0001144204-11-018269.txt : 20110330 0001144204-11-018269.hdr.sgml : 20110330 20110330160842 ACCESSION NUMBER: 0001144204-11-018269 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20101231 FILED AS OF DATE: 20110330 DATE AS OF CHANGE: 20110330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MACE SECURITY INTERNATIONAL INC CENTRAL INDEX KEY: 0000912607 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 030311630 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22810 FILM NUMBER: 11722246 BUSINESS ADDRESS: STREET 1: 1000 CROWFORD PLACE STREET 2: SUITE 400 CITY: MOUNT LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 8567782300 MAIL ADDRESS: STREET 1: 160 BENMONT AVE CITY: BENNINGTON STATE: VT ZIP: 05201 10-K 1 v216600_10k.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transaction period from __ to __
Commission File No. 0-22810

MACE SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
03-0311630
(I.R.S. Employer
Identification No.)
240 Gibraltar Rd., Suite 220, Horsham, PA 19044
(Address of Principal Executive Offices)                   (Zip Code)

Registrant's Telephone Number, Including Area Code: (267) 317-4009
 
Securities Registered Pursuant to Section 12(b) of the Act: None
 
Securities Registered Pursuant to Section 12(g) of the Act:
 
Common Stock, par value $0.01 per share
 
Name of each exchange on which registered: OTCQB
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨  No x

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨   No ¨

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)
Large accelerated filer ¨              Accelerated filer ¨           Non-accelerated filer ¨          Smaller reporting company x

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

The aggregate market value of the voting stock held by non-affiliates of registrant on June 30, 2010 was approximately $8,350,000. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq Global Market on June 30, 2010. For purposes of determining this amount only, the registrant has defined affiliates as including (a) the executive officers and directors of the Registrant on June 30, 2010 and (b) each stockholder that had informed registrant that it was the beneficial owner of 10% or more of the outstanding common stock of Registrant on June 30, 2010.

The number of shares of Common Stock, par value $0.01 per share, of registrant outstanding as of March 21, 2011 was 15,735,725.
 
 
 
 
 
Mace Security International, Inc. and Subsidiaries
Form 10-K
Year Ended December 31, 2010

Contents

       
Page
         
PART I
        
         
Item 1.
  
Business
  
3
         
Item 1A.
  
Risk Factors
  
9
         
Item 1B.
  
Unresolved Staff Comments
  
14
         
Item 2.
  
Properties
  
14
         
Item 3.
  
Legal Proceedings
  
15
         
Item 4.
  
(Removed and Reserved)
  
16
         
PART II
        
         
Item 5.
  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
16
         
Item 6.
  
Selected Financial Data
  
18
         
Item 7.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
18
         
Item 7A.
  
Quantitative and Qualitative Disclosures About Market Risks
  
32
         
Item 8.
  
Financial Statements and Supplementary Data
  
32
         
Item 9.
  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
32
         
Item 9A.
  
Controls and Procedures
  
32
         
Item 9B.
  
Other Information
  
33
         
PART III
        
         
Item 10.
  
Directors, Executive Officers and Corporate Governance
  
33
         
Item 11.
  
Executive Compensation
  
36
         
Item 12.
  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
41
         
Item 13.
  
Certain Relationships and Related Transactions, and Director Independence
  
44
         
Item 14.
  
Principal Accounting Fees and Services
  
45
         
PART IV
        
         
Item 15.
  
Exhibits, Financial Statement Schedules
  
45
 
 
2
 
 
PART I
ITEM 1.              BUSINESS

GENERAL

Mace Security International, Inc. (the “Company” or “Mace”) was incorporated in Delaware on September 1, 1993.  Our operations are currently conducted through one segment, our Security operation.

Our Security Segment designs, manufactures, assembles, markets and sells a wide range of security products.  The products include less-than-lethal Mace® defense sprays, intrusion fencing, access control, security cameras and security digital recorders. The Security Segment also owns and operates an Underwriters Laboratories (“UL”) listed monitoring center that monitors video and security alarms for approximately 400 security dealer clients with over 41,000 end-user accounts.  The Security Segment’s electronic surveillance products and components are purchased from Asian and European manufacturers.  Many of our products are designed to our specifications.  Other products in our Security Segment are monitors, high-end digital and machine vision cameras and professional imaging components.  We sell the electronic surveillance products and components primarily to installing dealers, distributors, system integrators and end users.  The main marketing channels for our products are industry shows, trade publications, catalogs, the internet, telephone orders, distributors and mass merchants.

We sold our Digital Media Marketing Segment in November 2010.  The Digital Media Marketing Segment sold consumer products on third party internet promotional sites and promotional sites which we owned.  We also sold third party products on the promotional sites that we owned.  The concepts for the products we sold were developed internally and were purchased from third party manufacturers.  We used a proprietary software marketing platform to sell the products on the internet promotional sites.

We formerly had a Car Wash Segment. At its largest, the Car Wash Segment consisted of fifty-seven car washes and five truck washes. As of December 31, 2010, we owned four remaining car washes, two of which were under separate Agreements for Sale. The sale of one of our car washes under an Agreement of Sale at December 31, 2010, the Lubbock, Texas car wash, was completed on March 8, 2011.  The sale of the other car wash under an Agreement of Sale is anticipated to close in the second quarter of 2011.

Our former Car Wash and Digital Media Marketing Segments have been classified as discontinued operations in the statements of operations and the statements of cash flows with the related assets and liabilities classified as assets and related liabilities held for sale in the December 31, 2010 balance sheet. The car wash operations and the digital media marketing operations are no longer reported as Segments of the Company.

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as filed with the United States Securities and Exchange Commission (the “SEC”), can be accessed through the Company’s website at www.mace.com.

LINES OF BUSINESS

Security Segment.  The Company’s Security Segment sells a wide variety of security products.  The Security Segment also owns and operates a UL listed monitoring center that monitors video and security alarms for approximately 400 security dealer clients having over 41,000 end-user accounts.  Among the products the Security Segment offers are:
 
·
electronic surveillance products, including analog, digital and IP cameras, digital video recorders, security monitors, and matrix switching equipment for video distribution;
 
·
electronic  security products, including intrusion fencing, access control and GPS tracking devices;
 
·
advanced imaging devices used by manufacturers, including robotic camera dome systems, system controls, and consoles for system assembly markets;
 
·
defense sprays, including our  less-than-lethal Mace® defense sprays;
 
·
personal defense items, including personal alarms, home security alarms, whistles, door jammers, window and door lock alarms, and the KinderGard® product line of childproof security locks;
 
·
security literature for the domestic and foreign financial community, state-of-the-art training videos, and crisis response materials; and
 
·
TG Guard®, an electronically controlled tear gas system used in prisons, embassies, and safe rooms.

Our electronic surveillance products and system component products are selected and sourced by our operating and marketing staff in Fort Lauderdale, Florida.  The products are manufactured by overseas original equipment manufacturers (“OEM”).  Our electronic surveillance products and system components are warehoused and shipped from our facility in Farmers Branch, Texas.  Our defense sprays are manufactured by the Company in our Bennington, Vermont facility.  The KinderGard® product line is manufactured by a third party utilizing molds primarily owned by the Company.  Our defense sprays and the KinderGard® product line are packaged, warehoused, and shipped from our Bennington, Vermont facility. Our TG Guard® products are also assembled in our Bennington, Vermont facility.
 
 
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Our electronic surveillance products and components are marketed through several sales channels, such as dealers, system integrators, catalogs, the internet, mass merchants, and by telephone orders.  We also sell our products through distributors, exhibitions at national trade shows, and advertisements in trade publications.

Discontinued Operations.  The Company, through its subsidiaries, owned four car washes as of December 31, 2010.   As of March 9, 2011, the Company owns three car washes, all of which are located in Texas.  The remaining car washes are all full service car washes, which provide exterior washing and drying, vacuuming of the interior of the vehicle, dusting of dashboards and door panels, and cleaning of all windows and glass.  One of the remaining car washes is subject to an Agreement of Sale and the sale is anticipated to close in the second quarter of 2011.

The Digital Media Marketing Segment was an e-commerce and online marketing business which had two business divisions: (1) e-commerce, the sale of products to consumers through promotional websites and (2) online marketing, which published promotional websites that offered our products and third party products for sale. This segment used proprietary technologies and software to sell products on the internet.  Linkstar, the e-commerce division, was sold on November 22, 2010. Promopath, which was not sold but was shut down, was an online marketer that located customers or leads for third party clients who hired Promopath.  The advertising clients who hired Promopath paid us based on a set fee per customer, prospect or lead acquired.  The online media marketing industry refers to the arrangement of acquiring customers, prospects or leads for advertisers on a fee basis per customer as the cost-per-acquisition (“CPA”) model.

BUSINESS STRATEGIES

Internal Growth. The Security Segment designs, manufacturers, markets and sells a wide range of security products.  For the year ended December 31, 2010, revenues from the Security Segment were $18.4 million.  The Company began selling electronic surveillance products and system components in August 2002. Revenues from electronic surveillance products and system components have grown from $373,000 of revenue in 2002 to $9.9 million in 2010. Growth has been principally achieved by acquiring businesses and through internal development of new products, as well as expanded advertising and marketing efforts.  During 2009, the Security Segment added intrusion fencing and access control and in 2010 introduced an updated video line to its product offerings. In the second quarter of 2009, the Security Segment acquired a UL listed monitoring center. The monitoring center monitors video and security alarms for approximately 400 security dealer clients which have over 41,000 end-user accounts. The wholesale alarm monitoring company offers our dealers an easy alternative for the monitoring of the video output of our products that the dealers install. By offering video monitoring, we hope to be able to increase the loyalty and number of our dealers.

The Company sells its defense sprays in the consumer market under its Mace® brand.  Defense sprays are sold in the law enforcement market under the brand name of TakeDown®.  The Mace Trademark Corporation, a subsidiary of the Company, manages the correct use of the Mace® trademark by the Company and Armor Holdings, Inc. (See also Trademarks and Patents, page 6).  Armor Holdings, Inc has the exclusive right to use the Mace® brand when selling aerosol defense sprays to the law enforcement market, pursuant to an agreement dated July 1998. We believe that the total domestic consumer defense spray market is approximately $18 million to $20 million in annual revenues and that the domestic law enforcement market is approximately $5 million in annual revenues.  Our newly developed Pepper Gel® has increased sales in Law Enforcement and Consumer markets. Pepper Gel® has a patent pending in the U.S. Patent and Trademark Office and in the European Union under the Patent Co-operation Treaty (PCT).

During the six months ended December 31, 2008 and throughout 2009 and 2010, we continued to implement cost savings measures, including a reduction in employees throughout the Company, and completed a consolidation of our Security Segment’s electronic surveillance equipment operations in Fort Lauderdale, Florida and Farmers Branch, Texas.  As part of this reorganization, we consolidated our security division’s surveillance equipment warehouse operations into our Farmers Branch, Texas facility and sold our Fort Lauderdale, Florida warehouse. Our professional security sales and administrative team has remained in Fort Lauderdale, Florida in a rented facility.  Our security catalog sales team was relocated to Florida in the rented facility. The goals of the reorganization were to align our electronic surveillance equipment sales teams to achieve sales growth, gain efficiencies by sharing redundant functions within our security operations, such as warehousing, customer service, and accounting services, and streamline our organization structure and management team for improved long-term growth.
 
 
4
 
 
Operating Agreements and Acquisitions.  On April 30, 2009, the Company completed the purchase of all the outstanding common stock of Central Station Security Systems, Inc. (“CSSS”) from CSSS’s shareholders.  Total consideration for such purchase was approximately $3.7 million, which consisted of $1.7 million in cash at closing, $224,000 paid subsequent to closing, potential additional payments of up to $1.2 million upon the settlement of certain contingencies as set forth in the Stock Purchase Agreement, $951,000 of which is recorded in accrued expenses and other current liabilities at December 31, 2010, and the assumption of approximately $590,000 of liabilities.  CSSS, which was renamed Mace CS, is reported within the Company’s Security Segment, and is a national wholesale monitoring company located in Anaheim, California, with approximately 400 security dealer clients. Mace CS owns and operates a UL-listed monitoring center that currently services over 41,000 end-user accounts. Mace CS’s primary assets are accounts receivable, equipment, customer contracts, and its business methods.  The acquisition of Mace CS enables the Company to expand the marketing of its security products through cross-marketing of the Company’s surveillance equipment products to Mace CS’s dealer base as well as offering monitoring services to the Company’s current customers. The purchase price was allocated as follows: approximately (i) $19,000 for cash; (ii) $112,000 for accounts receivable; (iii) $63,000 for prepaid expenses and other assets; (iv) $443,000 for fixed assets and capital leased assets; (v) the assumption of $590,000 of liabilities, and (vi) the remainder, or $3.04 million, allocated to goodwill and other intangible assets. Within the $3.04 million of acquired intangible assets, $1.98 million was assigned to goodwill, which is not subject to amortization expense.  The amount assigned to goodwill was deemed appropriate based on several factors, including: (i) multiples paid by market participants for businesses in the security monitoring business; (ii) levels of Mace CS’s current and future projected cash flows; (iii) the Company’s strategic business plan, which included cross-marketing the Company’s surveillance equipment products to Mace CS’s dealer base as well as offering the Company’s current customers monitoring services, thus potentially increasing the value of its existing business segment; and (iv) the Company’s plan to substitute for the cash flows of the Car Wash Segment, which the Company is exiting.  The remaining intangible assets were assigned to customer contracts and relationships for $940,000, trade name for $70,000, and a non-compete agreement for $50,000. Customer relationships, trade name and the non-compete agreement were assigned a life of fifteen, three, and five years, respectively.

We regularly evaluate potential acquisitions for the Security Segment to determine if they provide an advantageous opportunity.  In evaluating potential acquisitions, we consider: (i) our cash position and the availability of financing at favorable terms; (ii) the potential for operating cost reductions; (iii) marketing advantages by adding new products or services to the Mace® brand name; (iv) market penetration of existing products or services; and (v) other relevant factors.

As consideration for acquisitions, we may use combinations of common stock, warrants, cash, and indebtedness. The consideration for each future acquisition will vary on a case-by-case basis depending on our financial interests, the historic operating results of the acquisition target, and the growth potential of the business to be acquired.  We expect to finance the cash portion of future acquisitions through our cash reserves, funds provided by operations, loans, and the proceeds of possible future equity sales.

 Discontinued Operations

We acquired our car and truck washes between May 1999 and December 2000 and had reported their results as the Company’s Car Wash Segment.  From December 2005 to March 9, 2011, we sold all but three car washes.

We currently own three car washes as of March 9, 2011, all located in Texas. One of these remaining car washes is subject to an Agreement of Sale.  We are considering offers for our car washes and are evaluating offers based on whether the purchase price would be sufficient to retire all debt related to the car washes and provide sufficient capital for the growth of our Security Segment.

MARKETING

Our electronic surveillance products and components are marketed through several sales channels, such as catalogs, the internet, mass merchants and telephone orders. Our other products are sold through direct marketing, the use of distributors as well as exhibitions at national trade shows and advertisements in trade publications.

Our Mace® self defense sprays are available for purchase at mass merchant/department stores, gun shops, sporting goods stores, hardware stores, auto stores, convenience stores, drug stores and through the internet.  In the law enforcement market, our defense sprays, including Pepper Gel®, are sold through direct marketing, the use of independent sales representatives and distributors as well as at exhibitions at national trade shows and advertisements in trade publications.

We have a diverse customer base within the Security Segment with no single customer accounting for 10% or more of our consolidated revenues for the fiscal year ended December 31, 2010 or 2009.  We do not believe that the loss of any single Security Segment customer would have a material adverse effect on our business or results of operations.
 
 
5
 
 
PRODUCTION AND SUPPLIES

Our electronic surveillance products and system component requirements are established at our Fort Lauderdale, Florida facility and are manufactured principally in Korea, China, Taiwan, Israel and United Kingdom by OEMs. The electronic surveillance products and components meeting our requirements are labeled, packaged, and shipped ready for sale to our warehouse in Farmers Branch, Texas.

Substantially all of the manufacturing processes for our defense sprays are performed at our leased Bennington, Vermont facility.  Defense spray products are manufactured on an aerosol filling machine. Most products are packaged in sealed, tamper-resistant "clamshells." KinderGard ®, a product line of childproof locks, and TG Guard®, an electronic tear gas security system, are primarily manufactured by unrelated companies and are assembled and packaged on-site at our Vermont facility.  There are numerous potential suppliers of the components and parts required in the production process.  We have developed strong long-term relationships with many of our suppliers, including the following: Moldamatic, Inc., Amber International, Inc., and Springfield Printing, Inc.  In addition, we purchase for resale a variety of products produced by others, including whistles and window and door alarms.

COMPETITION

Our video systems and security products components face competition from many larger companies such as Sony, Panasonic, Security Equipment Corp., and others.   A number of these competitors have significantly greater financial, marketing, and other resources than us. Additionally, our foreign manufacturers of electronic surveillance products also sell directly to our customer base. We also compete with numerous well-established, smaller, local or regional firms.  Increased competition from these companies could have an adverse effect on our electronic surveillance products sales.

Our security monitoring company is in a highly competitive industry.  Monitoring accounts are difficult to obtain, as there is a natural resistance by dealers to move their end user accounts.  There are many national and local monitoring companies that compete aggressively on price.

There continues to be a number of companies marketing personal defense sprays to civilian consumers, such as Armor Holdings, Inc. We continue to offer defense spray products that we believe distinguish themselves through brand name recognition and superior product features and formulations.  This segment experienced increased sales in aerosols in each of the three years ending December 31, 2010, 2009 and 2008. We attribute the increased sales to improved marketing, including improvements in our website, and development of new products such as our Mace Pepper Gun®, our Mace Pepper Gel®, our Hot Pink Mace Defense Spray™ and our Night Defender Pepper Gel Defense Spray™.

TRADEMARKS AND PATENTS

We began marketing products in 1993 under the Mace® brand name and related trademarks pursuant to an exclusive license for sales of defense sprays to the consumer market in the continental United States and a non-exclusive license for sales to the consumer market worldwide.  We subsequently purchased outright the Mace® brand name and related trademarks (Pepper Mace®, Chemical Mace®, Mace . . . Just in Case®, CS MaceÔ and Magnum MaceÔ). In conjunction with this purchase, we acquired a non-exclusive worldwide license to promote a patented pepper spray formula in both the consumer and law enforcement markets.  We have patents pending for our new less-than-lethal gel products in the United States and also in several foreign jurisdictions.  We have recently obtained trademarks for Mace Pepper Gel® and have filed trademark applications for Hot Pink Mace Defense Spray™, Night Defender Pepper Gel Defense Spray™ and the Sportsman Scent System®. Additionally, we have been issued a patent on the locking mechanism for our Mark VI defense spray unit and have recently received a patent internationally for a non-irritant gel formulation.

In July 1998, in connection with the sale of our Law Enforcement Division, we transferred our Mace® brand trademark and all related trademarks, and a patent (No. 5,348,193) to our wholly-owned subsidiary, Mace Trademark Corp. The purchaser of our Law Enforcement division received a 99-year license to use the Mace® brand, certain other such trademarks and the patents in the law enforcement market only.

We also have various other patents and trademarks for the devices we sell, including trademarks and/or patents for the Big Jammer® door brace, Screecher®, Peppergard®, Mace (Mexico)®, Viper® defense spray, KinderGard®, TG Guard®, Take Down®, Muzzle®, Pepper Mace®, MSI and Design®, Mace® Community (European Union) Trademark, Pepper Gel®, and  Take Down Extreme®.  We also license the pending patent for our new Pepper Gun product.

Additional  trademarks used in our Security Segment are: SecurityandMore.com®, Industrial Vision Source®, Easy Watch®, Focus Vision 4 Observation System (Stylized)®, SmartChoice®, MaceLockÔ, MaceTrac™ and MaceVision™.

The Company has expanded the Mace® trademark to cover new electronic surveillance products.
 
 
6
 
 
We believe these Mace-related trademarks provide us with a competitive advantage.

GOVERNMENT REGULATION/ENVIRONMENTAL COMPLIANCE

The distribution, sale, ownership, and use of consumer defense sprays are legal in some form in all fifty states and the District of Columbia. However, in some states, sales to minors are prohibited and in several states (MA, MI, NY and WI, for example) sales are highly regulated. Among the typical regulations are the following, which list is not all inclusive: Massachusetts requires both the seller and possessor to be licensed; Michigan does not allow the sale of combinations of tear gas and pepper sprays; and New York requires sellers to be licensed firearms dealers or pharmacists. There are often restrictions on sizes, labeling and packaging that may vary from state to state. We have been able to sell our defense sprays consistent with the requirements of state laws. We believe we are in material compliance with all federal, state, and local laws that affect the sale and marketing of our defense spray business. There can be no assurance, however, that broader or more severe restrictions will not be enacted that would have an adverse impact on the sale of defense sprays. Additionally, certain states require licenses for the sale of our security equipment. We have obtained all required licenses.

During January 2008, the United States Environmental Protection Agency (the “EPA”) conducted a site investigation at the Company’s Bennington, Vermont location and the building within which the facility is located.  The Company leases 33,476 square feet of the building from Vermont Mill Properties, Inc. (“Vermont Mill”).  The site investigation was focused on whether hazardous substances were being improperly stored.  After the site investigation, the EPA notified the Company and the building owner, Benmont Mill Properties, Inc. (“Benmont”), that remediation of certain hazardous wastes was required.  Vermont Mill and Benmont are both owned and controlled by Jon Goodrich, the President of the Company’s defense spray division.  The EPA, the Company, and the building owner entered into an Administrative Consent Order under which the hazardous materials and waste were remediated. All remediation required by the Administrative Consent Order was completed within the time allowed by the EPA and a final report regarding the remediation was submitted to the EPA in October 2008, as required by the Administrative Consent Order.  On September 29, 2009, the EPA accepted the final report. On February 23, 2010, the EPA issued the Company an invoice for $240,096 representing the total of the EPA's oversight costs that the Company and Benmont were obligated to pay under the Administrative Consent Order.  On April 8, 2010, the Company negotiated a reduction in the oversight cost reimbursement and, on April 13, 2010, the Company paid a negotiated amount of $216,086 to the EPA.  During the quarter ended September 30, 2010, Benmont reimbursed the Company 15% of the amount paid to the EPA, or $32,413.  A total estimated cost of approximately $786,000 relating to the remediation, which includes disposal of the waste materials, as well as expenses incurred to engage environmental engineers and legal counsel and reimbursement of the EPA’s costs, has been recorded through December 31, 2010.

