Attached files

file filename
EX-23.2 - UNIVERSAL SECURITY INSTRUMENTS INCv188826_ex23-2.htm
EX-32.1 - UNIVERSAL SECURITY INSTRUMENTS INCv188826_ex32-1.htm
EX-31.2 - UNIVERSAL SECURITY INSTRUMENTS INCv188826_ex31-2.htm
EX-31.1 - UNIVERSAL SECURITY INSTRUMENTS INCv188826_ex31-1.htm
EX-23.1 - UNIVERSAL SECURITY INSTRUMENTS INCv188826_ex23-1.htm
EX-99.1 - UNIVERSAL SECURITY INSTRUMENTS INCv188826_ex99-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31,  2010 or
¨  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: 001-31747

UNIVERSAL SECURITY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)

MARYLAND
 
52-0898545
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)

11407 Cronhill Drive, Suite A, Owings Mills, Maryland
 
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:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
 
American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
      None      
Title of Class

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Act). Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ¨   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 other information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨   Accelerated Filer ¨   Non-Accelerated Filer ¨   Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨ No x

The aggregate market value of Common Stock, $.01 par value, held by non-affiliates of the registrant based on the closing sales price of the Common Stock on the New York Stock Exchange (NYSE AMEX) on September 30, 2009, was $14,207,928.

The number of shares of common stock outstanding as of June 15, 2010 was 2,387,887.

documents incorporated by reference

To the extent specified, Part III of this Form 10-K incorporates information by reference to the Registrant’s definitive proxy statement for its 2010 Annual Meeting of Shareholders (to be filed).

 
 

 

UNIVERSAL SECURITY INSTRUMENTS, INC.
2010 ANNUAL REPORT ON FORM 10-K

Table of Contents

   
Page
       
PART I
       
Item 1.
Business
3
 
Item 1A.
Risk Factors
6
 
Item 1B.
Unresolved Staff Comments
9
 
Item 2.
Properties
9
 
Item 3.
Legal Proceedings
10
 
 
Executive Officers of the Registrant
10
 
       
PART II
 
       
Item 5.
Market for Registrant’s Common Equity, Related
   
 
Stockholder Matters and Issuer Purchases of Equity Securities
11
 
Item 6.
Selected Financial Data
12
 
Item 7.
Management’s Discussion and Analysis of Financial
   
 
Condition and Results of Operations
13
 
Item 8.
Financial Statements and Supplementary Data
19
 
Item 9.
Changes in and Disagreements with Accountants
   
 
on Accounting and Financial Disclosure
19
 
Item 9A(T).
Controls and Procedures
19
 
Item 9B.
Other Information
20
 
       
PART III
       
Item 10.
Directors, Executive Officers and Corporate Governance
21
 
Item 11.
Executive Compensation
21
 
Item 12.
Security Ownership of Certain Beneficial Owners
   
 
and Management and Related Stockholder Matters
21
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
21
 
Item 14.
Principal Accountant Fees and Services
21
 
       
PART IV
       
Item 15.
Exhibits and Financial Statement Schedules
22
 
       
Signatures
24
 

 
 

 

PART I

BUSINESS

General

Universal Security Instruments, Inc. (“we” or “the Company”) designs and markets a variety of popularly-priced safety products consisting primarily of smoke alarms, carbon monoxide alarms and related products. Most of our products require minimal installation and are designed for easy installation by the consumer without professional assistance, and are sold through retail stores.  We also market products to the electrical distribution trade through our wholly-owned subsidiary, USI Electric, Inc. (“USI Electric”).  The electrical distribution trade includes electrical and lighting distributors as well as manufactured housing companies.  Products sold by USI Electric usually require professional installation.

In 1989 we formed a limited liability company under the laws of Hong Kong, as a joint venture with a Hong Kong-based partner to manufacture various products in the Peoples Republic of China (the “Hong Kong Joint Venture”).   We currently own a 50% interest in the Hong Kong Joint Venture and are a significant customer of the Hong Kong Joint Venture (51.1% and 63.2% of its sales during fiscal 2010 and 2009 respectively), with the balance of its sales made to unrelated customers worldwide.

We import all of our products from foreign suppliers.  For the fiscal year ended March 31, 2010, approximately 99.0% of our purchases were imported from the Hong Kong Joint Venture.

Our sales for the year ended March 31, 2010 were $26,439,118 compared to $26,097,596 for the year ended March 31, 2009, an increase of approximately 1.3%.  We reported income from continuing operations of $2,268,048 in fiscal 2010 compared to income from continuing operations of $1,442,336 in fiscal 2009, an increase of 57.2%.

The Company was incorporated in Maryland in 1969.  Our principal executive office is located at 11407 Cronhill Drive, Suite A, Owings Mills, Maryland 21117, and our telephone number is 410-363-3000.  Information about us may be obtained from our website www.universalsecurity.com. Copies of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, are available free of charge on our website as soon as they are filed with the Securities and Exchange Commission (SEC) through a link to the SEC’s EDGAR reporting system.  Simply select the “Investor Relations” menu item, then click on the “SEC Filings” link.  The SEC’s EDGAR reporting system can also be accessed directly at www.sec.gov.

Safety Products

We market a line of residential smoke and carbon monoxide alarms under the trade names “USI Electric” and “UNIVERSAL” both of which are manufactured by the Hong Kong Joint Venture.

Our line of smoke alarms consists of battery, electrical and electrical with battery backup alarms. Our products contain different types of batteries with different battery lives, and some with alarm silencers. The smoke alarms marketed to the electrical distribution trade also include hearing impaired and heat alarms with a variety of additional features.  We also market carbon monoxide alarms, door chimes and ventilation products.

We have been evaluating and researching new smoke and carbon monoxide detection technologies. This effort has resulted in the development of a new smoke alarm sensing technology and several new product features, and we have applied for patents on certain of these technologies and features.  We have also assisted in the development of a new carbon monoxide sensor which will be capable of detecting several types of gases.  We have initiated the process of obtaining independent certification of a full product line of our next generation of residential smoke and carbon monoxide alarms.  We plan on completing the certification process and expect to begin shipping the next generation of products to our customers during the fiscal year ending March 31, 2011.  We expect to incur additional engineering, design, and certification costs of between $400,000 and $600,000 during the fiscal year ending March 31, 2011.

Our wholly-owned subsidiary, USI Electric. Inc., focuses its sales and marketing efforts to maximize safety product sales, especially smoke alarms and carbon monoxide alarms manufactured by our Hong Kong Joint Venture.  USI Electric, Inc. concentrates on marketing to the electrical distribution and retail trade.

 
- 3 -

 

Import Matters

We import all of our products.  As an importer, we are 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, and currency fluctuations.  We have attempted to protect ourselves from fluctuations in currency exchange rates to the extent possible by negotiating commitments in U.S. dollars.

Our inventory purchases are also subject to delays in delivery due to problems with shipping and docking facilities, as well as other problems associated with purchasing products abroad.  Substantially all of our safety products, including products we purchase from our Hong Kong Joint Venture, are imported from the People’s Republic of China.

Sales and Marketing; Customers

We sell our products to various customers, and our total sales market can be divided generally into two categories; sales by the Company, and sales by our USI Electric subsidiary.

The Company markets our products to retailers, including wholesale distributors, chain, discount, television retailers and home center stores, catalog and mail order companies and to other distributors (“retailers”). Our products have historically been retailed to “do-it-yourself” consumers by these retailers.  We do not currently market any significant portion of our products directly to end users.

The Company’s retail sales are made directly by our employees and by approximately 17 independent sales organizations which are compensated by commissions.  Our agreements with these sales organizations are generally cancelable by either party upon 30 days notice.  We do not believe that the loss of any one of these organizations would have a material adverse effect upon our business.  The Company’s direct sales are made directly by our officers and full-time employees, seven of whom have other responsibilities for the Company, as well.  Sales outside the United States are made by our officers and through exporters, and amounted to less than 6.5% of total sales in each of the fiscal years ended March 31, 2010 and 2009.

During fiscal 2007, we began selling home safety products to The Home Depot, Inc., a major national home improvement retailer.  Total sales to Home Depot for fiscal 2010, 2009 and 2008 represented approximately 51.3%, 46.6% and 40.2% of our revenues, respectively.  As previously reported, The Home Depot has informed the Company that beginning approximately April 1, 2010 The Home Depot will only sell the Company’s products online and through the retailer’s professional contractors desk.  Accordingly, sales to The Home Depot are expected to decrease and are expected to represent a significantly lower percentage of the Company’s total revenue for the fiscal year ending March 31, 2011

Our USI Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies).  USI Electric has established a national distribution system with 9 regional stocking warehouses throughout the United States which generally enables customers to receive their orders the next day without paying for overnight freight charges.  USI Electric engages sales personnel from the electrical distribution trade and has engaged 27 independent sales organizations which represent approximately 230 sales representatives, some of which have warehouses where USI Electric products are maintained by our sales representatives for sale.

We also market our products through our own sales catalogs and brochures, which are mailed directly to trade customers, and our website.  Our customers, in turn, may advertise our products in their own catalogs and brochures and in their ads in newspapers and other media.  We also exhibit and sell our products at various trade shows, including the annual National Hardware Show.

