UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
SECURITIES EXCHANGE ACT OF 1934
 
 For the
Quarterly period ended June 30, 2009
 
 OR
  ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 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 of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)11407
      Cronhill Drive, Suite AOwings
      Mills, Maryland
              
              21117(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 Registrant’s telephone number,
including area code: (410)
363-3000
 
 Inapplicable
 (Former
name, former address and former fiscal year if changed from last
report.)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  x   No
 ̈
 
 Indicate
by check mark whether the registrant 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 the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.  See
the definitions 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 Exchange Act).  Yes  ̈  No
x
 
 At August
8, 2009, the number of shares outstanding of the registrant’s common stock was
2,387,887.
 
  
  TABLE OF
CONTENTS
 
 PagePart
      I - Financial InformationItem
      1.
                                                Consolidated
      Financial Statements (unaudited):
                                                3Consolidated
      Balance Sheets at June 30, 2009and
      March 31, 2009
                                                3Consolidated
      Statements of Earnings for the Three
                                                4Months
      Ended June 30, 2009 and 2008Consolidated
      Statements of Cash Flows for the Three
                                                5Months
      Ended June 30, 2009 and 2008Notes
      to Consolidated Financial Statements
                                                6Item
      2.
                                                Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                                9Item
      3.
                                                Quantitative
      and Qualitative Disclosure About Market Risk
                                                12Item
      4.
                                                Controls
      and Procedures
                                                12Part
      II - Other InformationItem
      1.
                                                Legal
      Proceedings
                                                13Item
      2.
                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                13Item
      5.
                                                Other
      Information
                                                14Item
      6.
                                                Exhibits
                                                14Signatures
                                                15
  2
  PART
I - FINANCIAL INFORMATION
 
 ITEM
1.        FINANCIAL
STATEMENTS
 
 UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (Unaudited)
 
 June 30, 2009
                                
                                
                                March 31, 2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                
                                $
                                934,820
                                
                                
                                $
                                284,030Accounts
      receivable:Trade
      less allowance for doubtful accounts of $87,851 and$95,927
      at June 30, 2009 and March 31, 2009
                                
                                
                                285,782
                                
                                
                                
                                55,779Other
      receivables
                                
                                
                                139,781
                                
                                
                                
                                97,780Receivable
      from Hong Kong Joint Venture
                                
                                
                                163,773
                                
                                
                                
                                312,257589,336
                                
                                
                                
                                465,816Amount
      due from factor
                                
                                
                                4,114,963
                                
                                
                                
                                4,610,401Inventories,
      net of allowance for obsolete inventory of $100,000 and$204,309
      at June 30, 2009 and March 31, 2009, respectively
                                
                                
                                7,407,697
                                
                                
                                
                                8,997.231Prepaid
      expenses
                                
                                
                                252,059
                                
                                
                                
                                255,745Assets
      held for sale
                                
                                
                                69,988
                                
                                
                                
                                202,565TOTAL
      CURRENT ASSETS
                                
                                
                                13,368,863
                                
                                
                                
                                14,815,788DEFERRED
      TAX ASSET
                                
                                
                                2,188,256
                                
                                
                                
                                2,141,702INVESTMENT
      IN HONG KONG JOINT VENTURE
                                
                                
                                11,271,479
                                
                                
                                
                                10,550,373PROPERTY
      AND EQUIPMENT – NET
                                
                                
                                240,148
                                
                                
                                
                                251,366OTHER
      ASSETS
                                
                                
                                20,136
                                
                                
                                
                                18,449TOTAL
      ASSETS
                                
                                $
                                27,088,882
                                
                                
                                $
                                27,777,678LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                
                                $
                                463,294
                                
                                
                                $
                                794,365Hong
      Kong Joint Venture accounts payable
                                
                                
                                1,437,440
                                
                                
                                
                                1,967,073Accrued
      liabilities:Litigation
      reserve
                                
                                
                                401,592
                                
                                
                                
                                401,592Payroll
      and employee benefits
                                
                                
                                101,777
                                
                                
                                
                                148,071Commissions
      and other
                                
                                
                                32,756
                                
                                
                                
                                202,789Liabilities
      held for sale
                                
                                
                                69,988
                                
                                
                                
                                202,565TOTAL
      CURRENT LIABILITIES
                                
                                
                                2,506,847
                                
                                
                                
                                3,716,455Long-term
      liability  – other
                                
                                
                                96,034
                                
                                
                                
                                95,324COMMITMENTS
      AND CONTINGENCIES
                                
                                
                                -
                                
                                
                                
                                -SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value per share; authorized 20,000,000
    shares;issued
      and outstanding 2,387,887 shares at June 30, 2009 and2,408,220
      shares at March 31, 2009
                                
                                
                                23,879
                                
                                
                                
                                24,083Additional
      paid-in capital
                                
                                
                                13,096,862
                                
                                
                                
