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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 2003
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ________________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7-A Gwynns Mill Court, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __________
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 19, 2003:
Common Stock, $.01 Par Value - $5,725,825
The number of shares outstanding of the issuer's classes of
common stock as of June 19, 2003:
Common Stock, $.01 Par Value - 654,380 shares
ITEM 1.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of the federal securities laws.
These statements can be identified by the use of forward-looking
terminology such as "believes", "expects", "may", "will",
"should", or "anticipates" or similar terminology, or by
discussions of strategy. These statements reflect the reasonable
judgment of our management with respect to future events and are
subject to risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking
statements. We cannot guarantee that our forward-looking
statements will turn out to be correct or that our beliefs or
goals will not change. Our actual results could be very different
from, and worse than, our expectations for various reasons,
including factors that may affect future results discussed in
Management's Discussion and Analysis of Financial Condition and
Results of Operations. Under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, an
SEC-reporting company that identifies forward-looking statements
and warns investors that actual results could differ materially
from those in the forward-looking statements, will not be liable
for any private action arising under the Securities Act of 1933
based on such forward-looking statements.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company" or "USI") was
incorporated in the State of Maryland in 1969. Its principal
offices are located at 7-A Gwynns Mill Court, Owings Mills, MD
21117 and its telephone number is 410-363-3000.
The Company designs and markets a variety of popularly-priced
safety and private label products consisting primarily of smoke
alarms, carbon monoxide alarms and related products. Most of the
Company's products require minimal installation and are designed
for easy installation by the consumer without professional
assistance. The products sold by USI ELECTRIC usually require
professional installation.
Prior to 2000, the Company also designed and marketed a variety
of telecommunication and video products. Due to the low margins
realized on its telecommunications and video products, the
Company has since focused its business primarily on safety
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products. As a result, the Company (i) changed its marketing of
telecommunications and video products to concentrate virtually
exclusively on made-to-order private label sales, and (ii)
entered into the electrical distribution market with an enhanced
and newly packaged line of smoke alarms as well as its other
safety products.
The Company imports all of its products from various foreign
suppliers. For the fiscal year ended March 31, 2003,
approximately 66% of the Company's purchases were from a Joint
Venture with a Hong Kong corporation (Hong Kong Joint Venture),
in which the Company owns a 50% interest. The Hong Kong Joint
Venture has manufacturing facilities in the People's Republic of
China. The Company's purchases during fiscal 2003 represented 31%
of the Hong Kong Joint Venture's total sales.
The Company's sales for the year ended March 31, 2003 were
$15,953,883 compared to $10,480,829 for the year ended March 31,
2002, an increase of approximately 52%.
The Company reported net income of $2,400,318 in fiscal 2003
compared to net income of $261,625 in fiscal 2002. The reasons
for the increase in earnings were higher Hong Kong Joint Venture
earnings and higher operating income due to higher levels of
sales due to increased sales by USI ELECTRIC.
SAFETY PRODUCTS
The Company markets a line of residential smoke alarms under the
trade names "USI ELECTRIC," "UNIVERSAL" and "Smoke Signal(TM)" all
of which are manufactured by the Hong Kong Joint Venture.
Our line of smoke alarms consists of battery, electrical and
electrical with battery backup alarms. The Company's products
contain different types of batteries with different battery
lives, and some with alarm silencers. The smoke alarms marketed
to the electrical distribution trade also include hearing
impaired and heat alarms with a variety of additional features.
The Company also markets a line of outdoor floodlights under the
name "Lite Aide(TM)," carbon monoxide alarms, door chimes and
ground fault circuit interrupters.
Sales of the Company's safety products aggregated $15,438,715
or approximately 97% of total sales in the fiscal year ended
March 31, 2003 and $10,054,979 or approximately 96% of total
sales in the fiscal year ended March 31, 2002. This increase in
sales volume was due primarily to increased sales volume to the
electrical distribution trade.
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The Company is focusing its sales and marketing efforts to
maximize safety product sales, especially smoke alarms and
carbon monoxide alarms manufactured by its Hong Kong Joint
Venture and marketed to the electrical distribution trade. The
electrical distribution trade covers electrical and lighting
distributors as well as manufactured housing companies.
OTHER PRODUCTS
For the fiscal year ended March 31, 2003, sales of the Company's
other private label products consisted primarily of audio tape,
which aggregated $515,168 or 3% of total sales. For the fiscal
year ended March 31, 2002, sales of these products were $425,850
or 4% of total sales. The primary reason for the decrease in
sales was fewer private label customers.
IMPORT MATTERS
The Company imports all of the products it sells. The Company, as
an importer, is subject to numerous tariffs which vary depending
on types of products and country of origin, changes in economic
and political conditions in the country of manufacture, potential
trade restrictions and currency fluctuations. The Company has
attempted to protect itself from fluctuations in currency
exchange rates to the extent possible by negotiating most
commitments in U.S. dollars.
The Company's purchases are also subject to delays in delivery
due to problems with shipping and docking facilities, as well as
other problems associated with purchasing products abroad. The
Company imports a majority of its products including those it
purchases from the Hong Kong Joint Venture, from the People's
Republic of China.
SALES AND MARKETING
The Company sells its products to various customers. In 1999, the
Company formed a new subsidiary, USI ELECTRIC, INC. for the
purpose of selling safety products to the electrical
distribution trade and the manufactured home industry
manufacturers. USI ELECTRIC has established a national
distribution system with 9 regional stocking warehouses
throughout the United States which enables customers to receive
their orders the next day without paying for overnight freight
charges. The subsidiary (USI ELECTRIC) has hired sales personnel
from the electrical distribution trade and has engaged 26
independent sales organizations which represent approximately 200
sales representatives, some of which have warehouses where USI
ELECTRIC products are maintained for sale.
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The Company's products are also marketed to retailers, wholesale
distributors, home centers, catalog and mail order companies and
to other distributors ("retailers"). The Company's products have
historically been retailed to "do-it-yourself" consumers by
chain, discount, electrical, building supply, electrical
distributors and hardware stores, as well as through catalogs.
The Company also distributes its products through specialty
markets such as premium/incentive and direct mail. The Company
does not currently market any significant portion of its
products directly to end users.
Sales to retailers are made both by the Company and by
approximately 10 independent sales organizations who are
compensated by commissions. The Company has agreements with the
sales organizations which are cancelable by either party upon 30
days notice. The Company does not believe that the loss of any
one of these organizations would have a material adverse effect
upon its business.
The Company also promotes its products through its own sales
catalogs and brochures, which are mailed directly to trade
customers. The Company's customers, in turn, may advertise the
Company's products in their own catalogs and brochures and in
their ads in newspapers and other media. The Company also
exhibits and sells its products at various trade shows, including
the annual National Hardware Show in Chicago, Illinois. The
Company's domestic retail marketing strategy is designed to
attract retailing customers outside the consumer electronics
industry, such as variety stores and home centers.
Sales are also made by officers and full-time employees of the
Company, five of whom are also engaged in sales management and
training. Sales outside the United States, which are made by
officers of the Company and through exporters, were less than 4%
of total sales in fiscal 2003.
The Company's backlog of orders believed to be firm as of March
31, 2003 was approximately $774,183. The Company's backlog as of
March 31, 2002 was approximately $714,085. The increase in
backlog is a function of the timing of orders received from its
customers.
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has a 50% interest in a Hong Kong Joint Venture which
has manufacturing facilities in the People's Republic of China,
for the manufacturing of certain electronic and electrical
products sold by the Company.
- 5 -
The Company believes that this Hong Kong Joint Venture
arrangement will ensure a continuing source of supply for a
majority of the Company's safety products at competitive
prices. During fiscal year 2003, the Company made 66% of its
total purchases from the Hong Kong Joint Venture. These
purchases represented approximately 31% of the Hong Kong Joint
Venture's total sales. The products produced by the Hong Kong
Joint Venture include smoke alarms and carbon monoxide alarms.
The Company is currently pursuing the development of additional
products by the Hong Kong Joint Venture such as other smoke
alarms and a combination carbon monoxide and smoke alarm.
Changes in economic and political conditions in China or any
other adversity to the Hong Kong Joint Venture will unfavorably
affect the value of the Company's investment in the Hong Kong
Joint Venture and would have a material adverse effect on the
Company's ability to purchase products for distribution. Refer to
NOTE C of the Financial Statements for a comparison of annual
sales and earnings of the Hong Kong Joint Venture. In the past
two fiscal years, the Hong Kong Joint Venture has increased its
sales to customers other than the Company by $9,562,275 from
$6,473,735 in fiscal 2002 to $16,036,010 in fiscal 2003.
SUPPLIERS - OTHERS
Certain private label products not manufactured for the Company
by the Hong Kong Joint Venture are manufactured by other foreign
suppliers. The Company believes that its relationships with its
suppliers are good. The Company believes that the loss of its
ability to purchase products from the Hong Kong Joint Venture
would have a material adverse effect on the Company. The loss of
any of its other suppliers could have a short-term adverse effect
on its operations, but the Company believes that replacement
sources for these other suppliers could be developed.
COMPETITION
In fiscal year 2003, sales of safety products accounted for
approximately 97% of total sales. In the sale of smoke alarms,
the Company competes in all of its markets with First Alert,
Firex and Walter Kidde. All of these companies have greater
financial resources and financial strength than the Company. The
Company believes that its safety products compete favorably
with other such products in the market primarily on the basis of
styling, features and pricing.
The safety industry in general involves changing technology.
The success of the Company's products may depend on the Company's
ability to improve and update its products in a timely manner and
to adapt to new technological advances.
- 6 -
EMPLOYEES
The Company has 16 employees, 9 of whom are engaged in
administration and sales, and the balance of whom are engaged in
product development and servicing.
The Company's employees are not unionized. The Company believes
that its relations with its employees are satisfactory.
ITEM 2.
PROPERTIES
Effective December 1999, the Company entered into an operating
lease for a 9,000 square foot office and warehouse located in
Baltimore County, Maryland. This lease, which expires in October
2005, is subject to renewal for an additional three years with
increasing rentals at 3% per year. The monthly rental
approximates $5,244 per month during the current fiscal year.
Effective March 2003, the Company entered into an operating lease
for an approximately 1,800 square foot office in Naperville,
Illinois. This lease, which expires in February 2006, is subject
to renewal for an additional six years with increasing rentals
at 3% per year. The monthly rental approximates $2,689 per month
during the initial term.
The Company also owns 1-1/2 acres of undeveloped land located in
an industrialized area in Baltimore County, Maryland. This
undeveloped parcel of land is pledged as collateral to the
Company's factor. The Company is currently negotiating the sale
of this property and expects the sale to be complete in late
2003.
The Company believes that its current facilities, and those of
the Hong Kong Joint Venture, are currently suitable and adequate.
ITEM 3.
LEGAL PROCEEDINGS
In December 2001, Leviton Manufacturing Company filed a civil
action in the United States District Court for the District of
Maryland (Case No. 01CV3855), alleging that, subsequent to
December 11, 2001, the Company's ground fault circuit
interrupters infringe on the plaintiff's patents and service
marks. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company and its counsel believe that
the Company has meritorious defenses to the claim and is
aggressively defending the suit. The Company believes it has
adequately reserved for this case.
- 7-
On June 13, 2003, Leviton Manufacturing Co., Inc. filed a second
civil suit against the Company in the United States District
Court for the District of Maryland (Case No. 03-CV-1701),
alleging this time that the Company's ground fault circuit
interrupters infringe on several more patents issued to the
plaintiff with respect to reset lockout technology mandated
by the revision of UL Standard 943 for ground fault circuit
interrupters, effective January 2003. Leviton has also asserted
various trade dress and unfair competition claims many of which
correspond to the claims in the previously identified pending
suit. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
On June 11, 2003, Walter Kidde Portable Equipment Inc. filed a
civil suit against the Company in the United States District
Court for the Middle District of North Carolina (Case No.
1:03CV00537), alleging that certain of the Company's battery
powered smoke detectors infringe a patent acquired by Kidde. The
plaintiff is seeking injunctive relief and damages to be
determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
From time to time, the Company is involved in various lawsuits
and legal matters. It is the opinion of management, based on the
advice of legal counsel, that these matters will not have a
material adverse effect on the Company's financial statements.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Over-The-Counter
Bulletin Board (OTCBB). The OTCBB is a regulated quotation
service that displays real-time quotes, last sales prices and
volume information on over-the-counter equity securities.
The following table shows the fiscal 2003 and 2002 quarterly high
and low bid prices for the Company's common stock as reported by
the OTCBB. The bid quotations represent prices between dealers
and do not reflect the retailer markups, markdowns or commissions
and may not represent actual transactions.
Fiscal year ended March 31, 2003
Bid Prices
High Low
First Quarter 4.50 2.60
Second Quarter 7.80 3.57
Third Quarter 10.50 4.60
Fourth Quarter 9.55 7.40
Fiscal year ended March 31, 2002
Bid Prices
High Low
First Quarter 1.25 0.90
Second Quarter 1.65 0.95
Third Quarter 3.95 0.90
Fourth Quarter 4.40 2.20
On June 19, 2003, the closing quotation for our common stock as
reported on the OTC Bulletin Board was $8.75. You should obtain
current market quotations for our common stock because the market
price of our stock may fluctuate greatly. You can obtain these
quotations from various websites or by calling your broker.
As of March 31, 2003, there were approximately 175 holders of
record of the Company's common stock. Approximately 55% of the
Company's 1,159,932 outstanding shares of common stock were held
in street name by an unknown number of beneficial owners since it
does not reflect persons or entities that hold our stock in
"Street" name or through various brokerage firms.
The Company has not paid any cash dividends on its common stock
in the last three years. It is the Company's present intention to
retain all earnings for use in its future operations.
- 9 -
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the five
years ended March 31, 2003 have been derived from the audited
consolidated financial statements. The information set forth
below is not necessarily indicative of results of future
operations.
Years Ended March 31,
2003 2002 2001 2000 1999
Consolidated Statement of Operations Data:
Net sales
$15,953,883 $10,480,829 $ 7,731,501 $ 7,667,530 $ 9,071,628
Income (loss) before equity in earnings (loss) of Hong Kong Joint
Venture
504,422 (976,063) (799,183) (95,925) (1,119,154)
Net income (loss)
2,400,318 261,625 (758,940) 41,056 (806,552)
Per common share:
Net income (loss) - basic
2.23 .28 (.83) .05 (.93)
- diluted
2.05 .28 (.83) .04 (.93)
Weighted average number of common shares outstanding - basic
1,075,079 938,624 912,270 903,495 863,706
- diluted
1,171,309 945,770 912,270 938,807 863,706
Consolidated Balance Sheet Data:
Total assets
8,382,043 5,182,462 5,945,690 5,476,545 6,402,120
Long-term debt (non-current)
7,224 22,396 45,088 60,260 -
Working capital (1)
2,377,688 402,425 585,032 1,368,513 1,514,425
Current ratio (1)
2.26 to 1 1.27 to 1 1.23 to 1 2.01 to 1 1.63 to 1
Shareholders' equity
6,493,415 3,681,273 3,303,304 4,062,244 3,987,072
(1) Working capital is computed as the excess of current assets
over current liabilities. The current ratio is calculated by
dividing current assets by current liabilities.
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years
2003 and 2002 are summarized as follows:
Quarter Ended
2003 June 30, September 30, December 31, March 31,
Net sales $3,750,926 $4,091,272 $4,252,447 $3,859,238
Gross profit 1,083,225 1,286,147 1,289,601 1,314,843
Net income 576,940 630,129 673,365 519,883
Net income
per share
- basic .57 .60 .61 .46
Net income
per share
- diluted .55 .55 .55 .42
Quarter Ended
2002 June 30, September 30, December 31, March 31,
Net sales $2,255,130 $2,653,482 $2,965,386 $2,606,831
Gross profit 552,282 748,584 790,350 721,436
Net income 62,359 23,543 36,433 139,290
Net income
per share
- basic .07 .03 .04 .14
Net income
per share
- diluted .07 .03 .04 .13
- 10 -
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 2003, sales increased by $5,473,054 (52%) from the
prior year. The Company's focus on marketing to the electrical
distribution trade through USI ELECTRIC generated an increase in
sales to this market of approximately $4,000,000, from
approximately $8,300,000 in 2002 to approximately $12,300,000 in
2003. The Company experienced an increase of approximately
$1,473,000 in sales from its retail and wholesale distribution
customers over the prior year. The Company anticipates these
favorable trends will continue.
In fiscal year 2002, sales increased by $2,749,328 (36%) from the
prior year. The Company's focus on marketing to the electrical
distribution trade through USI ELECTRIC generated an increase in
sales to this market of approximately $4,000,000, from
approximately $4,300,000 in 2001 to approximately $8,300,000 in
2002. The Company experienced a decrease of approximately
$1,210,000 in sales from its retail and wholesale distribution
customers. The decrease resulted primarily from lower private
label sales.
COST OF SALES AND GROSS PROFIT
Gross profit as a percentage of net sales ("gross margin") in
fiscal 2003 was 31.2% compared to 26.8% and 26.9% in fiscal 2002
and 2001, respectively. The increase in gross profit for fiscal
2003 resulted from a higher concentration of USI ELECTRIC sales
and increased productivity and efficiency. Gross margins were
similar in fiscal years 2002 and 2001.
The Company's strategy is to increase gross margins by increasing
sales, which will increase the gross margin percentage as a
percent of sales as the fixed costs will not increase at the
same rate as sales.
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EXPENSES
In fiscal year 2003, selling, general and administrative expenses
increased by approximately $662,927 (20%), from $3,377,847 in
2002 to $4,040,774 in 2003. As a percentage of sales, selling,
general and administrative expenses were 25% for fiscal year 2003
and 32% in fiscal year 2002. The decrease in selling, general
and administrative expense as a percent of sales was due to
higher sales volume and variable costs which did not increase at
the same rate as sales, including increased sales commissions and
freight, and higher legal costs partly associated with defending
the patent suit described under Item 3 - LEGAL PROCEEDINGS.
In fiscal year 2002, selling, general and administrative expenses
increased by approximately $924,466 (38%), from $2,453,381 in
2001 to $3,377,847 in 2002. As a percentage of sales, selling,
general and administrative expenses were 32% for both fiscal
years 2002 and 2001. The increase in the amount of these expenses
resulted from higher sales and associated costs, including
increased sales commissions and freight and higher legal costs
partly associated with defending the patent suit described under
Item 3 - LEGAL PROCEEDINGS.
INTEREST EXPENSE
Interest expense for fiscal year 2003 decreased to $153,168 from
$188,020 in fiscal year 2002 due primarily to lower interest
rates.
Interest expense for fiscal year 2002 decreased to $188,020 from
$248,135 in fiscal year 2001 due primarily to lower levels of
borrowings and lower interest rates.
INCOME TAX
The Company did not make any provision for federal or state
income taxes in each of the three years in the period ended March
31, 2003 due to the operating loss carry forward for income tax
purposes. A valuation allowance has been established and,
accordingly, no benefit has been recognized for the tax benefit
of our net operating losses or other deferred tax assets.
- 12 -
NET INCOME
The Company reported net income of $2,400,318 for fiscal year
2003 compared to a net income of $261,625 for fiscal year 2002.
The increase in net income resulted from both higher Hong Kong
Joint Venture earnings and higher gross profit, partially offset
by higher selling, general and administrative expenses associated
with increased sales and higher legal costs partly associated
with defending the patent suit described under Item 3 - LEGAL
PROCEEDINGS.
The Company reported net income of $261,625 for fiscal year 2002
compared to a net loss of $758,940 for fiscal year 2001. The
increase in net income resulted from higher Hong Kong Joint
Venture earnings, partially offset by higher selling, general and
administrative expenses associated with increased sales and
higher legal costs partly associated with defending the patent
suit described under Item 3 - LEGAL PROCEEDINGS.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated
from operations and from the Company's Factoring Agreement, which
supplies both short-term borrowings and letters of credit to
finance foreign inventory purchases. The Company's maximum
borrowing under this Agreement is $7,500,000. However, based on
specified percentages of the Company's accounts receivable and
inventory and letter of credit commitments, at March 31, 2003,
the borrowings were limited to $1,696,000. Of this amount,
$153,400 had been utilized for letters of credit, leaving
$1,534,000 available under this Agreement as of March 31, 2003.
