================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7-A Gwynns Mill Court
Owings Mills, Maryland 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 363-3000
Inapplicable
(Former name, former address and former fiscal year
if changed from last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes No X
----- -----
At November 12, 2003, the number of shares outstanding of the registrant's
common stock was 1,130,362.
================================================================================
TABLE OF CONTENTS
Part I - Financial Information Page
----
Item 1. Consolidated Financial Statements (unaudited):
------ Consolidated Balance Sheets at September 30, 2003
and March 31, 2003 3
Consolidated Statements of Earnings for the Three
Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Earnings for the Six
Months Ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
------ Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About 13
------ Market Risk
Item 4. Controls and Procedures 13
------
Part II - Other Information
Item 1. Legal Proceedings 14
------
Item 4. Submission of Matters to a Vote of Security Holders 15
------
Item 6. Exhibits and Reports on Form 8-K 15
------
Signatures 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS September 30, March 31,
-------------- ---------
2003 2003
---- ----
CURRENT ASSETS
Cash $ 690,873 $ 51,112
Accounts receivable:
Trade (less allowance for doubtful accounts of $70,000 and $10,000
at September 30 and March 31, 2003, respectively) 225,405 207,539
Employees 15,940 16,303
----------- ----------
241,345 223,842
Amount due from factor 1,141,935 623,566
Inventory 3,056,028 3,224,229
Prepaid expenses 322,856 136,343
----------- ----------
TOTAL CURRENT ASSETS 5,453,037 4,259,092
INVESTMENT IN JOINT VENTURE 4,492,665 3,831,583
PROPERTY, PLANT AND EQUIPMENT - NET 94,337 279,896
OTHER ASSETS 11,472 11,472
----------- ----------
TOTAL ASSETS $10,051,511 $8,382,043
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,277,579 $1,173,175
Accrued liabilities 644,549 684,979
Current obligations under capital lease 22,888 23,250
----------- ----------
TOTAL CURRENT LIABILITIES 1,945,016 1,881,404
----------- ----------
LONG-TERM CAPITAL LEASE OBLIGATIONS - 7,224
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per share; authorized 20,000,000 shares; issued
and outstanding 1,128,945 and 1,121,982 shares at September 30, 2003 and
March 31, 2003, respectively 11,289 11,220
Additional paid-in capital 11,079,447 11,059,381
Accumulated deficit (2,984,241) (4,577,186)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 8,106,495 6,493,415
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,051,511 $8,382,043
=========== ==========
See accompanying notes to consolidated financial statements.
3
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
September 30,
2003 2002
---- ----
Net sales $4,988,483 $4,091,272
Cost of goods sold 3,412,776 2,805,125
---------- ----------
GROSS PROFIT 1,575,707 1,286,147
Research and development expense 65,860 72,581
Selling, general and administrative expense 1,243,860 954,505
---------- ----------
Operating income 265,987 259,061
Other (expense):
Interest expense (30,663) (36,332)
Other - 750
---------- ----------
(30,663) (35,582)
INCOME BEFORE EARNINGS FROM JOINT VENTURE 235,324 223,479
Earnings from Joint Venture:
Equity in earnings of Joint Venture 546,449 447,759
Cost allocatable to Joint Venture (41,327) (41,109)
---------- ----------
NET INCOME $ 740,446 $ 630,129
========== ==========
Net income per common share amounts:
Basic $0.66 $0.60
Diluted $0.57 $0.55
Weighted average number of common shares outstanding
Basic 1,127,593 1,054,205
Diluted 1,293,520 1,152,001
See accompanying notes to consolidated financial statements.
4
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Six Months Ended
September 30,
2003 2002
---- ----
Net sales $9,420,433 $7,842,198
Cost of goods sold 6,384,481 5,472,826
---------- ----------
GROSS PROFIT 3,035,952 2,369,372
Research and development expense 130,477 132,981
Selling, general and administrative expense 1,903,720 2,415,190
---------- ----------
Operating income 490,285 332,671
Other (expense):
Interest expense (63,372) (73,269)
Other - 750
---------- ----------
(63,372) (72,519)
---------- ----------
INCOME BEFORE EARNINGS FROM JOINT VENTURE
426,913 260,152
Earnings from Joint Venture:
Equity in earnings of Joint Venture 1,253,269 1,052,130
Cost allocatable to Joint Venture (87,237) (105,213)
---------- ----------
NET INCOME $1,592,945 $1,207,069
========== ==========
Net income per common share amounts:
Basic $1.42 $1.17
Diluted $1.25 $1.09
Weighted average number of common shares outstanding
Basic 1,125,309 1,034,488
Diluted 1,279,516 1,105,055
See accompanying notes to consolidated financial statements.
5
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended September 30,
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $1,592,945 $1,207,069
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 17,013 19,463
Stock issued in lieu of directors fee - 30,000
Gain on sale of land (175,965) -
Earnings of the Joint Venture (1,253,269) (946,917)
Change in allowance for doubtful accounts 60,000 (68,358)
Changes in operating assets and liabilities:
Increase in accounts receivable and amounts due from factor (595,872) (760,937)
(Increase) decrease in inventories and prepaid expenses (18,312) (613,373)
Decrease in other assets - 1,801
Increase in accounts payable and accrued expenses 656,162 1,012,206
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 282,702 (119,046)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (5,489) (4,165)
Gross proceeds from sale of land 350,000 -
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 344,511 (4,165)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock from exercise of employee stock options 21,560 7,000
Principal payments on capital lease (7,586) (7,586)
Retirement of common stock (1,426) -
Issue of common stock - 250,000
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,548 249,414
---------- ----------
INCREASE IN CASH 639,761 126,203
Cash at beginning of period 51,112 19,383
---------- ----------
CASH AT END OF PERIOD $ 690,873 $ 145,586
=========== ==========
Supplemental information:
Interest paid $ 63,372 $73,269
Income tax paid - -
Non-cash financing activities:
Repayment of trade payables due the Joint Venture in lieu of cash distribution 592,188 708,566
Issuance of 10,000 shares of common stock in satisfaction of amounts payable - 39,200
Issuance of 6,974 shares of common stock as directors fee $ - $30,000
See accompanying notes to condensed consolidated financial statements.
