Universal Power (UPGI) 10-K/A 2009 FY Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2009
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ____________ to ____________
Commission file number:001-33207
Universal Power Group, Inc.
(Exact name of registrant as specified in its charter)

TEXAS	75-1288690
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1720 Hayden Drive, Carrollton, Texas	75006
(Address of principal executive offices)	(Zip Code)
(469) 892-1122
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 Par Value	NYSE Amex
(Title of Each Class)	(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     Yeso     Noþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     Yeso     Noþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yesþ     Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso     Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filero          Accelerated filero          Non-accelerated filero          Smaller Reporting Companyþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yeso     Noþ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $4,861,522 based on the price at which the common equity was last sold on the NYSE Amex as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter.
The number of shares outstanding of the registrant’s classes of common equity as of March 29, 2010 was 5,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
None

EXPLANATORY NOTE

     We are filing this Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Annual Report”), originally filed on March 31, 2010 to revise (i) the auditors’ reports to explicitly state that their audits have been conducted in accordance with the standards of the Public Oversight Accounting Board (United States); (ii) pages F-3, F-4 and F-10 to reflect the fact that we have three subsidiaries, of which two are inactive and one, Monarch Outdoor Adventures, LLC, d/b/a as Monarch Hunting is active; and (iii) the certifications required by Exchange Act 13a-14(a), Exhibits 31.1 and 31.2, to include the phrase “including its consolidated subsidiaries,” in paragraph 4(a). No other material changes have been made to the Annual Report. This amendment is not intended to update other information presented in the Annual Report as originally filed.

1

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          Information required by this Item begins on page F-1 and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

	(a)	1.	Financial Statements.
The following financial statements of Universal Power Group, Inc. are submitted as a separate section of this report (See F-pages) and are incorporated by reference in Item 8:
			•	Report of Independent Registered Public Accounting Firm
			•	Report of Independent Registered Public Accounting Firm
			•	Consolidated Balance Sheets as of December 31, 2009 and 2008
			•	Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
			•	Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2009 and 2008
			•	Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
			•	Notes to Consolidated Financial Statements
		2.	Financial Statement Schedules — See response to Item 15(c) below.
		3.	Exhibits. — See response to Item 15(b) below.
	(b)	Exhibits

          The following exhibits are furnished as part of this report or incorporated herein as indicated.

Exhibit No.	Description
3(i)	Amended and Restated Certificate of Formation (including Amended and Restated Articles of Incorporation) (1)
3(ii)	Amended and Restated Bylaws (1)
4.1	Specimen stock certificate (1)
4.2	Form of representatives’ warrant (1)
10.1(a)**	Form of 2006 Stock Option Plan (1)
10.1(b)	Form of Stock Option Agreement (1)
10.1(c)**	Amendment to the 2006 Stock Option Plan (6)
10.2	Separation Agreement between UPG and Randy Hardin (2)
10.3**	Form of Ian Edmonds Employment Agreement (7)
10.7	Real Property Lease for 1720 Hayden Drive, Carrollton, Texas (1)
10.8	Real Property Lease for 11605-B North Santa Fe, Oklahoma City, Oklahoma (1)
10.9	Real Property Lease for Las Vegas, Nevada (1)
10.10	Termination Agreement with Stan Battat d/b/a Import Consultants (3)
10.13	Third Party Logistics & Purchase Agreement, dated as of November 3, 2008, with Brinks Home Security, Inc., (currently Broadview Security, Inc.) (4)
10.14	Credit Agreement with Wells Fargo Bank, National Association (8)
10.15	Security Agreement with Wells Fargo Bank, National Association (8)
23.1	Consent of Independent Registered Public Accounting Firm*
23.2	Consent of Independent Registered Public Accounting Firm*
31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*	Filed herewith.
**	Management Contract, compensatory plan or arrangement.
(1)	Incorporated by reference to the Exhibit with the same number to our Registration Statement on Form S-1 (SEC File No. 333-137265) effective as of December 20, 2006.
(2)	Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 23, 2009.
(3)	Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 17, 2009.
(4)	Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2008.
(5)	Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 25, 2008.
(6)	Incorporated by reference to Exhibit 10.1(c) to our Annual Report on Form 10-K for the year ended December 31, 2008.
(7)	Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended June 30, 2009.
(8)	Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 23, 2009.

          (c) Other Financial Statement Schedules.

          The information required by the schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.