The outstanding principal balance under this Agreement is payable
upon demand. The interest rate on the Factoring Agreement on the
uncollected factored accounts receivable and any additional
borrowings is equal to 1% in excess of the prime rate of interest
charged by the Company's factor; which, as of March 31, 2003,
resulted in a 5.25% rate. The borrowings are collateralized by
all the Company's accounts receivable, inventory and a 1.5 acre
parcel of land owned by the Company. During the year ended March
31, 2003, working capital increased by $1,975,263, from $402,425
on March 31, 2002, to $2,377,688 on March 31, 2003.
Operating activities used cash of $61,873 for the year ended
March 31, 2003. For the fiscal year ended March 31, 2002,
operating activities used cash of $114,109. This decrease of
$52,236 was primarily due to higher levels of inventory,
undistributed Joint Venture earnings primarily offset by higher
net income and accounts payable.
- 13 -
Investing activities used cash of $16,892 and 2,322 for fiscal
years ended 2003 and 2002 for the purchase of equipment.
The Hong Kong Joint Venture offset $1,279,187 and $665,631 of
trade amounts due to the Hong Kong Joint Venture in lieu of cash
payments.
Financing activities in 2003 provided cash of $110,494, primarily
due to the sale of common stock and the exercise of employee
stock options. Financing activities in 2002 provided cash of
$101,172 which was also primarily from the sale of common stock.
HONG KONG JOINT VENTURE
In fiscal year 2003, sales of the Hong Kong Joint Venture were
$23,365,301 compared to $11,410,035 and $6,053,815 in fiscal
years 2002 and 2001, respectively.
Net income was $4,755,540 for fiscal year 2003 compared to net
income of $2,475,376 and $80,487 in fiscal years 2002 and 2001,
respectively. The increase in income for the year ended March 31,
2003 was due primarily to higher sales, including to customers
other than the Company.
Gross margins of the Hong Kong Joint Venture for fiscal 2003
increased to 33.7% from 32.6% in the prior year. The primary
reason for this increase was that the variable costs in cost of
goods sold did not increase at the same rate as sales.
Selling, general and administrative expenses were $2,806,412,
$1,530,579 and $1,448,320 for fiscal years 2003, 2002 and 2001,
respectively. As a percentage of sales, expenses were 12%, 13%
and 24% for fiscal years 2003, 2002 and 2001, respectively. The
decrease in selling, general and administrative expense as a
percent of sales was due to higher sales volume and variable
costs which did not increase at the same rate as sales.
Interest income net of interest expense was $2,315 for fiscal
year 2003, compared to $54,164 and $158,098 in fiscal years 2002
and 2001, respectively. The decrease in interest income is due to
higher sales and dividend payments which reduced investment
balances.
Cash needs of the Hong Kong Joint Venture are currently met by
funds generated from operations. During fiscal year 2003, working
capital increased by $1,738,218 from $3,844,654 on March 31, 2002
to $5,582,872 on March 31, 2003.
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RECENTLY ISSUED ACCOUNTING STANDARDS
During fiscal year 2003, the Financial Accounts Standards Board
issued Statement of financial Account Standards (SFAS) No. 145,
"Rescission of FASB Statements 4, 44, and 64, and Amendment of
FASB Statement 13, and Technical Corrections," SFAS No. 146,
"Accounting for Costs Associated with Exit and Disposal
Activities," SFAS No. 147, "Acquisition of Financial
Institutions," and FASB Interpretations (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Company does
not expect these new pronouncements to impact the preparation of
financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure: an amendment
of FASB Statement No. 123." SFAS 148 allows alternative methods
of transition for an entity to report a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on the reported results. SFAS 148 is effective for fiscal
years ending after December 15, 2002. The Company is evaluating
both whether to adopt a fair-value based method and the
transition methods allowed under this standard and accordingly,
cannot determine the impact of adoption at this time.
On January 31, 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities," which clarifies existing accounting
for whether interest entities should be consolidated in financial
statements based upon the investees' ability to finance its
activities without additional financial support and whether
investors possess characteristics of a controlling financial
interest. FIN 46 applies to years or interim periods beginning
after June 15, 2003 with certain disclosure provisions required
for financial statements issued after January 31, 2003. We are
currently evaluating the applicability of FIN 46 to our
investments in our Hong Kong Joint Venture and have complied with
the disclosure provisions of FIN 46 in these financial
statements.
- 15 -
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Company's
consolidated financial statements and results of operations are
based upon the Company's Consolidated Financial Statement
included as part of this document. The preparation of these
consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. On an ongoing
basis, the Company evaluates these estimates, including those
related to bad debts, inventories, income taxes, and
contingencies and litigation. The Company bases these estimates
on historical experiences and on various other assumptions that
are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
available from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies
affect management's more significant judgments and estimates used
in the preparation of its consolidated financial statements. For
a detailed discussion on the application on these and other
accounting policies see Note A to the attached consolidated
financial statements. Certain of our accounting policies require
the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty and actual results could differ
from these estimates. These judgments are based on our historical
experience, terms of existing contracts, current economic trends
in the industry, information provided by our customers, and
information available from outside sources, as appropriate. Our
critical accounting policies include:
The Company's revenue recognition policies are in compliance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" issued by the Securities and Exchange
Commission. Revenue is recognized at the time product
is shipped and titled passes pursuant to the terms of the
agreement with the customer, the amount due from the customer
is fixed and collectibility of the related receivable is
reasonably assured. The Company establishes allowances to cover
anticipated doubtful accounts based upon historical experience.
- 16 -
Inventories are valued at the lower of market or cost. Cost is
determined on the first-in first-out method. The Company has
recorded a reserve for obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
demand and market conditions. Management reviews the reserve
quarterly.
We currently have significant deferred tax assets resulting from
tax credit carryforwards, net operating loss carryforwards and
deductible temporary differences, which will reduce taxable
income in future periods. We have provided a valuation allowance
on future tax benefits such as foreign tax credits, foreign net
operating losses, capital losses and net operating losses.
A valuation allowance is required when it is more likely than not
that all or a portion of a deferred tax assets will not be
realized. Forming a conclusion that a valuation allowance is not
needed is difficult when there is a negative evidence such as
cumulative losses and losses in recent years. Cumulative losses
weigh heavily in the overall assessment. As a result of our
assessment, we established a full valuation allowance for our
remaining net deferred tax assets at March 31,2003.
We are subject to lawsuits and other claims, related to patents
and other matters. We are required to assess the likelihood of
any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies is
based on a careful analysis of each individual issue with the
assistance of outside legal counsel. The required reserves may
change in the future due to new developments in each matter or
changes in approach such as a change in settlement strategy in
dealing with these matters. For more information, see Note H to
the consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is its Factoring
Agreement which provides for interest at the factor's prime rate
(4.25% at March 31, 2003) plus 1%. The Company is affected by
market risk exposure primarily through the effect of changes in
interest rates on amounts payable by the Company under its
Factoring Agreement. A significant rise in the prime rate could
materially adversely affect the Company's business, financial
- 17 -
condition and results of operations. At March 31, 2003, the
Company had no aggregate principal outstanding under the
facility. If principal amounts outstanding under the Company's
Factoring Agreement remained at this year-end level for an entire
year and the prime rate increased or decreased, respectively, by
0.5%, the Company would pay or save, respectively, an additional
$8,500.00 in interest in that year. The Company does not utilize
derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description Page
Report of Independent Certified Public Accountants 19
Consolidated balance sheets, March 31, 2003 and 2002 20
Consolidated statements of operations for the years ended 21
March 31, 2003, 2002 and 2001
Consolidated statements of shareholders' equity for the 23
years ended March 31, 2003, 2002 and 2001
Consolidated statements of cash flows for the years ended 24
March 31, 2003, 2002 and 2001
Notes to consolidated financial statements 25
Schedule II - Valuation and Qualifying Accounts 52
- 18 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Universal Security
Instruments, Inc.
We have audited the accompanying consolidated balance sheets of
Universal Security Instruments, Inc. and subsidiaries (the
Company) as of March 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended March
31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did
not audit the financial statements of the Hong Kong Joint Venture
which is accounted for using the equity method. The Company's
investment of $3,831,583 and $2,990,067 in the Hong Kong Joint
Venture's net assets at March 31, 2003 and 2002, and equity in
earnings of $2,120,703, $1,237,688 and $40,243 for each of the
three years in the period ended March 31, 2003 are included in
the accompanying consolidated financial statements. The financial
statements of the Hong Kong Joint Venture were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for the Hong Kong
Joint Venture, is based on the report of the other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements present fairly,
in all material respects, the financial position of Universal
Security Instruments, Inc. and subsidiaries as of March 31, 2003
and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended March 31,
2003, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited Schedule II for each of the three years in
the period ended March 31, 2003. In our opinion, this schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information required therein.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
June 13, 2003
- 19 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2003 2002
CURRENT ASSETS
Cash $ 51,112 $ 19,383
Accounts receivable:
Trade, less allowance for doubtful
accounts of $10,000 and $68,358
in 2003 and 2002, respectively 207,539 155,052
Employees 16,303 1,115
223,842 156,157
Amount due from factor 623,566 38,436
Inventory 3,224,229 1,557,994
Prepaid expenses 136,343 109,238
TOTAL CURRENT ASSETS 4,259,092 1,881,218
INVESTMENT IN HONG KONG JOINT VENTURE 3,831,583 2,990,067
PROPERTY AND EQUIPMENT, NET 279,896 301,082
OTHER ASSETS 11,472 10,095
TOTAL ASSETS $8,382,043 $5,182,462
See notes to consolidated financial statements.
- 20 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
2003 2002
CURRENT LIABILITIES
Amount due to factor $ - $ 216,959
Accounts payable 1,173,175 787,492
Accrued liabilities 684,979 451,092
Current obligations under
capital lease 23,250 23,250
TOTAL CURRENT LIABILITIES 1,881,404 1,478,793
LONG-TERM OBLIGATIONS UNDER
CAPITAL LEASE 7,224 22,396
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
1,121,982 shares and 1,009,770
shares at March 31, 2003
and 2002, respectively 11,220 10,098
Additional paid-in capital 11,059,381 10,648,679
Accumulated deficit (4,577,186) (6,977,504)
TOTAL SHAREHOLDERS' EQUITY 6,493,415 3,681,273
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 8,382,043 $ 5,182,462
See notes to consolidated financial statements.
- 21 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
2003 2002 2001
Net sales $15,953,883 $10,480,829 $7,731,501
Cost of goods sold 10,980,067 7,668,177 5,652,616
GROSS PROFIT 4,973,816 2,812,652 2,078,885
Research and development
expense 284,552 222,817 176,767
Selling, general and
administrative expense 4,040,774 3,377,847 2,453,381
Operating income (loss) 648,490 (788,012) (551,263)
Other income (expense):
Interest income - - 233
Interest expense (153,168) (188,020) (248,135)
Other 9,100 (31) (18)
(144,068) (188,051) (247,920)
INCOME (LOSS) BEFORE EQUITY
IN EARNINGS OF HONG KONG
JOINT VENTURE 504,422 (976,063) (799,183)
Earnings from Hong Kong
Joint Venture:
Equity in earnings of
Hong Kong Joint
Venture 2,120,703 1,237,688 40,243
Cost allocable to
Joint Venture (224,807) - -
NET INCOME (LOSS) $ 2,400,318 $ 261,625 $ (758,940)
Net income (loss) per share
Basic $ 2.23 $ .28 $ (.83)
Diluted $ 2.05 $ .28 $ (.83)
Shares used in computing net
income (loss) per share:
Basic 1,075,079 938,624 912,270
Diluted 1,171,309 945,770 912,270
See notes to consolidated financial statements.
- 22 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
Balance at
March 31,
2000 912,270 $ 9,123 $10,533,310 $(6,480,189) $4,062,244
Net loss (758,940) (758,940)
Balance at
March 31,
2001 912,270 9,123 10,533,310 (7,239,129) 3,303,304
Issuance of
common
stock from
the
exercise
of
employee
stock
options 97,500 975 115,369 116,344
Net income 261,625 261,625
Balance at
March 31,
2002 1,009,770 10,098 10,648,679 (6,977,504) 3,681,273
Issuance
of common
stock
from the
exercise
of
employee
stock
options 40,750 407 92,218 92,625
Issuance
of
common
stock 51,000 510 249,490 250,000
Stock
issued
in lieu
of
directors
fees 6,974 70 29,930 30,000
Stock
issued
in
satis-
faction
of
accrued
liabil-
ities 13,488 135 39,064 39,199
Net income 2,400,318 2,400,318
Balance at
March 31,
2003 1,121,982 $11,220 $11,059,381 $(4,577,186) $6,493,415
See notes to consolidated financial statements.
- 23 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
CASH FLOWS FROM
OPERATING ACTIVITIES 2003 2002 2001
Net income (loss) $ 2,400,318 $ 261,625 $ (758,940)
Adjustments to reconcile
net income (loss) to
net cash used in
operating activities:
Depreciation and
amortization 38,077 30,483 45,858
Stock issued to
directors in lieu
of fees 30,000 - -
Change in allowance
for doubtful
accounts (58,358) (31,642) -
Inventory reserve
write-down (10,000) 61,741 -
Earnings of Hong Kong
Joint Venture (2,120,703) (1,237,688) (40,243)
Changes in operating
assets and
liabilities:
Increase in
accounts
receivable and
amount due from
factor (594,447) (106,494) (345,499)
(Increase) decrease
in inventories (1,656,235) 524,058 (205,735)
(Increase) decrease
in prepaid
expenses (27,105) (51,567) 34,083
Increase in accounts
payable and
accrued expenses 1,937,597 1,114,087 269,529
(Increase) decrease
in other assets (1,377) 6,012 (3,802)
Decrease in amount
due to factor - (684,726) -
NET CASH USED IN
OPERATING ACTIVITIES (61,873) (114,109) (1,004,749)
INVESTING ACTIVITIES
Purchase of equipment (16,892) (2,322) (11,182)
NET CASH USED IN
INVESTING ACTIVITIES (16,892) (2,322) (11,182)
FINANCING ACTIVITIES
Net (repayments)
borrowings of
short-term debt (216,959) - 973,728
Principal payments of
capital lease
obligations (15,172) (15,172) (15,172)
Proceeds from issuance
of common stock from
exercise of employee
stock options 92,625 - -
Proceeds from issuance
of common stock 250,000 116,344 -
NET CASH PROVIDED BY
FINANCING ACTIVITIES 110,494 101,172 958,556
INCREASE (DECREASE)
IN CASH 31,729 (15,259) (57,375)
Cash at beginning of
period 19,383 34,642 92,017
CASH AT END OF PERIOD $ 51,112 $ 19,383 $ 34,642
Supplemental information:
Interest paid $ 153,168 $ 188,020 $ 248,135
Income taxes paid - - -
Non-cash investing
transactions:
Issuance of 13,488
shares of common
stock in
satisfaction of
accrued liabilities 39,199 - -
Repayment of trade
payables due the
Hong Kong Joint
Venture in lieu of
cash distributions 1,279,187 665,631 -
See notes to consolidated financial statements.
- 24 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: The Company's primary business is the sale of
smoke alarms and other safety products to retailers, wholesale
distributors and to the electrical distribution trade which
includes electrical and lighting distributors as well as
manufactured housing companies. The Company imports all of its
safety and other products from foreign manufacturers. The
Company, as an importer, is subject to numerous tariffs which
vary depending on types of products and country of origin,
changes in economic and political conditions in the country of
manufacture, potential trade restrictions and currency
fluctuations.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: In preparing financial statements in conformity
with accounting principles generally accepted in the United
States of America (US GAAP), management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition: The Company recognizes sales upon the
shipment of its products net of applicable provisions for any
discounts or allowances.
Stock-Based Compensation: For fiscal 2003 and prior years the
Company used the intrinsic value method as defined by Accounting
Principles Board Opinion No. 25 to account for stock-based
employee compensation in each period presented. The Company
intends to adopt SFAS No. 123 as amended by SFAS No. 148 during
fiscal 2003 but has not yet made a determination as to the
transition method to use or completed the valuation of the
options granted during January 2003.
The following table illustrates the effect on net income (loss)
and net income (loss) per share had compensation costs for the
stock-based compensation plan been determined based on the grant
date fair values of awards under the provisions of SFAS No. 123,
for the fiscal years.
- 25 -
Year Ended March 31
2003 2002 2001
Net income, as reported $2,400,318 $261,625 $(758,940)
Deduct: Total stock-based
employee compensation
expense determined under
fair value, net of
related tax effects. (83,939) (48,729) 23,634
Pro forma net income 2,316,379 212,896 (782,574)
Earnings per share:
Basic - as reported 2.23 .28 (.83)
Basic - pro forma 2.15 .23 (.86)
Diluted - as reported 2.05 .28 (.83)
Diluted - pro forma 1.98 .23 (.86)
Research and Development: Research and development costs are
charged to operations as incurred.
Accounts Receivable: In September, 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS No.
140), which is effective for transfers of financial assets
occurring after March 31, 2001.
In fiscal year 2002, the Company achieved the sales criteria of
Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and, as such, amounts transferred
under the Company's Factoring Agreement are treated as a sale of
the asset.
Beginning in fiscal year 2002, with the achievement of SFAS 140
sales criteria, the Company nets the factored accounts receivable
with the corresponding advance from the Factor, showing the
amount net in its consolidated balance sheet.
The Company sells trade receivables on a pre-approved non-
recourse basis to the Factor under the Factoring Agreement on an
ongoing basis. Factoring charges recognized on sales of
receivables are included in selling, general and administrative
expenses in the consolidated statements of income and amounted to
- 26 -
$160,125 and $104,164 for the years ended March 31, 2003 and
2002, respectively. The Agreement for the sale of accounts
receivable provides for continuation of the program on a
revolving basis until terminated by one of the parties to the
Agreement.
Shipping and Handling Fees and Costs: The Company includes
shipping and handling fees billed to customers in net sales.
Shipping and handling costs associated with inbound freight are
included in cost of goods sold. Shipping and handling costs
associated with outbound freight are included in selling, general
and administrative expenses and totaled $498,179, $376,359 and
$244,149 in fiscal years 2003, 2002 and 2001, respectively.
Inventories: Inventories (consisting primarily of finished goods)
are stated at the lower of cost (first-in, first-out method) or
market. Included as a component of finished goods inventory are
additional non-material costs. These costs include freight,
import duty and inspection fees of $376,899 and $186,470 at March
31, 2003 and 2002, respectively.
The Company reviews inventory quarterly to identify slow moving
products and valuation allowances are provided when deemed
necessary.
Property and Equipment: Property and equipment are recorded at
cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided by using the
straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. The estimated useful
lives for financial reporting purposes are as follows:
Leasehold improvements - Term of lease
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Accounting for Hong Kong Joint Venture: The Company has a 50%
investment in a Hong Kong manufacturing facility. The Hong Kong
Joint Venture investment is accounted for using the equity
method. The investment and earnings are adjusted to eliminate
intercompany profits.
- 27 -
Income Taxes: The Company recognizes a liability or asset for
the deferred tax consequences of temporary differences between
the tax basis of assets or liabilities and their reported amounts
in the financial statements. These temporary differences will
result in taxable or deductible amounts in future years when the
reported amounts of the assets or liabilities are recovered or
settled. The deferred tax assets are reviewed periodically for
recoverability and valuation allowances are provided, as
necessary.
Net Income (Loss) per Share: The Company reports basic and
diluted earnings per share. Basic earnings per share exclude
dilution and are computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net
income (loss), adjusted by the assumed conversion of any
potential common share equivalents, including stock options, by
the weighted number of common shares and common share equivalents
outstanding (unless their effect is anti-dilutive). Common stock
equivalents totaling 14,750 at March 31, 2001 were not included
in the computation of diluted loss per share, because to do so
would have been anti-dilutive.
