATE INFORMATION (continued)
(v) Interest income from USI was charged at 6% - 12%
(2001: 12%) per annum of the overdue trading balance
during the year.
(vi) Fixed asset was purchased on negotiated price agreed
between the Group and An Affiliate of the Company
(name withheld and filed separately with the SEC).
An Affiliate of the Company (name withheld and filed
separately with the SEC) is a company of which A Director of
the Company (name withheld and filed separately with the
SEC) and A Director of the Company (name withheld and filed
separately with the SEC), beneficial shareholders of The
Original Joint Venture Owner (name withheld and filed
separately with the SEC) and ex-directors of the Company,
are also directors. The amount due to An Affiliate of the
Company (name withheld and filed separately with the SEC) of
HK$900,000 (2001: Nil) at 31 March 2002 is unsecured,
interest-free and has no fixed terms of repayment. Loan from
An Affiliate of the Company (name withheld and filed
separately with the SEC) of HK$27,329 as at 31 March 2001
was unsecured, bearing interest at 0.49% per annum and was
fully repaid during the year.
An Affiliate of the Company (name withheld and filed
separately with the SEC) is a company of which A Director
of the Company (name withheld and filed separately with the
SEC) and A Director of the Company (name withheld and filed
separately with the SEC), beneficial shareholders of The
Original Joint Venture Owner (name withheld and filed
separately with the SEC) and ex-directors of the Company,
are also directors.
Except for the trading balance of HK$1,512,801 (2001:
HK$2,930,354) with USI included as due from a shareholder of
HK$2,208,332 (2001: HK$3,990,870) under current assets at 31
March 2002 which is interest-bearing at 6% - 12% (2001: 12%)
per annum, the remaining balance with USI is unsecured,
interest-free, and has no fixed terms of repayment.
- 96 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
2. IMPACT OF NEW STATEMENTS OF STANDARD ACCOUNTING PRACTICE
("SSAPS")
The following recently-issued SSAPs are effective for the
first time for the current year's consolidated financial
statements:
*SSAP 28: "Provisions, contingent liabilities and
contingent assets"
*SSAP 31: "Impairment of assets"
These SSAPs prescribe new accounting measurement and
disclosure practices. The major effects on the Group's
accounting policies and on the amounts disclosed in these
financial statements of adopting these SSAPs are summarised
as follows:
SSAP 28 prescribes the recognition criteria and measurement
bases to apply to provisions, contingent liabilities and
contingent assets, together with the required disclosure in
respect thereof.
The revised SSAP requirements have not had a material effect
on the amounts previously recorded in the financial
statements; therefore, no prior adjustment has been
required.
SSAP 31 prescribes the recognition and measurement criteria
for impairment of assets. The SSAP is required to be applied
prospectively and therefore, has had no effect on amounts
previously reported in prior year financial statements.
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
These financial statements have been prepared in accordance
with Hong Kong Statements of Standard Accounting Practice
and accounting principles generally accepted in Hong Kong.
They have been prepared under the historical cost
convention.
- 97 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries for the years
ended 31 March 2002 and 2001. The results of subsidiaries
acquired or disposed of during the year are consolidated
from or to their effective dates of acquisition or disposal,
respectively. All significant intercompany transactions and
balances within the Group are eliminated on consolidation.
Subsidiaries
A subsidiary is a company in which the Company, directly or
indirectly, controls more than half of its voting power or
issued share capital or controls the composition of its
board of directors.
The Company's interests in subsidiaries are stated at cost
less any impairment losses.
Long term investment
Investment held on a long-term basis is stated at cost less
any impairment loss.
Related parties
Parties are related if one party has the ability, directly
or indirectly, to control the other party or exercise
significant influence over the other party in making
financial and operating decisions. Parties are also related
if they are subject to common control or common significant
influence. Related parties may be individuals or corporate
entities.