2

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: September 22, 2010
Universal Power Group, Inc.
By:	/s/ Ian Edmonds
	Ian Edmonds
	President and CEO

3

ITEM 15 (A) (1)
FINANCIAL STATEMENTS AND
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
UNIVERSAL POWER GROUP, INC.

DECEMBER 31, 2009

F-1

INDEX TO FINANCIAL STATEMENTS
UNIVERSAL POWER GROUP, INC.

	Page
Report of Independent Registered Public Accounting Firm – BKD LLP	F-3
Report of Independent Registered Public Accounting Firm – KBA Group LLP	F-4
Consolidated Balance Sheets at December 31, 2009 and 2008	F-5
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008	F-7
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2009 and 2008	F-8
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008	F-9
Notes to Consolidated Financial Statements	F-10

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee, Board of Directors and Stockholders of
Universal Power Group, Inc.

     We have audited the accompanying consolidated balance sheet of Universal Power Group, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and the related statements of operations, changes in shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Power Group, Inc. and subsidiaries, as of December 31,2009, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/BKD, LLP
Dallas, Texas
March 31, 2010

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee, Board of Directors and Stockholders of
Universal Power Group, Inc.

     We have audited the accompanying consolidated balance sheet of Universal Power Group, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Power Group, Inc. and subsidiaries, as of December 31, 2008, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/KBA GROUP LLP
Dallas, Texas
March 31, 2009

F-4

UNIVERSAL POWER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS

	December 31,
	2009			2008
CURRENT ASSETS
Cash and cash equivalents	$	2,059,475		$	326,194
Restricted cash		—			900,000
Accounts receivable:
Trade, net of allowance for doubtful accounts of $452,200 and $1,143,213		11,440,179			12,423,279
Other		13,561			50,303
Inventories – finished goods, net of allowance for obsolescence of $756,671 and $358,350		30,977,213			37,304,500
Current deferred tax asset		1,151,635			1,555,173
Income tax receivable		—			193,386
Prepaid expenses and other current assets		1,064,152			880,528
Total current assets		46,706,215			53,633,363
PROPERTY AND EQUIPMENT
Logistics and distribution systems		1,807,069			1,795,935
Machinery and equipment		984,918			651,916
Furniture and fixtures		385,940			436,424
Leasehold improvements		388,334			388,334
Vehicles		222,549			155,630
Total property and equipment		3,788,810			3,428,239
Less accumulated depreciation and amortization		(1,940,715	)		(1,407,712	)
Net property and equipment		1,848,095			2,020,527
OTHER ASSETS		313,754			86,879
NON-CURRENT DEFERRED TAX ASSET		771,490			—
TOTAL ASSETS	$	49,639,554		$	55,740,769

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

F-5

UNIVERSAL POWER GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS’ EQUITY

	December 31,
	2009			2008
CURRENT LIABILITIES
Line of credit	$	15,174,305		$	14,351,775
Accounts payable		11,971,502			16,418,768
Income taxes payable		698,654			24,712
Accrued liabilities		384,976			175,388
Interest rate swap liability		—			484,131
Current portion of notes payable to Zunicom, Inc.		—			1,462,500
Current portion of settlement expenses		955,730			—
Current portion of capital lease and note obligations		25,535			—
Current portion of deferred rent		92,040			57,984
Total current liabilities		29,302,742			32,975,258
LONG-TERM LIABILITIES
Notes payable to Zunicom, Inc. , less current portion		—			3,656,250
Settlement expenses, less current portion		985,027			—
Capital lease and note obligations, less current portion		50,606			—
Deferred rent, less current portion		36,103			168,317
Non-current deferred tax liability		233,654			230,611
Total long-term liabilities		1,305,390			4,055,178
TOTAL LIABILITIES		30,608,132			37,030,436
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common stock - $0.01 par value, 50,000,000 shares authorized, 5,000,000 shares issued and outstanding		50,000			50,000
Additional paid-in capital		15,951,626			15,529,783
Retained earnings		3,314,887			3,450,076
Accumulated other comprehensive loss		(285,091	)		(319,526	)
Total shareholders’ equity		19,031,422			18,710,333
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	49,639,554		$	55,740,769

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

F-6

UNIVERSAL POWER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

	December 31,
	2009			2008
Net sales	$	111,170,726		$	117,897,644
Cost of sales		91,797,823			99,599,576
Gross profit		19,372,903			18,298,068
Operating expenses		14,714,680			15,063,398
Settlement expenses		2,529,345			—
Total operating expenses		17,244,025			15,063,398
Operating income		2,128,878			3,234,670
Other income (expense)
Interest expense (including $310,000 and $346,000 to Zunicom, Inc.)		(953,251	)		(1,003,195	)
Other, net		(2,623	)		45,638
Total other expense, net		(955,874	)		(957,557	)
Income before provision for income taxes		1,173,004			2,277,113
Provision for income taxes		(1,308,193	)		(1,050,990	)
Net income (loss)	$	(135,189	)	$	1,226,123
Net income (loss) per share Basic and diluted	$	(0.03	)	$	0.25
Weighted average shares outstanding Basic and diluted		5,000,000			5,000,000

The accompanying notes are integral part of these financial statements.