Recently Issued Accounting Standards: During fiscal year 2003,
the Financial Accounts Standards Board issued Statement of
financial Account Standards (SFAS) No. 145, "Rescission of FASB
Statements 4, 44, and 64, and Amendment of FASB Statement 13, and
Technical Corrections," SFAS No. 146, "Accounting for Costs
Associated with Exit and Disposal Activities," SFAS No. 147,
"Acquisition of Financial Institutions," and FASB Interpretations
(FIN) 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." The Company does not expect these new pronouncements
to impact the preparation of financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure: an amendment
of FASB Statement No. 123." SFAS 148 allows alternative methods
of transition for an entity to report a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on the reported results. SFAS 148 is effective for fiscal
years ending after December 15, 2002. The Company is evaluating
both whether to adopt a fair-value based method and the
transition methods allowed under this standard and accordingly,
cannot determine the impact of adoption at this time.
- 28 -
On January 31, 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities," which clarifies existing accounting
for whether interest entities should be consolidated in financial
statements based upon the investees' ability to finance its
activities without additional financial support and whether
investors possess characteristics of a controlling financial
interest. FIN 46 applies to years or interim periods beginning
after June 15, 2003 with certain disclosure provisions required
for financial statements issued after January 31, 2003. We are
currently evaluating the applicability of FIN 46 to our
investments in our Hong Kong Joint Venture and have complied with
the disclosure provisions of FIN 46 in these financial
statements.
Reclassifications: Certain prior year amounts have been
reclassified in order to conform with current year presentation.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
2003 2002
Land and improvements $174,034 $174,034
Leasehold improvements 71,885 71,885
Machinery and equipment 77,746 157,626
Furniture and fixtures 166,344 155,154
Computer equipment 69,830 65,955
Equipment held under capital lease 80,950 80,950
640,789 705,604
Less accumulated depreciation
and amortization 360,893 404,522
$279,896 $301,082
NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE
The Company holds a 50% interest in a Joint Venture with a Hong
Kong Corporation, which has manufacturing facilities in the
People's Republic of China, for the manufacturing of consumer
electronic products. As of March 31, 2003, the Company has an
investment balance of $3,831,583 for its 50% interest in the Hong
Kong Joint Venture.
- 29 -
The following represents summarized financial information
derived from the audited financial statements of the Hong Kong
Joint Venture as of March 31, 2003 and 2002 and for the years
ended March 31, 2003, 2002 and 2001. This information was audited
by other accountants and their report is included at March 31,
2003 and 2002. (See Page 101 for additional details.)
March 31,
2003 2002
Current assets $ 8,343,860 $5,897,705
Property and other assets 2,500,674 2,117,443
Total $10,844,534 $8,015,148
Current liabilities $ 2,761,078 $2,053,051
Non-current liabilities 3,846 43,047
Equity 8,079,610 5,919,050
Total $10,844,534 $8,015,148
For the Year Ended March 31,
2003 2002 2001
Net sales $23,365,301 $11,410,035 $6,053,815
Gross profit 7,870,436 3,717,474 1,305,164
Net income 4,755,540 2,475,376 80,487
During the years ended March 31, 2003, 2002 and 2001, the Company
purchased $7,329,221, $4,895,903 and $3,841,325, respectively, of
finished product from the Hong Kong Joint Venture, which
represents 66%, 78% and 66%, respectively, of the Company's total
finished product purchases for the years ended at March 31,
2003, 2002 and 2001. Amounts due the Hong Kong Joint Venture
included in Accounts Payable totaled $480,546 and $199,917 at
March 31, 2003 and 2002, respectively. Amounts due from the Hong
Kong Joint Venture included in Accounts Receivable totaled
$40,000 and $53,676 at March 31, 2003 and 2002, respectively.
The Company incurred interest costs charged by the Hong Kong
Joint Venture of $16,585, $27,659 and $26,762 during the years
ended March 31, 2003, 2002 and 2001, respectively, related to its
purchases.
- 30 -
In 2002, the Company has amended its employment agreements so
that bonuses are based on the domestic and joint venture
operating performance and, as a result, payments are allocable
between domestic operations and joint venture operations. The
Company recorded $224,807 of costs allocatable to the joint
venture in the accompanying statement of operations for the year
ended March 31, 2003.
NOTE D - AMOUNTS DUE TO FACTOR
The Company sells certain of its trade receivables on a
pre-approved, non-recourse basis to a Factor. Since these are
sold on a non-recourse basis, the factored trade receivables and
related repayment obligations are not recorded in the Company's
consolidated balance sheets. The financing from the factoring of
the Company's trade receivables totaled $1,691,139 and
$1,426,751 at March 31, 2003 and 2002, respectively.
The Company's Factoring Agreement provides for financing of up to
a maximum of $7,500,000 with the amount available at any one time
based on 85% of uncollected non-recourse receivables sold to the
factor and 45% of qualifying inventory, which at March 31, 2003
was $1,696,000.
At March 31, 2003 and 2002 the Company owed $0 and $216,959 to
its factor under the Agreement. The amounts due to its factor at
March 31, 2002 relates to amounts advanced to the Company under
the Agreement in excess of amount allowed to be advanced related
to the Company's factored accounts receivable. In addition to the
factored accounts receivable, this excess amount is secured by
the Company's inventory and real property owned by the Company.
Under this Factoring Agreement, the Company sold receivables of
approximately $15,500,000 and $10,300,000 during the years ended
March 31, 2003 and 2002, respectively. Gains and losses
recognized on the sale of factored receivables include the
fair value of the limited recourse obligation. The uncollected
balance of non-recourse receivables held by the factor amounted
to $2,171,324 and $1,426,751 at March 31, 2003 and 2002,
respectively.
Any outstanding amounts due to the factor are payable upon
demand. The interest rate on this amount is the prime rate of
interest plus 1% (5.25% at March 31, 2003).
- 31 -
NOTE E - LEASES
The Company entered into capital lease agreements for various
equipment, with an outstanding balance of $30,474 as of March 31,
2003. The leases have imputed interest rates ranging from 7.6% to
10%, with monthly payments aggregating $1,810 per month.
Year Ended March 31,
2003 2002
Obligations under capital lease $30,474 $45,646
Less current maturities 23,250 23,250
$ 7,224 $22,396
Maturities of long term capital lease obligations for the three
years following March 31, 2003 are as follows:
Year
2004 $24,487
2005 7,435
Total 31,922
Less amounts representing interest 1,448
Obligations under capital lease $30,474
During December 1999, the Company entered into an operating lease
for its office and warehouse which expires in October 2005. This
lease is subject to renewal for an additional three years and
has increasing rentals at 3% per year.
Effective March 2003, the Company entered into an operating lease
for an approximately 1,800 square foot office in Naperville,
Illinois. This lease, which expires in February 2006, is subject
to renewal for an additional six years with increasing rentals
at 3% per year.
Rental expenses totaled $67,886 and $57,164 for the years ended
March 31, 2003 and 2002. Future obligations for the years ended
March 31, under these non-cancelable operating leases are as
follows:
Year Amount
2004 $ 95,685
2005 98,184
2006 31,048
$224,917
- 32 -
NOTE F - INCOME TAXES
No provision for US federal or state income taxes have been
recorded in any period presented, as the Company has incurred
domestic operating losses in prior periods.
Realization of deferred tax assets is dependent upon future
earnings, if any. The Company has recorded a full valuation
allowance against its deferred tax assets since management
believes it is more likely than not that these assets may not be
realized. No income tax benefit has been recorded for all periods
presented because of the valuation allowance.
At March 31, 2003, the Company has net operating loss (NOL)
carryforwards in the United States of America of approximately
$5,346,359 for income tax purposes that expire in 2009 through
2020.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
March 31,
2003 2002 2001
Deferred tax liabilities:
Unremitted Hong Kong
Joint Venture
earnings not
considered
permanently
reinvested $ 1,465,270 $ 1,054,553 $ 836,800
Gross deferred tax
liabilities 1,465,270 1,054,553 836,800
- 33 -
March 31,
2003 2002 2001
Deferred tax assets:
Financial statement
accruals and
allowances 232,167 170,990 75,070
Inventory uniform
capitalization 72,200 72,200 72,200
Other 41,983 47,367 39,650
NOL carryforwards
and tax credits 2,031,616 2,612,451 2,611,908
Gross deferred
tax assets 2,377,966 2,903,008 2,798,828
Valuation allowance (912,696) (1,848,455) (1,6962,028)
Net deferred tax assets $ -0- $ -0- $ -0-
The reconciliation of the income tax computed at the U.S. federal
statutory tax rates to income tax expense is as follows:
Years ended March 31,
2003 2002 2001
Federal tax expense (benefit)
at statutory rate on
domestic income (loss)(34%) $ 95,056 $(331,981) $(271,722)
State tax expense (Benefit) 96,013 10,451 (30,357)
Equity in (earnings) loss from
Hong Kong Joint Venture 721,039 420,814 13,683
Change in valuation allowance (935,758) (113,573) 276,262
Other 23,650 14,289 12,134
$ -0- $ -0- $ -0-
- 34 -
NOTE G - SHAREHOLDERS' EQUITY
Common Stock - During the year ended March 31, 2003, the Company
issued 112,212 shares of its common stock of which 40,750 were
issued on the exercise of employee stock options for total
proceeds of $92,625; 51,000 shares were sold for $250,000;
6,974 shares were issued to directors in lieu of directors fees
and 13,488 shares were issued in satisfaction of previously
accrued amounts. During the year ended March 31, 2002, the
Company issued 97,500 shares of its common stock on the exercise
of employee stock options and received proceeds of $92,625.
Employee Stock Purchase Plan - Under the terms of the Company's
1988 Employee Stock Purchase Plan, eligible employees can
purchase shares of the Company's common stock through payroll
deductions at a price equal to 90% of the price of the shares.
The Company has reserved 25,000 shares of common stock for
issuance under the Plan. No member of the Board of Directors who
is not an employee of the Company, and no member of the committee
administering the Plan, can participate in the Plan. At March 31,
2003, approximately 16,250 shares remain reserved for issuance
under this Plan.
Stock Options - Under terms of the Company's 1978 Non-Qualified
Stock Option Plan, as amended, 493,750 shares of common stock are
reserved for the granting of stock options, of which 109,019
shares have been issued as of March 31, 2003, leaving 343,981
available for issuance upon exercise of options granted, or
available for future grants to employees and directors. Under
provisions of the Plan, a committee of the Board of Directors
determines the option price and the dates exercisable. All
options expire five years from the date of grant and have an
exercise price at least equal to the market price at the date of
grant. The options usually vest at 25% a year over four years.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 2003 and option
transactions for the three years then ended:
- 35 -
Status as of March 31, 2003 Number of Shares
Presently exercisable 206,875
Exercisable in future years 39,625
Total outstanding 246,500
Available for future grants 97,481
Shares of common stock reserved 343,981
Outstanding options:
Number of holders 18
Average price per share $3.43
Expiration dates December 2003 to September 2007
Transactions for the Three Years Ended March 31, 2003:
Number of Weighted Average
Shares Exercise Price
Outstanding at March 31, 2000 237,875
Granted 5,000 $4.50
Canceled (4,500) 2.56
Outstanding at March 31, 2001 238,375
Granted 149,000 2.23
Canceled (60,625) 4.11
Exercised (97,500) 1.19
Outstanding at March 31, 2002 229,250
Granted 89,000 4.96
Canceled (31,000) 3.02
Exercised (40,750) 2.17
Outstanding at March 31, 2003 246,500
The following table summarizes information about stock options
outstanding at March 31, 2003:
Options
Options Outstanding Exercisable
Weighted Weighted Weighted
Average Average Number Average
Range of Number of Exercise Contract of Exercise
Exercise Price Shares Price Life (Yrs) Shares Price
$1.30 to $2.99 76,250 $1.93 3.50 70,250 $2.06
$3.00 to $3.99 101,250 3.23 2.75 75,125 3.18
$4.00 to $5.99 45,000 4.50 3.96 42,500 4.50
$6.00 to $7.20 24,000 6.97 4.50 19,000 7.20
- 36 -
The Company accounts for stock options granted to employees in
accordance with APB 25. Under APB 25, when the exercise price of
the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. The Company has provided additional pro forma
disclosures as required by SFAS No. 123, "Accounting for
Stock-Based Compensation."
For disclosure purposes, the fair value of each stock option is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions used for stock options and rights to receive stock in
2003, 2002 and 2001; no annual dividends, expected volatility of
80%, 80% and 85%, respectively, risk-free interest rate ranging
from 4.0% to 6.5% and expected life of five years. The
weighted-average fair values of the stock options granted in
2003, 2002 and 2001 were $5.00, $1.16 and $1.44, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of normal publicly traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
The following disclosures for the financial statements for the
year ended March 31, 2003, assume that the Company continues to
account for stock-based employee compensation using the intrinsic
value method under Opinion 25. For simplicity, this illustration
also assumes that all previous awards were fixed stock options
with no intrinsic value at the date of grant.
At March 31, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in Note G. The
Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for
Stock Issues to Employees, and related interpretations. No stock-
based employee compensation cost is reflected in net income, as
all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
- 37 -
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company entered into a three year employment agreement with
the President of its USI ELECTRIC, INC. subsidiary with fixed
annual remuneration amounts for three years and expires in March
2006. The agreement provides, among other things, incentive
compensation based on the Company achieving certain levels of
profitability from certain levels of sales for the year ended
March 31, 2003. The Company also entered into a three-year
employment agreement with its President with annual remuneration
amounts and incentive compensation based on the Company achieving
certain levels of profitability. The agreement was extended
effective April 1, 2003, and expires in July 2008.
In December 2001, Leviton Manufacturing Company filed a civil
action in the United States District Court for the District of
Maryland (Case No. 01CV3855), alleging that, subsequent to
December 11, 2001, the Company's ground fault circuit
interrupters infringe on the plaintiff's patents and service
marks. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company and its counsel believe that
the Company has meritorious defenses to the claim and is
aggressively defending the suit. The Company believes it has
adequately reserved for this case.
On June 13, 2003, Leviton Manufacturing Co., Inc. filed a second
civil suit against the Company in the United States District
Court for the District of Maryland (Case No. 03-CV-1701),
alleging this time that the Company's ground fault circuit
interrupters infringe on several more patents issued to the
plaintiff with respect to reset lockout technology mandated
by the revision of UL Standard 943 for ground fault circuit
interrupters, effective January 2003. Leviton has also asserted
various trade dress and unfair competition claims many of which
correspond to the claims in the previously identified pending
suit. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company believes
that it has meritorious defenses to the claims and will
aggressively defend the suit.
On June 11, 2003, Walter Kidde Portable Equipment Inc. filed a
civil suit against the Company in the United States District
Court for the Middle District of North Carolina (Case No.
1:03CV00537), alleging that certain of the Company's battery
powered smoke detectors infringe a patent acquired by Kidde. The
plaintiff is seeking injunctive relief and damages to be
determined at trial. The Company has not yet answered and/or
counterclaimed against the plaintiff, but the Company and its
counsel believe that the Company has meritorious defenses to the
claims and will aggressively defend the suit.
- 38 -
From time to time, the Company is involved in various lawsuits
and legal matters. It is the opinion of management, based on the
advice of legal counsel, that these matters will not have a
material adverse effect on the Company's financial statements.
NOTE I - MAJOR CUSTOMERS
The Company is primarily a distributor of safety products for
use in home and business under both its tradenames and private
labels for other companies. The Company's purchased a majority of
its products from its 50% owned Hong Kong Joint Venture.
There were not any customers that represented in excess of 10% of
the Company's product sales during the three years in the period
ended March 31, 2003.
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Results of Operations (Unaudited):
The unaudited quarterly results of operations for fiscal years
2003 and 2002 are summarized as follows:
Quarter Ended
2003 June 30, September 30, December 31, March 31,
Net sales $3,750,926 $4,091,272 $4,252,447 $3,859,238
Gross profit 1,083,225 1,286,147 1,289,601 1,314,843
Net income 576,940 630,129 673,365 519,883
Net income
per share
- basic .57 .60 .61 .46
Net income
per share
- diluted .55 .55 .55 .42
Quarter Ended
2002 June 30, September 30, December 31, March 31,
Net sales $2,255,130 $2,653,482 $2,965,386 $2,606,831
Gross profit 552,282 748,584 790,350 721,436
Net income 62,359 23,543 36,433 139,290
Net income
per share
- basic .07 .03 .04 .14
Net income
per share
- diluted .07 .03 .04 .13
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
- 39 -
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of six directors. The
following is a list of individuals currently serving as directors
of the Company until the Company's next annual stockholders
meeting and individuals currently serving as executive officers
of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper....59 Director; Chairman of the Board 1970
of the Company since October 2001;
Vice Chairman of the Board of the
Company since September 1996;
Chairman of the Board of the Company
from 1970 to September 1996.
Michael Kovens.....60 Director; Chairman of the Board 1970
of the Company from September
1996 to October 2001; President
of the Company from 1970 to
September 1996.
Harvey Grossblatt..56 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
October 1983; Vice President
of the Company from December
1986 to June 1996; Secretary and
Treasurer of the Company since
September, 1988.
Cary Luskin........46 President of The Big Screen Store, 2002
Inc., a chain of large-screen
television retail stores.
Howard Silverman...61 Vice President, Magellan Health
2002
Service from 1990 to 2001. Self-
employed as a consultant since
2001.
Ronald Seff........55 Ophthalmologist since 1977. 2002
- 40 -
ITEM 11.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table reflects the aggregate amount paid or accrued
by the Company in its three most recent fiscal years, for each
executive officer whose compensation exceeded $100,000 in that
year:
All
Long-Term Compensation Other
Annual Compensation Stock LTIP compen-
Year Salary Bonus Other Awards Options Payouts sation
Name and Principal Position
Stephen Knepper, Chairman of the Board and Chief Executive
Officer(1)
2003 $ 97,832 $110,219 $22,271(2) - 35,000 - $15,024(3)
2002 87,676 13,081 17,503(2) - 42,500 - 12,762(3)
2001 55,132 - 15,116(2) - - - 846(3)
Harvey Grossblatt, President, CFO, Secretary & Treasurer
2003 $123,928 $120,219 $ - - 20,000 - $15,655(4)
2002 128,849 13,081 - - 47,750 - 15,261(4)
2001 124,780 - - - 5,000 - 2,890(4)
(1) On October 23, 2001, Mr. Knepper was elected Chairman and
Chief Executive Officer.
(2) Includes an automobile allowance of $12,000 for the fiscal
year ended March 31, 2003, reimbursement of medical expenses
in the amount of $11,292 for the fiscal year ended March
31, 2002, and payment of life insurance premiums in the
amount of $4,861 for the fiscal year ended March 31, 2001.
(3) Represents: payment of term life insurance premiums in the
amount of $1,624, $1,012, and $846 for the fiscal years ended
March 31, 2003, 2002 and 2001, respectively; and Company
contributions on behalf of the named officer to the Company's
401(k) Plan in the amount of $12,650 and $12,500 for the
fiscal years ended March 31, 2003 and 2002, respectively.
(4) Represents: payment of term life insurance premiums in the
amount of $2,255, $2,761, and $2,890 for the fiscal years
ended March 31, 2003, 2002 and 2001, respectively; and
Company contributions on behalf of the named officer to the
Company's 401(k) Plan in the amount of $12,650 and $12,500
for the fiscal years ended March 31, 2003 and 2002,
respectively.
Option Grants in Last Fiscal Year
The following table sets forth information with respect to the
grant of stock options during the Company's fiscal year ended
March 31, 2003 to the executive officers named in the Summary
Compensation Table:
Potential
Individual Grants Realized Value
% of Total at Assumed Annual
Options to Exercise Rates of Stock
No. of Granted in or Base Price Appreciation
Options Employees in Price Expiration for Option Term(1)
Granted Fiscal Year ($/Share) Date 0%(2) 5% 10%
Name
Stephen Knepper
20,000(3) 22.47% $4.50 06/27/07 - $4,500 $9,000
Stephen Knepper
15,000(3) 16.85% $3.75 06/27/07 - $1,875 $3,750
Harvey Grossblatt
20,000(3) 22.47% $4.50 03/31/07 - $4,500 $9,000
(1) The 5% and 10% assumed rates of compensation are mandated by
the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the
future Common Stock price.