Impairment of assets
An assessment is made at each balance sheet date of whether
there is any indication of impairment of any asset, or
whether there is any indication that an impairment loss
previously recognised for an asset in prior years may no
longer exist or may have decreased. If any such indication
exists, the asset's recoverable amount is estimated. An
asset's recoverable amount is calculated as the higher of
the asset's value in use or its net selling price.
- 98 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
An impairment loss is recognised only if the carrying amount
of an asset exceeds its recoverable amount. An impairment
loss is charged to the profit and loss account in the period
in which it arises, unless the asset is carried at a
revalued amount, when the impairment loss is accounted for
in accordance with the relevant accounting policy for that
revalued asset.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated
depreciation and any impairment losses. The cost of an
asset comprises its purchase price and any directly
attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditure
incurred after fixed assets have been put into operation,
such as repairs and maintenance, is normally charged to the
profit and loss account in the period in which it is
incurred. In situations where it can be clearly demonstrated
that the expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the
use of the fixed asset, the expenditure is capitalised as an
additional cost of that asset.
Depreciation is calculated on the straight-line basis to
write off the cost of each asset over its estimated useful
life. The principal annual rates used for this purpose are
as follows:
Land held on medium term leases Over the lease terms
Buildings 5%
Leasehold improvements 20%
Plant and machinery 10%
Furniture and fixtures 20%
Motor vehicles 20%
Computer equipment and software 50%
The gain or loss on disposal or retirement of a fixed asset
recognised in the profit and loss account is the difference
between the net sales proceeds and the carrying amount of
the relevant asset.
- 99 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Inventories
Inventories are stated at the lower of cost and net
realisable value. Cost is determined on the first-in,
first-out basis and, in the case of work in progress and
finished goods, comprises direct materials, direct labour
and an appropriate proportion of overheads. Net realisable
value is based on the estimated selling prices less any
estimated costs to be incurred to completion and disposal.
Cash equivalents
For the purpose of the consolidated cash flow statement,
cash equivalents represent short-term highly liquid
investments which are readily convertible into known amounts
of cash and which were within three months of maturity when
acquired. For the purpose of balance sheet classification,
cash equivalents represent assets similar in nature to cash
that are not restricted as to use.
Revenue recognition
Revenue is recognised when it is probable that the economic
benefits will flow to the Group and when the revenue can be
measured reliably, on the following bases:
(a) from the sales of goods, when the significant risks
and rewards of ownership have been transferred to the
buyer, provided that the Group maintains neither
managerial involvement to the degree usually
associated with ownership, nor effective control over
the goods sold, net of discounts and returns;
(b) rental income, on the straight-line basis over the
lease term;
(c) management fee income, when the services are rendered;
and
(d) interest income, on a time proportion basis, taking
into account the principal outstanding and the
effective interest rate applicable.
- 100 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the lessor are accounted for
as operating leases. Where the Group is the lessor, assets
leased by the Group under operating leases are included in
non-current assets and rentals receivable under the
operating leases are credited to the profit and loss account
on the straight-line basis over the lease terms. Where the
Group is the lessee, rentals payable under the operating
leases are charged to the profit and loss account on the
straight-line basis over the lease terms.
Deferred tax
Deferred tax is provided, using the liability method, on all
significant timing differences to the extent it is probable
that the liability will crystallise in the foreseeable
future. A deferred tax asset is not recognised until its
realisation is assured beyond reasonable doubt.
Foreign currencies
Foreign currency transactions are recorded at the applicable
rates of exchange ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign currencies at
the balance sheet date are translated at the applicable
rates of exchange ruling at that date. Exchange differences
are dealt with in the profit and loss account.