F-7

UNIVERSAL POWER GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock				Additional Paid- in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total
	Shares		Amount
Balances at January 1, 2008		5,000,000	$	50,000	$	15,381,684	$	2,223,953		$	—		$	17,655,637
Stock-based compensation expense		—		—		148,099		—			—			148,099
Unrealized loss on hedging instrument, net of income taxes of $164,605		—		—		—					(319,526	)		(319,526	)
Net income		—		—		—		1,226,123			—			1,226,123
Balances at December 31, 2008		5,000,000		50,000		15,529,783		3,450,076			(319,526	)		18,710,333
Stock-based compensation expense		—		—		36,969		—			—			36,969
Gain on settlement of Zunicom, Inc. notes payable, net of income taxes of $102,558		—		—		199,083		—			—			199,083
Cumulative tax effect of tax adjustment recorded as a capital contribution from Zunicom, Inc.		—		—		185,791		—			—			185,791
Net change in fair value of hedging instrument, net of income taxes of $146,868		—		—		—		—			34,435			34,435
Net loss		—		—		—		(135,189	)		—			(135,189	)
Balances at December 31, 2009		5,000,000	$	50,000	$	15,951,626	$	3,314,887		$	(285,091	)	$	19,031,422

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

F-8

UNIVERSAL POWER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

	December 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(135,189	)	$	1,226,123
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		802,454			547,256
Provision for bad debts		415,808			1,143,213
Provision for obsolete inventory		599,145			180,000
Deferred income taxes		(196,857	)		(202,298	)
Loss on disposal of property and equipment		2,623			6,064
Stock-based compensation		36,969			148,099
Changes in operating assets and liabilities:
Accounts receivable – trade		592,626			(973,062	)
Accounts receivable – other		36,742			98,959
Inventories		5,945,535			(5,139,123	)
Income tax receivable/payable		867,328			(193,386	)
Prepaid expenses and other current assets		(183,624	)		379
Other assets		(60,716	)		(42,920	)
Accounts payable		(4,448,443	)		4,161,418
Accrued liabilities		(222,367	)		(337,148	)
Settlement expenses		1,940,758			—
Deferred rent		(98,159	)		(18,921	)
Net cash provided by operating activities		5,894,633			604,653
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(56,761	)		(851,766	)
Proceeds from sale of equipment		1,000			1,134
Escrow deposit		900,000			(900,000	)
Net cash paid in Monarch acquisition		(892,000	)		—
Net cash used in investing activities		(47,761	)		(1,750,632	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net activity on line of credit		822,530			1,518,744
Payments on capital lease and note obligations		(16,454	)		(6,609	)
Payment on notes to Zunicom, Inc.		(4,919,667	)		(731,250	)
Net cash provided by (used in) financing activities		(4,113,591	)		780,885
NET (DECREASE) IN CASH AND CASH EQUIVALENTS		1,733,281			(365,094	)
Cash and cash equivalents at beginning of year		326,194			691,288
Cash and cash equivalents at end of year	$	2,059,475		$	326,194
SUPPLEMENTAL DISCLOSURES
Income taxes paid	$	871,052		$	1,387,650
Interest paid	$	972,784		$	1,003,195
NONCASH FINANCING AND INVESTING ACTIVITIES:
Property and equipment acquired through capital leases or notes payable	$	86,066		$	—
Cumulative tax effect of Unicap adjustment treated as a capital contribution from Zunicom, Inc.	$	185,791		$	—
Gain on settlement with Zunicom, Inc.	$	301,641		$	—

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

F-9

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE A. ORGANIZATION AND BASIS OF PRESENTATION

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 Oklahoma City, Oklahoma, Las Vegas, Nevada and Columbus, 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, China and Canada.

          Until December 20, 2006, the Company was a wholly owned consolidated subsidiary of Zunicom, Inc. (“Zunicom”), a Texas corporation, whose stock is traded 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 2,000,000 shares of its common stock by the Company and 1,000,000 of the Company’s common stock 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.