The United States Attorney for the District of Vermont (the “U.S. Attorney”) conducted an investigation of the Company relating to possible violations of the Resource Conservation and Recovery Act (“RCRA”) at the Company’s Bennington, Vermont location. On November 16, 2010, the U.S. Attorney filed a one count indictment charging the Company and Jon Goodrich with a felony of storing hazardous waste without a permit under 42 U.S.C. Section 6928(d)(2)(A).   Mr. Goodrich is the President of Mace Personal Defense, Inc., the Company's defense spray division located in Bennington, Vermont. The Company has resolved the indictment through a Plea Agreement entered into between the Company's subsidiary, Mace Personal Defense, Inc. and the U.S. Attorney.  The Plea Agreement was made under Fed. R. Crim. P. 11(c)(1)(C), and provides in part, for (i) Mace Personal Defense, Inc., to plead guilty to one count of violating 42 U.S.C. § 6928(d)(2)(A) (Storage of Hazardous Waste Without a Permit); (ii) Mace Personal Defense, Inc. to pay a fine of $100,000 (the "Fine") and a court assessment of $400, the Fine to be paid $34,000 on sentencing, and two additional installments of $33,000 each, at six months and twelve months from January 4, 2011; (iii) the Company to guarantee the payment of the Fine; (iv) the United States to dismiss the indictment against the Company at time of sentencing of Mace Personal Defense, Inc.; and (v) the United States not to prosecute Mace Personal Defense, Inc. (excluding the guilty plea) or the Company for any criminal offenses known to the United States Attorney's Office of Vermont as of the date of signing of the Plea Agreement committed by the Company or Mace Personal Defense, Inc. in the District of Vermont relative to the storage, shipment, handling or disposal of hazardous waste, including any associated record keeping or reporting offenses.  The Plea Agreement is not final until it is accepted by the Court. A hearing date for sentencing has been scheduled for May 26, 2011. In addition to the Company incurring $83,000 in legal expenses in 2010 relating to this matter, the Company has recorded an accrual of $100,000 at December 31, 2010 as a result of its agreement to pay a $100,000 Fine as part of the Plea Agreement.

Car Washes Held for Sale.  We are subject to various local, state, and federal laws regulating the discharge of pollutants into the environment.  We believe that our operations are in compliance, in all material respects, with applicable environmental laws and regulations. Three major areas of regulation facing us are disposal of lubrication oil at our oil change centers, the compliance with all underground storage tank laws in connection with our gasoline sales, and the proper recycling and disposal of water used in our car washes.  We use approved waste-oil haulers to remove our oil and lubricant waste.   Our underground storage tanks are in compliance with all legal requirements. We recycle our waste water and, where we have proper permits, it is disposed of into sewage drains.  Approximately 70% of the water used in the car wash is recycled at sites where a built-in reclaim system exists.
 
 
7
 
 
RESEARCH AND DEVELOPMENT

The staff in our Fort Lauderdale, Florida facility determines the requirements of various electronic surveillance products and components in conjunction with OEM manufacturers. We also have an on-site laboratory at our Vermont facility where research and development is conducted to maintain our reputation in the defense spray industry. We are continually reviewing ideas and potential licensing arrangements to expand our product lines. Our research and development expense was not material in 2010 or 2009.

INSURANCE

We maintain various insurance policies for our assets and operations.  These policies provide property insurance including business interruption protection for each location.  We maintain commercial general liability coverage in the amount of $1 million per occurrence and $2 million in the aggregate with an umbrella policy which provides coverage of up to $25 million.  We also maintain workers’ compensation policies in every state in which we operate.  Commencing July 2002, as a result of increasing costs of the Company’s insurance program, including auto, general liability, and workers’ compensation coverage, we are insured through participation in a captive insurance program with other unrelated companies. Workers’ compensation coverage for non-car wash employees was transferred to an occurrence-based policy in March 2009 through May 2010. The Company maintains excess coverage through occurrence-based policies. With respect to our auto, general liability, and certain workers’ compensation policies, we are required to set aside an actuarially determined amount of cash in a restricted “loss fund” account for the payment of claims under the policies.  We expect to fund these accounts annually as required by the captive insurance company. Should funds deposited exceed claims incurred and paid, unused deposited funds are returned to us with interest upon the captive insurance company deciding a distribution is appropriate, but no earlier than the fifth anniversary of the policy year-end.  The captive insurance program is further secured by a letter of credit in the amount of $303,886 at December 31, 2010.  The Company records a monthly expense for losses up to the reinsurance limit per claim based on the Company’s tracking of claims and the insurance company’s reporting of amounts paid on claims plus an estimate of reserves for possible future losses on reported claims and claims incurred but not reported.  There can be no assurance that our insurance will provide sufficient coverage in the event a claim is made against us, or that we will be able to maintain in place such insurance at reasonable prices.  An uninsured or under insured claim against us of sufficient magnitude could have a material adverse effect on our business and results of operations.

U.S. BASED BUSINESS

Our electronic surveillance products are manufactured in Korea, China, Taiwan, United Kingdom and Israel. All of our property and equipment is located in the United States. We do not believe we are currently subject to any material risks associated with any foreign operations.  Approximately 11.2%, (or $2.1 million) and 3.6%, (or $676,000) of the 2010 and 2009 revenues, respectively, from our ongoing Security Segment were derived from customers outside of the United States.

EMPLOYEES

As of March 21, 2011, we had approximately 197 employees, of which approximately 88 were employed in our discontinued car wash business, 94 employed in the Security Segment, 13 in our corporate accounting, finance, marketing and information technology departments, and two in executive management.  None of our employees are covered by a collective bargaining agreement.

AVAILABLE INFORMATION

For more information about the Company, please visit our website at www.mace.com. Our electronic filings with the SEC (including all annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to these reports), including the exhibits, are available free of charge through our website as soon as reasonably practicable after we electronically file them with or furnish them to the SEC.
 
 
8
 
 
ITEM 1A.          RISK FACTORS

Risks Related to Our Business and Common Stock

If we are unable to finance our business, our stock price could decline and we could go out of business. Our net losses for 2009 and 2010 were $11.0 million and $18.1 million, respectively.  Our net loss for 2010 of $18.1 million included the $4.6 million Arbitration Award to Mr. Paolino and $7.4 million of non-cash impairment charges largely related to our discontinued Digital Media Marketing Segment. We have been funding operating losses by divesting of our car washes and other non-core assets through third party sales.  Our capital requirements include working capital for daily operations, including purchasing inventory and equipment.  We had cash and cash equivalents of $2.6 million as of December 31, 2010.  We estimate that our cash balances will not be sufficient to pay our cash operating requirements through December 31, 2011 unless we are successful in increasing our cash position through pending asset sales or otherwise raising additional capital. The Company plans to raise working capital through a rights offering approved by the Company’s Board of Directors, See Note 2. Liquidity.  The current economic climate has made it more difficult to sell our remaining car washes as it is more difficult for buyers to finance the purchase price.  A car wash was sold on March 8, 2011 and the sale of one of the three remaining car washes is pending, See Note 4. Business Acquisitions and Divestitures and Note 21. Subsequent Events, for a description of the car wash sale and pending sales. As of March 21, 2011, we had three remaining car washes for sale which we estimate will generate proceeds, net of related mortgages, in the range of approximately $1.7 million to $2.0 million.  Our Texas warehouse is also listed for sale. We estimate the sale of the Texas warehouse will generate proceeds, net of related mortgage debt, of approximately $1.0 to $1.2 million.  To the extent that these pending sales do not occur during the second or third quarter of 2011 and to the extent we lack cash to meet our future capital needs, we will need to raise additional funds through bank borrowings and additional equity and/or debt financings, which may result in significant increases in leverage and interest expense and/or substantial dilution of our outstanding equity.  If we are unable to raise additional capital, we may be forced to substantially reduce the scale of our operations and curtail our business plan.

Our common stock is not listed on a stock exchange and is traded on the OTCQB system of OTC Market, Inc. The Company’s common stock was transferred from the NASDAQ Global Market to the OTCQB™ Marketplace on September 30, 2010.  The OTCQB™ market is operated by OTC Market, Inc. and is only available to Over-the-Counter (“OTC”) securities that are registered and fully reporting with the SEC or that report to banking or insurance regulators.  The Company’s common stock was delisted from the NASDAQ Global Market as a result of the Company not regaining compliance with the minimum $1.00 closing bid price rule of the NASDAQ.  OTC listed stocks involve risks in addition to those associated with stocks traded on a national exchange. Many OTC stocks trade less frequently and in smaller volumes than stocks listed on national exchanges.  Also, the values of OTC stocks may be more volatile than stocks listed on a national exchange.

Many of our customers’ spending for our products and services continued to be negatively impacted by the 2008 recession, and  deterioration in the credit markets; our customers' spending may not recover at the same pace as the economy recovers.  Our customers’ reduced spending began in 2008 as a result of the recession, the credit crisis, declining consumer and business confidence, increased unemployment, and other challenges that affected the domestic economy.  Though the economy improved slightly in 2009 and 2010, the slow improvement has not resulted in our customers increasing their spending on our products and services.  Many of our customers in our electronic surveillance equipment business finance their purchases through cash flow from operations or the incurrence of debt.  Additionally, many of our customers in our electronic surveillance equipment and our personal defense products divisions depend on disposable personal income.  The combination of a reduction of disposable personal income, a reduction in cash flow of businesses and the difficulty of businesses and individuals to obtain financing has continued to result in decreased spending by our customers.  During 2010, our revenues from continuing operations declined $196,000, or 1%, from our revenues from continuing operations in 2009.  To the extent our customers do not increase their spending in 2011, the reduced revenue level could have a material adverse effect on our operations.  If our revenues do not recover or there is a further deterioration in the economy, our results of operations, financial position, and cash flows will be materially adversely affected.

We have reported net losses in the past.  If we continue to report net losses, the price of our common stock may decline, or we could go out of business.  We reported net losses and negative cash flow from operating activity from continuing operations in each of the five years ended December 31, 2010.  Although a portion of the reported losses in past years related to the Arbitration Award to Mr. Paolino and related legal costs expended, non-cash impairment charges of intangible assets and non-cash stock-based compensation expense, we may continue to report net losses and negative cash flow in the future.  Our net loss for the year ended December 2010 was $18.1 million.  Additionally, accounting pronouncements require annual fair value based impairment tests of goodwill and other intangible assets identified with indefinite useful lives.  As a result, we may be required to record additional impairments in the future, which could materially reduce our earnings and equity. If we continue to report net losses and negative cash flows, our stock price is likely to be adversely impacted.
 
 
9
 
 
We compete with many companies, some of whom are more established and better capitalized than us.  We compete with a variety of companies on a worldwide basis.  Some of these companies are larger and better capitalized than us.  There are also few barriers to entry in our markets and thus above average profit margins will likely attract additional competitors.  Our competitors may develop products and services that are superior to, or have greater market acceptance than, our products and services. For example, many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger customer bases than ours.  These factors may allow our competitors to respond more quickly than we can to new or emerging technologies and changes in customer requirements.  Our competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies which may allow them to offer superior products and services.
 
Failure or circumvention of our controls or procedures could seriously harm our business. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues, mistakes and instances of fraud, if any, within the Company have been or will be detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Any failure of our controls and procedures to detect error or fraud could seriously harm our business and results of operations.

If we lose the services of our executive officers, our business may suffer.  If we lose the services of one or more of our executive officers and do not replace them with experienced personnel, that loss of talent and experience will make our business plan, which is dependent on active growth and management, more difficult to implement and could adversely impact our operations.

If our insurance is inadequate, we could face significant losses.  We maintain various insurance coverage for our assets and operations.  These coverages include property coverage including business interruption protection for each location.  We maintain commercial general liability coverage in the amount of $1 million per occurrence and $2 million in the aggregate with an umbrella policy which provides coverage of up to $25 million.  We also maintain workers’ compensation policies in every state in which we operate.  Since July 2002, as a result of increasing costs of the Company’s insurance program, including auto, general liability, and certain of our workers’ compensation coverage, we have been insured as a participant in a captive insurance program with other unrelated businesses.  Workers’ compensation coverage for non-car wash employees was temporarily transferred to an occurrence-based policy from March 2009 to May 2010.  The Company maintains excess coverage through occurrence-based policies.  With respect to our auto, general liability, and certain workers’ compensation policies, we are required to set aside an actuarially determined amount of cash in a restricted “loss fund” account for the payment of claims under the policies.  We expect to fund these accounts annually as required by the insurance company. Should funds deposited exceed claims incurred and paid, unused deposited funds are returned to us with interest after the fifth anniversary of the policy year-end.  The captive insurance program is further secured by a letter of credit from the Company in the amount of $303,886 at December 31, 2010.  The Company records a monthly expense for losses up to the reinsurance limit per claim based on the Company’s tracking of claims and the insurance company’s reporting of amounts paid on claims plus an estimate of reserves for possible future losses on reported claims and claims incurred but not reported.  There can be no assurance that our insurance will provide sufficient coverage in the event a claim is made against us, or that we will be able to maintain in place such insurance at reasonable prices.  An uninsured or under insured claim against us of sufficient magnitude could have a material adverse effect on our business and results of operations.

Our stock price has been, and likely will continue to be, volatile and an investment in our common stock may suffer a decline in value. The market price of our common stock has in the past been, and is likely to continue in the future to be, volatile. That volatility depends upon many factors, some of which are beyond our control, including:
 
·
announcements regarding the results of expansion or development efforts by us or our competitors;
 
·
announcements regarding the acquisition of businesses or companies by us or our competitors;
 
·
announcements regarding the disposition of the remaining assets that comprise our former Car Wash Segment, which may or may not be on favorable terms;
 
·
technological innovations or new commercial products developed by us or our competitors;
 
·
changes in our or our suppliers’ intellectual property portfolio;
 
·
issuance of new or changed securities analysts’ reports and/or recommendations applicable to us or our competitors;
 
·
additions or departures of our key personnel;
 
·
operating losses by us; and
 
·
actual or anticipated fluctuations in our quarterly financial and operating results and degree of trading liquidity in our common stock.
 
 
10
 
 
One or more of these factors could cause a decline in our revenues and income or in the price of our common stock, thereby reducing the value of an investment in our Company.

Because we are a Delaware corporation, it may be difficult for a third party to acquire us, which could affect our stock price.  We are governed by Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from engaging in a “business combination” with an entity who is an “interested stockholder” (as defined in Section 203, an owner of 15% or more of the outstanding stock of the corporation) for a period of three years following the stockholder becoming an “interested stockholder,” unless approved in a prescribed manner.  This provision of Delaware law may affect our ability to merge with, or to engage in other similar activities with, some other companies.  This means that we may be a less attractive target to a potential acquirer who otherwise may be willing to pay a premium for our common stock above its market price.

If we issue our authorized preferred stock, the rights of the holders of our common stock may be affected and other entities may be discouraged from seeking to acquire control of our Company.  Our certificate of incorporation authorizes the issuance of up to 10 million shares of “blank check” preferred stock that could be designated and issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt.  No shares of preferred stock are currently outstanding.  It is not possible to state the precise effect of preferred stock upon the rights of the holders of our common stock until the board of directors determines the respective preferences, limitations, and relative rights of the holders of one or more series or classes of the preferred stock.  However, such effect might include: (i) reduction of the amount otherwise available for payment of dividends on common stock, to the extent dividends are payable on any issued shares of preferred stock, and restrictions on dividends on common stock if dividends on the preferred stock are in arrears, (ii) dilution of the voting power of the common stock to the extent that the preferred stock has voting rights, and (iii) the holders of common stock not being entitled to share in our assets upon liquidation until satisfaction of any liquidation preference granted to the holders of our preferred stock.  The “blank check” preferred stock may be viewed as having the effect of discouraging an unsolicited attempt by another entity to acquire control of us and may therefore have an anti-takeover effect.  Issuances of authorized preferred stock can be implemented, and have been implemented by some companies in recent years, with voting or conversion privileges intended to make an acquisition of a company more difficult or costly.  Such an issuance, or the perceived threat of such an issuance, could discourage or limit the stockholders’ participation in certain types of transactions that might be proposed (such as a tender offer), whether or not such transactions were favored by the majority of the stockholders, and could enhance the ability of officers and directors to retain their positions.

Our policy of not paying cash dividends on our common stock could negatively affect the price of our common stock.  We have not paid in the past, and do not expect to pay in the foreseeable future, cash dividends on our common stock.  We expect to reinvest in our business any cash otherwise available for dividends.  Our decision not to pay cash dividends may negatively affect the price of our common stock.

Risks Related to our Security Segment

We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.  Although we have not been the subject of any such actions, third parties may in the future assert against us infringement claims or claims that we have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them.  We provide the specifications for most of our security products and contract with independent suppliers to engineer and manufacture those products and deliver them to us.  Certain of these products contain proprietary intellectual property of these independent suppliers.  Third parties may in the future assert claims against our suppliers that such suppliers have violated a patent or infringed upon a copyright, trademark or other proprietary right belonging to them. If such infringement by our suppliers or us were found to exist, a party could seek an injunction preventing the use of their intellectual property.  In addition, if an infringement by us were found to exist, we may attempt to acquire a license or right to use such technology or intellectual property.  Some of our suppliers have agreed to indemnify us against any such infringement claim, but any infringement claim, even if not meritorious and/or covered by an indemnification obligation, could result in the expenditure of a significant amount of our financial and managerial resources, which would adversely affect our operations and financial results.

If our Mace brand name falls into common usage, we could lose the exclusive right to the brand name.  The Mace registered name and trademark is important to our security business and defense spray business. If we do not defend the Mace name or allow it to fall into common usage, our security segment business could be adversely affected.
 
 
11
 
 
If our original equipment manufacturers (“OEMs”) fail to adequately supply our products, our security products sales may suffer.  Reliance upon OEMs, as well as industry supply conditions, generally involves several additional risks, including the possibility of defective products (which can adversely affect our reputation for reliability), a shortage of components and reduced control over delivery schedules (which can adversely affect our distribution schedules), and increases in component costs (which can adversely affect our profitability). We have some single-sourced manufacturer relationships, either because alternative sources are not readily or economically available or because the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations.  If these sources are unable or unwilling to manufacture our products in a timely and reliable manner, we could experience temporary distribution interruptions, delays, or inefficiencies adversely affecting our results of operations.  Even where alternative OEMs are available, qualification of the alternative manufacturers and establishment of reliable suppliers could result in delays and a possible loss of sales, which could affect operating results adversely.

The loss of our distributorship for Sony Electronics’ Visual Imaging Products will adversely impact the sales within our high-end digital and machine vision camera operation, IVS. IVS recorded total net revenues of $4.6 million for the year ended December 31, 2010 of which approximately 60% of the net revenues were derived from the sale of Visual Imaging Products of Sony Electronics, Inc. (“Sony Products”). We have been notified by Sony Electronics, Inc. that our distributorship for Sony Products will end on March 27, 2011. If we are unable to replace Sony Products sales with other sales, the net revenues of our IVS business will decline. We are considering alternatives, such as selling the IVS business and obtaining other products to sell.

Many states have laws, and other states have stated an intention to enact laws, requiring manufacturers of certain electronic products to pay annual registration fees and have recycling plans in place for electronic products sold at retail, such as televisions, computers, and monitors (“electronic recycling laws”).  If the electronic recycling laws are applied to us, the sale of monitors by us may become prohibitively expensive.  Our Security Segment sells monitors as part of the video security surveillance packages we market. The video security surveillance packages consist of cameras, digital video recorders and video monitors.  We have taken the position with many states that our monitors are security monitors and are not subject to the laws they have enacted which generally refer to computer monitors. If we have to pay registration fees and have recycling plans for the monitors we sell, it may be prohibitively expensive to offer monitors as part of our security surveillance packages.  The inability to offer monitors at a competitive price will place us at a competitive disadvantage.

The businesses that manufacture our electronic surveillance products are located in foreign countries, making it difficult to recover damages if the manufacturers fail to meet their obligations.  Our electronic surveillance products and many non-aerosol personal protection products are manufactured on an OEM basis. Most of the OEM suppliers we deal with are located in Asian or European countries and are paid a significant portion of an order in advance of the shipment of the product. If any of the OEM suppliers defaulted on their agreements with the Company, it would be difficult for the Company to obtain legal recourse because of the suppliers’ assets being located in foreign countries.

If people are injured by our consumer safety products, we could be held liable and face damage awards.  We face claims of injury allegedly resulting from our defense sprays, which we market as less-than-lethal.  For example, we are aware of allegations that defense sprays used by law enforcement personnel resulted in deaths of prisoners and of suspects in custody.  In addition to use or misuse by law enforcement agencies, the general public may pursue legal action against us based on injuries alleged to have been caused by our products. We may also face claims by purchasers of our electronic surveillance systems if they fail to operate properly during the commission of a crime. As the use of defense sprays and electronic surveillance systems by the public increases, we could be subject to additional product liability claims.  We currently have a $25,000 deductible on our consumer safety products insurance policy, meaning that all such lawsuits, even unsuccessful ones and ones covered by insurance, cost the Company money.  Furthermore, if our insurance coverage is exceeded, we will have to pay the excess liability directly.  Our product liability insurance provides coverage of $1 million per occurrence and $2 million in the aggregate with an umbrella policy which provides coverage of up to $25 million. However, if we are required to directly pay a claim in excess of our coverage, our income will be significantly reduced, and in the event of a large claim, we could go out of business.

If governmental regulations regarding defense sprays change or are applied differently, our business could suffer. The distribution, sale, ownership and use of consumer defense sprays are legal in some form in all 50 states and the District of Columbia.  Restrictions on the manufacture or use of consumer defense sprays may be enacted, which would severely restrict the market for our products or increase our costs of doing business.

Our defense sprays use hazardous materials which, if not properly handled, would result in our being liable for damages under environmental laws.  Our consumer defense spray manufacturing operation currently incorporates hazardous materials, the use and emission of which are regulated by various state and federal environmental protection agencies, including the EPA. If we fail to comply with any environmental requirements, these changes or failures may expose us to significant liabilities that would have a material adverse effect on our business and financial condition.  The EPA conducted a site investigation at our Bennington, Vermont facility in January 2008 and found the facility in need of remediation.  See Note 18.  Commitments and Contingencies.
 
 
12
 
 
Our monitoring business relies on third party providers for the software systems and communication connections we use to monitor alarms and video signals; any failure or interruption in products or services provided by these third parties could harm our ability to operate our business. Our central station utilizes third party software and third party phone and internet connections to monitor alarm and video signals. Any financial or other difficulties our providers face may have negative effects on our business.
 
Our monitoring business can lose customers due to customers' cancelling land-line telecommunications services.  Certain elements of our operating model rely on our customers' selection and continued use of traditional, land-line telecommunications services, which we use to communicate with our monitoring operations.  In order to continue to service existing customers who cancel their land-line telecommunications services and to service new customers who do not subscribe to land-line telecommunications services, some customers must upgrade to alternative and often more expensive wireless or internet based technologies. Higher costs may reduce the market for new customers of alarm monitoring services, and the trend away from traditional land-lines to alternatives may mean more existing customers will cancel service with us. Continued shifts in customers' preferences regarding telecommunications services could continue to have an adverse impact on our earnings, cash flow and customer attrition.
 
