0001372000 2011-12-31 0001372000 2010-12-31 0001372000 2011-01-01 2011-12-31 0001372000 2010-01-01 2010-12-31 0001372000 us-gaap:CommonStockMember 2009-12-31 0001372000 us-gaap:AdditionalPaidInCapitalMember 2009-12-31 0001372000 us-gaap:RetainedEarningsMember 2009-12-31 0001372000 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2009-12-31 0001372000 2009-12-31 0001372000 us-gaap:AdditionalPaidInCapitalMember 2010-01-01 2010-12-31 0001372000 us-gaap:CommonStockMember 2010-01-01 2010-12-31 0001372000 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2010-01-01 2010-12-31 0001372000 us-gaap:ComprehensiveIncomeMember 2010-01-01 2010-12-31 0001372000 us-gaap:RetainedEarningsMember 2010-01-01 2010-12-31 0001372000 us-gaap:CommonStockMember 2010-12-31 0001372000 us-gaap:AdditionalPaidInCapitalMember 2010-12-31 0001372000 us-gaap:RetainedEarningsMember 2010-12-31 0001372000 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2010-12-31 0001372000 us-gaap:AdditionalPaidInCapitalMember 2011-01-01 2011-12-31 0001372000 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2011-01-01 2011-12-31 0001372000 us-gaap:ComprehensiveIncomeMember 2011-01-01 2011-12-31 0001372000 us-gaap:RetainedEarningsMember 2011-01-01 2011-12-31 0001372000 us-gaap:CommonStockMember 2011-12-31 0001372000 us-gaap:AdditionalPaidInCapitalMember 2011-12-31 0001372000 us-gaap:RetainedEarningsMember 2011-12-31 0001372000 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2011-12-31 0001372000 2012-03-30 0001372000 2011-06-30 iso4217:USD iso4217:USD xbrli:shares xbrli:shares

283000

215000

12972000

10190000

384000

657000

442000

26000

24174000

32894000

830000

1156000

972000

1564000

721000

1426000

1237000

40990000

46126000

1871000 1834000

1044000

991000

511000

468000

389000

408000

171000 200000

3986000

3901000

3128000

2561000

858000

1340000

1387000

527000

100000

127000

213000

18000

2227000

145000

44075000

47611000

12654000

16324000

6845000

7559000

26000

1213000

456000

241000 734000

119000

26000

14000

53000

21086000

25178000

241000

229000

25000

229000

266000

21315000

25444000

50000

0.01

50000000

5020000

16339000

16076000

6419000

6205000

-48000

-164000

22760000

22167000

44075000

47611000

89274000

107257000

71852000

87356000

17422000

19901000

16291000

14769000

1131000

5131000

568000

681000

-7000

2000

-575000

-679000

556000

4452000

342000

1562000

214000

2890000

0.04

0.58

5020000

5002000

0.04

0.58

5040000

5017000

5000000

50000

15952000

3315000

-285000

19031000

85000

20000

39000

121000

2890000

3011000

5020000

50000

16076000

6205000

-164000

263000

116000

214000

330000

5020000

50000

16339000

6419000

-48000

841000

809000

6000

228000

461000

770000

338000

107000

-7000

2000

263000

85000

2148000

-1022000

415000

12000

-8892000

2686000

-747000

-673000

139000

173000

-1032000

-4412000

932000

192000

-734000 -965000

-39000

-75000

6700000

-2895000

2268000

59000

135000

2000

-2325000

-133000

3670000

-1149000

39000

637000

4000

-4307000

1184000

68000

-1844000

2059000

1003000

2104000

568000

437000

UNIVERSAL POWER GROUP INC. 10-K --12-31 5020000 9207403 false 0001372000 Yes No Smaller Reporting Company No 2011 FY 2011-12-31 NOTE A. ORGANIZATION Organization           Universal Power Group, Inc. (“UPG” or the “Company”), a Texas corporation, is a distributor and supplier of batteries and related power accessories to a diverse range of industries, and a provider of third-party fulfillment and logistics services and value-added solutions. The Company’s primary logistics center is located in Carrollton, Texas and regional logistic centers are located in Las Vegas, Nevada and Atlanta, Georgia. The Company’s customers are primarily located in the United States. A small portion of the Company’s sales is to customers located in the United Kingdom, Australia, Ireland, Japan, China, Canada and Latin America.           Until December 20, 2006, the Company was a wholly owned consolidated subsidiary of Zunicom, Inc. (“Zunicom”), a Texas corporation, whose stock is quoted on the OTC Bulletin Board under the symbol “ZNCM.OB.” On December 20, 2006, the U.S. Securities and Exchange Commission declared effective a registration statement filed by the Company registering the sale of 3,000,000 shares of its common stock, including 1,000,000 shares owned by Zunicom (the “IPO”). As a result of the IPO, Zunicom’s interest in the Company was reduced to 40%. Zunicom no longer owns a controlling interest in UPG; however, as the largest shareholder, Zunicom does have significant influence over UPG.           On January 8, 2009, the Company formed a limited liability company under the name Monarch Outdoor Adventures LLC d/b/a Monarch Hunting (“Monarch”), through which it acquired all of the tangible and intangible assets of a business for approximately $892,000. Monarch is a manufacturer and retailer of high-quality hunting products including battery and solar powered deer feeders, hunting blinds, stands and accessories. Monarch is located in Arlington, Texas and has customers throughout the United States. Monarch’s revenue and assets are not material to the consolidated financial statements.           On April 20, 2011, the Company completed an acquisition of substantially all of the business assets of Progressive Technologies, Inc. (“PTI”), a North Carolina company that designs and builds custom battery packs. The acquisition consideration totaled approximately $3,300,000 million (see Note L). PTI’s expertise in lithium-ion battery packs, among other chemistries, further enhances the Company’s product and service offerings. In addition, PTI’s products will strengthen the Company’s position in the medical field and other market segments. On September 1, 2011, PTI changed its legal name to ProTechnologies, Inc.

NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation           The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents           The Company considers all unrestricted highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Accounts Receivable           Trade accounts receivable is stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms and financial condition. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts, are written off through a charge to the valuation allowance and a credit to accounts receivable. Inventories           Inventories consist of finished goods, primarily of batteries and security products related to the Company’s third-party fulfillment services and materials used in the assembly of batteries into “packs”. All items are stated at the lower of cost, determined using the average cost method by specific item, or market. The Company performs periodic evaluations, based upon business trends, to specifically identify obsolete, slow moving and non-salable inventory.           The Company is a supplier for ADT Security Services. In order to meet its obligations to ADT Security Services, the Company maintains certain required inventory levels at all times. Inventory held related to the Company’s relationship with ADT Security Services, primarily components for security systems, totaled approximately $4.2 million and $8.6 million at December 31, 2011 and 2010, respectively. The third-party logistics agreement with Broadview Security, Inc. that was assumed by ADT Security Services in the merger of these entities had an initial term that expired in November 2010, with automatic one year renewal terms unless one of the parties gives the other written notice of its intent to terminate the agreement. To date, neither party has provided notice of intent to terminate the agreement. Upon expiration of its third-party logistics agreement with the Company, ADT Security Services is obligated to purchase from the Company all remaining inventory held by the Company or in transit from suppliers purchased by the Company to fulfill its obligations to ADT Security Services. Property and Equipment           Property and equipment are carried at cost less applicable depreciation and amortization. Depreciation and amortization of property and equipment is provided for using the straight-line method over the estimated useful lives of the assets ranging from three to ten years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset. Equipment leased under capital leases is amortized over the service life of the related asset or term of the lease, whichever is shorter. Goodwill           Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired business. Goodwill is tested annually for impairment and when events or circumstances change to suggest that the carrying amount may not be recoverable. For purposes of impairment testing, goodwill is allocated to reporting units, which are either at the operating segment level or one reporting level below the operating segment. Goodwill is recorded in the financial statements at cost less accumulated impairment losses. Intangible Assets           Intangible assets consist primarily of non-compete agreements and customer lists. These assets are carried at historical cost and are amortized over the estimated useful lives of the assets, which range from one to six years. Income Taxes           The Company utilizes the asset and liability approach to accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Impairment of Long-Lived Assets           Long-lived assets, which include property and equipment and intangible assets, are reviewed when events or changes in circumstances indicate that their carrying value may not be recoverable. If an impairment indicator exists, the Company compares the future undiscounted cash flows of such assets to their carrying value. If the carrying value exceeds the future undiscounted cash flows, the assets are written down to their fair value using discounted cash flows. There were no indicators of impairment during the years ended December 31, 2011 and 2010. Deferred Rent           The Company’s operating lease for its primary office and various warehouse space contains a free rent period and contains predetermined fixed increases of the minimum rental rate during the initial lease term. The Company recognizes rental expense on a straight-line basis over the minimum lease term and records the difference between the amounts charged to expense and the rent paid as deferred rent. Comprehensive Income           Comprehensive income reported on the consolidated statements of changes in shareholders’ equity includes the amortization and reclassification of the loss on an interest rate swap that was terminated in 2009. Revenue Recognition           The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable and collectability is reasonably assured.           The Company is a distributor and purchases both finished goods and components from domestic and international suppliers. The Company adds value to products and components by packaging them in customer specified “kits” or tailor made units that are convenient for the customer to order and ship. Additionally, the Company has several customers that require specific battery pack assemblies. The Company obtains batteries and components and reconfigures finished goods based upon customer specifications. The Company refers to this process as battery pack assemblies. The Company recognizes sales of finished goods at the time the customer takes title to the product.           The Company sells products to several customers in bulk quantities. The Company obtains the order from the customer and arranges for the delivery of the product directly from the vendor to the customer to reduce freight costs and wear and tear on the product from excessive handling. The Company refers to these transactions as “drop shipments” because the product is shipped directly from its vendor to its customer. The Company also has a third-party logistics agreement with ADT Security Services. The Company purchases, handles, assembles and delivers security and installation components to ADT Security Services and to its authorized dealers. Revenues from drop shipment transactions and pursuant to the ADT Security Services agreement are recognized on a gross basis at the time the customer takes title to the product, based on an analysis of the criteria defined for gross revenue reporting. Specifically, (i) the Company is the primary obligor; (ii) the Company has general and physical loss inventory risk; (iii) the Company has credit risk; (iv) in most cases, the Company has discretion in supplier selection and product specifications; and (v) the Company has reasonable latitude within economic constraints to negotiate prices and terms with its customers. Post Shipment Obligations           The Company offers its customers a limited warranty for replacement of finished goods that do not function properly. Generally, the limited warranty period ranges from 90 days to three years. The most common types of warranty claims are batteries that leak or batteries that do not provide the voltage they are intended to supply. The Company’s written warranty is limited to the replacement of the product purchased and does not cover the product the battery is intended to power. The Company’s replacement rate is insignificant, and is therefore recorded when the warranty expense is incurred. If the Company determines that a shipment of product had a manufacturing defect, the Company has recourse with the manufacturer to recover the replacement costs incurred. The costs of isolated or individual instances of defects are borne by the Company. At December 31, 2011 and 2010, the Company has a warranty reserve of approximately $10,000. Advertising costs           Advertising costs are charged to operations when incurred. Advertising expense totaled approximately $750,000 and $480,000 for the years ended December 31, 2011 and 2010, respectively. Shipping and Handling Costs           Shipping and handling costs are charged to cost of sales in the accompanying statements of operations. Earnings Per Share           Basic earnings per common share is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding during each year.           Diluted earnings per common share are computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding for the year. The Company’s common stock equivalents include all dilutive common stock issuable upon exercise of outstanding stock options and warrants.           For the year ended December 31, 2011, 551,250 stock options are excluded from the calculation of diluted earnings per share because they are anti-dilutive. For the year ended December 31, 2010, 1,381,842 stock options and 300,000 warrants are excluded from the calculation of diluted earnings per share because they are anti-dilutive. Fair Value of Financial Instruments           The Company estimates the fair value of its assets and liabilities, which qualify as financial instruments, and includes this additional information in the notes to the financial statements when the fair value is different from carrying value of these financial instruments. The estimated fair value of cash equivalents, accounts receivable, the line-of-credit and accounts payable approximate their carrying amounts due to the relatively short maturity of these instruments. The estimated fair value of capital lease and note obligations approximates the carrying amounts since they bear market rates of interest. None of these instruments are held for trading purposes. Stock-Based Compensation           Stock-based compensation expense recognized in the statements of operations during the years ended December 31, 2011 and 2010 includes compensation expense recorded over the vesting period for options and restricted stock awards. Stock options are valued based on the grant date fair value. On December 22, 2011, the Company repriced certain outstanding options held by its directors, officers and employees having an exercise price substantially higher than the current per share trading price. The exercise price of these options was reduced to the current market value of common stock at the date of the modification. In consideration, the holders agreed that only 50% of their options would be exercisable immediately and the balance would be first exercisable in December 2012. These options were all fully vested at the repricing date and therefore the incremental compensation was recorded on the date of modification. The incremental compensation measured as the excess of the fair value of the modified award over the fair value of the original award immediately before the terms were modified, which totaled approximately $208,000, is recorded in operating expenses in the accompanying consolidated statements of operations. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Non-Employee Stock Options           Options issued to non-employees are measured at fair value at the grant date and recorded to expense over the period earned. Taxes Collected from Customers and Remitted to Governmental Authorities           Taxes collected from customers and remitted to governmental authorities are presented in the accompanying consolidated financial statements of operations on a net basis. Use of Estimates and Assumptions           The Company uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could vary from the estimates that were used. Segment and Geographic Information           The accounting standard for segment reporting requires enterprises to report financial information and descriptive information about reportable operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company evaluated the accounting standard for segment reporting and determined based on materiality thresholds that the Company operates in only one segment. Reclassifications           Certain prior period amounts have been reclassified to conform to current period presentation.