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.

NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Restricted Cash

          The Company placed $900,000 cash in an escrow account, which it reported as restricted cash on its balance sheet at December 31, 2008, pursuant to the terms of an asset purchase and related escrow agreement. The escrowed funds were used to purchase all of the tangible and intangible assets of Monarch.

Accounts Receivable

          Trade accounts receivable are 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. 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 significant supplier for Broadview Security, Inc. (“Broadview Security”), formerly Brink’s Home Security, Inc. In order to meet its obligations to Broadview Security, the Company maintains certain required inventory levels at all times. Inventory held related to the Company’s relationship with Broadview Security, primarily security products, totaled approximately $13.2 million at both December 31, 2009 and 2008. Upon expiration of the third-party logistics agreement with Broadview Security or a termination of the agreement by Broadview Security, Broadview Security is obligated to purchase from the Company any and all remaining inventory held by the Company or in transit from suppliers purchased by the Company to fulfill its obligations to Broadview.

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

F-10

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 the term of the lease, whichever is shorter.

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.

Long-Lived Assets

          Long-lived 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, 2009 and 2008.

Deferred Rent

          The Company’s operating lease for its primary office and warehouse space contains a free rent period and contains predetermined fixed increases of the minimum rental rate during the initial lease term. For this lease, 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. In addition, the landlord provided certain allowances for leasehold improvements on this office and warehouse space which have been recorded as deferred rent and leasehold improvements. The deferred rent will be amortized as an offset to rent expense over the remaining term of the related lease.

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 who 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 our 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 an inventory fulfillment agreement with Broadview Security. The Company purchases, handles, assembles and delivers security and installation components to Broadview Security and to its authorized dealers. Revenues from drop shipment transactions and pursuant to the Broadview Security 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 is for one year. 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, 2009 and 2008, the Company has a warranty reserve of approximately $10,000.

Advertising costs

          Advertising costs are charged to operations when incurred. Advertising expense totaled approximately $376,000 and $281,000 for the years ended December 31, 2009 and 2008, respectively.

F-11

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Shipping and Handling Costs

          Shipping and handling costs incurred for the receipt of inventory are charged to cost of sales in the accompanying statements of operations.

Earnings (loss) Per Share

          Basic earnings (loss) per common share is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding during each year.

          Diluted earnings per common share is 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, 2009 the dilutive effects of 1,391,842 stock options and 300,000 warrants are excluded from the calculation of diluted net loss per share as they are antidilutive. For the year ended December 31, 2008 the dilutive effects of 1,336,114 stock options 300,000 warrants are excluded from the calculation of diluted net income per share as they are antidilutive.

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, prepaid expenses, other current assets, the line-of-credit, accounts payable, and accrued liabilities 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. Additionally, the Company had a cash flow hedge related to the line of credit as of December 31, 2008 which was terminated during 2009. See disclosures regarding the fair value of the cash flow hedge in Note I.“Fair Value Measurements”.

Stock-Based Compensation and Restricted Stock

          Stock-based compensation expense recognized in the statements of operations during the years ended December 31, 2009 and 2008 includes compensation expense for fully vested stock options and the amortization of partially vested stock-based payment awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Accounting for Non-Employee Stock Options and Warrants

          Options and warrants issued to non-employees are measured at fair value at the measurement date and recorded to expense over the period earned.

Accounting for Derivative Activities

          During 2008, the Company designated an interest rate swap as a cash flow hedge. Accordingly the swap is recorded at fair value on the Company’s balance sheet as assets and liabilities with any changes in fair value recorded in accumulated other comprehensive income (loss), net of income tax effects. During the fourth quarter of 2009, the Company refinanced the Compass Bank credit facility (as discussed in Note D) and in conjunction with this refinancing also terminated the interest rate swap on December 16, 2009.

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 that the Company operates in only one segment.

F-12

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

          Effective January 1, 2009, the Company adopted a newly issued standard of accounting for business combinations. This standard establishes requirements for an acquirer to record the assets acquired, liabilities assumed, and any related non-controlling interests related to the acquisition of a controlled subsidiary, measured at fair value, as of the acquisition date. The adoption of this standard has not had a material impact on the Company’s financial statements, but may have a material impact on the Company’s financial position, operations and cash flows if the Company completes significant acquisitions in the future.

Reclassifications

          Certain 2008 amounts have been reclassified to conform to 2009 presentation.