Our backlog of orders believed to be firm as of March 31, 2010 was approximately $334,729.  Our backlog as of March 31, 2009 was approximately $458,590. This decrease in backlog is primarily due to the timing of orders of our safety products.

Hong Kong Joint Venture

We have a 50% interest in the Hong Kong Joint Venture which has manufacturing facilities in the People’s Republic of China, for the manufacturing of certain of our electronic and electrical products.

 
- 4 -

 

We believe that the Hong Kong Joint Venture arrangement will ensure a continuing source of supply for a majority of our safety products at competitive prices.  During fiscal years ended 2010 and 2009, 99.0% and 97.3% of our total inventory purchases were made from the Hong Kong Joint Venture.  The products produced by the Hong Kong Joint Venture include smoke alarms and carbon monoxide alarms.  Changes in economic and political conditions in China or any other adversity to the Hong Kong Joint Venture will unfavorably affect the value of our investment in the Hong Kong Joint Venture and would have a material adverse effect on the Company’s ability to purchase products for distribution.

Our purchases from the Hong Kong Joint Venture represented approximately 51.1% of the Hong Kong Joint Venture’s total sales during fiscal 2010 and 63.2% of total sales during fiscal 2009, with the balance of the Hong Kong Joint Venture’s sales being primarily made in Europe and Australia, to unrelated customers.  The Hong Kong Joint Venture’s sales to unrelated customers were $14,099,350 in fiscal 2010 and $13,299,688 in fiscal 2009.  Please see Note C of the Financial Statements for a comparison of annual sales and earnings of the Hong Kong Joint Venture.

Discontinued Operations

In October 2006, we formed 2113824 Ontario, Inc., an Ontario corporation, as a wholly-owned subsidiary of the Company for the purpose of acquiring a two-thirds interest in two Canadian corporations, International Conduits, Ltd. (Icon) and Intube, Inc. (Intube).  Icon and Intube were based in Toronto, Canada and manufactured and distributed electrical mechanical tubing (EMT) steel conduit.  Icon also sold home safety products, primarily purchased from the Company, in the Canadian market.  The primary purpose of the Icon and Intube acquisition was to expand our product offerings to include EMT steel conduit, and to provide this product and service to the commercial construction market.  On April 2, 2007, Icon and Intube were merged under the laws of Ontario to form one corporation.

 In June 2007, Icon entered into a credit agreement with CIT Financial, Ltd. to provide a term loan and a line of credit facility.  These loans were secured by all of the assets of Icon and by the corporate guarantees of the Company and our USI Electric subsidiary.

At the time of our investment in Icon, we projected that our established U.S. sales network would allow us to increase sales of EMT to U.S. customers.  Despite our efforts, Icon suffered continuing losses, and we were not successful in increasing Icon’s sales in the face of competition and a downturn in the housing market.  On January 29, 2008, Icon received notice from CIT Financial, Ltd. (CIT Canada), Icon’s principal and secured lender, that Icon was in default under the terms of the Credit Agreement dated June 22, 2007 between Icon and CIT Canada and demanding immediate payment of all of Icon’s obligations to CIT Canada under the Credit Agreement.  On February 11, 2008, the assets of Icon were placed under the direction of a court appointed receiver, and the operations of Icon were suspended.  Accordingly, the assets and liabilities of Icon are not consolidated in the financial statements of the Company and are classified as assets held in receivership.   Our consolidated financial statements and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.

As a result of continuing losses at Icon, we undertook an evaluation of the goodwill from our acquisition of Icon during the third quarter of fiscal year 2008 to determine whether the value of the goodwill had been impaired. Based on that evaluation, we determined that the value of the goodwill from our acquisition of Icon was impaired, and we recognized an impairment charge of US$1,926,696 at December 31, 2007 for the goodwill.   In addition, as a result of Icon’s receivership and the steps taken to liquidate Icon’s assets, the non-cash assets of Icon were written down to their estimated net realizable value and a further impairment charge of US$7,087,297 was recognized as of March 31, 2008.  These impairments have been recorded in discontinued operations in the consolidated statements of operations for the fiscal year ended March 31, 2008.

On September 22, 2008, Icon’s obligations were settled in the receivership action by Ontario Superior Court order.   As a result of the settlement of Icon’s obligations, a gain of CAD$5,101,674 (US$4,910,718) was realized by Icon in the quarter ended September 30, 2008.  Approximately US$3,000,000 of the gain related to extinguishment of liabilities due to unsecured creditors as the Company determined that a legal release of the liabilities had been achieved to allow recognition of the gain on extinguishment of liabilities.  This gain was partially offset in consolidation by the US$1,518,375 after-tax effect loss recognized by the Company in settlement of its guarantee of Icon’s secured debt and other losses attributable to the Icon discontinued operation to arrive at the gain from discontinued operations of $3,423,021 for the fiscal year ended March 31, 2009.

At March 31, 2010, all Icon liabilities had been settled and the receiver held no Icon assets.  In the accompanying consolidated financial statements, the results of Icon for all fiscal years included have been restated and are presented as the results of discontinued operations, and certain other prior year amounts have been reclassified in order to conform with the current year’s presentation.

 
- 5 -

 

Other Suppliers

Certain private label products not manufactured for us by the Hong Kong Joint Venture are manufactured by other foreign suppliers.  We believe that our relationships with our suppliers are good.  We believe that the loss of our ability to purchase products from the Hong Kong Joint Venture would have a material adverse effect on the Company.  The loss of any of our other suppliers would have a short-term adverse effect on our operations, but replacement sources for these other suppliers could be developed.

Competition

In fiscal year 2010, sales of safety products accounted for substantially all of our total sales.  In the sale of smoke alarms and carbon monoxide alarms, we compete in all of our markets with First Alert and Walter Kidde Portable Equipment, Inc.  These companies have greater financial resources and financial strength than we have.  We believe that our safety products compete favorably in the market primarily on the basis of styling, features and pricing.

The safety industry in general involves changing technology.  The success of our products may depend on our ability to improve and update our products in a timely manner and to adapt to new technological advances.

Employees

As of March 31, 2010, we had 18 employees, 15 of whom are engaged in administration and sales, and the balance of whom are engaged in product development.  Our employees are not unionized, and we believe that our relations with our employees are satisfactory.

ITEM 1A.
RISK FACTORS

An investment in our Common Stock is subject to risks inherent to our business.  The material risks and uncertainties that management believes affect the Company are described below.  Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations.

Risk Factors Relating To Our Business Generally

Our success depends to a very large degree on our relationship with and the success of our Hong Kong Joint Venture.

During fiscal year 2010, 99.0% of our total inventory purchases were made from the Hong Kong Joint Venture.  The products produced by the Hong Kong Joint Venture include smoke alarms and carbon monoxide alarms, and we are currently pursuing the development of additional products to be manufactured by the Hong Kong Joint Venture.  Our purchases from the Hong Kong Joint Venture represented approximately 51.1% of the Hong Kong Joint Venture’s total sales during fiscal 2010, with the balance of the Hong Kong Joint Venture’s sales being primarily made in Europe and Australia to unrelated customers. If the Hong Kong Joint Venture does not maintain profitability, our profitability will be adversely affected.

In addition, adverse changes in our relationship with our Hong Kong Joint Venture partners would unfavorably affect the value of our investment in the Hong Kong Joint Venture and could have a material adverse effect on our ability to purchase products for distribution.

Our reliance on the Hong Kong Joint Venture exposes us to uncertainties and risks from abroad which could negatively affect our operations and sales.

Our relationship with the Hong Kong Joint Venture and our and the Hong Kong Joint Venture’s sales in other countries expose us to particular risks.  The following are among the risks that could negatively affect our imports and our and the Hong Kong Joint Venture’s sales in foreign markets:

 
·
new restrictions on access to markets,
 
·
currency devaluation,
 
·
new tariffs,
 
·
adverse changes in monetary and/or tax policies,
 
·
inflation, and

 
- 6 -

 

 
·
governmental instability.

Should any of these risks occur, the value of our investment in the Hong Kong Joint Venture could be reduced and our results of operations could be negatively impacted.

The lack of availability of inventory could adversely affect our financial results.

We source inventory primarily from our Hong Kong Joint Venture, which has manufacturing facilities in the People’s Republic of China.  Our purchases of inventory are subject to being affected by a number of factors, namely, production capacity, labor unrest and untimely deliveries.  Changes in economic and political conditions in China or any other adversity to the Hong Kong Joint Venture will unfavorably affect the value of our investment in the Hong Kong Joint Venture and could have a material adverse effect on the our ability to purchase products for distribution.

Our Hong Kong Joint Venture is subject to political and economic factors unique to China.

The Chinese government has been reforming the Chinese economic system.  In recent years, the government has also begun reforming the government structure.  These reforms have resulted in significant economic growth and social progress.  Although the majority of the production assets in China are still state-owned, economic reform policies have emphasized autonomous enterprises and the utilization of market mechanisms.  Our Hong Kong Joint Venture currently expects that the Chinese government will continue its reform by further reducing governmental intervention in business enterprises and allowing market mechanisms to allocate resources.  Any adverse changes in political, economic or social conditions in China could have a material adverse effect on the Hong Kong Joint Venture’s operations and our financial results, as well as our ability to purchase products manufactured by the Hong Kong Joint Venture.

We are subject to risks in connection with the importation of our products from foreign countries.

