November
12, 2008
Via
EDGAR
and FEDEX
Lynn
Dicker
Reviewing
Accountant
Division
of Corporate Finance
Securities
and Exchange Commission
450
Fifth
Street, NW
Washington,
DC 20549
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RE:
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Universal
Security Instruments, Inc. (the “Company”)
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Follow-up
comment letter to Form 10-K filed July 8, 2008
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File
No. 001-31747
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Dear
Ms.
Dicker,
I
am
writing to you in response to your letter of October 16, 2008, regarding the
referenced file number. Below are the Company’s responses to the follow-up
comments raised.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures, page 21
1. As
further clarification to our response to prior comment number three we advise
the Commission as follows. Our assessment of internal controls over financial
reporting as it relates to the Canadian subsidiary involved two components.
The
first component of the assessment was related directly to the operations located
in Canada and the systems and procedures associated with accounting systems
and
financial statement preparation at that location. The second component of the
assessment related to the systems and procedures used by the Company (Universal
Security Instruments, Inc.) to prepare the consolidated financial statements
filed with the Commission.
As
previously indicated in our September 25 response (paragraph 4), we were unable
to initiate and complete the component of the assessment related to the systems
and procedures in Canada because prior to the initiation of that assessment
the
Canadian subsidiary was placed by the Canadian Courts into receivership for
the
benefit of creditors. The Court appointed receiver had physical possession
of
all assets, and books and records of the Canadian subsidiary and the Company
(Universal Security Instruments, Inc.) had no rights typically associated with
ownership. All employees of the Canadian subsidiary were terminated and two
warehouse personnel and one accounting department employee were retained as
temporary personnel hired by the receiver to assist in the liquidation of the
assets. As such, our assessment was complete to the extent of information
available under the Canadian receivership proceedings.
The
second component of the assessment related to the systems and procedures used
by
the Company to prepare the consolidated financial statements was completed
and
management concluded and clearly indicated in Form 10-K that “….management has
become aware of certain material weaknesses in the internal controls over
financial reporting of Icon’s discontinued operations…”.
Lynn
Dicker
Division
of Corporation Finance
Securities
and Exchange Commission
November
12, 2008
Page
2
In
view
of these facts and the unique and temporary nature of the situation, we did
not
believe that this is what was contemplated by Item II.B.2 of SEC Release No.
33-8810, and that it was appropriate to disclose our Canadian operations as
an
exception to our assessment of our internal controls over financial
reporting.
Please
be
assured that while our disclosures were based on our good faith understanding
of
the Commission’s requirements, we will use the Staff’s comments to guide any
future disclosures regarding similar issues.
2. Management
received a copy of the regular filings prepared by the receiver and submitted
to
the Court. In addition to a level of confidence that the court appointed
receiver would report accurate information for the benefit of creditors and
all
other stakeholders in the Canadian receivership proceedings, management was
able
to perform alternative analysis on this data in order to develop a basis upon
which to rely upon the financial information received. For example, management
had financial information from the Canadian subsidiary prior to the date it
was
placed into receivership. This “beginning data” when adjusted for the summary
transactional activity related to disposition of assets reported by the receiver
should have and did correspond to the ending balances of asset classes reported
by the receiver to the Court. Further, the amounts reported as assets had been
written down to appraised net realizable value and that value was guaranteed
by
the auctioneer/appraiser. The pre-receivership liabilities of the Canadian
subsidiary did not change during the course of the receivership and those
amounts when adjusted for post-receivership activities reported by the receiver
should have and did correspond to the ending balances of liability classes
reported by the receiver to the Court. The necessity to include information
from
the receiver is contemplated by our disclosure in Item 9A when we state in
paragraph four thereof that “Management anticipates that these material
weaknesses will be corrected and appropriate adjustments, if any, will be made
as the liquidation of Icon’s assets continues.”
3. Prior
to
the Canadian subsidiary being placed into receivership, the Company received
operating financial data monthly, and as needed on an ad hoc basis from the
controller and president of Icon. The accounting systems, procedures, and
controls were appropriate to the subsidiary’s size and level of activity. After
the subsidiary was placed into receivership, the Company’s oversight was limited
to review of the communications and reporting of the Court appointed receiver.
The Court appointed receiver was under no obligation to provide information
to
the Company. None of the pre-receivership management remained after the date
of
the receivership.