NOTE C. INVENTORIES           Inventories consist of the following: <table border="0" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="66%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="12%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="12%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> December 31, </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2010 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> (dollars in thousands) </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Battery and related inventory </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 15, 722 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 19,557 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Security related inventory </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 5,546 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 9,757 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Electronic components inventory </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3,565 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 4,556 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Other </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 171 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 180 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Inventory obsolescence reserve </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (830 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (1,156 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 24,174 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 32,894 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

NOTE D. LINE OF CREDIT           On December 16, 2009, the Company entered into a credit agreement with Wells Fargo under which the Company may borrow up to $30.0 million or up to $40.0 million if it can satisfy certain defined criteria, on a revolving basis (the “Credit Agreement”). All borrowings under the Credit Agreement are secured by a first lien on all of the Company’s assets. The Company’s ability to draw on the credit line is limited to an amount equal to 80% of “eligible accounts receivable” and 80% of “eligible inventory” as defined in the Credit Agreement. In connection with each draw down, the Company has an option to choose either a “Base Rate” or “Eurodollar” loan. Interest on Base Rate Loans is payable quarterly and interest on Eurodollar Loans is generally payable monthly or quarterly as selected by the Company. The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors, as described in the Credit Agreement. At December 31, 2011, all outstanding borrowings under the credit facility were accruing interest at the rate of 2.56% per annum. The Credit Agreement matures on July 30, 2013.           The Credit Agreement contains customary negative covenants restricting the Company’s ability to take certain actions without Wells Fargo’s consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses. If there is an “event of default”, including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the Credit Agreement will become immediately due and payable. In addition, the Company must maintain certain financial covenants on a quarterly basis.           At December 31, 2011, approximately $12.7 million was outstanding under the credit facility out of a maximum availability of approximately $17.8 million based on the borrowing formula. Interest Rate Swap           In connection with the Credit Agreement, the Company terminated an Interest Swap Agreement (“ISA”) it had with its previous lender and, consequently, discontinued hedge accounting as of December 16, 2009. The Company continues to incur interest expense commensurate with its original, hedged risk, and there is currently no indication that interest payments on the hedged transaction would not continue. Therefore, the realized losses related to the ISA were not recognized immediately and remain in accumulated other comprehensive income (loss). These losses are reclassified into interest expense over the original contractual term of the ISA starting as of December 16, 2009 through July 5, 2012.

NOTE F. CAPITAL LEASE AND NOTE OBLIGATIONS Capital lease and note obligations consist of the following: <table border="0" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="60%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> December 31, </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2010 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> (dollars in thousands) </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Various capital leases payable in monthly installments through December 2013. The monthly payments, including interest, range from $194 to $634. These obligations are secured by the related underlying equipment. </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 26 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 51 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Note obligation in connection with acquisition, matures April 2015; payable $8,333 monthly including interest, unsecured </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 322 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> — </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 348 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 51 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Less current portion </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (119 </td> <td valign="bottom"> ) </td> <td valign="bottom">   </td> <td valign="bottom"> (26 </td> <td valign="bottom"> ) </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Long-term portion of capital lease and note obligations </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 229 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 25 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

NOTE G. INCOME TAXES           The Company files income tax returns in the U.S. federal jurisdiction and various states. With a few exceptions, the Company is no longer subject to U.S. state and local income tax examinations by tax authorities for years before 2008.           Deferred tax assets and liabilities consist of the following: <table border="0" align="center" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="60%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> December 31, </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2010 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> (dollars in thousands) </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Deferred tax assets, current: </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Inventory obsolescence </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 282 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 393 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Inventory capitalization </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 490 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 687 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Allowance for doubtful accounts </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 58 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 86 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Accrued liabilities </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 31 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 61 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Interest rate swap </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 29 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 88 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Settlement accrual </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 82 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 249 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Total deferred tax assets, current </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 972 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 1,564 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Deferred tax assets, non-current: </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Intangible assets </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 175 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 86 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Settlement accrual </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> — </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 82 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Stock-based compensation </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 948 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 872 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Property and equipment </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (142 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (254 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> </tr> <tr> <td valign="bottom"> Valuation allowance </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (768 </td> <td valign="bottom"> ) </td> <td valign="bottom">   </td> <td valign="bottom"> (768 </td> <td valign="bottom"> ) </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Total deferred tax assets, non-current </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 213 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 18 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Net deferred tax assets </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1,185 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1,582 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>           The Company’s provision for income taxes is comprised as follows: <table border="0" align="center" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="60%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="14%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> Year Ended December 31, </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2010 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> (dollars in thousands) </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Current federal income tax expense (benefit) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> (67 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1,379 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Current state income tax expense </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 71 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 76 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Deferred income tax expense </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 338 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 107 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Provision for income taxes </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 342 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1,562 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>           The Company’s income tax expense for the years ended December 31, 2011 and 2010 differed from the statutory federal rate of 34 percent as follows: <table border="0" align="center" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="66%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="12%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="12%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> Year Ended December 31, </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2010 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="5" valign="bottom"> (dollars in thousands) </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Tax at statutory rate </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 189 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1,514 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Amounts not deductible for income tax purposes </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 61 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 38 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> State income taxes, net of federal income tax effect </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 48 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 50 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Other </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 44 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (40 </td> <td valign="bottom"> ) </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Income tax expense </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 342 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1,562 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>           In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that, some portion of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.           As of December 31, 2011 and 2010, management could not determine based on weighing of objective evidence that it is more likely than not that all of the deferred tax assets will be realized. As a result, as of December 31, 2011 and 2010, a valuation allowance of $768,324 was recorded to reduce the deferred tax assets to the amount that is more likely than not to be realized.

