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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, 1996
( ) 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.)
10324 S. Dolfield Road, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 19, 1996:
Common Stock, $.01 Par Value - $1,918,016
The number of shares outstanding of the issuer's classes of common stock as
of June 19, 1996:
Common Stock, $.01 Par Value - 3,245,587 shares
Page 1
ITEM 1.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company") was incorporated in the
State of Maryland in 1969. Its principal offices are located at 10324 South
Dolfield Road, Owings Mills, MD 21117 and its telephone number is
410-363-3000.
The Company designs and markets a variety of popularly-priced (i) security
products, (ii) telecommunications products and (iii) video products. Most of
the Company's products either require minimal installation, or are designed
for easy installation by the consumer without professional assistance and
requiring little or no technical knowledge.
The Company imports virtually all of its products from various suppliers
overseas. Approximately 53% of the Company's purchases are bought from a
joint venture with a Hong Kong Corporation (Hong Kong Joint Venture), in
which the Company owns a 50% interest, that has manufacturing facilities in
the People's Republic of China. Additionally, the Hong Kong Joint Venture has
entered into a separate joint venture with a People's Republic of China
company to design and develop a portable cellular telephone primarily for
manufacture and sale in China (Cellular Joint Venture).
The Company's sales for the year ended March 31, 1996 were $19,507,889
compared to $24,841,794 for the year ended March 31, 1995, a decrease of
approximately 21%. The primary reason for this decrease in sales was due to
decreased demand for some of the Company's high volume, low margin, private
label products.
SECURITY PRODUCTS
The Company markets a line of electronically advanced outdoor floodlights
under the name "Lite Aidetm," whose features include special sensors that
activate automatic lighting mechanisms and a quartz halogen system, offering
the consumer a variety of dependable outdoor security lighting systems. The
Company also markets a smoke detector under the name "Smoke Signaltm"
manufactured by the joint venture and markets a wireless intercom and a line
of speakers. In fiscal 1996, the Company began marketing a flexible
flashlight, under the name "PRETZL LITE." (See "Legal Proceedings" herein
for a description of litigation concerning this product.)
Sales of the Company's security products aggregated $9,216,686 or
approximately 47% of total sales in the fiscal year ended March 31, 1996 and
$7,795,720 or approximately 31% of total sales in the fiscal year ended
March 31, 1995. This increase in sales volume is due primarily to the
introduction of new products.
TELECOMMUNICATIONS PRODUCTS
The Company markets a variety of telephones with unique styling and
containing multiple features. The Company offers a variety of popularly-
priced multicolored trimline and feature telephones and telephone answering
machines which are produced by the joint venture. Some of the features
available on the Company's
Page 2
telephone products include cordless, handsfree speaker, true hold and
conferencing, high-speed dial function, memory capability, last number
redial, ringer silencer, programmable direct access emergency buttons,
pushbutton operation, and pulse/touchtone switch, making them usable with
all long distance networks. The Company has recently introduced several
models of Caller ID.
For the fiscal year ended March 31, 1996, sales of the Company's
telecommunications products aggregated $6,786,584 or 35% of total sales. For
the fiscal year ended March 31, 1995, sales of these products were
$10,726,679 or 43% of total sales.
VIDEO PRODUCTS
The Company designs and markets blank video cassette tapes and other video
products, including a wireless remote control converter and several models
of preprogrammed Universal Remote Controllers.
For the fiscal year ended March 31, 1996, sales of the Company's video
products and accessories aggregated $3,504,619 or 18% of total sales for the
year. For the fiscal year ended March 31, 1995, sales of these products were
$6,319,395 or 26% of total sales.
FCC REGULATION
The Federal Communications Commission establishes technical standards for
telecommunications equipment and products transmitting signals over the
airways and allocates frequencies for cordless telephones. These regulations
have had no material effect upon the Company's business or its products to
date, and all products subject to such regulation comply with the FCC
requirements.
IMPORT MATTERS
The Company imports virtually all of its security, telecommunications and
video products. The Company, as an importer, is subject to numerous tariffs
which vary depending on types of products and country of origin, changes in
economic and political conditions in the country of manufacture, potential
trade restrictions, including loss of Most Favored Nation status, and
currency fluctuations. The Company has attempted to protect itself from
fluctuations in currency exchange rates to the extent possible by
negotiating most commitments in U.S. Dollars. The Company's purchases are
subject to delays in delivery due to problems with shipping and docking
facilities, as well as other problems associated with purchasing products
abroad. The Company imports a majority of its products from the People's
Republic of China. The loss of China's Most Favored Nation status with the
United States would most likely have a material adverse impact on the
Company's business until competitive alternative sources of supply were
obtained.
SALES AND MARKETING
The Company's products are generally marketed to retailers, wholesale
distributors, service companies, catalog and mail order companies and to
other distributors. Sales are made both by the Company and by approximately
31 independent sales organizations which are compensated by commissions. The
Company has agreements with the sales organizations which are cancelable by
either party upon 30 days notice. The Company does not believe that the loss
of any one of these organizations would have a material adverse effect upon
its business.
Page 3
The Company also promotes its products through its own sales catalogs and
brochures, which are mailed directly to trade customers, and through
advertising in trade journals. The Company's customers, in turn, 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 International Consumer
Electronics Show in Las Vegas, Nevada. The Company's domestic marketing
strategy is designed to attract retailing customers outside the consumer
electronics industry, such as supermarkets, drug stores, variety stores and
home centers.
Sales by the Company are made by officers and full-time employees of the
Company, four 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 20% of total sales in fiscal 1996. The
Company's foreign marketing strategy is to increase sales of products from
the Hong Kong Joint Venture to overseas markets.
The Company's products are retailed to "do-it-yourself" consumers by chain
and independent department, discount, drug, electrical, electronic, building
supply and hardware stores; as well as through catalog and mail-order houses.
The Company also distributes its products through special markets such as
premium/incentive, direct mail, catalog and showroom sales. The Company does
not currently market any significant portion of its products directly to end
users.
The Company's backlog of orders believed to be firm as of March 31, 1996 was
approximately $2,753,530. The Company's backlog as of March 31, 1995, was
approximately $4,521,000. The decrease in backlog is a function of the timing
of orders received from its customers.
SUPPLIERS - JOINT VENTURE
The Company has a 50% interest in a joint venture with a Hong Kong
Corporation (Hong Kong Joint Venture) which has manufacturing facilities in
the People's Republic of China, for the manufacturing of certain consumer
electronic products sold by the Company. The Company believes that this
joint venture arrangement will ensure a continuing source of supply for each
product at competitive prices. At the present time, the Company buys
approximately 53% of its total purchases from the Hong Kong Joint Venture.
The products produced by the Hong Kong Joint Venture include most of the
video tape purchased by the Company, smoke detectors and certain models of
telecommunications products. The Company is currently pursuing the
development of additional products to be produced by the Hong Kong Joint
Venture. A loss of China's Most Favored Nation status with the United States
or changes in economic and political conditions in China could adversely
affect the value of the Company's investment in the Hong Kong Joint Venture.
Refer to Note C of the Financial Statements in Item 8 for a comparison of
annual sales and earnings of the Hong Kong Joint Venture.
SUPPLIERS - OTHERS
Telecommunications, video and security products not manufactured for the
Company by the Hong Kong Joint Venture are manufactured by other foreign
suppliers for the Company. The Company's relationships with its suppliers
are good. The Company believes that the loss of any of its suppliers could
have a short-term adverse effect on its operations, but that replacement
sources could be developed.
Page 4
CHINA CELLULAR TELEPHONE PROJECT
In the year ended March 31, 1993, the Hong Kong Joint Venture entered into
the Cellular Joint Venture with a People's Republic of China company to
design and develop a portable cellular telephone for manufacture and sale in
China. The Hong Kong Joint Venture has a 30% interest in the Cellular Joint
Venture. The Cellular Joint Venture has engaged the Hong Kong Joint Venture
to design and develop two versions of a portable cellular telephone for a
fee of $3.5 million. Through March, 1996, the Hong Kong Joint Venture has
received $3,150,000 of the $3.5 million fee. For the years ended March 31,
1996 and 1995, the Hong Kong Joint Venture has recorded a profit of $0 and
$500,000, respectively, on the development contract. Presently, the Hong
Kong Joint Venture has received approval for the design of both the first
and second versions of its cellular telephone for marketing both inside and
outside of China. As a result of these approvals, the Cellular Joint Venture
has begun the initial stages of field testing the approved versions.
COMPETITION
The market for telephones and telephone products is highly competitive and
subject to sudden shifts in consumer preferences and rapid changes in
technology. Since deregulation of the telephone industry, many companies
have entered the market, competing with lower prices and the continuous
introduction of new products incorporating the most advanced technology. The
Company competes with many other companies such as AT&T, IT&T, Southwestern
Bell, Bell South, Panasonic, Sony, Dynascan, Uniden, Unisonic and other
major companies competing for the same markets, almost all of which have
much greater financial resources than the Company. The Company believes,
however, that its products compete favorably with other products in the
marketplace primarily by reason of styling and pricing.
