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 December 31, 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 February 12, 2004, the number of shares outstanding of the registrant's
common stock was 1,164,092.
TABLE OF CONTENTS
Part I - Financial Information Page
----
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at December 31, 2003
and March 31, 2003 3
Consolidated Statements of Earnings for the Three and
Nine Months Ended December 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
------- Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About 12
------- Market Risk
Item 4. Controls and Procedures 12
-------
Part II - Other Information
Item 1. Legal Proceedings 13
-------
Item 2. Changes in Securities and Use of Proceeds 13
-------
Item 6. Exhibits and Reports on Form 8-K 13
-------
Signatures 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS December 31, 2003 March 31, 2003
----------------- --------------
CURRENT ASSETS
Cash $ 218,705 $ 51,112
Accounts receivable:
Trade (less allowance for doubtful accounts of $70,000 and $10,000
at December 31 and March 31, 2003, respectively) 482,798 207,539
Employees 14,113 16,303
----------- ----------
496,911 223,842
Amount due from factor 2,207,307 623,566
Inventory 2,844,327 3,224,229
Prepaid expenses 187,879 136,343
----------- ----------
TOTAL CURRENT ASSETS 5,955,129 4,259,092
INVESTMENT IN HONG KONG JOINT VENTURE 4,651,661 3,831,583
PROPERTY, PLANT AND EQUIPMENT - NET 87,141 279,896
OTHER ASSETS 11,472 11,472
----------- ----------
TOTAL ASSETS $10,705,403 $8,382,043
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,283,601 $1,173,175
Accrued liabilities 690,884 684,979
Current obligations under capital lease 19,095 23,250
----------- ----------
TOTAL CURRENT LIABILITIES 1,993,580 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 1,163,592 and 1,121,982 shares at December 31,
2003 and March 31, 2003, respectively 11,636 11,220
Additional paid-in capital 11,190,636 11,059,381
Accumulated deficit (2,490,449) (4,577,186)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 8,711,823 6,493,415
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,705,403 $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 Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $3,838,192 $4,252,447 $13,258,624 $12,094,645
Cost of goods sold 2,607,525 2,962,846 8,992,005 8,435,672
---------- ---------- ----------- -----------
GROSS PROFIT 1,230,667 1,289,601 4,266,619 3,658,973
Research and development expense 68,130 83,657 198,607 216,637
Selling, general and administrative expense 1,052,642 1,005,189 3,467,833 2,908,909
---------- ---------- ----------- -----------
Operating income 109,895 200,755 600,179 533,427
Other income (expense):
Interest expense (26,884) (40,040) (90,256) (113,310)
Other - 8,350 - 9,100
---------- ---------- ----------- -----------
(26,884) (31,690) (90,256) (104,210)
---------- ---------- ----------- -----------
INCOME BEFORE EARNINGS FROM HONG KONG JOINT VENTURE 83,011 169,065 509,923 429,217
Earnings from Hong Kong Joint Venture:
Equity in earnings of Hong Kong Joint Venture 441,713 600,636 1,694,983 1,652,766
Cost allocatable to Hong Kong Joint Venture (30,932) (96,336) (118,169) (201,549)
---------- ---------- ---------- ----------
NET INCOME $ 493,792 $ 673,365 $2,086,737 $1,880,434
========== ========== ========== ==========
Net income per common share amounts:
Basic $0.44 $0.61 $1.85 $1.77
Diluted $0.38 $0.55 $1.62 $1.65
Weighted average number of common shares
Outstanding
Basic 1,135,707 1,110,149 1,128,775 1,059,708
Diluted 1,293,497 1,226,243 1,285,909 1,139,544
See accompanying notes to consolidated financial statements
4
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended December 31,
------------------------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $2,086,737 $1,880,434
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 25,058 28,798
Stock issued in lieu of directors' fee 10,000 30,000
Gain on sale of land (175,965) -
Earnings of the Hong Kong Joint Venture (1,694,983) (1,652,766)
Change in allowance for doubtful accounts 60,000 -
Changes in operating assets and liabilities:
Increase in accounts receivable and amounts due from factor (1,916,810) (1,498,629)
Decrease (increase) in inventories and prepaid expenses 328,366 (1,117,513)
Increase in accounts payable and accrued expenses 991,236 2,146,549
Decrease in other assets - 1,801
---------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (286,361) (181,326)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,336) (4,165)
Gross proceeds from sale of land 350,000 -
---------- ----------
-
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 343,664 (4,165)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 123,095 89,125
Principal payments on capital lease (11,379) (11,379)
Retirement of common stock (1,426) -
Issue of common stock - 250,000
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 110,290 327,746
---------- ----------
INCREASE IN CASH 167,593 142,255
Cash at beginning of period 51,112 19,383
---------- ----------
CASH AT END OF PERIOD $ 218,705 $ 161,638
========== ==========
Supplemental information:
Interest paid $ 90,256 $ 113,310
Income taxes paid - -
Non-cash financing activities:
Repayment of trade payables due the Hong Kong Joint Venture in lieu of cash 874,904 1,032,479
distribution
Issuance of 13,488 shares of common stock in satisfaction of amounts payable - 39,200
Issuance of 567 shares in 2003 and 6,974 shares in 2002 of common stock
as directors' fee $ 10,000 $ 30,000
See accompanying notes to condensed consolidated financial statements.