                                13,186,436Retained
      earnings
                                
                                
                                11,365,260
                                
                                
                                
                                10,755,380TOTAL
      SHAREHOLDERS’ EQUITY
                                
                                
                                24,486,001
                                
                                
                                
                                23,965,899TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                                
                                $
                                27,088,882
                                
                                
                                $
                                27,777,678
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  3
  UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF EARNINGS
 (Unaudited)
 
 Three Months Ended June 30,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  5,914,905
                  
                  
                  $
                  6,192,801Cost
      of goods sold – acquired from Joint Venture
                  
                  
                  4,344,489
                  
                  
                  
                  4,615,735Cost
      of goods sold – other
                  
                  
                  400,582
                  
                  
                  
                  -GROSS
      PROFIT
                  
                  
                  1,169,834
                  
                  
                  
                  1,577,066Research
      and development expense
                  
                  
                  119,151
                  
                  
                  
                  86,234Selling,
      general and administrative expense
                  
                  
                  1,203,078
                  
                  
                  
                  1,243,934Operating
      (loss) income
                  
                  
                  (152,395
                  )
                  
                  
                  246,898Other
      income (expense):Interest
      income
                  
                  
                  4,151
                  
                  
                  
                  18,835Interest
      expense
                  
                  
                  (5,642
                  )
                  
                  
                  -(1,491
                  )
                  
                  
                  18,835(LOSS)
      INCOME BEFORE EQUITY IN EARNINGS OF JOINT VENTURE
                  
                  
                  (153,886
                  )
                  
                  
                  265,733Equity
      in earnings of Joint Venture
                  
                  
                  721,107
                  
                  
                  
                  292,772Income
      from continuing operations before income taxes
                  
                  
                  567,221
                  
                  
                  
                  558,505Provision
      for income tax (benefit) expense
                  
                  
                  (44,244
                  )
                  
                  
                  101,366INCOME
      FROM CONTINUING OPERATIONS
                  
                  
                  611,465
                  
                  
                  
                  457,139Discontinued
      operations:Loss
      from operations of the discontinued Canadian subsidiary
                  
                  
                  -
                  
                  
                  
                  (53,659
                  )Income
      tax expense – discontinued operations
                  
                  
                  -
                  
                  
                  
                  -Loss
      from discontinued operations
                  
                  
                  -
                  
                  
                  
                  (53,659
                  )NET
      INCOME
                  
                  $
                  611,465
                  
                  
                  $
                  403,480Income
      (loss) per share:Basic
      – from continuing operations
                  
                  $
                  0.25
                  
                  
                  $
                  0.18Basic
      – from discontinued operations
                  
                  $
                  0.00
                  
                  
                  $
                  (0.02
                  )Basic
      – net income
                  
                  $
                  0.25
                  
                  
                  $
                  0.16Diluted
      – from continuing operations
                  
                  $
                  0.25
                  
                  
                  $
                  0.18Diluted
      – from discontinued operations
                  
                  $
                  0.00
                  
                  
                  $
                  (0.02
                  )Diluted
      – net income
                  
                  $
                  0.25
                  
                  
                  $
                  0.16Shares
      used in computing net income per share:Basic
                  
                  
                  2,417,338
                  
                  
                  
                  2,487,867Diluted
                  
                  
                  2,422,379
                  
                  
                  
                  2,487,867
  The accompanying notes are an integral
part of these consolidated financial statements.
  4
 
 UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Three Months Ended June 30,2009
                    
                    
                    2008OPERATING
      ACTIVITIESNet
      income
                    
                    $
                    611,465
                    
                    
                    $
                    403,480Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Operations
      of discontinued subsidiary
                    
                    
                    -
                    
                    
                    
                    289Depreciation
      and amortization
                    
                    
                    14,147
                    
                    
                    
                    11,312Earnings
      of the Joint Venture
                    
                    
                    (721,107
                    )
                    
                    
                    (292,772
                    )Stock-based
      compensation
                    
                    
                    5,703
                    
                    
                    
                    3,494Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable and amounts due from
    factor
                    
                    
                    371,918
                    
                    
                    
                    (352,171
                    )Decrease
      (increase) in inventories and prepaid expenses
                    
                    
                    1,593,220
                    
                    
                    
                    (1,595,894
                    )(Increase)
      decrease in accounts payable and accrued expenses
                    
                    
                    (1,078,615
                    )
                    
                    
                    1,146,986(Increase)
      decrease in deferred taxes and other assets
                    
                    
                    (48,241
                    )
                    
                    
                    100,001NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                    
                    
                    748,490
                    
                    
                    
                    (575,275
                    )INVESTING
      ACTIVITIES:Purchase
      of property and equipment
                    
                    
                    (2,929
                    )
                    
                    
                    -NET
      CASH USED IN INVESTING ACTIVITIES
                    
                    
                    (2,929
                    )
                    
