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 December 31, 1996 ( ) 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 (l) 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 February 9, 1997 Common Stock, $.01 par value 3,245,587 UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES INDEX Part I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets at December 31, 1996 and March 31, 1996 Consolidated statements of operations for the nine months ended December 31, 1996 and 1995 and three months ended December 31, 1996 and 1995 Consolidated statements of cash flows for the nine months ended December 31, 1996 and 1995 Notes to consolidated financial statements Item 2. Management's discussion and analysis of results of operations and financial condition Part II - OTHER INFORMATION Item 6. Exhibits and Reports - 2 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS Dec 31, 1996 March 31, 1996 CURRENT ASSETS Cash and cash equivalents $ 243,389 $ 97,793 Time deposits 8,748 Accounts receivable: Trade (less allowance for doubtful accounts of $50,000 at December 31, 1996 and $25,771 at March 31, 1996) 2,095,857 2,033,092 Officers and employees 20,862 40,678 2,116,719 2,073,770 Inventories: Finished goods 2,759,997 4,099,907 Raw materials-foreign locations 361,328 152,303 3,121,325 4,252,210 Prepaid expenses 455,108 484,669 TOTAL CURRENT ASSETS 5,936,541 6,917,190 INVESTMENT IN JOINT VENTURE 2,527,701 3,660,350 PROPERTY, PLANT AND EQUIPMENT 1,765,929 1,985,790 OTHER ASSETS 99,800 113,061 $10,329,971 $12,676,391 See notes to consolidated financial statements. - 3 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Dec 31, 1996 March 31, 1996 CURRENT LIABILITIES Short-term borrowings $ 1,527,205 $ 2,993,685 Current maturity of long-term debt 88,488 13,488 Accounts payable 1,516,635 858,557 Accounts payable - joint venture 750,000 Accrued liabilities: Payroll, commissions and payroll taxes 111,345 71,372 Other 18,982 35,980 TOTAL CURRENT LIABILITIES 3,262,655 4,723,082 LONG-TERM DEBT, less current portion 1,354,835 1,277,394 SHAREHOLDERS' EQUITY Common stock, $.01 par value per share; authorized 20,000,000 shares; issued 3,245,587 shares at December 31, 1996 and at March 31, 1996 32,456 32,456 Additional paid-in capital 10,429,588 10,429,588 Retained (deficit) (4,749,563) (3,786,129) 5,712,481 6,675,915 $10,329,971 $ 12,676,391 See notes to consolidated financial statements. - 4 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Nine Months Ended Dec 31, 1996 Dec 31, 1995 Net sales $13,261,441 $15,275,355 Cost of goods sold 10,983,858 12,634,997 2,277,583 2,640,358 Research and development expense 177,008 164,778 Selling, general and administrative expense 2,584,133 2,707,113 Operating loss (483,558) (231,533) Other income (expense): Interest income 2,177 3,926 Interest expense (340,781) (399,713) Other (115,128) (447) (453,732) (396,234) LOSS BEFORE EQUITY IN (LOSS) EARNINGS OF JOINT VENTURE (937,290) (627,767) Equity in (loss) earnings of joint venture (26,144) 220,180 NET LOSS $ (963,434) $ (407,587) Per common share amounts: Primary $ (.30) $ (.13) Fully diluted (.30) (.13) Weighted average number of common shares outstanding Primary 3,245,587 3,245,568 Fully diluted 3,245,587 3,242,568 See notes to consolidated financial statements. - 5 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) For the Three Months Ended Dec 31, 1996 Dec 31, 1995 Net sales $ 3,677,423 $ 5,317,826 Cost of goods sold 2,972,936 4,087,389 704,487 1,230,437 Research and development expense 59,176 56,716 Selling, general and administrative expense 747,911 976,345 Operating (loss) income (102,600) 197,376 Other income (expense): Interest income 619 1,033 Interest expense (100,793) (141,316) Other 23,252 2,003 (76,922) (138,280) (LOSS) EARNINGS BEFORE EQUITY IN LOSS OF JOINT VENTURE (179,522) 59,096 Equity in loss of joint venture (107,435) (8,503) NET (LOSS) INCOME $ (286,957) $ 50,593 Per common share amounts: Primary $ (.09) $ .02 Fully diluted (.09) .02 Weighted average number of common shares outstanding Primary 3,245,587 3,245,587 Fully diluted 3,245,587 3,245,587 See notes to consolidated financial statements. - 6 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the Nine Months Ended Dec 31, 1996 Dec 31, 1995 OPERATING ACTIVITIES Net loss $ (963,434) $ (407,587) Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 123,268 135,788 Provision for losses on accounts receivable 24,229 Distributed (undistributed) earnings of joint venture 1,132,649 (220,180) Gain on sale of property, plant & equipment (311,287) Legal settlement 300,000 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (67,178) 731,648 Decrease (increase) in inventories and prepaid expenses 1,160,447 (429,467) Decrease in accounts payable and and accrued expenses (68,947) (41,147) Decrease (increase) in other assets 13,261 (10,731) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,343,008 (241,676) INVESTING ACTIVITIES Purchases of property, plant and equipment (89,520) Decrease (increase) in commercial paper and time deposits 8,748 (355) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 8,748 (89,875) FINANCING ACTIVITIES Net repayment of short-term debt (1,466,480) (258,654) Proceeds from sale of property, plant and equipment (407,880) Proceeds from issuance of long-term debt 1,300,000 Principal payments on long-term debt (47,560) (609,890) Payment on legal settlement (100,000) Proceeds from issuance of common stock under stock option plan and employee stock purchase plan 191 NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,206,160) 431,647 INCREASE IN CASH AND CASH EQUIVALENTS 145,596 100,096 Cash and cash equivalents at beginning of period 97,793 173,809 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 243,389 $ 273,905 Supplemental information: Interest paid $ 340,780 $ 399,713 Income taxes paid - - See notes to consolidated financial statements. - 7 - 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. 