We import all of our products.  As an importer, we are 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 and currency fluctuations.  We have attempted to protect ourselves from fluctuations in currency exchange rates to the extent possible by negotiating commitments in U.S. dollars.  We are also subject to strikes or other labor unrest at points of origin and destination, as well as delays and restrictions which impact shipping and shipping routes.

We rely on our key personnel and the loss of one or more of those personnel could have a material adverse effect on our business, financial condition and results of operations.

Our operations and prospects depend in large part on the performance of our senior management team.  There can be no assurance that we would be able to find qualified replacements for any of these individuals if their services were no longer available.  The loss of the services of one or more members of our senior management team could have a material adverse effect on our business, financial condition, and results of operations.

Our competition is both intense and varied and our failure to effectively compete could adversely affect our prospects.

In fiscal year 2010, our sales of safety products accounted for substantially all of our sales.  Many of our competitors have greater financial resources and financial strength than we have.  Some of our competitors may be willing to reduce prices and accept lower profit margins to compete with us.  While we believe that our safety products compete favorably with other such products in the market, primarily on the basis of styling, features, and pricing, the safety industry in general involves changing technology.  The success of our products may depend on our ability to improve and update our products in a timely manner and to adapt to new technological advances.  As a result of this competition, we could lose market share and suffer losses, which could have a material adverse effect on our future financial performance.

Our reliance on a single large customer exposes the Company to uncertainties and risk.

During recent fiscal years, our sales have decreased due to decreases in new housing construction in the U.S. domestic market.  As our total sales decreased, the percentage of our sales to a single large customer, The Home Depot, increased as a percentage of total sales.  Effective for the fiscal year ending March 31, 2011, this customer will sell our products only online and through its retailer’s professional contractors’ desk.  Accordingly, sales to this customer are expected to decrease and are expected to represent a significantly lower percentage of our total revenue for the fiscal year ending March 31, 2011.  If we are not successful in increasing sales of existing or new products to other customers, our overall sales and profitability will be negatively impacted.

 
- 7 -

 

The security products marketplace is dynamic and challenging because of the introduction of new products and services.

We must constantly introduce new products, services, and product features to meet competitive pressures. We may be unable to timely change our existing merchandise sales mix in order to meet these competitive pressures, which may result in increased inventory costs or loss of market share.

Adverse changes in national or regional U.S. economic conditions could adversely affect our financial results.

We market our products nationally to retailers, including wholesale distributors, chain, discount, and home center stores, catalog and mail order companies and to other distributors.  Overall consumer confidence, consumer credit availability, recessionary trends, housing starts and prices, mortgage rates, and consumers’ disposable income and spending levels directly impact our sales.  Negative trends, whether national or regional in nature, in any of these economic conditions have and could adversely affect our financial results.

Our products must meet specified quality and safety standards to enter and stay on the market.

Our products must meet US. and various international standards before they are sold.  For example, in the United States, our products must be certified by independent testing agencies and similar certifications must be obtained in each country where we compete for market share.  If our manufacturers’ products or manufacturing facilities (including those of the Hong Kong Joint Venture) fail to pass periodic inspections, the approval certificates for the relevant products may be suspended until corrections are made.  Loss of independent certifications could have a material adverse affect on our sales and financial results.

Our products expose us to the potential of product liability claims.

All of our products are manufactured by the Hong Kong Joint Venture or others.  Nevertheless, we could be named as a defendant in an action arising from damages suffered as a result of one of our products.  While we carry products liability insurance, to the extent we are found liable for damages for which we are uninsured, our profitability may be adversely affected. Any suit, even if not meritorious or if covered by an indemnification obligation, could result in the expenditure of a significant amount of our financial and managerial resources and could create significant negative publicity for us and our products.

We may be unable to successfully execute our merchandising and marketing strategic initiatives.

Our wholly-owned subsidiary, USI Electric focuses its sales and marketing efforts and initiatives to maximize safety product sales, especially smoke alarms and carbon monoxide alarms manufactured by our Hong Kong Joint Venture and marketed to the electrical distribution and retail trade.  If we fail to successfully execute these initiatives, our business could be adversely affected.

We are and could become subject to litigation regarding intellectual property rights, which could seriously harm our business.

We design most of our security products and contract with suppliers to manufacture those products and deliver them to us.  We have been the subject of lawsuits by third parties which assert against us infringement claims or claims that we have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  If such infringement by our suppliers or by us were found to exist, we could be subject to monetary damages and an injunction preventing the use of their intellectual property.  If one of our products were found to infringe, we may attempt to acquire a license or right to use such technology or intellectual property, which could result in higher manufacturing costs.  Any infringement claim, even if not meritorious and/or covered by an indemnification obligation, could result in the expenditure of a significant amount of our financial and managerial resources.

If governmental regulations change or are applied differently, our business could suffer.

The sales of our smoke and carbon monoxide alarms are impacted by local laws and regulations mandating the installation of these security devices in new and sometimes existing homes and buildings.  Changes in these consumer safety regulations, both in the United States and abroad, could impact our business.

 
- 8 -

 

Risk Factors Relating to our Articles of Incorporation and our Stock

The liability of our directors is limited.

Our Articles of Incorporation limit the liability of directors to the maximum extent permitted by Maryland law.

It is unlikely that we will issue dividends on our common stock in the foreseeable future.

We have not declared or paid cash dividends on our common stock in over 26 years.  We currently anticipate that we will retain all of our earnings for use in the development of our business and do not anticipate paying cash dividends in the foreseeable future.  As a result, capital appreciation, if any, of our common stock would be the only source of gain for stockholders until dividends are paid, if at all. The payment of dividends in the future will be at the discretion of our board of directors.

The exercise of outstanding options will dilute the percentage ownership of our stockholders, and any sales in the public market of shares of our common stock underlying such options may adversely affect prevailing market prices for our common stock.

As of March 31, 2010, there are outstanding options to purchase an aggregate of 53,427 shares of our common stock at per share exercise prices ranging from $3.25 to $16.09.  The exercise of such outstanding options would dilute the percentage ownership of our existing stockholders, and any sales in the public market of shares of our common stock underlying such options may adversely affect prevailing market prices for our common stock.

It may be difficult for a third party to acquire us, which could affect our stock price.

Our charter and Bylaws contain certain anti-takeover provisions pursuant to the Maryland General Corporation Law.  This means that we may be a less attractive target to a potential acquirer who otherwise may be willing to pay a premium for our common stock above its market price.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

Not applicable.

PROPERTIES

Effective January 2009, we entered into a 10 year operating lease for a 12,000 square foot office and warehouse located in Baltimore County, Maryland.  The Company has the right to terminate the lease after five years for a one-time payment of $42,000.  In June 2009, we amended this lease to include an additional 3,000 square feet of warehouse space contiguous to our existing warehouse in Baltimore County, Maryland for occupancy in August 2009.  Monthly rental expense, with common area maintenance, approximates $10,236 after occupancy of the additional warehouse space and increases 3% per year.

Effective March 2003, we entered into an operating lease for an approximately 2,600 square foot office in Naperville, Illinois.  This lease expires in February 2012 and is subject to increasing rentals at 3% per year.  The monthly rental, with common area maintenance, approximated $3,266 per month during the current fiscal year.

The Hong Kong Joint Venture currently operates an approximately 100,000 square foot manufacturing facility in the Guangdong province of Southern China and a 250,000 square-foot manufacturing facility in the Fujian province of Southern China.  The Hong Kong Joint Venture’s offices are leased pursuant to a five year lease with rental payments of approximately $13,250 per month.

The Company believes that its current facilities, and those of the Hong Kong Joint Venture, are currently suitable and adequate.

 
- 9 -

 

LEGAL PROCEEDINGS

On June 11, 2003, Walter Kidde Portable Equipment, Inc. (“Kidde”) filed a civil suit against the Company in the United States District Court for the Middle District of North Carolina (Case No. 03cv00537), alleging that certain of the Company’s AC powered/battery backup smoke detectors infringe a patent acquired by Kidde (US 4,972,181).  Kidde was seeking injunctive relief and damages to be determined at trial.  On March 31, 2006, following numerous procedural and substantive rulings which the Company believes were favorable to the Company, Kidde obtained dismissal, without prejudice, of its suit.  On November 28, 2005, prior to the March 31, 2006 dismissal of the original suit, Kidde filed a second lawsuit in the same court (Case No. 05cv1031) based on virtually identical infringement allegations as the earlier case.

On June 25, 2008, Maple Chase Company, which was acquired by United Technologies Corporation (UTC), which also owns Kidde, filed a civil suit against the Company in the United States District Court for the Northern District of Illinois (Case No. 08cv3641) for patent infringement of Re 33920, a patent that expired in March of 2007. On January 13, 2009, the Court granted permission to substitute Kidde for Maple Chase as the party plaintiff.  This action involved the same patent that formed the basis of a suit filed by Maple Chase against the Company in February 2004 (Case No. 03cv07205) which was dismissed by the Court in April 2005, subject to the outcome of a reexamination of the patent.  The 2008 case asserted infringement of claims emerging out of reexamination.

On August 21, 2008, Kidde again filed a civil suit against the Company for patent infringement in the United States District Court for the District of Maryland (Case No. 08cv2202).  Kidde alleged that the Company infringed US patent 6,791,453 by communication protocols for interconnected hazardous condition (smoke, heat and carbon monoxide) alarms sold by the Company.