                    
                    -FINANCING
      ACTIVITIES:Purchase
      and retirement of common stock
                    
                    
                    (95,481
                    )
                    
                    
                    -Other
      long-term obligations
                    
                    
                    710
                    
                    
                    
                    -NET
      CASH USED IN FINANCING ACTIVITIES
                    
                    
                    (94,771
                    )
                    
                    
                    -INCREASE
      (DECREASE) IN CASH
                    
                    
                    650,790
                    
                    
                    
                    (575,275
                    )Cash
      at beginning of period
                    
                    
                    284,030
                    
                    
                    
                    3,863,784CASH
      AT END OF PERIOD
                    
                    $
                    934,820
                    
                    
                    $
                    3,288,509Supplemental
      information:Interest
      paid
                    
                    $
                    5,642
                    
                    
                    $
                    -Income
      taxes
                    
                    $
                    -
                    
                    
                    $
                    -
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
  UNIVERSAL
SECURITY INSTRUMENTS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 Statement
of Management
 
 The
consolidated financial statements include the accounts of Universal Security
Instruments, Inc. (USI or the Company) and its majority owned
subsidiaries.  Significant inter-company accounts and transactions
have been eliminated in consolidation. In the opinion of the Company’s
management, the interim consolidated financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America have been condensed or omitted.  The interim
consolidated financial statements should be read in conjunction with the
Company’s March 31, 2009 audited financial statements filed with the Securities
and Exchange Commission on Form 10-K.  The interim operating results
are not necessarily indicative of the operating results for the full fiscal
year.
 
 Discontinued
Operations
 
 As
discussed in prior periods, on February 11, 2008, the assets of International
Conduits, Ltd. (Icon), a Canadian corporation in which we own a two-thirds
interest, 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.
 
 At June
30, 2009, the remaining asset of Icon held by the receiver consists of cash of
approximately US $70,000, and the remaining liability of Icon held by the
receiver is the final disbursement that is due to Universal Security
Instruments, Inc. as a secured party.
 
 The major
classes of assets and liabilities held in receivership reported as discontinued
operations included in the accompanying consolidated balance sheets are shown
below:
 
 June 30, 2009
                          
                          
                          March 31, 2009AssetCash
                          
                          $
                          69,988
                          
                          
                          $
                          202,565Assets
      held for sale
                          
                          $
                          69,988
                          
                          
                          $
                          202,565LiabilityAccounts
      payable, secured party
                          
                          $
                          69,988
                          
                          
                          $
                          202,565Liabilities
      held for sale
                          
                          $
                          69,988
                          
                          
                          $
                          202,565
 
 Income
Taxes
 
 A
provision for federal and state income tax (benefit) expense on continuing
operations of $(44,244) and $101,366 has been provided for the three month
periods ended June 30, 2009 and 2008, respectively.  For income tax
purposes, this provision is reduced by a $0 and $44,076 benefit derived from
deductions associated with the exercise of employee stock options for the three
month periods ended June 30, 2009 and 2008, respectively.  Under FAS
123R, the tax benefit of this deduction for the three month period ended June
30, 2008 has been treated as a credit to additional paid in capital and does not
require a cash payment for income taxes.
 
 On April
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  In
connection with the adoption of FIN 48, the Company recorded an initial
liability of approximately $86,000 for income taxes, interest and penalties
related to unrecognized tax benefits.  With the adoption of FIN 48,
the Company has chosen to treat interest and penalties related to uncertain tax
liabilities as income tax expense.  As of June 30, 2009, this
liability with imputed interest is $96,034.
  6
  Joint
Venture
 
 The
Company and its co-venturer, a Hong Kong corporation, each owns a 50% interest
in a Hong Kong joint venture, Eyston Company Limited (the “Joint Venture”), that
has manufacturing facilities in the People’s Republic of China, for the
manufacturing of security products.  The following represents
summarized balance sheet and income statement information of the Joint Venture
as of and for the three months ended June 30, 2009 and 2008:
 
 2009
                    
                    
                    2008Net
      sales
                    
                    $
                    5,867,623
                    
                    
                    $
                    7,797,035Gross
      profit
                    
                    
                    1,568,646
                    
                    
                    
                    1,822,409Net
      income
                    
                    
                    938,812
                    
                    
                    
                    587,885Total
      current assets
                    
                    
                    14,640,539
                    
                    
                    
                    16,206,245Total
      assets
                    
                    
                    28,932,600
                    
                    
                    
                    25,758,228Total
      current liabilities
                    
                    
                    6,051,978
                    
                    
                    
                    5,780,722
 
 During
the three months ended June 30, 2009 and 2008, respectively, the Company
purchased $3,064,419 and $5,196,060 of products from the Joint
Venture.  For the quarters ended June 30, 2009 and 2008, the Company
has adjusted its equity in earnings of the Joint Venture to reflect a reduction
of $246,180 and $1,171 for inter-company profit in inventory as required by US
GAAP.
 