NOTE H. STOCK-BASED COMPENSATION Stock options                2006 Equity Incentive Compensation Plan           In December 2006, the Company adopted, and its shareholders approved and ratified, the 2006 Stock Option Plan (the “Plan”), the purpose of which is to attract and retain the personnel necessary for the Company’s success. The Plan gives the board of directors (the “Board”) the ability to provide incentives through grants of stock options, restricted stock awards and other types of equity-based incentive compensation awards to the Company’s key employees, consultants and directors (other than directors that are not compensated for their time by the Company or receive only a director’s fee). The Compensation Committee administers the Plan. Except as may otherwise be provided in the Plan, the Compensation Committee has complete authority and discretion to determine the terms of awards.           The Plan authorizes the granting of options, including options that satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended. The Compensation Committee will determine the period of time during which a stock option may be exercised, as well as any vesting schedule, except that no stock option may be exercised more than 10 years after its date of grant. The exercise price for shares of the Company’s common stock covered by an incentive stock option cannot be less than the fair market value of the Company’s common stock on the date of grant; provided that that exercise of an incentive stock option granted to an eligible employee that owns more than 10% of the voting power of all classes of the Company’s capital stock must be at least 110% of the fair market value of the Company’s common stock on the date of grant.           The Plan also authorizes the grant of restricted stock awards on terms and conditions established by the Compensation Committee. The terms and conditions will include the designation of a restriction period during which the shares are not transferable and are subject to forfeiture.           The Board may terminate the Plan without shareholder approval or ratification at any time. Unless sooner terminated, the Plan will terminate in December 2016. The Board may also amend the Plan, provided that no amendment will be effective without approval of the Company’s shareholders if shareholder approval is required to satisfy any applicable statutory or regulatory requirements.           A total of 1,980,000 shares of the Company’s common stock, representing 39.4% of the total number of shares issued and outstanding at December 31, 2011, are reserved for issuance under the Plan. If an award expires or terminates unexercised or is forfeited to the Company, or shares covered by an award are used to fully or partially pay the exercise price of an option granted under the Plan or shares are retained by the Company to satisfy tax withholding obligations in connection with an option exercise or the vesting of another award, those shares will become available for further awards under the Plan.           At December 31, 2011, common shares reserved for future issuance include 1,980,000 shares issuable under the Plan, as well as 20,000 shares issuable outside the Plan. At December 31, 2011, there are 1,403,842 options outstanding under the Plan and 576,158 options are available for future grants.                Valuation Assumptions           The fair values of new option awards granted under the Plan were estimated at the grant date or modification date using a Black-Scholes option pricing model with the following assumptions for the fiscal years ended December 31, 2011 and 2010: <table border="0" align="center" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="56%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="7%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="7%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2011 </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> 2010 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Weighted average assumptions used: </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Expected dividend yield </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 0.00 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 0.00 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Risk-free interest rate </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.96 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2.40 </td> <td valign="bottom" style="background-color: #E5FFFF;"> % </td> </tr> <tr> <td valign="bottom"> Expected volatility </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 77 </td> <td valign="bottom"> % </td> <td valign="bottom">   </td> <td valign="bottom"> 81 </td> <td valign="bottom"> % </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Expected life (in years) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 5 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 5 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Weighted average grant date fair value </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 1.03 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 2.24 </td> <td valign="bottom">   </td> </tr> </table>           Volatility for the years ended December 31, 2011 and 2010 is computed using the volatility of the Company’s common stock since its IPO transaction in late 2006. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award. Due to the limited period of time its equity shares have been publicly traded, and the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term, the expected term is calculated using the simplified method for all options granted on each grant date.                Stock Incentive Plan Summary           Stock option activity under the Plan for the years ended December 31, 2011 and 2010, was as follows: <table border="0" align="center" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="39%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="16%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="16%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Number of Shares </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Weighted Average Exercise Price </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Options outstanding at January 1, 2010 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1,371,842 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 6.65 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Granted </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 30,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 3.47 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Exercised </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> (20,000 </td> <td valign="bottom" style="background-color: #E5FFFF;"> ) </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.97 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Options outstanding at December 31, 2010 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 1,381,842 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 6.65 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Granted </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 30,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.64 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Canceled, forfeited or expired </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> (8,000 </td> <td valign="bottom"> ) </td> <td valign="bottom">   </td> <td valign="bottom"> 7.00 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> Options outstanding at December 31, 2011 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1,403,842 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 3.50 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Options exercisable at December 31, 2011 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 992,546 </td> <td valign="bottom">   </td> <td valign="bottom"> $ </td> <td valign="bottom"> 4.31 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> </table>           On December 22, 2011, the Company modified the exercise price and exercisability dates for 822,592 stock options awarded to four board members, one executive officer and fifteen employees. Effective December 22, 2011, the exercise price for those option holders was reduced to $1.54 per share. Original exercise amounts ranged from $3.47 per share to $7.00 per share.           