In the video products industry, there are numerous competitors for each
product in the Company's line of video products. Blank VHS video cassettes
are marketed by many companies, including such large international firms as
Scotch, Polaroid, BASF, Sony, Fuji, Maxell and TDK. The Company's channel
converter competes with similar products marketed by such companies as
Zenith, General Instrument, Recoton, Hamlin, Gemini and Panasonic. Virtually
all of these competitors have greater financial resources than the Company.
The Company believes, however, that its products compete favorably with
other products in the marketplace primarily by reason of styling and pricing.
In the security lighting area, the Company competes with All-Trade, Woods
Wire, Intelectron and Heath-Zenith. In the smoke detector area, the Company
competes with Pittway, BRK, Fyrenetics and Firex. Many of these companies
have greater financial resources and financial strength than the Company.
The Company believes that its security products compete favorably with other
such products in the market primarily on the basis of styling and pricing.
The security industry in general, however, involves rapidly changing
technology, and the success of the Company's products may depend on the
Company's ability to improve and update the technology of its products in a
timely manner and to adapt to new technological advances.
Page 5
EMPLOYEES
The Company has approximately 30 employees, approximately 15 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
The Company's main facility, located in Baltimore County, Maryland, contains
approximately 32,000 square feet on approximately six acres and is used for
research and development, warehousing and administrative and executive
offices. This facility was completed in December 1993 and is subject to a
mortgage with a balance of $1,290,900 as of March 31, 1996. The Company has
listed for sale four undeveloped acres.
In addition, the Hong Kong Joint Venture's manufacturing facility consists
of six buildings totaling 100,000 square feet. Three of the buildings
(totaling 31,000 square feet) are leased pursuant to a long-term lease which
expires in 2010. The other three buildings (69,000 square feet) are owned by
the joint venture and were built on property leased for a 48 year term.
ITEM 3.
LEGAL PROCEEDINGS
On November 2, 1995, the Company was served with a Complaint filed by Black
& Decker (U.S.) Inc. and related entities against the Company and others in
the United States District Court for the Eastern District of Virginia. The
Complaint alleges patent and copyright infringement by the Company in
connection with its flexible flashlight, marketed under the name "PRETZL
LITE." The Complaint seeks triple damages for the infringement, costs and
attorneys' fees, and various injunctive relief prohibiting further
infringement. The Company engaged patent counsel to defend the suit.
As a result of a series of hearings, the claims against the Company have
been consolidated into a single action. The Company has asserted unfair
competition counter claims against Black & Decker.
It is the opinion of the Company and the Company's counsel that the Company
has asserted several strong defenses to the litigation and that a favorable
outcome is anticipated because, in part, similar devices by other
manufacturers have been found not to infringe. However, counsel has also
advised that, as with all litigation, the extent of liability is uncertain
and, in the unlikely event that Black & Decker were to obtain a judgment in
this matter, such judgment could have a material adverse effect.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
Page 6
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the over-the-counter market.
The following table shows the fiscal 1995 and 1996 quarterly high and low
bid prices for the Company's Common Stock as reported by NASDAQ. 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, 1995
Bid Prices
High Low
First Quarter 1-5/8 1-5/16
Second Quarter 1-7/8 1-1/2
Third Quarter 1-3/4 1-1/4
Fourth Quarter 1-7/16 1-1/8
Fiscal year ended March 31, 1996
Bid Prices
High Low
First Quarter 1-3/16 1-3/16
Second Quarter 1-7/16 7/8
Third Quarter 1-1/2 7/8
Fourth Quarter 1-9/16 1-5/16
As of June 19, 1996, there were approximately 703 holders of
record of the Company's Common Stock.
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 operations.
Page 7
ITEM 6.
SELECTED FINANCIAL DATA
Year Ended March 31,
1996 1995 1994 1993 1992
Operations
Net sales $19,507,889 $24,841,794 $25,804,715 $23,013,066 $25,739,931
(Loss)
earnings
before
equity in
earnings of
joint
venture,
income taxes
and
extraordinary
items (1,316,990) (2,220,460) (1,230,834) (1,326,653) 269,833
(Loss)
earnings
before
extraordinary
items (1,098,817) (1,296,426) 36,931 (783,720) 369,764
Extraordinary
items(1) 102,355
Net (loss)
income (1,098,817) (1,296,426) 36,931 (783,720) 472,119
Per common
share:
(Loss)
earnings
before
equity
in
earnings
of joint
venture,
income
taxes
and
extraordinary
items (.41) (.68) (.37) (.41) .08
(Loss)
earnings
before
extraordinary
items (.34) (.40) .01 (.24) .11
Net (loss)
income (.34) (.40) .01 (.24) .14
Weighted
average
number of
common
shares
out-
standing 3,245,587 3,242,595 3,237,608 3,227,195 3,224,839
Financial
Condition
Total
assets 12,676,391 13,732,846 15,864,756 11,767,934 11,507,186
Long-term
debt and
obligations
(non-
current) 1,277,394 497,222 927,500
Working
capital 2,194,108 2,728,405 4,777,650 6,146,506 7,555,129
Current
ratio 1.46 to 1 1.50 to 1 1.81 to 1 3.23 to 1 5.38 to 1
Share-
holders'
equity 6,675,915 7,774,540 9,063,910 9,011,887 9,783,331
Share-
holders'
equity
per
share 2.06 2.40 2.80 2.79 3.03
(1)Reduction of income taxes arising from carryforward of prior
years'
operating losses
Page 8
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 1996, sales decreased by $5,333,905 (21%) from the prior year.
This decrease was primarily due to a decreased demand for certain of the
Company's telecommunications products, which amounted to approximately
$3,940,095 and a decrease in video products of $2,814,776, partially offset
by the sale of a new security products, which amounted to approximately
$1,420,966. Sales of security products for the fiscal year totaled $9,216,686
(47%), while sales of telecommunications and video products were $6,786,584
(35%) and $3,504,619 (18%), respectively.
In fiscal year 1995, sales decreased by $962,921 (4%) from the prior year.
This decrease was primarily due to a decreased demand for certain of the
Company's video products, which amounted to approximately $1,700,000,
partially offset by the sale of a new telecommunications product to an
existing customer, which amounted to approximately $1,000,000. Sales of
security products for the fiscal year totaled $7,795,720 (31%), while sales
of telecommunications and video products were $10,726,679 (43%) and
$6,319,395 (26%), respectively.
NET PROFIT AND LOSS
The Company incurred a net loss of $1,098,817 for fiscal year 1996 as
compared to a net loss of $1,296,426 for fiscal year 1995. The most
significant reasons are reductions in research and development, and selling,
general and administrative expenses, partially offset by a reduction in
equity earnings of the Joint Venture.
The Company incurred a net loss of $1,296,426 for fiscal year 1995, as
compared to net income of $36,931 for fiscal year 1994. The decline in
results in 1995 was due to a decrease in gross profit margin of $638,531, an
increase in interest expense of $313,137 and a decrease in Joint Venture
earnings of $343,731. The two most significant reasons for the decrease in
gross profit margin were the decrease in sales and special promotional
allowances associated with the selling of certain slow-moving inventory,
which were approximately equal in amount. These reasons amounted to
approximately one-half of the decrease in gross profit margin.
EXPENSES
In fiscal year 1996, research, selling, general and administrative expenses
decreased by approximately $850,000 (18%) from the prior year. As a
percentage of sales, research, selling, general and administrative expenses
were 20% for the fiscal year ended March 31, 1996 and were 19% for the prior
year.
Page 9
In fiscal year 1995, research, selling, general and administrative expenses
increased by approximately $39,000 (1%) from the prior year. As a percentage
of sales, research, selling, general and administrative expenses were 19%
for the fiscal year ended March 31, 1995 and were 18% for the prior year.
INTEREST EXPENSE AND INCOME
Interest expense for fiscal 1996 decreased to $543,352 from $582,581 in 1995
due to a decrease in the average outstanding debt during the period resulting
from decreased inventory levels in the current fiscal year. Interest income
decreased to $4,935 in fiscal 1996 from $4,970 in fiscal 1995.
Interest expense for fiscal 1995 increased to $582,581 from $269,444 in 1994
due to an increase in the average outstanding debt during the period
resulting from increased inventory levels in the year ended March 31, 1995.
Additionally, interest rates were approximately 25% higher in the year ended
March 31, 1995, in comparison to 1994. Interest income decreased to $4,970 in
fiscal 1995 from $15,236 in fiscal 1994.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated from
operations and the Company's line of credit with a financial institution
which supplies both short-term borrowings and letters of credit to finance
foreign inventory purchases. The Company's maximum line of credit is
currently the lower of $7,500,000 or specified percentages of the Company's
accounts receivable and inventory. Approximately $3,118,000 has been
utilized in short-term borrowings and letter of credit commitments as of
March 31, 1996. The amount available under the line of credit as of
March 31, 1996 was approximately $100,000 based on the specified percentages.
The outstanding principal balance of the revolving credit line is payable upon
demand. The interest rate on the revolving credit line is equal to 1% in
excess of the prime rate of interest charged by the Company's lender.