4. REVENUE AND GAINS
Turnover represents the invoiced value of goods sold, net of
discounts and returns. An analysis of turnover, revenue and
gains is as follows:
2002 2001
HK$ HK$
Turnover
Sale of goods 88,449,887 46,928,800
- 101 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
4. REVENUE AND GAINS (continued)
Other revenue
Gross rental income 316,400 325,200
Management fee income 19,890 84,177
Interest income 565,330 1,274,622
Sundry income 267,041 101,530
1,168,661 1,785,529
Gains
Exchange gains, net 176,620 114,611
1,345,281 1,900,140
5. PROFIT FROM OPERATING ACTIVITIES
Profit from operating activities is arrived at after
charging/(crediting):
2002 2001
HK$ HK$
Depreciation 2,934,708 2,860,969
Less: Amount included in
cost of sales (2,278,081) (2,521,311)
656,627 339,658
Auditors' remuneration 168,000 168,000
Staff costs:
Wages and salaries 7,105,704 6,172,919
Provident fund 148,629 48,190
7,254,333 6,221,109
Less: Amount included in
cost of sales (3,301,487) (2,834,393)
3,952,846 3,386,716
Directors' remuneration - -
Minimum lease payments
under operating leases
in respect of land and
buildings 1,120,605 1,095,420
Inventories written off - 701,919
Gross and net rental income ( 316,400) ( 325,200)
- 102 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
6. FINANCE COSTS
2002 2001
HK$ HK$
Interest on inward bills 101,991 25,358
Interest to An Affiliate of the
Company (name withheld and
filed separately with the SEC) 667 4,000
Others 42,796 19,697
Total interests 145,454 49,055
7. TAX
Hong Kong profits tax has been provided at the rate of 16%
(2001: 16%) on the estimated assessable profits arising in
Hong Kong during the year.
2002 2001
HK$ HK$
Provision for the year 1,379,000 8,100
Overprovision in prior years (2,415,461) (38,986)
Provision for deferred
tax - note 15 - 33,700
Tax charge/(credit) for
the year (1,036,461) 2,814
8. DIVIDENDS
2002 2001
HK$ HK$
First interim - HK$4,680,000
(2000: Nil) per ordinary
share 9,360,000 -
Second interim - HK$511,836
(2001: Nil) per ordinary
share 1,023,672 -
10,383,672 -
- 103 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
9. FIXED ASSETS
Computer
equip-
Leasehold Leasehold Furniture ment
land and improve- Plant and and Motor and
buildings ments machinery fixtures vehicles software Total
HK$ HK$ HK$ HK$ HK$ HK$ HK$
Cost:
At beginning of year:
15,814,592 7,304,612 30,320,162 3,324,522 1,577,130 - 58,341,018
Additions:
- 515,568 824,260 258,327 - 673,322 2,271,477
Disposals:
- (30,187) (16,000) (91,582) - - (137,769)
At 31 March 2002:
15,814,592 7,789,993 31,128,422 3,491,267 1,577,130 673,322 60,474,726
Accumulated appreciation:
At beginning of year:
5,467,366 6,742,117 25,839,001 2,759,244 439,630 - 41,247,358
Provided during the year:
729,402 234,763 1,313,916 189,391 280,925 186,311 44,060,439
Net book value:
At 31 March 2002:
9,617,824 843,300 3,988,887 620,690 856,575 487,011 16,414,287
At 31 March 2002:
10,347,226 562,495 4,481,161 565,278 1,137,500 - 17,093,660
The leasehold land and buildings are situated in the PRC
under medium-term leases.
10. LONG TERM INVESTMENT
2002 2001
HK$ HK$
Unlisted investment, at cost 9,305,588 9,305,588
Amount due from the investee
company 1,158,675 1,158,675
10,464,263 10,464,263
Less: Provision for impairment (9,305,588) (9,305,588)
Provision against an
amount due from the
investee company (1,158,675) (1,158,675)
- -
- 104 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
10. LONG TERM INVESTMENT (continued)
Particulars of the investee company are as follows:
Percentage
Country of Nominal value of equity
registration of registered attributable Principal
Name and operation capital to the Group activity
2002 2001
An Affiliate of the
Company (name
withheld and filed
separately with
the SEC) The PRC US$4,000,000 30 30 Dormant
The Group does not have significant influence on the
financial and operating policy decisions of the investee
company and, accordingly, the investment is classified as
long-term investment. The amount due from the investee
company is unsecured, interest-free and has no fixed terms
of repayment.