Prior to the modification, the 822,592 option awards were fully vested and immediately exercisable. Effective December 22, 2011, 50% of the awards are immediately exercisable and 50% of the awards are exercisable on or after December 22, 2012.           In accordance with ASC 718, modifications to the terms of an equity award are treated as an exchange of the original award for a new award. Incremental compensation cost is measured as the excess, if any, of the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. For these modified awards, the Company recognized incremental compensation cost of approximately $208,000 during the year ended December 31, 2011.                Stock Options Outstanding and Exercisable           The following summarizes stock options outstanding under our 2006 Stock Option Plan at December 31, 2011, as modified by the provisions of the stock option modification agreement effective December 22, 2011: <table border="0" align="center" cellspacing="0" cellpadding="0" width="80%"> <tr style="FONT-SIZE:1PX"> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="18%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="18%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="18%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="18%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td colspan="11" valign="bottom"> Options Outstanding and Exercisable </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td colspan="11" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Exercise Prices </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Number of Options Outstanding </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Number of Options Exercisable </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> Weighted Average Remaining Contractual Life (in years) </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.54 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 822,592 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 411,296 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 5.15 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 1.64 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 30,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 30,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 9.88 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.97 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 20,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 20,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 7.55 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 3.81 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 36,250 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 36,250 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 6.62 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 4.48 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 20,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 20,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 4.97 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 7.00 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 475,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 475,000 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 4.97 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1.54 - $7.00 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1,403,843 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 992,546 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 5.26 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> </table>           At December 31, 2011, the aggregate intrinsic value of options outstanding and exercisable was $164,692. At December 31, 2010, the aggregate intrinsic value of options outstanding and exercisable was $41,000.           At December 31, 2011, all outstanding options under the Plan were fully vested with no remaining unrecognized compensation expense. Of these, 992,546 shares are immediately exercisable as of December 31, 2011, and the remaining 411,296 become first exercisable on December 22, 2012.                Non-Employee Stock Options           On March 21, 2007, the Company issued stock options to non-employees to purchase 20,000 shares of the Company’s common stock at an exercise price of $7.00 per share vesting over the next three years and expiring December 19, 2016. These stock options remain outstanding as of December 31, 2011.                Warrants           In connection with the IPO, the Company issued warrants to the underwriters to purchase 300,000 shares of the Company’s common stock at an exercise price of $ 8.40 per share. These warrants were exercisable at any time on or before December 19, 2011. None of these warrants remain outstanding as of December 31, 2011.                Restricted Stock           On June 25, 2007, Zunicom issued an aggregate of 645,133 shares of restricted stock to certain employees of UPG for past and future services. Under the terms of the grant, these shares could not be sold, conveyed, transferred, pledged, encumbered or otherwise disposed of prior to the earlier of June 25, 2011 or the date on which the employee’s employment is terminated by UPG, whichever occurred first. In January 2009, 227,229 of these shares were forfeited when the Company’s then chief executive officer resigned. In May 2011, another 19,760 shares were forfeited by employees who voluntarily terminated their employment with the Company. The Company amortized the fair value of these shares as compensation expense over the 48 month vesting period. Approximately $14,000 and $61,000 of compensation expense related to these shares was recorded during 2011 and 2010 respectively. As of December 31, 2011, the compensation expense for this group has been fully recognized.           On June 24, 2011, Zunicom issued an additional 99,538 restricted shares of its common stock to the same Company employees who received the grant in June 2007 and who were still employed by the Company. As a condition to this grant, the grantees agreed to extend the restricted period on the shares issued in June 2007 for an additional three years. As a result, all 497,683 shares will vest on June 24, 2014. The fair value of the shares issued on June 24, 2011 at the issue date was approximately $34,000. The Company is amortizing the fair value as compensation expense over the 36-month vesting period in accordance with ASC Topic 718, Compensation – Stock Compensation. Approximately $5,700 compensation expense related to these shares was recorded during 2011. At December 31, 2011, there is approximately $28,000 of remaining unrecognized compensation expense associated with this grant.