6
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statement of Management
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation. In the opinion of the
Company's management, the interim consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America have been condensed or omitted. The interim consolidated financial
statements should be read in conjunction with the Company's March 31, 2003
audited financial statements filed with the Securities and Exchange Commission
on Form 10-K. The interim operating results are not necessarily indicative of
the operating results for the full fiscal year.
Income Taxes
No income tax expense has been provided for the three and six month periods
ended September 30, 2003 as a result of the carryforward of prior years'
operating losses.
Joint Venture
The Company maintains a 50% interest in a joint venture with a Hong Kong
corporation ("Joint Venture") which has manufacturing facilities in the People's
Republic of China, for the manufacturing of consumer electronic products. The
following represents summarized balance sheet and income statement information
of the Hong Kong Joint Venture for the six months ended September 30, 2003 and
2002:
2003 2002
----------- -----------
Net sales $13,078,644 $11,728,014
Gross profit 4,188,176 3,951,259
Net income 2,566,465 2,692,827
Total current assets 9,909,010 7,544,756
Total assets 12,694,320 9,949,335
Total current liabilities 3,232,572 2,751,807
During the six months ended September 30, 2003 and 2002, respectively, the
Company purchased $4,159,596 and $3,615,994 of products from the Hong Kong Joint
Venture. At September 30, 2003 and 2002, the Company had amounts payable to the
Hong Kong Joint Venture of $490,071 and $458,575, respectively. The Company has
adjusted its equity in earnings of the Joint Venture to reflect certain
adjustments required by US GAAP.
In 2002, the Company amended its employment agreements so that bonus payments
are allocated between domestic operations and joint venture operations. The
Company recorded $41,327 and $87,237 of costs allocatable to the joint venture
in the accompanying statement of operations for the three and six months ended
September 30, 2003 and $41,109 and $105,213 for the same periods last year.
Net Income Per Common Share
Basic earnings per common share is computed based on the weighted average number
of common shares outstanding during the periods presented. Diluted earnings per
common share is computed based on the weighted average number of common shares
outstanding plus the effect of stock options and other potentially dilutive
common stock equivalents. The dilutive effect of stock options and other
potentially dilutive common stock equivalents is determined using the treasury
stock method based on the Company's average stock price.
A reconciliation of the weighted average shares of common stock utilized in the
computation of basic and diluted earnings per share for the three and six month
periods ended September 30, 2003 and 2002 is as follows:
7
Three Months Ended Six months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Weighted average number of common 1,127,593 1,054,205 1,125,309 1,034,488
shares outstanding for basic EPS
Shares issued upon the assumed 165,927 97,796 154,207 70,567
exercise of outstanding stock options --------- --------- --------- ---------
Weighted average number of common 1,293,520 1,152,001 1,279,516 1,105,055
and common equivalent shares
outstanding for diluted EPS
Stock Based Compensation
The Company uses the intrinsic value method as defined by Accounting Principles
Board Opinion No. 25 to account for stock-based employee compensation. The
Company has adopted the disclosure requirements of Financial Accounting
Standards Board (FASB) Statement No. 123, Accounting for Stock-Based
Compensation, as amended by FASB No. 148 during fiscal 2003. The following table
illustrates the effect on net income and earnings per share as if the fair value
based method had been applied to all outstanding and unvested awards in each
period.
Three Months Ended Six months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $740,446 $630,129 $1,592,945 $1,207,069
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (18,757) (20,985) (37,514) (41,969)
-------- -------- ---------- ----------
Pro forma net income $721,689 $609,144 $1,555,431 $1,165,100
======== ======== ========== ==========
Earnings per share:
Basic - as reported $0.66 $0.60 $1.42 $1.17
===== ===== ===== =====
Basic - pro forma $0.64 $0.58 $1.38 $1.13
===== ===== ===== =====
Diluted - as reported $0.57 $0.55 $1.25 $1.09
===== ===== ===== =====
Diluted - pro forma $0.56 $0.53 $1.22 $1.05
===== ===== ===== =====
Recently Issued Accounting Standards
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued which amends and clarifies the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities under SFAS No. 133. It
requires, among other things, that contracts with comparable characteristics be
accounted for similarly and clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is effective generally for contracts
entered into and modified after June 30, 2003. The adoption of this statement
did not have any effect on the Company's financial position or statement of
operations.
8
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both liabilities and Equity" was issued. This statement
establishes new standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement did not have any effect on
the Company's financial position or statement of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements reflecting the Company's current expectations with respect to its
operations, performance, financial condition, and other developments. These
forward-looking statements may generally be identified by the use of the words
"may", "will", "believes", "should", "expects", "anticipates", "estimates", and
similar expressions. Such statements are necessarily estimates reflecting the
Company's best judgment based upon current information and involve a number of
risks and uncertainties. While it is impossible to identify all such factors
which could cause actual results to differ materially from expectations are: (i)
the Company's and the Hong Kong Joint Venture's ability, respectively, to
maintain operating profitability, (ii) competitive practices in the industries
in which the Company competes, (iii) the Company's dependence on current
management, (iv) the impact of current and future laws and governmental
regulations affecting the Company and the Hong Kong Joint Venture, (v) general
economic conditions, (vi) other factors which may be identified from time to
time in the Company's Securities and Exchange Commission filings and other
public announcements, and (vii) currency fluctuations. There can be no assurance
that these and other factors will not affect the accuracy of such
forward-looking statements.
Three Months Ended September 30, 2003 and 2002
Sales. Net sales for the three months ended September 30, 2003 were
$4,988,483 compared to $4,091,272 for the comparable three months in the prior
fiscal year, an increase of $897,211. Net sales of safety products increased by
$894,818 as compared to the quarter ended September 30, 2002. Net sales of other
products increased by $2,393, as compared to the quarter ended September 30,
2002. The primary reason for the increase in safety sales was higher smoke alarm
and carbon monoxide alarm sales.
