UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 19961997
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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 of Incorporation I.R.S. Employer Identification
Number
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
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 and
(2) has been subject to the filing requirements for at least the
past 90 days.
YES X NO _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Date Class Shares Outstanding
August 1, 19961997 Common Stock, $.01 par value 3,245,587
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
INDEX
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated balance sheets at June 30, 19961997 and March
31, 19961997
Consolidated statements of operations for the three
months ended June 30, 19961997 and 19951996
Consolidated statements of cash flows for the three
months ended June 30, 19961997 and 19951996
Notes to consolidated financial statements
Item 2. Management's discussion and analysis of results
of operations and financial condition
Part II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports
- 2 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
June 30, 1996 March 31, 1996
June 30, 1997 March 31, 1997
CURRENT ASSETS
Cash and cash equivalents $ 178,32783,951 $ 97,793
Time deposits 8,820 8,748150,452
Accounts receivable:
Trade (less allowance for
doubtful accounts of $25,771$50,000
at June 30, 19961997 and $25,771 at
March 31, 1996) 1,531,877 2,033,0921997) 1,482,330 1,723,979
Officers and employees 6,631 40,678
1,538,508 2,073,770974 1,545
1,483,304 1,725,524
Inventories:
Finished goods 4,244,421 4,099,9072,959,513 2,900,910
Raw materials-foreign locations 306,925 152,303
4,551,346 4,252,210121,410 127,656
3,080,923 3,028,566
Prepaid expenses 467,095 484,669318,367 369,439
TOTAL CURRENT ASSETS 6,744,096 6,917,1904,966,545 5,273,981
INVESTMENT IN JOINT VENTURE 2,668,137 3,660,3502,522,879 2,508,957
PROPERTY, PLANT AND EQUIPMENT 1,944,114 1,985,7901,718,965 1,757,488
OTHER ASSETS 113,061 113,061
$11,469,408 $12,676,39116,690 16,690
TOTAL ASSETS $9,225,079 $9,557,116
See notes to consolidated financial statements
- 3 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 1996 March 31, 1996
June 30, 1997 March 31, 1997
CURRENT LIABILITIES
Short-term borrowings $ 2,589,8311,399,563 $ 2,993,6851,363,641
Current maturity of
long-term debt 188,488 13,48889,655 89,655
Accounts payable 1,235,648 858,557
Accounts payable - joint venture 750,0001,138,070 1,502,193
Accrued liabilities:
Payroll, commissions and
payroll taxes 184,873 71,37251,665 45,991
Other 43,056 35,98014,726 18,948
TOTAL CURRENT LIABILITIES 4,241,896 4,723,0822,693,679 3,020,428
LONG-TERM DEBT, less current
portion 1,399,200 1,277,3941,321,952 1,344,211
SHAREHOLDERS' EQUITY
Common stock, $.01 par value
per share; authorized
20,000,000 shares; issued
3,245,587 shares at June 30,
19961997 and 3,245,587 shares at March 31, 19961997 32,456 32,456
Additional paid-in capital 10,429,588 10,429,588
Retained earnings (deficit) (4,633,732) (3,786,129)
5,828,312 6,675,915
$11,469,408 $12,676,391
(5,252,596) (5,269,567)
TOTAL SHAREHOLDERS' EQUITY 5,209,448 5,192,477
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 9,225,079 $ 9,557,116
See notes to consolidated financial statements
- 4 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
June 30, 19961997 June 30, 1995
1996
Net sales $3,357,777 $4,346,913 $5,037,361
Cost of goods sold 2,709,796 3,500,311
4,408,179647,981 846,602 629,182
Research and development expense 62,831 48,455 57,316
Selling, general and administrative
expense 511,633 1,102,821
900,047
Operating lossincome (loss) 73,517 (304,674) (328,181)
Other income (expense):
Interest income 1,220 1,665 1,636
Interest expense (71,688) (113,040) (127,699)
Other (449,968)
(1,505)(70,468) (561,343)
(127,568)
LOSSEARNINGS (LOSS) BEFORE EQUITY
IN EARNINGS OF JOINT VENTURE 3,049 (866,017) (455,749)
Equity in earnings of joint venture 13,922 18,414
133,903
NET LOSSEARNINGS (LOSS) $ 16,971 $ (847,603) $ (321,846)
Per common share amounts:
Primary $ (.26).01 $ (.10)(.26)
Fully diluted .01 (.26) (.10)