NOTE I. CREDIT CONCENTRATIONS AND SIGNIFICANT CUSTOMERS           Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.           Effective July 1, 2010, the FDIC’s insurance limits were permanently increased to $250,000. Pursuant to legislation evocated in 2010, the FDIC will fully insure all non-interest bearing accounts beginning December 31, 2011 through December 31, 2012, at all FDIC insured institutions.           In the normal course of business, the Company extends unsecured credit to virtually all of its customers. Because of the credit risk involved, management has provided an allowance for doubtful accounts that reflects its estimate of amounts which may become uncollectible. In the event of complete non-performance by the Company’s customers, the maximum exposure to the Company is the outstanding accounts receivable balance at the date of non-performance.           At December 31, 2011 and 2010, the Company had receivables due from ADT Security Services that comprised approximately 23% and 13%, respectively of total trade receivables. During the years ended December 31, 2011 and 2010, ADT Security Services accounted for 14% and 28%, respectively, of net sales. The loss of ADT Security Services would materially decrease the Company’s net sales.           A significant portion of the Company’s inventory purchases are from two suppliers, representing 48% and 7% for the year ended December 31, 2011, and 45% and 25% for the year ended December 31, 2010, respectively. The Company purchased approximately 29% and 35%, of its inventory from domestic sources with the remainder purchased from international sources, predominantly China, for the years ended December 31, 2011 and 2010, respectively. Historically, the Company has had significant long-term relationships with manufacturers located principally in China, specifically one key supplier. The Company has since expanded its supplier relationships throughout the Pacific Rim including Taiwan, Malaysia and Vietnam, in an effort to reduce supplier concentration and better supplement the Company’s supply base.