Our monitoring business faces  continued competition and pricing pressure from other companies in the  industry and, if we are unable to compete effectively with these companies, our sales and profitability could be adversely affected.   We compete with a number of major domestic security monitoring companies, as well as a large number of smaller, regional competitors.  We believe that this competition is a factor in our customer attrition, limits our ability to raise prices, and, in some cases, requires that we lower prices.  Some of our monitoring competitors, either alone or in conjunction with their respective parent corporate groups, are larger than we are and have greater financial resources, sales, marketing or operational capabilities than we do.  In addition, opportunities to take market share using innovative products, services and sales approaches may attract new entrants to the field.  We may not be able to compete successfully with the offerings and sales tactics of other companies, which could result in the loss of customers and, as a result, decreased revenue and operating results.
 
Loss of customer accounts by our monitoring business could materially adversely affect our operations. Our contracts can be terminated on 60 day notice by our customers.  We could experience the loss of accounts as a result of, among other factors:
 
 
·
relocation of customers;
 
·
customers' inability or unwillingness to pay our charges;
 
·
adverse financial and economic conditions, the impact of which may be particularly acute among our small business customers;
 
·
the customers' perceptions of value;
 
·
competition from other alarm service companies; and
 
·
the purchase of our dealers by third parties who choose to monitor elsewhere.

Loss of a large dealer customer could result in a significant reduction in recurring monthly revenue. Net losses of customer accounts could materially and adversely affect our business, financial condition and results of operations.
 
Increased adoption of "false alarm" ordinances by local governments may adversely affect our monitoring business. An increasing number of local governmental authorities have adopted, or are considering the adoption of, laws, regulations or policies aimed at reducing the perceived costs to municipalities of responding to false alarm signals. Such measures could include:
 
 
·
requiring permits for the installation and operation of individual alarm systems and the revocation of such permits following a specified number of false alarms;
 
·
imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms;
 
·
requiring further verification of an alarm signal before the police will respond; and
 
·
subjecting alarm monitoring companies to fines or penalties for transmitting false alarms.
 
Enactment of these measures could adversely affect our future business and operations. For example, concern over false alarms in communities adopting these ordinances could cause a decrease in the timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services. In addition, our costs to service affected accounts could increase.
 
 
13
 
 
Due to a concentration of monitoring customers in California, we are susceptible to environmental incidents that may negatively impact our results of operations.  Approximately 92% of the monitoring businesses’ recurring monthly revenue at December 31, 2010 was derived from customers located in California.  A major earthquake, or other environmental disaster in California where our facilities are located, could disrupt our ability to serve customers or render customers uninterested in continuing to retain us to provide alarm monitoring services.
 
We could face liability for our failure to respond adequately to alarm activations. The nature of the monitoring services we provide potentially exposes us to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses. In an attempt to reduce this risk, our alarm monitoring agreements and other agreements pursuant to which we sell our products and services contain provisions limiting our liability to customers and third parties. In the event of litigation with respect to such matters, however, these limitations may not be enforced. In addition, the costs of such litigation could have an adverse effect on us.
 
Future government regulations or other standards could have an adverse effect on our operations. Our monitoring operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to obtain licenses or permits to comply with standards governing employee selection and training and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws, regulations and/or licensing requirements change, we may be required to modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse effect on us.
 
The loss of our Underwriter Laboratories (“UL”) listing could negatively impact our competitive position. Our alarm monitoring center is UL listed. To obtain and maintain a UL listing, an alarm monitoring center must be located in a building meeting UL's structural requirements, have back-up and uninterruptible power supplies, have secure telephone lines and maintain redundant computer systems. UL conducts periodic reviews of alarm monitoring centers to ensure compliance with its regulations. Non-compliance could result in a suspension of our UL listing. The loss of our UL listing could negatively impact our competitive position.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS

At March 21, 2011, there were no unresolved comments from the SEC staff regarding our periodic or current reports.

ITEM 2.      PROPERTIES

Our corporate headquarters is located in Horsham, Pennsylvania and the office of our Chief Executive Officer is in Walnut Creek, California. We rent approximately 5,000 square feet of space at a current annual cost of approximately $116,000 in Horsham, Pennsylvania and approximately 800 square feet of space plus use of common areas at a current annual cost of approximately $51,000 in Walnut Creek, California.

Security Segment Properties.  The operations of our electronic surveillance product operations are located in Fort Lauderdale, Florida and Farmers Branch, Texas. The operations of our personal defense and law enforcement aerosol business, including administration and sales, and all of its production facilities are located in Bennington, Vermont. Our wholesale security monitoring operation is located in Anaheim, California.

The Company’s Security Segment leases manufacturing and office space in Bennington, Vermont under a lease between Vermont Mill and the Company.  The lease, as extended, expires on November 14, 2011.  Vermont Mill is controlled by Jon E. Goodrich, a former director and current employee of the Company. The original lease was entered into in November 1999 for a five year term. In November 2004, the Company exercised an option to continue the lease through November 2009 at a rate of $10,576 per month. The Company amended the lease in 2008 to occupy additional space for an additional $200 per month.  The Company also leased from November 2008 to May 2009, on a month-to-month basis, approximately 3,000 square feet of temporary inventory storage space at a monthly cost of $1,200. In September 2009, the Company and Vermont Mill extended the term of the lease to November 14, 2010 at a monthly rate of $10,776 per month and modified the square footage rented to 33,476 square feet. The Company entered into a Lease Extension Agreement on December 20, 2010 to extend the lease through November 14, 2011 at a monthly rate of $11,315 and to provide an option to further extend the lease to May 14, 2012 at the same monthly rate. Rent expense under this lease was $129,857 and $135,318 for the years ended December 31, 2010 and 2009, respectively.
 
 
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On December 4, 2009, we sold our Fort Lauderdale, Florida building for cash consideration of $1.6 million.  We had purchased the Fort Lauderdale, Florida building in June 2004.  The Fort Lauderdale, Florida building had housed the administrative and sales staff of the Security Segment’s electronic surveillance products division. With the sale of this property, we lease 7,358 square feet of office space in Fort Lauderdale, Florida for the administrative and sales staff located in the Fort Lauderdale, Florida area. This lease is for a three year term expiring on December 31, 2012 at a current rate of $7,143 per month. The lease also provides for a two year renewal option through December 31, 2014.

We own a 45,000 square foot facility in Farmers Branch, Texas that was purchased in August 2004.  The facility is used to warehouse our electronic surveillance products and our high end camera products. Additionally, in the fourth quarter of 2008, we consolidated the inventory of our Fort Lauderdale, Florida based electronic surveillance equipment operation into our Farmers Branch, Texas facility. The Farmers Branch, Texas facility is secured by a first mortgage loan in the amount of $552,510 at December 31, 2010.

In connection with our 2009 acquisition of CSSS, our wholesale security monitoring operation, we lease 10,044 square feet of office space in Anaheim, California for our administrative staff and monitoring operations. The lease is for a four year term expiring on July 31, 2013 at a current lease rate of $16,370 per month. The lease also provides for two five year renewal options through July 31, 2023.

Car Wash Properties.   As of December 31, 2010, we owned three and leased one car wash facility. As of March 21, 2011, we own two and lease one car wash facility.  Our remaining car wash facilities are reported under Discontinued Operations and are being held for sale.  We have sold 45 car wash facilities and five truck washes since December 31, 2005. The locations of our car washes and the services offered at the locations are in the chart below.

Locations (1)
  
Type of
Car Wash 
  
Number of
Facilities as of
December 31, 2010 (2)
  
Number of
Facilities as of
 March 21, 2011 (3)
             
Dallas, Texas Area
  
Full Service
  
3
  
3
             
Lubbock, Texas
  
Full Service
  
1
  
-

 
(1)
All of our locations are owned, except for one location in the Dallas, Texas area which is leased. The Lubbock, Texas location was sold on March 8, 2011. (See Note 4. Business Acquisitions and Divestures and Note 21. Subsequent Events)
 
(2)
Our locations also offer other consumer products and related car care services, such as professional detailing services (currently offered at three locations), oil and lubrication services (currently offered at three locations), gasoline dispensing services (currently offered at two locations), state inspection services (currently offered at three locations), and merchandise store sales (currently offered at three locations).
 
(3)
One Dallas, Texas area location is subject to an Agreement of Sale. It is anticipated that the sale of this location will be consummated in the second quarter of 2011.

Certain of our car washes are encumbered by first mortgage loans.  Of the four car washes owned or leased by us at December 31, 2010, two properties and related equipment with a net book value totaling $3.7 million secured first mortgage loans totaling $1.4 million and two properties with a net book value totaling $810,000 million were not encumbered.

ITEM 3.         LEGAL PROCEEDINGS

The Company and its former Chief Executive Officer, Louis D. Paolino, Jr., have settled the various legal actions they had filed against each other.  The settlement was entered into on October 26, 2010.  As part of the settlement, the Company paid Mr. Paolino $2,300,000 on November 1, 2010 and $2,310,000 on December 29, 2010.  With Mace’s final payment under the settlement agreement, all legal actions between Mr. Paolino and the Company have been dismissed with prejudice and mutual releases between the Company and Mr. Paolino became effective. As previously disclosed in the Company's filings under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) an arbitration panel of the American Arbitration Association awarded Mr. Paolino the sum of $4,148,912 as damages and a supplemental award of $738,835 for legal fees in connection with various claims filed by Mr. Paolino in connection with his termination as the Company’s Chief Executive Officer (the “Arbitration Awards”).  The Arbitration Awards were confirmed on October 8, 2010 by the Court of Common Pleas of Philadelphia County.  As of the quarter ended March 31, 2010, the Company recorded an accrual of $4,500,000 million for the payment of the Arbitration Awards, increased to $4,600,000 in the quarter ended June 30, 2010. The Court also ruled that Mr. Paolino had until December 8, 2010 to exercise 1,769,682 stock options which were cancelled by the Company upon Mr. Paolino's termination.  These stock options were not exercised by Mr. Paolino by December 8, 2010 and accordingly expired and became null and void.
 
 
15
 

During January 2008, the United States Environmental Protection Agency (the “EPA”) conducted a site investigation at the Company’s Bennington, Vermont location and the building within which the facility is located.  The Company leases 33,476 square feet of the building from Vermont Mill Properties, Inc. (“Vermont Mill”).  The site investigation was focused on whether hazardous substances were being improperly stored.  After the site investigation, the EPA notified the Company and the building owner, Benmont Mill Properties, Inc. (“Benmont”), that remediation of certain hazardous wastes was required.  Vermont Mill and Benmont are both owned and controlled by Jon Goodrich, the President of the Company’s defense spray division.  The EPA, the Company, and the building owner entered into an Administrative Consent Order under which the hazardous materials and waste were remediated. All remediation required by the Administrative Consent Order was completed within the time allowed by the EPA and a final report regarding the remediation was submitted to the EPA in October 2008, as required by the Administrative Consent Order.  On September 29, 2009, the EPA accepted the final report. On February 23, 2010, the EPA issued the Company an invoice for $240,096 representing the total of the EPA's oversight costs that the Company and Benmont were obligated to pay under the Administrative Consent Order.  On April 8, 2010, the Company negotiated a reduction in the oversight cost reimbursement and, on April 13, 2010, the Company paid a negotiated amount of $216,086 to the EPA.  During the quarter ended September 30, 2010, Benmont reimbursed the Company 15% of the amount paid to the EPA or $32,413.  A total estimated cost of approximately $786,000 relating to the remediation, which includes disposal of the waste materials, as well as expenses incurred to engage environmental engineers and legal counsel and reimbursement of the EPA’s costs, has been recorded through December 31, 2010.

The U.S. Attorney conducted an investigation of the Company relating to possible violations of the Resource Conservation and Recovery Act (“RCRA”) at the Company’s Bennington, Vermont location. On November 16, 2010, the U.S. Attorney filed a one count indictment in the Federal District Court for the District of Vermont charging the Company and Jon Goodrich with a felony of storing hazardous waste without a permit under 42 U.S.C. Section 6928(d)(2)(A).   Mr. Goodrich is the President of Mace Personal Defense, Inc., the Company's defense spray division located in Bennington, Vermont.  The Company has resolved the indictment through a Plea Agreement entered into between the Company's subsidiary, Mace Personal Defense, Inc. and the U.S. Attorney.  The Plea Agreement was made under Fed. R. Crim. P. 11(c)(1)(C), and provides in part, for (i) Mace Personal Defense, Inc., to plead guilty to one count of violating 42 U.S.C. § 6928(d)(2)(A) (Storage of Hazardous Waste Without a Permit); (ii) Mace Personal Defense, Inc. to pay a fine of $100,000 (the "Fine") and a court assessment of $400, the Fine to be paid $34,000 on sentencing and two additional installments of $33,000 each,  at six months and twelve months from January 4, 2011; (iii) the Company to guarantee the payment of the Fine; (iv) the United States to dismiss the indictment against the Company at time of sentencing of Mace Personal Defense, Inc.; and (v) the United States not to prosecute Mace Personal Defense, Inc. (excluding the guilty plea) or the Company for any criminal offenses known to the United States Attorney's Office of Vermont as of the date of signing of the Plea Agreement committed by the Company or Mace Personal Defense, Inc. in the District of Vermont relative to the storage, shipment, handling or disposal of hazardous waste including any associated record keeping or reporting offenses.  The Plea Agreement is not final until it is accepted by the Court. A hearing date for sentencing has been scheduled for May 26, 2011.  The Company has recorded an accrual of $100,000 at December 31, 2010 as a result of its agreement to pay a $100,000 Fine as part of the Plea Agreement.

The Company is a party to various other legal proceedings related to its normal business activities.  In the opinion of the Company’s management, none of these proceedings are material in relation to the Company’s results of operations, liquidity, cash flows, or financial condition.

Additional information regarding our legal proceedings can be found in Note 18 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

ITEM 4.         (REMOVED AND RESERVED)

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 (a) Market Price and Dividends of the Registrant’s Common Equity

Our common stock was traded on the NASDAQ Global Market through September 30, 2010 and since September 30, 2010 our stock has been quoted on the OTCQB system of OTC Market, Inc. under the trading symbol "MACE."  Common stock price reflects inter-dealer quotations, does not include retail markups, markdowns or commissions and does not necessarily represent actual transactions.
 
 
16
 
 
The following table sets forth, for the quarters indicated, the high and low sale prices per share for our common stock, as reported by Nasdaq through September 30, 2010 and by the OTCQB system after September 30, 2010.

   
HIGH
    
LOW
  
             
Year Ended December 31, 2009
            
First Quarter
   $ 0.91     $ 0.61  
Second Quarter
   $ 1.29     $ 0.65  
Third Quarter
   $ 1.19     $ 0.89  
Fourth Quarter
   $ 1.24     $ 0.68  
Year Ended December 31, 2010
                
First Quarter
   $ 1.24     $ 0.75  
Second Quarter
   $ 0.96     $ 0.56  
Third Quarter
   $ 0.63     $ 0.41  
Fourth Quarter
   $ 0.45     $ 0.24  
Year Ended December 31, 2011
                
First Quarter, through March 21, 2011
   $ 0.55     $ 0.34  

The closing price for our common stock on June 30, 2010 was $0.60.  For purposes of calculating the aggregate market value of our shares of common stock held by non-affiliates, as shown on the cover page of this report, it has been assumed that all of the outstanding shares were held by non-affiliates except for the shares held by our directors and executive officers and stockholders owning 10% or more of our outstanding shares.  However, this should not be deemed to constitute an admission that all such persons are, in fact, affiliates of the Company, or that there are not other persons who may be deemed to be affiliates of the Company.  For further information concerning ownership of our securities by executive officers, directors and principal stockholders, see Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

As of March 21, 2011 we had 93 stockholders of record and approximately 2,600 beneficial owners of our common stock. We did not pay dividends in the preceding two years and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain all working capital and earnings, if any, for use in our operations and in the expansion of our business.  Any future determination with respect to the payment of dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our results of operations, financial condition and capital requirements, the terms of any then existing indebtedness, general business conditions, and such other factors as our Board of Directors deems relevant. Certain of our credit facilities prohibit or limit the payment of cash dividends without prior bank approval.

For information regarding our equity compensation plans, See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

(c) Recent Sales of Unregistered Securities

None
 
 
17
 
 
(d) Issuer Purchases of Securities

The following table summarizes our equity security repurchase during the three months ended December 31, 2010:

Period
  
Total Number
of Shares
Purchased
    
Average Price
Paid per Share
    
Total Number of
Shares Purchased
as part of
Publicly
Announced Plans
or Programs
    
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
Programs (1)
  
October 1 to October 31, 2010
     -     $ -       -     $ 1,226,000  
November 1 to November 30, 2010
     -     $ -       -     $ 1,226,000  
December 1 to December 31, 2010
     -     $ -       -     $ 1,226,000  
Total
     -     $ -       -          

 
(1)
On August 13, 2007, the Company’s Board of Directors approved a share repurchase program to allow the Company to repurchase up to an aggregate $2,000,000 of its common shares in the future if the market conditions so dictate. As of December 31, 2010, 747,860 shares had been repurchased under this program at a cost of approximately $774,000.

ITEM 6.         SELECTED FINANCIAL DATA

The Company is a “smaller reporting company” as defined by Rule 10(f)(1) of Regulation S-K, and as such is not required to present the information under this Item.

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

The following discussion reviews our operations for each of the two years in the periods ended December 31, 2010 and 2009, and should be read in conjunction with our Consolidated Financial Statements and related notes thereto included elsewhere herein.

FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS

This report includes forward looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act (“Forward-Looking Statements”).  All statements other than statements of historical fact included in this report are Forward-Looking Statements.  Forward-Looking Statements are statements related to future, not past, events. In this context, Forward-Looking Statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," believe," "seek," or ''will." Forward-Looking Statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our Forward-Looking Statements include: the severity and duration of current economic and financial conditions; our success in selling our remaining car washes; the level of demand of the customers we serve for our goods and services; and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties are described in more detail in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K. The Forward- Looking Statements made herein are only made as of the date of this filing, and we undertake no obligation to publicly update such Forward-Looking Statements to reflect subsequent events or circumstances.
 
 
18
 
 
Introduction
 
Revenues

Security

Our Security Segment designs, manufactures, assembles, markets and sells a wide range of security products.  The products include less-than-lethal Mace® defense sprays, intrusion fencing, access control, security cameras and security digital recorders. The Security Segment also owns and operates a UL listed monitoring center that monitors video and security alarms for approximately 400 security dealer clients with over 41,000 end-user accounts. The Security Segment’s electronic surveillance products and components are purchased from Asian and European manufacturers.  Many of our products are designed to our specifications. We sell the electronic surveillance products and components primarily to installing dealers, distributors, system integrators and end-users.  Other products in our Security Segment are less-than-lethal Mace® defense sprays and other security devices such as monitors, high-end digital and machine vision cameras and professional imaging components.  The main marketing channels for our products are industry shows, trade publications, catalogs, the internet, telephone orders, distributors, and mass merchants.  Revenues generated for the year ended December 31, 2010 for the Security Segment were comprised of approximately 22% from our professional electronic surveillance operation, 7% from our consumer direct home and small business electronic surveillance operations, 25% from our machine vision camera and video conferencing equipment operation, 29% from our personal defense and law enforcement aerosol operation in Vermont, and 17% from our wholesale security monitoring operation in California.

Cost of Revenues

Security

Cost of revenues within the Security Segment consists primarily of costs to purchase or manufacture the security products including direct labor and related taxes and fringe benefits, and raw material costs, and telecommunication costs related to our wholesale monitoring operation. Product warranty costs related to the Security Segment are mitigated in that a portion of customer product warranty claims are covered by the supplier through repair or replacement of the product associated with the warranty claim.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of management, clerical and administrative salaries, professional services, insurance premiums, sales commissions, and other costs relating to marketing and sales.

We expense direct incremental costs associated with business acquisitions as well as indirect acquisition costs, such as executive salaries, corporate overhead, public relations, and other corporate services and overhead.

Depreciation and Amortization

Depreciation and amortization consists primarily of depreciation of buildings and equipment, and amortization of leasehold improvements and certain intangible assets.  Buildings and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or the lease term with renewal options. Intangible assets, other than goodwill or intangible assets with indefinite useful lives, are amortized over their useful lives ranging from three to fifteen years, using the straight-line or an accelerated method.

Other Income

Other income consists primarily of gains and losses on short-term investments.

Income Taxes

Income tax expense is derived from tax provisions for interim periods that are based on the Company’s estimated annual effective rate.  Currently, the effective rate differs from the federal statutory rate primarily due to state and local income taxes, non-deductible costs related to acquired intangibles, and changes to the valuation allowance.
 
 
19
 
 
Discontinued Operations

Digital Media Marketing

The Company’s Board of Directors committed to a plan to divest of the Digital Media Marketing Segment and, on November 11, 2010, the Company entered into a Stock Purchase Agreement to sell the e-commerce division of its Digital Media Marketing Segment, Linkstar Corporation. On November 22, 2010, we sold Linkstar Corporation for a sale price of $1.1 million to Silverback Network, Inc. (the “Purchaser”). Under terms of the Stock Purchase Agreement, the Purchaser paid $1.1 million for the stock of Linkstar Corporation, $990,000 of which was received at closing with ten percent (10%) of the purchase price, or $110,000, placed into escrow, which funds will be released to the Company in six months provided there are no unsatisfied indemnity claims under the Stock Purchase Agreement. The results of the Digital Media Marketing Segment’s operations have been classified as assets held for sale and liabilities related to assets held for sale in our balance sheet at December 31, 2010, and as discontinued operations in our statements of operations and our statements of cash flows.  Our Digital Media Marketing Segment consisted of two business divisions: (1) e-commerce and (2) online marketing. At December 31, 2010, the results of operations of our previously owned Digital Media Marketing operations are reported as discontinued operations; and accordingly, have been segregated from the revenue and expense discussions below.

Linkstar, the e-commerce division, was a direct-response product business that developed, marketed and sold products directly to consumers through the internet. We reached our customers predominantly through online advertising on third-party promotional websites. Linkstar also marketed products on promotional websites operated by Promopath, our online marketing division. Promopath, our online affiliate marketing company, secured customer acquisitions or leads for advertising clients principally by using promotional internet sites that offer free gifts.

Revenues within our Digital Media Marketing Segment for the year ended December 31, 2010 were approximately $5.9 million, consisting of $5.7 million, or 97%, from our e-commerce division and $172,000, or 3%, from our online marketing division.