 Net
Income per Common Share
 
 Basic
earnings per common share is computed based on the weighted average number of
common shares outstanding during the periods presented.  Diluted
earnings per common share is computed based on the weighted average number of
common shares outstanding plus the effect of stock options and other potentially
dilutive common stock equivalents.  The dilutive effect of stock
options and other potentially dilutive common stock equivalents is determined
using the treasury stock method based on the Company’s average stock
price.
 
 A
reconciliation of the weighted average shares of common stock utilized in the
computation of basic and diluted earnings per share for the three month period
ended June 30, 2009 and 2008 is as follows:
 
 Three Months Ended
                        June 30,2009
                      
                      
                      2008Weighted
      average number of common shares outstanding for basic EPS
                      
                      
                      2,417,338
                      
                      
                      
                      2,487,867Shares
      issued upon the assumed exercise of outstanding stock
    options
                      
                      
                      5,041
                      
                      
                      
                      0Weighted
      average number of common and common equivalent shares outstanding for
      diluted EPS
                      
                      
                      2,422,379
                      
                      
                      
                      2,487,867
 
 Outstanding
options to purchase 71,089 shares of common stock as of June 30, 2009 are not
included in the above calculations as the effect would be
anti-dilutive.
 
 Stock
Based Compensation
 
 Effective
April 1, 2006, we adopted SFAS No. 123R using the modified prospective
method. Under this method, compensation costs for all awards granted after the
date of adoption and the unvested portion of previously granted awards will be
measured at an estimated fair value and included in operating expenses or
capitalized as appropriate over the vesting period during which an employee
provides service in exchange for the award. Accordingly, prior period amounts
presented have not been restated to reflect the adoption of SFAS
No. 123R.
 
 As a
result of adopting SFAS No. 123R, net income for the three months ended June 30,
2009 and 2008 was reduced by $5,703 and $3,494, respectively.  No
portion of employees’ compensation, including stock compensation expense, was
capitalized during the period.
 
 Fair Value
Determination.Under SFAS No. 123R, we have elected to
continue using the Black-Scholes option pricing model to determine fair value of
our awards on date of grant. We will reconsider the use of the Black-Scholes
model if additional information becomes available in the future that indicates another model would be more
appropriate, or if grants issued in future periods have characteristics that
cannot be reasonably estimated under this model.
  7
 
 Stock Option
Activity.  During the three month periods ended June 30, 2009,
no stock options were granted. During the three month
period ended June 30, 2009, no shares of our common stock have been issued as a
result of the exercise of the options granted under the plan.
 
 Stock Compensation
Expense.  Compensation expense related to share-based awards is
recognized on a straight-line basis based on the value of share awards that are
expected to vest during the requisite service period. Prior to the adoption of
SFAS No. 123R, we recognized the effect of forfeitures in our pro forma
disclosures as they occurred. In accordance with the new standard, we have
estimated forfeitures and are only recording expense on shares we expect to
vest. For the three months ended June 2009 and 2008, we recorded $5,703 and
$3,494, respectively, of stock-based compensation cost as general and
administrative expense in our statement of operations. No forfeitures have been
estimated.  No portion of employees’ compensation including stock
compensation expense was capitalized during the period.
 
 As of
June 30, 2009, there was $39,922 of unrecognized compensation cost related to
share-based compensation arrangements that we expect to vest.  The
aggregate intrinsic value of currently exercisable options was $81,310 at June
30, 2009.
 
 Recently
Issued Accounting Pronouncements
 
 Business Combinations: In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141(R), “Business Combinations,”
(“SFAS No. 141(R)”),which replaces SFAS No. 141 and issued
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements,” (“SFAS No. 160”), an amendment of Accounting Research
Bulletin No. 51. These two new standards will change the accounting
for and the reporting for business combination transactions and noncontrolling
(minority) interests in the consolidated financial statements, respectively.
SFAS No. 141(R) will change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the accounting and
reporting for minority interests, which will be re-characterized as
noncontrolling interests and classified as a component of equity. These two
standards will be effective for the Company for financial statements issued for
fiscal years beginning after December 31, 2008.  SFAS 141(R)
applies prospectively to business combinations on or after April 1,
2009.  SFAS 141R will have an impact on our accounting for
business combinations once adopted, but the effect on our consolidated results
of operations and financial position will be dependent upon future acquisitions,
if any.
 
