UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended March 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ________________
Commission file number 0-7885
UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-0898545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10324 S. Dolfield Road, Owings Mills, MD 21117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-363-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for at least the
past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of June 11, 1998:
Common Stock, $.01 Par Value - $1,064,958
The number of shares outstanding of the issuer's classes of common
stock as of June 11, 1998:
Common Stock, $.01 Par Value - 811,397 shares
<PAGE>
ITEM 1.
BUSINESS
GENERAL
Universal Security Instruments, Inc. (the "Company") was incorporated
in the State of Maryland in 1969. Its principal offices are located at
10324 South Dolfield Road, Owings Mills, MD 21117 and its telephone
number is 410-363-3000.
The Company designs and markets a variety of popularly-priced (I)
security products, (ii) telecommunications products and (iii) video
products. Most of the Company's products either require minimal
installation, or are designed for easy installation by the consumer
without professional assistance and requiring little or no technical
knowledge.
The Company imports virtually all of its products from various
suppliers overseas. Approximately 73% of the Company's purchases are
bought from a Hong Kong Joint Venture with a Hong Kong Corporation
(Hong Kong Joint Venture), in which the Company owns a 50% interest,
that has manufacturing facilities in the People's Republic of China.
The Company's sales for the year ended March 31, 1998 were $11,566,317
compared to $15,423,149 for the year ended March 31, 1997, a decrease
of approximately 25%. The primary reason for this decrease in sales
was due to decreased demand for some of the Company's high volume, low
margin, private label products.
The Company reduced its loss in fiscal 1998 to $445,126 from
$1,483,438 for its last fiscal year. The Company's cost reduction
program resulted in savings of approximately $1,117,000 from selling,
general and administrative expenses from last fiscal year.
Additionally, the Company improved its current ratio to 2.25 to 1 from
1.75 to 1.
SECURITY PRODUCTS
The Company markets a line of electronically advanced outdoor
floodlights under the name "Lite Aidetm," whose features include
special sensors that activate automatic lighting mechanisms and a
quartz halogen system, offering the consumer a variety of dependable
outdoor security lighting systems. The Company also markets a smoke
detector under the name "Smoke Signaltm" manufactured by the Hong Kong
joint venture and markets a wireless intercom and a line of speakers.
Sales of the Company's security products aggregated $6,094,152 or
approximately 53% of total sales in the fiscal year ended March 31,
1998 and $8,007,748 or approximately 52% of total sales in the fiscal
year ended March 31, 1997. This decrease in sales volume was due
primarily to lower export sales of smoke detectors.
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<PAGE>
TELECOMMUNICATIONS PRODUCTS
The Company markets a variety of telephones with unique styling and
containing multiple features. The Company offers a variety of
popularly-priced multicolored trimline and feature telephones and
telephone answering machines which are produced by the Hong Kong Joint
Venture. Some of the features available on the Company's telephone
products include handsfree speaker, true hold and conferencing,
high-speed dial function, memory capability, last number redial,
ringer silencer, programmable direct access emergency buttons,
pushbutton operation, and pulse/touchtone switch, making them usable
with all long distance networks. The Company has a full line of Caller
ID models.
For the fiscal year ended March 31, 1998, sales of the Company's
telecommunications products aggregated $3,216,281 or 28% of total
sales. For the fiscal year ended March 31, 1997, sales of these
products were $3,607,531 or 23% of total sales. The primary reason for
the decrease in sales was a reduction in high volume, low margin,
private label products.
VIDEO PRODUCTS
The Company designs and markets blank video cassette tapes and other
video products, including a wireless remote control converter.
For the fiscal year ended March 31, 1998, sales of the Company's video
products and accessories aggregated $2,255,884 or 19% of total sales
for the year. For the fiscal year ended March 31, 1997, sales of these
products were $3,807,870 or 25% of total sales. The decrease in sales
resulted from high volume, low margin private label products.
FCC REGULATION
The Federal Communications Commission establishes technical standards
for telecommunications equipment and products transmitting signals
over the airways and allocates frequencies for cordless telephones.
These regulations have had no material effect upon the Company's
business or its products to date, and all products subject to such
regulation comply with the FCC requirements.
IMPORT MATTERS
The Company imports virtually all of its security, telecommunications
and video products. The Company, as an importer, is subject to
numerous tariffs which vary depending on types of products and country
of origin, changes in economic and political conditions in the country
of manufacture, potential trade restrictions, including loss of Most
Favored Nation status, and currency fluctuations. The Company has
attempted to protect itself from fluctuations in currency exchange
rates to the extent possible by negotiating most commitments in U.S.
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<PAGE>
dollars. The Company's purchases are subject to delays in delivery due
to problems with shipping and docking facilities, as well as other
problems associated with purchasing products abroad. The Company
imports a majority of its products from the People's Republic of
China. The loss of China's Most Favored Nation status with the United
States would most likely have a material adverse impact on the
Company's business until competitive alternative sources of supply
were obtained.
SALES AND MARKETING
The Company's products are generally marketed to retailers, wholesale
distributors, service companies, catalog and mail order companies and
to other distributors. Sales are made both by the Company and by
approximately 31 independent sales organizations which are compensated
by commissions. The Company has agreements with the sales
organizations which are cancelable by either party upon 30 days
notice. The Company does not believe that the loss of any one of these
organizations would have a material adverse effect upon its business.
The Company also promotes its products through its own sales catalogs
and brochures, which are mailed directly to trade customers. The
Company's customers, in turn, advertise the Company's products in
their own catalogs and brochures and in their ads in newspapers and
other media. The Company also exhibits and sells its products at
various trade shows, including the annual National Hardware Show in
Chicago, Illinois. The Company's domestic marketing strategy is
designed to attract retailing customers outside the consumer
electronics industry, such as supermarkets, drug stores, variety
stores and home centers.
Sales by the Company are made by officers and full-time employees of
the Company, four of whom are also engaged in sales management and
training. Sales outside the United States, which are made by officers
of the Company and through exporters, were less than 25% of total
sales in fiscal 1998. The Company's foreign marketing strategy is to
increase sales of products from the Hong Kong Joint Venture to
overseas markets.
The Company's products are retailed to "do-it-yourself" consumers by
chain and independent department, discount, drug, electrical,
electronic, building supply and hardware stores; as well as through
catalog and mail-order houses. The Company also distributes its
products through special markets such as premium/incentive, direct
mail, catalog and showroom sales. The Company does not currently
market any significant portion of its products directly to end users.
The Company's backlog of orders believed to be firm as of March 31,
1998 was approximately $2,510,000. The Company's backlog as of March
31, 1997, was approximately $2,956,500. The decrease in backlog is a
function of the timing of orders received from its customers.
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<PAGE>
SUPPLIERS - HONG KONG JOINT VENTURE
The Company has a 50% interest in a Hong Kong Joint Venture with a
Hong Kong Corporation (Hong Kong Joint Venture) which has
manufacturing facilities in the People's Republic of China, for the
manufacturing of certain consumer electronic products sold by the
Company. The Company believes that this Hong Kong Joint Venture
arrangement will ensure a continuing source of supply for each product
at competitive prices. At the present time, the Company buys
approximately 73% of its total purchases from the Hong Kong Joint
Venture. The products produced by the Hong Kong Joint Venture include
most of the video tape purchased by the Company, smoke detectors and
certain models of telecommunications products and Caller ID products.
The Company is currently pursuing the development of additional
products to be produced by the Hong Kong Joint Venture. A loss of
China's Most Favored Nation status with the United States or changes
in economic and political conditions in China could adversely affect
the value of the Company's investment in the Hong Kong Joint Venture.
Refer to Note C of the Financial Statements in Item 8 for a comparison
of annual sales and earnings of the Hong Kong Joint Venture.
SUPPLIERS - OTHERS
Telecommunications, video and security products not manufactured for
the Company by the Hong Kong Joint Venture are manufactured by other
foreign suppliers for the Company. The Company's relationships with
its suppliers are good. The Company believes that the loss of any of
its suppliers could have a short-term adverse effect on its
operations, but that replacement sources could be developed.
CHINA CELLULAR TELEPHONE PROJECT
In the year ended March 31, 1993, the Hong Kong Joint Venture entered
into the Cellular Joint Venture with a People's Republic of China
Company to design and develop a portable cellular telephone for
manufacture and sale in China. The Hong Kong Joint Venture has a 30%
interest in the Cellular Joint Venture. The Cellular Joint Venture
engaged the Hong Kong Joint Venture to design and develop two versions
of a portable cellular telephone for a fee of $3.5 million. Through
March, 1996, the Hong Kong Joint Venture had received $3,150,000 of
the $3.5 million fee. For the year ended March 31, 1996, the Hong Kong
Joint Venture recorded no profit from the development contract. During
fiscal 1997, the Hong Kong Joint Venture completed the accounting of
its cellular development contract and, additionally, wrote down its
investment in its Cellular Joint Venture. The Hong Kong Joint Venture
recorded a profit of $122,328 on the development contract and a write-
down of $725,745 on its Cellular Joint Venture. Due to the uncertainty
of the commercial acceptance of the cellular telephone designed by the
China Joint Venture, the Hong Kong Joint Venture wrote-off the balance
of its Cellular Joint Venture investment in the amount of $337,464 in
fiscal 1998.