Cost of revenues within the Digital Media Marketing Segment consisted primarily of amounts we pay to website publishers that are directly related to revenue-generating events, including the cost to enroll new members, fulfillment and warehousing costs, including direct labor and related taxes, fringe benefits and e-commerce product costs. Promopath’s largest expense is the purchasing of internet addresses to which it sends its promotional pages.

Car Wash Services

At December 31, 2010, we owned or leased four full service car wash locations in Texas which are reported as discontinued operations (see Note 5. of the Notes to Consolidated Financial Statements); and accordingly, have been segregated from the following revenue and expense discussion.  We earn revenues from washing and detailing automobiles; performing oil and lubrication services, minor auto repairs, and state inspections; selling fuel; and selling merchandise through convenience stores within the car wash facilities.  The majority of revenues from our car wash operations are collected in the form of cash or credit card receipts, thus minimizing customer accounts receivable. Cost of revenues within the car wash operations consists primarily of direct labor and related taxes and fringe benefits, certain insurance costs, chemicals, wash and detailing supplies, rent, real estate taxes, utilities, car damages, maintenance and repairs of equipment and facilities, as well as the cost of the fuel and merchandise sold.

On December 31, 2007, Eagle completed the purchase of the Company’s five truck washes for $1.2 million in consideration, consisting of $280,000 cash and a $920,000 note payable to the Company secured by mortgages on the truck washes. The $920,000 note, which has a balance of $832,000 at December 31, 2010, has a five-year term, with principal and interest paid on a 15-year amortization schedule.
 
 
20
 
 
Results of Operations for the Two Years Ended December 31, 2010 and 2009

The following table presents the percentage each item in the consolidated statements of operations bears to total revenues:

   
Year ended December 31,
  
   
2010
    
2009
  
             
Revenues
     100 %     100 %
Cost of revenues
     70.0       69.9  
Selling, general and administrative expenses
     52.0       68.3  
Arbitration award
     25.1       -  
Depreciation and amortization
     3.2       3.0  
Asset impairment charges
     2.6       2.5  
Operating loss
     (52.9 )     (43.7 )
Interest expense, net
     (0.2 )     (0.0 )
Other income
     -       -  
Loss from continuing operations before income taxes
     (53.1 )     (43.7 )
Income tax expense
     (0.2 )     -  
Loss from continuing operations
     (53.3 )     (43.7 )
Loss from discontinued operations, net of tax
     (45.1 )     (15.2 )
Net loss
     (98.4 )%     (58.9 )%

Revenues

Security

Revenues were approximately $18.4 million and $18.6 million for the years ended December 31, 2010 and 2009, respectively.  Of the $18.4 million of revenues for the year ended December 31, 2010, $3.9 million, or 22%, was generated from our professional electronic surveillance operations, $1.3 million, or 7%, from our consumer direct home and small business electronic surveillance operations, $4.6 million or 25%, from our high-end digital and machine vision cameras and professional imaging components operation, $5.4 million, or 29%, from our personal defense and law enforcement aerosol operations in Vermont, and $3.2 million, or 17%, from our wholesale security monitoring operation in California acquired on April 30, 2009. Of the $18.6 million of revenues for the year ended December 31, 2009, $4.7 million, or 25%, was generated from our professional electronic surveillance operation, $2.5 million, or 14%, from our consumer direct home and small business electronic surveillance operation, $4.1 million or 22% from our high-end digital and machine vision cameras and professional imaging components operation, $5.0 million, or 27%, from our personal defense and law enforcement aerosol operation in Vermont and $2.3 million, or 12%, from our wholesale security monitoring operation.

Overall revenues within the Security Segment remained constant in 2010, despite increases in revenues from our wholesale security monitoring operation acquired in April 2009, our existing Vermont personal defense operation and from our machine vision operation.  Revenues decreased in our consumer direct electronic surveillance division and our professional electronic surveillance operation.  The combined $1.9 million, or 26%, decrease in sales within our consumer direct and professional electronic surveillance operations was due to several factors, including the impact on sales of increased competition and a reduction in spending by many of our customers impacted by low housing construction starts.  Our Vermont personal defense operations sales increased approximately $328,000, or 7%, from 2009 to 2010, with an increase noted in the sale of aerosol and non-aerosol products and TG Guard systems. Additionally, the Company’s machine vision camera and video conferencing equipment operations experienced an approximate $473,000, or 12%, increase in sales in 2010 over 2009, largely as a result of a focus on vertically integrating products, selling more system solutions, combined with increased sales in international markets.
 
 
21
 
 
Cost of Revenues

Security

Costs of revenues were $12.9 million and $13.0 million or 70% of revenues for 2010 and 2009, respectively.

Selling, General and Administrative Expenses

SG&A expenses for the years ended December 31, 2010 and 2009 were $9.6 million and $12.7 million, respectively.  SG&A expenses as a percentage of revenues decreased to 52% in 2010 as compared to 68% for 2009. The reduction in SG&A costs were the result of implementation of corporate wide cost savings measures in 2008 through 2010, including a significant reduction in employees throughout the entire Company.  The cost savings were partially realized from a reduction in costs with the consolidation of our security division’s surveillance equipment warehouse operations into our Farmers Branch, Texas facility, as well as the consolidation of customer service, accounting services, and other administrative functions within these operations.  SG&A costs decreased within our Florida and Texas electronic surveillance equipment operations by approximately $1.3 million, or 30%, partially as a result of our consolidation efforts to reduce SG&A expenses as noted above and partially as a result of our reduced sales levels.  In addition to these cost savings measures, we noted a reduction in stock option non-cash compensation expense from continuing operations from approximately $115,000 in 2009 to $66,000 in 2010.  SG&A expenses also include legal costs related to the recently settled arbitration proceedings with Mr. Paolino of approximately $344,000 and $798,000 for 2010 and 2009, respectively, and $224,000 and $163,000 of severance cost related to employee reductions in 2010 and 2009, respectively.  Finally, in May 2010, the Company adjusted a contingent purchase price payout related to its April 2009 acquisition of the Company’s wholesale monitoring operation originally recorded at $276,000 after determining that acquired recurring monthly revenue (“RMR”) calculated at the acquisition’s one year anniversary date was less than the required amount as defined in the Stock Purchase Agreement.  Accordingly, the Company recorded a reduction in SG&A expenses during the second quarter ended June 30, 2010 of $276,000 and reduced a portion of the previously recorded contingent liability at the date of the acquisition of CSSS.

Depreciation and Amortization

Depreciation and amortization totaled $582,000 and $567,000 for 2010 and 2009, respectively. The increase in depreciation and amortization expense in 2010 was principally related to amortization expense on the CSSS acquired intangible assets.

Asset Impairment Charges

In accordance with ASC 360, Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. Assets classified as held for sale are measured at the lower of carrying value or fair value, net of costs to sell.

Continuing Operations

In assessing goodwill for impairment, we first compare the fair value of our final reporting unit containing goodwill, our wholesale monitoring business, with its net book value. We estimate the fair value of the reporting unit using discounted expected future cash flows, supported by the results of various market approach valuation models. If the fair value of the reporting unit exceeds its net book value, goodwill is not impaired, and no further testing is necessary. If the net book value of this reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we determine the implied fair value of goodwill in the same manner as if our reporting unit was being acquired in a business combination. Specifically, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our balance sheet, we record an impairment charge for the difference.

We performed extensive valuation analyses, utilizing both income and market approaches, in our goodwill assessment process. The following describes the valuation methodologies used to derive the fair value of the reporting units.

 
·
Income Approach: To determine fair value, we discounted the expected cash flows of the reporting unit. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our reporting units and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our model, we used a terminal value approach. Under this approach, we used estimated operating income before interest, taxes, depreciation and amortization in the final year of our model, adjusted to estimate a normalized cash flow, applied a perpetuity growth assumption and discounted by a perpetuity discount factor to determine the terminal value. We incorporated the present value of the resulting terminal value into our estimate of fair value.
 
 
22
 
 
 
·
Market-Based Approach: To corroborate the results of the income approach described above, we estimated the fair value of our reporting unit using several market-based approaches, including the value that we derive based on our consolidated stock price as described above. We also used the guideline company method which focuses on comparing our risk profile and growth prospects to select reasonably similar/guideline publicly traded companies.

The determination of the fair value of the reporting unit requires us to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating income before depreciation and amortization and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. In addition, changes in underlying assumptions would have a significant impact on either the fair value of the reporting units or the goodwill impairment charge.

The allocation of the fair value of the reporting unit to individual assets and liabilities within the reporting unit also requires us to make significant estimates and assumptions. The allocation requires several analyses to determine fair value of assets and liabilities including, among others, customer relationships, non-competition agreements and current replacement costs for certain property, plant and equipment.

Due to continuing challenges in our Mace Security Products, Inc. reporting unit, we performed certain impairment testing of our remaining intangible assets, specifically, the value assigned to customer lists, product lists, and trademarks as of June 30, 2009, December 31, 2009,  June 30, 2010 and December 31, 2010. We recorded an impairment charge to trademarks of approximately $80,000 and an impairment charge of $142,000 to customer lists, both principally related to our consumer direct electronic surveillance operations as of June 30, 2009 and an impairment charge of $30,000 for trademarks related to our high end digital and machine vision cameras and professional imaging component operations at December 31, 2009.  With continuing deterioration in 2010, we recorded an additional impairment charge of $74,000 to customer lists, $81,000 to product lists, and $70,000 for trademarks as of June 30, 2010, and impairment charges of $260,000 at December 31, 2010 relating to trademarks, all principally related to our consumer direct electronic surveillance operations and our high end digital and machine vision cameras and professional imaging component operation.

Additionally, we conduct our annual assessment of goodwill for impairment for our wholesale security monitoring business reporting unit as of April 30 of each year. This is our remaining business reporting unit with recorded goodwill. With respect to our assessment of goodwill impairment for our wholesale security monitoring business as of April 30, 2010, we determined that there was no impairment in that the fair value for this reporting unit exceeded the book value of its invested capital. Our wholesale security monitoring business has recorded goodwill of $1.98 million, which exceeds the book value of its invested capital by $249,000, or 7.8%. Subsequent to our most recent annual testing date of April 30, 2010, the operating results of this reporting unit have performed at expected levels and no impairment indicators were deemed present at December 31, 2010. The determination of the fair value of this reporting unit requires us to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, expected future revenues and expense levels, the discount rate, terminal growth rates, operating income before depreciation and amortization and capital expenditures forecasts. We periodically update our forecasted cash flows of the wholesale security monitoring reporting unit considering current economic conditions and trends, estimated future operating results, our views of growth rates, anticipated future economic and relevant regulatory conditions.  The key or most significant assumption is our estimate of future recurring revenues. If monthly recurring revenue from security monitoring services within this reporting unit were to be adversely affected by the ongoing economic climate or by other events and we were unable to adjust operating costs to compensate for such revenue loss, this reporting unit would be adversely affected which would negatively impact the fair value of this business. Based on the Company’s April 30, 2010 assessment, a hypothetical reduction in the annual recurring revenue growth rate from a range of 5% to 6% to an annual recurring revenue growth ratio of 3% to 4%, without a corresponding decrease in operating expenses, would result in an approximate $500,000 impairment charge.  Additional events or circumstances that could have a negative effect on estimated fair value of this reporting unit include, but are not limited to, a loss of customers due to competition, pressure from our customers to reduce pricing, the purchase of our dealers by third parties who choose to obtain monitoring services elsewhere, the current adverse financial and economic conditions on revenues and costs, inability to continue to employ a competent workforce at current rates of pay, changes in government regulations, and accelerating costs beyond management’s control.

In the fourth quarter of 2008, we consolidated the inventory in our Fort Lauderdale, Florida warehouse into our Farmers Branch, Texas facility.  Certain of our administrative and sale staff of our Security Segment’s electronic surveillance products division remain in the Fort Lauderdale, Florida building, which we listed for sale with a real estate broker.  We performed an updated market evaluation of this property, listing the facility for sale at a price of $1,950,000.  We recorded an impairment charge of $275,000 related to this property at December 31, 2008, and additional impairment charges totaling $210,000 in 2009 to write-down the property to our estimate of net realizable value based on updated market valuations of the property.  On December 4, 2009, the Company sold the Fort Lauderdale, Florida building, subject to an Agreement of Sale entered into on October 5, 2009, and recorded a loss of $107,000 in the fourth quarter of 2009 after closing costs and broker commissions.
 
 
23
 
 
Discontinued Operations

As noted in Note 4. Business Acquisitions and Divestitures, in the accompanying financial statements, the agreements of sale related to the three car washes the Company owned in Austin, Texas were amended to modify the sale price to $8.0 million. This amended sale price, less costs to sell, was estimated to result in a loss upon disposal of approximately $175,000. Accordingly, an impairment loss of $175,000 was recorded as of September 30, 2009 and included in the results from discounted operations in the accompanying consolidated statement of operations. The sale of the Austin, Texas car washes was completed on November 30, 2009. During the quarter ended December 31, 2009, we wrote down three Arlington, Texas car wash sites for a total of $1.2 million, including a $200,000 write down of a car wash site for which the Company entered into an agreement of sale on January 27, 2010 for a sale price below its net book value; and a $37,000 write down related to a Lubbock, Texas car wash sold on March 10, 2010. In April 2010, we reduced the sale price of a Lubbock, Texas car wash location based on recent offers of $1.7 million for this location and our decision to negotiate a sale of this site at this price, which was below the net book value of $1.85 million.  Accordingly, we recorded an impairment charge of $150,000 related to this site at March 31, 2010. Finally, in October 2010, we accepted an offer to purchase our Arlington, Texas oil lubrication and self serve car wash facility for a sale price of $340,000, which was below the site’s net book value. Accordingly, we recorded an impairment charge of $53,000 related to this site as of September 30, 2010.  We have determined that, due to further reductions in car wash volumes at these sites resulting from increased competition and a deterioration in demographic in the immediate geographic areas of these sites, current economic pressures, along with current data utilized to estimate the fair value of these car wash facilities, future expected cash flows would not be sufficient to recover their carrying values.

Prior to the disposition of our Digital Media Marketing Segment in the fourth quarter of 2010, we conducted our annual assessment of goodwill for impairment for this reporting unit as of June 30 of each year.  We updated our forecasted cash flows of these reporting units during the second quarter of each year.  These updates considered current economic conditions and trends, estimated future operating results for the launch of new products as well as non-product revenue growth, and anticipated future economic and regulatory conditions.  Based on the results of our assessment of goodwill impairment at June 30, 2009 and June 30, 2010, the net book value of our Digital Media Marketing Segment reporting unit exceeded its fair value at both measurement dates.  With the noted potential impairment at June 30, 2009 and June 30, 2010, we performed the second step of the impairment test to determine the implied fair value of goodwill.  The resulting implied goodwill was $5.9 million at June 30, 2009 and $2.8 million at June 30, 2010, which were less than the recorded value of goodwill at these respective dates. Accordingly, we recorded impairments to write down goodwill of this reporting unit by $1.0 million and $3.1 million at June 30, 2009 and June 30, 2010, respectively. Additionally, during our June 30, 2010 review of intangible assets, we determined that trademarks within our Digital Media Marketing Segment were also impaired by $275,000. Finally, as noted in Note 5. Discontinued Operations and Assets Held for Sale, we entered into an agreement of sale on November 11, 2010 to sell the e-commerce division of our Digital Media Marketing Segment, Linkstar, for a sale price of $1.1 million. Accordingly, an impairment loss of $3.6 million was recorded as of September 30, 2010 and included in the results from discontinued operations in the accompanying consolidated statements of operations. The $3.6 million impairment charge included a write-off of the remaining goodwill of the Digital Media Marketing Segment of $2.8 million and $800,000 related to other intangible assets, including software, trademarks, and non-compete agreements. With the closing of the sale of the e-commerce division of our Digital Media Marketing Segment on November 22, 2010, a final loss of $191,000 on disposal was recorded in the fourth quarter of 2010.

Interest Expense, Net

Interest expense, net of interest income, for the years ended December 31, 2010 and 2009 was $51,000 and $7,000, respectively. The increase in net interest expense is due to an increase in interest expense of approximately $14,000 and a reduction in interest income of approximately $30,000 with the Company’s decrease in average cash and cash equivalent balances on hand during 2010.

Other Income

Other income was $5,000 and $0 for 2010 and 2009, respectively.
 
 
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Income Taxes

We recorded income tax expense of $30,000 and $0 for the years ended December 31, 2010, and 2009, respectively. Income tax expense (benefit) reflects the recording of income taxes on loss before income taxes at effective rates of approximately (0.3)%, and (0)% for the years ended December 31, 2010 and 2009, respectively.  The effective rate differs from the federal statutory rate for each year primarily due to state and local income taxes, non-deductible costs related to intangibles, and changes to the valuation allowance.

Realization of the future tax benefits related to the deferred tax assets is dependent upon many factors, including the Company’s ability to generate taxable income in future years. The Company performed a detailed review of the considerations influencing our ability to realize the future benefit of the NOLs, including the extent of recently used NOLs, the turnaround of future deductible temporary differences, the duration of the NOL carryforward period, and the Company’s future projection of taxable income. The Company increased its valuation allowance against deferred tax assets by $3.8 million in 2010 and $3.4 million in 2009 with a total valuation allowance of $22.2 million at December 31, 2010 representing the amount of its deferred income tax assets in excess of the Company’s deferred income tax liabilities. The valuation allowance was recorded because management was unable to conclude that realization of the net deferred income tax asset was more likely than not. This determination was a result of the Company’s continued losses, the uncertainty of the timing of the Company’s sale of its remaining Car Wash operations, and the ultimate extent of growth in the Company’s Security Segment.

Discontinued Operations

Digital Media Marketing

Revenues within our Digital Media Marketing Segment for the year ended December 31, 2010 were approximately $5.9 million, consisting of $5.7 million from our e-commerce division and $172,000 from our online marketing division.  Revenues within our Digital Media Marketing Segment for the year ended December 31, 2009 were approximately $9.7 million, consisting of $9.6 million from our e-commerce division and $21,000 from our online marketing division.  The reduction in revenues within our e-commerce division of approximately $4.0 million is principally related to a reduction in sales in our Purity by Mineral Science cosmetic product line, our ExtremeBriteWhite teeth whitening product, and our cross sell revenue with third-party companies. Additionally, in May 2010, many credit card companies implemented restrictive controls over customer data in response to legislation which negatively impacted our cross sell revenue.  Finally, our ExtremeBriteWhite product sales were negatively impacted during the second and third quarter of 2010 as a result of one of our credit card processors discontinuing the processing of payments for this product.

Cost of revenues within our Digital Media Marketing Segment was approximately $4.7 million, or 79% of revenues, for the year ended December 31, 2010 and approximately $6.9 million, or 72% of revenues, for the year ended December 2009.  The decrease in cost is due to a decline in new member acquisitions, partially offset by an increase in average CPA marketing expense for ExtremeBriteWhite customers.  CPA marketing expense is recognized at the time a new member is acquired.

Car Wash Services

Revenues within the car wash operations for the year ended December 31, 2010 were $5.1 million as compared to $10.6 million for the same period in 2009, a decrease of $5.5 million or 52%. This decrease was primarily attributable to a decrease in wash and detail services, principally due to the sale of car washes and reduced car wash volumes in the Texas market. Overall car wash volumes declined by 252,000 cars, or 60%, in 2010 as compared to 2009, largely related to the closure and divestiture of 11 car wash locations in Texas since January 2009.  Additionally, the Company experienced a slight decrease in average car wash and detailing revenue per car from $17.89 in 2009 to $17.38 in 2010.

Cost of revenues within the car wash operations were $4.6 million, or 91% of revenues, and $6.6 million or 88% of revenues, for the years ended December 31, 2010 and 2009, respectively.  The increase in cost of revenues as a percent of revenues in 2010 as compared to 2009 was the result of the reduction in car wash volumes and a slight increase in cost of labor as a percentage of car wash and detailing revenues.

Liquidity and Capital Resources

Liquidity

Cash and cash equivalents were $2.6 million at December 31, 2010.  The ratio of our total debt to total capitalization, which consists of total debt plus stockholders’ equity, was 20.0% at December 31, 2010 and 8.4% at December 31, 2009. Our business requires a substantial amount of capital, most notably to fund our losses.  We plan to meet these capital needs from various financing sources, including borrowings, cash generated from the sale of car washes, and the issuance of common stock. Our debt covenants with J.P. Morgan Chase Bank, N.A. require us to maintain a total unencumbered cash and marketable securities balance of $1.5 million.
 
 
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As of December 31, 2010, we had working capital of approximately $7.0 million.  Working capital was approximately $16.6 million at December 31, 2009.  Our positive working capital decreased by approximately $9.6 million from December 31, 2009 to December 31, 2010, principally due to the payment of $4.6 million for the Paolino arbitration award and from our 2010 net loss. As described in Note 18.  Commitments and Contingencies, the Company and Mr. Paolino settled the various legal actions they had filed against each other in exchange for the Company paying Mr. Paolino $2,300,000 on November 1, 2010 and $2,310,000 on December 29, 2010.

The Company funded a portion of the payment to Mr. Paolino by borrowing $1.35 million from Merlin Partners, LP (“Merlin”).  The loan which had an original maturity date of March 28, 2011 was extended to April 28, 2011.   The loan was payable in two installments of $675,000 each upon the closing of each of two car washes that were under agreements of sale at December 31, 2010.  The Company made a payment of $675,000 to Merlin upon the sale of the Lubbock, Texas car wash on March 8, 2011. The Company expects to pay the remaining balance owed plus accrued interest from the proceeds generated by the sale of a Dallas, Texas area car wash that is under an agreement of sale and expected to close in the second quarter of 2011. Merlin is a fund managed by Ancora Advisors, a subsidiary of the Ancora Group.  Richard Barone, a Company director, is Chairman of the Ancora Group.  The loan bears interest at a rate of 12% per annum, and is secured by second liens on the Dallas, Texas area car wash and a security interest in the trade name “Mace”.  As part of the consideration for the financing, Merlin was also granted a Common Stock Purchase Warrant (the “Warrant”) to purchase up to 314,715 shares of the Company’s common stock at an exercise price of $0.20 per share, expiring December 28, 2015.  The Warrant contains anti-dilution provisions providing that Merlin will receive additional warrants exercisable into 2% of any common stock of the Company issued by the Company through December 28, 2011.  The exercise price of the Warrant will be adjusted lower to equal the stock issuance price of any stock issued through December 28, 2011 at a price below $0.20.  The warrants were accounted for under the equity method with the Black-Scholes fair value of the warrants of $63,274 recorded as a discount to the $1.35 million Merlin loan and as additional paid-in capital. The discount will be charged to interest expense over the three month maturity period of the loan with an offsetting credit to the loan balance.
 