 Fair Value
Measurements:  In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements,
(“SFAS No. 157”).  SFAS No. 157 establishes a formal framework
for measuring fair value under generally accepted accounting
principles.  Although SFAS No. 157 applies (amends) the provisions of
existing FASB and other accounting pronouncements, it does not require any new
fair value measurements nor does it establish valuation
standards.  SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007.  In February 2008,
the FASB issued FASB Staff Position No. 157-1 (“FSP 157-1”) which excludes
SFAS No. 13, Accounting for
Leases, and its related pronouncements that address leasing transactions
from the scope of SFAS No. 157.  Also in February 2008, the FASB
issued FASB Staff Position No. 157-2 (“FSP 157-2”) which delays
the effective date of SFAS No. 157 for all non-financial assets and liabilities,
except those items recognized or disclosed at fair value on a recurring basis
(at least annually).  FSP 157-2 defers the effective date of SFAS No.
157 for non-financial assets and non-financial liabilities for financial
statements issued for fiscal years beginning after November 15,
2008.  The FASB has issued a proposed FASB Staff Position No. 157-c,
(“FSP 157-c)”, that
would provide guidance on measuring liabilities under SFAS No.
157.  SFAS No. 157 does not have a material impact on the Company’s
consolidated financial position or results of operations.
 
 Subsequent
Events:In May 2009, the Financial Accounting Standards Board
issued Statement 165, Subsequent Events,to
incorporate the accounting and disclosure requirements for subsequent events
into U.S. generally accepted accounting principles.  Statement 165
introduces new terminology, defines a date through which management must
evaluate subsequent events, and lists the circumstances under which an entity
must recognize and disclose events or transactions occurring after the
balance-sheet date.  The Company adopted Statement 165 as of June 30,
2009, which was the required effective date.
 
 The
Company evaluated its June 30, 2009 financial statements for subsequent events
through the date the financial statements were available to be issued which was
August 12, 2009.  Other than the published warning of our factor
regarding a possible bankruptcy filing noted below, the Company is not aware of
any other subsequent events that would require recognition or disclosure in the
financial statements.
  8
 
 In July
2009, CIT Group, Inc. (CIT), the Company’s factor and principal lender, warned
in a press release of the possibility that CIT may file for bankruptcy
protection.  At June 30, 2009, the Company had no borrowings under its
factoring agreement with CIT, had cash on deposit with CIT, and had availability
to borrow based on its factoring agreement with CIT.  Since July 13,
2009 the Company has borrowed substantially all of its availability from CIT and
transferred this amount and the cash on deposit with CIT to an account with the
Company’s commercial bank.  The Company will continue to monitor its
borrowing policy with respect to CIT and is reviewing its options to establish
an alternate source of commercial financing, if needed.
 
 ITEM 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 As used throughout this Report, “we,”
“our,” “the Company” “USI” and similar words refers to Universal Security
Instruments, Inc.
 
 Forward-Looking
Statements
 
 This Quarterly Report on Form 10-Q
contains certain forward-looking statements reflecting our current expectations
with respect to our operations, performance, financial condition, and other
developments.  These forward-looking statements may generally be
identified by the use of the words “may”, “will”, “believes”, “should”,
“expects”, “anticipates”, “estimates”, and similar expressions.  These
statements are necessarily estimates reflecting management’s best judgment based
upon current information and involve a number of risks and
uncertainties.  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 could affect our financial performance
and could cause our actual results for future periods to differ materially from
those anticipated or projected.  While it is impossible to identify
all such factors, such factors include, but are not limited to, those risks
identified in our periodic reports filed with the Securities and Exchange
Commission, including our most recent Annual Report on Form 10-K.
 
 overview
 
 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.  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
three months ended June 30, 2009 and 2008 relate to the operational results of
the Company.  A discussion and analysis of the Hong Kong Joint
Venture’s operational results for these periods is presented below under the
heading “Joint Venture.”
 
 Discontinued
Canadian Operations
 
 As
discussed in prior periods, on February 11, 2008, the assets of International
Conduits, Ltd. (Icon), a Canadian corporation in which we own a two-thirds
interest, 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.
 
 At June
30, 2009, the remaining asset of Icon held by the receiver consists of cash of
approximately US $70,000, and the remaining liability of Icon held by the
receiver is the final disbursement that is due to Universal Security
Instruments, Inc. as a secured party.
 
 The major
classes of assets and liabilities held in receivership reported as discontinued
operations included in the accompanying consolidated balance sheets are shown
below:
 
 June 30, 2009
                        
                        
                        March 31, 2009AssetCash
                        
                        $
                        69,988
                        
                        
                        $
                        202,565Assets
      held for sale
                        
                        $
                        69,988
                        
                        
                        $
                        202,565LiabilityAccounts
      payable, secured party
                        
                        $
                        69,988
                        
                        
                        $
                        202,565Liabilities
      held for sale
                        
                        $
                        69,988
                        
                        
                        $
                        202,565
  9
 
 Results
of Operations
 
 Three Months Ended June 30,
2009 and 2008
 
 Sales.  Net sales
for the three months ended June 30, 2009 were $5,914,905 compared to $6,192,801
for the comparable three months in the prior fiscal year, a decrease of $277,896
(4.5%).  The primary reason for the decrease in net sales volumes was
sales of our core product lines to the electrical distribution trade, including
smoke alarms and carbon monoxide alarms, decreased due to a decrease in new home
construction during the quarter.
 