Gross Profit Margin. The gross profit margin is calculated as net sales
less cost of goods sold expressed as a percentage of net sales. The Company's
gross profit margins increased 3%, to 32% of sales for the quarter ended
September 30, 2003 from 31% for the corresponding quarter last year. The
increase resulted from higher sales and increased productivity and efficiency.
Expenses. Selling, general and administrative expenses increased by
$289,355 from the comparable three months in the prior year. As a percentage of
sales, selling, general and administrative expenses were 25% for the three month
period ended September 30, 2003 and 23% for the three month period ended
September 30, 2002. The increase in selling, general and administrative expenses
was mainly due to higher commission and freight costs associated with the
Company's higher sales and higher legal costs associated with defending patent
and the other litigation discussed below, listing on the American Stock Exchange
and partially offset by a gain on the sale of a 1.5 acre parcel of land for
gross sale proceeds of $350,000. Selling, general and administrative expenses
have been reduced by $146,836, which was the gain, net of selling expenses, from
the sale of the parcel of land.
Interest Expense and Income. The Company's interest expense, net of
interest income, decreased from $36,332 for the quarter ended September 30, 2002
to $30,663 for the quarter ended September 30, 2003. The lower interest expenses
resulted primarily from lower interest rates.
Net Income. The Company reported a net profit of $740,446 for the quarter
ended September 30, 2003 compared to net profit of $630,129 for the
corresponding quarter of the prior fiscal year. The primary reasons for the
increase in profit were higher Joint Venture earnings, higher gross profit from
Company sales, and the gain on the sale of the 1.5 acre parcel of land,
partially offset by higher selling, general and administrative expenses
associated with increased sales and higher legal costs associated with defending
patent and other litigation discussed below.
Six Months Ended September 30, 2003 and 2002
Sales. Net sales for the six months ended September 30, 2003 were
$9,420,433 compared to $7,842,198 for the comparable six months in the prior
fiscal year, an increase of $1,578,235. Net sales of safety products increased
10
by $1,673,748 as compared to the quarter ended September 30, 2002. Net sales of
other products decreased by $95,513, as compared to the six months ended
September 30, 2002. The primary reason for the increase in safety sales was
higher smoke alarm and carbon monoxide alarm sales. The primary reason for lower
sales of other products was lower sales of speakers.
Gross Profit Margin. The gross profit margin is calculated as net sales
less cost of goods sold expressed as a percentage of net sales. The Company's
gross profit margins increased 7%, to 32% of sales for the six months ended
September 30, 2003 from 30% for the corresponding period last year. The increase
resulted from increased sales and improved productivity and efficiencies.
Expenses. Selling, general and administrative expenses increased by
$511,470 from the comparable six months in the prior year. As a percentage of
sales, selling, general and administrative expenses were 26% for the six month
period ended September 30, 2003 and 24% for the six month period ended September
30, 2002. The increase in selling, general and administrative expenses was
mainly due to higher commission and freight costs associated with the Company's
higher sales and higher legal costs associated with defending patent and other
litigation discussed below, listing on the American Stock Exchange and partially
offset by a gain on the sale of a 1.5 acre parcel of land for gross sale
proceeds of $350,000. Selling, general and administrative expenses have been
reduced by $146,836, which was the gain, net of selling expenses, from the sale
of the parcel of land.
Interest Expense and Income. The Company's interest expense, net of
interest income, decreased from $73,269 for the six months ended September 30,
2002, to $63,372 for the six months ended September 30, 2003. The lower interest
expenses resulted primarily from lower interest rates.
Net Income. The Company reported a net profit of $1,592,945 for the six
months ended September 30, 2003 compared to net profit of $1,207,069 for the
corresponding period of the prior fiscal year. The primary reasons for the
increase in profit were higher Joint Venture earnings, higher gross profit from
Company sales, and the gain on the sale of the 1.5 acre parcel of land,
partially offset by higher selling, general and administrative expenses
associated with increased sales and higher legal costs associated with defending
patent and other litigation discussed below.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated from
operations and the Company's Factoring Agreement which supplies both short-term
borrowings and letters of credit to finance foreign inventory purchases. The
Company's maximum amount available under the Factoring Agreement is currently
$7,500,000. However, based on specified percentages of the Company's accounts
receivable and inventory and letter of credit commitments, at September 30,
2003, the Company had $1,946,000 available under the Factoring Agreement as of
September 30, 2003. The interest rate under the Factoring Agreement on the
uncollected factored accounts receivable and any additional borrowings is equal
to 1% in excess of the prime rate of interest charged by the Company's lender,
which was 5% at September 30, 2003. Borrowings are collateralized by all the
Company's accounts receivable and inventory. On August 1, 2003, the Company sold
a 1.5 acre parcel of land which until then had also secured the borrowings under
the Factoring Agreement and used the proceeds to reduce the outstanding
principal balance due under the Factoring Agreement.
Operating activities provided cash of $282,702 for the quarter ended
September 30, 2003. This was primarily due to an increase in accounts receivable
and amount due from factor of $595,872, and equity in the earnings from the
Company's Joint Venture of $1,253,269, which were offset by an increase in
accounts payable and accrued expenses of $656,162. For the same period last
year, operating activities used cash of $119,046.
Investing activities provided cash of $344,511 in the current quarter,
primarily from the sale of the 1.5 acre parcel of land. For the same period last
year, investing activities used cash of $4,165.
Financing activities provided cash of $12,548 primarily from the exercise
of employee stock options. For the same period last year, financing activities
provided cash of $249,414, primarily from the issuance of common stock for
$250,000.
The Company believes that funds available under the Factoring Agreement,
distributions from the Hong Kong Joint Venture, and working capital provide the
Company with sufficient resources to meet its requirements for liquidity and
working capital in the ordinary course of its business over the next twelve
months.