The loan is collateralized by the Company's accounts receivable and
inventory. During the year ended March 31, 1996, working capital
decreased by $534,297, from $2,728,405 on March 31, 1995 to
$2,194,108 on March 31, 1996.
Operating activities provided cash of $206,748 for the year ended March 31,
1996. This was primarily due to a decrease in accounts receivable of
$1,089,291, an increase in accounts payable of $231,202 partially offset by
the net loss of $1,098,817 and the undistributed joint venture earnings of
$218,173. For the prior fiscal year, operating activities provided cash of
$1,575,406, which was mainly due to a decrease in accounts receivable and
inventories of $921,324 and $1,411,789, respectively, an increase in
accounts payable of $826,664 partially offset by the net loss of $1,296,426
and the undistributed joint venture earnings of $424,034.
Investing activities used cash of $93,924, mainly due to the purchases of
equipment . For the same period last year, investing activities used
$94,965, primarily due to the purchases of equipment.
Financing activities used cash of $188,840 mainly due to the refinancing of
the Company facilities, offset by the net repayment of short-term debt and
principal payments on long-term debt. For the same period last year,
financing activities used cash of $1,581,770 primarily due to the net
repayment of short-term debt and principal payments on long-term
debt.
Page 10
During the fiscal year ended March 31, 1995, the Company received a
distribution of $500,000 from the Hong Kong Joint Venture, of which $400,000
was used to reduce the mortgage indebtedness on its headquarters building.
During the year ended March 31, 1996, the Company refinanced its mortgage
indebtedness. The terms of the new financing are a $1,300,000 loan
repayable in 60 equal monthly installments of principal and interest based on a
25 year amortization schedule, with interest at the rate of 10%. The full
outstanding balance is due at the end of the 60 month period. The
refinancing resulted in an increase in cash available to the Company of
approximately $700,000, which was used to repay existing debt, and in operating
activities.
The Company believes that its line of credit and its working capital provide
it with sufficient resources to meet its requirements for liquidity and
working capital in the ordinary course of its business over the next twelve
months.
HONG KONG JOINT VENTURE
In fiscal year 1996, sales of the Hong Kong Joint Venture were $9,977,272
compared to $15,260,179 and $16,153,285 in fiscal years 1995 and 1994,
respectively.
Net income was $436,345 for the year ended March 31, 1996 compared to
$1,848,069 and $2,535,529 in fiscal years 1995 and 1994, respectively. The
decrease in income for the year ended March 31, 1996 was due primarily to a
decrease in sales. Fiscal 1994 results included approximately $368,000 of
income relating to a favorable ruling from the Hong Kong Inland Revenue
Department related to an exemption of Hong Kong income taxes for the Hong
Kong Joint Venture's percent of business done in China. Exclusive of this
item, the primary reason for the decrease in net income of approximately
$200,000 in fiscal 1995 from 1994 was the decrease in sales.
Selling, general and administrative expenses were $1,456,591, $1,672,523
and $1,503,602 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively. As a percentage of sales, expenses were 15%, 11% and 9% for
fiscal 1996, 1995 and 1994, respectively. The increase in expenses as a
percentage of sales in fiscal 1996 was primarily due to a decrease in sales,
without a corresponding decrease in expenses.
Interest income net of interest expense was $191,916 for the year ended
March 31, 1996 compared to $74,741 and $17,766 in fiscal years 1995 and
1994, respectively. The increase in net interest income was primarily due to
the short-term investment of a higher level of cash balances during the year.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During the year ended March 31, 1996, working
capital decreased by $688,719, from $1,401,158 on March 31, 1995 to $712,439
on March 31, 1996.
Subsequent to year end, the Company received a distribution of earnings from
the Joint Venture in the amount of $1,000,000, which was used to retire an
expiring credit line, and in operations.
INFLATION
The Company believes that inflation has not had a material effect upon its
results of operations, and liquidity and capital resources for any of the
periods presented.
Page 11
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description Page
Reports of Independent Auditors 13
Financial statements
Consolidated balance sheets, March 31, 1996 and 1995 15
Consolidated statements of operations for the years ended
March 31, 1996, 1995 and 1994 17
Consolidated statements of shareholders' equity for the
years ended March 31, 1996, 1995 and 1994 18
Consolidated statements of cash flows for the years ended
March 31, 1996, 1995 and 1994 19
Notes to consolidated financial statements 20
Page 12
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the accompanying consolidated balance sheet of
Universal Security Instruments, Inc. and subsidiaries as of March
31, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We did
not audit the financial statements of the Hong Kong Joint
Venture, the Corporation's investment which is accounted for by
use of the equity method. The Corporation's equity of $3,660,350
in the Hong Kong Joint Venture's net assets at March 31, 1996,
and of $218,173 in that company's net income for the year then
ended is 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 such company, is based solely on the report
of such other auditors.
We have conducted our audit in accordance with generally accepted
auditing standards. 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
audit and the report of the other auditors provides a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of the other
auditors, such consolidated financial statements present fairly,
in all material respects, the financial position of Universal
Security Instruments, Inc. at March 31, 1996, and the results of
its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on
the basic 1996 consolidated financial statement taken as a whole.
The 1996 supplemental schedule is presented for the purpose of
additional analysis and is not a required part of the basic 1996
consolidated financial statements. The 1996 supplemental schedule
is the responsibility of the Company's management. Such 1996
supplemental schedule has been subjected to the auditing
procedures applied in our audit of the basic consolidated
financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic 1996
consolidated financial statements taken as a whole.
Deloitte & Touche LLP
June 25, 1996
Baltimore, Maryland
Page 13
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the consolidated balance sheet of Universal
Security Instruments, Inc. and subsidiaries as of March 31, 1995,
and the related consolidated statements of operations,
shareholders' equity, and cash flows for for each of the two
years in the period ended March 31, 1995. Our audits also
included the financial statement schedule listed in the index at
item 14(a). These financial statements and this schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule
based on our audits.
We have conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Universal Security Instruments, Inc. at
March 31, 1995 and the consolidated results of their operations
and their cash flows for each of the two years in the period
ended March 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Ernst & Young LLP
June 21, 1995
except for Note D, as to which the date is
June 26, 1995
Page 14
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1996 1995
CURRENT ASSETS
Cash $97,793 $173,809
Time deposits 8,748 8,322
Accounts receivable:
Trade (less allowance for doubtful
accounts of $25,771 in 1996 and
$50,000 in 1995) 2,033,092 3,129,869
Officers and employees 40,678 33,192
2,073,770 3,163,061
Inventories:
Finished goods 4,099,907 4,252,825
Raw materials - foreign locations 152,303 163,756
4,252,210 4,416,581
Prepaid expenses 484,669 427,716
TOTAL CURRENT ASSETS 6,917,190 8,189,489
INVESTMENT IN JOINT VENTURE 3,660,350 3,366,951
PROPERTY, PLANT AND EQUIPMENT 1,985,790 2,074,073
OTHER ASSETS 113,061 102,333
TOTAL ASSETS $12,676,391 $13,732,846
See notes to consolidated financial statements
Page 15
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31,
1996 1995
CURRENT LIABILITIES
Short-term borrowings $2,993,685 $3,869,711
Current maturity of long-term debt 13,488 106,666
Accounts payable 858,557 560,064
Accounts payable - joint venture 750,000 750,000
Accrued liabilities:
Payroll, commissions and
payroll taxes 71,372 128,600
Other 35,980 46,043
TOTAL CURRENT LIABILITIES 4,723,082 5,461,084
LONG-TERM DEBT, less current portion 1,277,394 497,222
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
3,245,587 shares in 1996 and
3,245,382 shares in 1995 32,456 32,454
Additional paid-in capital 10,429,588 10,429,398
Retained earnings (deficit) (3,786,129) (2,687,312)
TOTAL SHAREHOLDERS' EQUITY 6,675,915 7,774,540
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,676,391 $13,732,846
See notes to consolidated financial statements
Page 16
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
1996 1995 1994
Net sales $19,507,889 $24,841,794 $25,804,715
Cost of goods sold 16,369,364 21,713,689 22,038,079
GROSS PROFIT 3,138,525 3,128,105 3,766,636
Research and development expense 220,051 446,178 582,829
Selling, general and
administrative expense 3,696,740 4,327,921 4,151,812
Operating loss (778,266) (1,645,994) (968,005)
Other income (expense):
Interest income 4,935 4,970 15,236
Interest expense (543,352) (582,581) (269,444)
Other (307) 3,145 (8,621)
(538,724) (574,466) (262,829)
LOSS BEFORE EQUITY IN
EARNINGS OF JOINT VENTURE (1,316,990) (2,220,460) (1,230,834)