 Gross Profit
Margin.  Gross profit margin is calculated as net sales less
cost of goods sold expressed as a percentage of net sales.  Our gross
profit margin was 19.8% and 25.5% of sales for the quarters ended June 30, 2009
and 2008, respectively.  The decrease in gross profit margin was
primarily due to a lower gross profit margin realized on sales to a national
home improvement retailer.
 
 Expenses.  Research
and development, and selling, general and administrative expenses increased by
$7,939 from the comparable three months in the prior year.  As a
percentage of net sales, these expenses increased to 22.4% for the three month
period ended June 30, 2009, from 21.5% for the 2008 period.  The
increase in costs as a percentage of net sales was primarily due to fixed costs
that did not decrease at the same rate as sales.
 
 Interest Expense and
Income.  Our interest expense on cash deposits, net of interest
income, was $1,491 for the quarter ended June 30, 2009, compared to net interest
income of $18,835 for the quarter ended June 30, 2008.  Net interest
income in the prior year’s quarterly period resulted from net cash deposits with
our factor.
 
 Income
Taxes.  During the quarter ended June 30, 2009, the Company had
a net income tax benefit of $44,244 as a result of a $153,886 loss before equity
in earnings of the Joint Venture.  For the corresponding 2008 period,
the Company had a provision for income taxes of $101,366, based on income before
equity in earnings of the Joint Venture of $265,733.
 
 Net Income.  We
reported net income of $611,465 for the quarter ended June 30, 2009, compared to
net income of $403,480 for the corresponding quarter of the prior fiscal year, a
$207,985 (51.5%) increase.  The reason for the increase in net income
is an increase of $428,335 in the Company’s equity in the earnings of the Joint
Venture from the same period of the prior year, partially offset by the
Company’s $153,896 operating loss due to a decrease in new home construction
during the quarter.  Included in our equity in the earnings of the
Joint Venture for the current period is $246,180 recognized by the Company on
inter-company sales of inventory from prior periods which, in accordance with
GAAP, may only be recognized by us as income upon sales by us to customers, and
an adjustment of $117,050 to reflect gains on foreign currency
held.
 
 Financial
Condition and Liquidity
 
 The Company has a Factoring Agreement
with CIT Group, Inc. (CIT) which supplies both short-term borrowings and letters
of credit to finance foreign inventory purchases.  The maximum amount
available under the Factoring Agreement is currently $7,500,000. Based on
specified percentages of our accounts receivable and inventory and letter of
credit commitments, we had $3,925,000 available under the Factoring Agreement at
June 30, 2009.  There were no amounts borrowed under this agreement as
of June 30, 2009.  The interest rate under the Factoring Agreement on
the uncollected factored accounts receivable and any additional borrowings is
equal to the prime rate of interest charged by our lender.  At June
30, 2009, the prime rate was 3.25%.  Borrowings are collateralized by
all of our accounts receivable and inventory.
 
 Our factored accounts receivable as of
the end of our last fiscal year (net of allowances for doubtful accounts) were
$4,610,401, and were $4,114,963 as of June 30, 2009.  Our prepaid
expenses as of the end of our last fiscal year were $255,745, and were $252,059
as of June 30, 2009.
 
 Operating activities provided cash of
$748,490 for the three months ended June 30, 2009.  This was primarily
due to a decrease in accounts receivable of $371,918, and decreases in
inventories and prepaid expenses of $1,593,220, offset by a decrease in accounts
payable and accrued expenses of $1,077,028 and earnings of the Joint Venture of
$721,107.  For the same period last year, operating activities used
cash of $575,275, primarily as a result of unremitted earnings of the Hong Kong
Joint Venture and increases in inventory and prepaid expenses offset by a
decrease in accounts payable and accrued expenses, which was due to a build in
the Company’s inventory balances during that period to meet forecasted sales
orders.
 
 Investing activities used cash of
$2,929 during the three months ended June 30, 2009.
  10
 
 Financing activities used cash of
$94,771 during the three months ended June 30, 2009, primarily from the
acquisition and retirement of Company stock in accordance with our stock
repurchase plan.
 
 We believe that funds available under
the Factoring Agreement, distributions from the Joint Venture, and our line of
credit facilities provide us with sufficient resources to meet our requirements
for liquidity and working capital.  In July 2009, CIT warned in a
press release of the possibility that it may file for bankruptcy
protection.  At June 30, 2009, we had no borrowings under our
factoring agreement with CIT, had cash on deposit with CIT, and had availability
to borrow based on our Factoring Agreement.  Since July 13, 2009 we
borrowed substantially all of our availability from CIT and transferred this
amount and the cash on deposit with CIT to a certificate of deposit account with
our commercial bank.  We will continue to monitor our borrowing policy
with respect to CIT, and we are reviewing our options to establish an alternate
source of commercial financing, if needed.
 