11
In August 2003, the Company had announced that Underwriters Laboratories
(UL) had identified certain ground fault circuit interrupter (GFCI) units sold
by the Company, as potentially hazardous and recommending their return. (See
Part II, Item 1, "Legal Proceedings", below.) At that time, the Company
voluntarily stopped sales of its GFCI unit inventory. The U.S. Consumer Product
Safety Commission reviewed the matter and closed its inquiry into the Company's
GFCI units. The costs, if any, to the Company related to these GFCI units is not
presently determinable. The Company is working towards a possible resolution of
any remaining UL concerns. The GFCI units accounted for approximately 17% of the
Company's sales in the first six months of the current year.
HONG KONG JOINT VENTURE
Net Sales. Net sales of the Hong Kong Joint Venture for the three and six
months ended September 30, 2003 were $6,317,099 and $13,078,644, respectively,
compared to $6,717,026 and $11,728,014, respectively, for the comparable three
months in the prior fiscal year. The increase in sales was primarily due to
increased sales of smoke alarms to non-related customers.
Net Income. Net income for the three and six months ended September 30,
2003 was $1,290,429 and $2,566,465, respectively, compared to $1,312,301 and
$2,692,827, respectively, in the comparable periods last year.
Gross Margins. Gross margins of the Hong Kong Joint Venture for the three
month period ended September 30, 2003 increased to 35% from 34% for the 2002
period. For the six month period ended September 30, 2003, gross margins
decreased to 32% from 34% for the 2002 period. Since gross margins depend on
sales volume of various products, changes in product sales mix caused these
changes in gross margins.
Expenses. Selling, general and administrative expenses were $880,139 and
$1,570,281, respectively, for the three and six month periods ended September
30, 2003, compared to $528,354 and $1,074,146, in the prior year's respective
periods. As a percentage of sales, expenses were 14% and 12%, respectively, for
the three and six month periods ended September 30, 2003, compared to 8% and 9%,
respectively, for the three and six month periods ended September 30, 2002. The
increase in selling, general and administrative expense as a percent of sales
was due to increases in the Joint Venture's management fees and management
bonuses.
Interest Income and Expense. Interest income, net of interest expense, was
$298 and $854, respectively, for the three and six month periods ended September
30, 2003, compared to interest expense of $4,264 and $8,413, respectively, for
the prior year's periods.
Liquidity. Cash needs of the Hong Kong Joint Venture are currently met by
funds generated from operations. During the six months ended September 30, 2003,
working capital increased by $1,093,655 from $5,582,783 on March 31, 2003 to
$6,676,438 on September 30, 2003.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Company's consolidated
financial statements and results of operations are based upon the Company's
Consolidated Financial Statement included as part of this document. The
preparation of these consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an ongoing basis, the Company evaluates these estimates,
including those related to bad debts, inventories, income taxes, and
contingencies and litigation. The Company bases these estimates on historical
experiences and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect
management's more significant judgments and estimates used in the preparation of
its consolidated financial statements. For a detailed discussion on the
application on these and other accounting policies see Note A to the
consolidated financial statements included in Item 8 of the Form 10-K for the
year ended March 31, 2003. Certain of our accounting policies require the
application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty and actual results
12
could differ from these estimates. These judgments are based on our historical
experience, terms of existing contracts, current economic trends in the
industry, information provided by our customers, and information available from
outside sources, as appropriate. Our critical accounting policies include:
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
issued by the Securities and Exchange Commission. Revenue is recognized at the
time product is shipped and titled passes pursuant to the terms of the agreement
with the customer, the amount due from the customer is fixed and collectibility
of the related receivable is reasonably assured. The Company establishes
allowances to cover anticipated doubtful accounts based upon historical
experience.
Inventories are valued at the lower of market or cost. Cost is determined
on the first-in first-out method. The Company has recorded a reserve for
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. Management reviews the reserve quarterly.
The Company currently has significant deferred tax assets resulting from
tax credit carryforwards, net operating loss carryforwards and deductible
temporary differences, which will reduce taxable income in future periods. The
Company has provided a valuation allowance on future tax benefits such as
foreign tax credits, foreign net operating losses, capital losses and net
operating losses.
A valuation allowance is required when it is more likely than not that all
or a portion of a deferred tax assets will not be realized. Forming a conclusion
that a valuation allowance is not needed is difficult when there is a negative
evidence such as cumulative losses and losses in recent years. Cumulative losses
weigh heavily in the overall assessment. As a result of management's assessment,
the Company established a full valuation allowance for its remaining net
deferred tax assets at March 31, 2003.
The Company is subject to lawsuits and other claims, related to patents and
other matters. Management is required to assess the likelihood of any adverse
judgments or outcomes to these matters, as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies is based on a careful analysis of each individual issue with the
assistance of outside legal counsel. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
No material changes have occurred in the quantitative and qualitative
market risk disclosures of the Company as presented in the Company's Annual
Report Form 10-K for the year ended March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that
is designed to provide reasonable assurance that information, which is required
to be disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is accumulated and communicated
to management in a timely manner. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated this system of disclosure controls and
procedures as of the end of the period covered by this quarterly report, and
believe that the system is operating effectively to ensure appropriate
disclosure. There have been no changes in the Company's internal control over
financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported by the Company in a Current Report on Form 8-K, on
September 3, 2003 the Company was advised that Michael Kovens, a then-director,
principal stockholder and the former Chairman and chief executive officer of the
Company, had filed an action in Baltimore County Circuit Court (Case No.