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<PAGE>
COMPETITION
The market for telephones and telephone products is highly competitive
and subject to sudden shifts in consumer preferences and rapid changes
in technology. Since deregulation of the telephone industry, many
companies have entered the market, competing with lower prices and the
continuous introduction of new products incorporating the most
advanced technology. The Company competes with many other companies
such as AT&T, Southwestern Bell, Bell South, Sony, Cobra, Uniden,
Unisonic and other major companies competing for the same markets,
almost all of which have much greater financial resources than the
Company. The Company believes, however, that its products compete
favorably with other products in the marketplace primarily by reason
of styling and pricing.
In the video products industry, there are numerous competitors for
each product in the Company's line of video products. Blank VHS video
cassettes are marketed by many companies, including such large
international firms as Sony, Fuji, Maxell and TDK. The Company's
channel converter competes with similar products marketed by such
companies as Zenith, General Instrument, Recoton, Gemini and
Panasonic. Virtually all of these competitors have greater financial
resources than the Company. The Company believes, however, that its
products compete favorably with other products in the marketplace
primarily by reason of styling and pricing.
In the security lighting area, the Company competes with All-Trade,
Regent and Heath-Zenith. In the smoke detector area, the Company
competes with BRK, Fyrenetics and Walter Kidde. Many of these
companies have greater financial resources and financial strength than
the Company. The Company believes that its security products compete
favorably with other such products in the market primarily on the
basis of styling and pricing. The security industry in general,
however, involves rapidly changing technology, and the success of the
Company's products may depend on the Company's ability to improve and
update the technology of its products in a timely manner and to adapt
to new technological advances.
EMPLOYEES
The Company has 18 employees, 7 of whom are engaged in administration
and sales, and the balance of whom are engaged in product development
and servicing.
The Company's employees are not unionized. The Company believes that
its relations with its employees are satisfactory.
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<PAGE>
ITEM 2.
PROPERTIES
The Company's main facility, located in Baltimore County, Maryland,
contains approximately 32,000 square feet on approximately four acres
and is used for research and development, warehousing and
administrative and executive offices. This facility was completed in
December 1993 and is subject to a mortgage with a balance of
$1,263,051 as of March 31, 1998. The Company has listed this facility
for sale. If the Company is successful in selling its facility, the
Company believes alternative space would be readily available at
reasonable rental.
In addition, the Hong Kong Joint Venture's manufacturing facility
consists of six buildings totaling 100,000 square feet. Three of the
buildings (totaling 31,000 square feet) are leased pursuant to a
long-term lease which expires in 2010. The other three buildings
(69,000 square feet) are owned by the Hong Kong Joint Venture and were
built on property leased for a 48 year term.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders of the Company held on February
27, 1998, a one-for-four reverse split of the Company's common stock
was approved. The vote was 2,302,517 shares in favor, 136,866 shares
against and 9,945 shares voted to withhold approval. A vote of two-
thirds of the Company's outstanding stock (i.e., 2,163,833 shares) was
required for approval.
The objective of the reverse stock split was to assure that the
Company met the minimum bid requirements of the NASDAQ Small Cap
Market.
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<PAGE>
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded on the over-the-counter
market. The following table shows the fiscal 1997 and 1998 quarterly
high and low bid prices for the Company's Common Stock as reported by
NASDAQ. The bid quotations represent prices between dealers and do not
reflect the retailer markups, markdowns or commissions and may not
represent actual transactions.
Fiscal year ended March 31, 1997
Bid Prices*
High Low
First Quarter 5-1/4 3-1/4
Second Quarter 3-1/2 1-3/4
Third Quarter 3-5/8 2
Fourth Quarter 2-3/4 2
Fiscal year ended March 31, 1998
Bid Prices*
High Low
First Quarter 2-7/8 2-1/8
Second Quarter 4 2-1/4
Third Quarter 3-1/4 2-1/16
Fourth Quarter 3-1/8 1-1/8
As of June 11, 1998, there were approximately 639 holders of record of
the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock in the
last three years. It is the Company's present intention to retain all
earnings for use in its operations.
*Prices adjusted to reflect one-for-four reverse stock split.
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<PAGE>
ITEM 6.
SELECTED FINANCIAL DATA
<TABLE>
Year Ended March 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Operations
Net sales $11,566,317 $15,423,149 $19,507,889 $24,841,794 $25,804,715
Loss before
equity in
(loss)
earnings of
Hong Kong
Joint
Venture
and income
taxes (414,351) (1,332,427) (1,316,990) (2,220,460) (1,230,834)
Net (loss)
income (445,126) (1,483,438) (1,098,817) (1,296,426) 36,931
Per common
share:
Loss before
equity in
earnings of
Hong Kong
Joint
Venture,
income
taxes(1) (.51) (1.64) (1.62) (2.74) (1.52)
Net (loss)
income(1) (.55) (1.83) (1.35) (1.60) .05
Weighted
average number
of common
shares
out-
standing(1) 811,397 811,397 811,397 810,649 809,402
Financial
Condition
Total assets 7,705,310 9,557,116 12,676,391 13,732,846 15,864,756
Long-term debt
and
obligations
(non-
current) 1,246,861 1,344,211 1,277,394 497,222 927,500
Working
capital 2,130,408 2,253,553 2,194,108 2,728,405 4,777,650
Current ratio 2.25 to 1 1.75 to 1 1.46 to 1 1.50 to 1 1.81 to 1
Shareholders'
equity 4,747,351 5,192,477 6,675,915 7,774,540 9,063,910
Shareholders'
equity
per
share(1) 5.85 6.40 8.23 9.59 11.20
(1) All per share amounts and number of outstanding shares have been restated
to reflect the one-for-four reserve stock split.
</TABLE>
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<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SALES
In fiscal year 1998, sales decreased by $3,856,832 (25%) from the
prior year. This decrease was primarily due to a decreased demand for
certain of the Company's security products, which amounted to
$1,913,596 and a decrease in video products of $1,551,986, resulting
from lower private label sales. Sales of security products for the
fiscal year totaled $6,094,152 (53%) while sales of telecommunications
and video products were $3,216,281 (28%) and video products were
$2,255,884 (19%), respectively.
In fiscal year 1997, sales decreased by $4,084,740 (21%) from the
prior year. This decrease was primarily due to a decreased demand for
certain of the Company's telecommunications products, which amounted
to $3,179,053 and a decrease in security products of $1,208,938,
partially offset by increased video sales of $303,251. Sales of
security products for the fiscal year totaled $8,007,748 (52%), while
sales of telecommunications and video products were $3,607,531 (23%)
and $3,807,870 (25%), respectively.
NET PROFIT AND LOSS
The Company incurred a net loss of $445,126 for fiscal year 1998 as
compared to a net loss of $1,483,438 for fiscal year 1997. The most
significant reasons for the decrease were reductions in selling,
general and administrative expenses, increased gross margins and
decreased equity losses of the Hong Kong Joint Venture.
The Company incurred a net loss of $1,483,438 for fiscal year 1997, as
compared to a net loss of $1,098,817 for fiscal year 1996. The primary
reason for the increase was the Company's Hong Kong Joint Venture
writing down its investment by $725,745 in its China Cellular Joint
Venture. The Company's 50% portion of this write-down was $362,873.
EXPENSES
In fiscal year 1998, research, selling, general and administrative
expenses decreased by approximately $1,117,000 (35%) from the prior
year. This savings resulted from the Company's cost reduction program.
As a percentage of sales, research, selling, general and
administrative expenses were 20% for the fiscal year ended March 31,
1998 and 22% for the prior year.
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<PAGE>
In fiscal year 1997, research, selling, general and administrative
expenses decreased by approximately $450,000 (12%) from the prior
year. As a percentage of sales, research, selling, general and
administrative expenses were 22% for the fiscal year ended March 31,
1997 and 20% for the prior year. The primary reason for reduction in
expenses was a reduction in personnel and associated costs.
INTEREST EXPENSE AND INCOME
Interest expense for fiscal 1998 decreased to $270,817 from $411,541
in fiscal 1997 due to a decrease in the average outstanding debt
during the period resulting from decreased inventory levels in the
current fiscal year. Interest income decreased to $2,916 in fiscal
1998 from $5,984 in fiscal 1997.
Interest expense for fiscal 1997 decreased to $411,541 from $543,352
in fiscal 1996 due to a decrease in the average outstanding debt
during the period resulting from decreased inventory levels in fiscal
1997. Interest income increased to $5,984 from $4,935 in fiscal 1996.
FINANCIAL CONDITION AND LIQUIDITY
Cash needs of the Company are currently met by funds generated from
operations and the Company's line of credit with a financial
institution which supplies both short-term borrowings and letters of
credit to finance foreign inventory purchases. The Company's maximum
line of credit is currently the lower of $7,500,000 or specified
percentages of the Company's accounts receivable and inventory.
Approximately $1,021,000 has been utilized in short-term borrowings
and letter of credit commitments as of March 31, 1998. The amount
available under the line of credit as of March 31, 1998 was
approximately $300,000 based on the specified percentages. The
outstanding principal balance of the revolving credit line is payable
upon demand. The interest rate on the revolving credit line is equal
to 1-1/2% in excess of the prime rate of interest charged by the
Company's lender. The loan is collateralized by the Company's accounts
receivable, inventory and a 1.5 acre parcel of the Company's real
estate. During the year ended March 31, 1998, working capital
decreased by $123,145, from $2,253,553 on March 31, 1997 to $2,130,408
on March 31, 1998.