Equity in earnings of joint venture 218,173 924,034 1,267,765
NET (LOSS) INCOME $(1,098,817) $(1,296,426) $36,931
Per common share amounts:
Primary $(.34) $(.40) $.01
Fully diluted (.34) (.40) .01
Weighted average number of
common shares outstanding:
Primary 3,245,587 3,242,595 3,237,608
Fully diluted 3,245,587 3,242,595 3,237,608
See notes to consolidated financial statements
Page 17
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
Balance
at April 1,
1993 3,230,358 $32,304 $10,407,400 $(1,427,817) $9,011,887
Net income
for 1994 36,931 36,931
Common stock
issued pursuant
to exercise
of stock
options 5,000 50 7,450 7,500
Common stock
issued to
employees
through employee
stock purchase
plan 4,477 44 7,548 7,592
Balance
at March 31,
1994 3,239,835 32,398 10,422,398 (1,390,886) 9,063,910
Net loss
for 1995 (1,296,426) (1,296,426)
Common stock
issued to
employees
through employee
stock purchase
plan 547 6 800 806
Common stock
issued to
employees
as compensation 5,000 50 6,200 6,250
Balance
at March 31,
1995 3,245,382 32,454 10,429,398 (2,687,312) 7,774,540
Net loss
for 1996 (1,098,817) (1,098,817)
Common stock
issued to
employees
through employee
stock purchase
plan 205 2 190 192
Balance
at March 31,
1996 3,245,587 $32,456 $10,429,588 $(3,786,129) $6,675,915
See notes to consolidated financial statements
Page 18
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
1996 1995 1994
OPERATING ACTIVITIES
Net (loss) income $(1,098,817) $(1,296,426) $36,931
Adjustments to reconcile net
(loss) income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 181,781 200,166 131,207
Provision for losses on
accounts receivable 27,330 114,168
Undistributed earnings of
joint venture (218,173) (424,034) (1,017,765)
(Gain) loss on sale of
property, plant and
equipment (7,200) 5,258
Changes in operating
assets and liabilities:
Decrease (increase) in
accounts receivable 1,014,065 921,324 (1,105,655)
Decrease (increase) in
inventories and
prepaid expenses 107,418 1,411,789 (778,272)
Increase in accounts
payable and accrued
liabilities 231,202 746,286 198,158
Increase in other assets (10,728) (3,829) (19,619)
NET CASH PROVIDED BY USED IN
OPERATING ACTIVITIES 206,748 1,575,406 (2,435,589)
INVESTING ACTIVITIES
Purchases of property, plant
and equipment (93,498) (110,755) (1,494,460)
Increase in time deposits (426) (265) (210)
Proceeds from sale of property,
plant and equipment 16,055 47,000
NET CASH USED IN INVESTING ACTIVITIES (93,924) (94,965) (1,447,670)
FINANCING ACTIVITIES
Net (repayment) issuance of
short-term debt (876,026) (1,195,214) 2,849,141
Proceeds from issuance of
long-term debt 1,300,000 110,000 1,050,000
Principal payments on long-term
debt (613,006) (503,612) (52,500)
Proceeds from issuance of
common stock 192 7,056 15,092
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (188,840) (1,581,770) 3,861,733
DECREASE IN CASH (76,016) (101,329) (21,526)
CASH AT BEGINNING OF YEAR 173,809 275,138 296,664
CASH AT END OF YEAR $97,793 $173,809 $275,138
Supplemental information:
Interest paid $543,352 $582,581 $311,453
Income taxes paid - - -
See notes to consolidated financial statements
Page 19
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
Research and Development: Research and development costs are charged to
operations as incurred.
Accounts Receivable: The Company provides allowances for doubtful
receivables by a charge against income in amounts equal to the estimated
losses that will be incurred in collection of all receivables.
The estimated
losses are based on historical collection experience and a review of the
current status of the existing receivables. Customer accounts are written
off against the allowance for doubtful accounts when an account is determined
to be uncollectible.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment is recorded at
cost, less accumulated depreciation and amortization. Depreciation and
amortization is provided for by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes. The
estimated useful lives for financial reporting purposes are as follows:
Building - 40 years
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Income Taxes: The Company accounts for income taxes using SFAS No. 109,
"Accounting for Income Taxes." For further information (see Note F).
Net Income per Share: Primary and fully diluted net earnings per share are
computed by dividing net income (loss) by the weighted average number of
common and common equivalent shares outstanding. Common equivalent shares
include the dilutive effect of outstanding stock options calculated under
the treasury stock method. Stock options are antidilutive for the fiscal
years 1996, 1995 and 1994.
Reclassifications: Certain amounts reported in the 1995 financial statements
have been reclassified to conform with the 1996 financial statement
presentation.
Page 20
NOTE B - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31,
1996 1995
Land and improvements $305,079 $305,079
Building and improvements 1,412,271 1,384,005
Machinery and equipment 810,172 798,636
Furniture and fixtures 241,366 201,425
Computer equipment 46,379 32,624
2,815,267 2,721,769
Less accumulated depreciation and amortization 829,477 647,696
$1,985,790 $2,074,073
NOTE C - INVESTMENT IN JOINT VENTURE
The Company maintains 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, 1996, the
Company has invested approximately $3,660,000 for their 50% interest in the
joint venture. The investment has been accounted for using the equity
method of accounting.
Additionally, the joint venture has a 30% interest in a separate joint
venture with a People's Republic of China company to design and develop a
portable cellular phone for manufacture and sale in China. Included in the
results of the 50% owned Hong Kong Joint Venture for the year ended March
31, 1995 is $500,000 of profit related to a $3.5 million contract for the
design and development of the cellular telephone. No such profits were
recorded in the year ended March 31, 1996. The contract is being accounted
for under the percentage of completion method.
Page 21
The following represents summarized financial information from the financial
statements of the joint venture as of March 31, 1996 and 1995 and for the
years ended March 31, 1996, 1995 and 1994.
Year Ended March 31,
1996 1995 1994
Current assets $4,807,113 $5,224,472
Property and other assets 4,694,364 5,101,071
Total $9,501,477 $10,325,543
Current liabilities $4,094,674 $3,893,515
Non-current liabilities 141,384 106,554
Shareholders' equity 5,265,419 6,325,474
Total $9,501,477 $10,325,543
Net sales $9,977,272 $15,260,179 $16,153,285
Gross profit 1,640,186 3,308,602 3,396,897
Net income 436,345 1,848,069 2,535,529
As of and for the years ended March 31, 1996, 1995 and 1994, the period
ending exchange rate and the weighted average exchange rates are
approximately 7.75 Hong Kong dollars to each U.S. dollar.
Current liabilities at March 31, 1996 include $2,000,000 in dividends
payable to shareholders which were distributed in April 1996.
During the years ended March 31, 1996, 1995 and 1994, the Company purchased
$9,206,000, $13,832,000 and $13,506,000, respectively, of finished product
from the joint venture, which represents 53%, 81% and 65%, respectively, of
the Company's total finished product purchases. The Company has an agreement
with the joint venture, expiring in April 1996, whereby the Company is
provided 60 day payment terms for finished goods purchases up to $750,000,
at an interest rate of 12%. Subsequent to year end, this line was retired
and paid in full.
NOTE D - DEBT
Debt consisted of the following:
March 31,
1996 1995
Short-term borrowings $2,993,685 $3,869,771
Promissory notes - long-term 1,290,882 603,828
4,284,567 4,473,599
Less current maturities 3,007,173 3,976,377
$1,277,394 $497,222
Page 22
The short-term borrowings relate to the Company's agreement with a financial
institution to provide a maximum line of credit of the lower of $7,500,000
or specified percentages of the Company's accounts receivable and inventory
consisting of a revolving line of credit and letter of credit. The
outstanding principal balance of the revolving credit line ($2,993,685 at
March 31, 1996) is payable on demand. The interest rate on the revolving
credit line is equal to 1% in excess of the prime rate of interest (10% at
March 31, 1996). As of March 31, 1996, the amount available for borrowings
under the line was approximately $100,000 based on the specified percentages.
The loan is collateralized by the Company's accounts receivable and
inventory. The agreement does not contain any provision for compliance with
financial covenants. The weighted average interest rate on outstanding
short-term borrowings for the years ended March 31, 1996, 1995 and 1994 was
11.0%, 9.0% and 6.8%, respectively.
In connection with the financing of the Company's new headquarters building
in 1993, the Company borrowed $1,050,000, pursuant to a promissory note. The
note was payable in 60 equal monthly installments of principal, based on a
15 year amortization schedule, together with interest on the full unpaid
balance, with a balloon payment and certain other costs at the end of the 60
month period. Interest accrues at a rate of 2.5% over the Wall Street
Journal prime rate (111/2% at March 31, 1995). The Company borrowed the
funds from an affiliate of the Hong Kong Corporation which maintains the
other 50% interest in the Company's joint venture (see Note C). Subsequent
to March 31, 1995, the Company refinanced its mortgage on the above building.
The terms of the new financing are a $1,300,000 loan repayable in 60 equal
monthly installments of principal and interest, based on a 25 year
amortization schedule, with an interest rate of 10%. The full outstanding
balance is due at the end of the 60 month period.
The fair value of debt is estimated to approximate its carrying value at
March 31, 1996, based on borrowing rates currently available with similar
terms and maturity.