The Company plans to raise working capital through a rights offering or other sale of securities. On December 23, 2010, the Board of Directors of the Company approved a plan to prepare a rights offering to purchase shares of the Company’s common stock (the “Rights Offering”). On March 25, 2011, the Company and Ancora Securities, Inc. ("Ancora") executed a Placement Agent and Dealer-Manager Agreement, under which Ancora will act as the placement agent for the planned Rights Offering. The basic terms of the Rights Offering being prepared is for each stockholder to be given the right to purchase three shares of common stock for each share of common stock owned as of the record date, at an exercise price to be established by the Company.  The record date and exercise price will be determined and set by the Board of Directors at a later date near the date of the mailing of the prospectus for the Rights Offering.  All new shares issued under the Rights Offering will be registered under the Securities Act of 1933, as amended (the “Securities Act”).  We have also entered into a Securities Purchase Agreement dated March 25, 2011 ("Securities Purchase Agreement") with Merlin, a hedge fund which is under common control with Ancora.  In accordance with the Securities Purchase Agreement, Merlin and up to three assignees of Merlin, will purchase $4,000,000 of our common stock, valued at the per share exercise price used in the Rights Offering at the conclusion of the Rights Offering.  There are conditions to Merlin's obligation to purchase, including: (i) that the Rights Offering occur; (ii) the stock sold to Merlin is registered under the Securities Act; and (iii) the Company expand its Board of Directors to seven persons with the two vacancies created by the expansion to be filled with individuals acceptable to Merlin. The Company is currently preparing a registration statement to register the Rights Offering stock and the stock to be sold to Merlin.  Richard Barone, a member of our Board of Directors, is a controlling owner of Ancora Securities, Inc and Ancora Advisors, LLC.  Ancora Advisors, LLC is the manager of Merlin.

The Rights Offering is expected to be made to stockholders in the first half of 2011.  This disclosure of the Rights Offering does not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of any securities in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

We have been funding our losses through the sale of assets.  In 2010, we generated $3.1 million in cash from the sale of assets, including $990,000 from the sale of Linkstar and $2.1 million from the sale of four car washes, net of related mortgages.  As of December 31, 2010, we had four remaining car washes for sale, two of which were under agreements of sale (See Note 4. Business Acquisitions and Divestitures and Note 21. Subsequent Events). A car wash was sold on March 8, 2011 with the sale of one of the three remaining car washes pending.  As of March 21, 2011, we had three remaining car washes for sale which we estimate will generate proceeds, net of related mortgages, in the range of approximately $1.7 million to $2.0 million. We also listed our Texas warehouse for sale in August, 2010 with a real estate broker, which we estimate will generate proceeds, net of related mortgage debt, of approximately $1.0 million to $1.2 million.
 
 
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To the extent we do not reduce the current negative cash flow from operations of approximately $250,000 per month or generate sufficient cash from the sale of assets, we may not have sufficient cash to operate.  To the extent we lack cash to meet our future capital and cash operating requirements, we will need to raise additional funds through bank borrowings and additional equity and/or debt financings, which may result in significant increases in leverage and interest expense and/or substantial dilution of our outstanding equity.  We estimate that our cash balances will not be sufficient to pay our estimated cash operating requirements through December 31, 2011 unless we are successful in increasing our cash position through the above noted asset sales or raising additional capital through the sale of securities. There can be no assurance that adequate pending asset sales will take place prior to December 31, 2011 or that we will be successful in selling our securities. If we are unable to raise additional capital, we will need to substantially reduce the scale of operations and curtail our business plans. Additionally, we will not have sufficient funds to meet capital expenditures and cash operating requirements through the next twelve months and will not comply with our debt covenants with JP Morgan Chase, unless we can increase sales and reduce the current levels of negative cash flow from operations as per the Company’s business plan, complete the pending sale of assets and/or raise additional cash from securities sales. Also see Item 1A. Risk Factors above for Risks Related to Our Business and Common Stock.

If we generate cash from the successful sale of our remaining Car Wash operations and our Texas warehouse as planned, our current cash and short-term investment balance at December 31, 2010 of $2.6 million and the cash proceeds from these asset sales will be sufficient to meet our future capital expenditure and operating funding needs through at least the next twelve months and will allow us to continue to satisfy our debt covenant requirement with Chase.

One of our short-term investments in 2008 was in a hedge fund, the Victory Fund, Ltd.  The Victory Fund, Ltd. was a "Ponzi" scheme operated by Arthur Nadel.  Mr. Nadel has been criminally convicted and a receiver was appointed to recover assets of the hedge fund on behalf of its investors.  We invested $2.0 million in the Victory Fund and were repaid $1.0 million through a redemption on November 5, 2008.  We recorded a charge of $2.2 million as an investment loss at December 31, 2008, which included $1.2 million that was reported by the hedge funds as profit on the initial investment.  If we recover any of the $1.0 million initial investment loss, such amounts will be recorded as recoveries in future periods when received.

Capital expenditures for our Security Segment and our corporate division were $348,000 and $430,000 for the years ended December 31, 2010 and 2009, respectively. Capital expenditures in our discontinued operations, consisting of car wash operations and our Digital Media Marketing business, were $13,000 and $64,000 for the years ended December 31, 2010 and 2009, respectively.  We estimate capital expenditures for the Security Segment at approximately $150,000 to $200,000 for 2011, principally related to technology and facility improvements for warehouse production equipment.

We intend to continue to expend cash for the purchasing of inventory as we grow and introduce new video surveillance and access control products in 2011 and in years subsequent to 2011.  We anticipate that inventory purchases will be funded from cash collected from sales and working capital.  At December 31, 2010, we maintained a $500,000 revolving credit facility with Chase to provide financing for additional video surveillance and access control product inventory purchases and for issuance of commercial letters of credit.

The amount of capital that we will spend in 2011 and in years subsequent to 2011 on all of our businesses is largely dependent on the profitability of our businesses. During the six months ended December 31, 2008, throughout 2009, and into 2010, we implemented Company-wide cost savings measures, including a reduction in employees throughout the entire Company, and completed a consolidation and reorganization of our Security Segment’s electronic surveillance equipment operations in Fort Lauderdale, Florida and Farmers Branch, Texas at December 31, 2008.  Our goals of the reorganization were to better align our electronic surveillance equipment sales teams to achieve sales growth, gain efficiencies by sharing redundant functions within our security operations, such as warehousing, customer service, and administrative services, and to streamline our organizational structure and management team for improved long-term growth.  During the twelve months ending December 31, 2010, we incurred approximately $224,000 in severance costs from employee reductions.

During January 2008, the EPA conducted a site investigation at the Company’s Bennington, Vermont location and the building within which the facility is located.  The Company leases 33,476 square feet of the building from Vermont Mill.  The site investigation was focused on whether hazardous substances were being improperly stored.  After the site investigation, the EPA notified the Company and the building owner, Benmont, that remediation of certain hazardous wastes was required.  Vermont Mill and Benmont are both owned and controlled by Jon Goodrich, the president of the Company’s defense spray division.  The EPA, the Company, and the building owner entered into an Administrative Consent Order under which the hazardous materials and waste were remediated. All remediation required by the Administrative Consent Order was completed within the time allowed by the EPA and a final report regarding the remediation was submitted to the EPA in October 2008, as required by the Administrative Consent Order.  On September 29, 2009, the EPA accepted the final report. On February 23, 2010, the EPA issued the Company an invoice for $240,096 representing the total of the EPA's oversight costs that the Company and Benmont were obligated to pay under the Administrative Consent Order.  On April 8, 2010, the Company negotiated a reduction in the oversight cost reimbursement and, on April 13, 2010, the Company paid a negotiated amount of $216,086 to the EPA.  During the quarter ended September 30, 2010, Benmont reimbursed the Company 15% of the amount paid to the EPA or $32,413.  A total estimated cost of approximately $786,000 relating to the remediation, which includes disposal of the waste materials, as well as expenses incurred to engage environmental engineers and legal counsel and reimbursement of the EPA’s costs, has been recorded through December 31, 2010.
 
 
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The U.S. Attorney conducted an investigation of the Company relating to possible violations of the RCRA at the Company’s Bennington, Vermont location. On November 16, 2010, the U.S. Attorney filed a one count indictment charging the Company and Jon Goodrich with a felony of storing hazardous waste without a permit under 42 U.S.C. Section 6928(d)(2)(A).   Mr. Goodrich is the President of Mace Personal Defense, Inc., the Company's defense spray division located in Bennington, Vermont.  The Company has resolved the indictment through a Plea Agreement entered into between the Company's subsidiary, Mace Personal Defense, Inc. and the U.S. Attorney.  The Plea Agreement was made under Fed. R. Crim. P. 11(c)(1)(C), and provides in part, for (i) Mace Personal Defense, Inc., to plead guilty to one count of violating 42 U.S.C. § 6928(d)(2)(A) (Storage of Hazardous Waste Without a Permit); (ii) Mace Personal Defense, Inc. to pay a fine of $100,000 (the "Fine") and a court assessment of $400, the Fine to be paid $34,000 on sentencing, and two additional installments of $33,000 each, at six months and twelve months from January 4, 2011; (iii) the Company to guarantee the payment of the Fine; (iv) the United States to dismiss the indictment against the Company at time of sentencing of Mace Personal Defense, Inc.; and (v) the United States not to prosecute Mace Personal Defense, Inc. (excluding the guilty plea) or the Company for any criminal offenses known to the United States Attorney's Office of Vermont as of the date of signing of the Plea Agreement committed by the Company or Mace Personal Defense, Inc. in the District of Vermont relative to the storage, shipment, handling or disposal of hazardous waste, including any associated record keeping or reporting offenses.  The Plea Agreement is not final until it is accepted by the Court. A hearing date for sentencing has been scheduled for May 26, 2011. In addition to the Company incurring $83,000 in legal expenses in 2010 relating to this matter, the Company has recorded an accrual of $100,000 at December 31, 2010 as a result of its agreement to pay a $100,000 Fine as part of the Plea Agreement.

The Company is a party to various other legal proceedings related to its ordinary business activities.  In the opinion of the Company’s management, none of these proceedings are material in relation to the Company’s results of operations, liquidity, cash flows, or financial condition.

In the past, we have been successful in obtaining financing by selling our common stock and obtaining mortgage loans.  Our ability to obtain new financing can be adversely impacted by our stock price.  Our failure to maintain the required debt covenants on existing loans also adversely impacts our ability to obtain additional financing.  We are reluctant to sell our common stock at market prices below our per share book value.  Our ability to obtain new financing will be limited if our stock price is not above our per share book value and our cash from operating activities does not improve. Currently, we cannot incur additional long term debt without the approval of one of our commercial lenders. The Company must demonstrate that the cash flow benefit from the use of new loan proceeds exceeds the resulting future debt service requirements.

Debt Capitalization and Other Financing Arrangements

At December 31, 2010, we had borrowings, including capital lease obligations, of approximately $3.5 million. We had two letters of credit outstanding at December 31, 2010, totaling $307,566, as collateral relating to workers’ compensation insurance policies. We maintain a $500,000 revolving credit facility to provide financing for additional video surveillance product inventory purchases and for issuance of commercial letters of credit.  There were five commercial letters of credit outstanding for inventory purchases under the revolving credit facility at December 31, 2010 totaling $399,000.

Several of our debt agreements, as amended, contain certain affirmative and negative covenants and require the maintenance of certain levels of tangible net worth, maintenance of certain unencumbered cash and marketable securities balances, limitations on capital spending and the maintenance of certain debt service coverage ratios on a consolidated level.

The Chase term loan agreements limit capital expenditures annually to $1.0 million, require the Company to provide Chase with an Annual Report on Form 10-K and audited financial statements within 120 days of the Company’s fiscal year end and a Quarterly Report on Form 10-Q within 60 days after the end of each fiscal quarter, and require the maintenance of a minimum total unencumbered cash and marketable securities balance of $1.5 million.

The Company’s ongoing ability to comply with its debt covenants under its credit arrangements and to refinance its debt depends largely on the achievement of adequate levels of cash flow.  If our future cash flows are less than expected or our debt service, including interest expense, increases more than expected, causing us to default on any of the Chase covenants in the future, the Company will need to obtain further amendments or waivers from Chase. Our cash flow has been and could continue to be adversely affected by continued deterioration in economic conditions, and the requirements to fund the growth of our security business.  In the event that non-compliance with the debt covenants should occur, the Company would pursue various alternatives in an attempt to successfully resolve the non-compliance, which might include, among other things, seeking additional debt covenant waivers or amendments or refinancing debt with other financial institutions.  If the Company was unable to obtain waivers or amendments in the future, Chase debt currently totaling $1.5 million, would become payable on demand by the financial institution.  There can be no assurance that debt covenant waivers or amendments would be obtained or that the debt would be refinanced with other financial institutions at favorable terms.
 
 
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The Company is obligated under various operating leases, primarily for certain equipment and real estate within the Car Wash operations.  Certain of these leases contain purchase options, renewal provisions, and contingent rentals for our proportionate share of taxes, utilities, insurance, and annual cost of living increases.

The following are summaries of our contractual obligations and other commercial commitments at December 31, 2010, including capital lease obligations, debt related to discontinued operations, and liabilities related to assets held for sale (in thousands):
 
  
  
Payments Due By Period
  
Contractual Obligations  (1)
  
Total
    
Less Than
One Year
    
One to Three
Years
    
Three to Five
Years
    
More Than
Five Years
  
Long-term debt (2)
   $ 3,341     $ 2,165     $ 1,016     $ 160     $ -  
Capital lease obligations
     128       58       70       -       -  
Minimum operating lease payments
     2,359       846       993       462       58  
    $ 5,828     $ 3,069     $ 2,079     $ 622     $ 58  

   
Amounts Expiring Per Period
  
Other Commercial Commitments
  
Total
    
Less Than One
Year
    
One to Three
Years
    
Three to Five
Years
    
More Than Five
Years
  
Line of credit  (3)
   $ 399     $ 399     $ -     $ -     $ -  
Standby letters of credit  (4)
     308       308       -       -       -  
    $ 707     $ 707     $ -     $ -     $ -  

 
(1)
Potential amounts for inventory ordered under purchase orders are not reflected in the amounts above as they are typically cancelable prior to delivery and, if purchased, would be sold within the normal business cycle.
 
(2)
Related interest obligations have been excluded from this maturity schedule.  Our interest payments for the next twelve month period, based on current market rates, are expected to be approximately $93,000.
 
(3)
The Company maintains a $500,000 line of credit with Chase. There were five commercial letters of credit outstanding for inventory purchases under this line of credit at December 31, 2010 totaling $399,000.
 
(4) 
Outstanding letters of credit of $308,000 represent collateral for workers’ compensation insurance policies.

Cash Flows

Operating Activities.  Net cash used in operating activities totaled $10.2 million for the year ended December 31, 2010.  Cash used in operating activities in 2010 was primarily due to a net loss from continuing operations of $9.8 million, partially offset by $66,000 of non-cash stock-based compensation charges from continuing operations, $583,000 of depreciation and amortization expense and $485,000 of other intangible asset impairment charges. Cash was also impacted by an increase in accounts receivable of $444,000, a decrease in accounts payable and accrual expenses of $886,000, and a decrease in inventory of $974,000.

Net cash used in operating activities totaled $3.7 million for the year ended December 31, 2009. Cash used in operating activities in 2009 was primarily due to a net loss from continuing operations of $8.1 million, which included $115,000 in non-cash stock-based compensation charges, $567,000 of depreciation and amortization expense and $462,000 of goodwill and asset impairment charges.  Cash was also impacted by an increase in accounts receivable of $487,000, a decrease in inventory of $1.5 million and an increase in accounts payable and accrued expenses of $2.0 million.

 
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Investing Activities.  Cash provided by investing activities totaled approximately $3.8 million for the year ended December 31, 2010, which includes cash provided by investing activities from discontinued operations of $3.0 million related to the sale of four car wash sites and Linkstar Corporation from our former Digital Media Marketing Segment in the year ended December 31, 2010.  Investing activity also included capital expenditures of $348,000 related to ongoing operations and proceeds from short-term investments of $1.1 million.

Cash used in investing activities totaled approximately $5.2 million for the year ended December 31, 2009, which includes cash used in investing activities from discontinued operations of $6.1.  Investing activity in 2009 also included capital expenditures of $430,000 related to ongoing operations and $1.9 million related to the acquisition of CSSS.

Financing Activities.  Cash provided in financing activities was approximately $681,000 for the year ended December 31, 2010, which includes $1.4 million of borrowings, largely related to a $1.35 million short term note with Merlin, $136,000 of routine principal payments on debt from continuing operations, and $178,000 related to the purchase of treasury stock.  Financing activities also include $448,000 of routine principal payments on debt related to discontinued operations.

Cash used in financing activities was approximately $1.5 million for the year ended December 31, 2009, which included $93,000 of routine principal payments related to continuing operations and $1.0 million of routine principal payments on debt related to discontinued operations.

Seasonality and Inflation

The Company does not believe that its operations are subject to seasonality.

Summary of Critical Accounting Policies

Revenue Recognition and Deferred Revenue

The Company recognizes revenue in general when the following criteria have been met: persuasive evidence of an arrangement exists, a customer contract or purchase order exists and the fees are fixed and determinable, no significant obligations remain and collection of the related receivable is reasonably assured.  Allowances for sales returns, discounts and allowances are estimated and recorded concurrent with the recognition of the sale and are primarily based on historic return rates.

Revenues from the Company’s Security Segment are recognized when shipments are made or security monitoring services are provided, or for export sales, when title has passed. More specifically, revenue is recognized and recorded by our electronic surveillance equipment business and personal defense spray and related products business when shipments are made and title has passed. Revenue within of our wholesale security monitoring operation is recognized and recorded on a monthly basis as security monitoring services are provided to its dealers under cancellable contracts with terms generally for two (2) to twenty-four (24) months. Revenues are recorded net of sales returns and discounts.

The Company’s discontinued Digital Media Marketing Segment’s e-commerce division recognized revenue and the related product costs for trial product shipments after the expiration of the trial period.  Marketing costs incurred by the e-commerce division were recognized as incurred. The online marketing division recognized revenue and cost of sales based on the gross amount received from advertisers and the amount paid to the publishers placing the advertisements as cost of sales.

Revenues from the Company’s discontinued Car Wash operations are recognized, net of customer coupon discounts, when services are rendered or fuel or merchandise is sold.  The Company records a liability for gift certificates, ticket books, and seasonal and annual passes sold at its car care locations but not yet redeemed.  The Company estimates these unredeemed amounts based on gift certificate and ticket book sales and redemptions throughout the year, as well as utilizing historic sales and tracking of redemption rates per the car washes’ point-of-sale systems. Seasonal and annual passes are amortized on a straight-line basis over the time during which the passes are valid.

Fair Value Measurements

The Company’s nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis include goodwill, intangible assets and long-lived tangible assets including property, plant and equipment. The Company did record impairment charges for certain of these assets during the years ended December 31, 2010 and 2009.  See Note 19. Asset Impairment Charges.
 
 
30
 
 
Accounts Receivable

The Company’s accounts receivable are due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is not required. Payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts.  Accounts which are outstanding longer than the payment terms are considered past due.  The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole.  The Company writes off accounts receivable when they are deemed uncollectible. Any payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Risk of losses from international sales within the Security Segment are reduced by requiring substantially all international customers to provide either irrevocable confirmed letters of credit or cash advances.

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined using the first-in first-out (“FIFO”) method for security and e-commerce products.  Inventories at the Company’s car wash locations consist of various chemicals and cleaning supplies used in operations and merchandise and fuel for resale to consumers.  Inventories within the Company’s Security Segment consist of defense sprays, child safety products, electronic security monitors, cameras and digital recorders, and various other consumer security and safety products. The Company continually, and at least on a quarterly basis, reviews the book value of slow moving inventory items, as well as discontinued product lines, to determine if inventory is properly valued. The Company identifies slow moving or discontinued product lines by a detail review of recent sales volumes of inventory items as well as a review of recent selling prices versus cost and assesses the ability to dispose of inventory items at a price greater than cost. If it is determined that cost is less than market value, then cost is used for inventory valuation.  If market value is less than cost, then an adjustment is made to the Company’s obsolescence reserve to adjust the inventory to market value. When slow moving items are sold at a price less than cost, the difference between cost and selling price is charged against the established obsolescence reserve.

Property and Equipment

Property and equipment are stated at cost.  Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which are generally as follows: buildings and leasehold improvements - 15 to 40 years; machinery and equipment - 5 to 20 years; and furniture and fixtures - 5 to 10 years.  Significant additions or improvements extending assets' useful lives are capitalized; normal maintenance and repair costs are expensed as incurred.

Advertising and Marketing Costs

The Company expenses advertising costs in its Security Segment and in its Car Wash operations, including advertising production cost, as the costs are incurred or the first time the advertisement appears.  Marketing costs in the Company’s Digital Media Marketing Segment, which consist of the costs to acquire new members for its e-commerce business, are expensed as incurred rather than deferred and amortized over the expected life of a customer.

Impairment of Long-Lived Assets

We periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, when events and circumstances warrant such a review. If significant events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows.  Cash flow projections are sometimes based on a group of assets, rather than a single asset.  If cash flows cannot be separately and independently identified for a single asset, we determine whether an impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded.

Goodwill

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets we have acquired in business combinations.  We perform a goodwill impairment test on at least an annual basis for each of our reporting units as previously disclosed. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of our weighted average cost of capital.  Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit.  The Company conducts its annual goodwill impairment test as of April 30 of each year for its wholesale security monitoring operation business unit or more frequently if indicators of impairment exist.  We periodically analyze whether any such indicators of impairment exist.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred.  Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, among others.  The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill.  Future changes in the industry could impact the results of future annual impairment tests. There can be no assurance that future tests of goodwill impairment will not result in impairment charges.
 
 
31
 
 
Other Intangible Assets

Other intangible assets consist primarily of deferred financing costs, non-compete agreements, customer lists, software costs, product lists, patent costs, and trademarks.  Our trademarks are considered to have indefinite lives, and as such, are not subject to amortization. These assets are tested for impairment using discounted cash flow methodology annually and whenever there is an impairment indicator.  Estimating future cash flows requires significant judgment and projections may vary from cash flows eventually realized.  Several impairment indicators are beyond our control, and determining whether or not they will occur cannot be predicted with any certainty.  Customer lists, product lists, software costs, patents and non-compete agreements are amortized on a straight-line or accelerated basis over their respective assigned estimated useful lives.

Income Taxes

Deferred income taxes are determined based on the difference between the financial accounting and tax bases of assets and liabilities.  Deferred income tax expense (benefit) represents the change during the period in the deferred income tax assets and deferred income tax liabilities.  In establishing the provision for income taxes and deferred income tax assets and liabilities, and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted laws, published tax guidance and estimates of future earnings. Deferred income tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are not materially exposed to market risk arising from fluctuations in foreign currency exchange rates, commodity prices, or equity prices.