Weighted average number of common
shares outstanding
Primary 3,245,587 3,245,4703,245,587
Fully diluted 3,245,587 3,245,470
3,245,587
See notes to consolidated financial statements
- 5 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Three Months Ended
June 30, 19961997 June 30, 1995
1996
OPERATING ACTIVITIES
Net lossearnings (loss) $ (847,603) $ (321,846)16,971 $(847,603)
Adjustments to reconcile net lossearnings
(loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 39,748 41,677
43,782
Distributed (undistributed)(Undistributed) distributed
earnings of joint venture (13,922) 992,213 (133,903)
Legal settlement 300,000
Changes in operating assets and liabilities:
Decrease in accounts receivable 242,220 535,263
1,527,514
(Increase) decreaseIncrease in inventories and
prepaid expenses (1,285) (281,564) 404,256
Decrease in accounts payable
and accrued expenses (362,671) (252,332) (118,763)
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (78,939) 487,654 1,401,040
INVESTING ACTIVITIES
Property, plant and equipment (43,673)(1,225)
Increase in time deposits (72) (77)
NET CASH USED IN INVESTING ACTIVITIES (1,225) (72) (43,750)
FINANCING ACTIVITIES
Net repaymentborrowings (repayment) of short-term debt 35,922 (403,854) (1,988,736)
Proceeds from issuance of long-term debt 1,300,000
Principal payments on long-term debt (3,509) (3,194)
(603,888)
Proceeds from issuance of common stock
under stock option plan and employee
stock purchase plan 184Payment on legal settlement (18,750)
NET CASH USED INPROVIDED BY (USED IN)
FINANCING ACTIVITIES 13,663 (407,048)
(1,292,440)(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(66,501) 80,534
64,850
Cash and cash equivalents at beginning of period 150,452 97,793
173,809
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 178,32783,951 $ 238,659178,327
Supplemental information:
Interest paid $ 111,84471,688 $ 127,699111,844
Income taxes paid - -
See notes to consolidated financial statements
- 6 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Statement of Management - The financial information included herein is
unaudited and does not include all disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles. The interim financial information should be read in
connection with the financial statements and related notes in the Company's
annual report on Form 10-K for the year ended March 31, 1996.1997. The results
for the interim period are not necessarily indicative of the results
expected for the year. The accompanying interim information reflects all
adjustments (consisting of normal recurring adjustments), which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods.
Per Share Data - Primary and fully diluted net income per share is computed
by dividing net income (loss) by the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares include the
dilutive effect of outstanding stock options calculated under the treasury
stock method.
Cash EquivalentsEarnings Per Share - The Company considers all highly liquid investments
with a maturitywill adopt Statement of three months or less when purchased to be cash
equivalents.
Long-Term DebtFinancial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128") effective
April 1, 1998, as required. The standard specifies the computation,
presentation and disclosure requirements for earnings per share. The pro
forma basic earnings per common share and the pro forma diluted earnings
per common share, as computed under the provision of SFAS 128 for the
quarter ended June 30, 1997, were each $0.01. Basic and diluted pro forma
earnings per share, as computed under the provisions of SFAS 128, are the
same previously reported for the quarter ended June 30, 1996.
Income Taxes - In conjunction withNo income tax provision has been provided for the settlement of litigation with Black
& Decker, the Company agreed to pay the sum of $300,000. The repayment terms
are $100,000 payable 10 days from the datequarter
ended June 30, 1997 because of the settlement and
$200,000 payable in 32 equal installments.Company's unrecognized deferred income
tax benefits related to the carryforward of prior years' operating losses.