C-03-9639) against the Company and the other directors seeking: (i) to enjoin
the Company from holding its Annual Meeting of Stockholders on Monday, September
8, until Mr. Kovens is able to nominate directors for election at the Annual
Meeting; (ii) to require the Company to provide Mr. Kovens with certain
confidential information to which Mr. Kovens claims he is entitled under
Maryland law; (iii) to enjoin the Company from voting any shares issued by the
Company since Mr. Kovens was replaced as Chairman and CEO; (iv) to void the
employment agreement between the Company and its president, and to enjoin the
Company from enforcing a "Change of Control" provision in the Company's
president's employment agreement; (v) to void all issuances by the Company of
restricted stock and options from and after October 1, 2001; (vi) to void any
Bylaw amendments adopted by the Company from and after October 1, 2001; (vii) to
enforce the exercise of an option by Mr. Kovens which the Company maintains has
expired; (viii) to void the election by the Company, pursuant to the Maryland
General Corporation Law, to be governed by certain provisions of Maryland law;
and (ix) other unspecified relief.
Following a hearing in on September 3, 2003, the Court refused to issue a
temporary restraining order requested by Mr. Kovens to enjoin the Company and
the other directors from holding the Annual Meeting, enforcing the "Change of
Control" provision in the Company's president's employment agreement, and taking
other unspecified actions. The Company and the other defendants were served with
the complaint on September 5, 2003.
The Company has been advised by counsel that the action as filed is without
merit, and the Company intends to aggressively defend the action. On October 2,
2003, the Court granted the parties joint motion to stay all proceedings in this
matter to allow the parties an opportunity to negotiate a resolution of the
dispute, and providing that the stay may be terminated upon the request of any
party at any time if the negotiation and/or implementation of the settlement is
not progressing satisfactorily.
In the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 2003, the Company reported on a suit filed on June 13, 2003 by Leviton
Manufacturing Co., Inc. in the United States District Court for the District of
Maryland (Case No. 03-CV-1701). The Company has since filed its answer in that
litigation. The Company and its counsel believe that the Company has meritorious
defenses to the claims and is aggressively defending the suit.
In the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 2003, the also Company reported on a suit filed on June 11, 2003 by Walter
Kidde Portable Equipment Inc. in the United States District Court for the Middle
District of North Carolina (Case No. 1:03CV00537). The Company has since filed
its answer in that litigation. The Company and its counsel believe that the
Company has meritorious defenses to the claims and is aggressively defending the
suit.
On October 10, 2003, Maple Chase Company filed a civil complaint against
the Company in the United States District Court for the Northern District of
Illinois (Case No. 03-CV-7205), alleging that a feature incorporated into the
Company's existing battery powered fire and smoke detectors infringes a patent
held by the plaintiff. The plaintiff is seeking injunctive relief and damages to
be determined at trial. The Company has not yet answered and/or counterclaimed
against the plaintiff, but the Company believes that it has meritorious defenses
to the claims and will aggressively defend the suit.
In August 2003, the Company had announced that Underwriters Laboratories
(UL) had identified certain ground fault circuit interrupter (GFCI) units
manufactured by Shanghai Meihao Electric, including GFCI units sold by the
Company, as potentially hazardous and recommending their return. The Company,
along with the manufacturer and the other distributors of the GFCI units
defended the safety of the GFCI units and submitted the units to various
independent laboratories for testing. Simultaneously, the Company voluntarily
stopped sales of its GFCI unit inventory and began discussions with the U.S.
Consumer Product Safety Commission (CPSC) to determine what action, if any, is
14
necessary to protect consumer safety. After review of the independent testing
results, the CPSC closed its inquiry into the Company's GFCI units. The Company
is continuing its discussions with UL to remedy any remaining UL concerns. The
Company will continue its voluntary hold on sales of these GFCI units until the
UL issues have been resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 8, 2003, the Company held its Annual Meeting of Stockholders.
Reference is made to the Current Report on Form 8-K filed by the Company on
September 9, 2003 with respect to the voting results of the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No.
- -----------
3.1 Articles of Incorporation (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the period ended December 31, 1988,
File No. 0-7885)
3.2 Articles Supplementary, filed October 14, 2003 (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on Form 8-K
filed October 31, 2002, file No. 0-7885)
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3 to the
Company's Form 8-A/A filed July 24, 2003)
10.1 Non-Qualified Stock Option Plan, as amended* 10.2 Hong Kong Joint
Venture Agreement, as amended (incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for the year ended
March 31, 2003, File No. 0-7885)
10.3 Amended Factoring Agreement with CIT Group (successor to Congress
Talcott, Inc.) dated November 14, 1999 (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 0-7885)
10.4 Amendment to Factoring Agreement with CIT Group (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 0-7885)
10.5 Lease between Universal Security Instruments, Inc. and National
Instruments Company dated October 21, 1999 for its office and
warehouse located at 7-A Gwynns Mill Court, Owings Mills, Maryland
21117 (incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the Fiscal Year Ended March 31, 2000,
File No. 0-7885)
10.6 Amended and Restated Employment Agreement dated April 1, 2003 between
the Company and Harvey B. Grossblatt (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 0-7885)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1 Section 1350 Certifications*
99.1 Press Release dated November 12, 2003*
*Filed herewith
(b) Reports on Form 8-K:
On July 25, 2003, the Registrant filed a Current Report on Form 8-K
reporting, under Item 5, the July 24, 2003 listing of the Company's shares of
Common Stock for trading on the American Stock Exchange.
On September 5, 2003, the Registrant filed a Current Report on Form 8-K
reporting, under Item 5, the September 3, 2003 filing of a lawsuit against the
Company and the members of its Board of Directors by Michael Kovens.
On September 9, 2003, the Registrant filed a Current Report on Form 8-K
reporting, under Item 5, the voting results of the Company's September 8, 2003
Annual Meeting of Stockholders.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Registrant)
Date: November 14, 2003 By: /s/ Harvey B. Grossblatt
---------------------------------
Harvey B. Grossblatt
President, Chief Financial Officer
16
Exhibit 10.1
------------
UNIVERSAL SECURITY INSTRUMENTS, INC.