5
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.
Accounts Receivable and Due from Factor
Accounts Receivable represents sales made to non-factored customers. Due from
Factor represents customers' invoices sold to the factor for which the Company
has not received payment.
Inventories
Inventories (consisting primarily of finished goods) are stated at the lower of
cost (first-in, first-out method) or market.
Income Taxes
No income tax expense has been provided for the three and nine month periods
ended December 31, 2003 as a result of the carryforward of prior years'
operating losses.
Hong Kong Joint Venture
The Company maintains a 50% interest in a Hong Kong 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 nine months ended December
31, 2003 and 2002:
2003 2002
----------- -----------
Net sales $18,862,545 $17,395,366
Gross profit 5,822,631 5,958,635
Net income 3,319,731 3,663,638
Total current assets 7,215,778 7,686,402
Total assets 12,248,733 10,225,111
Total current liabilities 2,580,509 2,731,171
During the nine months ended December 31, 2003 and 2002, respectively, the
Company purchased $5,276,159 and $5,578,341 of products from the Hong Kong Joint
Venture. At December 31, 2003 and 2002, the Company had amounts payable to the
Hong Kong Joint Venture of $554,874 and $487,176, respectively. The Company has
adjusted its equity in earnings of the Hong Kong Joint Venture to reflect
elimination of intercompany profits.
In 2002, the Company amended its employment agreements so that bonus payments
are allocated between domestic operations and Hong Kong Joint Venture
operations. The Company recorded $30,932 and $118,169 of costs allocatable to
the Hong Kong Joint Venture in the accompanying statement of operations for the
three and nine months ended December 31, 2003 and $96,336 and $201,549 for the
same periods last year.
6
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 nine month
periods ended December 31, 2003 and 2002 is as follows:
Three Months Ended Nine months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Weighted average number of common 1,135,707 1,110,149 1,128,775 1,059,708
shares outstanding for basic EPS
Shares issued upon the assumed 157,790 116,094 157,134 79,836
exercise of outstanding stock options
Weighted average number of common 1,293,497 1,226,243 1,285,909 1,139,544
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 Nine months Ended
December 31, December 31,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $493,792 $673,365 $2,086,737 $1,880,434
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
(21,009) (20,985) (63,028) (62,954)
-------- -------- ---------- ----------
Pro forma net income $472,783 $652,380 $2,023,709 $1,817,480
======== ======== ========== ==========
Earnings per share:
Basic - as reported $0.44 $0.61 $1.85 $1.77
===== ===== ===== =====
Basic - pro forma $0.42 $0.59 $1.79 $1.72
===== ===== ===== =====
Diluted - as reported $0.38 $0.55 $1.62 $1.65
===== ===== ===== =====
Diluted - pro forma $0.37 $0.53 $1.57 $1.59
===== ===== ===== =====
Stockholders' Equity
During the nine months ended December 31, 2003, the Company granted options for
the purchase of 8,000 shares to employees. These options are exercisable at an
average price of $14.04 per share, expiring in 2008, and vested over a four year
period from the date of grant.
7
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.
General
- -------
The Company is in the business of marketing safety and security
products which are primarily manufactured through its 50%-owned Hong Kong Joint
Venture. The Company's financial statements detail sales and other operational
results of the Company only, and report the financial results of the Hong Kong
Joint Venture as the Company's equity in the earnings of the Hong Kong Joint
Venture. Accordingly, the following discussion and analysis of the three and
nine-month periods ended December 31, 2003 relate to the operational results of
the Company only. A discussion and analysis of the Hong Kong Joint Venture's
operational results for the three and nine-month periods ended December 31, 2003
is presented below under the heading "Hong Kong Joint Venture."