On September 25, 2008, the Company filed a third-party Complaint against UTC and Kidde in the United States District Court for the District of Maryland with its Answer and Counterclaims to Kidde in Case No. 08cv2202 seeking injunctive and antitrust damages for the predatory litigation campaign by UTC and Kidde against the Company.

As reported by the Company in a Current Report on Form 8-K, on February 22, 2010 the Company entered into a confidential Settlement and License Agreement with UTC and Kidde.  Under the terms of the agreement, all claims and counterclaims in all of the above described lawsuits were mutually dismissed.  Additionally, UTC and Kidde granted to the Company world-wide non-exclusive licenses under the patented technology in litigation.

From time to time, the Company may be involved in various lawsuits and legal matters.


Set forth below is information about the Company’s executive officers.

NAME
 
AGE
 
POSITIONS
         
Harvey B. Grossblatt
 
63
 
President, Chief Operating Officer and Chief Executive Officer
         
James B. Huff
 
58
 
Chief Financial Officer, Secretary and Treasurer

HARVEY B. GROSSBLATT has been a director of the Company since 1996.  He served as Chief Financial Officer from October 1983 through August 2004, Secretary and Treasurer of the Company from September 1988 through August 2004, and Chief Operating Officer from April 2003 through August 2004.  Mr. Grossblatt was appointed Chief Executive Officer in August 2004.

JAMES B. HUFF was appointed Chief Financial Officer in August 2004 and Secretary and Treasurer in October 2004. From December 2003 until August 2004, Mr. Huff was controller of Essex Corporation, a Columbia, Maryland based public company which provides intelligence engineering services to federal government agencies. From August 2002 until November 2003, Mr. Huff served as chief financial officer of Computer Temporaries, Inc., Lanham, Maryland; from August 2000 until July 2002, he was chief financial officer of HLM Architects and Engineering, Inc., a Charlotte, North Carolina based public company; and from January 1990 until November 1999, Mr. Huff was chief financial officer of RMF Engineering, Inc., Baltimore, Maryland.

 
- 10 -

 

PART II
   
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
   
Market for Common Stock

Our common stock, $.01 par value (the “Common Stock”) trades on the American Stock Exchange under the symbol UUU.  As of June 15, 2010, there were 224 record holders of the Common Stock.  The closing price for the Common Stock on that date was $6.00.  We have not paid any cash dividends on our common stock, and it is our present intention to retain all earnings for use in future operations.  The following table sets forth the high and low prices for the Common Stock for each full quarterly period during the fiscal years indicated.

Fiscal Year Ended March 31, 2010
       
First Quarter
High
  $ 6.47  
 
Low
  $ 3.11  
           
Second Quarter
High
  $ 6.24  
 
Low
  $ 4.40  
           
Third Quarter
High
  $ 7.83  
 
Low
  $ 4.46  
           
Fourth Quarter
High
  $ 7.51  
 
Low
  $ 5.30  
           
Fiscal Year Ended March 31, 2009
         
First Quarter
High
  $ 7.25  
 
Low
  $ 5.00  
           
Second Quarter
High
  $ 6.65  
 
Low
  $ 4.60  
           
Third Quarter
High
  $ 5.65  
 
Low
  $ 2.28  
           
Fourth Quarter
High
  $ 4.34  
 
Low
  $ 3.01  

Stock Repurchase Program

There were no purchases of common stock by the Company or any affiliated purchasers during the three months ended March 31, 2010.  In July, 2008, the Company announced a stock buyback program and authorized the purchase of up to 100,000 shares of common stock.  Shares may be purchased from time to time under this program in the open market, through block trades and/or in negotiated transactions.  As of June 10, 2009, the Company completed the repurchase program, buying a total of 99,980 shares at an average cost of $3.71 per share.

 
- 11 -

 
 
ITEM 6.
SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with, and is qualified by reference to, the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K.  The Statement of Operations data and the Balance Sheet data for the years ended, and as at, March 31, 2006, 2007, 2008, 2009 and 2010 are derived from our audited consolidated financial statements.  These historical results are not necessarily indicative of results that may be expected in future periods.  All share and per share amounts included in the following financial data have been retroactively adjusted to reflect the 4-for-3 stock dividend paid on October 16, 2007 to shareholders of record on September 25, 2007.

   
Year Ended March 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Statement  of Operations Data:
                             
Net sales
  $ 26,439,118     $ 26,097,596     $ 33,871,362     $ 32,934,388     $ 28,894,101  
(Loss) Income before equity in earnings of  Hong Kong Joint Venture and income taxes
    (158,962 )     371,966       1,351,139       3,608,196       2,394,258  
Income from continuing operations
    2,268,048       1,442,336       2,824,749       6,093,366       4,600,352  
Income (loss) from discontinued operations (net of tax benefit)
    -       3,423,021       (8,393,663 )     (560,108 )     -  
Net income (loss)
    2,268,048       4,865,357       (5,568,914 )     5,533,258       4,600,352  
Per common share:
                                       
Basic – from continuing operations
    0.95       0.58       1.14       2.54       2.06  
Basic – from discontinued Operations
    -       1.39       (3.38 )     (0.23 )     -  
Basic – net income (loss)
    0.95       1.97       (2.24 )     2.31       -  
Diluted – from continuing Operations
    0.95       0.58       1.13       2.45       1.89  
Diluted – from discontinued Operations
    -       1.38       (3.35 )     (0.23 )     -  
Diluted – net income (loss)
    0.95       1.96       (2.23 )     2.23       -  
Weighted average number of common shares outstanding
                                       
Basic
    2,387,887       2,466,983       2,484,192       2,398,284       2,228,908  
Diluted
    2,398,300       2,471,807       2,502,017       2,484,606       2,432,705  
                                         
Balance Sheet Data:
                                       
Total assets
    28,670,754       27,777,678       30,468,917       36,195,468       20,358,603  
Long-term debt (non-current)
    46,459       95,324       91,160       -       -  
Working capital (1)
    11,979,053       11,099,333       7,468,547       14,678,615       9,911,628  
Current ratio (1)
 
5.91:1
   
3.99:1
   
1.68:1
   
2.27:1
   
4.60:1
 
Shareholders’ equity
    26,182,505       23,965,899       19,423,935       24,671,881       17,606,569  

(1)
Working capital is computed as the excess of current assets over current liabilities. The current ratio is calculated by dividing current assets by current liabilities.

 
- 12 -

 

Quarterly Results of Operations (Unaudited)

The unaudited quarterly results of operations for fiscal years 2010 and 2009 are summarized as follows:

   
Quarter Ended
 
   
June 30,
   
September 30,
   
December 31,
   
March 31,
 
                         
2010
                       
Net sales
  $ 5,914,905     $ 7,900,805     $ 6,321,490     $ 6,301,918  
Gross profit
    1,169,834       1,647,672       1,319,001       1,195,105  
Income from operations
    611,465       924,870       263,490       468,223  
Income per share from operations:
                               
Basic
    0.25       0.39       0.11       0.20  
Diluted
    0.25       0.39       0.11       0.20  
                                 
2009
                               
Net sales
  $ 6,192,801     $ 8,381,379     $ 5,595,049     $ 5,928,367  
Gross profit
    1,577,066       1,891,273       1,337,785       1,293,846  
Income from continuing operations
    457,139       656,301       292,513       36,383  
(Loss) Income from discontinued operations
    (53,659 )     3,434,913       -       41,767  
Income per share from continuing operations:
                               
Basic
    0.18       0.26       0.12       0.02  
Diluted
    0.18       0.26       0.12       0.02  
(Loss) Income per share from discontinued operations:
                               
Basic
    (0.02 )     1.38       -       0.02  
Diluted
    (0.02 )     1.38       -       0.02  
Net income – basic
    0.16       1.64       0.12       0.03  
Net income - diluted
    0.16       1.64       0.12       0.03  

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

When used in this discussion and elsewhere in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and readers are advised that various factors, including the Risk Factors discussed elsewhere in this Annual Report and other risks, could affect our financial performance and could cause our actual results for future periods to differ materially from those anticipated or projected.  We do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

General

We are in the business of marketing and distributing safety and security products which are primarily manufactured through our 50% owned Hong Kong Joint Venture.  From October 2006 through January 2008, we also were engaged in the manufacture and distribution of EMT steel conduit through Icon, our majority-owned Canadian subsidiary.  Our financial statements detail our sales and other operational results only, and report the financial results of the Hong Kong Joint Venture using the equity method.  Accordingly, the following discussion and analysis of the fiscal years ended March 31, 2010, 2009 and 2008 relate to the operational results of the Company and its consolidated subsidiaries only and includes the Company’s equity share of earnings in the Hong Kong Joint Venture.  A discussion and analysis of the Hong Kong Joint Venture’s operational results for these periods is presented below under the heading “Hong Kong Joint Venture.”

 
- 13 -

 

While we believe that our overall sales are likely affected by the current global economic situation, we believe that we are specifically negatively impacted by the severe downturn in the U.S. housing market.  As stated elsewhere in this report, our USI Electric subsidiary markets our products to the electrical distribution trade (primarily electrical and lighting distributors and manufactured housing companies).  Every downturn in new home construction and new home sales negatively impacts sales by our USI Electric subsidiary.  We anticipate that when and as the housing market recovers, sales by our USI Electric subsidiary will improve, as well.