NON-QUALIFIED STOCK OPTION PLAN
1. Purpose - The purpose of this Plan is to further the interests of UNIVERSAL
SECURITY INSTRUMENTS, INC. (hereinafter called the "Company") by providing
incentives for employees, officers and directors of the Company and its
subsidiaries, who may be designated for participation therein and to provide
additional means of attracting and retaining competent personnel.
2. Administration - The Plan shall be administered by a committee consisting of
the Board of Directors of the Company or such lesser number of such Board (but
not less than three persons) as is designated by the Board. Such committee shall
hereinafter be referred to as the "Non-Qualified Stock Option Committee" or the
"Committee". Subject to the provisions of the Plan and applicable law, the
Committee is authorized to interpret the Plan and to prescribe, amend and
rescind rules and regulations relating to the Plan and to any options granted
thereunder, and to make al other determinations necessary or advisable for the
administration of the Plan.
3. Participants and Allotments - The Committee shall determine and designate
from time to time those employees and directors of the Company to whom options
are to be granted and who thereby become participants in the Plan. The Committee
shall allot to such participants options to purchase shares in such amounts as
the Committee shall from time to time determine. Employees, officers and
directors of the Company or its subsidiaries shall be eligible to participate in
the Plan. No member of the Committee shall have any right to vote or decide upon
any matter relating solely to himself or a member of his immediate family or
solely to any of his rights or benefits (or rights or benefits of a member of
his immediate family) under the Plan. Participation in the Plan shall not confer
any right of continuation of service as an employee, officer or a director of
the Company or its subsidiary.
4. Shares Subject to the Plan - Under this Plan, the Committee may from time to
time grant options to employees, officers and directors of the Company and its
subsidiaries, entitling the holders thereof to purchase shares of the Company's
authorized and unissued common stock, par value $.01 per share (the "Common
Stock"), or shares of the Company's treasury Common Stock, or a combination of
both, up to an aggregate of 493,750 shares of Common Stock. Notwithstanding
anything herein to the contrary, no member of the Committee shall be eligible to
vote on the granting of any option under the Plan if the option is to be granted
to such member of the Committee or to a member of his immediate family. If any
option granted under the Plan shall terminate or expire unexercised, in whole or
in part, the shares so released from option may be made the subject of
additional options granted under the Plan. The Company shall reserve and keep
available such number of shares of stock as will satisfy the requirements of all
outstanding options granted under the Plan. In the event there is any change in
the Company's shares of Common Stock, as by stock splits, reverse stock splits,
stock dividends or recapitalization, the number of shares available for option
and the shares subject to option shall be appropriately adjusted by the
Committee.
5. Option Price - The option price or prices shall be as established by the
Committee when such option is granted on the date or dates the options are
granted. In the event there is any change in the Company's shares as by stock
splits, reverse stock splits, stock dividends or recapitalization, the purchase
price of shares subject to option shall be appropriately adjusted by the
Committee.
6. Other Provisions - Each option shall be subject to all provisions of this
Plan and to the following terms and conditions:
(a) Options will be granted under the Plan which will be exercisable
for a period of five years from the date of grant. The Committee may in its
discretion impose additional restrictions as to the time of exercise and/or
number of shares that may be purchased upon any exercise of options.
1
(b) No option shall be transferable by the optionee otherwise than by
will or the laws of descent and distribution and shall be exercisable
during his lifetime only by the optionee.
(c) All unexercised options will terminate, be forfeited and will
lapse immediately if (i) the optionee's employment with the Company or its
subsidiaries is terminated because the optionee is discharged for
dishonesty, commission of a felony or the intentional committing of an act
which has a material adverse effect or impact upon the Company or its
subsidiaries, such as his disclosing Company confidential information or
trade secrets to an unauthorized person or persons, or (ii) the optionee
agrees to accept employment with a competitor of the Company or its
subsidiaries without the consent of the Company.
(d) If the optionee's employment with the Company or its subsidiaries
is terminated for any reason other than as set forth in subparagraph (c)
above, or if the optionee ceases to be a director of the Company or its
subsidiaries, the Optionee may exercise, subject to the provisions of
subparagraph (a) and (c) above, any option which has accrued hereunder as
of the date his employment with the Company or its subsidiaries terminated
or as of the date he ceases to be a director (as may be the case) for a
period of ninety (90) days after the date of the termination of his
employment with, or his termination as a director of, the Company or its
subsidiaries; provided, however, that if the optionee's employment (or
being a director, as may be the case) with the Company or its subsidiaries
is terminated by reason of his death, the optionee's personal
representatives, estate or heirs (as the case may be) may exercise, subject
to the provisions of subparagraph (a) above, any option which has accrued
hereunder as of the date of the optionee's death for a period of one
hundred eighty (180) days after the date of the optionee's death.
(e) Except as otherwise provided in subparagraph (d) above, all
unexercised options will terminate, be forfeited and will lapse upon the
termination of the optionee's employment with the Company or its
subsidiaries (or upon the termination of his being a director of the
Company or its subsidiaries, as the case may be).
7. Exercise of Options - To exercise the option, the optionee or his successor
shall give written notice to the Company's Chief Financial Officer at the
Company's principal office in Owings Mills, Maryland, accompanied by full
payment for the shares being purchased and a written statement that the shares
are purchased for investment and not with a view to distribution. However, this
statement will not be required in the event the shares subject to the option are
registered with the Securities and Exchange Commission. If the option is
exercised by the successor of the optionee, following his death, proof shall be
submitted, satisfactory to the Committee, of the right of the successor to
exercise the option.
Shares of stock issued pursuant to this Plan which have not been registered
with the Securities and Exchange Commission shall bear the following legend:
"The shares represented by this certificate
have not been registered under the Securities Act
of 1933 and may be offered or sold only if
registered under the provisions of that Act or if
an exemption from registration is available.
The Company shall not be required to transfer or deliver any certificate or
certificates for shares purchased upon any such exercise of said option: (a)
until after compliance with all then applicable requirements of law; and (b)
prior to admission of such shares to listing on any stock exchange on which the
stock may then be listed. In no event shall the Company be required to issue
fractional shares to the employee, officer or director.