(2) Denotes realizable value at the date of grant which reflected
a market value or higher valuation per share.
(3) Five year option fully exercisable and vested.
- 41 -
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
Number Value
of Unexercised of Unexercised
Shares Options at FY-End Options at FY-End
Acquired Value Exerci/Unexerci- Exerci/Unexerci-
Name In Exercise Realized sable/sable sable/sable
Stephen
Knepper - $ - 52,500/ - $233,150/ -
Harvey
Gross-
blatt 6,250 18,188 60,312/12,438 $290,868/$58,564
Employment Agreements
Harvey Grossblatt entered into an employment agreement with the
Company effective April 1, 2002. The employment agreement
provides that Mr. Grossblatt is employed for a term ending June
30, 2005 at an initial base annual salary of $122,500, subject to
automatic annual cost of living increases and further subject to
increases in the Board's discretion. Additionally, Mr. Grossblatt
is entitled to bonus compensation for each fiscal year of the
Company in which the Company earned pre-tax net income of at
least $100,000, in an amount equal to 5% of pre-tax net income up
to $1,000,000, 4% of pre-tax net income over $1,000,000 up to
$2,000,000, 3% of pre-tax net income over $2,000,000 up to
$3,000,000, and 1% of pre-tax net income over $3,000,000.
Effective April 1, 2003, Mr. Grossblatt's Employment Agreement
was amended to: (i) extend the term until July 31, 2008; (ii)
increase the annual base salary to $180,000 subject to automatic
annual cost of living increases up to 4%; and (iii) revising the
annual bonus compensation to provide that the bonus is paid on
pre-tax net income in excess of an amount equal to 8% of
shareholders' equity as of the start of the fiscal year, as
follows: 3% of all (after the 8% threshold) pre-tax net income up
to $1 million, 4% of pre-tax net income from $1-$2 million, 5%
of pre-tax net income from $2-$3 million, 6% of pre-tax net
income from $3-$4 million, 7% of pre-tax net income over $4
million.
Under the Employment Agreement, Mr. Grossblatt has been granted
an option to purchase 20,000 shares of common stock at an
exercise price of $4.50 per share pursuant to the Company's
Non-Qualified Stock Option Plan, and is also entitled to life,
health and disability insurance benefits, medical reimbursement,
automobile allowance, and Company paid retirement plan
contributions.
If the employment agreement is terminated by the Company other
than for cause or Mr. Grossblatt's death or disability, Mr.
Grossblatt is entitled to receive a lump sum payment equal to Mr.
Grossblatt's base salary for the balance of the employment
agreement's term plus the amount of Mr. Grossblatt's last bonus
- 42 -
and an additional lump sum payment payable on the date the term
of the employment agreement would have expired equal to two times
Mr. Grossblatt's base salary for the last 12 months plus the
amount of Mr. Grossblatt's last bonus. In addition, Mr.
Grossblatt would be entitled to receive the health insurance and
medical reimbursement benefits for the balance of the term and a
period of three years thereafter.
If Mr. Grossblatt's employment is terminated following or in
anticipation of a "change of control" of the Company, Mr.
Grossblatt will be entitled to receive a lump sum payment equal
to Mr. Grossblatt's base salary for the balance of the employment
agreement's term and the amount of Mr. Grossblatt's last bonus,
plus an amount equal to three times Mr. Grossblatt's base salary
for the last 12 months and the amount of Mr. Grossblatt's last
bonus, limited to 2.99 times Mr. Grossblatt's average annual
taxable compensation from the Company which is included in his
gross income for the five taxable years of the Company ending
before the date on which the change of control occurs.
If the employment agreement is terminated by the Company due to
Mr. Grossblatt's death or disability, Mr. Grossblatt (or his
estate) is entitled to the continuation of the payment of his
base salary for the balance of the term, reduced, in the event of
death, by any individual life insurance benefits the premiums for
which are paid for by the Company, and in the event of
disability, by any group or individual disability income
insurance benefits the premiums for which are paid for by the
Company. In addition, Mr. Grossblatt (or his estate) is entitled
to the health insurance and medical reimbursement benefits for
the longer of balance of the term or three years following the
date of death or disability.
The employment agreement generally prohibits Mr. Grossblatt from
competing with the Company during the term and during any
subsequent period during which he receives compensation from the
Company.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 19, 2003, the following persons were "beneficial
owners" (as that term is defined under Rule 13d-3 promulgated by
the Securities and Exchange Commission) of more than five percent
of the Company's common stock.
- 43 -
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 285,795 25.5%
6 Regency Court
Baltimore, MD 21208
Stephen Knepper 151,631(2) 12.9%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Ronald Lazarus 128,850(3) 10.7%
7-A Gwynns Mill Court
Owings Mills, MD 21117
Bruce Paul 104,500 9.3%
One Hampton Road
Purchase, NY 10577
Harvey B. Grossblatt 78,396(4) 6.6%
7-A Gwynns Mill Court
Owings Mills, MD 21117
(1) For the purpose of determining the percentages of stock
beneficially owned, shares of stock subject to options
exercisable within 60 days of June 19, 2003 are deemed to be
outstanding.
(2) Includes 52,500 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options and
2,000 shares held by a trust in which Mr. Knepper has voting
control.
(3) Includes 82,000 shares which Mr. Lazarus presently has the
right to acquire through the exercise of stock options.
(4) Includes 64,874 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
- 44 -
As of June 19, 2003, the shares of the Company's common stock
owned beneficially by each director, by each executive officer
and by all directors and officers as a group were as follows:
Shares Percent
Name of beneficial owner Beneficially Owned(1) of class
Michael Kovens 285,795 25.5%
Stephen Knepper 151,631(2) 12.9%
Harvey Grossblatt 78,396(3) 6.6%
Cary Luskin 30,167(4) 2.7%
Ronald A. Seff 39,515 3.5%
Howard Silverman 6,167(4) 0.3%
All directors and officers as 720,596(5) 54.3%
a group (6 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) Includes 64,874 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
(4) Includes 2,500 shares which Mr. Luskin and Dr. Silverman each
presently has the right to acquire through the exercise of
stock options.
(5) See footnotes 1 through 4 on previous table.
Equity Compensation Plan Information
Number of
securities
remaining
available for
for future
issuance
Number of under equity
Securities Weighted- compensation
to be average plans
issued upon exercise (excluding)
exercise of price of securities
outstanding outstanding reflected
Plan options options in column(a)]
Category (a) (b) (c)
Equity 246,500 $3.43 97,481
compensation
plans approved
by security
holders
Equity - - -
compensation
plans not
approved by
security
holders
Total 246,500 $3.43 97,481
- 45 -
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that the Company's directors and executive officers and
each person who owns more than 10% of the Company's Common Stock,
file with the Securities and Exchange Commission an initial
report of beneficial ownership and subsequent reports of
changes in beneficial ownership of the Shares. To our knowledge,
based solely upon the review of the copies of such reports
furnished to us, all of these reporting persons complied with the
Section 16(a) filing requirements applicable to them with respect
to transactions during the fiscal year ended March 31, 2003,
other than Mr. Kovens, who filed one Form 4 late with respect to
a disposition of shares of Common Stock.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had several related party transactions with its Hong
Kong Joint Venture in its normal course of business. See NOTE C
to the Consolidated Financial Statements for a description of
these transactions.
ITEM 14.
CONTROLS AND PROCEDURES
Based on the evaluation of the Company's disclosure controls and
procedures by Stephen C. Knepper, the Company's Chief Executive
Officer, and Harvey B. Grossblatt, the Company's Chief Financial
Officer, as of a date within 90 days of the filing date of this
annual report, such officers have concluded that the Company's
disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities and
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time period specified by the
Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
- 46 -
ITEM 15.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees
The following is a description of the fees billed to the Company
by Grant Thornton LLP (the "Auditor") during the fiscal years
ended March 31, 2003 and 2002:
Audit Fees. Audit fees include fees paid by the Company to the
Auditor in connection with the annual audit of the Company's
consolidated financial statements, and review of the Company's
interim financial statements. Audit fees also include fees for
services performed by the Auditor that are closely related to the
audit and in many cases could only be provided by the Auditor.
Such services include consents related to SEC and other
regulatory filings. The aggregate fees billed to the Company by
the Auditor for audit services rendered to the Company for the
years ended March 31, 2003 and 2002 totaled $69,500 and $42,250,
respectively.
Audit Related Fees. Audit related services include due diligence
services related to accounting consultations, internal control
reviews, and employee benefit plan audits. The aggregate fees
billed to the Company by the Auditor for audit related services
rendered to the Company for the years ended March 31, 2003 and
2002 totaled $0 and $0, respectively.
Tax Fees. Tax fees include corporate tax compliance, counsel and
advisory services. The aggregate fees billed to the Company by
the Auditor for the tax related services rendered to the Company
for the years ended March 31, 2003 and 2002 totaled $5,000 and
$5,000, respectively.
All Other Fees. There were no other audit services provided in
both years.
- 47 -
Approval of Independent Auditor Services and Fees
The Company's Audit Committee reviews all fees charged by the
Company's independent auditors, and actively monitors the
relationship between audit and non-audit services provided.
Effective April 1, 2003, the Audit Committee must pre-approve all
services provided by the Company's independent auditors and fees
charged. The Audit Committee has further mandated that all
independent auditor services strictly adhere to the limitations
contained within the SEC's release, "Strengthening the
Commission's Requirements Regarding Auditor Independence," which
was issued in final form in January 2003. The release restricts
engagement of the independent auditors to perform non-audit
services; requires Audit Committee pre-approval of all audit
and non-audit services; addresses the duration of time certain
independent auditor partners can serve on the audit engagement
and the manner of the partners' compensation; restricts
employment by the Company of senior engagement team personnel;
requires the independent auditor to report certain matters to the
Audit Committee; and requires certain disclosures to investors of
information related to the nature of audit and non-audit services
provided and associated fees. The Company's senior corporate
financial management administers these requirements, and will
report throughout the year to the Audit Committee.
- 48 -
PART IV
ITEM 16.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are
included in Part II, Item 8.
Consolidated balance sheets, March 31, 2003 and 2002
Consolidated statements of operations for the years
ended March 31, 2003, 2002 and 2001.
Consolidated statements of shareholders' equity for the
years ended March 31, 2003, 2002 and 2001.
Consolidated statements of cash flows for the years
ended March 31, 2003, 2002 and 2001.
Notes to consolidated financial statements.
(a) 2. Financial Statement Schedules
Schedule II - Schedule of Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
are not required, or because the required information is included
in the consolidated financial statements or notes thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation
S-K
Exhibit No.
3.1 Articles of Incorporation, as amended (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 1988, File No. 0-7885)
3.2 Articles Supplementary, filed October 14, 2003 (incorporated
by reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K filed October 31, 2002, file No. 0-7885)
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3.3
to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2002, file No. 0-7885)
- 49 -
10.1 Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1999, File No.
0-7885)
10.2 Hong Kong Joint Venture Agreement, as amended (confidential
treatment of Name requested and filed separately with the
Commission)*
10.3 Amended Factoring Agreement with CIT Group (successor to
Congress Talcott, Inc.) dated November 14, 1999
(incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended March 31,
2003, File No. 0-7885)
10.4 Amendment to Factoring Agreement with CIT Group
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2002, File No.
0-7885)
10.5 Lease between Universal Security Instruments, Inc. and
National Instruments Company dated October 21, 1999 for its
office and warehouse located at 7-A Gwynns Mill Court,
Owings Mills, Maryland 21117 (incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the Fiscal Year Ended March 31, 2000, File No. 0-7885)
10.6 Employment Agreement dated April 1, 2002 between the Company
and Harvey B. Grossblatt (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended March 31, 2002, File No. 0-7885)
10.7 Amendment to Employment Agreement dated as of April 1, 2002
between the Company and Harvey B. Grossblatt (incorporated
by reference to Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 2002,
File No. 0-7885)
10.8 Amended and Restated Employment Agreement dated April 1,
2003 between the Company and Harvey B. Grossblatt*
21 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for
the Fiscal Year Ended March 31, 2001, File No. 0-7885)
23.1 Consent of Grant Thornton LLP*
23.2 Consent of Ernst & Young (Hong Kong)*
- 50 -
99.1 Rule 15d-14(a) Certification of Chief Executive Officer*
99.2 Rule 15d-14(a) Certification of Chief Financial Officer*
99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
99.4 June 26, 2003 Letter to Stockholders and Press Release*
*Filed herewith
(b) Reports on Form 8-K
None
(d) Financial Statements Required by Regulation S-X
Separate financial statements of the Hong Kong Joint Venture
(confidential treatment of name requested and filed
separately with the Commission.
Pages
Independent auditor's report 103
Consolidated profit and loss account, March 31,
2003 and 2002 104
Consolidated balance sheets, March 31, 2003
and 2002 105
Consolidated cash flow statements, March 31,
2003 and 2002 107-109
Notes to consolidated financial statements 110-127
- 51 -
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED March 31, 2003, 2002 and 2001
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions of year
Year ended
March 31, 2003
Allowance for
doubtful accounts $ 68,358 $ 10,000 $-0- $ 68,358 $ 10,000
Year ended
March 31, 2002
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ 31,642 $ 68,358
Year ended
March 31, 2001
Allowance for
doubtful accounts $100,000 $ -0- $-0- $ -0- $100,000
Year ended
March 31, 2003
Allowance for
inventory reserve $111,741 $ -0- $-0- $ 10,000 $101,741
Year ended
March 31, 2002
Allowance for
inventory reserve $ 50,000 $ 61,741 $-0- $ -0- $111,741
Year ended
March 31, 2001
Allowance for
inventory reserve $ 92,000 $ -0- $-0- $ 42,000 $ 50,000
- 52 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By: /s/ Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated.
Date: June 26, 2003 By: /s/ Stephen Knepper
Stephen Knepper
Chairman of the Board, Director
Date: June 26, 2003 By: /s/ Harvey Grossblatt
Harvey Grossblatt, President,
Director, Chief Accounting Officer
Date: By:
Michael Kovens
Director
Date: June 26, 2003 By: /s/ Cary Luskin
Cary Luskin
Director
Date: June 26, 2003 By: /s/ Ronald Seff
Ronald Seff
Director
Date: June 26, 2003 By: /s/ Howard Silverman
Howard Silverman
Director
- 53 -
EXHIBIT 10.2
2002 JOINT VENTURE AGREEMENT
This 2002 Joint Venture Agreement (the "Agreement") is made on
this 22nd day of October 2002, by and between Universal Security
Instruments, Inc. ("Universal") of 7-A Gwynns Mill Court, Owings
Mills, Maryland 21117-3586, United States of America ("USA"), a
corporation organized and existing under the laws of the State of
Maryland, USA, and The Original Joint Venture Owner (name
withheld and filed separately with the SEC) ("Original Owner"), a
limited liability company organized and existing under the laws
of Hong Kong.
WHEREAS
A. The parties hereto (the "Parties") are parties to a Joint
Venture Agreement dated 23 October 1989 as supplemented by a
Supplementary Agreement dated 21 August 2001 and a memorandum
letter dated 8 October 2001 (collectively referred to as the
"1989-2001 Agreements") relating to the business, management
and operation of (name withheld and filed separately with the
Securities and Exchange Commission) ("The Joint Venture"), a
limited liability company organized and existing under the
laws of Hong Kong.
B. The Parties have concluded that certain provisions of the
1989-2001 Agreements are redundant, obsolete and no longer
appropriate.
C. The Parties are also considering a listing of (name withheld
and filed separately with the Securities and Exchange
Commission) or its business on The Stock Exchange of Hong Kong
Limited or another stock exchanges of equivalent international
standing (the "Stock Exchange").
D. In view of these considerations, the Parties have agreed to
enter into this Agreement and thereby to terminate the
1989-2001 Agreements.
- 54 -
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, IT IS HEREBY
AGREED AS FOLLOWS:
ARTICLE ONE
ESTABLISHMENT AND OPERATION OF A PARENT COMPANY
(NAME WITHHELD AND FILED SEPARATELY WITH THE SECURITIES A
EXCHANGE COMMISSION)
1.1 Establishment of A Parent Company (name withheld and filed
separately with the Securities and Exchange Commission).
The Parties shall promptly purchase (name withheld and
filed separately with the Securities and Exchange
Commission) ("Parent Company"), a private company limited
by shares, duly organized, validly existing and properly
registered in Hong Kong. The Parties shall share equally
all costs with regard to the purchase of (name withheld
and filed separately with the Securities and Exchange
Commission). The initial capital of (name withheld and
filed separately with the Securities and Exchange
Commission) shall be the normal minimums permissible in
Hong Kong.
1.2 Memorandum and Articles of Association (name withheld and
filed separately with the Securities and Exchange
Commission). It is recognized that, upon the acquisition
of (name withheld and filed separately with the
Securities and Exchange Commission), there will be
inconsistencies between this Agreement and the Memorandum
and Articles of Association of (name withheld and filed
separately with the Securities and Exchange Commission).
The Parties agree promptly, with the assistance of
counsel, to cause the Memorandum and Articles of
Association of (name withheld and filed separately with
the Securities and Exchange Commission) to be amended so
that they will be consistent with terms and conditions of
this Agreement.
In all cases, before and after the amendment of the
Memorandum and Articles of Association, in the event of
conflict between the provisions of this Agreement and the
Memorandum and Articles of Association of (name withheld
and filed separately with the Securities and Exchange
Commission), the provisions of this Agreement shall
prevail.
- 55 -
1.3 Transfer of (name withheld and filed separately with the
Securities and Exchange Commission) Shares to (name
withheld and filed separately with the Securities and
Exchange Commission). The Parties are the beneficial
owners of fifty percent (50%) each of the share capital of
(name withheld and filed separately with the Securities
and Exchange Commission). Upon the formation of (name
withheld and filed separately with the Securities and
Exchange Commission), each of the Parties shall promptly
transfer all of their shares in (name withheld and filed
separately with the Securities and Exchange Commission) to
(name withheld and filed separately with the
Securities and Exchange Commission) in exchange for fully
paid-up shares of (name withheld and filed separately with
the Securities and Exchange Commission). The transfer of
(name withheld and filed separately with the Securities
and Exchange Commission) shares of the Parties shall be
completed simultaneously, and each Party (or its nominees)
shall receive fifty percent (50%) of the share capital of
(name withheld and filed separately with the Securities
and Exchange Commission) immediately upon completion of
the transaction. The (name withheld and filed separately
with the Securities and Exchange Commission) shares
transferred shall be free from all encumbrances, liens and
third party rights. Neither Party shall be obligated to
carry out the transfer of its interest in(name withheld
and filed separately with the Securities and Exchange
Commission) unless the other Party demonstrates that it
can fully comply with its obligations with respect to this
transfer.
1.4 Stamp Duty. Any stamp duty or similar excise taxes
imposed in Hong Kong as a result of the transactions
stated in Paragraph 1.3 shall be shared equally by the
Parties.
1.5 Right of First Refusal. Each shareholder (name withheld
and filed separately with the Securities and Exchange
Commission) shall have a right of first refusal for the
purchase of any or all shares in Parent Company (name
withheld and filed separately with the Securities and
Exchange Commission) proposed to be transferred by the
other shareholder. This right of first refusal shall be
exercised within thirty (30) days of notice to the other
shareholder of the proposed transfer of shares.
- 56 -
1.6 Transferee to Accept This Agreement. In addition to the
requirements of Paragraph 1.5, in the event either
shareholder (name withheld and filed separately with the
Securities and Exchange Commission) proposes to transfer
any of its shares in (name withheld and filed separately
with the Securities and Exchange Commission) to a third
party, such transferring Party shall not transfer such
shares until it has secured the written agreement of the
proposed transferee to assume all the rights and
obligations of a Party to this Agreement.