 Joint
Venture
 
 Net Sales.  Net
sales of the Joint Venture for the three months ended June 30, 2009 were
$5,867,623, compared to $7,797,035, for the comparable period in the prior
fiscal year.  The decrease in net sales for the three month period was
due to decreased sales of smoke alarm products to the Company.
 
 Net Income.  Net
income for the three months ended June 30, 2009 was $938,812, compared to
$587,885 in the comparable period last year.  The 59.7% increase in
net income for the three month period was due primarily to the recognition of
currency gain and to reduced selling, general and administrative expenses over
the prior year’s quarter.
 
 Gross
Margins.  Gross margins of the Joint Venture for the three
month period ended June 30, 2009 increased to 26.7% from 23.4% for the 2008
period.  Since gross margins depend on sales volume of various
products, changes in the sales mix of items sold to a large U.S. national
retailer caused these changes in gross margins.
 
 Expenses.  Selling,
general and administrative expenses were $878,201 for the three month period
ended June 30, 2009, compared to $1,218,586 in the prior year’s
period.  As a percentage of sales, expenses were 15.0% for the three
month period ended June 30, 2009, compared to 15.6% for the three month period
ended June 30, 2008.  The decrease in selling, general and
administrative expense in dollars and as a percent of sales was primarily due to
decreases in selling expenses due to lower sales volumes.
 
 Interest Income and
Expense.  Interest expense, net of interest income, was $2,093
for the three month period ended June 30, 2009, compared to net interest expense
of $1,494 for the prior year’s period.  Net interest expense resulted
from an increase in the Joint Venture’s borrowings.
 
 Liquidity.  Cash
needs of the Joint Venture are currently met by funds generated from
operations.  During the three months ended June 30, 2009, working
capital decreased by $562,638 from $9,151,199 on March 31, 2009 to $8,588,561 on
June 30, 2009.
 
 Critical
Accounting Policies
 
 Management’s discussion and analysis of
our consolidated financial statements and results of operations are based on our
Consolidated Financial Statements 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, 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 the following critical
accounting policies affect management’s more significant judgments and estimates
used in the preparation of its consolidated financial statements.  For
a detailed discussion on the application on these and other accounting policies,
see Note A to the consolidated financial statements included in Item 8 of the
Form 10-K for the year ended March 31, 2009.  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:
  11
 
 Revenue
Recognition.  Our revenue recognition policies are in
compliance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” issued by the Securities and Exchange
Commission.  We recognize sales upon shipment of products net of
applicable provisions for any discounts or allowances.  The shipping
date from our warehouse is the appropriate point of revenue recognition since
upon shipment we have substantially completed our obligations which entitle us
to receive the benefits represented by the revenues, and the shipping date
provides a consistent point within our control to measure
revenue.  Customers may not return, exchange or refuse acceptance of
goods without our approval.  We have established allowances to cover
anticipated doubtful accounts based upon historical experience.
 
 Inventories are valued at the lower of
market or cost.  Cost is determined on the first-in first-out
method.  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.
 
 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 in accordance with Statement
of Financial Accounting Standards (“SFAS”), SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets”,(“SFAS No. 144”). 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.
 
 We are 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.
 
 We generally provide warranties from
one to ten years to the non-commercial end user on all products
sold.  The manufacturers of our products provide us with a one-year
warranty on all products we purchase for resale.  Claims for warranty
replacement of products beyond the one-year warranty period covered by the
manufacturers are immaterial and we do not record estimated warranty expense or
a contingent liability for warranty claims.
 
 ITEM 3.
              QUANTITATIVE AND
      QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
 
 No material changes have occurred in
our quantitative and qualitative market risk disclosures as presented in our
Annual Report Form 10-K for the year ended March 31, 2009.
 
 
 ITEM 4.
              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, 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 quarterly report, and have concluded that the system is
effective.  There have been no changes in our internal control over
financial reporting during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
  12
  PART
II - OTHER INFORMATION
 
 ITEM 1.
              LEGAL
      PROCEEDINGS
 
 As
reported in the Company’s Annual Report of Form 10-K for the fiscal year ended
March 31, 2009, 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.  Discovery is now closed in this second
case.  Although the asserted patent is now expired, prior to its
expiration, the Company sought and has now successfully obtained re-examination
of the asserted patent in the United States Patent and Trademark Office (USPTO)
largely based on the references cited and analysis presented by the Company
which correspond to defenses raised in the litigation.  In July, the
USPTO issued a final rejection of all of the claims asserted against the Company
based on the references.  Kidde has not responded to the rejection but
is entitled to take an appeal to the Board of Patent Appeals and
Interferences.  The litigation is stayed pending the conclusion of the
reexamination proceedings. The USPTO action fully supports the Company’s
substantive position and its defenses to Kidde.  The Company and its
counsel believe that regardless of the outcome of the reexamination, the Company
has significant defenses relating to the patent in suit.  In the event
of an unfavorable outcome, the amount of any potential loss to the Company is
not yet determinable.
 