Operating activities provided cash of $486,840 for the year ended
March 31, 1998. A decrease of $967,791 from 1997 was primarily due to
decreases in inventory of $943,414, a decrease in accounts payable
of $916,550 and distributions in excess of earnings of the Joint
Venture of $280,775, partially offset by a net loss of $445,126. For
the prior fiscal year, operating activities provided cash of
$1,454,631 for the year ended March 31, 1997. This was primarily due
to a decrease in inventory of $1,338,874 and an increase in accounts
payable of $601,223.
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<PAGE>
Investing activities used cash of $13,786 in 1998, due to the purchase
of equipment. For the same period last year, investing activities
provided cash of $384,588, due to the sale of an undeveloped parcel of
real estate.
Financing activities used cash in 1998 of $490,129 mainly due to the
repayment of $394,315 in short-term debt and $81,250 in payments on
the legal settlement and, for the same period last year, financing
activities used cash of $1,786,560 primarily due to the repayment of
$1,630,044 in short-term debt and $143,250 in payments on a legal
settlement.
During the fiscal year ended March 31, 1998, the Company received a
distribution of $250,000 from the Hong Kong Joint Venture.
The Company believes that its line of credit and its working capital
provide it with sufficient resources to meet its requirements for
liquidity and working capital in the ordinary course of its business
over the next twelve months.
HONG KONG JOINT VENTURE
In fiscal year 1998, sales of the Hong Kong Joint Venture were
$6,984,960 compared to $6,644,142 and $9,977,272 in fiscal years 1997
and 1996, respectively.
Net loss was $61,550 for the year ended March 31, 1998 compared to
a net loss of $302,022 and net income of $436,345 in fiscal years 1997
and 1996, respectively. The decrease in income for the years ended
March 31, 1998 and 1997 was due primarily to a write-down of its
investment in its China Cellular Joint Venture of $337,464 in 1998 and
$725,745 in 1997, respectively.
Selling, general and administrative expenses were $1,288,622,
$1,337,015 and $1,456,591 for the fiscal years ended March 31, 1998,
1997 and 1996, respectively. As a percentage of sales, expenses were
18%, 20% and 15% for fiscal 1998, 1997 and 1996, respectively. The
decrease in expenses as a percentage of sales in fiscal 1998 was
primarily due to lower expenses.
Interest income net of interest expense was $96,469 for the year ended
March 31, 1998, compared to $85,414 and $191,916 in fiscal years
1997 and 1996, respectively. The decrease in net interest income in
fiscal year 1997 was primarily due to a distribution of $2,000,000
paid to its shareholders in April 1996.
Cash needs of the Hong Kong Joint Venture are currently met by funds
generated from operations. During the year ended March 31, 1998,
working capital increased by $111,914 from $1,648,274 on March 31,
1997 to $1,760,188 on March 31, 1998.
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<PAGE>
YEAR 2000 COMPLIANCE
The Company believes that the impact of the year 2000 issue will not
have a material effect on results of operations. However, the Company
is in the process of hiring a consultant to review its computer
operations and anticipates completing any required changes during
calendar year 1999.
INFLATION
The Company believes that inflation has not had a material effect upon
its results of operations, and liquidity and capital resources for any
of the periods presented.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Description Page
Report of Independent Auditors 14
Financial statements
Consolidated balance sheets, March 31, 1998 and 1997 15
Consolidated statements of operations for the years ended
March 31, 1998, 1997 and 1996 17
Consolidated statements of shareholders' equity for the
years ended March 31, 1998, 1997 and 1996 18
Consolidated statements of cash flows for the years ended
March 31, 1998, 1997 and 1996 19
Notes to consolidated financial statements 20
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<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Universal Security Instruments, Inc.
We have audited the accompanying consolidated balance sheets of Universal
Security Instruments, Inc. and subsidiaries (the Corporation) as of March
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended March 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We did not audit the financial statements of the Hong Kong Joint
Venture, the Corporation's investment which is accounted for by use of the
equity method. The Corporation's equity of $2,228,182 and $2,508,957 in the
Hong Kong Joint Venture's net assets at March 31, 1998 and 1997, and
of $(30,775), $(151,011) and $218,173 in that company's net (loss) income
for each of the three years is included in the accompanying consolidated
financial statements. The financial statements of the Hong Kong Joint
Venture were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for such
company, is based solely on the report of such other auditors.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of Universal Security Instruments, Inc. and
subsidiaries at March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March
31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respect the information set forth therein.
Deloitte & Touche LLP
June 17, 1998
Baltimore, Maryland
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<PAGE>
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
March 31,
1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash $ 133,377 $ 150,452
Accounts receivable:
Trade (less allowance for doubtful
accounts of $100,000 in 1998 and
$50,000 in 1997) 1,248,023 1,723,979
Officers and employees 5,515 1,545
1,253,538 1,725,524
Inventories:
Finished goods 2,228,070 2,900,910
Raw materials - foreign locations 83,728 127,656
2,311,798 3,028,566
Prepaid expenses 142,793 369,439
TOTAL CURRENT ASSETS 3,841,506 5,273,981
INVESTMENT IN HONG KONG JOINT VENTURE 2,228,182 2,508,957
PROPERTY AND EQUIPMENT 1,613,222 1,757,488
OTHER ASSETS 22,400 16,690
TOTAL ASSETS $7,705,310 $9,557,116
See notes to consolidated financial statements.
</TABLE>
- 15 -
<PAGE>
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
March 31,
1998 1997
<S> <C> <C>
CURRENT LIABILITIES
Short-term borrowings $ 969,326 $ 1,363,641
Current maturity of long-term debt 91,190 89,655
Accounts payable 583,910 1,502,193
Accrued liabilities 66,672 64,939
TOTAL CURRENT LIABILITIES 1,711,098 3,020,428
LONG-TERM DEBT, less current portion 1,246,861 1,344,211
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per
share; authorized 20,000,000
shares; issued and outstanding
811,397 shares in 1998 and 1997 8,114 8,114
Additional paid-in capital 10,453,930 10,453,930
Retained deficit (5,714,693) (5,269,567)
TOTAL SHAREHOLDERS' EQUITY 4,747,351 5,192,477
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,705,310 $ 9,557,116
See notes to consolidated financial statements.
</TABLE>
- 16 -
<PAGE>
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Year ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Net sales $11,566,317 $15,423,149 $19,507,889
Cost of goods sold 9,393,376 13,000,896 16,369,364
GROSS PROFIT 2,172,941 2,422,253 3,138,525
Research and development expense 226,529 250,751 220,051
Selling, general and
administrative expense 2,092,570 3,209,962 3,696,740
Operating loss (146,158) (1,038,460) (778,266)
Other income (expense):
Interest income 2,916 5,984 4,935
Interest expense (270,817) (411,541) (543,352)
Gain from sale of land 312,625
Legal settlement (247,500)
Other (292) 46,465 (307)
(268,193) (293,967) (538,724)
LOSS BEFORE EQUITY IN (LOSS)
EARNINGS OF HONG KONG
JOINT VENTURE (414,351) (1,332,427) (1,316,990)
Equity in (loss) earnings of
Hong Kong Joint Venture (30,775) (151,011) 218,173
NET LOSS $ (445,126) $(1,483,438) $(1,098,817)
Per common share amounts:
Basic and Diluted $ (.55) $ (1.83) $ (1.35)
Weighted average number of
common shares outstanding:
Basic and Diluted 811,397 811,397 811,397
See notes to consolidated financial statements.
</TABLE>
- 17 -
<PAGE>
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1995 811,346 $8,113 $10,453,739 $(2,687,312) $ 7,774,540
Net loss for 1996 (1,098,817) (1,098,817)
Common stock issued
to employees
through employee
stock purchase
plan 51 1 191 192
Balance at
March 31, 1996 811,397 8,114 10,453,930 (3,786,129) 6,675,915
Net loss for 1997 (1,483,438) (1,483,438)
Balance at
March 31, 1997 811,397 8,114 10,453,930 (5,269,567) 5,192,477
Net loss for 1998 (445,126) (445,126)
Balance at
March 31, 1998 811,397 $8,114 $10,453,930 $(5,714,693) $4,747,351
See notes to consolidated financial statements.