Lynn
Dicker
Division
of Corporation Finance
Securities
and Exchange Commission
November
12, 2008
Page
3
4. Management
noted material weaknesses associated with reporting the
financial
operations of the Canadian subsidiary as previously discussed. Management also
noted that there may be material weaknesses associated with the identification
and measurement of uncertain tax positions and the preparation of its
consolidated income tax provision.
As
of
September 22, 2008, the receivership and the affairs of the
Canadian
subsidiary
have been completed and the subsidiary has been closed. The cash resulting
from
the complete liquidation of the Canadian subsidiary has been distributed or
is
being held by the receiver awaiting final distribution in accordance with the
Court order relating thereto. Accordingly, there can be no remediation of any
material weakness directly associated with the Canadian subsidiary. With the
dissolution of the Canadian subsidiary, the internal control issues that arose
from the complex accounting and tax issues associated with the discontinued
operations of a foreign subsidiary will not be relevant in future periods,
and
the noted material weakness issues are, in effect, mitigated.
Regarding
the material weakness related to income tax issues, this item is based on an
assessment of procedures in place to review our tax provision and the
measurement of uncertain tax positions. Prior to filing our financial
statements, our tax provision and measurement of uncertain tax positions is
reviewed by accountants other than our independent registered public
accountants. At March 31, 2008, it became apparent that this additional level
of
review did not function as intended and certain errors in our income tax
provision were not corrected prior to submission of our tax provision to our
registered public accountants for audit. Management believes that the outside
review of our tax provision now serves its purpose and that this weakness was
addressed prior to completion of our June 30, 2008 financial statements.
5. The
uncertain tax position noted relates to the initial capitalization of the
Canadian subsidiary. The initial capitalization of the Canadian subsidiary
consisted of debt and equity. Upon the dissolution of the Canadian subsidiary,
the Company will recognize a U.S. tax loss related to the uncollectible debt
from the Canadian subsidiary. The portion of this loss deductible for U.S.
income tax purposes is subject to interpretation of Internal Revenue Service
code sections regarding the composition of debt and equity of subsidiaries
and
capital versus ordinary income issues. As such this is a U.S. tax issue with
respect to our Canadian subsidiary and not a Canadian tax issue. However, for
financial reporting purposes the income tax impact of this item is included
in
the “Income tax benefit - discontinued operations” line of the Statement of
Operations. If the facts and circumstances of this tax item are decided in
the
Company’s favor in the future, the financial statement impact will be a
reduction in income tax expense of a future period.
Lynn
Dicker
Division
of Corporation Finance
Securities
and Exchange Commission
November
12, 2008
Page
4
6. As
discussed in paragraph 4 above, management’s disclosure of material weaknesses
over income tax items is based upon our internal review procedures and controls
over financial reporting up to the preparation and presentation of preliminary
financial statements for review by outside professional accountants other than
our independent registered public accountants. An item is considered a weakness
in internal controls over financial reporting if that item would represent
an
error that would not be prevented by our internal systems and procedures.
However, in the case of the noted income tax issues and processes, the material
weakness was related to the complexities of reporting the impact of the
operations of our Canadian subsidiary. Management does not believe that
weaknesses in its domestic tax provision rise to the level of a material
weakness. Accordingly, and as previously discussed, management believes it
was
appropriate to differentiate its opinion as to the effectiveness of internal
controls over financial reporting between its discontinued Canadian operations
and its continuing operations. We further believe the further review by
independent professional accountants other than our independent registered
public accountants would prevent a material error from ultimately being included
in future financial statements filed with the Commission. Accordingly, and
based
on our prior discussion regarding the exclusion of the Canadian subsidiaries
operations, we concluded that our disclosure controls and procedures beyond
those that are internal to our organization (external independent professional
reviews) are sufficient to prevent a material misstatement to our published
financial information.
Consolidated
Statements of Operations, page F-2
7. We
note
your comment and will revise future filings to separately present the cost
of
goods sold from the Hong Kong Joint Venture on the face of the statement of
operations in future filings.
The
Joint Venture Financial Statements
8. We
note
your comment and will revise our filing accordingly.
General
9.
In
connection with our response to your comments management acknowledges its
understanding that all other statements made to comply with your comments in
future filings include providing such changes in this amendment, as
applicable.
Sincerely,
UNIVERSAL
SECURITY INSTRUMENTS, INC.
James
B.
Huff
Chief
Financial Officer
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cc:
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Mr.
Harvey B. Grossbatt, CEO
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Craig
Miller, CPA
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Grant
Thornton
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