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 accruals) 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 Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Long-Term Debt - In addition to the mortgage on the Company's headquarters, the Company agreed to pay the sum of $300,000 in conjunction with the settlement of litigation with Black & Decker. The repayment terms are $100,000 paid in July 1996 and $200,000 payable in 32 equal monthly installments without interest starting September 1, 1996. Sale of Property - On July 26, 1996, the Company sold undeveloped real estate adjacent to its plant which resulted in a gain of approximately $311,000. Litigation - The Company settled a 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. - 8 - Joint Venture - The Company maintains a 50% interest in a joint venture with a Hong Kong corporation (Hong Kong joint venture) which has 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 manufacture and sell a portable cellular telephone primarily in China. The contract is being accounted for under the percentage of completion method. The following represents summarized income statement information of the Hong Kong joint venture for the nine months ended December 31, 1996 and 1995: 1996 1995 Sales $5,467,731 $8,136,727 Gross Profit 704,519 1,451,206 Net (Loss) Income (52,288) 440,361 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 per year. In addition, the agreements provide incentive compensation to these officers based on the Company's achievement of certain levels of earnings. However, in September 1996, one of the officers voluntarily agreed to a non-reimbursable reduction in remuneration of $200,000. - 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31, 1995 Sales - Net sales for the nine months ended December 31, 1996 were $13,261,441 compared to $15,275,355 for the comparable nine months in the prior fiscal year, a decrease of $2,013,914. Net sales of security products increased by $74,493, as compared to the nine months ended December 31, 1995. Net sales of telecommunications products decreased by $2,779,178 and video products increased by $690,771, from the comparable period of the previous year. The decrease in telecommunications sales was due to a decreased demand by certain of its private label customers. The increase in security sales was due to the demand for certain security products. The increase in video sales was due to increased demand for certain of the Company's video products by its private label customers. Net Income - The Company reported a net loss of $963,434 for the nine months ended December 31, 1996 compared to a net loss of $407,587 for the corresponding nine months of the prior fiscal year. The Company's gross margin declined by $362,775, which was due to the decline in sales described above. Additionally, expenses declined by $110,750 as described below, more than offset by a decline in joint venture earnings of $246,324. Expenses - Research, selling, general and administrative expenses decreased by $110,750 from the comparable nine months in the prior year. As a percentage of sales, research, selling, general and administrative expenses were 21% for the nine months ended December 31, 1996 and 19% for the same period in the prior fiscal year. The most significant reason for the decrease in expenses was the savings resulting from the implementation of the Company's cost reduction program. Interest Expense and Income - The Company's interest expense, net of interest income, decreased to $338,604 for the nine months ended December 31, 1996 from $395,787 for the comparable period in 1995. The decrease in interest expense is due largely to a decrease in short-term debt. Three Months Ended December 31, 1996 Compared to Three Months Ended December 31, 1995 Sales - Net sales for the three months ended December 31, 1996 were $3,677,423 compared to $5,317,826 for the comparable three months in the prior fiscal year, a decrease of $1,640,403. Net sales of security products decreased by $1,470,013, as compared to the quarter ended December 31, 1995. Net sales of telecommunications products decreased by $311,831, while video products increased by $141,441 from the same quarter last year. The decrease in telecommunications sales was due to a decreased demand for certain of the Company's telecommunications products by its private label customers. The increase in video sales was due to the demand for certain