</TABLE>
- 18 -
<PAGE>
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year ended March 31,
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (445,126) $(1,483,438) $(1,098,817)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 158,051 165,096 181,781
Provision for losses on
accounts receivable 50,000 24,229
Legal settlement 300,000
Distributions in excess of
(undistributed) earnings of
Hong Kong Joint Venture 280,775 401,393 (218,173)
Gain on sale of property
and equipment (312,635)
Changes in operating assets
and liabilities:
Decrease in accounts
receivable trade 421,986 284,884 1,014,065
Decrease in inventories
and prepaid expenses 943,414 1,338,874 107,418
(Decrease) increase in
accounts payable and
accrued liabilities (916,550) 601,223 231,202
(Increase) decrease
in other assets (5,710) 135,005 (10,728)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 486,840 1,454,631 206,748
INVESTING ACTIVITIES
Purchases of property and equipment (13,786) (7,589) (93,498)
Decrease (increase) in time deposits 8,748 (426)
Proceeds from sale of property
and equipment 383,429
NET CASH (USED IN) PROVIDED
BY INVESTING ACTIVITIES (13,786) 384,588 (93,924)
FINANCING ACTIVITIES
Net repayment of short-term debt (394,315) (1,630,044) (876,026)
Proceeds from issuance of long
term-debt 1,300,000
Principal payments on long-term debt (14,564) (13,266) (613,006)
Payments on legal settlement (81,250) (143,250)
Proceeds from issuance of common stock 192
NET CASH USED IN FINANCING ACTIVITIES (490,129) (1,786,560) (188,840)
(DECREASE) INCREASE IN CASH (17,075) 52,659 (76,016)
CASH AT BEGINNING OF YEAR 150,452 97,793 173,809
CASH AT END OF YEAR $ 133,377 $ 150,452 $ 97,793
Supplemental information:
Interest paid $ 270,817 $ 411,541 $ 543,352
Income taxes paid - - -
See notes to consolidated financial statements.
</TABLE>
- 19 -
<PAGE>
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Research and Development: Research and development costs are charged
to operations as incurred.
Accounts Receivable: The Company provides allowances for doubtful
receivables by a charge against income in amounts equal to the
estimated losses that will be incurred in collection of all
receivables. The estimated losses are based on historical collection
experience and a review of the current status of the existing
receivables. Customer accounts are written off against the allowance
for doubtful accounts when an account is determined to be
uncollectible.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment: Property and equipment is recorded at cost,
less accumulated depreciation and amortization. Depreciation and
amortization is provided by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes.
The estimated useful lives for financial reporting purposes are as
follows:
Building - 40 years
Machinery and equipment - 5 to 10 years
Furniture and fixtures - 5 to 15 years
Computer equipment - 5 years
Income Taxes: The Company accounts for income taxes using SFAS No.
109, "Accounting for Income Taxes." For further information (see Note
F).
Per Share Data: The Company implemented Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" for all years
presented which requires presentation of basic and diluted earnings per
share amounts and a reconciliation for all years presented of the
- 20 -
<PAGE>
respective calculations. The Company incurred a net loss for the years
ended March 31, 1998, 1997 and 1996; therefore, all potential dilutive
common shares are antidilutive and not included in the calculation of
diluted earnings per share. Basic and diluted net income per share are
computed by dividing net income (loss) by the weighted average number
of common and potential dilutive common (if any) shares outstanding
during the period.
New Accounting Pronouncements: The Company is required to adopt SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
About Segments of An Enterprise and Related Information" effective
April 1, 1998. These standards specify the presentation and disclosure
requirements for comprehensive income and segment information. The
Company does not believe these statements will have a material effect
on the Company's financial statement presentation.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
March 31,
1998 1997
<S> <C> <C>
Land and improvements $ 234,284 $ 234,284
Building and improvements 1,412,271 1,412,271
Machinery and equipment 824,171 812,171
Furniture and fixtures 246,036 244,250
Computer equipment 49,085 49,085
2,765,847 2,752,061
Less accumulated depreciation
and amortization 1,152,625 994,573
$1,613,222 $1,757,488
</TABLE>
NOTE C - INVESTMENT IN HONG KONG JOINT VENTURE
The Company maintains a Hong Kong Joint Venture with a Hong Kong
Corporation, which has manufacturing facilities in the People's
Republic of China, for the manufacturing of consumer electronic
products. As of March 31, 1998, the Company has invested $2,228,182 for
their 50% interest in the Hong Kong Joint Venture. The investment has
been accounted for using the equity method of accounting.
During fiscal 1997, the Hong Kong Joint Venture completed the
accounting of its development contract and recorded a profit of
$122,328 on the development contract and a write-down of $725,745 on
its Cellular Joint Venture investment. During fiscal 1998, the Hong
Kong Joint Venture wrote off the balance of its Cellular Joint Venture
investment in the amount of $337,464.
- 21 -
<PAGE>
The following represents summarized financial information from the
financial statements of the Hong Kong Joint Venture as of March 31,
1998 and 1997 and for the years ended March 31, 1998, 1997 and 1996.
<TABLE>
Year Ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Current assets $3,041,311 $2,712,051
Property and other assets 2,742,444 3,456,418
Total $5,783,755 $6,168,469
Current liabilities $1,281,123 $1,063,777
Non-current liabilities 100,017 141,296
Shareholders' equity $4,402,615 $4,963,396
Total $5,783,755 $6,168,469
Net sales $6,984,960 $6,644,142 $9,977,272
Gross profit 1,327,380 1,792,877 1,640,186
Net (loss) income (61,550) (302,023) 436,345
</TABLE>
As of and for the years ended March 31, 1998, 1997 and 1996, the
period ending exchange rate and the weighted average exchange rates
are approximately 7.75 Hong Kong dollars to each U.S. dollar.
During the years ended March 31, 1998, 1997 and 1996, the Company
purchased $6,078,933, $5,824,622 and $9,206,000, respectively, of
finished product from the Hong Kong Joint Venture, which represents
73%, 57% and 53%, respectively, of the Company's total finished product
purchases.
NOTE D - DEBT
Debt consisted of the following:
<TABLE>
March 31,
1998 1997
<S> <C> <C>
Short-term borrowings $ 969,326 $1,363,641
Promissory notes - long-term 1,338,051 1,433,866
2,307,377 2,797,507
Less current maturities 1,060,516 1,453,296
$1,246,861 $1,344,211
</TABLE>
- 22 -
<PAGE>
The short-term borrowings relate to the Company's agreement with a
financial institution to provide a maximum line of credit of the lower
of $7,500,000 or specified percentages of the Company's accounts
receivable and inventory consisting of a revolving line of credit and
letter of credit. The outstanding principal balance of the revolving
credit line ($1,020,746 at March 31, 1998) is payable on demand. The
interest rate on the revolving credit line is equal to 1-1/2% in excess
of the prime rate of interest (10% at March 31, 1998). As of March 31,
1998, the amount available for borrowings under the line was
approximately $300,000 based on the specified percentages. The loan is
collateralized by the Company's accounts receivable, inventory and a
1.5 acre parcel of the Company's real estate. The agreement does not
contain any provision for compliance with financial covenants. The
weighted average interest rate on outstanding short-term borrowings
for the years ended March 31, 1998, 1997 and 1996 was 10.0%, 9.40% and
11.0%, respectively.
During the year ended March 31, 1996, the Company refinanced its
mortgage on its corporate headquarters. The terms of the mortgage are
a $1,300,000 loan repayable in 60 equal monthly installments of
principal and interest based on a 25 year amortization schedule, with
an interest rate of 10%. The full outstanding balance is due at the
end of the 60 month period. At March 31, 1998 and 1997, the
outstanding principal balances were $1,263,051 and $1,277,616,
respectively.
Included in debt at March 31, 1998 and 1997 is a note payable of
$75,000 and $156,250, respectively, payable to Black & Decker, as a
result of a legal settlement (see Note K). This note is non-interest
bearing and payable at $6,250 per month.
The annual maturities for all debt outstanding at March 31, 1998 are:
1999, $1,060,516, 2000, $20,895 and 2001, $1,225,966.
NOTE E - LEASES
There were no operating leases for either of the years ended March 31,
1998 or March 31, 1997.
NOTE F - INCOME TAXES
At March 31, 1998, the Company has net operating loss (NOL)
carryforwards in the United States of approximately $5,206,000 for
income tax purposes that expire in years 1999 through 2012. From 1997
to 1998, the deferred tax asset valuation allowance increased by
$344,248 primarily due to operating losses generated in fiscal 1998 and
the adjustment of prior year NOL's. From 1996 to 1997, the deferred tax
asset valuation allowance decreased by $1,025,421, due to IRS audit the
adjustments and establishing a deferred tax liability for the
unremitted earnings of the Hong Kong Joint Venture which was offset
somewhat by losses generated during fiscal 1997.
- 23 -
<PAGE>
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows:
<TABLE>
March 31,
1998 1997
<C> <C> <C>
Deferred tax liabilities:
Unremitted Hong Kong Joint Venture earnings
not considered permanently reinvested $ 766,174 $ 777,868
Gross deferred tax liabilities 766,174 777,868
Deferred tax assets:
Financial statement accruals and reserves 106,032 90,782
Inventory uniform capitalization 72,200
Other 34,615 35,355
NOL carryforwards and tax credits 1,978,230 1,732,386
Gross deferred tax assets 2,191,077 1,858,523
Valuation allowance (1,424,903) (1,080,655)
Net deferred tax assets $ -0- $ -0-
</TABLE>
The reconciliation of the income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:
<TABLE>
3/31/98 3/31/97 3/31/96
<S> <C> <C> <C>
Federal tax benefit at
statutory rate on loss (34%) $(151,343) $(504,269) $(373,598)
Equity in loss (earnings) from
Hong Kong Joint Venture 10,464 51,344 (80,023)
Dividends received from Hong Kong
Joint Venture for which net
deferred taxes were not previously
provided 85,000 340,000
Effect of net operating
loss carryforwards 81,144 60,000 394,629
Other (25,265) 52,925 58,992
$ -0- $ -0- $ -0-
</TABLE>
Investment and other tax credits are accounted for by the flow-through
method.