Discontinued Canadian Operations

In October 2006, we formed 2113824 Ontario, Inc., an Ontario corporation, as a wholly-owned subsidiary of the Company for the purpose of acquiring a two-thirds interest in two Canadian corporations, International Conduits, Ltd. (Icon) and Intube, Inc. (Intube).  Icon and Intube were based in Toronto, Canada and manufactured and distributed electrical mechanical tubing (EMT) steel conduit.  Icon also sold home safety products, primarily purchased from the Company, in the Canadian market.  The primary purpose of the Icon and Intube acquisition was to expand our product offerings to include EMT steel conduit, and to provide this product and service to the commercial construction market.  On April 2, 2007, Icon and Intube were merged under the laws of Ontario to form one corporation.

 In June 2007, Icon entered into a credit agreement with CIT Financial, Ltd. to provide a term loan and a line of credit facility.  These loans were secured by all of the assets of Icon and by the corporate guarantees of the Company and our USI Electric subsidiary.

At the time of our investment in Icon, we projected that our established U.S. sales network would allow us to increase sales of EMT to U.S. customers.  Despite our efforts, Icon suffered continuing losses, and we were not successful in increasing Icon’s sales in the face of competition and a downturn in the housing market.  On January 29, 2008, Icon received notice from CIT Financial, Ltd. (CIT Canada), Icon’s principal and secured lender, that Icon was in default under the terms of the Credit Agreement dated June 22, 2007 between Icon and CIT Canada and demanding immediate payment of all of Icon’s obligations to CIT Canada under the Credit Agreement.  On February 11, 2008, the assets of Icon were placed under the direction of a court appointed receiver, and the operations of Icon were suspended.  Accordingly, the assets and liabilities of Icon are not consolidated in the financial statements of the Company and are classified as assets held in receivership.   Our consolidated financial statements and the related note disclosures reflect the operations of Icon as discontinued operations for all periods presented.

As a result of continuing losses at Icon, we undertook an evaluation of the goodwill from our acquisition of Icon to determine whether the value of the goodwill had been impaired.    Based on that evaluation, we determined that the value of the goodwill from our acquisition of Icon was impaired, and we recognized an impairment charge of US$1,926,696 for the goodwill.   In addition, as a result of Icon’s receivership and the steps taken to liquidate Icon’s assets, the non-cash assets of Icon were written down to their estimated net realizable value and a further impairment charge of US$7,087,294 was recognized as of March 31, 2008.  These impairments have been recorded in discontinued operations in the consolidated statements of operations for the fiscal year ended March 31, 2008.

On September 22, 2008, Icon’s obligations were settled in the receivership action by Ontario Superior Court order.   As a result of the settlement of Icon’s obligations, a gain of CAD$5,101,674 (US$4,910,718) was realized by Icon in the quarter ended September 30, 2008.  Approximately US$3,000,000 of the gain related to extinguishment of liabilities due to unsecured creditors as the Company determined that a legal release of the liabilities had been achieved to allow recognition of the gain on extinguishment of liabilities.  This gain was partially offset in consolidation by the US$1,518,375 after-tax effect loss recognized by the Company in settlement of its guarantee of Icon’s secured debt and other losses attributable to the Icon discontinued operation to arrive at the gain from discontinued operations of $3,423,021 for the fiscal year ended March 31, 2009.

At March 31, 2009, the remaining asset of Icon held by the receiver consisted of cash of US$202,565.  The liabilities of Icon held by the receiver include a claim by a supplier and other secured amounts payable of US$202,565.   As of March 31, 2010, the claim by a supplier was settled for CAD$175,000 (approximately US$140,000).  The difference between the cash held by the receiver and the amount paid in settlement of a claim was received by the Company and reduced previously recorded losses from discontinued operations.

 
- 14 -

 

The major classes of assets and liabilities held in receivership reported as discontinued operations included in the accompanying consolidated balance sheets are shown below.

  
 
March 31, 2010
   
March 31, 2009
 
Assets
               
Cash
  $ 0     $ 202,565  
Assets of discontinued operations
  $ 0     $ 202,565  
                 
Liabilities
               
Accounts payable, trade and other
  $ 0     $ 202,565  
Liabilities of discontinued operations
  $ 0     $ 202,565  

In the accompanying consolidated financial statements, the results of Icon for all fiscal years included  have been restated and are presented as the results of discontinued operations, and certain other prior year amounts have been reclassified in order to conform with the current year’s presentation.

Comparison of Results of Operations for the Years Ended March 31, 2010, 2009 and 2008

Sales.  In fiscal year 2010, our net sales increased by $341,522 (1.3%), from $26,097,596 in fiscal 2009 to $26,439,118 in fiscal 2010.  Sales to the electrical distribution trade through our USI Electric subsidiary decreased to $6,402,776 (from $8,619,816 in 2009), principally due to decreased volume from the U.S. residential construction trade resulting from the overall decline in the U.S. domestic housing industry.  The Company’s sales to retail and wholesale customers in the fiscal year ended March 31, 2010 increased to $20,036,342 from $17,477,780 at March 31, 2009, principally as a result of increased sales to additional national home improvement retailers.

In fiscal year 2009, sales decreased by $7,773,766 (23.0%) from $33,871,362 in fiscal 2008 to $26,097,596 in fiscal 2009.  Sales to the electrical distribution trade through our USI Electric subsidiary decreased to $8,619,816 (from $15,178,930 in 2008), principally due to decreased volume from the U.S. residential construction trade.  Sales to retail and wholesale customers decreased in the fiscal year ended March 31, 2009 to $17,477,780 from $18,692,432 at March 31, 2008, principally as a result of decreased sales to a national home improvement retailer.

Gross Profit.  Gross profit margin is calculated as net sales less cost of goods sold expressed as a percentage of net sales.  Our gross profit margin for the fiscal year ended March 31, 2010 was 20.2% compared to 23.4% and 23.2% in fiscal 2009 and 2008, respectively.  The decreases in 2010 and 2009 gross margins from the respective prior years are attributed to our increased sales to a national home improvement retailer and our lower gross profit margins on those sales.

Selling, General and Administrative Expense.  Selling, general and administrative expenses decreased from $5,297,284 in fiscal 2009 to $4,731,697 in fiscal 2010, a $565,587 (10.7%) decrease.  As a percentage of net sales, these expenses decreased to 17.9% for the fiscal year ended March 31, 2010 from 20.3% for the fiscal year ended March 31, 2009.  The decrease in selling, general and administrative expense in dollars is principally attributable to lower commissions, legal, selling and freight expenses associated with the reduced volume of sales to the electrical distribution trade due to the decline in new home construction during the period.  Of the total decrease in these expenses, approximately $401,000 resulted from the elimination of an amount previously accrued to pursue related litigation that was settled during the current fiscal year.

Selling, general and administrative expenses for fiscal 2009 decreased by $826,929 (13.5%) from $6,124,213 in fiscal 2008 to $5,297,284 in fiscal 2009.  As a percentage of net sales, these expenses increased to 20.3% for the fiscal year ended March 31, 2009 from 18.1% for the fiscal year ended March 31, 2008.  The increase in selling, general and administrative expense as a percent of sales is attributable to lower absorption of fixed costs due to lower sales volume.  Commissions and freight charges, as a percentage of sales, while consistent with commission and freight charges of the prior year, vary directly with sales volume.

Research and Development.  Research and development expense was $712,688, of which approximately $500,000 was for new product development, for the fiscal year ended March 31, 2010 compared to $435,750 for the comparable period of the prior year, an increase of $276,938 or 63.6%.  These expenses were $364,510 for the fiscal year ended March 31, 2008.  The Company has been evaluating and researching new smoke and gas detection technologies, resulting in the development of new sensing technology and product features, for which the Company has applied for patents.  We expect to incur additional engineering, design and certification costs of between $400,000 and $600,000 during the fiscal year ending March 31, 2011.

 
- 15 -

 
Interest Income and Expense. Interest expense for fiscal 2010 increased to $78,451 from $32,198 in fiscal 2009 primarily due to the timing of activity in our line of credit.  The Company incurred additional interest charges during the fiscal year ended March 31, 2010 related to advances acquired from its factor in order to secure the Company’s cash position after the factor warned in a press release of the probability of bankruptcy proceedings. Interest expense for fiscal 2009 decreased $14,151 from $46,349 in fiscal 2008, primarily due to the timing of activity in our line of credit.  We earn interest on our cash balances on accounts receivable collections maintained on deposit with the factor at the factor’s prime rate of interest minus 3%.  At March 31, 2010, the majority of our cash balances were transferred to short term investments.  During the fiscal years ended March 31, 2010, 2009 and 2008, we earned interest of $32,262, $37,228 and $16,155, respectively, resulting in net interest expense of $46,189 for fiscal 2010, net interest income of $5,030 for fiscal 2009, and net interest expense of $30,194 for fiscal 2008.

Income Taxes.  For the fiscal year ended March 31, 2010, we used net operating loss carryovers to offset a federal and state income tax provision of approximately $217,281.  Furthermore, we generated foreign tax credits of $169,511 for the fiscal year ended March 31, 2010.  We have elected to carry our remaining net operating loss of approximately $821,000 forward to offset future taxable income.  In addition, we have foreign tax credits of approximately $1,410,000 available to offset future taxes.