The annual maturities for all debt outstanding at March 31, 1996 are: 1997,
$3,007,173; 1998, $14,655; 1999, $16,190; 2000, $1,246,549.
NOTE E - LEASES
Rental expense under operating leases was $136,000 for the year ended March
31, 1994. There were no operating leases for either of the years ended March
31, 1996 or March 31, 1995.
NOTE F - INCOME TAXES
At March 31, 1996, the Company has net operating loss carryforwards in the
United States of approximately $6,526,000 for income tax purposes that
expire in years 1999 through 2011 and tax credit carryforwards of
approximately $71,000 in the United States. From 1995 to 1996 and 1994 to
1995, the deferred tax asset valuation allowance increased by $339,555 and
$451,110, respectively. These net increases are mainly due to allowances
provided for domestic loss carryforwards generated during 1995
and 1996.
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:
Page 23
March 31,
1996 1995
Deferred tax liabilities:
Deferred gain on involuntary conversion $71,092 $94,790
Unremitted joint venture earnings not
considered permanently reinvested 380,000 224,580
Other 13,120
Gross deferred tax liabilities 451,092 332,490
Deferred tax assets:
Other accruals and reserves 43,993 60,311
Other 33,419
NOL carryforwards and tax credits 2,479,756 2,038,700
Gross deferred tax assets 2,557,168 2,099,011
Valuation allowance (2,106,076) (1,766,521)
Net deferred tax assets $-0- $-0-
The Company's portion of the undistributed earnings of the joint venture as
of March 31, 1996 is approximately $2,181,000 of which approximately
$1,181,000 is considered permanently reinvested. Therefore, deferred taxes
have not been provided on this amount. If that amount were repatriated,
United States taxes of approximately $449,000 would result; however, the
Company's domestic net operating loss carryforwards would eliminate the
effect of such additional taxes.
The reconciliation of the income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
3/31/96 3/31/95 3/31/94
Federal tax (benefit) expense at
statutory rate on earnings (loss)
before extraordinary item (34%) $(373,598) $(440,785) $12,557
Equity in earnings from joint venture (80,023) (314,172) (431,040)
Dividends received from joint venture
for which deferred taxes were not
previously provided 170,000 85,000
Effect of net operating
loss carryforwards 394,629 585,960 323,581
Other 58,992 (1,003) 9,902
$-0- $-0- $-0-
Investment and other tax credits are accounted for by the flow-through
method.
Page 24
NOTE G - COMMON STOCK
Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as
amended, 975,000 shares of common stock are authorized for the granting of
stock options, of which 46,075 shares have been issued as of March 31, 1996,
leaving 928,925 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.
The following tables summarize the status of options under the Non-Qualified
Stock Option Plan at March 31, 1996 and option transactions for the two
years then ended:
Status as of March 31, 1996 Number of Shares
Presently exercisable 509,000
Exercisable in future years 32,500
Total outstanding 541,500
Available for future grants 387,425
Shares of common stock reserved 928,925
Outstanding options:
Number of holders 14
Average price per share $1.97
Expiration dates December 1996 to January 2001
Transactions for the Two Years Ended March 31, 1996:
Weighted Average
Number of Per Share Total
Shares Option Price Option Price
Outstanding at
March 31, 1994 698,000 $1.98 $1,381,775
Granted 350,000 2.25 787,150
Canceled (458,500) 2.24 (1,025,700)
Outstanding at
March 31, 1995 589,500 1.94 1,143,225
Granted 12,500 2.28 28,450
Canceled (60,500) 2.09 (168,825)
Outstanding at
March 31, 1996 541,500 $1.85 $1,002,850
Page 25
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 asked price of the shares. The
Company has reserved 100,000 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, 1996, approximately 65,000 shares
remain reserved for issuance under this Plan.
During the year ended March 31, 1996, 715,000 outstanding warrants expired.
During October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." SFAS 123 encourages employers to adopt its
prescribed fair value-based method of accounting to recognize compensation
expense for employee stock compensation plans, however, it does allow the
Company to continue to account for its plans using its current method. The
Company intends to adopt the provisions of SFAS 123 effective April 1, 1996
under its disclosure-only alternative.
NOTE H - BENEFIT PLAN
The Company maintains a 401(k) defined contribution plan for its employees.
For calendar years 1996, 1995 and 1994, the Company has elected to
contribute 2% of each eligible employee's salary to the Plan. Additionally,
the Company has elected to match 20% of employee contributions,
up to a maximum of $200, and to provide an aggregate contribution of 3% of
corporate net income to be allocated among Plan participants. The 401(k)
expense for the years ended March 31, 1996, 1995 and 1994 was $32,486,
$41,305 and $44,572, respectively.
NOTE I - COMMITMENTS
The Company has employment agreements with two of its officers, both
expiring on March 31, 1998. The fixed aggregate annual remuneration under
these agreements approximates $500,000 per year. In addition, the
agreements provide incentive compensation to these officers based on the
Company's achievement of certain levels of earnings.
Outstanding letter of credit commitments which are used solely for
short-term inventory financing totalled $124,000 at March 31, 1996.
NOTE J - BUSINESS AND SALES INFORMATION
The Company is a manufacturer and wholesaler of a variety of products,
principally of security, video and telecommunications devices and systems,
for use in homes and businesses.
Approximately 11% of the Company's total sales were to a single
customer in
1996. Approximately 19% and 12% of the Company's total sales
were to a
different single customer in 1995 and 1994, respectively.
NOTE K - LITIGATION
On November 2, 1995, the Company was served with a Complaint filed by Black
& Decker (U.S.) Inc. and related entities against the Company and others in
the United States District Court for the Eastern District of Virginia. The
Complaint alleges patent and copyright infringement by the Company in
connection with its flexible flashlight, marketed under the name "PRETZL
LITE." The Complaint seeks triple damages for the infringement, costs and
attorneys' fees, and various injunctive relief prohibiting further
infringement. The Company engaged patent counsel to defend the
suit.
As a result of a series of hearings, the claims against the Company have
been consolidated into a single action. The Company has asserted unfair
competition counter claims against Black & Decker.
It is the opinion of the Company and the Company's counsel that the Company
has asserted several strong defenses to the litigation and that a favorable
outcome is anticipated because, in part, similar devices by other
manufacturers have been found not to infringe. However, counsel has also
advised that, as with all litigation, the extent of liability is uncertain
and, in the unlikely event that Black & Decker were to obtain a judgment in
this matter, such judgment could have a material adverse effect.
Page 26
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
At its board meeting on February 13, 1996, the Board of Directors
of the Company appointed the accounting firm of Deloitte & Touche
LLP as independent accountants for the Company for the year ended
March 31, 1996. The audit work of Ernst & Young LLP was
terminated as of January 17, 1996. During the two most recent
fiscal years and subsequent interim period preceding the
termination of Ernst & Young LLP, there were no disagreements
with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure or any reportable events. Ernst & Young LLP's report on
the financial statements for the past two years contained no
adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
Page 27
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of three directors. The following
is a list of individuals currently serving as directors of the Company, and
individuals currently serving as executive officers of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper 52 Director; Chairman of Board of 1970
the Company since 1970.
Michael Kovens 53 Director; President of the Company 1970
since 1970.
Mark Boyar 53 Director; President, Boyar Asset 1983
Management, Inc., New York,
NY, a registered investment
adviser; President, Mark Boyar &
Company, Inc., New York, NY, a
registered broker-dealer; and
Publisher and Director of Asset
Analysis Focus, New York, NY, a
monthly research analysis report.
Harvey Grossblatt 49 Executive Vice President of the
Company since December 1986;
Secretary and Treasurer of the
Company since September, 1988;
Vice President and Chief Financial
Officer of the Company from
October, 1983 through May 1995.
Page 28
ITEM 11.
EXECUTIVE COMPENSATION
Table I. Summary Compensation Table
The following table reflects the aggregate amount paid or accrued
by the Company in its three most recent fiscal years, for each
executive officer whose compensation exceeded $100,000 in that
year.
Long-Term Compensation
Name and Awards Payouts
Principal Annual Compensation Stock LTIP All Other
Position Year Salary Bonus Other Awards Options Payouts Compensation(1)
Stephen
C.
Knepper 1996 $250,000 - - - - - $2,700
Chairman
of the
Board 1995 237,500 - - - 95,000 - 3,250
1994 250,000 - - - 50,000 - 5,014
Michael
Kovens 1996 $250,000 - - - - - $3,200
President 1995 237,500 - - - 95,000 - 3,200
1994 250,000 - - - 50,000 - 4,619
Harvey
Gross-
blatt 1996 $143,675 - - - - - $3,918
Executive
Vice
Pres-
ident, 1995 143,269 - - - - - 2,840
Secretary
and
Treasurer 1994 136,738 - - - 25,000 - 3,771
(1)Consists of Company contributions under its 401(k) plan.