NOTE C. INVENTORIES

          Inventories at December 31, 2009 and 2008 consist of the following:

	December 31,
	2009			2008
Battery and related inventory	$	14,684,429		$	21,256,255
Security related inventory		14,279,758			13,178,947
Electronic components inventory		2,435,877			3,227,648
Hunting related inventory		333,820			—
Inventory obsolescence reserve		(756,671	)		(358,350	)
	$	30,977,213		$	37,304,500

NOTE D. LINE OF CREDIT

          On December 16, 2009, the Company entered into a Credit Agreement with Wells Fargo for a $30 million revolving credit facility. Maximum borrowing under the facility may be increased to $40 million if the Company satisfies certain pre-defined conditions. Borrowings under the facility are secured by a first priority lien on all of the Company’s assets. Borrowing availability under the facility depends on the level of the Company’s accounts receivable and inventory. For each borrowing, the Company has the option to choose 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. At December 31, 2009, the interest rate was 2.75%. The Agreement terminates 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 facility will become immediately due and payable. The line’s availability is based on a borrowing formula, which allows for borrowings equal to 80% of the Company’s eligible accounts receivable and a percentage of eligible inventory. In addition, the Company must maintain certain financial covenants on a quarterly basis (1) leverage ratio (a) 2.5 to 1.0 as of any date determination on or before December 31, 2010 and (b) 2.0 as of any date of determination after January 1, 2011; (2) fixed charge coverage ratio (a) 1.5 to 1.0 minimum fixed charges from December 16, 2009 through December 31, 2011 and (b) 1.75 to 1.0 January 1, 2012 through revolving termination date; (3) Consolidated Net Income for each fiscal quarter ended can not be less than zero ($0.00) for any two (2) consecutive fiscal quarters beginning January 1, 2010; (4) Capital Expenditures can not exceed $750,000 during any fiscal year commencing on January 1, 2010.

          Upon closing of the Wells Fargo facility, the Company immediately borrowed $14.3 million; of which $10.4 million was used to repay the amounts due to Compass Bank under the Company’s previous credit facility, approximately $3.8 million was used to settle the liability evidenced by the notes held by Zunicom (see Note E). At the settlement date, those notes had an aggregate outstanding principal amount of $4.0 million plus accrued and unpaid interest of $50,000. As Zunicom is a related party, the discount on the settlement of those notes resulted in the gain being recorded as additional paid-in capital.

          At December 31, 2009, approximately $15.2 million was outstanding under the line of credit and approximately $5.7 million remained available for borrowings under the line of credit based on the borrowing formula.

          The Company had a $30 million line of credit with Compass Bank that was paid in full on December 16, 2009. The facility bore interest at the LIBOR Index Rate plus a sliding range from 1.25% to 2.50% based on quarterly covenant performance. The line’s availability was based on a borrowing formula, which allowed for borrowings equal to 85% of the Company’s eligible accounts receivable and a percentage of eligible inventory.

Interest Rate Swap

          As a result of the refinancing of the line of credit, the interest swap agreement entered into with Compass Bank in June, 2008 was terminated. The swap agreement had a fixed rate of 5.85% on a notional amount of $6.0 million through its maturity date of July 5, 2012. The interest rate swap was accounted for as an effective cash flow hedge and the unrealized gains or losses related to the change in fair value were recorded in accumulated other comprehensive income (loss). As a result of the termination of the interest swap agreement, the Company’s discontinued hedge accounting on December 16, 2009. The de-designation of cash flow hedges requires that the net derivative gain or loss related to the

F-13

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE D. LINE OF CREDIT (CONTINUED)

discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income (loss), unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. 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 this derivative will not be recognized immediately and will remain in accumulated other comprehensive income (loss). These losses are reclassified into earnings over the contractual terms of the original swap agreement starting as of December 16, 2009.

NOTE E. NOTES PAYABLE TO ZUNICOM, INC.

          The Company had two notes payable, with an aggregate original principal amount of $5.85 million, issued to its former parent, Zunicom. The notes were issued in December 2006 immediately before the IPO. One note, in the original principal amount of $3 million, evidenced a final dividend declared by the Company. The second note, in the original principal amount of $2.85 million, represented the value of Zunicom’s net operating losses that the Company used to offset its taxable income in the years prior to the IPO. The notes were unsecured obligations, maturing June 20, 2012. Interest on the principal amount of the notes accrued at the rate of 6% per annum, payable quarterly, in arrears. The principal amount of the notes was to be repaid in 16 equal quarterly installments of $365,625 beginning in September 2008. The Company paid $3.72 million to pay off the $4.022 million note balances on December 16, 2009 with proceeds from the Wells Fargo credit facility. The gain on extinguishment of debt (net of income taxes of $102,558) totaling $199,083 was recorded as a capital contribution.