8. Registration - If the Company shall be advised by its counsel that shares of
stock deliverable upon any exercise of an option are required to be registered
under the Securities Act of 1933, or that the consent of any other authority is
required for the issuance of same, the Company may effect registration or obtain
consent, and delivery of shares by the Company may be deferred until
registration is effected or consent obtained. However, the Company reserves the
right to revoke the option if it determines that, in the best interest of the
Company, the shares should not be registered or that consent should not be
obtained.
2
9. Issuance of Stock - No stock will be issued until full payment for such stock
has been made. The Optionee shall have no rights as a shareholder with respect
to optioned shares until the date of the issuance of a stock certificate to him
for such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Paragraphs 4 and 5.
10. Amendments and Termination - The Board of Directors may amend, suspend,
discontinue or terminate the Plan, but no such action may, without the consent
of the holder of any option granted hereunder, alter or impair such option,
except as provided in Paragraphs 4 and 5.
11. Option Agreement - The granting of an option shall take place only when a
written option agreement substantially in the form of the Option Agreement which
is attached hereto and marked Exhibit I is executed by or on behalf of the
Company and the employee, officer or director to whom the option is granted and
such executed agreement is delivered to the Company.
12. Period of Plan - The Plan, which initially became effective on April 5,
1978, has been extended by the Board of Directors and will continue in effect
until and will expire on March 31, 2008.
3
Exhibit I
UNIVERSAL SECURITY INSTRUMENTS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, Made as of this ____ day of __________, 20__, by and
between UNIVERSAL SECURITY INSTRUMENTS, INC., a Maryland corporation
(hereinafter called the "Company"), and (hereinafter called the "Optionee").
WHEREAS, the Board of Directors of the Company considers it desirable and
in the company's best interest that the Optionee be given an opportunity to
purchase shares of its Common Stock to provide an incentive for the Optionee and
to promote the success of the Company.
NOW, THEREFORE, in consideration of the premises, it is agreed as follows:
1. Grant of Option. The Company hereby grants to optionee the right,
privilege and option to purchase from the Company ( ) shares of the Common Stock
of the Company at a purchase price of ($ ) per share in the manner and subject
to the conditions hereinafter provided.
2. Period of Exercise of Option.
(a) The option will be exercisable for a period of years from the date
of grant, except as provided in subparagraphs (b), (c) and (d) below, in
accordance with the following schedule:
[INSERT EXERCISE SCHEDULE]
(b) All unexercised options will terminate, be forfeited and will
lapse immediately if (i) the Optionee's employment with the Company or its
subsidiary is terminated because the Optionee is discharged for dishonesty,
commission of a felony or the intentional committing of an act which has a
material adverse effect or impact upon the Company or its subsidiary, such
as his disclosing Company confidential information or trade secrets to an
unauthorized person or persons, or (ii) the Optionee accepts employment
with a competitor of the Company or its subsidiary, without the consent of
the Company.
(c) If the Optionee's employment with the Company or its subsidiary is
terminated for any reason other than as set forth in subparagraph (b)
above, the Optionee may exercise, subject to the provisions of
subparagraphs (a) and (b) above, any option which has accrued hereunder as
of the date of his employment with the Company or its subsidiary terminated
for a period of ninety (90) days after the date of the termination of his
employment with the Company or its subsidiary; provided, however, that if
the Optionee's employment with the Company or its subsidiary is terminated
by reason of his death, the Optionee's personal representatives, estate or
heirs (as the case may be) may exercise, subject to the provisions of
subparagraph (a) above, any option which has accrued hereunder as of the
date of the Optionee's death for a period of one hundred eighty (180) days
after the date of the Optionee's death.
(d) Except as otherwise provided in subparagraph (c) above, all
unexercised options will terminate, be forfeited and will lapse upon the
termination of the Optionee's employment with the Company or its
subsidiary.
3. Method of Exercise. In order to exercise the option the holder thereof
must give written notice to the Chief Financial Officer of the Company at Owings
Mills, Maryland, accompanies by full payment of the shares being purchased and a
written statement that the shares are purchased for investment and not with a
view to distribution. If the option is exercised by the successor of the
Optionee following his death, proof shall be submitted of the right of the
successor to exercise the option. shares of stock issued pursuant to this Plan
which have not been registered with the Securities and Exchange Commission shall
bear the following legend:
- i -
"The shares represented by this Certificate
have not been registered under the Securities Act
of 1933 and may be offered or sole only if
registered under the provisions of that Act or if
an exemption from registration is available."
The Company shall not be required to transfer or deliver any certificate or
certificates for shares purchased upon any such exercise of said option: (a)
until after compliance with all then applicable requirements of law; and (b)
prior to admission of such shares to listing on any stock exchange on which the
stock may then be listed. In no event shall the Company be required to issue
fractional shares to the Optionee.
4. Limitation upon Transfer. Except as otherwise provided in paragraph 2
hereof, the option and all rights granted hereunder shall not be transferred by
the Optionee, other than by will or by the laws of descent and distribution, and
may not be assigned, pledged or hypothecated in any way and shall not be subject
to execution, attachment or similar process. Upon any attempt to transfer the
options, other than by will or by the laws of descent and distribution, or to
assign, pledge, hypothecate or otherwise dispose of such option or of any rights
granted hereunder, contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon such option or such rights, such option and
such rights shall immediately become null and void.
5. Stock Adjustment. In the event there is any change in the number of
issued shares of the Company by reason of stock splits, reverse stock splits,
stock dividends, recapitalizations or other transactions, the number of shares
remaining subject to the option and the option price per share shall e
proportionately adjusted.
6. Corporate Reorganization. If there shall be any capital reorganization
or consolidation or merger of the Company with another corporation or
corporations, or any sale of all or substantially all of the Company's
properties and assets to any other corporation or corporations, the Company
shall take such action as may be necessary to enable Optionee to receive upon
any subsequent exercise of such option, in whole or in part, in lieu of shares
of Common Stock, securities or other assets as were issuable or payable upon
such reorganization, consolidation, merger or sale in respect of, or in exchange
for such shares of Common Stock.