- 24 -
<PAGE>
NOTE G - COMMON STOCK
On February 27, 1998, the Shareholders approved a one-for-four reverse
stock split of the Company's issued and outstanding common stock. The
effective date of the reverse stock split was March 9, 1998, which reduced
the number of outstanding shares from 3,245,587 shares to 811,397 shares.
Additional paid-in capital was increased and common stock was decreased by
$24,342 as a result of the reverse stock split. All share and per share
amounts in this report have been restated to reflect the reverse stock
split.
Under terms of the Company's 1978 Non-Qualified Stock Option Plan, as
amended, 243,750 shares of common stock are authorized for the granting of
stock options, of which 11,519 shares have been issued as of March 31,
1998, leaving 232,231 available for issuance upon exercise of options
granted, or available for future grants to employees and directors. Under
provisions of the Plan, a committee of the Board of Directors determines
the option price and the dates exercisable. All options expire five years
from the date of grant.
The following tables summarize the status of options under the
Non-Qualified Stock Option Plan at March 31, 1998 and option transactions
for the two years then ended:
<TABLE>
Status as of March 31, 1998 Number of Shares
<S> <C>
Presently exercisable 168,281
Exercisable in future years 19,844
Total outstanding 188,125
Available for future grants 44,106
Shares of common stock reserved 232,231
Outstanding options:
Number of holders 13
Average price per share $5.72
Expiration dates October 1998 to November 2002
</TABLE>
Transactions for the Two Years Ended March 31, 1998:
<TABLE>
Weighted Average
Number of Per Share Total
Shares Option Price Option Price
<S> <C> <C> <C>
Outstanding at
March 31, 1996 135,375 $7.40 $1,002,850
Granted 75,250 5.12 384,250
Canceled (47,500) 7.08 (336,200)
Outstanding at
March 31, 1997 163,125 6.44 1,050,900
Granted 42,500 4.01 170,500
Canceled (17,500) 8.26 (144,575)
Outstanding at
March 31, 1998 188,125 $1,076,825
</TABLE>
- 25 -
<PAGE>
Under the terms of the Company's 1988 Employee Stock Purchase Plan,
eligible employees can purchase shares of the Company's common stock
through payroll deductions at a price equal to 90% of the asked price of
the shares. The Company has reserved 25,000 shares of common stock for
issuance under the Plan. No member of the Board of Directors who is not an
employee of the Company, and no member of the committee administering the
Plan, can participate in the Plan. At March 31, 1998, approximately 16,250
shares remain reserved for issuance under this Plan.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the 1978 Non-Qualified Stock Plan. Accordingly, no
compensation has been recognized for the 1978 Stock Plan. Had compensation
costs for the 1978 Stock Plan been determined based on fair value at the
grant date forward under that Plan consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss would not
have been affected on a pro forma basis. No adjustment to the Company's net
loss is required for the years ended March 31, 1998, 1997 and 1996
NOTE H - BENEFIT PLAN
The Company maintains a 401(k) defined contribution plan for its employees.
For fiscal years 1997 and 1996, the Company elected to contribute 2% of
each eligible employee's salary to the Plan. Additionally, the Company
elected to match 20% of employee contributions, up to a maximum of $200,
and provide an aggregate contribution of 3% of corporate net income to be
allocated among Plan participants. All Company contributions were
terminated as of March 3, 1997. The 401(k) expense for the years ended
March 31, 1997 and 1996 was $23,674 and $32,486, respectively.
NOTE I - COMMITMENTS
The Company has employment agreements with two of its officers, which
expired on March 31, 1998. The fixed aggregate annual remuneration under
these agreements approximates $300,000 per year. In addition, the
agreements provide incentive compensation to these officers based on the
Company's achievement of certain levels of earnings.
Outstanding letter of credit commitments which are used solely for
short-term inventory financing totaled $51,420 at March 31, 1998.
NOTE J - BUSINESS AND SALES INFORMATION
The Company is a manufacturer and wholesaler of a variety of products,
principally of security, video and telecommunications devices and
systems, for use in homes and businesses.
Approximately 15%, 15% and 11% of the Company's total sales were to a the
same customer in 1998, 1997 and 1996, respectively. An additional 12% of
the Company's total sales were to a different customer in 1998.
NOTE K - LITIGATION
In fiscal 1997, the Company settled its legal proceeding for patent
infringement litigation with Black & Decker (U.S.). In conjunction with the
settlement with Black & Decker, the Company agreed to pay the sum of
$300,000. The repayment terms were $100,000 paid in July 1996 and $200,000
payable in 32 equal monthly installments without interest beginning
September 1, 1996. As a result of the other related expenses and insurance
carrier recovery, the net charge for this matter amounted to $247,500.
- 26 -
<PAGE>
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of five directors. The
following is a list of individuals currently serving as directors of
the Company until the Company's next annual stockholders meeting and
individuals currently serving as executive officers of the Company:
Principal Occupation Director
for past five years since
Stephen Knepper.....54 Director; Vice Chairman of the 1970
Board of the Company since
September 1996; Chairman of the
Board of the Company from 1970
to September 1996.
Michael Kovens......55 Director; Chairman of the Board 1970
of the Company since September
1996; President of the Company
from 1970 to September 1996.
Harvey Grossblatt...51 Director since September 1996; 1996
President since June 1996;
Chief Financial Officer since
April 1997; Executive Vice
President of the Company since
December 1986; Secretary and
Treasurer of the Company since
September, 1988; Vice President
and Chief Financial Officer of
the Company from October 1983
through May 1995.
Ronald Frank(1).....32 Vice President of Lexington 1998
National Insurance Company
since 1993.
Gary Goldberg.......49 1993-1996 President of Ultravision 1998
LLC, 1996 to 1997; Independent
Consultant 1997 to present;
Procurement Agent for Sierra
Military Health Services, Inc.
(1) Mr. Frank is the son-in-law of Mr. Michael Kovens, Director and
Chairman of the Board of the Company.
- 27 -
<PAGE>
ITEM 11.
EXECUTIVE COMPENSATION
Table I. Summary Compensation Table
The following table reflects the aggregate amount paid or accrued by the Company
in its three most recent fiscal years, for each executive officer whose
compensation exceeded $100,000 in that year.
<TABLE>
Long-Term Compensation
Name and Awards Payouts
Principal Annual Compensation Stock LTIP All Other
Position Year Salary Bonus Other Awards Options Payouts Compensation(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael
Kovens 1998 $175,000 - - - 15,000 - $ -0-
Chairman 1997 300,000 - - - 17,500 - 3,200
of the 1996 250,000 - - - - - 3,200
Board
Stephen C.
Knepper 1998 $ 50,000 - - - 15,000 - $ -0-
Vice 1997 183,328 - - - 17,500 - 3,200
Chairman 1996 250,000 - - - - - 2,700
of the
Board
Harvey
Gross-
blatt 1998 $122,500 - - - - - $ -0-
President, 1997 142,923 - - - 17,750 - 2,857
Secre- 1996 143,675 - - - - - 3,918
tary
and
Treasurer
(1)Consists of Company contributions under its 401(k) plan.
</TABLE>
Table II. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
<TABLE>
Value
Number of Unexercised
of Unexercised In-The-Money
Shares Options at FY-End Options at FY-End
Acquired Value Exerci-/Unexerci- Exerci-/Unexerci-
Name In Exercise Realized sable / sable sable / sable
<S> <C> <C> <C>
Stephen C. Knepper - - 68,750/ -0- -0- / -0-
Michael Kovens - - 68,750/ -0- -0- / -0-
Harvey Grossblatt - - 24,000/ -0- -0- / -0-
</TABLE>
- 28 -
<PAGE>
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 11, 1998, the following persons were "beneficial owners"
(as that term is defined under Rule 13d-3 promulgated by the
Securities and Exchange Commission) of more than five percent of the
Company's Common Stock.
Name and address of Shares Percent
beneficial owner Beneficially Owned(1) of class
Michael Kovens 219,707(2) 25.0%
10324 South Dolfield Rd.
Owings Mills, MD 21117
Stephen Knepper 100,873(3) 11.5%
10324 South Dolfield Rd.
Owings Mills, MD 21117
Bruce Paul 46,000 5.7%
One Hampton Road
Purchase, NY 10577
Norman H. Pessin 42,250 5.0%
c/o Neuberger & Berman, LLC
605 Third Avenue
New York, NY 10158
(1) For the purpose of determining the percentages of stock
beneficially owned, shares of stock subject to options
exercisable within 60 days of June 11, 1998 are deemed to be
outstanding.
(2) Includes 5,048 shares held by Mr. Kovens' adult children and
68,750 shares which Mr. Kovens presently has the right to
acquire through the exercise of stock options.
(3) Includes 68,750 shares which Mr. Knepper presently has the
right to acquire through the exercise of stock options.
- 29 -
<PAGE>
As of June 11, 1998, the shares of the Company's Common Stock owned
beneficially by each director, by each executive officer and by all
directors and officers as a group were as follows:
Shares Percent
Name of beneficial owner Beneficially Owned(1) of class
Michael Kovens 219,707(2) 25.0%
Stephen Knepper 100,873(3) 11.5%
Harvey Grossblatt 31,273(4) 3.7%
All directors and officers as 355,353 36.4%
a group (7 persons included)
(1) See footnote 1 under previous table.