For the fiscal year ended March 31, 2009, we generated a net operating loss for federal and state income tax purposes of $600,508. The loss was generated principally as a result of the payment of the guarantee of the indebtedness of the discontinued Canadian subsidiary.  Furthermore, we generated foreign tax credits of $157,249 for the fiscal year ended March 31, 2009.  We have elected to carry our net operating loss forward to offset future taxable income.

During the fiscal year ended 2008, the Company offset a portion of its federal taxes with foreign tax credits available as a result of foreign taxes paid on the repatriated earnings of the Hong Kong Joint Venture.  At March 31, 2008, we had a foreign tax credit carryforward of $1,082,990 available to offset future taxes.  After application of the deductions and credits identified above, we had a net tax liability for federal and state income tax purposes of approximately $337,000 with respect to our 2008 fiscal year.  The deductions and the income tax credits for foreign income taxes paid resulted in an effective income tax rate of approximately 10.1% for the fiscal year ended March 31, 2008.

Income from Continuing Operations.  We reported income from continuing operations of $2,268,048 for fiscal year 2010 compared to income from continuing operations of $1,442,336 for fiscal year 2009, a $825,712 (57.2%) increase.  This increase in income from continuing operations resulted principally from an increase of $1,114,539 in our reported equity in the earnings of the Hong Kong Joint Venture, partially offset by a higher net provision in 2010 for income taxes.  Our equity in the earnings of the Hong Kong Joint Venture is calculated by adusting our share of the Hong Kong Joint Venture’s net income by certain items, including our share of the Hong Kong Joint Venture’s profit on sales of inventory ($236,247) to the Company which remain in the Company’s inventory at year end.  We ended fiscal 2010 with a lower amount of inventory purchased from the Hong Kong Joint Venture primarily due to lower inventories maintained to service a large national retailer, and also due to the downturn in the U.S. housing market.

We reported income from continuing operations of $1,442,336 for fiscal year 2009 compared to income from continuing operations of $2,824,749 for fiscal year 2008, a $1,382,413 (48.9%) decrease.  This decrease resulted from a reduction of $456,093 in our equity in earnings of the Joint Venture, due to lower sales volume as a result of the downturn in the housing industry, and a reduction in the after tax earnings from domestic operations of $926,320 due to sales of lower margin products and the downturn in the housing industry.

Net Income.  We reported net income of $2,268,048 for fiscal 2010 compared to net income of $4,865,357 for fiscal year 2009 and a net loss of $5,568,914 for fiscal year 2008.  In addition to the discussion above with respect to  income from continuing operations, net income was lower in fiscal year 2010 principally as a result of the higher fiscal 2009 net income due to recognition in fiscal year 2009 of income from the operations of the discontinued Canadian subsidiary.  This gain was partially offset by a loss (net of income tax benefit) recorded by the Company related to the payment of debt of the Canadian subsidiary guaranteed by the Company.  In the fiscal year ended March 31, 2008, the net loss related primarily to impairment charges related to the discontinued Canadian subsidiary.

Financial Condition, Liquidity and Capital Resources

Our cash needs are currently met by funds generated from operations and from our Factoring Agreement with CIT Group, which supplies both short-term borrowings and letters of credit to finance foreign inventory purchases.  The maximum we may borrow under this Agreement is $7,500,000.  Based on specified percentages of our accounts receivable and inventory and letter of credit commitments, at March 31, 2010, our maximum borrowing availability under this Agreement was $5,087,000.  Any outstanding principal balance under this Agreement is payable upon demand. The interest rate on the Factoring Agreement, on the uncollected factored accounts receivable and any additional borrowings is equal to the prime rate of interest charged by the factor which, as of March 31, 2010, was 3.25%.  All borrowings are collateralized by all our accounts receivable and inventory.  During the year ended March 31, 2010, working capital (computed as the excess of current assets over current liabilities) increased by $879,720, from $11,099,333 on March 31, 2009, to $11,979,053 on March 31, 2010.

 
- 16 -

 

Our operating activities provided cash of $5,028,726 for the year ended March 31, 2010.  For the fiscal year ended March 31, 2009, operating activities used cash of $2,503,959.  The increase in cash provided by operating activities was primarily due to decreases in the amount of inventories and amount due from factor.  These sources of cash were partially offset by increases in our equity in the earnings of the Hong Kong Joint Venture and decreases in accounts payable and accrued expenses.

Our investing activities used cash of $2,964,842 during fiscal 2010 principally as a result of the investment in short-term investments partially offset by cash distributions of the Hong Kong Joint Venture.  Investing activities provided cash of $3,386,451 during fiscal 2009 from activity of discontinued subsidiary and distributions of the Hong Kong Joint Venture.

Financing activities in 2010 used cash of $94,283.  The use of cash for financing activities resulted principally from the repurchase of Company shares in accordance with a stock repurchase program.  Financing activities in 2009 used cash of $4,462,246, which was primarily from the activities associated with the discontinued Canadian Subsidiary.

While sales by our USI Electric subsidiary have been negatively impacted by the severe downturn in the U.S. housing market, we believe that our capital resources are sufficient for our operations.  We anticipate that when and as the housing market recovers, sales by our USI Electric subsidiary will improve, as well, thereby increasing our capital resources.

Hong Kong Joint Venture

The financial statements of the Hong Kong Joint Venture are included in this Form 10-K beginning on page JV-1.  The reader should refer to these financial statements for additional information.  There are no material Hong Kong to US GAAP differences in the Hong Kong Joint Venture’s accounting policies.

In fiscal year 2010, sales of the Hong Kong Joint Venture were $28,848,177 compared to $36,161,337 and $30,144,148 in fiscal years 2009 and 2008, respectively.  The decrease in sales for 2010 is primarily due to decreased sales to the Company, partially offset by increased sales to non-affiliated customers in Europe.  The increase in sales for the 2009 period from the 2008 period was primarily due to increased sales to the Company and to non-affiliated customers in Europe.

Net income was $4,018,779 for fiscal year 2010 compared to net income of $4,011,404 and $3,270,926 in fiscal years 2009 and 2008, respectively.  The increase in the current fiscal year is primarily due to increased sales volume in the European and Asian markets, which provide higher gross margins as discussed below.  The increase in sales for fiscal 2009 from fiscal 2008 was primarily due to increased sales to non-affiliated customers in Europe.

Gross margins of the Hong Kong Joint Venture for fiscal 2010 increased to 28.1% from 26.5% in the prior fiscal year.  The primary reason for this increase was due to additional sales to non-affiliated customers.  The primary reason for the change in product mix is attributed to the large volume of higher margin sales to the non-affiliated customers in Europe.  At March 31, 2009, the Hong Kong Joint Venture’s gross margin decreased to 26.5% from 25.1% at March 31, 2008.  The primary reason for this decrease was lower gross margins on sales to the Company for the U.S. retail market.

Selling, general and administrative expenses of the Hong Kong Joint Venture were $4,275,709, $5,298,831 and $4,408,855 for fiscal years 2010, 2009 and 2008, respectively.  As a percentage of sales, these expenses were 14.8%, 14.7% and 14.6% for fiscal years 2010, 2009 and 2008, respectively.  The decrease in dollars of selling, general and administrative expenses for the year ended March 31, 2010 was due principally to increases in foreign currency exchange losses, insurance, management bonus, rent expense and sales commissions.

Interest expense net of interest income was $7,033 for fiscal year 2010, compared to $14,516 and $26,932 in fiscal years 2009 and 2008, respectively.  The decrease in interest expense net of interest income for 2010 was due to an increase in investments.  The decrease from 2009 to 2008 is due to variations in the amount of investments in bonds during those fiscal periods.

 
- 17 -

 

Cash needs of the Hong Kong Joint Venture are currently met by funds generated from operations.  During fiscal year 2010, working capital increased by $2,604,827 from $9,151,199 on March 31, 2009 to $11,756,026 on March 31, 2010.

Contractual Obligations and Commitments

The following table presents, as of March 31, 2010, our significant fixed and determinable contractual obligations to third parties by payment date.  Further discussion of the nature of each obligation is included in Note F to the consolidated financial statements.

   
Payment due by period
 
         
Less than
   
1-3
   
3-5
 
   
Total
   
1 year
   
years
   
years
 
Operating lease obligations
  $ 647,365     $ 181,890     $ 323,882     $ 141,593  

Critical Accounting Policies

Management’s discussion and analysis of our consolidated financial statements and results of operations are based upon our Consolidated Financial Statement included as part of this document.  The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate these estimates, including those related to bad debts, inventories, income taxes, impairment of long-lived assets, and contingencies and litigation. We base these estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies affect management’s more significant judgments and estimates used in the preparation of its consolidated financial statements.  For a detailed discussion on the application on these and other accounting policies, see Note A to the consolidated financial statements included in this Annual Report.  Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates.  These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. Our critical accounting policies include:

Discontinued Operations: The financial statements of the Company’s Canadian subsidiary, International Conduits, Ltd. (Icon) are not consolidated with the financial statements of the Company.  As a result of the February 11, 2008 court appointed receivership of Icon’s assets, we no longer controlled Icon as of that date.  Accordingly, the accounts and operations of Icon in our consolidated financial statements are presented as assets and liabilities held in receivership and as the results of discontinued operations.