 As further reported in the Company’s
Annual Report of Form 10-K for the fiscal year ended March 31, 2009, on June 25,
2008, Maple Chase Company which was acquired in January 2008 by United
Technologies Corporation (“UTC”) (which also owns Walter Kidde Portable
Equipment, Inc.), 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 involves
the same patent that formed the basis of the suit filed by Maple Chase against
the Company in February 2004 (Case No. 03cv07205).   In that
case, the Company successfully sought and obtained reexamination of the asserted
patent in the USPTO based on the references cited and analysis presented by the
Company.  In April 2005, the Court dismissed the earlier case subject
to the outcome of the reexamination.   After pending for more
than three years and after the expiration of the patent, a Reexamination
Certificate was granted confirming patentability of many of the claims and
cancelling the remaining claims.  The 2008 case asserts infringement
of the claims emerging out of reexamination. On June 10, 2009, the Court granted
the Company’s motion to amend its answer and counterclaims seeking injunctive
and antitrust damages against Kidde, and the Company filed a third-party
complaint against UTC, Kidde’s parent company.   Kidde and UTC
filed a motion to dismiss the antitrust claims which is being opposed by the
Company.  Discovery is now underway.  The Company believes
that it has meritorious and substantial technical defenses to the action and
that it is entitled to a number of legal/equitable defenses due to the long
period of inaction and acquiescence by Kidde/Maple Chase and its
predecessors.  The amount, if any, of potential loss to the Company is
not yet determinable.  The Company intends to vigorously defend the
suit and press its pending counterclaims.
 
 From time
to time, the Company is involved in various lawsuits and legal matters. It is
the opinion of management, based on the advice of legal counsel, that these
matters will not have a material adverse effect on the Company’s financial
statements.
 
 ITEM 2.
              UNREGISTERED SALES OF
      EQUITY SECURITIES AND USE OF
PROCEEDS
 
 The following table sets forth
information with respect to purchases of common stock by the Company or any
affiliated purchasers during the three months ended June 30,
2009:
  13
 
 Period
                    
                    Total
                      Number of
                      Shares
                      Purchased
                    
                    
                    Average
                      Price
                      Paid per
                      Share
                    
                    
                    Total Number of
                      Shares Purchased
                      as Part of
                      Publicly
                      Announced Plans
                      or Programs
                    
                    
                    Maximum Number
                      of Shares that May
                      Yet Be Purchased
                      Under the Plans or
                      ProgramsApril
      2009
                    
                    
                    12,733
                    
                    
                    $
                    4.19
                    
                    
                    
                    12,733
                    
                    
                    
                    8,420May
      2009
                    
                    
                    8,400
                    
                    
                    $
                    5.01
                    
                    
                    
                    8,400
                    
                    
                    
                    20June
      2009
                    
                    
                    -
                    
                    
                    $
                    0.00
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    21,133
                    
                    
                    $
                    4.52
                    
                    
                    
                    21,133
                    
                    
                    
                    20
 
 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.  Unless extended by the Company’s Board of
Directors, the program will terminate when 100,000 shares of common stock have
been repurchased by the Company pursuant to the program (unless increased or
decreased by the Board of Directors).
 
 ITEM 5.
              OTHER
      INFORMATION
 
 On August
11, 2009, the Company’s Board of Directors amended Article I, Section 1 of its
Bylaws to provide that the Company’s annual meeting of the stockholders shall be
held on such date as may be selected by the Board of Directors.  Prior
to this amendment, the Bylaws provided that the Company’s annual meeting of the
stockholders shall be held on such date in the month of September as may be
selected by the Board of Directors.
 
 ITEM 6.
              EXHIBITS
 
 Exhibit
No.
 3.1
              Articles
      of Incorporation (incorporated by reference to the Company’s Quarterly
      Report on Form 10-Q for the period ended December 31, 1988, File No.
      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*10.1
              Non-Qualified
      Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the period ended
      September 30, 2003, File No. 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, 2008 (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, 2008, file No. 1-31747)10.5
              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)10.6
              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)10.7
              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 September 30,
      2007, File No. 1-31747)31.1
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer*31.2
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer*32.1
              Section
      1350 Certifications*99.1
              Press
      Release dated August 12, 2009*
 *Filed
herewith
  14
  SIGNATURES
 
 Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
 
 UNIVERSAL
      SECURITY INSTRUMENTS, INC.(Registrant)Date:
      August 12, 2009
              By:
              /s/ Harvey B. GrossblattHarvey
      B. GrossblattPresident,
      Chief Executive OfficerBy:
              /s/ James B. HuffJames
      B. HuffVice
      President, Chief Financial Officer
  15