(2) See footnote 2 under previous table.
(3) See footnote 3 under previous table.
(4) Includes 24,000 shares which Mr. Grossblatt presently has the
right to acquire through the exercise of stock options.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
- 30 -
<PAGE>
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following consolidated financial statements are
included in Part II, Item 8.
Report of independent auditors
Financial statements
Consolidated balance sheets, March 31, 1998 and 1997
Consolidated statements of operations for the years ended
March 31, 1998, 1997 and 1996.
Consolidated statements of shareholders' equity for the
years ended March 31, 1998, 1997 and 1996.
Consolidated statements of cash flows for the years
ended March 31, 1998, 1997 and 1996.
Notes to consolidated financial statements.
2. The following financial statement schedule for the
years ended March 31, 1998, 1997 and 1996 is submitted
herewith:
Page
Schedule II - Valuation account 33
All other schedules are omitted because they are not
applicable, not required, or because the required information is
included in the financial statements or notes thereto.
- 31 -
<PAGE>
3. Exhibits required by Item 601 of Regulation S-K.
The following exhibit is incorporated by reference to the
exhibit to Form 10-K for the fiscal year ended March 31, 1998, filed
by the Company with the Securities and Exchange Commission (SEC).
10.15 Hong Kong Joint Venture Agreement
(confidential treatment of name requested and
filed separately with the SEC).
The following exhibits are attached hereto:
24.1 Consent of Deloitte & Touche LLP, Independent
Auditors.
(b) None.
(d) 1. Separate financial statements of The Hong Kong Joint
Venture (name withheld and filed separately with the SEC).
Page
Report of the auditors JV-1
Consolidated profit and loss account,
March 31, 1998 and 1997 JV-2
Consolidated balance sheets, March 31, 1998 and 1997 JV-3
Consolidated cash flow statements, March 31, 1998 and
1997 JV-5
Notes to consolidated financial statements JV-7
- 32 -
<PAGE>
SCHEDULE II
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
VALUATION ACCOUNT
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
Charged
Balance at to cost Charged Balance
beginning and to other at end
of year expenses accounts Deductions(1) of year
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 1998
Allowance for
doubtful accounts $50,000 $50,000 $-0- $ -0- $100,000
Year ended
March 31, 1997
Allowance for
doubtful accounts $25,771 $24,229 $-0- $ -0- $ 50,000
Year ended
March 31, 1996
Allowance for
doubtful accounts $50,000 $ -0- $-0- $24,229 $ 25,771
(1)Write-off of uncollectible accounts, net of recoveries.
</TABLE>
- 33 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL SECURITY INSTRUMENTS, INC.
By: Harvey Grossblatt
Harvey Grossblatt, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: June 29, 1998 By: Michael Kovens
Michael Kovens
Chairman of the Board, Director
Date: June 29, 1998 By: Stephen Knepper
Stephen Knepper
Vice Chairman of the Board, Director
Date: June 29, 1998 By: Harvey Grossblatt
Harvey Grossblatt, President,
Director, Secretary, Treasurer,
Chief Accounting Officer
- 34 -
<PAGE>
REPORT OF THE AUDITORS
To the members
The Joint Venture (name withheld and filed separately
with the Securities and Exchange Commission)
We have audited the financial statements on pages 4 to 20 which
have been prepared in accordance with accounting principles
generally accepted in Hong Kong.
Respective responsibilities of directors and auditors
The Companies Ordinance requires the directors to prepare
financial statements which give a true and fair view. In
preparing financial statements which give a true and fair view it
is fundamental that appropriate accounting policies are selected
and applied consistently. It is our responsibility to form an
independent opinion, based on our audit, on those statements and
to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Statements of Auditing
Standards issued by the Hong Kong Society of Accountants. An
audit includes an examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation
of the financial statements, and of whether the accounting
policies are appropriate to the Company's and the Group's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance as to whether the financial statements are free from
material misstatement. In forming our opinion we also evaluated
the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a
reasonable basis for our opinion.
Opinion
In our opinion the financial statements give a true and fair
view, in all material respects, of the state of affairs of the
Company and the Group as at 31 March 1998 and of the loss and
cash flows of the Group for the year then ended and have been
properly prepared in accordance with the Companies Ordinance.
Hong Kong
5 June 1998
JV-1
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Year ended 31 March 1998
<TABLE>
Notes 1998 1997
HK$ HK$
<S> <C> <C> <C>
TURNOVER 3 54,146,978 57,585,355
PROFIT BEFORE EXCEPTIONAL ITEMS 4 2,196,879 5,333,906
Exceptional items 5 (2,616,066) (5,625,929)
LOSS BEFORE TAXATION (419,187) (292,023)
Taxation 6 (57,945) (2,049,242)
NET LOSS ATTRIBUTABLE TO
SHAREHOLDERS 7 (477,132) (2,341,265)
Retained profits at
beginning of year 31,736,781 34,078,046
RETAINED PROFITS AT END OF YEAR 31,259,649 31,736,781
</TABLE>
JV-2
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEET
31 March 1998
Notes 1998 1997
HK$ HK$
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and bank balances 8 14,313,804 8,681,244
Accounts and bills receivable 26,131 135,450
Prepayments, deposits and
other receivables 251,003 209,031
Inventories 9 6,215,626 6,897,070
Due from a shareholder 2 2,769,494 5,100,859
TOTAL CURRENT ASSETS 23,576,058 21,023,654
INTERESTS IN AN
ASSOCIATED COMPANY 11 - 2,616,066
FIXED ASSETS 12 21,259,257 24,177,874
TOTAL ASSETS 44,835,315 47,817,594
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable 4,529,687 3,570,499
Other payables and accrued
liabilities 2,256,962 2,179,155
Due to a related company 2 235,613 268,695
Current portion of loan from
a related company 2 164,004 164,004
Taxation 2,744,917 2,063,977
TOTAL CURRENT LIABILITIES 9,931,183 8,246,330
DEFERRED TAXATION 13 420,000 576,000
LOANS FROM SHAREHOLDERS 14 2,868,954 6,738,954
LONG TERM PORTION OF LOAN FROM
A RELATED COMPANY 2 355,329 519,329
TOTAL LIABILITIES - page 6 13,575,466 16,080,613
</TABLE>
JV-3
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEET (continued)
31 March 1998
Notes 1998 1997
HK$ HK$
<S> <C> <C> <C>
TOTAL LIABILITIES - page 5 13,575,466 16,080,613
SHAREHOLDERS' EQUITY
Share capital 15 200 200
Retained profits 31,259,649 31,736,781
31,259,849 31,736,981
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 44,835,315 47,817,594
</TABLE>
JV-4
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
<TABLE>
CONSOLIDATED CASH FLOW STATEMENT
Year ended 31 March 1998
Notes 1998 1997
HK$ HK$
<S> <C> <C> <C>
NET CASH INFLOW FROM OPERATING
ACTIVITIES 16(a) 9,043,415 4,370,287
RETURNS ON INVESTMENTS AND
SERVICING OF FINANCE
Interest received 779,306 676,510
Interest paid (31,483) (14,385)
Dividend paid - (15,460,000)
Net cash inflow/(outflow)
from returns on investments
and servicing of finance 747,823 (14,797,875)
TAXATION
Hong Kong profits tax
refunded/(paid) 466,995 (718,865)
INVESTING ACTIVITIES
Purchases of fixed assets (637,674) (2,139,552)
Sales proceeds from disposal
of fixed assets 46,001 4,000
Increase in pledged time deposit (93,267) (57,244)
Net cash outflow from investing
activities (684,940) (2,192,796)
NET CASH INFLOW/(OUTFLOW)
BEFORE FINANCING ACTIVITIES 9,573,293 (13,339,249)
FINANCING ACTIVITIES 16(b)
Loan from a related company - 820,000
Repayment of loan from a
related company (164,000) (136,667)
Repayment of loans from
shareholders (3,870,000) -
Net cash inflow/(outflow)
from financing activities (4,034,000) 683,333
</TABLE>
JV-5
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
<TABLE>
CONSOLIDATED CASH FLOW STATEMENT (continued)
Year ended 31 March 1998
Notes 1998 1997
HK$ HK$
<S> <C> <C> <C>
INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 5,539,293 (12,655,916)
Cash and cash equivalents at
beginning of year 7,383,158 20,039,074
CASH AND CASH EQUIVALENTS AT
END OF YEAR 12,922,451 7,383,158
ANALYSIS OF THE BALANCES OF
CASH AND CASH EQUIVALENTS
Cash and bank balances 12,922,451 7,383,158
</TABLE>
JV-6
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the audited
financial statements of the Company and its subsidiaries for
the year ended 31 March 1998. The results of subsidiaries
acquired or disposed of during the year are consolidated from
or to their effective dates of acquisition or disposal,
respectively. All significant intercompany transactions and
balances within the Group are eliminated on consolidation.
Subsidiaries
A subsidiary is a company in which the Company, directly or
indirectly, controls more than half of its voting power or
issued share capital or controls the composition of its board
of directors. Interests in subsidiaries are stated at cost
unless, in the opinion of the directors, there have been
permanent diminutions in value, when they are written down to
values determined by the directors.