Revenue Recognition: Revenue is recognized at the time product is shipped and title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed and collectability of the related receivable is reasonably assured.  We establish allowances to cover anticipated doubtful accounts and sales returns based upon historical experience.  The Company nets the factored accounts receivable with the corresponding advance from the Factor, with the net amount reflected in the consolidated balance sheet.  The Company sells trade receivables on a pre-approved non-recourse basis to the Factor under the Factoring Agreement on an ongoing basis.

Inventories:  Inventories are valued at the lower of market or cost.  Cost is determined on the first in/first out method.  We have recorded a reserve for obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  Management reviews the reserve quarterly.

Assets Held For Investment:  Assets held for investment are accounted for as investments available for sale and valued at their fair value, with unrealized gains and losses reported as a separate component of stockholders' equity in accumulated other comprehensive income. All realized gains and losses on our investments available for sale are recognized in results of operations as investment income.

 
- 18 -

 

Investments available for sale are evaluated periodically to determine whether a decline in their value is "other than temporary." Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Income Taxes: The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary.  The Company follows the financial pronouncement that gives guidance related to the financial statement of recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position.  Interest and penalties related to income tax matters are recorded as income tax expenses, See Note G, Income Taxes.

We may be subject to lawsuits and other claims, related to patents and other matters.  Management is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses.  A determination of the amount of reserves required, if any, for these contingencies is based on a careful analysis of each individual issue with the assistance of outside legal counsel.  The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Impairment of Long-Lived Assets:  The Company’s policy is to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognizes an impairment loss when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. The measurement of the impairment losses to be recognized is based upon the difference between the fair value and the carrying amount of the assets. During fiscal 2008, the company recognized impairment losses on assets held for sale of approximately $3,750,000, which is included in the loss from discontinued operations.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective for the Company beginning April 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We believe adoption of this new guidance will not have a material impact on our financial position and results of operations.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are included in the Company’s Consolidated Financial Statements and set forth in the pages indicated in Item 15(a) of this Annual Report.

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A(T).      CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management in a timely manner.  Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this annual report, and have concluded that the system is effective.

 
- 19 -

 

Management’s Annual Report on Internal Control over Financial Reporting
 
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (GAAP).  Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Our Chief Financial Officer (with the participation of our Chief Executive Officer) conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2010.

Effective February 11, 2008, the assets, liabilities and operations of Icon were placed in receivership and thus are presented in discontinued operations as an unconsolidated subsidiary.   Accordingly, internal control procedures relating to the unconsolidated Canadian subsidiary were not evaluated as a part of management’s review of internal control over financial reporting as of March 31, 2009.

Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters.  However, at this time management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation are insignificant and the potential benefits of adding employees to clearly segregate duties do not justify the expenses associated with such increases.  Management does not deem this rises to the level of a material weakness.  Management will periodically review this situation.
 
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

Not applicable.

 
- 20 -

 

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to the identity and business experience of the directors of the Company and their remuneration set forth in the section captioned “Election of Directors” in the Company’s definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction with the 2010 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.  The information with respect to the identity and business experience of executive officers of the Company is set forth in Part I of this Form 10-K.  The information with respect to the Company’s Audit Committee is incorporated herein by reference to the section captioned “Meetings and Committees of the Board of Directors” in the Proxy Statement.  The information with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the section captioned “Compliance with Section 16(a) of the Exchange Act” in the Proxy Statement.  The information with respect to the Company’s Code of Ethics is incorporated herein by reference to the section captioned “Code of Ethics” in the Proxy Statement.

ITEM 11.   EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the sections captioned “Director Compensation” and “Executive Compensation” in the Proxy Statement.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item regarding security ownership is incorporated herein by reference to the sections captioned “Beneficial Ownership” and “Information Regarding Share Ownership of Management” in the Proxy Statement.  Information required by this item regarding our equity compensation plans is incorporated herein by reference to the Section entitled “Executive Compensation” in the Proxy Statement.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the sections captioned “Transactions with Management”, if any, and “Election of Directors” in the Proxy Statement.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section captioned “Independent Registered Public Accountants” in the Proxy Statement.

 
- 21 -

 

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)1. Financial Statements.
 
Page
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheets as of March 31, 2010 and 2009
F-2
Consolidated Statements of Operations for the Years Ended March 31, 2010, 2009 and 2008
F-3
Consolidated Statements of Shareholders’ Equity for the Years Ended March 31, 2010, 2009 and 2008
F-4
Consolidated Statements of Cash Flows for the Years Ended March 31, 2010, 2009 and 2008
F-5
Notes to Consolidated Financial Statements
F-6
   
(a)2. Financial Statement Schedules.
 
   
Schedule II – Valuation of Qualifying Accounts
S-1

(a)3. Exhibits required to be filed by Item 601 of Regulation S-K.

Exhibit No.
 
3.1
Articles of Incorporation (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 1988, File No. 1-31747)
3.2
Articles Supplementary, filed October 14, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31, 2002, file No. 1-31747)
3.3
Bylaws, as amended (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2009, File No. 1-31747)
10.1
Non-Qualified Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2003, File No. 1-31747)
10.2
Hong Kong Joint Venture Agreement, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2003, File No. 1-31747)
10.3
Amended and Restated Factoring Agreement between the Registrant and The CIT Group/Commercial Services, Inc. (“CIT”), dated June 22, 2007 (substantially identical agreement entered into by the Registrant’s wholly-owned subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 26, 2007, file No. 1-31747)
10.4
Amended and Restated Inventory Security Agreement between the Registrant and CIT, dated June 22, 2007 (substantially identical agreement entered into by the Registrant’s wholly-owned subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 26, 2007, file No. 1-31747)
10.5
Amendment, dated December 22, 2009, to Amended and Restated Factoring Agreement between the Registrant and CIT dated June 22, 2007 (substantially identical agreement entered into by the Registrant’s wholly-owned subsidiary, USI Electric, Inc.) (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed February 16, 2010, file No. 1-31747)
10.6
Lease between Universal Security Instruments, Inc. and St. John Properties, Inc. dated November 4, 2008 for its office and warehouse located at 11407 Cronhill Drive, Suites A-D, Owings Mills, Maryland 21117 (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2008, File No. 1-31747)
10.7
Amendment to Lease between Universal Security Instruments, Inc. and St. John Properties, Inc. dated June 23, 2009 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2009, File No. 1-31747)
10.8
Amended and Restated Employment Agreement dated July 18, 2007 between the Company and Harvey B. Grossblatt (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2007, File No. 1-31747), as amended by Addendum dated November 13, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 15, 2007, File No. 1-31747), by Addendum dated September 8, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 8, 2008, File No. 1-31747), and by Addendum dated March 11, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 12, 2010, File No. 1-31747)
14
Code of Ethics (incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2004, File No. 1-31747)
21
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2007, File No. 1-31747)

 
- 22 -

 

23.1
Consent of Grant Thornton LLP*
23.2
Consent of Grant Thornton LLP (Hong Kong)*
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1
Section 1350 Certifications (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K for the year ended March 31, 2007, File No. 1-31747)*
99.1
Press Release dated June 23, 2010*

*Filed herewith

(c)   Financial Statements Required by Regulation S-X.

Separate financial statements of the Hong Kong Joint Venture

Report of Independent Registered Public Accounting Firm
JV-1
Consolidated Statement of Comprehensive Income
JV-2
Consolidated Statement of Financial Position
JV-3
Statement of Financial Position
JV-4
Consolidated Statement of Changes in Equity
JV-5
Consolidated Statement of Cash Flow
JV-6
Notes to Financial Statements
JV-7

 
- 23 -

 
 
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.
     
June 23, 2010
By: 
/s/ Harvey B. Grossblatt
   
Harvey B. Grossblatt
   
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
 
Title
Date
       
 /s/ Harvey B. Grossblatt
 
President, Chief Executive Officer
June 23, 2010
Harvey B. Grossblatt
 
and Director
 
       
/s/ James B. Huff
 
Chief Financial Officer
June 23, 2010
 James B. Huff
     
       
/s/ Cary Luskin
 
Director
June 23, 2010
Cary Luskin
     
       
/s/ Ronald A. Seff
 
Director
June 23, 2010
Ronald A. Seff
     
       
/s/ Ira Bormel
 
Director
June 23, 2010
Ira Bormel
     

 
- 24 -

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Universal Security Instruments, Inc.