Nearly all of the Company’s debt at December 31, 2010, including debt related to discontinued operations, is at variable rates. Substantially all of our variable rate debt obligations are tied to the prime rate, as is our incremental borrowing rate. A one percent increase in the prime rates would not have a material effect on the fair value of our variable rate debt at December 31, 2010. The impact of increasing interest rates by one percent would be an increase in interest expense of approximately $24,000 in 2010.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The report of independent registered public accounting firm and Consolidated Financial Statements are included in Part IV, Item 15 of this Annual Report on Form 10-K.

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

None.

ITEM 9A.      CONTROLS AND PROCEDURES

 
(a)
Evaluation of Disclosure Controls and Procedures
 
The Company’s management performed an evaluation under the supervision and with the participation of Dennis R. Raefield, the Company’s Chief Executive Officer (the “CEO”) and Gregory M. Krzemien, Chief Financial Officer (the “CFO”), and completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act (“Exchange Act”)) as of December 31, 2010.  Based on that evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company that is required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and is accumulated and communicated to management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosure.
 
 
(b)
Management’s Annual Report on Internal Control over Financial Reporting
 
 
32
 
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). To evaluate the effectiveness of the Company’s internal control over financial reporting, the Company uses the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Using the COSO Framework, the Company’s management, including the CEO and the CFO, evaluated the Company’s internal control over financial reporting and concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
 
 
(c) 
Changes in Internal Control over Financial Reporting.
 
During the Company’s last quarter, there were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 9B.      OTHER INFORMATION

None.
PART III

ITEM 10.       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS

Name
  
Age
  
Position
John C. Mallon
  
75
  
Director, Chairman of the Board
Dennis R. Raefield
  
63
  
Director, President and Chief Executive Officer
Gerald T. LaFlamme
  
71
  
Director
Richard A. Barone
  
68
  
Director
Michael E. Smith
  
55
  
Director

All of Mace’s directors serve for terms of one year each until their successors are elected and qualified.  All of the above directors were elected on June 18, 2010.

Dennis R. Raefield has served as a director since October 16, 2007 and as President and Chief Executive Officer since August 18, 2008. From April 2007 to August 17, 2008, Mr. Raefield was the President of Reach Systems, Inc. (formerly Edge Integration Systems, Inc.) (a manufacturer of security access control systems). From February 2005 to February 2006, Mr. Raefield was President of Rosslare Security Products, Inc. (a manufacturer of diverse security products).  From February 2004 to February 2005, Mr. Raefield was President of NexVision Consulting (security business consultant).  From January 2003 to February 2004, Mr. Raefield was President of Ortega InfoSystems (a software developer).  From October 1998 to November 2002, Mr. Raefield was President of Ademco and Honeywell Access Systems (a division of Honeywell, Inc. that manufactured access control systems).

John C. Mallon has served as a director since December 14, 2007 and as Chairman of the Board since May 20, 2008. From 1994 to the present, Mr. Mallon has been the Managing Director of Mallon Associates (an investment bank and broker specializing in the security industry).  From 1994 to 2006, Mr. Mallon was the Editor and Publisher of Mallon’s Security Investing and Mallon’s Security Report (financial newsletters tracking more than 250 public security companies).  Mr. Mallon is a director of and Chairman of the Audit Committee of Good Harbor Partners Acquisition Corporation (a public special purpose acquisition corporation focusing on acquisitions in the global security market).  Mr. Mallon is a director of and Chairman of the Board of IBI Armored Services, Inc. (a privately held national armored trucking, and money processing company). Mr. Mallon is also an attorney admitted to practice in the states of New York and Connecticut and before the United States Federal Court.
 
 
33
 
 
Gerald T. LaFlamme has served as a director since December 14, 2007. From May 20, 2008 to August 18, 2008, Mr. LaFlamme served as interim Chief Executive Officer of the Company. From 2004 to the present, Mr. LaFlamme has been President of JL Development Company, Inc. (a real estate development and consulting company).  From 2001 to 2004, Mr. LaFlamme was Senior Vice President and CFO of Davidson Communities, LLC (a regional home builder).  From 1978 to 1997, Mr. LaFlamme was Area Managing Partner for Ernst & Young, LLP, and a predecessor accounting firm in San Diego, CA.  Mr. LaFlamme is a director and Chairman of the Audit Committee of Arlington Hospitality Inc.  On August 31, 2005, Arlington Hospitality Inc. filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. At the time of the Chapter 11 filing, Mr. LaFlamme was a director of Arlington Hospitality Inc.

Richard A. Barone has served as a director since March 31, 2009. From 2001 to present, Mr. Barone has been Chairman of the Executive Committee for the Ancora Group of Companies.  The Ancora Group of Companies includes Ancora Advisors LLC, Ancora Capital Inc., Ancora Securities Inc, the Ancora Mutual Funds, and the Ancora Foundation.  Mr. Barone also oversees or manages a variety of investment strategies for the Ancora Group, selected clients and the Ancora Group’s Hedge Fund, Merlin Partners, LP.  Ancora Securities, Inc. is registered as a broker/dealer with the SEC and the Financial Industry Regulatory Authority (“FINRA”), formerly known as the NASD. Mr. Barone is Chairman of the Cleveland State University Foundation, Trustee of Cleveland State University, Director of Hospice of the Western Reserve, Director of Brentwood Hospital, Director of Stephan Company, and Chairman of Evergreen Expedition Group.

Michael E. Smith has served as a director since June 18, 2010. From 2003 to the present, Mr. Smith has been an Independent Consultant and Managing and Founding Partner of Chesterbrook Growth Partners, a consulting organization focused on providing strategic and operational advice to small to medium size firms in the security, RFID, auto-identification and electronic components industries. From 2001 to 2002, Mr. Smith was the President and Chief Executive Officer of Checkpoint Systems, Inc., a New York Stock Exchange listed company in the security, auto-identification and electronic components industries, having $650 million in sales during the 2001 to 2002 period.

EXECUTIVE OFFICERS

The individuals below are the current Executive Officers and were the Executive Officers during 2010, except for Robert M. Kramer whose last day as an employee of the Company was February 12, 2010.

Name
  
Age
  
Position
Dennis R. Raefield
  
63
  
President and Chief Executive Officer
Robert M. Kramer
  
58
  
Executive Vice President, General Counsel and Secretary
Gregory M. Krzemien
  
51
  
Chief Financial Officer and Treasurer

Dennis R. Raefield has served as President and Chief Executive Officer since August 18, 2008.  From April 2007 to August 17, 2008, Mr. Raefield was the President of Reach Systems, Inc. (formerly Edge Integration Systems, Inc.) (a manufacturer of security access control systems). From February 2005 to February 2006, Mr. Raefield was President of Rosslare Security Products, Inc. (a manufacturer of diverse security products).  From February 2004 to February 2005, Mr. Raefield was President of NexVision Consulting (security business consultant).  From January 2003 to February 2004, Mr. Raefield was President of Ortega InfoSystems (a software developer).  From October 1998 to November 2002, Mr. Raefield was President of Ademco and Honeywell Access Systems (a division of Honeywell, Inc. that manufactured access control systems).

Robert M. Kramer served as Executive Vice President, General Counsel, and Secretary of the Company from May 1999, to February 12, 2010 and as Chief Operating Officer of the Car Wash Segment from July 2000 to July 2006. Mr. Kramer was terminated upon the expiration of his employment contract, effective on February 12, 2010. Mr. Kramer also served as a director of the Company from May 1999 to December 2003. From June 1996 through December 1998, he served as General Counsel, Executive Vice President and Secretary of Eastern Environmental Services, Inc.  Mr. Kramer is an attorney and has practiced law since 1979 with various firms, including Blank Rome Comisky & McCauley, Philadelphia, Pennsylvania and Arent Fox Kitner Poltkin & Kahn, Washington, D.C.  From 1989 to December 2000, Mr. Kramer had been the sole partner of Robert M. Kramer & Associates, P.C. From December 1989 to December 1997, Mr. Kramer served on the Board of Directors of American Capital Corporation, a registered securities broker dealer.  Mr. Kramer received B.S. and J.D. degrees from Temple University.

Gregory M. Krzemien has served as the Chief Financial Officer and Treasurer of the Company since May 1999.  From August 1992 through December 1998, he served as Chief Financial Officer and Treasurer of Eastern Environmental Services, Inc.  From October 1988 to August 1992, Mr. Krzemien was a senior audit manager with Ernst & Young LLP.  Mr. Krzemien received a B.S. degree in Accounting from the Pennsylvania State University.
 
 
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CORPORATE GOVERNANCE

Audit Committee and Audit Committee Financial Expert

The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Messrs. LaFlamme, Chairman, Smith, and Barone. The Board of Directors has determined that each member of the Audit Committee is independent within the meaning of Rule 4200(a)(15) of the National Association of Securities Dealers’ Nasdaq Global Market listing standards and Rule 10A-3 promulgated under the Securities Exchange Act of 1934.  The Board of Directors has determined that Mr. LaFlamme, the Chairman of the Company’s Audit Committee, is an audit committee financial expert as defined by Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act. The Charter of the Audit Committee is posted on our website at www.mace.com.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires Mace’s directors and executive officers, as well as persons beneficially owning more than 10% of Mace’s outstanding shares of common stock and certain other holders of such shares (collectively, “Covered Persons”), to file with the SEC, within specified time periods, initial reports of ownership, and subsequent reports of changes in ownership, of common stock and other equity securities of Mace. Based upon Mace’s review of copies of such reports furnished to it and upon representations of Covered Persons that no other reports were required, to Mace’s knowledge, all of the Section 16(a) filings required to be made by the Covered Persons with respect to 2010 were made on a timely basis, except that a Form 4 filing related to certain stock options granted to Mr. Krzemien in April 2010, due within two business days of the receipt of the stock options, was filed late.

Code of Ethics and Corporate Governance

The Company has adopted a Code of Ethics and Business Conduct for directors, officers (including the chief executive officer, chief financial officer, and employees. The Code of Ethics and Business Conduct is posted on our website at www.mace.com.

The Board of Directors has adopted Corporate Governance Guidelines. Stockholders are encouraged to review the Corporate Governance Guidelines at our website at www.mace.com for information concerning the Company’s governance practices. Copies of the charters of the committees of the Board are also available on the Company’s website.

Nominating Committee

The Nominating Committee is composed of independent directors.  The Nominating Committee is currently composed of Messrs. Barone, Chairman, LaFlamme and Mallon.  The charter of the Nominating Committee is available for inspection on the Company’s web site, www.mace.com, under the heading of Investor Relations. The Nominating Committee considers candidates for Board membership suggested by its members, other Board members and management. The Nominating Committee has authority to retain a search firm to assist in the identification of director candidates. In selecting nominees for director, the Nominating Committee considers a number of factors, including, but not limited to:

 
·
whether a candidate has demonstrated business and industry experience that is relevant to the Company, including recent experience at the senior management level (preferably as chief executive officer or in a similar position) of a company as large or larger than the Company;
 
·
the candidate’s ability to meet the suitability requirements of all relevant regulatory agencies;
 
·
the candidate’s ability to represent interests of the stockholders;
 
·
the candidate’s independence from management and freedom from potential conflicts of interest with the Company;
 
·
the candidate’s financial literacy, including whether the candidate will meet the audit committee membership standards;
 
·
whether a candidate is widely recognized for his or her reputation, integrity, judgment, skill, leadership ability, honesty and moral values;
 
·
the candidate’s ability to work constructively with the Company’s management and other directors; and
 
·
the candidate’s availability, including the number of other boards on which the candidate serves, and his or her ability to dedicate sufficient time and energy to his or her board duties.

During the process of considering a potential nominee, the Committee may request additional information concerning, or an interview with, the potential nominee.

The Nominating Committee will also consider recommendations by stockholders of nominees for directors to be elected at the Company’s Annual Meeting of Stockholders, if they are received on or before January 15 of the year of the meeting or at an earlier date as may be determined and disclosed by the Company. In evaluating nominations received from stockholders, the Committee will apply the same criteria and follow the same process used to evaluate candidates recommended by members of the Nominating Committee. Stockholders wishing to recommend a nominee for director are to submit such nomination in writing, along with any other supporting materials the stockholder deems appropriate, to the Secretary of the Company at the Company’s offices at 240 Gibraltar Road, Suite 220, Horsham, Pennsylvania 19044.
 
 
35
 
 
ITEM 11.       EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION TABLES AND NARRATIVES

The following table provides summary information concerning cash and certain other compensation paid or accrued by Mace to, or on behalf of the Named Executive Officers for the years ended December 31, 2010 and 2009.
 
                   
Option
    
All Other
        
Name and Principal
            
Bonus
    
Awards
    
Compensation
        
Position
  
Year
  
Salary $
    
($)
    
($)(2)
    
($)(3)
    
Total
  
                                   
Dennis R. Raefield
                                  
President and Chief
  
2010
   $ 375,000     $ -     $ 53,020     $ 27,454     $ 455,474  
Executive Officer
  
2009
   $ 375,000     $ -     $ 26,520     $ 32,059     $ 433,579  
                                             
Robert M. Kramer
                                            
Executive Vice
  
2010
   $ 84,436     $ -     $ -     $ 969     $ 85,405  
President, General
  
2009
   $ 230,000     $ -     $ 8,587     $ 8,400     $ 246,987  
Counsel and Secretary
                                            
                                             
Gregory M. Krzemien
                                            
Chief Financial Officer
  
2010
   $ 230,000     $ -     $ 5,012     $ 8,400     $ 243,412  
and Treasurer
  
2009
   $ 230,000     $ -     $ 8,587     $ 8,400     $ 246,987  
 
(1)
The Company (i) granted no restricted stock awards and (ii) maintained no other long-term incentive plan for any of the Named Executive Officers, in each case during the fiscal years ended December 31, 2010 and 2009. Additionally, the Company has never issued any stock appreciation rights (SARs).
(2)
The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes, including the impact of estimated forfeitures, for the fiscal years ended December 31, 2010 and 2009, for all existing stock option awards and thus include amounts from awards granted in and prior to 2010. Assumptions used in the calculation of this amount are included in Note 3 to the Company’s Audited Financial Statements for the fiscal year ended December 31, 2010.
(3) 
Mr. Raefield received a car at a lease cost of $791 per month beginning in August 2008. Additionally, Mr. Raefield is entitled under his employment agreement to receive payment of certain life and disability insurance premiums and funding of certain health reimbursement plans which totaled $17,962 and $22,567 in 2010 and 2009, respectively. Mr. Krzemien and Mr. Kramer (until the end of his employment on February 12, 2010), received car allowances of $700 per month in 2010 and 2009.

Dennis R. Raefield Employment Agreement

Dennis R. Raefield serves as the Company’s President and Chief Executive Officer under an Employment Contract dated July 29, 2008 and expiring on August 18, 2011 (the “Raefield Employment Agreement”).  Mr. Raefield’s base salary is $375,000 annually.  As a one-time incentive to execute the Raefield Employment Agreement, Mr. Raefield was paid $50,000 and received a reimbursement of legal expenses of $2,812 related to review of his employment contract.

In accordance with the Raefield Employment Agreement, Mr. Raefield received an option grant on July 30, 2008 exercisable into 250,000 shares of common stock at an exercise price of $1.50 per share (the “First Option”).  The First Option was issued fully vested.  On July 26, 2009, Mr. Raefield received a second option grant exercisable for 250,000 shares (the “Second Option”).  The Second Option vests over two years, with the first 125,000 option shares vesting 12 months from the date of grant and the second 125,000 option shares vesting 24 months from the date of grant.  The Second Option grant fully vests upon a change of control of the Company.
 
 
36
 
 
The Raefield Employment Agreement also provides that Mr. Raefield and the Company are required to develop a mutually acceptable annual bonus plan for Mr. Raefield within forty-five (45) days from the date of the Employment Agreement.   No annual bonus plan was agreed upon for 2010.  The Compensation Committee implemented a formal 2009 Incentive Plan for the CEO based on benchmarks of achieved earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the year ended 2009.  Based on the Company’s results for 2009, Mr. Raefield did not receive any payments under the 2009 Incentive Plan. The Raefield Employment Agreement further provides that Mr. Raefield can be terminated by the Board of Directors for cause without any severance or other payment.  The Board of Directors can also terminate Mr. Raefield without cause, upon a payment of two times Mr. Raefield’s current annual base salary.

Mr. Raefield has also been provided a Company vehicle at a lease cost of approximately $791 per month, plus all maintenance costs, and Company standard medical and other employee benefits. Mr. Raefield is prohibited from competing with the Company during his period of employment and for a one year period following a termination of employment.  The Company is obligated to pay Mr. Raefield $375,000 in exchange for the one year non-compete obligation if Mr. Raefield is employed through August 18, 2011 and the Company and Mr. Raefield do not enter into a new employment agreement within sixty days after August 18, 2011.

Gregory M. Krzemien Employment Agreement

Mace currently employs Gregory M. Krzemien as its CFO and Treasurer as an employee at will under the Krzemien Agreement dated March 23, 2010.  Mr. Krzemien's current annual base salary is $230,000, plus a $700 per month car allowance.  The Krzemien Agreement also provided Mr. Krzemien with an option grant to purchase 50,000 shares of common stock under the Company’s Stock Option Plan at an exercise price of $0.93, the market price of the Company's common stock on the date of the option grant.  The option is to vest in three equal annual installments on the anniversary dates of the Krzemien Agreement.  Under the Krzemien Agreement, Mr. Krzemien is not entitled to any change of control payment, but is entitled to a severance payment equal to six months of his base salary if he is terminated without “Good Cause,” as defined in the Krzemien Agreement.  Mr. Krzemien is also entitled to the six month severance payment if he resigns due to the Company materially changing his duties as Chief Financial Officer, relocating his office more than 25 miles from its present location or reducing his annual base salary.  As defined, “Good Cause” to terminate Mr. Krzemien without a severance payment generally exists if Mr. Krzemien fails to perform his duties and does not cure such failure within thirty days of being notified of the failure, or commits certain other enumerated actions which harm the Company.

From February 12, 2007 through February 12, 2010, Mr. Krzemien was employed under an Employment Contract (the “Former Krzemien Employment Agreement”).  In accordance with the Former Krzemien Employment Agreement, Mr. Krzemien received an option grant for 60,000 shares of common stock under the Company’s Stock Option Plan at an exercise price of $2.73, the market price at the close of market on the date of grant. The options were granted on February 12, 2007. The options vested one-third on the date of the grant, one-third on February 12, 2008, and one-third on February 12, 2009.

Under the Former Krzemien Employment Agreement, Mr. Krzemien would have received a one-time retention payment equal to Mr. Krzemien’s then annual base compensation (currently $230,000) upon the occurrence of both: (a) a change of control of the Company and (b) Louis D. Paolino, Jr. ceasing to be CEO of the Company (this event occurred on May 20, 2008).  If Mr. Krzemien’s employment was terminated during the term of the Former Krzemien Employment Agreement without cause or if the Company breached the Former Krzemien Employment Agreement, Mr. Krzemien would have been entitled to an additional one-time payment equal to Mr. Krzemien’s then annual base compensation. The total amount of both the retention payment and termination payment was $460,000.

Mr. Krzemien receives a monthly car allowance of $700, which began in February 2007, and the Company’s standard medical and other employee benefits.

Robert M. Kramer Employment Agreement

Mace employed Robert M. Kramer as its Executive Vice President, General Counsel and Secretary during 2009 through February 12, 2010 under an Employment Contract dated February 12, 2007 and expiring on February 12, 2010 (the “Kramer Employment Agreement”). The Company’s Compensation Committee obtained a compensation study from Compensation Resources, Inc. prior to entering into the Kramer Employment Agreement. The initial base salary under the Kramer Employment Agreement was $230,000. In accordance with the Kramer Employment Agreement, Mr. Kramer received an option grant for 60,000 shares of common stock under the Company’s Stock Option Plan at an exercise price of $2.73, the market price at the close of market on the date of grant. The options were granted on February 12, 2007. The options vested one-third on the date of the grant, one-third on February 12, 2008 and one-third on February 12, 2009.
 
 
37
 
 
Under the Kramer Employment Agreement, Mr. Kramer would have received a one-time retention payment equal to Mr. Kramer’s then annual base compensation ($230,000) upon the occurrence of both: (a) a change of control of the Company and (b) Louis D. Paolino, Jr. ceasing to be CEO of the Company. Mr. Paolino ceased to be CEO of the Company on May 20, 2008. If during the term of the Kramer Employment Agreement, Mr. Kramer’s employment was terminated without cause or if the Company breached the Kramer Employment Agreement, Mr. Kramer would have been entitled to an additional one-time payment equal to Mr. Kramer’s then annual base compensation. The total amount of both the retention payment and termination payment was $460,000.

Mr. Kramer received a monthly car allowance of $700 through February 2010, the date of his termination, and the Company’s standard medical and other employee benefits. Mr. Kramer was prohibited against competing with the Company during his period of employment and for a three-month period following termination of employment.

Potential Payments upon Termination or Change of Control

For a description of compensation that would become payable under existing arrangements in the event of a change of control or termination of each Named Executive Officer’s employment under several different circumstances, see the discussion under “Change of Control Arrangements” in the “Compensation Discussion and Analysis” Section which is part of the Executive Compensation Section of this report.

The following tables quantify the amounts payable upon a change of control or the termination of each of the Named Executive Officers.