1.7 No Pledge. Neither(name withheld and filed separately
with the Securities and Exchange Commission) shareholder
may pledge or encumber its shares in (name withheld and
filed separately with the Securities and Exchange
Commission) without prior written consent of (name
withheld and filed separately with the Securities and
Exchange Commission) shareholder.
1.8 Board (name withheld and filed separately with the
Securities and Exchange Commission). The board of
directors of (name withheld and filed separately with the
Securities and Exchange Commission) (the "Board") shall
consist of four (4) members, two (2) to be nominated by
Universal and two (2) to be nominated by (name withheld
and filed separately with the Securities and Exchange
Commission). The Parties shall vote their shares for the
nominees. The nominating Party shall have the right to
remove and replace its directors. The quorum required for
a meeting of the Board (name withheld and filed separately
with the Securities and Exchange Commission) shall be two
(2) members, provided that at least one director nominated
by (name withheld and filed separately with the Securities
and Exchange Commission) and at least one director
nominated by Universal is present.
1.9 Chairman (name withheld and filed separately with the
with the Securities and Exchange Commission). The chairman
of the Board (name withheld and filed separately with the
Securities and Exchange Commission)(the "Chairman") shall
be nominated by (name withheld and filed separately with
the Securities and Exchange Commission). The Board (name
withheld and filed separately with the Securities and
Exchange Commission) shall appoint such Board (name
withheld and filed separately with the Securities and
Exchange Commission) member nominated by (name withheld
- 57 -
and filed separately with the Securities and Exchange
Commission) as the Chairman (name withheld and filed
separately with the Securities and Exchange Commission).
For as long as (name withheld and filed separately
with the Securities and Exchange Commission) provides
operations and management services to (name withheld and
filed separately with the Securities and Exchange
Commission), the Chairman (name withheld and filed
separately with the Securities and Exchange Commission)
shall have a casting vote on all matters, except for the
matters specifically set out in Paragraph 1.11, presented
to the Board (name withheld and filed separately with the
Securities and Exchange Commission).
1.10 Management of (name withheld and filed separately with the
Securities and Exchange Commission). Day-to-day
operations and management of (name withheld and filed
separately with the Securities and Exchange Commission)
and its subsidiaries, if any, and companies controlled
directly or indirectly by (name withheld and filed
separately with the Securities and Exchange Commission)
shall be under the control of (name withheld and filed
separately with the Securities and Exchange Commission),
save as specifically set out in Paragraph 1.11 below.
1.11 Major Decisions. The following matters shall require
approval of the Board (name withheld and filed separately
with the Securities and Exchange Commission): (i) approval
of annual financial statements/reports of (name withheld
and filed separately with the Securities and Exchange
Commission); (ii) determination on remuneration of (name
withheld and filed separately with the Securities and
Exchange Commission) for providing operations and
management services to (name withheld and filed separately
with the Securities and Exchange Commission); (iii)
declaration of dividends of (name withheld and filed
separately with the Securities and Exchange Commission);
(iv) the merger of (name withheld and filed separately
with the Securities and Exchange Commission) with any
other entity or the acquisition of any other entity by
(name withheld and filed separately with the Securities
and Exchange Commission); (v) the sale, lease or disposal
of the whole or a substantial part of the business or
assets of (name withheld and filed separately with the
Securities and Exchange Commission); (vi) any capital
- 58 -
increase or any request for shareholder contribution to
provide additional funding to (name withheld and filed
separately with the Securities and Exchange Commission),
including additional capital or shareholder loans; (vii)
capital investment of (name withheld and filed separately
with the Securities and Exchange Commission) in excess of
One Million Hong Kong Dollars (HKD1,000,000); (viii) any
amendment to the Memorandum and Articles of Association of
(name withheld and filed separately with the Securities
and Exchange Commission); (ix) any mortgage of the assets
of (name withheld and filed separately with the Securities
and Exchange Commission); (x) change of the Company
auditor; and (xi) any business transaction, excluding the
sales transactions of the products of (name withheld and
filed separately with the Securities and Exchange
Commission) which are the subject of Appendix I and II
hereof, between (name withheld and filed separately with
the Securities and Exchange Commission) and any Company
owned or controlled, directly or indirectly, by one of the
shareholders of (name withheld and filed separately with
the Securities and Exchange Commission).
1.12 Management Obligations. (name withheld and filed
separately with the Securities and Exchange Commission)
shall not be obligated to provide operations and
management services to (name withheld and filed separately
with the Securities and Exchange Commission) and its
subsidiaries specified in Paragraph 1.10 above, in the
event that (name withheld and filed separately with the
Securities and Exchange Commission) ceases to be a
shareholder of (name withheld and filed separately with
the Securities and Exchange Commission) or the composition
or procedures of the (name withheld and filed separately
with the Securities and Exchange Commission) Board as set
forth in this Agreement are changed so as to be less
favorable to (name withheld and filed separately with the
Securities and Exchange Commission).
1.13 Fiscal Year. (name withheld and filed separately with the
Securities and Exchange Commission) shall have a fiscal
year ending March 31.
- 59 -
1.14 Financial Statements. (name withheld and filed separately
with the Securities and Exchange Commission). (name
withheld and filed separately with the Securities and
Exchange Commission) shall, at its expense, have its
financial statements audited once a year by an independent
auditor. Until otherwise determined by the (name withheld
and filed separately with the Securities and Exchange
Commission) Board, Ernst and Young shall remain the
company auditor of (name withheld and filed separately
with the Securities and Exchange Commission). (name
withheld and filed separately with the Securities and
Exchange Commission) shall also produce unaudited monthly
financial statements to be promptly distributed to the
shareholders.
- 60 -
ARTICLE TWO
PRODUCT DISTRIBUTION AGREEMENTS
Immediately upon the signing of this Agreement, Universal and
(name withheld and filed separately with the Securities and
Exchange Commission) shall enter into a product distribution
agreement with terms and conditions identical to Appendix I of
this Agreement, and (name withheld and filed separately
with the Securities and Exchange Commission) and (name withheld
and filed separately with the Securities and Exchange Commission)
shall enter into a product distribution agreement with terms and
conditions identical to Appendix II of this Agreement.
ARTICLE THREE
LISTING
3.1 Potential Listing. It is the intention of the Parties
that, provided both Parties agree the prevailing
conditions are suitable and confirm this agreement in
writing, (name withheld and filed separately with the
Securities and Exchange Commission) will seek the listing
of (name withheld and filed separately with the Securities
and Exchange Commission) shares or, where appropriate, a
listing of a special purpose vehicle formed to become the
holding company of (name withheld and filed separately
with the Securities and Exchange Commission) or its
business on the Stock Exchange (the "Listing").
3.2 An Ownership Company. (name withheld and filed separately
with the Securities and Exchange Commission), or a
specially formed holding company of (name withheld and
filed separately with the Securities and Exchange
Commission) or its business, is referred to herein as
"Ownership Company." (name withheld and filed separately
with the Securities and Exchange Commission) and its
subsidiaries are collectively referred to herein as the
"Group." (name withheld and filed separately with the
Securities and Exchange Commission) shall be set up as a
subsidiary of (name withheld and filed separately with the
Securities and Exchange Commission). The rules applicable
to the Listing of (name withheld and filed separately with
the Securities and Exchange Commission) on the Stock
Exchange are herein referred to as the "Listing Rules."
- 61 -
3.3 Board (name withheld and filed separately with the
Securities and Exchange Commission). Prior to the Listing,
(name withheld and filed separately with the Securities
and Exchange Commission) shall be structured or its
structure amended so that the board of directors of (name
withheld and filed separately with the Securities and
Exchange Commission) (the "Board") shall consist of three
types of directors: Executive Directors, Non-Executive
Directors, and Independent (Non-Executive) Directors. Two
(2) Non-executive Directors and one (1) Independent
(Non-Executive) Director shall be nominated by Universal.
Subject to the ability of the post-Listing public
shareholders to elect one or more directors, all the
remaining directors shall be nominated by (name withheld
and filed separately with the Securities and Exchange
Commission) so that (name withheld and filed separately
with the Securities and Exchange Commission) shall be able
at all times to nominate one more director than Universal.
The number of directors shall be determined by the Parties
according to the need of operations from time to time, and
the agreements set forth in this Paragraph 3.3. (name
withheld and filed separately with the Securities and
Exchange Commission) shall vote its shares for the
nominees determined in accordance with this Paragraph 3.3.
The nominating Party shall have the right to remove and
replace its directors subject to any applicable laws and
Listing Rules.
3.4 Major Decisions (name withheld and filed separately with
the Securities and Exchange Commission). Prior to a
Listing, no board resolution on the following matters
shall be passed by the (name withheld and filed separately
with the Securities and Exchange Commission) Board unless
approved by at least one Non-executive Director of the
(name withheld and filed separately with the Securities
and Exchange Commission) Board nominated by Universal and
at least one Executive Director of the (name withheld and
filed separately with the Securities and Exchange
Commission) Board nominated by (name withheld and filed
separately with the Securities and Exchange Commission):
(i) approval of annual financial statements/reports of
(name withheld and filed separately with the Securities
and Exchange Commission); (ii) determination on
remuneration of (name withheld and filed separately with
the Securities and Exchange Commission) for providing
- 62 -
operations and management services to (name withheld and
filed separately with the Securities and Exchange
Commission); (iii) declaration of dividends of (name
withheld and filed separately with the Securities and
Exchange Commission); (iv) the merger of (name withheld
and filed separately with the Securities and Exchange
Commission) with any other entity or the acquisition of
any other entity by (name withheld and filed separately
with the Securities and Exchange Commission); (v) the
sale, lease or disposal of the whole or a substantial part
of the business or assets of (name withheld and filed
separately with the Securities and Exchange Commission);
(vi) any capital increase or any request for shareholder
contribution to provide additional funding to (name
withheld and filed separately with the Securities and
Exchange Commission), including additional capital or
shareholder loans; (vii) capital investment of (name
withheld and filed separately with the Securities and
Exchange Commission) in excess of One Million Hong Kong
Dollars (HKD1,000,000); (viii) any amendment to the
Memorandum and Articles of Association of (name withheld
and filed separately with the Securities and Exchange
Commission); (ix) any mortgage of the assets of (name
withheld and filed separately with the Securities and
Exchange Commission); (x) appointment or change of the
company auditor; and (xi) any business transaction,
excluding the sales transactions of the products of
(name withheld and filed separately with the Securities
and Exchange Commission), which are the subject of
Appendix I and II hereof, between (name withheld and filed
separately with the Securities and Exchange Commission)
and any company owned or controlled, directly or
indirectly, by one of the shareholders of (name withheld
and filed separately with the Securities and Exchange
Commission).
3.5 Dividends (name withheld and filed separately with the
Securities and Exchange Commission). (name withheld and
filed separately with the Securities and Exchange
Commission) shall, to the extent permissible under
applicable law, pay quarterly dividends to (name withheld
and filed separately with the Securities and Exchange
Commission) with a total amount equal to at least fifty
percent (50%) of the quarterly after-tax net profit
determined after the quarterly review of the unaudited
quarterly financial statements by the (name withheld and
filed separately with the Securities and Exchange
Commission) Board.
- 63 -
3.6 Dividends. (name withheld and filed separately with the
Securities and Exchange Commission) shall, to the extent
permissible under applicable law, pay as quarterly
dividends to its shareholders all of the dividends
received from (name withheld and filed separately with the
Securities and Exchange Commission) less any normal and
customary deductions necessary to cover the operational
expenses of (name withheld and filed separately with the
Securities and Exchange Commission).
3.7 Management of the Listing. The Listing shall be managed by
(name withheld and filed separately with the Securities
and Exchange Commission), which shall be responsible for
all negotiations and determinations, including, without
limitation determining the overall policy, structure,
manner and arrangements of the Listing and in carrying out
the application for the Listing, including, but not
limited, to:
(a) the appointment of sponsor(s), legal advisers,
reporting accountants, valuers and other professional
advisers of (name withheld and filed separately
with the Securities and Exchange Commission) and/or
(name withheld and filed separately with the
Securities and Exchange Commission) incidental to the
Listing;
(b) all liaison with the Stock Exchange; (c) allowing for
the disclosure of all relevant information about the
Group to the public and the Stock Exchange as
required by the applicable laws, regulations and
rules incidental to the Listing, and to all
professional parties to facilitate their provision of
advice and service to (name withheld and filed
separately with the Securities and Exchange
Commission) and/or (name withheld and filed
separately with the Securities and Exchange
Commission) for the purpose of the Listing, including
without limitation, its corporate and shareholders
information, financial, business and customers
information and material contracts;
- 64 -
(d) amending and/or restructuring the Group's and/or
(name withheld and filed separately with the
Securities and Exchange Commission) memorandum,
article of association, corporate structure and
business arrangements to comply with the applicable
Listing Rules or otherwise to facilitate the Listing
and/or public issue and/or placing of shares of
(name withheld and filed separately with the
Securities and Exchange Commission) incidental to the
Listing as the sponsor(s) and/or other professional
advisers appointed under sub-clause (a) above may
advise to be necessary or desirable.
The Parties hereby acknowledge that the restructuring
of the Group in preparation for the Listing may
involve inter-company transfer of assets, merger and
acquisition of new intermediary holding vehicle(s).
3.8 Final Approval. Notwithstanding the provisions of
Paragraph 3.7, the arrangements for the offering and the
timing of the Listing application shall be subject to the
prior written approval of each of the Parties.
ARTICLE FOUR
SHAREHOLDER SALES
4.1 Request for Sale. After the expiration of any lock-up
period required by the Listing Rules or agreed with the
Stock Exchange, (name withheld and filed separately with
the Securities and Exchange Commission) shall, at any time
after the Listing, upon written request from either of the
Parties, use its reasonable endeavors to dispose of such
number of shares in (name withheld and filed separately
with the Securities and Exchange Commission) as the
requesting Party may request, provided that:
(a) (name withheld and filed separately with the
Securities and Exchange Commission) shall not dispose
more than five percent (5%) of the issued share
capital of (name withheld and filed separately with
the Securities and Exchange Commission) under any
request at any time;
- 65 -
(b) (name withheld and filed separately with the
Securities and Exchange Commission) shall not made
any disposal if it has disposed of any interest in
shares in (name withheld and filed separately with
the Securities and Exchange Commission) in the ten
(10) weeks immediately preceding the date of the
request;
(c) (name withheld and filed separately with the
Securities and Exchange Commission) shall not dispose
any shares if, immediately following the disposal,
(name withheld and filed separately with the
Securities and Exchange Commission) would cease to
hold at least fifty point one percent (50.1%) of the
issued share capital of (name withheld and filed
separately with the Securities and Exchange
Commission);
(d) (name withheld and filed separately with the
Securities and Exchange Commission) shall not make
any disposal to the extent and at any time where it
is prohibited or restricted by law or applicable
rules and regulations from making such disposal and
shall comply with all applicable laws, rules and
regulations in making such disposal;
(e) (name withheld and filed separately with the
Securities and Exchange Commission) shall dispose of
such shares in the manner set out in Paragraph 4.2
below; and
(f) (name withheld and filed separately with the
Securities and Exchange Commission) shall exercise
its best endeavors to make such disposal in a manner
so as to maintain an orderly market for the shares of
(name withheld and filed separately with the
Securities and Exchange Commission).
4.2 First Offer. Provided that it raises no issues under the
Takeover Code of Hong Kong, (name withheld and filed
separately with the Securities and Exchange Commission)
shall dispose of shares in (name withheld and filed
separately with the Securities and Exchange Commission)
under Paragraph 4.1 above by:
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(a) first offering (the "First Offer") such shares to the
Party which did not request the sale pursuant to
Clause 4.1 above (the "Non-Requesting Party");
(b) the First Offer shall be made to the Non-Requesting
Party at a price equivalent to the average closing
price less five percent (5%) for such shares on the
Stock Exchange on which they are primarily listed for
the ten (10) consecutive trading days ending on the
trading day immediately preceding the date of the
request and on which there was trading in the shares
(the "Sale Price"). Such offer shall remain open for
a minimum of three (3) working days for acceptance
(the "Offer Period") and can be accepted in whole or
in part;
(c) (name withheld and filed separately with the
Securities and Exchange Commission) shall only offer
to sell and make arrangements for the disposal of
such shares to third parties (the "Open Offer") if
and to the extent the Non-Requesting Party does not
accept or reply to the First Offer made in
subparagraph (b) above prior to the expiry of the
Offer Period;
(d) the Open Offer shall be made at a price no less than
the Sale Price; and
(e) the Open Offer shall remain open for a period of
fifteen (15) trading days (the "Open Offer Period").
If (name withheld and filed separately with the
Securities and Exchange Commission) fails to conclude
any definite agreement for the sale or placing of all
or any part of such shares during the Open Offer
Period, the request in the above Paragraph 4.1 and
the Open Offer in respect of all or such part of the
shares, as the case may be, shall both be deemed to
have lapsed.
4.3 Sales Proceeds. The net proceeds arising from the disposal
of shares in (name withheld and filed separately with the
Securities and Exchange Commission) under Paragraphs 4.1
and 4.2 above shall, to the extent distributable under
applicable law, be distributed to the shareholders of
(name withheld and filed separately with the Securities
and Exchange Commission) as dividends as soon as
practicable.
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ARTICLE FIVE
1989-2001 AGREEMENTS SUPERSEDED
Upon being duly signed by both Parties, this Agreement shall
supersede the 1989-2001 Agreements and the 1989-2001 Agreements
shall cease to have legal effect. The Parties hereby waive and
release against each other and forever discharge any claims
arising out of or in connection with the 1989-2001 Agreements.
ARTICLE SIX
GENERAL PROVISIONS
6.1 Term. This Agreement shall be of unlimited duration unless
terminated by mutual agreement. Termination does not
release either Party from liability already accrued.
6.2 Breach. This Agreement may be terminated for breach. In
the event of termination for breach, the non-breaching
Party shall have all rights and remedies available at law.
6.3 Disputes. Any dispute or difference arising out of or in
connection with this Agreement shall be referred to and
determined by arbitration in Hong Kong in accordance with
the UNCITRAL Arbitration Rules in force at the date of
this Agreement. In the event of arbitration, the
appointing authority shall be the Hong Kong International
Arbitration Centre (the "HKIAC"). The place of arbitration
shall be in Hong Kong at the HKIAC. The language to be
used in the arbitral proceedings shall be English. Any
such arbitration shall be administered by HKIAC in
accordance with HKIAC Procedures for Arbitration. The
Parties agree to exclude any right of application or
appeal to any courts in connection with any question of
law arising in the course of the arbitration or with
respect to any award made.
6.4 Entire Agreement; Amendment; Waiver. This Agreement
constitutes the entire agreement between the Parties
pertaining to the subject matter hereof and supersedes all
prior and contemporaneous agreements, representations, and
understandings of the Parties. No supplement,
modification, or amendment of this Agreement shall be
binding unless executed by both Parties in writing. No
waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other
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provisions, whether or not similar, nor shall any waiver
constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the Party making the waiver.
6.5 Assignment. This Agreement may not be assigned or
transferred without the prior written approval of the
other Party and shall be binding on, and shall inure to
the benefit of, the Parties and their respective heirs,
legal representatives, successors, and assigns.
6.6 Assignment. All notices, request, demands, and other
communications under this Agreement shall be in writing,
in English, and shall be deemed to have been duly given to
a Party when received, addressed as below. A Party may
change its address for purposes of this Paragraph by
giving the other Party its written notice of the new
address in the manner set forth above.
To Universal:
Universal Security Instruments, Inc.
7-A Gwynns Mill Court
Owings Mills, Maryland 21117, U.S.A.
Telephone: 1 410 363 3000
Facsimile: 1 410 363 2218
To (name withheld and filed separately with the Securities and
Exchange Commission):
(name withheld and filed separately with the Securities and
Exchange Commission)
6.7 Savings. Should any provision of this Agreement be
judicially declared invalid, unenforceable, or void, in
whole or in part, such decision shall not have the effect
of invalidating or voiding the remainder of this
Agreement, and the Parties agree that the provision of
this Agreement so held to be invalid, unenforceable, or
void shall be deemed to have been stricken herefrom, and
the remainder shall have the same force and effect as if
such provision had never been included herein. With
respect to any provision of this Agreement declared
invalid, unenforceable or void, the Parties agree to
negotiate in good faith for the purpose of replacing such
clause, sentence or paragraph with a provision which is as
near in substance as possible to that declared invalid,
- 69 -
unenforceable or void without itself being so declared.