Associated companies
An associated company is a company, not being a subsidiary,
in which the Group has a long term interest of not less than
20% of the equity voting rights and over which it exerts
significant influence.
The Group's share of the post-acquisition results and
reserves of associated companies are included in the
consolidated profit and loss account and consolidated
reserves, respectively. The Group's investments in associated
companies are stated in the consolidated balance sheet at the
Group's share of net assets under the equity method of
accounting.
Goodwill
Goodwill arising on consolidation of subsidiaries and on
acquisition of associated companies represents the excess
purchase consideration paid for subsidiaries/associated
companies over the fair values ascribed to the net underlying
assets acquired and is written off to the profit and loss
account in the year of acquisition.
JV-7
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Related company
A related company is a company in which a shareholder or
director has a direct or indirect interest, either as a
shareholder or director of that company, and is in a position
to exert significant influence over the related company.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated
depreciation. The cost of an asset comprises its purchase
price and any directly attributable costs of bringing the
asset to its working condition and location for its intended
use.
Expenditure incurred after the assets have been put into
operation, such as repairs and maintenance, is normally
charged to the profit and loss account in the period in which
it is incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase
in the future economic benefits expected to be obtained from
the use of the asset, the expenditure is capitalized as an
additional cost of the asset.
Depreciation is calculated on the straight-line basis to
write off the cost of each asset over its estimated useful
life. The principal annual rates used for this purpose are as
follows:
Land held on medium term leases Over the lease terms
Buildings 5%
Leasehold improvements 20%
Plant and machinery 10%
Furniture and fixtures 20%
Motor vehicles 20%
The gain or loss on disposal or retirement of fixed assets
recognized in the profit and loss account is the difference
between the sales proceeds and the carrying amount of the
relevant asset.
JV-8
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost and net
realizable value. Cost is determined on the first-in, first-
out basis and comprises direct materials, direct labor and
an appropriate proportion of overheads. Net realizable value
is based on estimated selling prices less further costs
expected to be incurred to completion and disposal.
Long term contracts
Long term contract work in progress is stated at cost plus
attributable profits less foreseeable losses and progress
payments received and receivable. The excess of progress
payments received and receivable over costs of individual
contract plus attributable profits recognized to date is
included under current liabilities in the balance sheet.
Cost comprises materials, direct labor and an appropriate
proportion of overheads.
Where losses are currently estimated to arise over the
duration of the contracts, allowance is made for such losses.
In determining this, account is taken of the anticipated
final contract settlement.
Attributable profit is calculated and included in long term
contract work in progress on a percentage of completion basis
where the contract's ultimate outcome can be foreseen and
assessed with reasonable certainty.
The percentage of completion is measured by reference to the
percentage of contract costs incurred for work performed to
date to the estimated total contracted costs.
Cash equivalents
Cash equivalents represent short term highly liquid
investments which are readily convertible into known amounts
of cash and which were within three months of maturity when
acquired.
JV-9
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
Revenue is recognized when it is probable that the economic
benefits will flow to the Group and when the revenue can be
measured reliably, on the following bases:
(a) on the sales of goods, when the significant risks and
rewards of ownership have been transferred to the buyer;
(b) rental income, on the straight line basis over the lease
term;
management fee income, when the services are rendered;
and
(d) interest, on a time proportion basis, taking into
account the principal outstanding and the effective
interest rate applicable.
Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are
accounted for as operating leases. Rentals applicable to
such operating leases are charged to the profit and loss
account on the straight line basis over the lease terms.
Deferred taxation
Deferred taxation is provided, using the liability method, on
all significant timing differences to the extent it is
probable that the liability will crystallize in the
foreseeable future. A deferred tax asset is not recognized
until its realization is assured beyond reasonable doubt.
Foreign currencies
Foreign currency transactions are recorded at the applicable
rates of exchange ruling at the transaction dates. Monetary
assets and liabilities denominated in foreign currencies at
the balance sheet date are translated at the applicable rates
of exchange ruling at that date. Exchange differences are
dealt with in the profit and loss account.
JV-10
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS
The Company was incorporated under the laws of Hong Kong on 7
July 1989. It operates under a joint venture agreement
entered into on 23 October 1989 between Universal Security
Instruments, Inc., which is incorporated in the United
States, and The Original Joint Venture Owner (name withheld and
filed separately with the SEC) which is incorporated in Hong Kong.
The Company is economically dependent on Universal Security
Instruments, Inc. with which it transacts most of its business and
the financial statements reflect the effect of these transactions
which are conducted on bases determined between the parties.
During the year, the following significant related party
transactions were recorded:
<TABLE>
1998 1997
HK$ HK$
<S> <C> <C>
Sales made to Universal Security
Instruments, Inc. 47,123,514 45,152,112
Purchases of inventories from
Universal Security Instruments, Inc. 393,233 838,680
Interest received from Universal
Security Instruments, Inc. - 57,964
Sundry income received from
Universal Security Instruments, Inc. 178,147 400,139
Management fee received from USI
Oberlin Limited 139,320 139,320
License fees paid to An Affiliate of
The Company (name withheld and
filed separately with the SEC) 235,613 268,695
Rentals paid to:
An Affiliate of The Company (name
withheld and filed separately with
the SEC) 840,000 840,000
A Manager (name withheld and filed
separately with the SEC) 240,000 240,000
Management fee paid to An Affiliate
of The Company (name withheld and
filed separately with the SEC) 1,440,000 1,440,000
Interest paid to An Affiliate of The
Company (name withheld and filed
separately with the SEC) 3,996 3,330
The balances with a shareholder and subsidiaries are
unsecured, interest-free, and have no fixed terms of
repayment.
</TABLE>
JV-11
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
2. CORPORATE AFFILIATION AND RELATED PARTY TRANSACTIONS
(continued)
USI Oberlin Limited is a subsidiary of Universal Security
Instruments, Inc.
An Affiliate of The Company (name withheld and filed separately
with the SEC) is a company of which (names withheld and filed
separately with the SEC), directors of the Company, are directors.
The current account with a related company, (name withheld and
filed separately with the SEC), is unsecured, interest-free, and
has no fixed terms of repayment.
The loan from a related company, (name withheld and filed
separately with the SEC), is unsecured, bears interest at 0.49%
per annum, and is repayable by 38 equal monthly installments.
3. TURNOVER
Turnover represents the invoiced value of goods sold, net of
discounts and returns, and attributable profit of long term
contracts.
4. PROFIT BEFORE EXCEPTIONAL ITEMS
Profit before exceptional items is arrived at after
charging/(crediting):
<TABLE>
Group
1998 1997
HK$ HK$
<S> <C> <C>
Depreciation 3,506,804 3,591,058
Auditors' remuneration 190,000 168,000
Directors' remuneration - -
Interest on other loan wholly
repayable within 5 years 31,483 14,385
Operating lease rentals for land
and buildings 1,107,021 1,107,918
Loss on disposal of fixed assets 3,486 4,928
Exchange gains, net (417,924) (161,323)
Interest income (779,306) (676,510)
Rental income (304,800) (284,640)
</TABLE>
JV-12
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
5. EXCEPTIONAL ITEMS
<TABLE>
Group
1998 1997
HK$ HK$
<S> <C> <C>
Provision for permanent diminution
in value of the Group's interest in
an associated company - note 11 2,326,397 1,561,029
Provision for amount due from an
associated company - note 11 289,669 4,064,900
2,616,066 5,625,929
</TABLE>
6. TAXATION
Hong Kong profits tax has been provided at the rate of 16.5%
(1997: 16.5%) on the estimated assessable profits arising in
Hong Kong during the year. Taxes on profits assessable
elsewhere have been calculated at the rates of taxation
prevailing in the countries in which the group operates.
<TABLE>
Group
1998 1997
HK$ HK$
<S> <C> <C>
Provision for the year 325,945 2,530,917
Underprovision/(overprovision)
in prior years (112,000) 38,325
Deferred tax credit - note 13 (156,000) (520,000)
Taxation charge for the year 57,945 2,049,242
</TABLE>
JV-13
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
7. NET LOSS ATTRIBUTABLE TO SHAREHOLDERS
The net loss attributable to shareholders dealt with in the
financial statements of the Company is HK$8,486,396 (1997:
HK$824,803).
8. CASH AND BANK BALANCES
These included time deposit amounted to HK$1,391,353 (1997:
HK$1,298,086) which was pledged to a bank for credit
facilities of HK$3,329,000 (1997: HK$3,329,000) granted to
the Company.
Certain banking facilities of the Company are secured by
personal guarantees of (names withheld and filed separately with
the SEC), directors of the Company, and (name withheld and filed
separately with the SEC), a director of the Company's subsidiary
to the extent of HK$7,879,000. The facilities were not utilized at
the balance sheet date.