          During the years ended December 31, 2009 and 2008 the Company paid interest totaling $310,000 and $346,000, respectively, to Zunicom with respect to these notes.

NOTE F – LONG TERM DEBT

Long-term debt at December 31, 2009 and 2008 consists of the following:

	December 31,
	2009			2008
Various capital lease and note obligations payable in monthly installments through April 2013. The monthly payments, including interest, range from $160 to $634. These obligations are secured by the related underlying equipment.	$	76,141		$	—
Less current portion		(25,535	)		—
Long-term portion of capital lease and note obligations	$	50,606		$	—

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 2006. The Internal Revenue Service (“IRS”) commenced an examination of the Company’s U.S. income tax returns for 2007 and 2008 during 2009 that is anticipated to be completed by the end of 2010. As of December 31, 2009, the IRS has proposed certain significant adjustments to the Company’s inventory capitalization, bad debts and depreciation positions. Management is currently evaluating those proposed adjustments to determine if it agrees. Management believes that appropriate provisions for all outstanding issues have been recorded for all open years.

          Included in the tax balances at December 31, 2009, are approximately $565,000 of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred income tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

          The Company has recorded a deferred tax asset in the amount of $185,791 related to the tax effect of a cumulative inventory capitalization adjustment. This adjustment was recorded as a capital contribution from Zunicom, Inc. as the resulting deferred tax asset recorded for the this estimated adjustment relates to tax years in which the Company filed a consolidated tax return with its former parent.

          During the years ended December 31, 2009, the Company recognized approximately $130,000 in interest and penalties which was recorded into operating expenses. This amount is accrued as a currently liability in the accompanying balance sheet as of December 31, 2009.

F-14

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE G. INCOME TAXES (CONTINUED)

          Deferred tax assets and liabilities at December 31, 2009 and 2008 consist of the following:

	December 31,
	2009			2008
Deferred tax assets:
Inventory obsolescence	$	257,268		$	121,839
UNICAP		641,907			—
Amortization of intangibles		38,751			—
Allowance for doubtful accounts		45,595			388,692
Accrued liabilities		59,999			—
Interest rate swap		146,866			164,605
Settlement compensation		658,431			49,975
Stock-based compensation		842,632			830,062
Total deferred tax assets		2,691,449			1,555,173
Valuation allowance		(768,324	)		—
Net deferred tax assets	$	1,923,125		$	1,555,173
Non-current deferred tax liability	$	(233,654	)	$	(230,611	)

          Net deferred tax assets recorded in the consolidated balance sheets at December 31, 2009 and 2008:

	2009		2008
Current	$	1,151,635	$	1,555,173
Non-current		771,490		—
Net deferred tax assets	$	1,923,125	$	1,555,173

          The non-current deferred tax liability arises from the different useful lives and depreciation methods for depreciating assets for income tax purposes and financial reporting purposes.

          The Company’s provision for income taxes for the years ended December 31, 2009 and 2008 is comprised as follows:

	2009			2008
Current federal income tax expense	$	1,442,621		$	1,051,619
Current state income tax expense		62,429			201,669
Deferred income tax expense (benefit)		(196,857	)		(202,298	)
Provision for income taxes	$	1,308,193		$	1,050,990

          The Company’s income tax expense for the years ended December 31, 2009 and 2008 differed from the statutory federal rate of 34 percent as follows:

	2009			2008
Statutory rate applied to income before income taxes	$	398,821		$	774,221
Amounts not deductible for income tax purposes		96,923			91,690
State income taxes, net of federal income tax effect		62,429			53,316
Change in valuation allowance		768,324			—
Change in prior year state income tax estimate		—			120,887
Other		(18,304	)		10,876
Income tax expense	$	1,308,193		$	1,050,990

          In assessing the realizability 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.

          At December 31, 2009, management could not determine based on a weighing of objective evidence that it is more likely than not that all of the recorded deferred tax assets will be realized. As a result, as of December 31, 2009, a valuation allowance totaling $768,324 for a portion of the recorded deferred tax assets has been established. This valuation allowance is related to the deferred tax asset for stock-based compensation.

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.

F-15

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE H. STOCK-BASED COMPENSATION (CONTINUED)

          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.