Joint Venture - The Company maintains a 50% interest in a joint venture
with a Hong Kong corporation (Hong Kong joint venture) which has
manufacturing facilities in the People's Republic of China, for the
manufacturing of consumer electronic products. Additionally, the Hong
Kong joint venture has a 30% interest in a separate joint venture with a
People's Republic of China company to design and develop a portable
cellular phone for manufacture and sale in China. The following represents
summarized income statement information of the Hong Kong joint venture for
the quarters ended June 30, 1997 and 1996:
1997 1996
and 1995:
1996 1995
Net sales $2,098,476 $1,859,574 $3,217,892
Gross profit 353,252 396,569 581,363
Net income 27,844 36,828 267,805
Commitments - The Company has employment agreements with two of its
officers, both expiring on March 31, 1998. The combined fixed aggregate
annual remuneration under these agreements is $500,000$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.
- 7 -
Subsequent Events - Since June 30, 1996, the following events have
occurred: (i) the Company settled the suit filed by Black &
Decker against the Company for patent infringement in
connection with the marketing by the Company of a flexible
flashlight under the name "PRETZL LITE." Under the terms of
the settlement agreement entered into on July 19, 1996, the Company
agreed to pay Black & Decker $300,000 as follows: $100,000 within
10 days and $200,000 in 32 consecutive monthly payments of $6,250
beginning September 1, 1996. Under the terms of a Consent Decree
entered in the U.S. District Court for the Eastern District of
Virginia, the Company was enjoined from future sales of the product,
except for approximately 31,300 units to specified customers and the
Company was ordered to turn over to Black & Decker for destruction
its molds and marketing and packaging materials for the product. The
total expenses related to the settlement amounted to approximately
$450,000 and have been recorded in the three month period ended
June 30, 1996; (ii) the Company sold undeveloped real estate adjacent
to its plant which resulted in a gain of approximately $314,000,
which will be recorded in the quarter ending September 30, 1996; and (iii)
commencing in August, the Company began implementation of an additional
phase of its cost reduction program.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three Months Ended June 30, 19961997 Compared to
Three Months Ended June 30, 19951996
Sales - Net sales for the three months ended June 30, 19961997 were
$4,346,913$3,357,777 compared to $5,037,361$4,346,913 for the comparable three months
in the prior fiscal year, a decrease of $690,448.$989,136. Net sales of
security products increaseddecreased by $932,148$1,441,921 as compared to the
quarter ended June 30, 1995.1996. Net sales of telecommunications and
video products decreasedincreased by $1,390,640$373,933 and $231,956,$78,852, respectively,
as compared to the quarter ended June 30, 1995.1996. The increasedecrease in
security sales was due primarily to a
significant salelower sales of smoke
detectors to an existing customer.and flexible flashlights. The decreaseincrease in
telecommunications and video sales was due to a decreasedan increased demand
for certain of the Company's telecommunications and video
products by its private label customers.products.
Net Income - The Company reported a net lossprofit of $847,603$16,971 for the
quarter ended June 30, 19961997 compared to net loss of $321,846$847,603 for
the corresponding quarter of the prior fiscal year. The decreaseincrease
in net income was due primarily to a decreaselower selling and general
administrative costs of $591,188 in the Company's equity in the earnings of its
joint venture,1997 quarter and the costs of1996
quarter including a $450,000 charge for the settlement of Black &
Decker's patent infringement suit against the Company, including fees and expenses,
in the aggregate approximate amount of $450,000.Company.
Expenses - Research, selling, general and administrative expenses
increaseddecreased by approximately $202,000$577,000 from the comparable three
months in the prior year. As a percentage of sales, research,
selling, general and administrative expenses were 25%17% for the
three months ended June 30, 19961997 and 19%25% for the same period in
the last fiscal year. The reduction in expenses was due to the
Company's cost reduction program.
Interest Expense and Income - The Company's interest expense, net
of interest income, decreased from $126,063 for the quarter ended June 30,
1995 to $111,375 for the quarter ended
June 30, 1996.1996 to $70,468 for the quarter ended June 30, 1997. The
lower interest expenses resulted from lower levels of borrowing.
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 bank
line of credit is currently the lower of $7,500,000 or specified
percentages of the Company's accounts receivable and inventory.
Approximately $2,589,000$1,443,000 has been utilized in letter of credit
commitments and short-term borrowings as of June 30, 1996.1997. As of
June 30, 1996,1997, the amount available for borrowings under the line
was approximately $100,000$130,000 based on the specified percentages.
- 8 -
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%1-1/2% 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 inventory.a 1.5 acre
parcel of the Company's real estate.