NOTE J. SETTLEMENT AGREEMENT           In March 2009, in an effort to improve efficiencies within its sourcing channels, the Company entered into an agreement with its primary independent sourcing agent canceling its relationship with that agent. Under the agreement, the Company agreed to pay its former sourcing agent a total of $2.565 million, including amounts owed with respect to purchases prior to the cancellation of the relationship, over a three-year period. The sourcing agent assigned to the Company all of the North American distribution rights on products manufactured by certain factories, including the Company’s primary battery supplier, and agreed to a three-year non-compete covenant. At December 31, 2011 and 2010, there was approximately $241,000 and $975,000, respectively, recorded as settlement accrual in the accompanying balance sheet that are due and payable to the agent pursuant to this agreement. The Company recorded the entire settlement amount as settlement expense during 2009 and an aggregate of $89,000 will be expensed as interest over the term of the agreement.

NOTE K. COMMITMENTS AND CONTINGENCIES Licensing Agreement           During 2009, the Company entered into a licensing agreement for the development and sale of automotive battery chargers and maintainers, automotive jump-starters and power inverters. Under the terms of the agreement, the Company will pay a royalty of a defined percentage on net sales of licensed products as defined in the agreement. This agreement was subsequently amended to terminate at the end of 2012 and the related minimum annual royalty guarantee requirements waived. Litigation Universal Power Group, Inc., (Plaintiff and Counterdefendant) v. Randy T. Hardin, Steven W. Crow and Bright Way Group, LLC (Defendants, Counter Plaintiffs and Third-Party Plaintiffs) v. William Tan, Ian Edmonds and Mimi Tan Edmonds (Third-Party Defendants), Cause No. 11-09787-E (In the District Court of Dallas County, Texas, 101st Judicial District).           The Company initiated the above referenced case on August 8, 2011 by filing its Original Petition and Application for Temporary Injunction and for Permanent Injunctive Relief against Randy Hardin, a former President of the Company, Bright Way Group, Hardin’s new business venture, and Steven Crow, the Company’s former Vice President of Product Development and Retail Chain Sales. On March 19, 2012, the parties entered into a settlement agreement whereby Defendants agreed to pay the Company a sum of money and agreed to the entry of a temporary injunction restricting Defendants from contacting certain of the Company’s customers and suppliers until January 1, 2013. The parties have agreed to dismiss all claims and counterclaims in the lawsuit.           The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of these matters will have a material adverse effect on the Company’s financial position, operating results, or cash flows. However, there can be no assurance that such legal proceedings will not have a material impact. Operating Leases           The Company leases certain office and warehouse facilities and various vehicles and equipment under non-cancelable operating leases, some with escalating payment and free rent clauses with various maturity dates through 2018. Minimum future payments on these leases as of December 31, 2011 are as follows: <table border="0" align="center" cellspacing="0" cellpadding="0" width="60%"> <tr style="FONT-SIZE:1PX"> <td width="76%" valign="bottom">   </td> <td width="3%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="16%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Years Ending December 31, </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom"> (dollars in thousands) </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> <hr size="1" width="21%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td colspan="2" valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> 2012 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 1,095 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> 2013 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 475 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> 2014 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 375 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> 2015 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 324 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> 2016 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 193 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Thereafter </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 189 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 2,651 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>           Rent expense for the years ended December 31, 2011 and 2010 totaled approximately $1.428 million and $1.063 million, respectively. Employment Agreements and Arrangements           The Company has an employment agreement (the “Agreement”) effective as of June 1, 2009 (the ‘Effective Date”), with Ian Edmonds, its President and Chief Executive Officer. The current employment term ends on May 31, 2015. However, beginning on June 1, of each year the term is automatically extended by an additional year unless either party provides at least 180 days prior written notice to the other of its election not to extend the term by another year. Under the Agreement, Mr. Edmonds earns a base salary of $250,000 per annum plus an annual cash bonus equal in amount to seven and one-half percent (7 1/2%) of the Company’s net income before provision for income taxes, as adjusted, provided it meets or exceed the annual targeted performance levels established by the Compensation Committee for each year. Mr. Edmonds is entitled to participate on the same basis as other senior executives in any of our benefit plans or programs available to them. In addition, the Agreement also provides, generally, that during the employment term and for the two-year period immediately following the end of such term, Mr. Edmonds shall not compete with us, solicit any of our employees for hire by an unaffiliated entity or knowingly release any of our confidential information, without the prior approval of our Board.           On January 21, 2009, the Company entered into a Separation Agreement with Randy Hardin (“Hardin”), its former chief executive officer, terminating his employment agreement. Under the Separation Agreement, the Company agreed to continue to pay Hardin his annual base salary and to reimburse him for the costs of his healthcare insurance coverage through January 21, 2011 (the “Restricted Period”) to the same extent it paid for such insurance immediately prior to the termination of his employment agreement. In consideration therefore, Hardin agreed that he would not during the Restricted Period (i) compete with the Company in any of its lines of business including the battery and related power accessory supply and distribution business and its third-party logistics services business; (ii) solicit or hire any of its employees; or (iii) encourage any person or entity that has an existing business relationship with the Company to curtail or cancel its relationship with the Company. In addition, Hardin agreed not to disclose any of its confidential or proprietary information. (See Note K.)