          In June, 2007 the Company’s shareholders approved an additional 250,000 common shares issuable under the Plan. In August, 2008 the Company’s shareholders approved an additional 500,000 common shares issuable under the Plan. A total of 2,000,000 shares of the Company’s common stock, representing 40% of the total number of shares issued and outstanding at December 31, 2009, 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, 2009, common shares reserved for future issuance include 2,000,000 shares issuable under the Plan, as well as 20,000 shares issuable outside the Plan and 300,000 shares issuable upon exercise of outstanding warrants described below. At December 31, 2009 there are 1,371,842 options outstanding under the Plan and 628,158 options are available for future grants.

          Valuation Assumptions

          The fair values of option awards granted under the Plan were estimated at the grant date using a Black-Scholes option pricing model with the following assumptions for the fiscal years ended December 31, 2009 and 2008:

	2009			2008
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		3.87	%		3.87	%
Expected volatility		25.00	%		17.00	%
Expected life (in years)		5			5
Weighted average grant date fair value	$	0.59		$	0.92

          The Company has elected to use the calculated value method to estimate expected volatility in 2009 and 2008. As the stock of the Company became publicly traded in December, 2006 and has traded for a relatively short period time, it is not practicable for management to estimate the expected volatility of share price, or a peer company price because there is not sufficient historical information about volatility. The Company used historical volatility of the Dow Jones Small Cap Non-Durable Household Companies, which is representative of the Company’s size and industry. The Company has used the historical closing values of that index to estimate volatility which was calculated at 25% and 17% for 2009 and 2008, respectively. The expected term considers the contractual term of the option as well as expectations for exercise and forfeiture behavior. 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.

          Stock Incentive Plan Summary

          Stock option activity under the Plan for the years ended December 31, 2009 and 2008 was as follows:

	Number of Shares			Weighted Average Exercise Price
Options outstanding at January 1, 2008		1,289,364		$	6.92
Granted		56,886		$	3.85
Exercised		—		$	—
Canceled, forfeited or expired		(10,136	)	$	7.00
Options outstanding at December 31, 2008		1,336,114		$	6.79
Granted		40,000		$	1.97
Exercised		—		$	—
Canceled, forfeited or expired		(4,272	)	$	7.00
Options outstanding at December 31, 2009		1,371,842		$	6.65

F-16

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE H. STOCK-BASED COMPENSATION (CONTINUED)

          Stock Options Outstanding and Exercisable

          The following summarizes stock options outstanding under our 2006 Stock Option Plan at December 31, 2009:

Options Outstanding and Exercisable
Exercise Prices		Number of Options Outstanding		Weighted Average Remaining Contractual Life (in years)
$	1.97		40,000		9.55
$	3.81		56,250		8.62
$	4.48		40,000		6.97
$	7.00		1,235,592		6.97
$	1.97 - $7.00		1,371,842		7.12

          At December 31, 2009, the aggregate intrinsic value of options outstanding and exercisable was $45,200.

          At December 31, 2009, all outstanding options under the Plan were fully vested with no remaining unrecognized compensation expense.

          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, 2009.

          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 are exercisable at any time on or after December 20, 2008 and on or before December 19, 2011. All warrants remain outstanding as of December 31, 2009.

          Restricted Stock

          On June 25, 2007, Zunicom issued 645,133 shares of restricted stock to certain employees of UPG for past and future services. The Company is amortizing the fair value of these shares as compensation expense over the 48 month vesting period. During 2009, 227,229 of these shares were forfeited when the Chief Executive Officer terminated employment. 417,904 shares remain outstanding at December 31, 2009. Approximately $61,000 and $94,000 of compensation expense related to these shares was recorded during 2009 and 2008, respectively. There is approximately $97,000 of unvested expense remaining as of December 31, 2009 which will be recognized as compensation expense through July 2011.

NOTE I. FAIR VALUE MEASUREMENTS

          As discussed in Note D, the Company discontinued hedge accounting as of December 16, 2009. Assets and liabilities measured at fair value primarily relate to the Company’s derivative contract, which was terminated December 16, 2009.

          A fair value hierarchy is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.

          The fair value hierarchy consists of the following three levels:

•      Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.

•      Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

•      Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

          The following table represents liabilities the Company has measured at fair value as of December 31, 2008 and the basis for that measurement:

	Total Fair Value Measurement 2008		Quoted Prices in Active Markets for Identical Asset (Level 1) 2008		Significant Other Observable Inputs (Level 2) 2008		Significant Unobservable Inputs (Level 3) 2008
Derivative Liabilities	$	484,131	$	—	$	484,131	$	—

F-17

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE I. FAIR VALUE MEASUREMENTS (CONTINUED)

The fair market value of the interest rate swap is measured using the discounted present value of the forecasted one month LIBOR, an observable input.