We have audited the accompanying consolidated balance sheets of Universal Security Instruments, Inc. (a Maryland Corporation) and subsidiaries (the Company) as of March 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2010. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Security Instruments, Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Baltimore, Maryland
June 23, 2010

 
F-1

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
March 31
 
   
2010
   
2009
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 2,253,631     $ 284,030  
Assets held for investment
    4,001,890       -  
Accounts receivable:
               
Trade less allowance for doubtful accounts of $87,851 at March 31, 2010 and $95,927 at March 31, 2009
 
  266,526       55,779  
Other receivables
    70,523       97,780  
Receivable from Hong Kong Joint Venture
    212,622       312,257  
      549,671       465,816  
                 
Amount due from factor
    3,824,553       4,610,401  
Inventories, net of allowance for obsolete inventory of $100,000 at March 31, 2010 and $204,309 at March 31, 2009
    3,439,906       8,997,231  
Prepaid expenses
    351,192       255,745  
Assets held in receivership
    -       202,565  
                 
TOTAL CURRENT ASSETS
    14,420,843       14,815,788  
                 
DEFERRED TAX ASSET
    1,877,156       2,141,702  
                 
INVESTMENT IN HONG KONG JOINT VENTURE
    12,153,456       10,550,373  
                 
PROPERTY AND EQUIPMENT – NET
    199,163       251,366  
                 
OTHER ASSETS
    20,136       18,449  
                 
TOTAL ASSETS
  $ 28,670,754     $ 27,777,678  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 689,762     $ 794,365  
Hong Kong Joint Venture accounts payable
    1,472,993       1,967,073  
Accrued liabilities:
               
Litigation reserve
    -       401,592  
Payroll and employee benefits
    232,034       148,071  
Commissions and other
    47,001       202,789  
Liabilities held in receivership
    -       202,565  
                 
TOTAL CURRENT LIABILITIES
    2,441,790       3,716,455  
                 
Long-term obligation – other
    46,459       95,324  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
SHAREHOLDERS’ EQUITY
               
Common stock, $.01 par value per share; authorized 20,000,000 shares; issued and outstanding, 2,387,887 shares at March 31, 2010 and 2,408,220 shares at March 31, 2009
    23,879       24,083  
Additional paid-in capital
    13,135,198       13,186,436  
Retained earnings
    13,023,428       10,755,380  
TOTAL SHAREHOLDERS’ EQUITY
    26,182,505       23,965,899  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 28,670,754     $ 27,777,678  

The accompanying notes are an integral part of these consolidated financial statements

 
F-2

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Years Ended March 31
 
   
2010
   
2009
   
2008
 
                   
Net sales
  $ 26,439,118     $ 26,097,596     $ 33,871,362  
Cost of goods sold – acquired from Joint Venture
    20,908,186       19,363,886       22,530,867  
Cost of goods sold - other
    199,320       633,740       3,470,439  
                         
GROSS PROFIT
    5,331,612       6,099,970       7,870,056  
                         
Research and development expense
    712,688       435,750       364,510  
Selling, general and administrative expense
    4,731,697       5,297,284       6,124,213  
                         
Operating (loss) income
    (112,773 )     366,936       1,381,333  
                         
Other income (expense):
                       
Interest expense
    (78,451 )     (32,198 )     (46,349 )
Investment income
    32,262       37,228       16,155  
      (46,189 )     5,030       (30,194 )
                         
(LOSS) INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
    (158,962 )     371,966       1,351,139  
                         
Equity in earnings of Hong Kong Joint Venture
    2,644,291       1,529,752       1,985,845  
                         
Income from continuing operations before income taxes
    2,485,329       1,901,718       3,336,984  
                         
Provision for income tax expense
    217,281       459,382       512,235  
                         
INCOME FROM CONTINUING OPERATIONS
    2,268,048       1,442,336       2,824,749  
                         
Discontinued operations
                       
Income (loss) from the discontinued Canadian subsidiary (including impairment loss of $9,013,990 in 2008)
    -       2,481,318       (10,242,663 )
                         
Income tax benefit – discontinued operations
    -       941,703       1,849,000  
                         
Income (loss) from discontinued operations
    -       3,423,021       (8,393,663 )
                         
NET INCOME (LOSS)
  $ 2,268,048     $ 4,865,357     $ (5,568,914 )
                         
Income (loss) per share:
                       
Basic – from continuing operations
  $ 0.95     $ 0.58     $ 1.14  
Basic – from discontinued operations
  $ 0.00     $ 1.39     $ (3.38 )
Basic – net  income (loss)
  $ 0.95     $ 1.97     $ (2.24 )
Diluted – from continuing operations
  $ 0.95     $ 0.58     $ 1.13  
Diluted – from discontinued operations
  $ 0.00     $ 1.38     $ (3.35 )
Diluted – net income (loss)
  $ 0.95     $ 1.96     $ (2.23 )
Shares used in computing net income (loss) per share:
                       
Basic
    2,387,887       2,466,983       2,484,192  
Diluted
    2,398,300       2,471,807       2,502,017  

The accompanying notes are an integral part of these consolidated financial statements

 
F-3

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

   
Common Stock
                         
   
Shares
   
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Other
Comprehensive
Income
   
Total
 
                                     
Balance at March 31, 2007
    2,475,612     $ 24,756     $ 13,214,025     $ 11,545,304     $ (112,204 )   $ 24,671,881  
                                                 
Recognition of uncertain tax provisions
    -       -       -       (86,367 )     -       (86,367 )
                                                 
Issuance of common stock from the exercise of employee stock options
    12,255       123       126,555       -       -       126,678  
                                                 
Stock based compensation
    -       -       19,863       -       -       19,863  
                                                 
Comprehensive income:
                                               
                                                 
Effect of currency translation
    -       -       -       -       167,859       -  
                                                 
Net loss
    -       -       -       (5,568,914 )     -       (5,401,055 )
                                                 
Tax benefit from exercise of stock options
    -       -       92,935       -       -       92,935  
                                                 
Balance at March 31, 2008
    2,487,867     $ 24,879     $ 13,453,378     $ 5,890,023     $ 55,655     $ 19,423,935  
                                                 
Stock based compensation
    -       -       11,230       -       -       11,230  
                                                 
Comprehensive income:
                                               
                                                 
Effect of currency translation
    -       -       -       -       (55,655 )     (55,655 )
                                                 
Net income
    -       -       -       4,865,357       -       4,865,357  
                                                 
Repurchase of common stock
    (79,647 )     (796 )     (278,172 )     -       -       (278,968 )
                                                 
Balance at March 31, 2009
    2,408,220     $ 24,083     $ 13,186,436     $ 10,755,380             $ 23,965,899  
                                                 
Stock based compensation
    -       -       42,762       -       -       42,762  
                                                 
Net income:
    -       -       -       2,268,048       -       2,268,048  
                                                 
Repurchase of common stock
    (20,333 )     (204 )     (94,000 )     -       -       (94,204 )
                                                 
Balance at March 31, 2010
    2,387,887     $ 23,879     $ 13,135,198     $ 13,023,428     $ -     $ 26,182,505  

 
F-4

 

UNIVERSAL SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Years Ended March 31,
 
 
 
2010
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
OPERATING ACTIVITIES
                 
Net income (loss)
  $ 2,268,048     $ 4,865,357     $ (5,568,914 )
Adjustments to reconcile net income to net cash Provided by (used in) operating activities:
                       
Operations of discontinued subsidiary
    -       (3,431,654 )     7,904,780  
Depreciation and amortization
    56,361       49,210       46,503  
Stock based compensation
    42,762       11,230       19,863  
Increase (decrease) in deferred taxes
    264,546       (227,566 )     (1,157,711 )
              -       -  
Earnings of the Hong Kong Joint Venture
    (2,644,291 )     (1,529,752 )     (1,985,845 )
Changes in operating assets and liabilities:
                       
Decrease  in accounts receivable and amounts due from factor
    701,993       1,067,952       2,329,219  
Decrease (Increase) in inventories
    5,557,325       (3,639,743 )     3,347,828  
(Increase) in prepaid expenses
    (95,447 )     (49,548 )     (64,620 )
(Decrease) increase in accounts payable, accrued expenses, and other
    (1,120,884 )     383,518       (2,524,540 )
(Increase) decrease in other assets
    (1,687 )     (2,963 )     3,000  
                         
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    5,028,726       (2,503,959 )     2,349,563  
                         
INVESTING ACTIVITIES:
                       
Investment in assets held for investment
    (4,001,890 )     -       -  
Cash distributions from Joint Venture
    1,041,281       965,958       1,071,549  
Purchase of equipment
    (4,233 )     (170,229 )     (30,778 )
Activities of discontinued subsidiary
    -       2,590,722       (1,584,733 )
                         
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
    (2,964,842 )     3,386,451       (543,962 )
                         
FINANCING ACTIVITIES:
                       
Activities of discontinued subsidiary
    -       (4,187,444 )     4,012,046  
Repurchase of common stock
    (94,204 )     (278,968 )     -  
Principal payment of notes payable
    (79 )     -       (2,254,966 )
Proceeds from issuance of common stock from exercise of employee stock Options
    -       -       126,678  
Decrease in long-term debt
            4,166       -  
Tax benefit from exercise of stock options
    -       -       92,935  
                         
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    (94,283 )     (4,462,246 )     1,976,693  
                         
Effects of exchange rate on cash
    -       -       81,490  
                         
INCREASE (DECREASE) IN CASH
    1,969,601       (3,579,754 )     3,863,784  
                         
Cash at beginning of period
    284,030       3,863,784       -  
                         
CASH AT END OF PERIOD
  $ 2,253,631     $ 284,030     $ 3,863,784  
                         
Supplemental information:
                       
Interest paid
  $ 78,451     $ 32,198     $ 46,349  
Income taxes recovered (paid)
  $ -     $ 520,558     $ (227,000 )
                         
Non-cash investing transactions:
                       
Offset of trade payables due the Hong Kong Joint Venture in lieu of cash Distributions