Three Months Ended December 31, 2003 and 2002
- ---------------------------------------------
Sales. Net sales for the three months ended December 31, 2003 were $3,838,192
compared to $4,252,447 for the comparable three months in the prior fiscal year,
a decrease of $414,255. Net sales of safety products decreased by $375,092 as
compared to the quarter ended December 31, 2002. Net sales of other products
decreased by $39,163, as compared to the quarter ended December 31, 2002. The
primary reason for the decrease in safety sales was the Company's previously
reported voluntary hold on sales of ground fault circuit interrupters (GFCI)
pending resolution of the Underwriters Laboratories (UL) testing issues (see
"Financial Condition and Liquidity", below), which represented approximately
$1,100,000 of the Company's sales during the quarter ended December 31, 2002,
partially offset by an increase in smoke and carbon monoxide alarm sales of
approximately $725,000 in the 2003 period.
Gross Profit and Gross Profit Margin. Gross profit is calculated as
net sales less cost of goods sold, and 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 decreased from $1,289,601 for the quarter ended December
31, 2002, to $1,230,667 for the corresponding 2003 period, primarily as the
result of the Company's voluntary hold on GFCI sales in the 2003 period
partially offset by an increase in smoke and carbon monoxide alarm sales. The
Company's gross profit margin increased 6%, to 32% of sales for the quarter
ended December 31, 2003 from 30% for the corresponding quarter last year. The
increase in gross profit margin resulted from a change in product mix with
higher sales of smoke and carbon monoxide alarms through December 31, 2003.
Expenses. Selling, general and administrative expenses increased by
$47,453 from the comparable three months in the prior year primarily due to
implementing the Company's expansion in retail marketing. As a percentage of
sales, selling, general and administrative expenses were 27% for the three month
period ended December 31, 2003 and 24% for the three month period ended December
31, 2002. The increase in selling, general and administrative expenses as a
percentage of sales was mainly due to the lower sales resulting from the
Company's voluntary hold on GFCI sales.
8
Interest Expense. The Company's interest expense decreased from
$40,040 for the quarter ended December 31, 2002 to $26,884 for the quarter ended
December 31, 2003. The lower interest expenses resulted primarily from reduced
borrowings from factor.
Net Income. The Company reported a net profit of $493,792 for the
quarter ended December 31, 2003 compared to net profit of $673,365 for the
corresponding quarter of the prior fiscal year. The primary reasons for the
decrease in net profit were lower Hong Kong Joint Venture earnings, and the
lower sales resulting from the Company's voluntary hold on GFCI sales.
Nine Months Ended December 31, 2003 and 2002
Sales. Net sales for the nine months ended December 31, 2003 were
$13,258,624 compared to $12,094,645 for the comparable nine months in the prior
fiscal year, an increase of $1,163,979. Net sales of safety products increased
by $1,384,474 as compared to the quarter ended December 31, 2002. Net sales of
other products decreased by $220,495, as compared to the nine months ended
December 31, 2002. The primary reason for the increase in safety sales was
higher smoke alarm and carbon monoxide alarm sales, partially offset by lower
GFCI sales.
Gross Profit and Gross Profit Margin. The Company's gross profit
increased from $3,658,973 for the nine months ended December 31, 2002, to
$4,266,619 for the corresponding 2003 period, primarily as result of an increase
in smoke and carbon monoxide alarm sales, partially offset by the Company's
voluntary hold on GFCI sales in the 2003 period. The Company's gross profit
margin increased 6%, to 32% of sales for the nine months ended December 31, 2003
from 30% for the corresponding period last year. The increase in gross profit
margin resulted from a change in product mix with higher sales of smoke and
carbon monoxide alarms through December 31, 2003.
Expenses. Selling, general and administrative expenses increased by
$558,924 from the comparable nine months in the prior year. As a percentage of
sales, selling, general and administrative expenses were 26% for the nine month
period ended December 31, 2003 and 24% for the nine month period ended December
31, 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, higher legal costs associated with defending patent and other
litigation previously reported, listing on the American Stock Exchange, and
implementing the Company's expansion in retail marketing. These increases were
partially offset by $146,836, which was the gain, net of selling expenses, from
the sale of a 1.5 acre parcel of land for gross sale proceeds of $350,000.
Interest Expense. The Company's interest expense decreased from
$113,310 for the nine months ended December 31, 2002, to $90,256 for the nine
months ended December 31, 2003. The lower interest expenses resulted primarily
from reduced borrowings from factor.
Net Income. The Company reported a net profit of $2,086,737 for the
nine months ended December 31, 2003 compared to net profit of $1,880,434 for the
corresponding period of the prior fiscal year. The primary reasons for the
increase in net profit were higher Hong Kong 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
discussed above.