NOTE L. BUSINESS COMBINATION           In April 2011, the Company completed the acquisition of substantially all of the business assets of PTI for approximately $3.3 million, including $2.3 million in cash and $1.0 million in notes payable to third parties. PTI, which is based in Pilot Mountain, North Carolina, is an assembler and distributor of battery packs. As a result of the acquisition, the Company will have an opportunity to increase its battery pack sales. During the year ended December 31, 2011, the Company incurred approximately $0.2 million of third-party acquisition-related costs, which are included in operating expenses in the Company’s consolidated statement of operations. The acquisition was accounted for using the acquisition method of accounting, under which the aggregate purchase price (including liabilities assumed of $0.3 million) is allocated to tangible and identifiable intangible assets acquired based on their fair values. The excess of the purchase price over those fair values has been recorded as goodwill. The fair values of assets acquired are as follows: receivables of $0.6 million, inventory of $0.6 million, prepaid expenses and other assets of $0.1 million, property and equipment of $0.1 million, intangible assets of $0.7 million. The excess of the purchase consideration over the net fair value of assets acquired resulted in goodwill of $1.4 million. The goodwill of $1.4 million arising from the acquisition consists largely of the economies of scale expected from combining the operations of the Company and PTI. All of the goodwill was assigned to this reporting unit of the Company. The goodwill is expected to be deductible for income tax purposes. Goodwill will not be amortized but rather be tested annually for impairment or on more frequently if impairment indicators arise.           Accumulated amortization associated with the intangibles acquired was $219,834 at December 31, 2011. The weighted average remaining useful life of the intangibles at December 31, 2011 is 3.58 years. Amortization expense for the year ended December 31, 2011 was $219,834. Estimated amortization at December 31, 2011 for each of the following five years is: <table border="0" align="center" cellspacing="0" cellpadding="0" width="60%"> <tr style="FONT-SIZE:1PX"> <td width="46%" valign="bottom">   </td> <td width="2%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> <td width="10%" valign="bottom">   </td> <td width="1%" valign="bottom">   </td> </tr> <tr> <td valign="bottom"> Years Ending December 31, </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom"> <hr size="1" width="21%" noshade="noshade" /> </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> 2012 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 186,100 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> 2013 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 152,100 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> 2014 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 76,600 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> 2015 </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 51,433 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;"> 2016 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> 51,433 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom"> Thereafter </td> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> 9,334 </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="1" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> <tr> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> <td valign="bottom" style="background-color: #E5FFFF;"> $ </td> <td valign="bottom" style="background-color: #E5FFFF;"> 527,000 </td> <td valign="bottom" style="background-color: #E5FFFF;">   </td> </tr> <tr> <td valign="bottom">   </td> <td valign="bottom">   </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom"> <hr size="3" width="100%" noshade="noshade" /> </td> <td valign="bottom">   </td> </tr> </table>

NOTE M. EMPLOYEE BENEFIT PLAN           The Company established and continues to maintain a 401(k) plan intended to qualify under sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. All employees who are at least 18 years of age are eligible to participate in the plan. There is no minimum service requirement to participate in the plan. Under the plan, an eligible employee can elect to defer from 1% to 85% of his salary subject to Internal Revenue Code limitations. The Company may, at its sole discretion, contribute and allocate to plan participant’s account a percentage of the plan participant’s contribution. PTI has a 401(k) plan which the employer contributes 3% under the safe harbor contribution. Total Company contributions to the 401(k) plans were $20,000 and $0 for the years ended December 31, 2011 and 2010, respectively.