Change of Control Payment and Termination Payments – Dennis R. Raefield, Chief Executive Officer

Event Triggering Payment
  
Severance Payment
    
Acceleration of Option
Awards(4)
  
Termination by Company For Cause (1)
   $ -    
None
  
Termination by Company without Cause (1)
   $ 750,000    
None
  
Non-Compete Payment (2)
   $ 375,000    
None
  
Change of Control (3)
   $ -     $ -  

Change of Control Payment and Termination Payments – Gregory Krzemien, Chief Financial Officer
Event Triggering Payment
  
Severance Payment
    
Acceleration of Option
Awards(4)
  
Change of Control
   $ -     $ -  
Termination of Mr. Krzemien(5)
   $ 115,000     $ -  

(1)   Cause is defined in the Raefield Employment Agreement as “(a) Employee committing against the Company fraud, gross misrepresentation, theft or embezzlement, (b) Employee’s conviction of any felony (excluding felonies involving driving a vehicle), (c) Employee’s material intentional violations of Company policies, or (d) a material breach of the provisions of the Raefield Employment Agreement, including specifically the failure of Employee to perform his duties after written notice of such failure from the Company.”  The Raefield Employment Agreement provides that Mr. Raefield can be terminated by the Board of Directors for Cause, without any severance or other payment.  The Board of Directors can also terminate Mr. Raefield without Cause, upon a payment of two times Mr. Raefield’s then current annual base salary.  The termination payment is calculated based on Mr. Raefield’s base salary of $375,000 as of December 31, 2010.
(2)  Mr. Raefield is prohibited from competing with the Company during his period of employment and for a one year period following a termination of employment. The Company is obligated to pay Mr. Raefield $375,000 in exchange for his one year agreement not to compete, if Mr. Raefield is employed through August 18, 2011 and the Company and Mr. Raefield do not enter into a new employment agreement within sixty days after August 18, 2011.
(3)  A Change of Control Event is defined in the Named Executive Officer’s Employment Agreement as any of the events set forth in items (i) through and including (iii) below: (i) the acquisition in one or more transactions by any “Person,” excepting the employee, as the term “Person” is used for purposes of Sections 13(d) or 14(d) of the Exchange Act, of  “Beneficial Ownership” (as the term beneficial ownership is used for purposes or Rule 13d-3 promulgated under the Exchange Act) of the fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities (the “Voting Securities”), for purposes of this item (i), Voting Securities acquired directly from the Company and from third parties by any Person shall be included in the determination of such Person’s Beneficial Ownership of Voting Securities;  (ii) the approval by the stockholders of the Company of: (A) a merger, reorganization or consolidation involving the Company, if the shareholders of the Company immediately before such merger, reorganization or consolidation do not or will not own directly or indirectly immediately following such merger, reorganization or consolidation, more than fifty percent (50%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from or surviving such merger, reorganization or consolidation in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, reorganization or consolidation, (B) a complete liquidation or dissolution of the Company, or (C) an agreement for the sale or other disposition of 50% or more of the assets of the Company and a distribution of the proceeds of the sale to the stockholders; or (iii) the acceptance by stockholders of the Company of shares in a share exchange, if the stockholders of the Company immediately before such share exchange do not or will not own directly or indirectly following such share exchange own more than fifty percent  (50%) of  the combined voting power of the outstanding Voting Securities of the corporation  resulting from or surviving such share exchange in substantially the same proportion as the ownership of the Voting Securities outstanding immediately before such share exchange.
 
 
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   (4)  Assumes exercise of all in-the-money stock options for which vesting accelerated at $0.39 per share (the closing price of the Company’s common stock on December 31, 2010).
   (5) The payment is due Mr. Krzemien if he is terminated without “Good Cause.”  “Good Cause” in the Krzemien Agreement exists, if any of the following occur: (i)  Employee’s refusal to perform his duties or other obligations under this Agreement, or Employee’s intentional or grossly negligent conduct causing material harm to the Company as determined by the Company, on fifteen (15) days notice after the Company has provided Employee written notice of such failure to perform and Employee has failed to cure the unsatisfactory performance, if capable of cure, within thirty (30) business days; or (ii)  Employee’s conviction of a felony, or a misdemeanor involving moral turpitude, or Employee’s engaging in conduct involving dishonesty toward the Company or its customers, or engaging in conduct that could damage the reputation or good will of the Company, whether or not occurring in the workplace; or (iii)  Employee’s death, or inability with reasonable accommodation to perform his duties under this Agreement because of illness or physical or mental disability or other incapacity which continues for a period of 120 consecutive days, as determined by a medical doctor; or (iv)  If Employee engages in any type of discrimination, harassment, violence or threat thereof, or other behavior toward other employees of the Company, or any of its subsidiaries or toward third parties or employees of a third party; (v)  alcohol abuse and/or use of controlled substances during employment hours, or a positive test for use of controlled substances that are not prescribed by a medical doctor; or (vi)  gross negligence or willful misconduct with respect to the Company, or any of its affiliates or subsidiaries; or (vii)  on fifteen (15) days notice for any other material intentional breach of this Agreement or the Company’s Employee Manual by Employee not cured within 30 days after Employee’s receipt of written notice of the same from the Company.

Grants of Stock Options

The following table sets forth certain information concerning individual grants of stock options to the Named Executive Officers during the fiscal year ended December 31, 2010.

GRANTS OF PLAN-BASED AWARDS
Name
  
Grant Date
    
All other Option
Awards:
Number of
Securities
Underlying
Options
    
Exercise Price
of Option
Awards per
Share
    
Grant Date
Fair Value of
Stock and
Option
Awards
  
Dennis R. Raefield
     -       -       -       -  
Gregory M. Krzemien
  
April 7, 2010
       50,000     $ 0.93     $ 28,640  

On July 28, 2009, as part of Mr. Raefield’s Employment Agreement, the Compensation Committee awarded Mr. Raefield options for 250,000 shares of the Company’s Common Stock vesting one-half on July 28, 2010 and one-half on July 28, 2011.  The options are exercisable at $0.97 per share.  The Black Scholes value of the awarded option grant is $151,542.  The median long term incentive compensation of chief executive officers, as set forth in the Hay 2007 Report was $243,257. The Compensation Committee believed that the option award was warranted due to the award being below the median of long term incentive compensation granted to chief executive officers, as stated in the Hay 2007 Report, a compensation study for the Chief Executive Officer position from the Hay Group dated December 12, 2007.  Mr. Raefield’s total direct compensation under his employment agreement was below the median total direct compensation market consensus for chief executive officers, as set forth in the Hay 2007 Report.

On April 7, 2010, as part of the Krzemien Agreement, the Compensation Committee awarded Mr. Krzemien an option grant to purchase 50,000 shares of common stock under the Company’s Stock Option Plan at an exercise price of $0.93, the market price of the Company’s common stock on the date of the option grant. The option grant is to vest in three equal annual installments on the anniversary dates of the Krzemien Agreement. The Black- Scholes value of the awarded option grant is $28,640.
 
 
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Aggregated Option and Warrant Exercises in Last Fiscal Year

The following table sets forth certain information regarding stock options held by the Named Executive Officers during the fiscal year ended December 31, 2010, including the number of exercisable and un-exercisable stock options as of December 31, 2010 by grant.  No options were exercised by any of the Named Executive Officers during the fiscal year ended December 31, 2010.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 
Name
  
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
    
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
    
Option
Exercise
Price
($)
  
Option
Grant Date
  
Option
Expiration
Date
Dennis R. Raefield
   (2) 15,000       -       1.94  
1/8/2008
  
1/8/2018
    (3) 250,000       -       1.50  
7/30/2008
  
7/30/2018
    (4) 125,000     (4) 125,000       0.97  
7/28/2009
  
7/28/2019
                               
Gregory M. Krzemien
     50,000       -       1.38  
3/30/2001
  
3/30/2011
      37,500       -       2.36  
4/4/2002
  
4/4/2012
      150,000       -       1.32  
7/14/2003
  
7/14/2013
      50,000       -       5.35  
11/19/2004
  
11/19/2014
      60,000       -       2.40  
3/23/2006
  
3/23/2016
      60,000       -       2.73  
2/12/2007
  
2/12/2017
      40,000       -       1.44  
3/25/2008
  
3/25/2018
      -     (5) 50,000       0.93  
4/7/2010
  
4/7/2020
                               
Robert M. Kramer (1)
     50,000       -       1.38  
3/30/2001
  
3/30/2011
      37,500       -       2.36  
4/4/2002
  
4/4/2012
      150,000       -       1.32  
7/14/2003
  
7/14/2013
      37,500       -       4.21  
11/2/2004
  
11/2/2014
      75,000       -       5.35  
11/19/2004
  
11/19/2014
      75,000       -       2.40  
3/23/2006
  
3/23/2016
      60,000       -       2.73  
2/12/2007
  
2/12/2017
      40,000       -       1.44  
3/25/2008
  
3/25/2018
(1)
Fully vested option.
(2)
Fully vested options granted to Mr. Raefield during the period Mr. Raefield served as a Director.
(3)
Fully vested options granted to Mr. Raefield as part of Mr. Raefield being hired as the Company’s President and Chief Executive Officer.
(4)
Options granted on July 28, 2009 vest 125,000 shares on July 28, 2010 and 125,000 shares on July 28, 2011.
(5)
Options granted on April 7, 2010 vest 16,667 shares on April 7, 2011, 16,667 shares on April 7, 2012 and 16,666 shares on April 7, 2013.

DIRECTOR COMPENSATION
 
The following table provides summary information concerning cash and certain other compensation paid or accrued by Mace to or on behalf of Mace’s Directors, other than Mr. Raefield, for the year ended December 31, 2010.
 
 
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Name
  
Fees
Earned or
Paid in
Cash
($) (1)
    
Option
Awards
($) (2)
    
All
Other
Compensation
($)
    
Total
  
                         
John C. Mallon
   $ 27,500     $ -     $ -     $ 27,500  
                                 
Mark S. Alsentzer
   $ 21,000     $ -     $ -     $ 21,000  
                                 
Gerald T. LaFlamme
   $ 27,500     $ -     $ -     $ 27,500  
                                 
Richard A. Barone
   $ 29,500     $ -     $ -     $ 29,500  
                                 
Michael E. Smith
   $ 15,125     $ 2,915     $ -     $ 18,040  

(1)
Mark S. Alsentzer served on the Board of Directors until the election of our new Director, Michael E. Smith, at the Annual Meeting of Stockholders on June 18, 2010.
(2)
The aggregate options outstanding at December 31, 2010 were as follows: John C. Mallon, 45,000 options; Gerald T. LaFlamme, 45,000 options; Richard A. Barone, 30,000 options; and Michael E. Smith, 15,000 options. Assumptions used in the calculation of these amounts are included in Note 3 to the Company’s Audited Financial Statements for the fiscal year ended December 31, 2010.  The amounts in this column reflect the dollar amount recognized, in accordance with GAAP for share-based payments, for financial reporting purposes for the fiscal year ended December 31, 2010. There were no options granted to non-employee directors in 2010, except for Mr. Smith’s initial grant of 15,000 options upon his election to the Board of Directors on June 18, 2010. Options granted to non-employee directors in 2008 were for services on the Board for 2008 and 2009. Options granted to non-employee directors in 2009 were for services on the Board for 2010.

For the year 2010, the Board of Directors approved of the following fees to be paid to directors who are not employees of the Company with respect to their calendar year 2010 service: a $15,000 annual cash retainer fee to be paid in a lump sum; a $1,000 fee to each non-employee director for each Board or Committee meeting attended in person; a $500 fee to each non-employee director for each Board or Committee meeting exceeding thirty minutes in length attended by telephone.  Additionally, a grant of 15,000 options at the close of market on December 18, 2009 for services on the Board for 2010 were granted to each non-employee director, except for Mr. Smith who was granted 15,000 options upon his election to the Board of Directors on June 18, 2010. The grants vested immediately.

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

Securities Authorized for Issuance Under Equity Compensation Plans

The Company has two Stock Option Plans that have been approved by the stockholders.  The plans are the 1999 Stock Option Plan and the 1993 Stock Option Plan.  Stock options are issued under the 1999 Stock Option Plan and 1993 Stock Option Plan at the discretion of the Compensation Committee to employees at an exercise price of no less than the then current market price of the common stock and generally expire ten years from the date of grant.  Allocation of available options and vesting schedules are at the discretion of the Compensation Committee and are determined by potential contribution to, or impact upon, the overall performance of the Company by the executives and employees. Stock options are also issued to members of the Board of Directors at the discretion of the Compensation Committee. These options may have similar terms as those issued to officers or may vest immediately.  The purpose of both Stock Option Plans is to provide a means of performance-based compensation in order to provide incentive for the Company’s employees. Warrants have been issued in connection with the sale of the shares of the Company’s stock, the purchase and sale of certain businesses and to a director. The terms of the warrants have been established by the Board of Directors of the Company.  Certain of the warrants have been approved by stockholders.

The following table sets forth certain information regarding the Company’s Stock Option Plans and warrants as of December 31, 2010.
 
 
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Plan Category
  
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
    
Weighted average
exercise price of
outstanding options,
warrants and rights
    
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the first
column)
  
                   
1993 Stock Option Plan
     18,959     $ 3.11       56,999  
                         
1999 Stock Option Plan
     3,133,415     $ 2.09       3,867,788  
                         
Total of both Equity Compensation Plans approved by stockholders
     3,152,374     $ 2.07       3,924,787  
                         
Equity compensation plans not approved by stockholders
     314,715     $ 0.20       N/A  
                         
Total
     3,467,089     $ 1.92       3,924,787  

Beneficial Ownership

 The following beneficial ownership table sets forth information as of February 28, 2011 regarding ownership of shares of Mace common stock by the following persons:

 
·
each person who is known to Mace to own beneficially more than 5% of the outstanding shares of Mace common stock, based upon Mace’s records or the records of the SEC;
 
·
each director of Mace;
 
·
each Named Executive Officer; and
 
·
all directors and executive officers of Mace, as a group.

Unless otherwise indicated, to Mace’s knowledge, all persons listed on the beneficial ownership table below have sole voting and investment power with respect to their shares of Mace common stock. Shares of Mace common stock subject to options or warrants exercisable within 60 days of February 28, 2011 are considered outstanding for the purpose of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person.
 
 
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Name and Address of
Beneficial Owner
  
Amount and Nature of Beneficial
Ownership
    
Percentage of
Common Stock
Owned (1)
  
                 
Lawndale Capital Management, LLC
     1,638,382 (2)     10.3 %
591 Redwood Highway, Suite 2345
                
Mill Valley, CA 94941
                
                 
Ancora Group (3)
      1,905,515 (3)      11.9 % 
One Chagrin Highlands
                
2000 Auburn Drive, Suite 300
                
Cleveland, Ohio 44122
                
                 
Louis D. Paolino, Jr.
     1,040,958 (4)       6.6 % 
2626 Del Mar Place
                
Fort Lauderdale, Florida 33301
                
                 
Nantahala Capital Management, LLC
     788,700 (5)       5.0 % 
100 First Stamford Place, 2nd Floor
                
Stamford, CT 06902
                
                 
Gregory M. Krzemien
     489,417 (6)     3.0 %
                 
Michael E. Smith
     15,000 (7)     *  
                 
Dennis R. Raefield
     401,000 (8)     2.5 %
                 
Richard A. Barone
     197,000 (9)     1.3 %
                 
John C. Mallon
     55,000 (10)     *  
                 
Gerald T. LaFlamme
     45,000 (11)     *  
                 
All current directors and executive officers as a group (6 persons)
     1,202,417 (12)     7.2 %

* Less than 1% of the outstanding shares of Mace common stock.
 (1)    Percentage calculation is based on 15,735,725 shares outstanding on February 28, 2011.
 (2)   According to their Schedule 13D Amendment 8 filed with the SEC on November 30, 2009, consists of 1,638,382 shares to which Lawndale Capital Management, LLC (“Lawndale”) has shared voting and dispositive power. The Schedule 13D was filed jointly by Lawndale, Andrew E. Shapiro and Diamond A Partners, L.P. (“Diamond”).  Lawndale is the investment advisor to and the general partner of Diamond, which is an investment limited partnership.  Mr. Shapiro is the sole manager of Lawndale.  Mr. Shapiro is also deemed to have shared voting and dispositive power with respect to the shares reported as beneficially owned by Lawndale.  Diamond has shared voting and dispositive power with respect to 1,415,110 shares of the Company.
(3)    According to information provided by the Ancora Group, which includes The Ancora Group, Inc., Ancora Capital, Inc.; Ancora Securities, Inc., the main subsidiary of Ancora Capital, Inc.; Ancora Advisors, LLC, Ancora Trust, the master trust for the Ancora Mutual Funds; Ancora Foundation, a private foundation; Merlin Partners, LP an investment limited partnership; and various owners and employees of the aforementioned entities have aggregate beneficial ownership of 1,905,515 shares, including warrants issued to Merlin Partners, LP to purchase 314,715 shares of Mace common stock. Ancora Securities, Inc. is registered as a broker/dealer with the SEC and FINRA.  Ancora Advisors, LLC is registered as an investment advisor with the SEC under the Investment Advisors Act of 1940, as amended.  The Ancora Trust, which includes Ancora Income Fund, Ancora Equity Fund, Ancora Special Opportunity Fund, and Ancora MicroCap Fund, are registered with the SEC as investment companies under the Investment Company Act of 1940, as amended. Mr. Richard Barone, a director of the Company, is the controlling shareholder of The Ancora Group, Inc., which is the parent company of Ancora Advisors, LLC, and Ancora Securities, Inc.  Mr. Barone owns approximately 5% of Merlin Partners, LP and 20% of The Ancora  Group and is Chairman of and has an ownership interest in the various Ancora Funds.  Ancora Advisors, LLC has the power to dispose of the shares owned by the investment clients for which it acts as advisor, including Merlin Partners, for which it is also the General Partner, and the Ancora Mutual Funds.  Ancora Advisors, LLC, disclaims beneficial ownership of such shares, except to the extent of its pecuniary interest therein. Ancora Securities, Inc. acts as the agent for its various clients and has neither the power to vote nor the power to dispose of the shares.  Ancora Securities, Inc. disclaims beneficial ownership of such shares.  Each of the entities named have disclaimed membership in a Group within the meaning of Section 13(d)(3) of the Exchange Act and the Rules and Regulations promulgated thereunder in Schedule 13D Amendment 5 as filed with the SEC.  The 1,905,515 aggregate shares listed for the Ancora Group are represented as owned beneficially, as follows: (a) 470,000 by the Ancora Mutual Funds for which Mr. Barone is a portfolio manager; (b) 1,078,800 by investment clients of Ancora Advisors, LLC, over which shares Ancora Advisors LLC has the power of disposition by virtue of an Investment Management Agreement (Ancora Advisors, LLC has disclaimed beneficial ownership of such shares); (c) 42,000 by owners/employees of Ancora Group, including Richard A. Barone; and (d) 314,715 warrants issued to Merlin Partners, LP to purchase Mace common stock.
 
 
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(4)    Includes options to purchase 150,000 shares.
(5)   The 788,700 shares listed for Nantahala Capital Management, LLC are owned beneficially according to Schedule 13G filed with the SEC on February 3, 2011.
(6)    Includes options to purchase 464,167 shares.
(7)    Includes options to purchase 15,000 shares.
(8)    Includes options to purchase 390,000 shares.
(9)    Includes 135,000 shares owned by Mr. Barone, 32,000 shares owned by entities Mr. Barone directly controls and options to purchase 30,000 shares.
(10)  Includes options to purchase 45,000 shares.
(11)  Represents options to purchase 45,000 shares.
(12)  See Notes 1 and 6 through 11 above.
 
ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Party Transactions
 
The Company’s Security Segment leases manufacturing and office space under a lease between Vermont Mill and the Company.  The lease, as extended, expires on November 14, 2011.  Vermont Mill is controlled by Jon E. Goodrich, a former director and current employee of the Company. The original lease was entered into in November 1999 for a five year term. In November 2004, the Company exercised an option to continue the lease through November 2009 at a rate of $10,576 per month. The Company amended the lease in 2008 to occupy additional space for an additional $200 per month.  The Company also leased from November 2008 to May 2009, on a month-to-month basis, approximately 3,000 square feet of temporary inventory storage space at a monthly cost of $1,200. In September 2009, the Company and Vermont Mill extended the term of the lease to November 14, 2010 at a monthly rate of $10,776 per month and modified the square footage rented to 33,476 square feet. The Company entered into a Lease Extension Agreement on December 20, 2010 to further extend the lease through November 14, 2011 at a monthly rate of $11,315 and provides an option to further extend the lease to May 14, 2012 at the same monthly rate. Rent expense under this lease was $129,857 and $135,318 for the years ended December 31, 2010 and 2009, respectively.

The Company funded a portion of the payment to Mr. Paolino by borrowing $1.35 million from Merlin Partners, LP (“Merlin”).  The loan which had an original maturity date of March 28, 2011 was extended to April 28, 2011.   The loan was payable in two installments of $675,000 each upon the closing of each of two car washes that were under agreements of sale at December 31, 2010.  The Company made a payment of $675,000 to Merlin upon the sale of the Lubbock, Texas car wash on March 8, 2011. The Company expects to pay the remaining balance owed plus accrued interest from the proceeds generated by the sale of a Dallas, Texas area car wash that is under an agreement of sale and expected to close in the second quarter of 2011. Merlin is a fund managed by Ancora Advisors, a subsidiary of the Ancora Group.  Richard Barone, a Company director, is Chairman of the Ancora Group.  The loan bears interest at a rate of 12% per annum, and is secured by second liens on the Dallas, Texas area car wash and a security interest in the trade name “Mace”.  As part of the consideration for the financing, Merlin was also granted a Common Stock Purchase Warrant (the “Warrant”) to purchase up to 314,715 shares of the Company’s common stock at an exercise price of $0.20 per share, expiring December 28, 2015.  The Warrant contains anti-dilution provisions providing that Merlin will receive additional warrants exercisable into 2% of any common stock of the Company issued by the Company through December 28, 2011.  The exercise price of the Warrant will be adjusted lower to equal the stock issuance price of any stock issued through December 28, 2011 at a price below $0.20.

The Company’s Audit Committee Charter, Section IV.E (vi), provides that the Audit Committee annually reviews all existing related party transactions or other conflicts of interest that exist between employees and directors and the Company. The Audit Committee Charter also requires that the Audit Committee review all proposed related party transactions. As provided in Section IV.E (iv) of the Audit Committee Charter, the Company may not enter into a related party transaction, unless the transaction is first approved by the Audit Committee. The Audit Committee Charter is in writing and is available for review on the Company’s website at www.mace.com, under the Investor Relations heading. The current members of the Audit Committee are Messrs. LaFlamme, Barone, and Smith. When reviewing related party transactions, the Audit Committee considers the benefit to the Company of the transaction and whether the transaction furthers the Company’s interest. The decisions of the Audit Committee are set forth in writing in the minutes of the meetings of the Audit Committee.

 
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Director Independence

Mace has Corporate Governance Guidelines.  The Corporate Governance Guidelines provide that a majority of the Company’s directors should be independent, as defined in Section 3.14 of the Company’s ByLaws. Section 3.14 of the Company’s ByLaws is available for review on the Company’s website at www.mace.com, under the Investor Relations heading. The Board has determined that Messrs. LaFlamme, Mallon, Barone and Smith are independent under these rules. In addition, all of the Audit Committee members are independent under the Audit Committee independence standards established by the NASDAQ Global Market and the rules promulgated by the SEC. The Board has an Audit Committee, a Compensation Committee, a Nominating Committee and an Ethics and Corporate Governance Committee. The independent directors are the sole members of all of the named committees.

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Audit Fees. The Company was billed $274,997 by Grant Thornton LLP for the audit of Mace’s annual financial statements for the fiscal year ended December 31, 2010, and for the review of the financial statements included in Mace’s Quarterly Reports on Form 10-Q filed for each calendar quarter of 2010. The Company was billed $361,193 by Grant Thornton LLP for the audit of Mace’s annual financial statements for the fiscal year ended December 31, 2009, and for the review of the financial statements included in Mace’s Quarterly Reports on Form 10-Q for each calendar quarter of 2009.