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
$2,912,000, including due from factor of $2,207,307. However, based on specified
percentages of the Company's accounts receivable and inventory and letter of
credit commitments, at December 31, 2003, the Company had approximately
$2,786,000 available under the Factoring Agreement as of December 31, 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 December 31,
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.
9
Operating activities used cash of $286,361 for the quarter ended
December 31, 2003. This was primarily due to an increase in accounts receivable
and amount due from factor of $1,916,810, and equity in the earnings from the
Company's Hong Kong Joint Venture of $1,694,983, which were offset by an
increase in accounts payable and accrued expenses of $991,236. For the same
period last year, operating activities used cash of $181,326. The Company
anticipates that if sales continue to increase, the amount due from factor
should increase.
Investing activities provided cash of $343,664 in the current quarter.
For the same period last year, investing activities used cash of $4,165. The
primary reason for the change was the sale of land for $350,000. The Company
does not anticipate any significant expenditures for the acquisition of
equipment.
Financing activities provided cash of $110,290 primarily from the
exercise of employee stock options. For the same period last year, financing
activities provided cash of $327,746, 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.
In August 2003, the Company announced that Underwriters Laboratories
(UL) had identified certain 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 without recommending
a recall. 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 20% of the
Company's sales in the first nine months of the current year. The Company will
continue its voluntary hold on sales of these GFCI units until the UL issues
have been resolved. The Company believes that increases in sales of other safety
products (primarily smoke and carbon monoxide alarms) will partially offset the
loss of GFCI sales. The Company has been advised by its supplier that this
matter should be resolved by the end of the Company's fourth quarter, which ends
March 31, 2004.
HONG KONG JOINT VENTURE
Net Sales. Net sales of the Hong Kong Joint Venture for the three and
nine months ended December 31, 2003 were $5,783,901 and $18,862,545,
respectively, compared to $5,667,352 and $17,395,366, respectively, for the
comparable periods in the prior fiscal year. The increase in sales was primarily
due to increased sales of smoke alarms to non-related customers. The Hong Kong
Joint Venture continues to develop its own non-Universal customer base
worldwide.
Net Income. Net income for the three and nine months ended December
31, 2003 was $753,266 and $3,319,731, respectively, compared to $970,811 and
$3,663,638, respectively, in the comparable periods last year.
Gross Margins. Gross margins of the Hong Kong Joint Venture for the
three month period ended December 31, 2003 decreased to 28% from 35% for the
2002 period. For the nine month period ended December 31, 2003, gross margins
decreased to 31% from 34% for the 2002 period. The decrease in gross profit
margins was mainly due to a general reduction in the per unit selling price for
DC photoelectric smoke alarms sold to European customers.
Expenses. Selling, general and administrative expenses were $677,976
and $2,248,257, respectively, for the three and nine month periods ended
December 31, 2003, compared to $984,075 and $2,058,233, in the prior year's
respective periods. As a percentage of sales, expenses were 12% and 12%,
respectively, for the three and nine month periods ended December 31, 2003,
compared to 17% and 9%, respectively, for the three and nine month periods ended
December 31, 2002. The increase in selling, general and administrative expense
was due to increases in the Hong Kong Joint Venture's management fees and
management bonuses for the nine months.
Interest Income and Expense. Interest income, net of interest expense,
was $490 and $562, respectively, for the three and nine month periods ended
December 31, 2003, compared to interest income, net of interest expense, of
$6,631 and $2,487, respectively, for the prior year's periods.
10
Liquidity. Cash needs of the Hong Kong Joint Venture are currently met
by funds generated from operations. During the nine months ended December 31,
2003, working capital decreased by $947,513 from $5,582,782 on March 31, 2003 to
$4,635,269 on December 31, 2003. The primary reason for the decrease was
investment in approximately $2,000,000 of fixed income securities.
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
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 title 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.
11
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.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, the Company reported on the Underwriters Laboratories (UL)
action with respect to certain ground fault circuit interrupter (GFCI) units
manufactured by Shanghai Meihao Electric, including GFCI units sold by the
Company. The Company reported that the U.S. Consumer Product Safety Commission
(CPSC) reviewed GFCI test results and closed its inquiry into the Company's GFCI
units without recommending a recall. The Company has been advised by the
manufacturer that this matter should be resolved by the end of the Company's
fourth quarter, which ends March 31, 2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 23, 2003, the Company issued 567 shares of its Common Stock
to one of its directors in lieu of an annual $10,000 director's fee. These
shares were issued pursuant to an exemption from registration from the
Securities Act of 1933 pursuant to Section 4(2) and Regulation D thereunder.