11. INVENTORIES
2002 2001
HK$ HK$
Raw materials 8,615,554 3,721,912
Work in progress 1,779,372 830,782
Finished goods 2,373,371 2,105,650
12,768,297 6,658,344
12. BANKING FACILITIES
Time deposit of HK$1,676,441 (2001: HK$1,631,932) is pledged
to a bank for credit facilities of HK$3,329,000 (2001:
HK$3,329,000) granted to the Company. Last year's banking
facilities of the Company were also secured by a personal
guarantee of A Director of the Company (name withheld and
filed separately with the SEC) a beneficial shareholder
of The Original Joint Venture Owner (name withheld and filed
separately with the SEC) Limited and an ex-director of the
Company, which was released during the year. The facilities
were not utilised at the balance sheet date.
- 105 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
13. CASH AND CASH EQUIVALENTS
2002 2001
HK$ HK$
Cash and bank balances 14,962,374 4,493,074
Time deposits 12,032,593 11,122,392
26,994,967 15,615,466
14. LOANS FROM SHAREHOLDERS
2002 2001
HK$ HK$
USI 1,434,477 1,434,477
The Original Joint Venture Owner
(name withheld and filed
separately with the SEC) 1,434,477 1,434,477
2,868,954 2,868,954
The loans are unsecured, interest-free and repayable on
demand by the respective shareholders with the consent of
the other. The directors of the Company consider that these
liabilities to be non-current.
15. DEFERRED TAX
2002 2001
HK$ HK$
Balance at beginning of year 333,700 300,000
Charge for the year - note 7 - 33,700
Balance at end of year 333,700 333,700
The principal component of deferred tax liability calculated
at 16% (2001: 16%) of the cumulative timing differences
comprises accelerated depreciation allowances at the balance
sheet date.
- 106 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
16. SHARE CAPITAL
Company
2002 2001
HK$ HK$
Authorised:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
17. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of profit from operating activities to
net cash inflow/(outflow) from operating activities:
2002 2001
HK$ HK$
Profit from operating activities 18,297,952 675,796
Interest income (565,330) (1,274,622)
Depreciation 2,934,708 2,860,969
Loss on disposal of fixed assets 29 5,992
Increase in amount due from a
shareholder (3,409,298) (2,329,234)
Increase in inventories (6,109,953) (1,160,219)
Increase in trade receivables (1,698,965) -
Decrease/(increase) in prepayments,
deposits and other receivables 282,502 (417,894)
Increase in amount due to a
related company 900,000 -
Decrease in other payables and
accruals (1,031,455) (379,502)
Increase in trade payables 8,795,015 1,484,225
Net cash inflow/(outflow) from
operating activities 18,395,205 (534,489)
- 107 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2002 and 2001
17. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)
(b) Analysis of changes in financing during the year
Loan from a
related company
HK$
Balance at 1 April 2000 191,333
Repayment (164,004)
Balance at 31 March 2001 and 1 April 2001 27,329
Repayment (27,329)
Balance at 31 March 2002 -
(c) Major non-cash transactions
During the year, interim dividends of HK$5,191,836 were
settled through the current account with a shareholder.
18. COMMITMENTS
2002 2001
HK$ HK$
Capital commitments contracted for 162,000 -
19. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED
IN THE UNITED STATES OF AMERICA
The financial statements have been prepared in accordance
with accounting principles generally accepted in Hong Kong,
which differ in certain significant respects from accounting
principles generally accepted in the United States of
America. However, the application of generally accepted
accounting principles in the United States of America would
not have a significant effect on either the operation
results of the Group for each of the two years in the period
ended 31 March 2002 or the financial position of the Group
as of 31 March 2001 and 2002.
- 108 -