6.8 Time of the Essence. Time is of the essence with respect
to all matters related to this Agreement.
6.9 Counterparts. This Agreement may be executed by the
Parties in any number of counterparts, each of which when
so executed and delivered shall be an original but all
counterparts together shall constitute one and the same
instrument.
6.10 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of Hong Kong.
6.11 Headings. The titles and headings used in this Agreement
are for the convenience of the Parties only and shall not
be used in interpreting or construing this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly entered into by
the Parties the day and year first above written.
Universal Security Instruments, Inc. (name withheld and filed
separately with the
Securities and Exchange
Commission)
By: /s/ Stephen Knepper By: /s/
Stephen Knepper (name withheld and filed
Chairman and Chief Executive Officer separately with the
Securities and Exchange
Commission)
Director
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EXHIBIT 10.8
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Agreement") is made and entered into as of April 1, 2003, by
and between UNIVERSAL SECURITY INSTRUMENTS, INC., a Maryland
corporation (the "Company"), and HARVEY B. GROSSBLATT (the
"Executive").
RECITALS
WHEREAS, the Company is engaged in the business of
designing, manufacturing and marketing security products (the
"Business"); and
WHEREAS, the Executive is the President of the Company; and
WHEREAS, the Company desires to continue to employ the
Executive to perform services as the President and Chief
Operating Officer of the Company, and to perform other duties
which may be assigned from time to time by the Board of
Directors of the Company (the "Board") or the Chairman of the
Board of the Company (the "Chairman") from time to time at its
discretion;
WHEREAS, the Company and Executive entered into an
Employment Agreement dated as of April 1, 2002, as amended by
Addendum to Employment Agreement dated October 21, 2002 (the
"Original Agreement");
WHEREAS, the parties desire to extend the term of the
Original Agreement, amend certain other provisions of the
Original Agreement to be effective from and after April 1, 2003,
and in furtherance thereof, the parties have agreed to amend and
restate the Original Agreement.
NOW, THEREFORE, in consideration of the foregoing, the
mutual promises herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree that the Original
Agreement is hereby amended and restated in its entirety as
follows:
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1. Employment.
(a) Agreement to Employ. Upon the terms and
subject to the conditions of this Agreement, the Company shall
hereby employ the Executive and the Executive hereby agrees to be
employed by Company.
(b) Term of Employment. Subject to Section 7, the
Company shall employ the Executive pursuant to the terms hereof
for the period commencing as of the date hereof and ending on
July 31, 2008 (the "Term"). The period during which the Executive
is employed pursuant to this Agreement, including any renewal
thereof shall be referred to as the "Employment Period."
2. Position and Duties. During the Employment Period,
the Executive shall serve as, and have responsibilities and
authority consistent with the position of, President and Chief
Operating Officer of the Company, which shall be subject to the
discretion of the Board. The Executive shall diligently and
conscientiously devote his full and exclusive business time and
attention and best efforts in discharging his duties. The
Company shall provide appropriate office space and services to
allow the Executive to discharge his duties, consistent with
policies established by the Board from time to time.
3. Compensation.
(a) Salary. The Company shall initially pay the
Executive an annual base salary ("Annual Base Salary") of
$180,000. The Annual Base Salary during any year of the
Employment Period shall be an amount determined by the Board.
The Annual Base Salary shall be subject to periodic review at
least annually by the Board or by a committee established by the
Board for increases based on the policies of the Company in
effect from time to time. There shall be an annual increase in
the Annual Base Salary, effective as of each anniversary date of
this Agreement, equal to any increase, up to 4%, in the Consumer
Price Index for the Greater Baltimore Area (as determined by the
U.S. Bureau of Labor Statistics) for the immediately preceding
four calendar quarters (the "COL Adjustment"). Once established,
the Annual Base Salary shall not be reduced without the prior
written consent of the Executive. The Annual Base Salary shall
be payable according to the Company's regular payroll practices
and shall be subject to all applicable federal, state and local
withholding taxes.
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(b) Bonus.
(i) In addition to the Annual Base Salary,
the Executive shall receive an annual bonus equal to the amount
determined pursuant to Exhibit A attached hereto and incorporated
herein by reference ("Bonus"), which shall be paid by the Company
within 30 days following the filing with the United States
Securities and Exchange Commission of the Company's Annual Report
on Form 10-K for the fiscal year with respect to which the Bonus
is earned. The Bonus shall be deemed fully earned by the
Executive with respect to any fiscal year of the Company during
which the Executive has been employed by the Company for at least
nine months. The Bonus shall be subject to all applicable
federal, state and local withholding taxes.
(ii) To the extent the Company reports
income from both its domestic operations (currently shown
on the Company's annual consolidated statements of
operations as "Operating income") and Hong Kong Joint Venture
(currently shown on the Company's annual consolidated
statements of operations as "Equity in earnings of Hong Kong
joint venture"), the Bonus expense shall be allocated between
such two components in the respective proportions as such
components bear to the consolidated Net Income (currently shown
on the Company's annual audited consolidated statements of
operations).
(c) Stock Options. In addition to the Annual Base
Salary and any Bonus, the Executive shall be eligible to
receive grants of options to acquire shares of the Company's
Common Stock, as may be granted from time to time by the Board or
a committee thereof. The parties acknowledge that on the
effective date of the Original Agreement, the Board granted to
the Executive options to purchase 20,000 shares of the Company's
Common Stock, at an exercise price of $4.50 per share,
exercisable immediately, pursuant to the Company's Non-Qualified
Stock Option Plan.
4. Benefits. During the Employment Period, the Company
shall provide the Executive with the following benefits:
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(a) Participation by the Executive, and his wife
and dependant children in any group health plans sponsored or
arranged by the Company for its employees. The full amount
of all premiums for such insurance will be paid by the Company.
In the event the Executive declines or is ineligible to
participate in such group health plans, the Company shall pay to
the Executive, no less frequently than quarterly, additional
compensation equal to the amount of such premiums which the
Company would have paid for such period had the Executive
accepted such participation for himself, his wife and dependant
children. Nothing herein shall obligate the Company to continue
any health plan currently offered to employees or offered to
employees in the future. The Executive agrees to cooperate with
the Company and to take all steps reasonably necessary to assist
the Company in obtaining such insurance. The Executive
represents that he currently has no significant health condition
which would make it commercially unreasonable to obtain such
insurance.
(b) Participation in any retirement plans, disability
income insurance and term life insurance policies sponsored or
arranged by the Company for its employees from time to time.
Nothing herein shall obligate the Company to continue any plan or
policy currently offered to employees or offered to employees in
the future.
(c) For each calendar year during the Term, the
Company shall contribute the maximum amount permitted by
applicable law on behalf of the Executive to the Company's 401(k)
Plan. The Executive shall be entitled to the full amount of this
benefit with respect to any calendar year during which the
Executive has been employed by the Company for at least 60 days.
(d) Three weeks per year of paid vacation time
plus sick leave and personal leave in accordance with the
Company's policies for senior executive officers. The Executive
shall be entitled to the full amount of this benefit with respect
to any fiscal year of the Company during which the Executive has
been employed by the Company for 60 days.
(e) Use of a Company owned or leased automobile
or, at the Executive's option, an automobile payment allowance of
$800 per month. In addition, the Company shall pay for the
insurance, fuel and service for such automobile.
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(f) All costs and expenses of a mobile phone for
the Executive's use in connection with the performance of his
duties, in accordance with the terms and conditions that the
Board shall determine from time to time.
(g) In addition to the benefit provided under
Section 4(a), reimbursement up to a maximum of $25,000 per annum
for expenses incurred by the Executive, his wife and dependant
children for medical, dental, optical and long-term care and
prescription drugs, or third-party payor coverage therefor, which
are not reimbursable under any medical coverage for which the
premiums are paid by the Company. This amount shall be increased
annually by an amount equal to the then-current medical expense
reimbursement benefit multiplied by the COL Adjustment. All
requests by the Executive for such reimbursement must be in
writing accompanied by receipts for such amounts.
(h) Participation in the Company's Cafeteria
Plan/Flexible Spending Plan.
(i) Any other group employee benefit plans or
programs to the extent that he is qualified under the
requirements relating to participation in any such plan or
program.
5. Business Expenses. The Company shall pay or reimburse
the Executive for business expenses incurred by the Executive
during the Employment Period in connection with his employment.
6. Termination of Employment. Executive's employment
will be terminated in accordance with Sections 6(a), or may be
terminated in accordance with Sections 6(b) - (e), as follows:
(a) Upon the last day of a Term.
(b) By the Company for "Cause". For the purpose
of this Section, "Cause" shall mean a determination by a court of
competent jurisdiction that:
(i) The Executive committed a willful act
against the interest of the Company resulting in material harm to
the Company's interests; or
- 75 -
(ii) The Executive committed a material act
of dishonesty or fraud against the Company, unless it is
determined by such court that the Executive acted in a manner
which he believed, in good faith, to be in the interest of
the Company.
(c) By the Executive after 15-days written notice
to the Company of the Company's material breach of this Agreement
unless the Company cures such breach during such notice period.
If the Executive terminates employment hereunder, the Executive's
employment shall be deemed to have been terminated by the Company
without Cause.
(d) Upon the death of the Executive, or by the
Company if the Executive is Permanently Disabled (as hereafter
defined). For purposes of this Agreement, the term "Permanently
Disabled" or "Permanent Disability" shall mean (i) becoming
permanently disabled as provided in any permanent disability
income policy provided by the Company under this Agreement
insuring the Executive or (ii) in the absence of any such
disability income policy, the inability for a period of six
consecutive months, with reasonable accommodation, due to a
mental or physical injury, illness or disorder, of Executive to
provide substantially all of the services required pursuant to
this Agreement to be provided by Executive. Whether or not
Executive is Permanently Disabled under subsection (ii) shall
be determined by a medical doctor agreed to by Company and
Executive. If Company and the Executive cannot agree on such
a medical doctor, they shall each, at their own expense,
designate an unrelated medical doctor and such medical doctors
shall in turn designate a third unrelated medical doctor, whose
fee shall be shared equally by Company and Executive. Such
medical doctor(s) shall determine whether Executive is
Permanently Disabled and shall also determine the date of the
commencement and termination, if any, of such Permanent
Disability. Such determinations (whether made by unanimous or
majority vote of the medical doctors) shall be binding on the
parties hereto. If any party (the "Second Party") fails to
select its medical doctor within 30 days after written notice
from the other party (the "First Party") of the appointment of
the First Party's medical doctor, then the First Party's medical
doctor shall determine whether Executive is Permanently Disabled
and shall also determine the date of the commencement and
termination, if any, of such Permanent Disability.
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(e) By the Executive on 30 days advance written
notice at any time within 24 months following a "Change of
Control", as defined in Exhibit B attached hereto and
incorporated herein by reference (a "Change of Control").
7. Effect of Termination.
(a) In the event that Executive's employment is
terminated for any reason, Executive shall be paid on the payroll
date next following the date of termination, all compensation,
and reimbursement of all expenses, for the applicable Term
accruing through the effective date of termination of employment.
(b) In the event of the termination of the
Executive's employment hereunder pursuant to Section 6(c), the
Executive shall be entitled to receive in addition to the payment
under Section 7(a):
(i) A lump sum severance payment in an
amount equal to the Annual Base Salary for the balance of the
Term plus the amount of the last Bonus, payable concurrently with
the delivery by the Company to the Executive of the written
notice of termination, and, on the date on which the Term
would have expired, a lump sum severance payment in an amount
equal to two times the previous 12 months' Annual Base Salary and
last Bonus, in each instance subject to all applicable federal,
state and local withholding taxes; and
(ii) For the balance of the Term and a
period of three years following the end of the Term, the benefits
set forth in Sections 4(a) and 4(g).
(c) In the event the Executive's employment is
terminated by the Company or its successor following or in
anticipation of a Change of Control, or in the event the
Executive's employment is terminated by the Executive pursuant to
Section 6(e) above, the Executive shall be entitled to receive in
addition to the payment under Section 7(a):
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(i) A lump sum severance payment in an
amount equal to (A) the Annual Base Salary for the balance of the
Term, (B) the amount of the last Bonus, and (C) three times the
previous 12 months' Annual Base Salary and last Bonus, payable
concurrently with the delivery by the Company or its successor to
the Executive of the written notice of termination or within 30
days following termination by the Executive, as the case may be,
subject to all applicable federal, state and local withholding
taxes; and
(ii) For a period of three years following
the end of the Term of this Agreement, the benefits set forth in
Sections 4(a) and 4(g); provided, however, the aggregate present
value of payments pursuant to this Section 7(c) (plus any
payments under any other plan of the Company and its
affiliates which are contingent on a change of control),
determined in accordance with Section 280G of the Internal
Revenue Code of 1986, as amended, or any corresponding provision
of any succeeding law, may not exceed 2.99 times the Executive's
average annual taxable compensation from the Company or its
affiliates which is included in the Executive's gross income for
the five taxable years of the Company ending before the date on
which the change of control occurs.
(d) In the event the Executive's employment is
terminated pursuant to Section 6(d), the Executive (or his
estate) shall be entitled to receive in addition to the payment
under Section 7(a):
(i) The continuation of the payment of the
Executive's then current Annual Base Salary for the balance of
the Term, reduced, in the event of the Executive's death, by any
individual life insurance benefits the premiums for which are
paid for by the Company, and in the event of the Executive's
Permanent Disability, by any group or individual disability
income insurance benefits the premiums for which are paid for by
the Company and Social Security disability benefits paid to the
Executive. The net amount payable hereunder shall be paid
according to the Company's regular payroll practices, subject to
all applicable federal, state and local withholding taxes; and
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(ii) The continuation of the benefits set
forth in Sections 4(a) and 4(g) for the longer of (A) the balance
of the Term, or (B) three years following the date of the
Executive's death or Permanent Disability; provided, however,
that if the terms of the group health plans sponsored or arranged
by the Company for its employees limit the length of time during
which the benefit set forth in Section 4(a) may be provided, the
Company shall pay to the Executive (or his estate) with respect
to any period during which such benefit may not be provided, no
less frequently than quarterly, a sum equal to the amount of the
premiums which the Company would have paid for such period had
the benefit set forth in Section 4(a) continued.
8. Company Obligations. The amounts payable to the
Executive pursuant to Section 7 following termination of his
employment shall be in addition to any rights the Executive may
have with respect to previously granted stock options and any
rights the Executive may have arising from claims of breaches by
the Company of the terms of this Agreement.
9. Restrictive Covenants.
(a) Noncompetition. During the Employment Period
and any additional period during which the Executive receives
compensation from the Company pursuant to Section 7, the
Executive will not directly or indirectly, either as principal,
agent, employee, or in any other capacity, enter into or engage
in any business in which the Company is engaged during the Term
hereof.
(b) CONFIDENTIALITY. DURING THE EMPLOYMENT PERIOD
AND AT ALL TIMES AFTER THE TERMINATION OF THIS AGREEMENT FOR ANY
REASON, THE EXECUTIVE WILL NOT DISCLOSE TO ANY THIRD PARTY ANY
TRADE SECRETS, CUSTOMER LISTS OR OTHER CONFIDENTIAL INFORMATION
PERTAINING TO THE BUSINESS.
(c) Company Property. Promptly following the
Executive's termination of employment for any reason, the
Executive shall return to the Company all property of such
entity, and originals and any copies thereof in the Executive's
possession or under his control, including all confidential
information and trade secrets, in whatever media or in whatever
form.
- 79 -
(d) Nonsolicitation of Employees. During the
Employment Period and any additional period during which the
Executive receives compensation from the Company pursuant to
Section 7, the Executive shall not directly or indirectly induce
any management or supervisor-level employee of the Company or any
of its affiliates to terminate employment with such entity, and
will not directly or indirectly, either individually or as owner,
agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or
a subsidiary thereof as a management or supervisor-level employee
unless such person shall have ceased to be employed by such
entity for a period of at least three months.
(e) INJUNCTIVE RELIEF WITH RESPECT TO COVENANTS.
THE EXECUTIVE ACKNOWLEDGES AND AGREES THAT THE COVENANTS AND
OBLIGATIONS OF THE EXECUTIVE WITH RESPECT TO NONCOMPETITION,
NONSOLICITATION, CONFIDENTIALITY AND COMPANY PROPERTY RELATE TO
SPECIAL, UNIQUE AND EXTRAORDINARY MATTERS AND THAT A VIOLATION OF
ANY OF THE TERMS OF SUCH COVENANTS AND OBLIGATIONS WILL CAUSE THE
COMPANY AND ITS SUBSIDIARIES IRREPARABLE INJURY FOR WHICH
ADEQUATE REMEDIES ARE NOT AVAILABLE AT LAW. THEREFORE, THE
EXECUTIVE AGREES THAT THE COMPANY AND ITS SUBSIDIARIES SHALL BE
ENTITLED TO AN INJUNCTION, RESTRAINING ORDER OR SUCH OTHER
EQUITABLE RELIEF AS A COURT OF COMPETENT JURISDICTION MAY DEEM
NECESSARY OR APPROPRIATE TO RESTRAIN THE EXECUTIVE FROM
COMMITTING ANY VIOLATION OF THE COVENANTS AND OBLIGATIONS
CONTAINED IN THIS SECTION. THESE INJUNCTIVE REMEDIES ARE
CUMULATIVE AND ARE IN ADDITION TO ANY OTHER RIGHTS AND REMEDIES
THE COMPANY OR ITS SUBSIDIARIES MAY HAVE AT LAW OR IN EQUITY. IN
THE EVENT (I) THE ENFORCEABILITY OF ANY OF THE COVENANTS
CONTAINED IN THIS SECTION IS CHALLENGED BY EXECUTIVE IN ANY
JUDICIAL PROCEEDING, (II) EXECUTIVE IS NOT ENJOINED IN SUCH
PROCEEDING FROM BREACHING SUCH COVENANT, AND (III) EXECUTIVE
DOES, IN FACT BREACH SUCH COVENANT, THEN, IF A COURT OF COMPETENT
JURISDICTION DETERMINES THAT THE CHALLENGED COVENANT IS
ENFORCEABLE, THE TIME PERIOD SET FORTH IN SUCH COVENANT SHALL BE
DEEMED TOLLED UPON THE INITIATION OF SUCH PROCEEDING UNTIL THE
DISPUTE IS FINALLY RESOLVED AND ALL PERIODS OF APPEAL HAVE
EXPIRED.
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10. Miscellaneous.
(a) Binding Effect. This Agreement shall be
binding on the Company and any person or entity which succeeds to
the interest of the Company (regardless of whether such
succession occurs by operation of law, by reason of the sale of
all or a portion of the Company's stock or assets or a merger,
consolidation or reorganization involving the Company). This
Agreement shall also inure to the benefit of the Executive's
heirs, executors, administrators and legal representatives.
(b) Assignment. Neither this Agreement nor any of
the rights or obligations hereunder shall be assigned or
delegated by either party hereto without the prior written
consent of the other party.
(c) Entire Agreement. This Agreement supersedes
any and all prior agreements between the parties hereto, and
constitutes the entire agreement between the parties hereto with
respect to the matters referred to herein, and no other
agreement, oral or otherwise, shall be binding between the
parties unless it is in writing and signed by the party against
whom enforcement is sought. There are no promises,
representations, inducements or statements between the parties
other than those that are expressly contained herein. THE
EXECUTIVE ACKNOWLEDGES THAT HE IS ENTERING INTO THIS AGREEMENT OF
HIS OWN FREE WILL AND ACCORD, AND WITH NO DURESS, THAT HE HAS
READ THIS AGREEMENT AND THAT HE UNDERSTANDS IT AND ITS LEGAL
CONSEQUENCES. No parol or other evidence may be admitted to
alter, modify or construe this Agreement, which may be changed
only by a writing signed by the parties hereto.