7. Rights of Stockholder. Neither Optionee, his legal representatives, nor
any other person entitled to exercise such option shall have any rights or be a
stockholder in the Company in respect of the shares issuable upon exercise of
the option granted hereunder, unless and until certificates representing such
shares shall have been delivered pursuant to the terms hereof.
8. Stock Reserved. The Company shall at all times during the term of this
Agreement reserve and keep available such number of shares of its Common Stock
as will be sufficient to satisfy the terms of this Agreement.
9. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successor or successors of the Company.
IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be
executed the day and year first above written.
ATTEST: UNIVERSAL SECURITY INSTRUMENTS, INC.
(Company)
By: (SEAL)
- ---------------------------------- -------------------------------------
WITNESS: (Optionee)
By: (SEAL)
- ---------------------------------- -------------------------------------
- ii -
Exhibit 31.1
------------
CERTIFICATION
I, Stephen C. Knepper, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Universal Security
Instruments, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter (the Registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's board of directors
(or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: November 14, 2003 /s/ Stephen C. Knepper
------------------------------------
Stephen C. Knepper
Chief Executive Officer
Exhibit 31.2
------------
CERTIFICATION
I, Harvey B. Grossblatt, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Universal Security
Instruments, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter (the Registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's board of directors
(or persons performing the equivalent function):
(c) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
(d) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: November 14, 2003 /s/ Harvey B. Grossblatt
------------------------------------
Harvey B. Grossblatt
Chief Financial Officer
Exhibit 32.1
------------
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Universal Security Instruments,
Inc. (the "Company") on Form 10-Q for the period ending September 30, 2003 as
filed with the Securities and Exchange Commission and to which this
Certification is an exhibit (the "Report"), the undersigned hereby certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of
operations of the Company for the periods reflected therein.
Date: November 14, 2003 /s/ Stephen C. Knepper
-----------------------------------
Stephen C. Knepper
Chief Executive Officer
/s/ Harvey B. Grossblatt
-----------------------------------
Harvey B. Grossblatt
Chief Financial Officer
Exhibit 99.1
------------
For Immediate Release
Contact: Harvey Grossblatt, President
[graphic omitted] Universal Security Instruments, Inc.
410-363-3000, Ext. 224
or
Don Hunt, Jeff Lambert
Lambert, Edwards & Associates, Inc.
616-233-0500
Universal Security Instruments Posts
Sharply Higher Second-Quarter Sales & Earnings
Sales Grow 22%; Earnings Rise 18%
OWINGS MILLS, MD, November 12, 2003 - Universal Security Instruments, Inc.
(AMEX: UUU) today announced significantly higher sales and earnings for its
second quarter and six months ended September 30, 2003.
The Company cited solid growth in the retail sales channel as a key contributing
factor during the quarter, as well as strong continuing results from its
Hong-Kong-based joint venture. The announcement marked the Company's 10th
consecutive quarter of profitability.
The Owings Mills, MD-based designer and marketer of safety and security
equipment posted net earnings for the quarter of $740,446, or $0.66 per basic
share ($0.57 per diluted share), on net sales which rose 22% to $4,988,483,
compared with net earnings of $630,129, or $0.60 per basic share ($0.55 per
diluted share) on net sales of $4,091,272 for last year's second quarter.
For the six months ended September 30, 2003, sales rose 20% to $9,420,433,
versus $7,842,198 for the same period last year. The Company reported net
earnings of $1,592,945, or $1.42 per basic share ($1.25 per diluted share),
compared to net earnings of $1,207,069, or $1.17 per basic share ($1.09 per
diluted share), for the same period last year.
As previously advised, Underwriters Laboratories (UL) had identified potential
problems with the ground fault circuit interrupters (GFCI) which are
manufactured by Shanghai Meihao Electric, Inc. As one of several companies
distributing the units, Universal voluntarily stopped sales in August following
concerns announced by UL. The Company and its supplier are working toward a
possible resolution of any remaining UL concerns. The GFCI units accounted for
approximately 17% of the Company's sales in the first six months of the current
year.
"We are pleased with our results for the quarter and six-month periods,
particularly on the retail side of our business," said Steve Knepper, chairman
of the board and chief executive officer of Universal Security Instruments. "Our
team has worked hard to develop an expanded sales strategy aimed at increasing
market share in retail distribution channels for our core smoke and carbon
monoxide alarms. We are encouraged by the early results of our new retailer
program and expect these channels to represent a significant opportunity for
growth going forward."
UNIVERSAL SECURITY INSTRUMENTS, INC. (www.universalsecurity.com), founded in
1969, is a Maryland-based manufacturer and worldwide marketer of safety and
security products directly and through its 50%-owned Hong Kong joint venture.
(2)
UNIVERSAL SECURITY INSTRUMENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended September 30,
--------------------------------
2003 2002
---- ----
Sales $4,988,483 $4,091,272
Net income* 740,446 630,129
Income per share
Basic .66 .60
Diluted .57 .55
Weighted average number of common shares outstanding
Basic 1,127,593 1,054,205
Diluted 1,293,520 1,152,001
Six Months Ended September 30,
------------------------------
2003 2002
---- ----
Sales $9,420,433 $7,842,198
Net income* 1,592,945 1,207,069
Income per share
Basic 1.42 1.17
Diluted 1.25 1.09
Weighted average number of common shares outstanding
Basic 1,125,309 1,034,488
Diluted 1,279,516 1,105,055
* Due to the tax benefit carryforward of prior years' operating losses, no tax
tax liability was incurred.
----------------------------------------------
Statements contained in this press release that are not historical facts are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Although UNIVERSAL SECURITY INSTRUMENTS, INC.
believes that the expectations reflected in such forward-looking statements are
reasonable; the forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projections.