Table II. Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End
Option/SAR Values
Value
Number of Unexercised
of Unexercised In-The-Money
Shares Options at FY-End Options at FY-End
Acquired Value Exerci-/Unexerci- Exerci-/Unexerci-
Name In Exercise Realized sable / sable sable / sable
Stephen C. Knepper - - 215,000/-0- -0- /-0-
Michael Kovens - - 215,000/-0- -0- /-0-
Harvey Grossblatt - - 43,000/-0- -0- /-0-
EMPLOYMENT CONTRACTS
Stephen Knepper and Michael Kovens each have employment agreements with the
Company which expire March 31, 1998. Both agreements prohibit competition
with the Company during their term and for one year thereafter. Each
employee is entitled to Base Compensation of $250,000 a year plus Incentive
Compensation equal to specified percentages of the amount by which the
Company's consolidated annual pre-tax profits in each fiscal year exceed the
amount the Company would have received if the shareholders' equity (as
defined in the agreements) in the Company were invested in United States
Treasury Bills. The specified percentage is 5% of the first $1,000,000,
3-3/4% of the second $1,000,000, 2-1/2% of the third 1,000,000 and 1% of
everything over $3,000,000. The employment agreements further provide that
each employee is entitled to (i) certain life insurance and medical
reimbursement benefits, (ii) upon death or disability, 75% of the Base
Compensation for a period of 60 months (including Incentive Compensation for
that year if death or disability occurs after the first three months of the
fiscal year), (iii) deferred compensation upon termination of their
employment in the amount of three times the annual Base Compensation,
payable within 30 days after termination, and (iv) the continuation of
certain life insurance and medical reimbursement benefits for a period of
three years after termination.
DIRECTOR COMPENSATION
In the fiscal year ended March 31, 1996, the Company paid a director's fee
of $10,000 to Mark Boyar, the Company's non-management director.
Page 29
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 19, 1996, the following persons were "beneficial owners" (as that
term is defined under Rule 13d-3 promulgated by the Securities and Exchange
Commission) of more than five percent of the Company's Common Stock.
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 745,408(2) 22.9%
10324 South Dolfield Rd.
Owings Mills, MD 21117
Stephen Knepper 343,493(3) 10.6%
10324 South Dolfield Rd.
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, 1996 are deemed to be
outstanding.
(2) Includes 40,371 shares held by Mr. Kovens' adult children
and 215,000 shares which Mr. Kovens presently has the right to
acquire through the exercise of stock options.
(3) Includes 215,000 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options.
Page 30
As of June 19, 1996, 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 745,408(2) 22.9%
Stephen Knepper 343,493(3) 10.6%
Mark Boyar 30,000(4) 0.9%
Harvey Grossblatt 68,092(5) 2.1%
All directors and officers as a
group (6 persons included) 1,201,161 37.0%
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Consists of 5,000 shares owned by Mark Boyar & Company,
Inc., of which Mr. Boyar is the President, and 25,000 shares
which Mr. Boyar presently has the right to acquire through the
exercise of stock options.
(5) Includes 43,000 shares which Mr. Grossblatt presently has
the right to acquire through the exercise of stock options.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
Page 31
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following consolidated financial statements are included
in Part II, Item 8.
Reports of independent auditors
Financial statements
Consolidated balance sheets, March 31, 1996 and 1995
Consolidated statements of operations for the years ended
March 31, 1996, 1995 and 1994.
Consolidated statements of shareholders' equity for the
years ended March 31, 1996, 1995 and 1994.
Consolidated statements of cash flows for the years
ended March 31, 1996, 1995 and 1994.
Notes to consolidated financial statements.
2. The following financial statement schedule for the
years ended March 31, 1996, 1995 and 1994 are submitted herewith:
Page
Schedule II - Valuation accounts 34
All other schedules are omitted because they are not
applicable, not required, or because the required information is included in
the financial statements or notes thereto.
Page 32
3. Exhibits required by Item 601 of Regulation S-K.
The following exhibit is incorporated by reference to the exhibit
to Form 10-K for the fiscal year ended March 31, 1994, filed by the Company
with the Securities and Exchange Commission (SEC).
10.15 Joint Venture Agreement (confidential treatment of
name requested and filed separately with the SEC).
The following exhibit is incorporated by reference to the exhibit
to Form 10-K for the fiscal year ended March 31, 1995, filed by the Company
with the Securities and Exchange Commission (SEC).
10.16 Discount Factoring Agreement dated February 28,
1995 with Congress Talcott Corporation.
The following exhibits are incorporated by reference to the exhibit
to Form 10-Q for the period ended September 30, 1994 or December 31, 1994,
filed by the Company with the SEC:
10.13 Letter agreements dated September 14, 1994, October
30, 1994 and December 16, 1994 with the Riggs
National Bank of Washington, DC extending the Third
Amended and Restated Loan and Security Agreement.
The following exhibits are attached hereto:
11.1 Statement of computation of per share earnings.
24.1 Consent of Deloitte & Touche LLP, Independent Auditors.
24.2 Consent of Ernst & Young LLP, Independent Auditors.
(b) A report on Form 8-K was filed on January 19, 1996 recording
a change in registrant's certifying accountant.
(d) 1. Separate financial statements of The Joint Venture (name
withheld and filed separately with the SEC).
Page
Report of the auditors JV-1
Consolidated profit and loss account,
March 31, 1996 and 1995 JV-2
Consolidated balance sheets, March 31, 1996 and 1995 JV-3
Cash flow statement, March 31, 1996, 1995 and 1994 JV-4
Balance sheet, March 31, 1996, 1995 and 1994 JV-5
Notes to consolidated financial statements JV-6
Page 33
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION ACCOUNTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions(1) of year
Year ended
March 31, 1996
Allowance for
doubtful accounts $50,000 $-0- $-0- $24,229 $25,771
Year ended
March 31, 1995
Allowance for
doubtful accounts $45,000 $27,330 $-0- $22,330 $50,000
Year ended
March 31, 1994
Allowance for
doubtful accounts $50,000 $114,168 $-0- $119,168 $45,000
(1)Write-off of uncollectible accounts, net of recoveries.
Page 34
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: Michael Kovens
Michael Kovens, 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 28, 1996 By: Stephen Knepper
Stephen Knepper
Chairman of the Board, Director
Date: June 28, 1996 By: Michael Kovens
Michael Kovens, President, Director
Date: June 28, 1996 By: Mark Boyar
Mark Boyar, Director
Date: June 28, 1996 By: Harvey Grossblatt
Harvey Grossblatt,
Executive Vice President
Secretary, Treasurer
Date: June 28, 1996 By: Grant Pierpont
Grant Pierpont, Principal
Financial Officer
Page 35
REPORT OF THE AUDITORS
Shareholders and Board of Directors
The Joint Venture (name withheld and filed separately
with the Securities and Exchange Commission)
We have audited the financial statements on pages 2 to 18 which have been
prepared in accordance with accounting principles generally accepted in Hong
Kong.
Respective responsibilities of directors and auditors
The Companies Ordinance requires the directors to prepare financial statements
which give a true and fair view. In preparing financial statements which give a
true and fair view it is fundamental that appropriate accounting policies are
selected and applied consistently. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Statements of Auditing Standards
issued by the Hong Kong Society of Accountants. An audit includes an
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgements made by the directors in the preparation of
the financial statements, and of whether the accounting policies are appropriate
to the Company's and the Group's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statement are free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
Opinion
In our opinion the financial statements give a true and fair view, in all
material respects, of the state of affairs of the Company and the Group as at 31
March 1996 and of the profit and cash flows of the Group for the year then ended
and have been properly prepared in accordance with the Companies Ordinance.