NOTE J. 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.

          Cash, cash equivalents and restricted cash are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts of $250,000 per institution. At December 31, 2009 and 2008, the Company had cash and restricted cash accounts in excess of these limits.

          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 which 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, 2009 and 2008, the Company had receivables due from Broadview Security which comprised approximately 32% and 28%, respectively, of total trade receivables. During the years ended December 31, 2009 and 2008, Broadview Security accounted for 36% and 35%, respectively, of net sales. The loss of Broadview Security would materially decrease the Company’s net sales.

          A significant portion of the Company’s inventory purchases are from two suppliers, representing 33% and 40% for the year ended December 31, 2009, 38% and 36% for the year ended December 31, 2008. The Company purchased approximately 54% and 51%, respectively, of its product through domestic sources with the remainder purchased from international sources, predominately China, for the years ended December 31, 2009 and 2008.

NOTE K. 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 his 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. The Company does not believe that the cancellation of this relationship will impact its ability to source goods from its suppliers. The majority of the Company’s international purchases were coordinated through an independent sourcing agent in 2008. At December 31, 2009, there is approximately $1,648,000 recorded as settlement expenses 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 L. COMMITMENTS AND CONTINGENCIES

Licensing

          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. During the term of the agreement, the Company will pay a royalty of a defined percentage on net sales of licensed products as defined in the agreement. The Company is subject to an annual minimum royalty guarantee (the “Royalty Guarantee”) for the last two twelve-month periods of the Initial Term (January 1, 2011 thru December 31, 2012) of $250,000 for each year and for an automatic renewal period of two years after the expiration of the initial term. The Royalty Guarantee shall be paid in equal parts, quarterly in the same manner as royalties due under the agreement. If the actual royalty for any calendar quarter is less than the Royalty Guarantee due for that quarter, the Company will make up the shortfall. For the year ended December 31, 2009, there were no royalties incurred or payable pursuant to this agreement.

Litigation

          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.

F-18

UNIVERSAL POWER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE L. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 all leases for real and personal property as of December 31, 2009 are as follows:

Years Ending December 31,
2010		1,051,120
2011		917,128
2012		778,604
2013		150,777
Thereafter		469,083
	$	3,366,712

          Rent expense for the years ended December 31, 2009 and 2008 totaled approximately $1,025,000 and $943,000, respectively.

Employment Agreements and Arrangements

          On August 12, 2009, we entered into an employment agreement (the “Agreement”), effective as of June 1, 2009 (the ‘Effective Date”), with Ian Edmonds, our President and Chief Executive Officer for his continued employment with us in such positions for a term beginning on the Effective Date and ending on May 31, 2014; provided, however, beginning on June 1, 2010 and on each anniversary of such date thereafter, the term will automatically be 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, he will continue to earn 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 our net income before provision for income taxes, as adjusted, provided we meet or exceed the annual targeted performance levels established by our Compensation Committee 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, 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. The total cost under the Separation Agreement to the Company, approximately $513,000, was recorded as an expense in the first quarter of 2009. At December 31, 2009, there is approximately $293,000 recorded as settlement expenses in the accompanying balance sheet that are due and payable pursuant to the Separation Agreement

          On December 12, 2008, the Company entered into a separation agreement with the former chief financial officer under which we agreed to pay him severance of approximately $147,000 and to provide him with health insurance coverage for as long as he is eligible to participate in our health insurance plan under COBRA. For the year ended December 31, 2009, the Company paid a total of $142,287 in cash to its former CFO under this agreement and also paid approximately $11,609 in health insurance premiums on his behalf. The Company has no further obligations to him for cash payments as of December 31, 2009 although it continues to pay health insurance costs on his behalf.

NOTE M. BUSINESS COMBINATION

          On January 8, 2009, the Company completed the acquisition of a line of outdoor hunting and recreational products, including all tangible and intangible assets relating thereto, marketed under the brand name “Monarch”, for a total net purchase price of $892,000. Approximate fair values of assets acquired are as follows: receivables and inventory of $0.3 million, property and equipment of $0.4 million, and intangible assets of $0.3 million.

NOTE N. 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. The Company may, at its sole discretion, contribute and allocate to plan participant’s account a percentage of the plan participant’s contribution. There were no Company contributions for the years ended December 31, 2009 and 2008.

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