(d) Severability; Reformation. In the event that
one or more of the provisions of this Agreement shall become
invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained
herein shall not be affected thereby. In the event any of Section
9(a), (b), (c), (d) or (e) is not enforceable in accordance with
its terms, the Executive and the Company agree that such Section,
or such portion of such Section, shall be reformed to make it
enforceable in a manner which provides the Company the maximum
rights permitted under applicable law.
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(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.
(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.
- 82 -
(j) Withholding. Any payments provided for herein
shall be reduced by any amounts required to be withheld by the
Company from time to time under applicable federal, state or
local income or employment tax laws or similar statutes or other
provisions of law then in effect.
(k) Governing Law. This Agreement shall be
governed by the laws of the State of Maryland, without reference
to principles of conflicts or choice of law under which the law
of any other jurisdiction would apply.
(l) Context. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the
singular, to the singular include the plural, to the part include
the whole, and to the male gender shall also pertain to the
female and neuter genders and vice versa. The term "including"
is not limiting, and the term "or" has the inclusive meaning
represented by the phrase "and/or". The words "hereof,"
"herein," "hereby", "hereto", "hereunder" and similar terms in
this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement. Section and Exhibit and
clause references are to this Agreement unless otherwise
specified.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officer and the Executive has
hereunto set his hand as of the day and year first above written.
WITNESS: THE COMPANY:
UNIVERSAL SECURITY INSTRUMENTS, INC.
_________________________ By: /s/ Stephen Knepper
Stephen Knepper
Chairman of the Board
THE EXECUTIVE:
_________________________ /s/ Harvey B. Grossblatt
Harvey B. Grossblatt
- 83 -
EXHIBIT A
BONUS FORMULA
For purposes of the Bonus calculation, the Company's
"Pre-Tax Net Income" with respect to any fiscal year means the
amount of net income before income taxes and before Bonus
calculation which will be reported by the Company in its annual
audited consolidated financial statements with respect to such
fiscal year.
With respect to any fiscal year of the Company in which the
Company has achieved Pre-Tax Net Income, the amount of Pre-Tax
Net Income equal to 8% of shareholders' equity as of the start of
the fiscal year shall be excluded from the Bonus calculation (the
"Bonus Threshold"). Thereafter, the Executive shall be entitled
to receive as a Bonus an amount equal to the aggregate of the
percentages of such Pre-Tax Net Income in excess of the Bonus
Threshold, as specified below:
On Pre-Tax Net Income up to and including $1 million 3%
On all portions of Pre-Tax Net Income from over
$1 million up to and including $2 million 4%
On all portions of Pre-Tax Net Income from over
$2 million up to and including $3 million 5%
On all portions of Pre-Tax Net Income from over
$3 million up to and including $4 million 6%
On all portions of Pre-Tax Net Income over $4 million 7%
- 84 -
EXHIBIT B
CHANGE OF CONTROL
For the purposes of this Agreement, a "Change of Control"
means the occurrence of any one or more of the following events,
provided that the Chief Executive Officer of the Company as of
the date of this Agreement either exercises his/her rights under
a Change of Control pursuant to his/her employment agreement with
the Company, or consents to the exercise by the Executive:
(i) The acquisition or attainment of "beneficial
ownership" by a person or entity, including any "group", as such
terms are defined under Section 13(d) of the Securities Exchange
Act of 1934, including any of the equity owners of the Company as
of the date hereof, of 50% or more (on a primary and not a fully
diluted basis) of the outstanding common equity of the Company. *
(ii) The sale or other disposition of all or
substantially all of the assets of the Company in one transaction
or a series of transactions (other than financing arrangements),
unless approved by the Board.
(iii) A merger, consolidation or share exchange
involving the Company and any other person or entity, including
any of the equity owners as of the date hereof, in which the
Company or one of its subsidiaries is not the surviving entity,
unless approved by the Board.
(iv) Any other "business combination" (as defined
in Section 3-601(e) of the Maryland General Corporation Law)
involving the Company and any person or entity, including any of
the equity owners as of the date hereof, whether or not such
person or entity is an "interested stockholder" under that
statute, unless approved by the Board.
(v) The deadlock of the Board with respect to the
management of the Company's affairs that a majority vote for
action by the Board cannot be obtained either within a reasonable
time or, if shorter, for two consecutive Board meetings.
- 85 -
(vi) The filing by the Company or any other party
with the Securities and Exchange Commission ("SEC") of proxy
materials with respect to the election to the Board of
individuals other than those nominated by the Board and who, if
elected would constitute, together with other directors serving
on the Board who were not nominated by the Board, a majority of
the Board.
(vii) The filing by any party or group (other than
the Executive or a group which includes the Executive) with the
SEC of information disclosing the plan or proposal of such party
or group to accomplish any of the following:
1. The acquisition by such party or group of
additional securities of the Company
which, if accomplished, would result in
the occurrence of the event(s) specified
in paragraphs (i) or (ii), above;
2. An extraordinary corporate transaction,
such as a merger, reorganization or
liquidation, involving the Company or any
of its subsidiaries;
3. A sale or transfer of a material amount of
assets of the Company or any of its
subsidiaries (other than financing
arrangements);
4. Any change in the present Board or
management of the Company, including any
plans or proposals to change the number or
term of directors or to fill any existing
vacancies on the Board;
5. Changes in the Company's charter, bylaws
or instruments corresponding thereto or
other actions which may impede or advance
the acquisition of control of the Company
by any person;
- 86 -
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.
- 87 -
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration
Statement of Universal Security Instruments, Inc. and
subsidiaries on Form S-8 (No. 333-81930 dated February 1, 2002)
pertaining to the Non-Qualified Stock Option Plan as Amended,
Registration Statements on Form S-8 (No. 2-83323 dated May 4,
1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April
13, 1988) pertaining to the Non-Qualified Stock Option Plan and
in the Registration Statement on Form S-8 (No. 33-21225 dated
April 13, 1988) pertaining to the 1988 Employee Stock Purchase
Plan, of our report dated June 13, 2003, included in the Annual
Report of Universal Security Instruments, Inc. and subsidiaries
on Form 10-K for the year ended March 31, 2003 filed with the
Securities and Exchange Commission.
GRANT THORNTON LLP
Baltimore, Maryland
June 13, 2003
- 88 -
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-81930 dated February 1, 2002)
pertaining to the Non-Qualified Stock Option Plan as Amended,
Registration Statements on Form S-8 (No. 2-83323 dated May 4,
1983, No. 33-6953 dated July 2, 1986, No. 33-21226 dated April
13, 1988) pertaining to the Non-Qualified Stock Option Plan and
in the Registration Statement on Form S-8 (No. 33-21225 dated
April 13, 1988) pertaining to the 1988 Employee Stock Purchase
Plan of our report dated May 9, 2003 with respect to the
consolidated financial statements of The Joint Venture (Name
withheld and filed separately with the Securities and Exchange
Commission), included in the Annual Report (Form 10-K) of
Universal Security Instruments, Inc. for the year ended March 31,
2003, filed with the Securities and Exchange Commission.
ERNST & YOUNG
Hong Kong
June 23, 2003
- 89 -
EXHIBIT 99.1
RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Stephen C. Knepper, certify that:
1. I have reviewed this Annual Report on Form 10-K of
Universal Security Instruments. Inc.;
2. Based on my knowledge, this Annual Report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and
other financial information included in this Annual Report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of, and
for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this Annual report is being prepared;
b) evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this Annual Report (the
"Evaluation Date"); and
c) presented in this Annual Report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
- 90 -
5. The Registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have
indicated in this Annual Report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: June 26, 2003 /s/ Stephen C. Knepper
Stephen C. Knepper
Chief Executive Officer
- 91 -
EXHIBIT 99.2
RULE 15d-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Harvey Grossblatt, certify that:
1. I have reviewed this Annual Report on Form 10-K of
Universal Security Instruments. Inc.;
2. Based on my knowledge, this Annual Report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and
other financial information included in this Annual Report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of, and
for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this Annual report is being prepared;
b) evaluated the effectiveness of the Registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this Annual Report (the
"Evaluation Date"); and
c) presented in this Annual Report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
- 92 -
5. The Registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have
indicated in this Annual Report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: June 26, 2003 /s/ Harvey Grossblatt
Harvey Grossblatt
Chief Financial Officer
- 93 -
Exhibit 99.3
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Universal Security
Instruments, Inc. (the "Company") on Form 10-K for the period
ending March 31, 2003 as filed with the Securities and Exchange
Commission and to which this Certification is an exhibit (the
"Report"), the undersigned hereby certify, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in this Form 10-K fairly
presents, in all material respects, the financial
condition and result of the Company as of, and for,
the periods reflected therein.
Date: June 26, 2003 /s/ Stephen C. Knepper
Stephen C. Knepper
Chairman,
Chief Executive Officer
/s/ Harvey B. Grossblatt
Harvey B. Grossblatt
President,
Chief Financial Officer
- 94 -
EXHIBIT 99.4
June 26, 2003
Dear Partners/Shareholders:
I am very pleased to have an opportunity to share with you our
results for the fourth quarter and fiscal year ended March 31,
2003. The first full fiscal year under our new leadership team
has been one of important operational progress and top and
bottom-line success.
While many factors have contributed to our growth of the past
year, overall we must credit a Company-wide commitment to strong
execution of our strategic plan. In late 2001, we were determined
to return to our roots as an aggressive, innovative Company that
puts the customer first. We focused on building market share
across the board, developing new products and becoming more
service-driven and efficient.
Our financial performance reflects the results of this focus. For
the quarter, sales rose 48% to $3,859,238 versus $2,606,831 a
year ago while earnings increased to $519,883 or $0.46 per basic
share, ($.42 per diluted share), versus last year's $139,290, or
$0.14 per basic share ($0.13 per diluted share). As the fourth
quarter is typically our softest, we are very encouraged by these
results and our momentum heading into the first quarter.
For our fiscal year, earnings were $2,400,318, or $2.23 per basic
share, ($2.05 per diluted share), the highest in your Company's
history, versus last year's $261,625, or $0.28 per basic share
and diluted share, and a sales increase for the 12 months of 52%
to $15,953,883 versus $10,480,829 for the same period a year ago.
I cannot point to just one operational area as the reason for our
progress this year. We have seen domestic market share growth in
our wholesale and electrical distribution business. Our
50-percent-owned Hong Kong joint venture continues to provide us
with outstanding manufacturing in a highly efficient manner. Our
joint venture is also performing well in expanding sales in
international markets and continues to explore new markets.
In addition, new products such as our smoke alarms with
side-loading battery drawer and carbon monoxide alarms have been
introduced to our marketplace. We expect to continue to introduce
other new products this year.
- 95 -
Looking back over the past four quarters, our story has been
remarkably consistent despite an unpredictable economy. While our
progress has been good, be assured we will continue to focus on
building our business and generating shareholder value for the
long term. Universal has worked hard over the past year and is
well positioned to take advantage of the opportunities we see in
the market.
As always, should you have any questions, please don't hesitate
to contact me. Thank you for your continued support.
Respectfully,
Stephen C. Knepper
Chairman
_________________________________________________________________
Statements contained in this document that are not historical
facts are forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Although
UNIVERSAL SECURITY INSTRUMENTS, INC. believes that the
expectations reflected in such forward-looking statements are
reasonable, the forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ
materially from those projections.
- 96 -
EXHIBIT 99.4
For Immediate Release
Contact: Harvey Grossblatt, President
Universal Security Instruments, Inc.
410-363-3000, Ext. 224
or
Don Hunt, Jeff Lambert
Lambert, Edwards & Associates, Inc.
616-233-0500
Universal Security Instruments Announces Sharply Higher
Sales & Earnings For Fourth Quarter and Fiscal Year
Annual Sales Increase 52%; Earnings Per Share Rise to
$2.23 Vs. $0.28
OWINGS MILLS, MD, June 26, 2003: Universal Security Instruments,
Inc. (OTC-BB: USEC) today announced significant sales and
earnings growth for the fourth quarter and fiscal year ended
March 31, 2003. The Company cited continued market share
expansion, successful new product launches and solid growth at
its Hong Kong joint venture.
The Owings Mills, MD-based designer and marketer of safety and
security equipment reported fourth quarter net earnings rose to
$519,883, or $0.46 per basic share ($0.42 per diluted share), and
sales rose 48% to $3,859,238, compared with net earnings of
$139,290, or $0.14 per basic share (0.13 per diluted share), and
sales of $2,606,831 for last year's fourth quarter.
For the 12 months ended March 31, 2003 sales rose 52% to
$15,953,883, versus $10,480,829 for the same period last year.
The Company reported net earnings rose to $2,400,318, or $2.23
per basic share ($2.05 per diluted share), compared to net
earnings of $261,625, or $0.28 per basic and diluted share, for
the same period last year.
The Company said the annual results, the best in Universal's
33-year history, reflect consistent performance, efficiency and
growth in all areas of the Company's business. The Company's
50-percent-owned Hong Kong manufacturing joint venture continues
to focus on outstanding quality and efficiency and has expanded
sales in international markets as it continues to explore new
opportunities. In addition, the Company's wholesale and
electrical distribution businesses have increased their domestic
market share.
- 97 -
"We are very pleased with our results for the fourth quarter and
fiscal 2003. As the fourth quarter is traditionally one of the
softest periods for our industry, it was highly rewarding to
close our year on such a positive note. We have aggressively
gained market share across the board, introduced new products and
kept costs in check," said Harvey Grossblatt, President and Chief
Operating Officer of Universal Security Instruments, Inc.
"Looking back over the past 12 months, it is clear that the plan
we began implementing in late 2001 to improve all levels of our
operation has taken hold. While aggressively pursuing the many
opportunities present in our markets today, we have not lost our
focus on remaining efficient, service-oriented and
quality-driven. Gross margins rose 16% from 27% to 31% during the
past year, sales per employee are up and customer retention and
satisfaction are strong. We are very enthusiastic about the work
that's been done this year and believe we are well-positioned
heading into 2004," Grossblatt added.
UNIVERSAL SECURITY INSTRUMENTS, INC., founded in 1969, is a
Maryland-based manufacturer and worldwide marketer of safety and
security products directly and through its 50%-owned Hong Kong
joint venture.
-- more --
- 98 -
Universal/Page 2
UNIVERSAL SECURITY INSTRUMENTS, INC.
ANNOUNCES RESULTS FOR THE
FOURTH QUARTER ENDED MARCH 31:
UNAUDITED
2003 2002
Sales $3,859,238 $2,606,831
Net income* 519,883 139,290
Income per share:
Basic .46 .14
Diluted .42 .13
Weighted average number of
common shares outstanding:
Basic 1,121,191 999,562
Diluted 1,248,880 1,055,769
RESULTS FOR THE FISCAL YEAR ENDED MARCH 31:
AUDITED
2003 2002
Sales $15,953,883 $10,480,829
Net income* 2,400,318 261,625
Income per share:
Basic 2.23 .28
Diluted 2.05 .28
Weighted average number of
common shares outstanding:
Basic 1,075,079 938,624
Diluted 1,171,309 945,770
*Due to the tax benefit carryforward of prior years' operating
losses, no tax liability was incurred.
OTC:USEC
- 99 -
Statements contained in this press release that are not
historical facts are forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995.
Although UNIVERSAL SECURITY INSTRUMENTS, INC. believes that the
expectations reflected in such forward-looking statements are
reasonable; the forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ
materially from those projections.
- 100 -
Audited Financial Statements
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
31 March 2003
- 101 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONTENTS
Pages
REPORT OF INDEPENDENT AUDITORS 103
AUDITED FINANCIAL STATEMENTS
Consolidated profit and loss account 104
Consolidated balance sheet 105
Consolidated statement of changes in equity 106
Consolidated cash flow statement 107-109
Notes to consolidated financial statements 110-127
- 102 -
Report of Independent Auditors
To the board of directors
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of
(name withheld and filed separately with the Securities and
Exchange Commission) (the "Company") and its subsidiaries as of
31 March 2003 and 2002, and the related consolidated profit and
loss accounts, consolidated statements of changes in equity and
cash flows for each of the two years in the period ended 31 March
2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of 31
March 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the two years in the
period ended 31 March 2003 in conformity with accounting
principles generally accepted in Hong Kong.
Accounting principles generally accepted in Hong Kong vary in
certain significant respects from accounting principles generally
accepted in the United States of America. Application of
generally accepted accounting principles in the United States of
America would not have had a significant effect on the
consolidated results of operations of the Company and its
subsidiaries for each of the two years ended 31 March 2003 and
the financial position of the Company and its subsidiaries as of
31 March 2003 and 2002.
Ernst & Young
Hong Kong
9 May 2003
- 103 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
TURNOVER 4 182,256,085 88,449,887
Cost of sales (120,864,232) (59,632,260)
Gross profit 61,391,853 28,817,627
Other revenue 4 1,221,670 1,345,281
Administrative and
operating expenses ( 21,819,089) (11,864,956)
PROFIT FROM OPERATING ACTIVITIES 5 40,794,434 18,297,952
Finance costs 6 ( 355,013) ( 145,454)
PROFIT BEFORE TAX 40,439,421 18,152,498
Tax 7 ( 3,344,724) 1,036,461
NET PROFIT FOR THE YEAR 37,094,697 19,188,959
INTERIM DIVIDENDS 8 19,955,322 10,383,672
- 104 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED BALANCE SHEET
31 March 2003
Notes 2003 2002
HK$ HK$
ASSETS
Non-current assets:
Fixed assets 9 19,506,034 16,414,287
Long term investment 10 - -
19,506,034 16,414,287
Current assets:
Due from a shareholder 1 4,204,766 2,208,332
Inventories 11 15,122,141 12,768,297
Trade receivables 3,982,562 1,698,965
Prepayments, deposits and
other receivables 881,514 371,644
Pledged time deposit 12 - 1,676,441
Cash and cash equivalents 13 40,893,730 26,994,967
65,084,713 45,718,646
TOTAL ASSETS 84,590,747 62,132,933
EQUITY AND LIABILITIES
Current liabilities:
Due to a related Company 1 3,435,335 900,000
Tax payable 2,366,798 1,379,000
Other payables and accruals 2,387,135 1,447,572
Trade payables 13,347,999 12,188,556
21,537,267 15,915,128
Non-current liabilities:
Loans from shareholders 14 2,868,954 2,868,954
Deferred tax 15 30,000 333,700
2,898,954 3,202,654
TOTAL LIABILITIES 24,436,221 19,117,782
Capital and reserve:
Issued capital 16 200 200
Retained profits 60,154,326 43,014,951
60,154,526 43,015,151
TOTAL EQUITY AND LIABILITIES 84,590,747 62,132,933
- 105 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 March 2003
Issued Retained
capital profits Total
HK$ HK$ HK$
At 1 April 2001 200 34,209,664 34,209,864
Net profit for the year - 19,188,959 19,188,959
Interim dividends - (10,383,672) (10,383,672)
At 31 March 2002 and
1 April 2002 200 43,014,951 43,015,151
Net profit for the year - 37,094,697 37,094,697
Interim dividends - (19,955,322) (19,955,322)
At 31 March 2003 200 60,154,326 60,154,526
- 106 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit before tax 40,439,421 18,152,498
Adjustments for:
Finance costs 6 355,013 145,454
Interest income 4 ( 373,074) ( 565,330)
Depreciation 5 3,455,158 2,934,708
Loss on disposal
of fixed assets 5 120,708 29
Operating profit before
working capital changes 43,997,226 20,667,359
Increase in amount due
from a shareholder (11,974,095) ( 3,409,298)
Increase in inventories ( 2,353,844) ( 6,109,953)
Increase in trade
receivables ( 2,283,597) ( 1,698,965)
Decrease/(increase) in
prepayments, deposits
and other receivables ( 509,870) 282,502
Increase in amount due
to a related Company 2,535,335 900,000
Increase/(decrease) in
other payables and
accruals 939,563 ( 1,031,455)
Increase in trade payables 1,159,443 8,795,015
Cash generated from operations 31,510,161 18,395,205
Interest received 373,074 565,330
Interest paid ( 355,013) ( 145,454)
Dividends paid ( 9,977,661) ( 5,191,836)
Hong Kong profits tax
refunded/(paid) ( 2,660,626) 83,458
Net cash inflow from operating
activities 18,889,935 13,706,703
- 107 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of fixed assets ( 6,738,013) ( 2,271,477)
Proceeds from disposal
of fixed assets 70,400 16,113
Decrease/(increase) in
pledged time deposit 1,676,441 ( 44,509)
Net cash outflow from
investing activities ( 4,991,172) ( 2,299,873)
CASH FLOWS FROM FINANCING
ACTIVITY
Repayment of loan from
a related Company - ( 27,329)
Net cash outflow from
financing activity - ( 27,329)
NET INCREASE IN CASH AND
CASH EQUIVALENTS 13,898,763 11,379,501
Cash and cash equivalents
at beginning of year 26,994,967 15,615,466
CASH AND CASH EQUIVALENTS
AT END OF YEAR 40,893,730 26,994,967
NET INCREASE IN CASH AND
CASH EQUIVALENTS 13,898,763 11,379,501
Cash and cash equivalents
at beginning of year 26,994,967 15,615,466
CASH AND CASH EQUIVALENTS
AT END OF YEAR 40,893,730 26,994,967
- 108 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 March 2003
Notes 2003 2002
HK$ HK$
ANALYSIS OF BALANCES OF CASH
AND CASH EQUIVALENTS
Cash and bank balances 13 33,066,829 14,962,374
Time deposits with original
maturity of less than
three months when acquired 13 7,826,901 12,032,593
40,893,730 26,994,967
- 109 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
1. CORPORATE INFORMATION
The registered office of the Company is at (address withheld
and filed separately with the SEC).