Hong Kong
(June 16, 1996)
JV-1
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31 March 1996
Notes 1996 1995
HK$ HK$
TURNOVER 3 77,343,193 115,821,703
PROFIT BEFORE TAXATION 4 4,379,377 15,201,521
Taxation 6 (996,854) (891,374)
NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS 7 3,382,523 14,310,147
Retained profits at beginning of year 46,155,523 31,845,376
Dividends 8 (15,460,000) -
RETAINED PROFITS AT END OF YEAR 34,078,046 46,155,523
JV-2
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE
SEC)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
Notes 1996 1995
HK$ HK$
ASSETS
CURRENT ASSETS
Cash and bank balances 9 21,279,916 10,861,690
Bills receivable 192,430 -
Inventories 10 8,134,908 19,105,627
Prepayments, deposits and other receivables 807,869 582,254
Due from a shareholder 2 6,849,317 7,204,303
TOTAL CURRENT ASSETS 37,264,441 37,753,874
INTEREST IN AN ASSOCIATED COMPANY 12 10,752,111 10,392,304
FIXED ASSETS 13 25,638,308 29,194,790
TOTAL ASSETS 73,654,860 77,340,968
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bills payable, secured 435,117 -
Accounts payable 4,459,490 8,138,406
Other payables and accrued liabilities 1,059,993 1,127,833
Due to an associated company 14 10,113,460 10,507,167
Due to a related company 2 - 3,845,585
Taxation 213,600 1,300
Dividend payable 15,460,000 -
TOTAL CURRENT LIABILITIES 31,741,660 23,620,291
DEFERRED TAXATION 15 1,096,000 826,000
LOANS FROM SHAREHOLDERS 16 6,738,954 6,738,954
TOTAL LIABILITIES 39,576,614 31,185,245
SHAREHOLDERS' EQUITY
Share capital 17 200 200
Retained profits 34,078,046 46,155,523
34,078,246 46,155,723
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 73,654,860 77,340,968
JV-3
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
CASH FLOW STATEMENT
For the year ended 31 March 1996
Notes 1996 1995
HK$ HK$
NET CASH INFLOW FROM OPERATING ACTIVITIES 18 11,052,097 18,390,732
RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE
Interest received 1,498,463 693,437
Interest paid (10,742) (114,047)
Net cash inflow from returns on investments
and servicing of finance 1,487,721 579,390
TAXATION
Hong Kong profits tax paid (514,556) (1,638,437)
INVESTING ACTIVITIES
Purchases of fixed assets (1,926,285) (9,950,789)
Addition to interest in an associated
company (115,868) (5,256,634)
Net cash outflow from investing activities (2,042,153) (15,207,423)
NET CASH INFLOW BEFORE FINANCING ACTIVITY 9,983,109 2,124,262
FINANCING ACTIVITY
Repayment of shareholders' loans - (7,735,000)
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 9,983,109 (5,610,738)
Cash and cash equivalents at beginning
of year 10,861,690 16,472,420
CASH AND CASH EQUIVALENTS AT END OF YEAR 20,844,799 10,861,690
ANALYSIS OF THE BALANCES OF CASH AND
CASH EQUIVALENTS:
Cash and bank balances 21,279,916 10,861,690
Bills payable, secured (435,117) -
20,844,799 10,861,690
JV-4
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
BALANCE SHEET
31 March 1996
Notes 1996 1995
HK$ HK$
ASSETS
CURRENT ASSETS
Cash and bank balances 9 21,100,045 9,884,367
Bills receivable 192,430 -
Inventories 10 8,134,909 19,105,627
Prepayments, deposits and other receivables 582,254
Due from subsidiaries 2 807,869 11,147,603
Due from an associated company 12 287,848 43,909
Due from a shareholder 2 6,849,317 7,204,303
TOTAL CURRENT ASSETS 37,372,418 47,968,063
INTERESTS IN SUBSIDIARIES 11 210,008 210,008
FIXED ASSETS 13 25,638,308 29,194,790
TOTAL ASSETS 63,220,734 77,372,861
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bills payable, secured 435,117 -
Accounts payable 4,459,490 8,138,406
Other payables and accrued liabilities 1,041,993 1,109,833
Due to subsidiaries 2 6,211,206 17,069,173
Due to a related company 2 - 3,845,585
Taxation 210,000
Dividend payable 15,460,000 -
TOTAL CURRENT LIABILITIES 27,817,806 30,162,997
DEFERRED TAXATION 15 1,096,000 826,000
LOANS FROM SHAREHOLDERS 16 6,738,954 6,738,954
TOTAL LIABILITIES 35,652,760 37,727,951
SHAREHOLDERS' EQUITY
Share capital 17 200 200
Retained profits 27,567,774 39,644,710
27,567,974 39,644,910
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 63,220,734 77,372,861
JV-5
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Income received from the sales of goods is recognised upon the time the
goods are delivered to customers. Attributable profit arising from long
term contracts is recognised on the percentage of completion basis where
the contracts ultimate outcome can be foreseen and assessed with
reasonable certainty.
Basis of consolidation
The consolidated financial statements include the audited financial
statements of the Company and its subsidiaries for the year ended 31 March
1996. 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
Interests in subsidiaries are stated at cost unless, in the opinion of the
directors, there have been permanent diminutions in values, when they are
written down to values determined by the directors.
Associated companies
An associated company is a company, not being a subsidiary, in which the
Group has a long term interest of not less than 20% of the equity voting
rights and over which it exerts significant influence.
The Group's share of the post-acquisition results and reserves of
associated companies is included in the consolidated profit and loss
account and consolidated reserves, respectively. The Group's investments
in associated companies are stated in the consolidated balance sheet at
the Group's share of net assets under the equity method of accounting.
Goodwill
Goodwill arising on consolidation of subsidiaries and on acquisition of
associated companies represents the excess purchase consideration paid for
subsidiaries/associates over the fair values ascribed to the net underlying
assets acquired and is written off to the profit and loss account in the
year of acquisition.
JV-6
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation.
Depreciation is calculated on the straight-line basis to write off the
cost of each asset over its estimated useful life. The principal annual
rates used for this purpose are as follows:
Land held on medium term leases Over the lease terms
Buildings 5%
Leadhold improvements 20%
Plant and machinery 14.3%
Furniture and fixtures 20%
Motor vehicles 20%
Inventories
Inventories are stated at the lower of cost and net realizable value.
Cost is determined on the first-in, first-out basis and comprises direct
materials, direct labor and an appropriate proportion of overheads.
Net realizable value is based on estimated selling prices less further
costs expected to be incurred to completion and disposal.
Long term contracts
Long term contract work in progress is stated at cost plus attributable
profits less foreseeable losses and progress payments received and
receivable. The excess of progress payments received and receivable over
costs of individual contract plus attributable profits recognised to date
is included under current liabilities in the balance sheet. Cost
comprises materials, direct labor and an appropriate proportion of
overheads.
Where losses are currently estimated to arise over the duration of the
contracts, allowances is made for such losses. In determining this,
account is taken of the anticipated final contract settlement.
Attributable profit is calculated and included in long term contract work
in progress on a percentage of completion basis where the contract's
ultimate outcome can be foreseen and assessed with reasonable certainty.
The percentage of completion is measured by reference to the percentage of
contract costs incurred for work performed to date to the estimated total
contracted costs.
JV-7
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
OPERATING LEASES
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are accounted
for as operating leases. Rentals applicable to such operating
leases are charged to the profit and loss account on the
straight-line basis over the lease terms.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions are recorded at the
approximate rates of exchange ruling at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies
at the balance sheet date are translated at the approximate rates
of exchange ruling at that date. Exchange differences are dealt
with in the profit and loss account.
DEFERRED TAXATION
Deferred taxation 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.
RELATED COMPANY
A related company is a company in which a shareholder or
director has a direct or indirect interest, either as a
shareholder or director of that company, and is in a position to
exert significant influence over the related company.
2. CORPORATE AFFILIATION
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., which was incorporated in the United States, and The
Original Joint Venture Owner (name withheld and filed separately
with the SEC), which was incorporated in Hong Kong. On 3 October
1991, all the shares held by The Original Joint Venture Owner
(name withheld and filed separately with the SEC) were
transferred to The New Joint Venture Owner (name withheld and
filed separately with the SEC) and these shares were transferred
back to The Original Joint Venture Owner (name withheld and filed
separately with the SEC) on 22 December 1995. The Company is
economically dependent on Universal Security Instruments, Inc.
with which it transacts most of its business and the financial
statements reflect the effect of these transactions which are
conducted on bases determined between the parties.
During the year, the following significant related party
transactions were recorded:
Group
1996 1995
HK$ HK$
Sales made to:
Universal Security Instruments, Inc. 71,364,067 96,740,605
An Affiliate of The Company (name withheld
and filed separately with the SEC) - 632,898
An Associate of The Company (name withheld
and filed separately with the SEC) - 7,388,096
JV-8
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE
SEC) AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
2. CORPORATE AFFILIATION (continued)
Group
1996 1995
HK$ HK$
Contracting revenue received from:
An Associate of The Company (name withheld
and filed separately with the SEC) - 3,971,940
Sundry income received from:
Universal Security Instruments, Inc. 717,392 784,332
Management fee received from:
USI Oberlin Limited 139,320 139,770
Construction fee paid to:
An Affiliate of The Company (name withheld
and filed separately with the SEC) - 6,414,586
Purchases of inventories from:
An Affiliate of The Company (name withheld
and filed separately with the SEC) - 200,568
Universal Security Instruments, Inc. 553,559 1,308,275
An Affiliate of The Company (name withheld
and filed separately with the SEC) - 971,190
An Affiliate of The Company (name withheld
and filed separately with the SEC) 314,816 -
Licence fees paid to:
An Affiliate of The Company (name withheld
and filed separately with the SEC) 292,742 635,560
Rentals paid to:
An Affiliate of The Company (name withheld
and filed separately with the SEC) 1,080,000 1,080,000
A Manager (name withheld
and filed separately with the SEC) 480,000 540,000
Management fee paid to:
An Affiliate of The Company (name withheld
and filed separately with the SEC) 1,440,000 1,220,000
The balances with a shareholder and a related company, (name withheld
and filed separately with the SEC), are unsecured, interest-free, and have
no fixed terms of repayment.
The amounts due from/to subsidiaries are interest-free, unsecured and
have no fixed terms of repayment.
JV-9
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
3. TURNOVER AND REVENUE
Turnover represents the invoiced value of goods sold, net of
discounts and returns.