of the Company's video products. The decrease in security products was due to decreased demand for certain of the Company's security products. - 10 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Net Income - The Company reported a net loss of $286,957 for the quarter ended December 31, 1996 compared to net income of $50,593 for the corresponding quarter of the prior fiscal year. The primary reasons for the reduction of net income were a reduction in gross sales, combined with an increase in the loss of the joint venture. Expenses - Research, selling, general and administrative expenses decreased by approximately $225,974 from the comparable three months in the prior year. As a percentage of sales, research, selling, general and administrative expenses were 22% for the three months ended December 31, 1996 and 19% for the same period in the last fiscal year. The decrease in selling, general and administrative expenses was primarily due to the savings resulting from the implementation of the Company's cost reduction program. Interest Expense and Income - The Company's interest expense, net of interest income, decreased from $140,283 for the three months ended December 31, 1995 to $100,174 for the current quarter in 1996. Financial Condition and Liquidity - Cash needs of the Company are currently met by funds generated from operations and its 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 $1,527,000 has been utilized in letter of credit commitments and short-term borrowings as of December 31, 1996. As of December 31, 1996, the amount available for borrowings under the line was approximately $100,000, based on the specified percentages. The outstanding principal balance of the revolving credit line is payable upon demand. The interest rate on the revolving credit line is equal to 1% in excess of the prime rate of interest charged by the Company's lender. The loan is secured by the Company's accounts receivable and inventory. During the nine months ended December 31, 1996, working capital increased by $479,778. Operating activities provided cash of $1,434,008 for the nine months ended December 31, 1996. This was primarily due to the reduction of inventories of $1,130,885. For the same period last year, operating activities used cash of $241,676. This was primarily due to the loss from operations, the undistributed earnings from the Company's joint venture and the increase in inventory, partially offset by a decrease in accounts receivable of $731,648. - 11 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Investing activities provided cash of $8,748 in the current period and used cash of $89,875 in the same period last year, consisting primarily of purchases of equipment and returned deposits. Financing activities used cash of $1,206,160, primarily due to repayment of short-term debt of $1,466,480, partially offset by proceeds from the sale of property of $407,880. For the same period last year, financing activities provided cash of $431,647, primarily due to the net issuance of long-term debt. The Company believes that its demand line of credit and its working capital provide it with sufficient resources to meet its current requirements for liquidity and working capital in the ordinary course of its business. The Company's ability to retain its financing may be dependent upon the Company's results of operations. If the Company's losses continue, it may not be able to retain its funding sources for as long as the next 12 months. Hong Kong Joint Venture - Net sales of the joint venture for the nine months and three months ended December 31, 1996 were $5,467,731 and $944,076, respectively, compared to $8,136,727 and $2,678,668, respectively, for the comparable nine months and three months in the prior fiscal year. The decrease in sales was primarily due to decreased sales of telecommunications and video products to the Company which was due to the decreased demand for certain of these products by the Company's private label customers. The net loss for the nine months ended December 31, 1996 was $52,288 and net loss for the three months ended December 31, 1996 was $214,870, compared to net income of $440,361 and net loss of $17,005, respectively, in the comparable nine months and three months last year. Selling, general and administrative expenses were $1,034,726 (19% of sales) and $115,199 (12% of sales), respectively, for the nine months and three months ended December 31, 1996 and were $1,172,463 (14% of sales) and $348,381 (13% of sales) for the comparable periods last year. Cash needs of the Hong Kong joint venture are currently met by funds generated from operations. During the nine months ended December 31, 1996, working capital decreased by $659,600 from $1,373,039 on December 31, 1996 to $713,439 on March 31, 1996. - 12 - UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES PART II Item 6. Exhibits and Reports on Form 8-K (b) No reports on Form 8-K were filed during the quarter for which this report is filed. - 13 - 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: February 14, 1997 Harvey Grossblatt HARVEY GROSSBLATT President Dated: February 14, 1997 Grant Pierpont GRANT PIERPONT Chief Financial Officer - 14 -