9. INVENTORIES
<TABLE>
Group and Company
1998 1997
HK$ HK$
<S> <C> <C>
Raw materials 3,739,541 4,959,689
Work in progress 898,987 976,428
Finished goods 1,577,098 960,953
6,215,626 6,897,070
</TABLE>
10. INVESTMENTS IN SUBSIDIARIES
<TABLE>
Group and Company
1998 1997
HK$ HK$
<S> <C> <C>
Unlisted shares, at cost 210,008 210,008
Less: Provision for
permanent diminution (200,000) -
10,008 210,008
</TABLE>
JV-14
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
10. INVESTMENTS IN SUBSIDIARIES (continued)
Particulars of the wholly owned subsidiaries are as follows:
<TABLE>
Nominal value
Place of of issued
incorporation ordinary Principal
Name and operation share capital activities
<S> <C> <C> <C>
A Subsidiary of The Hong Kong HK$200,000 Investment
Company (name holding
withheld and
filed separately
with the SEC)
A Subsidiary of The British US$1 Dormant
Company (name Virgin Islands
withheld and
filed separately
with the SEC)
A Subsidiary of The Hong Kong HK$10,000 Trading of
Company (name consumer
withheld and electronic
filed separately products
with the SEC)
</TABLE>
11. INTERESTS IN AN ASSOCIATED COMPANY
<TABLE>
Group
1998 1997
HK$ HK$
<S> <C> <C>
Share of net assets, other than
goodwill 3,887,426 3,887,426
Due from an associated company 4,354,569 4,354,569
8,241,995 8,241,995
Less: Provision for permanent
diminution - note 5 (3,887,426) (1,561,029)
Provision against amount
due from an associated
company - note 5 (4,354,569) (4,064,900)
- 2,616,066
The amount due from the associated company is unsecured,
interest-free, and has no fixed terms of repayment.
</TABLE>
JV-15
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
11. INTERESTS IN AN ASSOCIATED COMPANY (continued)
Particulars of the associated company are as follows:
<TABLE>
Percentage
Country of Nominal value of equity
registration of registered attributable Principal
Name and operation capital to the Group activity
1998 1997
<S> <C> <C> <C> <C> <C>
An Associate The People's US$4,000,000 30 30 Dormant
of The Republic of
Company China
(name withheld
and filed
separately with
the SEC)
</TABLE>
The Associated Company (name withheld and filed separately with
the SEC) was registered under the laws of the People's Republic
of China as a sino-foreign equity joint venture on 20 June
1992 and has a tenure of 15 years. The tenure of the joint
venture can be extended by the board of directors of The
Associated Company (name withheld and filed separately with
the SEC) with the approval of the relevant government authorities.
The Associated Company (name withheld and filed separately with
the SEC) has not commenced its operation at the balance sheet
date.
12. FIXED ASSETS
Group and Company
<TABLE>
Leasehold Furniture
land and improve- Plant and and Motor
buildings ments machinery fixtures vehicles Total
HK$ HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Cost:
At begin-
ning of
year 15,814,592 6,484,419 27,876,135 2,580,139 627,161 53,382,446
Additions - - 588,464 49,210 - 637,674
Disposals - - - - (174,660) (174,660)
At 31
March
1998 15,814,592 6,484,419 28,464,599 2,629,349 452,501 53,845,460
Accumulated depreciation:
At begin-
ning of
year 2,549,761 4,092,063 19,952,676 2,039,232 570,840 29,204,572
Provided
during
the year 729,401 982,584 1,525,972 262,013 6,834 3,506,804
Disposals 3,279,162 5,074,647 21,478,648 2,301,245 452,501 32,586,203
At 31
March
1998 3,279,162 5,074,647 21,478,648 2,301,245 452,501 32,586,203
</TABLE>
JV-16
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
12. FIXED ASSETS (continued)
Group and Company
<TABLE>
Leasehold Furniture
land and improve- Plant and and Motor
buildings ments machinery fixtures vehicles Total
HK$ HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Net book value:
At 31
March
1998 12,535,430 1,409,772 6,985,951 328,104 - 21,259,257
At 31
March
1997 13,264,831 2,392,356 7,923,459 540,907 56,321 24,177,874
</TABLE>
The leasehold land and buildings are situated in the People's Republic of
China under medium-term leases.
13. DEFERRED TAXATION
<TABLE>
Group and Company
1998 1997
HK$ HK$
<S> <C> <C>
Balance at beginning of year 576,000 1,096,000
Credit for the year - note 6 (156,000) ( 520,000)
Balance at end of year 420,000 576,000
</TABLE>
The principal components of the Group's deferred tax
liability comprise accelerated depreciation allowances.
14. LOANS FROM SHAREHOLDERS
<TABLE>
Group and Company
1998 1997
HK$ HK$
<S> <C> <C>
Universal Security
Instruments, Inc. 1,434,477 3,369,477
An Affiliate of The Company 1,434,477 3,369,477
(name withheld and filed
separately with the SEC)
2,868,954 6,738,954
</TABLE>
The loans are unsecured, interest-free and repayable on
demand by the respective shareholder with the consent of the
other. The directors of the Company consider that these
liabilities are non-current.
JV-17
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
15. SHARE CAPITAL
<TABLE>
Group
1998 1997
HK$ HK$
<S> <C> <C>
Authorized:
100 ordinary shares of HK$100 each 10,000 10,000
Issued and fully paid:
2 ordinary shares of HK$100 each 200 200
</TABLE>
JV-18
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
16. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
(a) Reconciliation of loss before taxation to net cash
inflow from operating activities:
<TABLE>
1998 1997
HK$ HK$
<S> <C> <C>
Loss before taxation (419,187) (292,023)
Provision for permanent diminution in value
of the investment in an associated company 2,326,397 1,561,029
Provision for amount due from an associated
company 289,669 4,064,900
Unrealized profit in pre-operating expenses
of an associated company - 5,418,162
Interest income (779,306) (676,510)
Interest expense 31,483 14,385
Depreciation 3,506,804 3,591,058
Loss on disposal of fixed assets 3,486 4,928
Decrease in accounts and bills receivable 109,319 56,980
Decrease/(increase) in prepayments, deposits
and other receivables (41,972) 405,625
Decrease in inventories 681,444 1,237,839
Decrease in amount due from a shareholder 2,331,365 1,748,458
Increase/(decrease) in accounts payable 959,188 (888,991)
Decrease in bills payable - (435,117)
Increase in other payables and
accrued liabilities 77,807 1,387,857
Decrease in amount due to a related company (33,082) -
Decrease in amount due to an
associated company - (12,828,293)
Net cash inflow from operating activities 9,043,415 4,370,287
</TABLE>
(b) Analysis of changes in financing during the year
<TABLE>
Loan from a Loans from
related company shareholders
HK$ HK$
<S> <C> <C>
Balance 1 April 1996 - 6,738,954
Cash inflow from financing 820,000 -
Repayment (136,667)
Balance at 31 March 1997 and 1 April 1997 683,333 6,738,954
Repayment (164,000) (3,870,000)
Balance at 31 March 1998 519,333 2,868,954
JV-19
<PAGE>
THE JOINT VENTURE (NAME WITHHELD AND FILED SEPARATELY WITH THE SEC)
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
31 March 1998
17. COMMITMENTS
</TABLE>
<TABLE>
Group and Company
1998 1997
HK$ HK$
<S> <C> <C>
Capital commitments contracted for 262,600 303,115
Commitments payable in the following
year under operating leases in
respect of land and buildings
expiring within one year 1,080,000 1,080,000
</TABLE>
18. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclasassified to conform
with the current year's presentation.
19. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved by the board of
directors on 5 June 1998.
JV-20
EXHIBIT 24.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following
Registration Statements of our report dated June 17, 1998 with
respect to the consolidated financial statements and financial statement
schedule of Universal Security Instruments, Inc. and Subsidiaries
as of March 31, 1998 and for the three years then ended included in
this Annual Report (Form 10-K).
Registration Statement Number Description
Non-qualified Stock Option Plan:
2-83323 Form S-8
33-6953 Form S-8
33-21226 Form S-8
Incentive Stock Option Plan:
2-99736 Form S-8
Employee Stock Purchase Plan:
33-21225 Form S-8
Deloitte & Touche LLP
Baltimore, Maryland
June 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-END> MAR-31-1998 MAR-31-1998
<CASH> 133,377 133,377
<SECURITIES> 0 0
<RECEIVABLES> 1,253,538 1,253,538
<ALLOWANCES> 100,000 100,000
<INVENTORY> 2,311,798 2,311,798
<CURRENT-ASSETS> 3,841,506 3,841,506
<PP&E> 2,765,846 2,765,846
<DEPRECIATION> 1,152,624 1,152,624
<TOTAL-ASSETS> 7,705,310 7,705,310
<CURRENT-LIABILITIES> 1,711,098 1,711,098
<BONDS> 0 0
0 0
0 0
<COMMON> 8,114 8,114
<OTHER-SE> 4,739,237 4,739,237
<TOTAL-LIABILITY-AND-EQUITY> 7,705,310 7,705,310
<SALES> 2,586,998 11,566,317
<TOTAL-REVENUES> 2,586,998 11,566,317
<CGS> 1,952,790 9,393,376
<TOTAL-COSTS> 1,952,790 9,393,376
<OTHER-EXPENSES> 563,244 2,319,099
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 56,827 268,193
<INCOME-PRETAX> (99,521) (445,126)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (99,521) (445,126)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (99,521) (445,126)
<EPS-PRIMARY> (.12) (.55)
<EPS-DILUTED> (.12) (.55)
</TABLE>