The Group's revenue from the following activities has been
included in turnover:
Group
1995 1994
HK$ HK$
Invoiced value of goods sold,
net of discounts and returns 77,343,193 111,849,763
Attributable profit recognised
in respect of a long term contract - 3,971,940
Turnover 77,343,193 115,821,703
4. PROFIT BEFORE TAXATION
Profit before taxation is arrived at after charging/(crediting):
Group
1996 1995
HK$ HK$
Depreciation 5,464,145 5,339,981
Auditors' remuneration 168,000 216,512
Interest on bank overdrafts and loans wholly
repayable within five years 10,742 114,047
Operating lease rentals for land and buildings 1,587,918 1,647,667
Foreign exchange gains, net (466,732) (895,982)
JV-10
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
5. DIRECTORS' REMUNERATION
Group
1996 1995
HK$ HK$
Fees - -
Other emoluments - 40,000
- 40,000
6. TAXATION
Hong Kong profits tax has been provided at the rate of 16.5%
on the estimated assessable profits arising in Hong Kong during
the year.
Group
1996 1995
HK$ HK$
Provision for the year 342,300 984,374
Underprovision in prior years 384,554 -
Deferred tax charge/(credit) - note 15 270,000 ( 93,000)
Taxation charge for the year 996,854 891,374
7. NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The net profit for the year dealt with in the financial
statements of the Company is HK$4,377,638 (1995: HK$10,470,796).
8. DIVIDENDS
1996 1995
HK$ HK$
Proposed final - HK$7,730,000 (1995: Nil)
per ordinary share 15,460,000 -
9. CASH AND BANK BALANCES
These included time deposits amounting to HK$1,240,842
(1995: HK$3,431,131) which were pledged to banks for credit
facilities of HK$3,329,000 (1995: HK$5,467,000) granted to the
Company.
JV-11
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
10. INVENTORIES
Group and Company
1996 1995
HK$ HK$
Raw materials 6,213,308 10,993,008
Work in progress 1,114,347 4,021,712
Finished goods 807,254 4,090,907
8,134,909 19,105,627
11. INTERESTS IN SUBSIDIARIES
Company
1996 1995
HK$ HK$
Unlisted shares, at cost 210,008 210,008
Particulars of the subsidiaries, all of which are wholly-owned by the
Group are as follows:
Nominal value
Place of of issued
incorporation ordinary Principal
Name and operation share capital activities
A Subsidiary of Incorporated US$1 Provision of
The Company in the British assistance in
(name withheld Virgin Islands development and
and filed and operates in manufacture
separately the People's of cellular
with the SEC) Republic hand-held
of China phones
A Subsidiary of Hong Kong HK$200,000 investment
The Company holding
(name withheld
and filed
separately
with the SEC)
A Subsidiary of Hong Kong HK$10,000 Dormant
The Company
(name withheld
and filed
separately
with the SEC)
JV-12
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
12. INTEREST IN AN ASSOCIATED COMPANY
Group
1996 1995
HK$ HK$
Unlisted equity investments 10,464,263 10,348,395
Due from associated company 287,848 43,909
10,752,111 10,392,304
The amount due from the associated company is unsecured,
interest-free and has no fixed terms of repayment.
Particulars of the associated company are as follows:
Percentage of
Country of Nominal value equity
registration of registered attributable Principal
Name and operation capital to the Group activities
1996 1995
An Associate The People's US$4,000,000 30 30 Manufacture
of The Republic of of cellular
Company China hand-held
(name phones
withheld
and filed
separately
with the SEC)
The Associated Company (name withheld and filed separately with the SEC)
was registered under the laws of the People's Republic of China as a
Sino-foreign equity joint venture on 20 June 1992 and has a tenure of
15 years. The tenure of the joint venture can be extended by the board
of directors of The Associated Company (name withheld and filed separately
with the SEC) with the approval of the relevant government authorities.
The Associated Company (name withheld and filed separately with the SEC)
has not commenced its operation at the balance sheet date.
The pre-operating expenses have been capitalised and, therefore, the
attributable share of net assets of The Associated Company (name withheld
and filed separately with the SEC) approximates the Group's capital
contribution.
JV-13
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
13. FIXED ASSETS
Group and Company
Leasehold Leasehold Plant Furniture Motor Con-
land and improve- and and vehi- struction
buildings ments machinery fixtures cles in progress Total
HK$ HK$ HK$ HK$ HK$ HK$ HK$
Cost:
At
begin-
ning
of
year 9,400,006 4,480,287 26,357,632 2,391,417 627,161 6,414,586 49,671,089
Addi-
tions - 1,077,659 696,264 152,362 - - 1,926,285
Re-
classifi
cati-
ons 6,414,586 - - - - (6,414,586) -
Dis-
pos-
als - - 156,250) (48,230) - - (204,480)
At 31
March
1996 15,814,592 5,557,946 26,897,646 2,495,549 627,161 - 51,392,894
Accumulated depreciation:
At
begin-
ning of
year 1,331,506 2,387,329 15,041,243 1,288,912 427,309 - 20,476,299
Pro-
vided
during
the
year 488,854 718,521 3,767,358 415,313 74,099 - 5,464,145
Dis-
po-
sals - - (139,851) (46,007) - - (185,858)
At
31
March
1996 1,820,360 3,105,850 18,668,750 1,658,218 501,408 - 25,754,586
Net book value:
At
31
March
19-
96 13,994,232 2,452,096 8,228,896 837,331 125,753 - 25,638,308
At
31
March
1995 8,068,500 2,092,958 11,316,389 1,102,505 199,852 6,414,586 29,194,790
The land and buildings, which represent the factory site and
facilities, are situated in the People's Republic of China under
medium-term leases. The construction in progress represented
construction fee paid to a related company (see note 2) for
expansion of the factory site and facilities. The balance was
transferred to leasehold land and buildings upon completion of
construction during the year.
JV-14
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
14. DUE TO AN ASSOCIATED COMPANY
The balance represents contract work in progress reflected
as a current liability at the balance sheet date and is analysed
as follows:
Group
1996 1995
HK$ HK$
Progress payments received 24,433,500 24,433,500
Less: Costs incurred on incompleted contract (7,758,040) (7,364,333)
Estimated attributable profits (6,562,000) (6,562,000)
14,320,040 (13,926,333)
10,113,460 10,507,167
Contract work in progress arose as a result of the provision
of assistance in the development and manufacture of cellular
hand-held phones by a subsidiary, (name withheld and filed
separately with the SEC), to an associated company, (name
withheld and filed separately with the SEC), at a contract value
of US$3,500,000 (HK$27,055,000).
15. DEFERRED TAXATION
Group and Company
1996 1995
HK$ HK$
Balance at beginning of year 826,000 919,000
Charge/(credit) for the year - note 6 270,000 (93,000)
Balance at end of year 1,096,000 826,000
The provision for deferred taxation represents mainly the
timing differences in respect of accelerated depreciation
allowances.
JV-15
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Year ended 31 March 1996
16. LOANS FROM SHAREHOLDERS
Group and Company
1996 1995
HK$ HK$
Universal Security Instruments, Inc. 3,369,477 3,369,477
An Affiliate of The Company (name withheld
and filed separately with the SEC) - 3,369,477
An Affiliate of The Company (name withheld
and filed separately with the SEC) 3,369,477 -
6,738,954 6,738,954
The loans are unsecured, interest-free and repayable on
demand by the respective shareholder with the consent of the
other. The shares held by An Affiliate of The Company (name
withheld and filed separately with the SEC) were transferred to
An Affiliate of The Company (name withheld and filed separately
with the SEC) during the year. The directors of the Company
consider that these liabilities are non-current.
17. SHARE CAPITAL
Group and Company
1996 1995
HK$ HK$
Authorised:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
JV-16
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
18. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
Reconciliation of profit before taxation to net cash inflow
from operating activities:
1996 1995
HK$ HK$
Profit before taxation 4,379,377 15,201,521
Interest income (1,498,463) (693,437)
Interest expense 10,742 114,047
Depreciation 5,464,147 5,339,981
Loss on disposal of fixed assets 18,622 8,615
Decrease/(increase) in bills receivable (192,430) 564,316
Decrease/(increase) in inventories 10,970,718 (7,095,500)
Decrease/(increase) in prepayments,
deposits and other receivables (225,615) 415,776
(Increase)/decrease in amount due
from a shareholder 354,986 (5,697,919)
Increase/(decrease) in accounts payable (3,678,916) 56,607
Decrease in other payables and accrued
liabilities (67,840) (358,804)
Increase/(decrease) in amount due to
an associated company (637,646) 7,581,877
Increase/(decrease) in amount due to
a related company (3,845,585) 2,953,652
Net cash inflow from operating activities 11,052,097 18,390,732
19. COMMITMENTS
Group Company
1996 1995 1996 1995
HK$ HK$ HK$ HK$
Capital commitments
authorised and
contracted for 348,400 262,625 348,400 262,625
Commitments payable in the
following year under
operating leases in
respect of land and
buildings expiring
within one year 1,560,000 900,000 1,560,000 900,000
JV-17
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1996
20. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to
conform with the current year's presentation.
21. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved by the board of
directors on (6/13/96).
JV-18
Universal Security Instruments, Inc.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31,
1996.
CONFIDENTIAL TREATMENT