Operating activities providedused cash of $487,654$78,939 for the quarter ended
June 30, 1996.1997. This was primarily due to a decrease in accounts
receivable of $535,263$242,220 and a partnership distributiondecrease in accounts payable and
accrued expenses of approximately
$1,000,000, partially offset by the net loss of $847,603.$362,671. For the same period last year,
operating activities provided cash of $1,401,040,
primarily due to a decrease in accounts receivable of $1,527,514 and a
decrease in inventories of $49,624 offset by a net loss of $321,846.
- 8 -
$487,654.
Investing activities used cash of $72$1,225 in the current quarter
and $43,750$72 in the same quarter last year.
Financing activities usedprovided cash of $407,048 primarily due to the net
repayment of short-term debt of $403,854.$13,663. For the same
period last year, financing activities used $1,292,440$407,048, primarily
due to the net repayments of short-term debt.debt of $403,854.
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 - Net sales of the joint venture for the
three months ended June 30, 19961997 were $1,859,574$2,098,476 compared to
$3,217,892$1,859,574 for the comparable three months in the prior fiscal
year. The decreaseincrease in sales was primarily due to decreasedincreased sales
of telecommunications and video products to the Company.
Net income was $36,828$27,844 for the quarter ended June 30, 19961997
compared to $267,805$36,828 in the comparable quarter last year.
The decrease in
net income is due to the decrease in sales.
Selling, general and administrative expenses were $430,224$322,821 and
$384,669$430,224 for the quarter ended June 30, 19961997 and 1995,1996,
respectively. As a percentage of sales, expenses were 15% and
23% for 1997 and 12%
for 1996, and 1995, respectively.
Interest income net of interest expense was $13,023$20,854 for the
quarter ended June 30, 19961997 compared to $38,154$13,023 for the same
quarter last year.
Cash needs of the Hong Kong joint venture are currently met by
funds generated from operations. During the quarter ended June
30, 1996,1997, working capital increaseddecreased by $651,541$378,049 from $712,439$1,648,274
on March 31, 19961997 to $1,363,980$1,270,225 on June 30, 1996.
Subsequent Events1997.
- Since June 30, 1996, the following events have
occurred: (i) the Company settled the suit filed by Black &
Decker against the Company for patent infringement in
connection with the marketing by the Company of a flexible
flashlight under the name "PRETZL LITE." Under the terms of
the settlement agreement entered into on July 19, 1996, the Company
agreed to pay Black & Decker $300,000 as follows: $100,000 within
10 days and $200,000 in 32 consecutive monthly payments of $6,250
beginning September 1, 1996. Under the terms of a Consent Decree
entered in the U.S. District Court for the Eastern District of
Virginia, the Company was enjoined from future sales of the product,
except for approximately 31,300 units to specified customers and the
Company was ordered to turn over to Black & Decker for destruction
its molds and marketing and packaging materials for the product. The
total expenses related to the settlement amounted to approximately
$450,000 and have been recorded in the three month period ended
June 30, 1996; (ii) the Company sold undeveloped real estate adjacent
to its plant which resulted in a gain of approximately $314,000,
which will be recorded in the quarter ending September 30, 1996; and (iii)
commencing in August, the Company began implementation of an additional
phase of its cost reduction program.
- 109 -
UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
PART II
Item 5. Other Information
On August 1, 1996, the Board of Directors of the Corporation
(i) adopted amendments to the Company's by-laws creating the office of
Vice Chairman of the Company, (ii) accepted the resignation of Michael
Kovens as President and elected him to the office of Vice Chairman, (iii)
elevated Harvey Grossblatt from Executive Vice President to President,
and (iv) reduced the annual salary of Stephen Knepper, Chairman of the
Board of Directors of the Company, from $250,000 to $50,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herein:
Exhibit Number
3(ii) By-Law Amendments
(b) No reports on Form 8-K were filed during the
quarter for which this report is filed.
- 1110 -
UNIVERSAL SECURITY INSTRUMENTS, INC.
SIGNATURE
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.
Dated: August 14, 199612, 1997 Harvey Grossblatt
HARVEY GROSSBLATT
President, Dated: August 14, 1996 Grant Pierpont
GRANT PIERPONT
PrincipalChief Financial Officer
- 1211 -