The Company was incorporated under the laws of Hong Kong on
7 July 1989. It operates under a joint venture agreement
entered into on 23 October 1989 between Universal Security
Instruments, Inc. ("USI"), a company incorporated in the
United States, and The Original Joint Venture Owner (name
withheld and filed separately with the SEC). The Company is
economically dependent on USI with which it transacts a
significant portion of its business and the financial
statements reflect the effect of these transactions that are
conducted on bases determined between the parties.
During the year, the following significant related party
transactions were recorded:
Notes 2003 2002
HK$ HK$
Sales made to USI (i) 57,170,207 37,952,734
Purchases from USI (i) 7,279,138 5,323,216
Sales commission to USI (ii) 335,090 -
Rentals paid to:
An Affiliate of the
Company (name
withheld and filed
separately with the
SEC) (iii) 840,000 840,000
A Director of the
Company (name
withheld and filed
separately with the
SEC) (iii) 240,000 240,000
Management fee paid to
(name withheld and
filed separately
with the SEC) (iv) 2,160,000 1,620,000
- 110 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
1. CORPORATE INFORMATION (continued)
Management bonus paid to
(name withheld and filed
separately with the
SEC) (v) 3,435,335 900,000
Interest income from USI (vi) 169,260 214,409
Notes:
(i) Sales and purchases were made according to published
prices and conditions similar to those offered to
other customers or by other suppliers of the Group.
(ii) Sales commission was charged at mutually agreed terms
between the Group and USI for the Group's sales to
customers referred by USI.
(iii) Rental expenses were charged for the office premises
owned by (name withheld and filed separately with the
SEC) and (name withheld and filed separately with the
SEC) in Hong Kong and the People's Republic of China
(the "PRC") with reference to the prevailing market
rate and area occupied by the Group.
(iv) Management fee was charged at a monthly basis of
HK$180,000 (2002: HK$120,000 for the months from
January to December 2001 and HK$180,000 for the
months from January to March 2002) for the provision
of management services rendered in planning,
execution and operation of electronics manufacturing
plant in the PRC.
(v) Management bonus was calculated at 10% (2002: 10%) on
the portion of the Company's annual pre-tax profit in
excess of HK$10 million.
(vi) Interest income from USI was charged at 6% (2002: 6%
- 12%) per annum of the overdue trading balance
during the year.
- 111 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
1. CORPORATE INFORMATION (continued)
Notes (continued):
(name withheld and filed separately with the SEC) is a
company of which (name withheld and filed separately with
the SEC) and (name withheld and filed separately with the
SEC), beneficial shareholders of (name withheld and filed
separately with the SEC), are also directors. The amount
due to (name withheld and filed separately with the
SEC) of HK$3,435,335 (2002: HK$900,000) as at 31 March 2003
is unsecured, interest-free and has no fixed terms of
repayment.
Except for the trading balance of HK$3,748,182 (2002:
HK$1,512,801) with USI included as due from a shareholder of
HK$4,204,766 (2002: HK$2,208,332) under current assets at 31
March 2003 which is interest-bearing at 6% (2002: 6% - 12%)
per annum, the remaining balance with USI is unsecured,
interest-free, and has no fixed terms of repayment.
2. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD
ACCOUNTING PRACTICE ("SSAPS")
The following new and revised SSAPs are effective for the
first time for the current year's consolidated financial
statements:
* SSAP 1 (Revised): "Presentation of financial statements"
* SSAP 15 (Revised): "Cash flow statements"
* SSAP 34: "Employee benefits"
These SSAPs prescribe new accounting measurement and
disclosure practices. The major effects on the Group's
accounting policies and on the amounts disclosed in these
financial statements of adopting these SSAPs are summarised
as follows:
- 112 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
2. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD
ACCOUNTING PRACTICE ("SSAPS") (continued)
SSAP 1 prescribes the basis for the presentation of
financial statements and sets out guidelines for their
structure and minimum requirements for the content thereof.
The principal impact of the revision to this SSAP is that a
consolidated statement of changes in equity is now presented
on page 106 of the consolidated financial statements in
place of the consolidated statement of recognised gains and
losses that was previously required.
SSAP 15 (Revised) prescribes the revised format for the cash
flow statement. The principal impact of the revision of
this SSAP is that the consolidated cash flow statement now
presents cash flows under three headings, cash flows from
operating, investing and financing activities, rather than
the five headings previously required.
SSAP 34 prescribes the recognition and measurement criteria
to apply to employee benefits, together with the required
disclosures in respect thereof. The adoption of this SSAP
has resulted in no material change to the previously adopted
accounting treatments for employee benefits.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance
with Hong Kong Statements of Standard Accounting Practice
and accounting principles generally accepted in Hong Kong.
They have been prepared under the historical cost
convention.
- 113 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries for the year
ended 31 March 2003. The results of subsidiaries acquired
or disposed of during the year are consolidated from or to
their effective dates of acquisition or disposal,
respectively. All significant intercompany transactions and
balances within the Group are eliminated on consolidation.
Subsidiaries
A subsidiary is a company in which the Company, directly or
indirectly, controls more than half of its voting power or
issued share capital or controls the composition of its
board of directors.
Long term investment
Investment held on a long-term basis is stated at cost less
any impairment loss.
Related parties
Parties are related if one party has the ability, directly
or indirectly, to control the other party or exercise
significant influence over the other party in making
financial and operating decisions. Parties are also related
if they are subject to common control or common significant
influence. Related parties may be individuals or corporate
entities.
Impairment of assets
An assessment is made at each balance sheet date of whether
there is any indication of impairment of any asset, or
whether there is any indication that an impairment loss
previously recognised for an asset in prior years may no
longer exist or may have decreased. If any such indication
exists, the asset's recoverable amount is estimated. An
asset's recoverable amount is calculated as the higher of
the asset's value in use or its net selling price.
- 114 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
An impairment loss is recognised only if the carrying amount
of an asset exceeds its recoverable amount. An impairment
loss is charged to the consolidated profit and loss account
in the period in which it arises.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated
depreciation and any impairment losses. The cost of an
asset comprises its purchase price and any directly
attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditure
incurred after fixed assets have been put into operation,
such as repairs and maintenance, is normally charged to the
profit and loss account in the period in which it is
incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be
obtained from the use of the fixed asset, the expenditure is
capitalised as an additional cost of that asset.
Depreciation is calculated on the straight-line basis to
write off the cost of each asset over its estimated useful
life. The principal annual rates used for this purpose are
as follows:
Land held on medium term lease Over the lease term
Buildings 5%
Leasehold improvements 20%
Plant and machinery 10%
Furniture and fixtures 20%
Motor vehicles 20%
Computer equipment and software 50%
The gain or loss on disposal or retirement of a fixed asset
recognised in the consolidated profit and loss account is
the difference between the net sales proceeds and the
carrying amount of the relevant asset.
- 115 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost and net
realisable value. Cost is determined on the first-in,
first-out basis and, in the case of work in progress and
finished goods, comprises direct materials, direct labour
and an appropriate proportion of overheads. Net realisable
value is based on the estimated selling prices less any
estimated costs to be incurred to completion and disposal.
Cash and cash equivalents
For the purpose of the consolidated cash flow statement,
cash and cash equivalents comprise cash on hand and demand
deposits, and short term highly liquid investments which are
readily convertible into known amounts of cash and which are
subject to an insignificant risk of changes in value, and
have a short maturity of generally within three months when
acquired, less bank overdrafts which are repayable on demand
and form an integral part of the Group's cash management.
For the purpose of the consolidated balance sheet, cash and
cash equivalents comprise cash on hand and at banks,
including term deposits, which are not restricted as to use.
Revenue recognition
Revenue is recognised when it is probable that the economic
benefits will flow to the Group and when the revenue can be
measured reliably, on the following bases:
(a) from the sales of goods, when the significant risks and
rewards of ownership have been transferred to the
buyer, provided that the Group maintains neither
managerial involvement to the degree usually associated
with ownership, nor effective control over the goods
sold, net of discounts and returns;
(b) rental income, on the straight-line basis over the
lease term;
- 116 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) management fee income, when the services are rendered;
and
(d) interest income, on a time proportion basis taking into
account the principal outstanding and the effective
interest rate applicable.
Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the lessor are accounted for
as operating leases. Where the Group is the lessor, assets
leased by the Group under operating leases are included in
non-current assets and rentals receivable under the
operating leases are credited to the consolidated profit and
loss account on the straight-line basis over the lease
terms. Where the Group is the lessee, rentals payable under
the operating leases are charged to the consolidated profit
and loss account on the straight-line basis over the lease
terms.
Deferred tax
Deferred tax is provided, using the liability method, on all
significant timing differences to the extent it is probable
that the liability will crystallise in the foreseeable
future. A deferred tax asset is not recognised until its
realisation is assured beyond reasonable doubt.
Foreign currencies
Foreign currency transactions are recorded at the applicable
exchange rates ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign currencies at
the balance sheet date are translated at the applicable
exchange rates ruling at that date. Exchange differences
are dealt with in the consolidated profit and loss account.
- 117 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee benefits
Pension Scheme
The Group operates a defined contribution Mandatory
Provident Fund retirement benefits scheme (the "MPF Scheme")
under the Mandatory Provident Fund Schemes Ordinance for all
of its employees. Contributions are made based on a
percentage of the employees' basic salaries and are charged
to the consolidated profit and loss account as they become
payable in accordance with the rules of the MPF Scheme. The
assets of the MPF Scheme are held separately from those of
the Group in an independently administered fund. The
Group's employer contributions vest fully with the employees
when contributed into the MPF Scheme.
4. REVENUE AND GAINS
Turnover represents the invoiced value of goods sold, net of
discounts and returns. An analysis of turnover, revenue and
gains is as follows:
2003 2002
HK$ HK$
Turnover
Sale of goods 182,256,085 88,449,887
Other revenue
Gross rental income 295,200 316,400
Management fee income - 19,890
Interest income 373,074 565,330
Sundry income 314,918 267,041
983,192 1,168,661
Gains
Exchange gains, net 238,478 176,620
1,221,670 1,345,281
- 118 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
5. PROFIT FROM OPERATING ACTIVITIES
Profit from operating activities is arrived at after
charging/(crediting):
2003 2002
HK$ HK$
Cost of inventories sold 120,864,232 59,632,260
Depreciation 3,455,158 2,934,708
Less: Amount included in
cost of sales (2,400,072) (2,278,081)
1,055,086 656,627
Auditors' remuneration 168,000 168,000
Staff costs:
Wages and salaries 9,433,055 7,105,704
Pension scheme contributions 162,751 148,629
9,595,806 7,254,333
Less: Amount included in
cost of sales (5,012,585) (3,301,487)
4,583,221 3,952,846
Directors' remuneration - -
Minimum lease payments under
operating leases in respect
of land and buildings 1,175,993 1,120,605
Gross and net rental income ( 295,200) ( 316,400)
Loss on disposal of fixed assets 120,708 29
- 119 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
6. FINANCE COSTS
2003 2002
HK$ HK$
Interest on inward bills 286,947 101,991
Interest to (name withheld and
filed separately with the SEC) - 667
Others 68,066 42,796
Total interest 355,013 145,454
7. TAX
Hong Kong profits tax has been provided at the rate of 16%
(2002: 16%) on the estimated assessable profits arising in
Hong Kong during the year.
2003 2002
HK$ HK$
Provision for the year 3,700,000 1,379,000
Overprovision in prior years ( 51,576) (2,415,461)
Deferred tax - note 15 ( 303,700) -
Tax charge/(credit) for the year 3,344,724 (1,036,461)
- 120 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
8. INTERIM DIVIDENDS
2003 2002
HK$ HK$
First interim - HK$2,834,679
(2002: HK$4,680,000) per
ordinary share 5,669,358 9,360,000
Second interim - HK$2,692,134
(2002: HK$511,836) per
ordinary share 5,384,268 1,023,672
Third interim - HK$2,526,524
(2002: Nil) per ordinary share 5,053,048 -
Fourth interim - HK$1,924,324
(2002: Nil) per ordinary share 3,848,648 -
19,955,322 10,383,672
9. FIXED ASSETS (continued)
Cost:
At beginning
of Year Additions Disposals At 31 March 2003
Medium
term
leasehold
land
HK$ 2,102,686 - - 2,102,686
Buildings
HK$ 13,711,906 - - 13,711,906
Leasehold
improve-
ments
HK$ 7,789,993 2,487,245 - 10,277,238
Plant and
machinery
HK$ 31,128,422 2,566,240 (2,398,412) 31,296,250
Furniture
and
fixtures
HK$ 3,491,267 357,579 - 3,848,846
Motor
vehicles
HK$ 1,577,130 927,603 - 2,504,733
Computer
equipment
and
software
HK$ 673,322 399,346 - 1,072,668
Total HK$ 60,474,726 6,738,013 (2,398,412) 64,814,327
Accumulated depreciation:
Provided
At beginning during
of Year the year Disposals At 31 March 2003
Medium
term
leasehold
land
HK$ 471,352 43,806 - 515,158
Buildings
HK$ 5,725,416 636,602 - 6,362,018
Leasehold
improve-
ments
HK$ 6,946,693 503,475 - 7,450,168
Plant and
machinery
HK$ 27,139,535 1,216,189 (2,207,304) 26,148,420
Furniture
and
fixtures
HK$ 2,870,577 213,433 - 3,084,010
Motor
vehicles
HK$ 720,555 405,809 - 1,126,364
Computer
equipment
and
software
HK$ 186,311 435,844 - 622,155
Total HK$ 44,060,439 3,455,158 (2,207,304) 45,308,293
Net book value:
At 31 March 2003 At 31 March 2003
Medium term leasehold
land HK$ 1,587,528 1,631,334
Buildings HK$ 7,349,888 7,986,490
Leasehold
improvements HK$ 2,827,070 843,300
Plant and machinery HK$ 5,147,830 3,988,887
Furniture and fixtures HK$ 764,836 1,378,369
Motor vehicles HK$ 1,378,369 856,575
Computer equipment and
software HK$ 450,513 487,011
Total HK$ 19,506,034 16,414,287
- 121 -
In 1991, the Group entered an agreement to lease certain
land located in the PRC for the building of factory premises
and staff quarters for a term of 50 years at a consideration
of HK$2,102,686. However, the Group has not obtained the
land use right from the relevant authority in the PRC. This
land is amortised over the lease term of 50 years.
10. LONG TERM INVESTMENT
2003 2002
HK$ HK$
Unlisted investment, at cost 9,305,588 9,305,588
Amount due from the investee
Company 1,158,675 1,158,675
10,464,263 10,464,263
Less: Provision for impairment (9,305,588) (9,305,588)
Provision against an
amount due from the
investee Company (1,158,675) (1,158,675)
- -
- 122 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
10. LONG TERM INVESTMENT (continued)
Particulars of the investee company are as follows:
Percentage
Place of Nominal of equity
registration value of attributable
and registered to the Group Principal
Name operation capital 2002 2001 activity
An Affiliate
of the Company
(name withheld
and filed
separately
with the SEC) PRC US$4,000,000 30 30 Dormant
The Group does not have significant influence on the
financial and operating policy decisions of the investee
company and, accordingly, the investment is classified as
long-term investment. The amount due from the investee
company is unsecured, interest-free and has no fixed terms
of repayment.
11. INVENTORIES
2003 2002
HK$ HK$
Raw materials 8,294,473 8,615,554
Work in progress 3,224,558 1,779,372
Finished goods 3,603,110 2,373,371
15,122,141 12,768,297
- 123 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
12. PLEDGED TIME DEPOSIT
At 31 March 2002, time deposit of HK$1,676,441 was pledged
to a bank for credit facilities of HK$3,329,000 granted to
the Group. The pledge was released during the year.
13. CASH AND CASH EQUIVALENTS
2003 2002
HK$ HK$
Cash and bank balances 33,066,829 14,962,374
Time deposits 7,826,901 12,032,593
40,893,730 26,994,967
14. LOANS FROM SHAREHOLDERS
2003 2002
HK$ HK$
USI 1,434,477 1,434,477
(name withheld and filed
separately with the SEC) 1,434,477 1,434,477
2,868,954 2,868,954
The loans are unsecured, interest-free and repayable on
demand by the respective shareholders with the consent of
the other. The directors of the Company consider that these
liabilities to be non-current.
- 124 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
15. DEFERRED TAX
2003 2002
HK$ HK$
Balance at beginning of year 333,700 333,700
Credit for the year - note 7 (303,700) -
Balance at end of year 30,000 333,700
The principal component of deferred tax liability calculated
at 17.5% (2002: 16%) of the cumulative timing differences
comprises accelerated depreciation allowances at the balance
sheet date.
16. SHARE CAPITAL
Company
2003 2002
HK$ HK$
Authorised:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
17. NOTE TO THE CONSOLIDATED CASH FLOW STATEMENT
Major non-cash transactions
During the year, interim dividends of HK$9,977,661 were
settled through the current account with a shareholder.
- 125 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
18. OPERATING LEASE ARRANGEMENTS
The Group leases certain of its office premises and factory
premises under operating lease arrangements for terms
ranging from 1 to 5 years.
At 31 March 2003, the Group had total future minimum lease
payments under non-cancellable operating leases falling due
as follows:
2003 2002
HK$ HK$
Within one year 913,500 -
In the second to fifth years,
inclusive 2,660,000 -
3,573,500 -
19. COMMITMENTS
In addition to the operating lease commitments detailed in
note 18 above, the Group had the following contracted
commitments at the balance sheet date:
2003 2002
HK$ HK$
Purchase of fixed assets 128,181 162,000
Capital contribution payable to
a PRC wholly-owned subsidiary 117,000,000 -
117,128,181 162,000
- 126 -
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 March 2003
20. COMPARATIVE AMOUNTS
As further explained in note 2 to the financial statements,
due to the adoption of certain new and revised SSAPs during
the current year, the presentation of certain items and
balances in the financial statements have been revised to
comply with the new requirements. Accordingly, certain
comparative amounts have been reclassified to confirm with
the current year's presentation.
21. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED
IN THE UNITED STATES OF AMERICA
The financial statements have been prepared in accordance
with accounting principles generally accepted in Hong Kong,
which differ in certain significant respects from accounting
principles generally accepted in the United States of
America. However, the application of generally accepted
accounting principles in the United States of America
would not have a significant effect on either the operation
results of the Group for each of the two years in the
period ended 31 March 2003 or the financial position of
the Group as of 31 March 2003 and 2002.
- 127 -