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 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2003, File No. 0-7885)
10.2 Hong Kong Joint Venture Agreement, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the year ended March 31, 2003, File No. 0-7885)
10.3 Amended Factoring Agreement with CIT Group (successor to Congress
Talcott, Inc.) dated November 14, 1999 (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 0-7885)
10.4 Amendment to Factoring Agreement with CIT Group (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2002, File No. 0-7885)
10.5 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 February 12, 2004*
*Filed herewith
(b) Reports on Form 8-K:
On November 12, 2003, the Registrant filed a Current Report on Form
8-K, with an amendment thereto filed on December 19, 2003, reporting, under Item
4, the change in independent auditor by the Registrant's 50%-owned Hong Kong
Joint Venture.
13
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: February 12, 2004 By: /s/ Harvey B. Grossblatt
----------------------------------
Harvey B. Grossblatt
President, Chief Financial Officer
14
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: February 12, 2004 /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: February 12, 2004 /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 December
31, 2003 as filed with the Securities and Exchange Commission and to which this
Certification is an exhibit (the "Report"), the undersigned hereby certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company for the periods reflected therein.
Date: February 12, 2004 /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
Universal Security Instruments, Inc.
410-363-3000, Ext. 224
or
Don Hunt, Jeff Lambert
Lambert, Edwards & Associates, Inc.
616-233-0500
Universal Security Instruments Announces Third-Quarter Results
--------------------------------------------------------------
Company Posts 11th Consecutive Profitable Quarter and
Joint Venture Receives Regulatory Approval for Australia
OWINGS MILLS, MD, February 12, 2004 - Universal Security Instruments, Inc.
(AMEX: UUU) today announced results for its third quarter and nine months ended
December 31, 2003.
The Owings Mills, MD-based designer and marketer of safety and security
equipment posted net earnings for the quarter of $493,792, or $0.44 per basic
share ($0.38 per diluted share), on net sales of $3,838,192, compared with net
earnings of $673,365, or $0.61 per basic share ($0.55 per diluted share), on net
sales of $4,252,447 for last year's third quarter.
For the nine months ended December 31, 2003, sales rose 10% to $13,258,624
versus $12,094,645 for the same period last year. The Company reported that net
earnings rose 11% to $2,086,737, or $1.85 per basic share ($1.62 per diluted
share), compared to net earnings of $1,880,434, or $1.77 per basic share ($1.65
per diluted share), for the same period last year.
The Company noted that while sales of its core smoke and carbon monoxide alarm
products increased for the quarter, overall third quarter results were affected
by Universal's voluntary hold on sales of its ground fault circuit interrupter
(GFCI) units. Universal cited ongoing market share gains in the retail channel
and electrical distribution businesses as contributing to the increase in smoke
and carbon monoxide alarm sales. The third quarter marked the Company's 11th
consecutive quarter of profitability.
As previously announced, Underwriters Laboratories (UL) identified potential
problems with the GFCI units manufactured by Shanghai Meihao Electric, Inc. As
one of several companies distributing these units, Universal voluntarily stopped
sales in August. The manufacturer of the GFCI units has advised the Company that
it is working closely with UL and expects to have this matter resolved during
the fourth quarter which ends March 31, 2004.
Steve Knepper, chairman of the board and chief executive officer of Universal
Security Instruments commented, "Our third quarter results reflect the strength
we have developed within our core product lines, as we were basically able to
hold our sales levels despite not shipping any GFCI units. Also, we have begun
initial shipments of the highly anticipated combination smoke and carbon
monoxide alarms and expect them to be a significant addition to our expanding
product line. Additionally, our 50%-owned Hong Kong joint venture has recently
received regulatory approval to sell AC/DC smoke alarms to the retail and
electrical distribution markets in Australia."
The Company said it was very encouraged by the sales increase of its core
products. This increase in sales, coupled with the addition of our new
combination smoke and carbon monoxide alarms, reinforces our need for the new
250,000 square-foot manufacturing facility the Hong Kong joint venture is
expected to open in late spring.
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 December 31,
2003 2002
---- ----
Sales $3,838,192 $4,252,447
Net income* 493,792 673,365
Income per share
Basic .44 .61
Diluted .38 .55
Weighted average number of common shares outstanding
Basic 1,135,707 1,110,149
Diluted 1,293,497 1,226,243
Nine Months Ended December 31,
2003 2002
---- ----
Sales $13,258,624 $12,094,645
Net income* 2,086,737 1,880,434
Income per share
Basic 1.85 1.77
Diluted 1.62 1.65
Weighted average number of common shares outstanding
Basic 1,128,775 1,059,708
Diluted 1,285,909 1,139,544
* Due to the tax benefit carryforward of prior years' operating losses,
no 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.