Tax Fees. The Company was billed $49,961 and $63,771 for tax compliance services rendered by Grant Thornton LLP during 2010 and 2009, respectively.  The services aided the Company in the preparation of federal, state and local tax returns.

All Other Fees.  The Company did not incur any other fees from Grant Thornton LLP during 2010 or 2009.

Other Matters.  The Audit Committee of the Board of Directors has considered whether the provision of financial information systems design and implementation services and other non-audit services is compatible with maintaining the independence of Mace’s registered public accountants, Grant Thornton LLP. The Audit Committee pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditors.  One hundred percent of auditing services and permitted non-audit services in 2009 and 2010 were pre-approved by the Audit Committee. The Audit Committee may delegate authority to the chairman, or in his or her absence, a member designated by the chairman to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such person or subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting.

PART IV

ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) (1)
Consolidated Financial Statements:
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets as of December 31, 2010 and 2009
 
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
 
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010 and 2009
 
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
 
Notes to Consolidated Financial Statements
   
(a) (2)
The requirements of Schedule II have been included in the Notes to Consolidated Financial Statements.  All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
   
(a) (3)  Exhibits:

 
The following Exhibits are filed as part of this report (exhibits marked with an asterisk have been previously filed with the SEC and are incorporated herein by this reference):
   
*3.3
Amended and Restated Bylaws of Mace Security International, Inc.
*3.4
Amended and Restated Certificate of Incorporation of Mace Security International, Inc. (Exhibit 3.4 to the 1999 Form 10-KSB)
 
 
45
 
 
*3.5
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Mace Security International, Inc. (Exhibit 3.5 to the 2000 Form 10-KSB)
   
*3.6
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Mace Security International, Inc. (Exhibit 3.6 to the 2002 Form 10-K)
*3.7
The Company’s Amended and Restated Certificate of Incorporation (Exhibit 4.1 to the June 16, 2004 Form S-3)
*10.1
1993 Non-Qualified Stock Option Plan (1)
*10.2
Trademarks (1)
*10.3
Mace Security International, Inc. 1999 Stock Option Plan. (Exhibit 10.98 to the June 30, 1999 Form 10-QSB dated August 13, 1999) (3)
*10.4
Business Loan Agreement dated January 31, 2000, between the Company, its subsidiary - Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A.; Promissory Note dated February 2, 2000 between the same parties as above in the amount of $400,000 (pursuant to instruction 2 to Item 601 of Regulation S-K, two additional Promissory Notes, which are substantially identical in all material respects except as to the amount of the Promissory Notes) are not being filed in the amount of: $19,643.97 and $6,482; and a Modification Agreement dated as of January 31, 2000 between the same parties as above in the amount of $110,801.55 (pursuant to instruction 2 to Item 601 of Regulation S-K, Modification Agreements, which are substantially identical in all material respects except to the amount of the Modification Agreement) are not being filed in the amounts of: $39,617.29, $1,947,884.87, $853,745.73, and $1,696,103.31. (Exhibit 10.124 to the December 31, 1999 Form 10-KSB dated March 29, 2000)
*10.5
Amendment dated March 13, 2001, to Business Loan Agreement between the Company, its subsidiary Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A. (pursuant to instruction 2 to Item 601 of Regulation S-K, one additional amendment which is substantially identical in all material respects, except as to the borrower being Eager Beaver Car Wash, Inc., is not being filed). (Exhibit 10.132 to the December 31, 2000 Form 10-KSB dated March 20, 2001)
*10.6
Modification Agreement between the Company, its subsidiary, Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A. in the amount of $2,216,000 (pursuant to Instruction 2 to Item 601 of Regulation S-K, Modification Agreements, which are substantially identical in all material respects except to amount and extension date of the Modification Agreement are not being filed in the original amounts of $984,000 (extended to August 20, 2004) and $1,970,000 (extended to June 21, 2004). (Exhibit 10.133 to the June 30, 2001 Form 10-Q dated August 9, 2001)
*10.7
Term Note dated November 6, 2001 between the Company, its subsidiary, Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A. in the amount of $380,000. (Exhibit 10.134 to the September 30, 2001 Form 10-Q dated November 9, 2001)
*10.8
Master Lease Agreement dated June 10, 2002 between the Company, its subsidiary Colonial Full Service Car Wash, Inc., and Banc One Leasing Corporation in the amount of $193,055. (Exhibit 10.140 to the June 30, 2002 Form 10-Q dated August 14, 2002)
*10.9
Lease Schedule and Addendum dated August 28, 2002 in the amount of $39,434 to Master Lease Agreement dated June 10, 2002, between the Company, its subsidiary, Colonial Full Service Car Wash, Inc., and Banc One Leasing Corporation. (Exhibit 10.144 to the September 30, 2002 Form 10-Q dated November 12, 2002)
*10.10
Note Modification Agreement dated February 21, 2003, between the Company, its subsidiary, Colonial Full Service Car Wash, Inc. and Bank One, Texas, N.A. in the amount of $348,100. (Exhibit 10.148 to the December 31, 2002 Form 10-K dated March 19, 2003)
*10.11
Note Modification Agreement and Amendment to Credit Agreement dated January 21, 2004, between the Company, its subsidiary, Colonial Full Service Car Wash, Inc. and Bank One, Texas, N.A. in the amount of $48,725.50. (Exhibit 10.157 to the December 31, 2004 Form 10-K dated March 12, 2004)
*10.12
Credit Agreement dated as of December 31, 2003 between the Company, its subsidiary, Eager Beaver Car Wash, Inc., and Bank One Texas, N.A. (pursuant to instruction 2 to Item 601of Regulation S-K, four additional credit agreements which are substantially identical in all material respects, except as to the borrower being Mace Car Wash - Arizona, Inc., Colonial Full Service Car Wash, Inc., Mace Security Products, Inc. and Mace Security International, Inc., are not being filed.) (Exhibit 10.158 to the December 31, 2004 Form 10-K dated March 12, 2004.)
*10.13
Amendment to Credit Agreement dated April 27, 2004, effective March 31, 2004 between Mace Security International, Inc., and Bank One Texas, N.A. (Pursuant to instruction 2 to Item 601 of Regulation S-K, four Additional credit agreements which are substantially identical in all material respects, except as to borrower being the Company’s subsidiaries, Mace Car Wash-Arizona, Inc., Colonial Full Service Car Wash, Inc. Mace Security Products Inc. and Eager Beaver Car Wash, Inc., are not being filed) (Exhibit 10.159 to the March 31, 2004 Form 10-Q dated May 5, 2004)
 
 
46
 
 
*10.14
Modification Agreement between the Company , its subsidiary, Colonial Full Service Car Wash,  Inc., and Bank One, Texas, N.A. in the original amount of $984,000 (pursuant to Instruction 2 to Item 601 of Regulation S-K, Modification Agreements, which are substantially identical in all material respects except to amount and extension date of the Modification Agreement, are not being filed in the original amounts of $2,216,000 (extended to August 20, 2009) and $380,000 (extended to October 6, 2009)). (Exhibit 10.167 to the September 30, 2004 Form 10-Q dated November 12, 2004)
*10.15
Promissory Note dated September 15, 2004 between the Company, its subsidiary, Mace Security Products, Inc.,  and Bank One, Texas, N.A. in the amount of $825,000. (Exhibit 10.168 to the September 30, 2004 Form 10-Q dated November 12, 2004)
*10.16
Note Modification Agreement dated December 1, 2005 between the Company, its subsidiary Mace Security Products, Inc. and JPMorgan Bank One Bank, N.A. in the amount of $500,000. (Exhibit 10.179 to the December 31, 2005 Form 10-K dated July 14, 2006)
 
Form 8-K dated March 6, 2006) +
*10.17
Amendment to Credit Agreement dated October 31, 2006, effective September 30, 2006 between Mace Security International, Inc., and JP Morgan Chase Bank, N.A. (Pursuant to Instruction 2 to Item 601 of Regulation S-K, five additional credit agreements which are substantially identical in all material respects, except as to borrower being the Company’s subsidiaries, Mace Truck Wash, Inc., Mace Car Wash-Arizona, Inc., Colonial Full Service Car Wash, Inc., Mace Security Products Inc., and Eager Beaver Car Wash, Inc., are not being filed). (Exhibit 10.1 to the September 30, 2006 Form 10-Q dated November 13, 2006)
*10.18
Employment Agreement dated August 21, 2006 between Mace Security International, Inc. and Louis D. Paolino, Jr. (Exhibit 10.1 to the August 21, 2006 Form 8-K dated August 22, 2006) (3)
*10.19
Employment Agreement dated February 12, 2007 between Mace Security International, Inc. and Gregory M. Krzemien (Exhibit 10.1 to the February 8, 2007 Form 8-K dated February 14, 2007) (3)
*10.21
Employment Agreement dated July 29, 2008 between Mace Security International, Inc. and Dennis R. Raefield
 
(Incorporated by reference as Exhibit 10.1 to the July 29, 2008 Form 8-K dated July 31, 2008) (3)
*10.22
Amendment to Credit Agreement dated May 1, 2009, between Mace Security International, Inc., and JP Morgan Chase Bank N.A. (“Chase”). (Pursuant to Instruction 2 to Item 601 of Regulation S-K, two additional credit agreements which are substantially identical in all material respects, except as to borrower being the Company’s subsidiaries, Mace Car Wash-Arizona, Inc. and Colonial Full Service Car Wash, Inc. are not being filed). (Incorporated by reference as Exhibit 10.37 to the March 31, 2009 Form 10Q dated May 13, 2009).
*10.23
Note Modification Agreement between the Company, its subsidiary-Colonial Full Service Car Wash, Inc. and Chase, in the original amount of $2,216,000 extended to April 20, 2011. (Pursuant to Instruction 2 to Item 601 of Regulation S-K, Modification Agreements which are substantially identified in all material respects except to amounts and extension dates of the Modification Agreements, are not being filed in the original amounts of $1,970,000 (extended to April 21, 2011) $984,000 (extended to April 20, 2011 and $380,000 extended to May 6, 2011)). (Incorporated by reference as Exhibit 10.38 to the March 31, 2009 Form 10Q dated May 13, 2009).
*10.24
Modification, Renewal, and Extension of Note, Liens and Credit Agreement dated May 8, 2009 between the Company, its subsidiary, Mace Security Products Inc. and Chase. (Incorporated by reference as Exhibit 10.39 to the March 31, 2009 Form 10Q dated May 13, 2009).
*10.25
Stock Purchase Agreement dated April 7, 2009, by and among Mace Security International, Inc., CSSS, In Keays, and Bradley Keays and related Amendment 1 to Stock Purchase Agreement dated April (Incorporated by reference as Exhibit 10.40 to the March 31, 2009 Form 10Q dated May 13, 2009).
*10.26
Agreements consisting of: (i) Commercial Earnest Money Contract, dated as of January 15, 2009; (ii) Amendment to Commercial Earnest Money Contract dated effective March 16, 2009; (iii) Commercial Earnest Contract, executed as of April 16, 2009; (iv) Amendment to Commercial Earnest Monet Contracts, dated as of May 27, 2009, (v) Third Amendment to Commercial Earnest Money Contracts, dated September 1, 2009; (vii) Fifth Amendment to Contracts dated October 9, 2009; and (viii) Assignment of Commercial Earnest money Contract dated October 12, 2009. (Incorporated by reference as Exhibit 10.1 to the November 30, 2009 Form 8-K dated December 4, 2009).
*10.27
Amendment to Credit Agreement dated December 21, 2009, between Mace Security International, Inc., and JP Morgan Chase Bank N.A. (“Chase”). (Pursuant to Instruction 2 to Item 601 of Regulation S-K, two additional credit agreements which are substantially identical in all material respects, except as to borrower being the Company’s subsidiaries, Mace Security Products, Inc. and Colonial Full Service Car Wash, Inc., are not being filed). (Incorporated by reference as Exhibit 10.27 to the December 31, 2009 Form 10-K dated March 24, 2010).
*10.28
Line of Credit Note dated December 12, 2009 between the Company, its subsidiary, Mace Security Products, Inc., and JP Morgan Chase Bank N.A. in the amount of $500,000.  (Incorporated by reference as Exhibit 10.28 to the December 31, 2009 Form 10-K dated March 24, 2010).
 
 
47
 
 
*10.29
Letter Agreement of Employment dated March 23, 2010 between Mace Security International, Inc. and Gregory M. Krzemien. (3) (Incorporated by reference as Exhibit 10.29 to the December 31, 2009 Form 10-K dated March 24, 2010).
*10.30
Stock Purchase Agreement dated November 11, 2010, by and among Mace Security International, Inc., Linkstar Interactive, Inc., Linkstar Corporation, and Silverback Network, Inc. (Exhibit 10.1 to the September 30, 2010 Form 10-Q filed November 15, 2010).
  10.31
Promissory Term Note Agreement dated December 28, 2010, between the Company and Merlin Partners, LP in the amount of $1,350,000 and related Security Agreement and Common Stock Purchase Warrant.
  10.32
Line of Credit Note in the amount of $500,000 and related Amendment to Credit Agreement dated December 17, 2010 between the Company, its subsidiary, Mace Securities Products, Inc., and JP Morgan Chase Bank N.A.
  10.33
Securities Purchase Agreement dated March 25, 2011, between the Company and Merlin Partners, LP.
  10.34
Placement Agent and Dealer-Manager Agreement dated March 25, 2011, between the Company and Ancora Securities, Inc.
   
  11
Statement Regarding Computation of Per Share Earnings.
*14
Code of Ethics and Business Conduct (Exhibit 14 to the December 31, 2003 Form 10-K dated March 12, 2004)
  21
Subsidiaries of the Company
  23.1
Consent of Grant Thornton LLP
  31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.
  32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.1
Corporate Governance Guidelines dated October 16, 2007 (Exhibit 99.1 to the October 16, 2007 8-K dated October 16, 2007)

*Incorporated by reference to the exhibit indicated in parentheses.
+Schedules and other attachments to the indicated exhibit have been omitted.  The Company agrees to furnish supplementally to the SEC upon request a copy of any omitted schedules or attachments.
(1)
Incorporated by reference to the exhibit of the same number filed with the Company's registration statement on Form SB-2 (33-69270) that was declared effective on November 12, 1993.
(2)
Incorporated by reference to the Company's Form 10-QSB report for the quarter ended September 30, 1994 filed on November 14, 1994. It should be noted that Exhibits 10.25 through 10.34 were previously numbered 10.1 through 10.10 in that report.
(3)
Indicates a management contract or compensation plan or arrangement.

 
48
 
 
SIGNATURES

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

MACE SECURITY INTERNATIONAL, INC.

By:
  /s/ Dennis R. Raefield.
  
Dennis R. Raefield
President and Chief Executive Officer

DATED the 30 day of March, 2011

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

Name
  
Title
  
Date
         
/s/ Dennis R. Raefield
  
President, Chief Executive Officer
  
March 30, 2011
Dennis R. Raefield.
  
and Director
    
(Principal Executive Officer)
  
 
    
         
/s/ Gregory M. Krzemien
  
Chief Financial Officer
  
March 30, 2011
Gregory M. Krzemien
  
and Treasurer
    
(Principal Financial Officer and
  
 
    
Principle Accounting Officer)
  
 
    
         
/s/John C. Mallon
  
Chairman of the Board
  
March 30 2011
John C. Mallon
        
         
/s/Richard A. Barone
  
Director
  
March 30, 2011
Richard A. Barone
        
         
/s/Gerald T. LaFlamme
  
Director
  
March 30, 2011
Gerald T. LaFlamme
        
         
/s/ Michael E. Smith
  
Director
  
March 30, 2011
Michael E. Smith
  
  
  
  

 
49
 
 
Mace Security International, Inc.
Audited Consolidated Financial Statements
Years ended December 31, 2010 and 2009

Contents

Report of Independent Registered Public Accounting Firm
  
F-2
     
Audited Consolidated Financial Statements
    
     
Consolidated Balance Sheets
  
F-3
     
Consolidated Statements of Operations
  
F-5
     
Consolidated Statements of Stockholders’ Equity
  
F-6
     
Consolidated Statements of Cash Flows
  
F-7
     
Notes to Consolidated Financial Statements
  
F-8

 
 
 

Report of Independent Registered Public Accounting Firm

Board of Directors
Mace Security International, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Mace Security International, Inc. (a Delaware corporation) and Subsidiaries (the Company) as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mace Security International, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP
  
Philadelphia, Pennsylvania
March 30, 2011

 
F-2
 
 
Mace Security International, Inc. and Subsidiaries
Consolidated Balance Sheets

(In thousands, except share and par value information)
  
ASSETS
 
   
December 31,
  
   
2010
    
2009
  
 
            
Current assets:
  
 
        
Cash and cash equivalents
   $ 2,564     $ 8,289  
Short-term investments
     -       1,086  
Accounts receivable, less allowance for doubtful accounts of $562 and $785 in 2010 and 2009, respectively
     2,119       1,939  
Inventories, less reserve for obsolescence of $1,304 and $1,379 in 2010 and 2009, respectively
     3,273       5,232  
Prepaid expenses and other current assets
     1,790       2,078  
Assets held for sale
     6,330       7,180  
Total current assets
     16,076       25,804  
Property and equipment:
                
Land
     -       250  
Buildings and leasehold improvements
     703       2,213  
Machinery and equipment
     3,237       3,177  
Furniture and fixtures
     459       491  
Total property and equipment
     4,399       6,131  
Accumulated depreciation and amortization
     (2,754 )     (2,856 )
Total property and equipment, net
     1,645       3,275  
                 
Goodwill
     1,982       7,869  
                 
Other intangible assets, net of accumulated amortization of $1,675 and $1,881 in 2010 and 2009, respectively
     1,767       3,780  
                 
Other assets
     1,554       1,630  
Total assets
   $ 23,024     $ 42,358  

The accompanying notes are an integral
 part of these consolidated financial statements.
 
 
F-3
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
   
December 31,
  
 
  
2010
    
2009
  
             
Current liabilities:
            
Current portion of long-term debt and capital lease obligations
   $ 1,378     $ 109  
Accounts payable
     2,168       3,436  
Income taxes payable
     199       206  
Deferred revenue
     324       319  
Accrued expenses and other current liabilities
     2,905       3,028  
Liabilities related to assets held for sale
     2,081       2,123  
Total current liabilities
     9,055       9,221  
                 
Long-term debt, net of current portion
     43       568  
Capital lease obligations, net of current portion
     70       120  
Other liabilities
     -       461  
                 
Commitments and contingencies – See Note 18
                
                 
Stockholders’ equity:
                
Preferred stock, $.01 par value: authorized shares-10,000,000, issued and outstanding shares-none
     -       -  
Common stock, $.01 par value: authorized shares-100,000,000, issued and outstanding shares of 15,735,725 and 15,913,775 in 2010 and 2009, respectively
     157       159  
Additional paid-in capital
     93,912       93,948  
Accumulated other comprehensive loss
     -       -  
Accumulated deficit
     (80,196 )     (62,098 )
      13,873       32,009  
Less treasury stock at cost 18,332 and 18,200 shares in 2010 and 2009, respectively
     (17 )     (21 )
Total stockholders’ equity
     13,856       31,988  
Total liabilities and stockholders’ equity
   $ 23,024     $ 42,358  

The accompanying notes are an integral
 part of these consolidated financial statements.
 
 
F-4
 
 
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Operations

(In thousands, except share and per share information)
 
   
Year Ended December 31,
  
 
  
2010
    
2009
  
             
Revenues
   $ 18,395     $ 18,591  
Cost of revenues
     12,874       12,998  
                 
Gross profit
     5,521       5,593  
Selling, general, and administrative expenses
     9,568       12,691  
Arbitration award
     4,610       -  
Depreciation and amortization
     582       567  
Asset impairment charges
     485       462  
                 
Operating loss
     (9,724 )     (8,127 )
                 
Interest expense, net
     51       7  
Other income
     5       -  
Loss from continuing operations before income taxes
     (9,770 )     (8,134 )
                 
Income tax expense
     30       -  
Loss from continuing operations
     (9,800 )     (8,134 )
Loss from discontinued operations, net of tax of $0 in 2010 and 2009
     (8,298 )     (2,817 )
Net loss
   $ (18,098 )   $ (10,951 )
Per share of common stock (basic and diluted):
                
Loss from continuing operations
   $ (0.62 )   $ (0.50 )
Loss from discontinued operations
     (0.53 )     (0.18 )
Net loss
   $ (1.15 )   $ (0.68 )
                 
Weighted average shares outstanding:
                
Basic and diluted
     15,749,465       16,202,254  

The accompanying notes are an integral
 part of these consolidated financial statements.
 
 
F-5
 
 
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except share information)

   
Common Stock
    
Additional
Paid-in
    
Accumulated
Other
Comprehensive
    
Accumulated
    
Treasury
        
   
Shares
    
Amount
    
Capital
    
Income (Loss)
    
Deficit
    
Stock
    
Total
  
Balance at December 31, 2008
     16,285,377     $ 163     $ 94,161     $ (5 )   $ (51,147 )   $ (5 )   $ 43,167  
Purchase and retirement of treasury stock
     (371,602 )     (4 )     (329 )     -       -       (16 )     (349 )
Stock-based compensation expense (see note 14)
     -       -       116       -       -       -       116  
Unrealized gain on short-term investments
     -       -       -       5       -       -       5  
Net loss
     -       -       -       -       (10,951 )     -       (10,951 )
Total comprehensive loss
     -       -       -       -       -       -       (10,946 )
Balance at December 31, 2009
     15,913,775       159       93,948       -       (62,098 )     (21 )     31,988  
Purchase and retirement of treasury stock
     (178,050 )     (2 )     (181 )     -       -       4       (179 )
Stock-based compensation expense (see note 14)
     -       -       145       -       -       -       145  
Net loss
     -       -       -       -       (18,098 )     -       (18,098 )
Total comprehensive loss
     -       -       -       -       -       -       (18,098 )
Balance at December 31, 2010
     15,735,725     $ 157     $ 93,912     $ -     $ (80,196 )   $ (17 )   $ 13,856  

The accompanying notes are an integral
 part of these consolidated financial statements.
 
 
F-6
 
 
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
   
Year Ended December 31,
  
   
2010
    
2009
  
Operating activities
            
Net loss
   $ (18,098 )   $ (10,951 )
Loss from discontinued operations, net of tax
     (8,298 )     (2,817 )
Loss from continuing operations
     (9,800 )     (8,134 )
Adjustments to reconcile loss from continuing operations to net cash used in  operating activities:
                
Depreciation and amortization
     583       567  
Stock-based compensation
     66       115  
Provision for losses on receivables
     170       204  
Loss on sale of property and equipment
     -       98  
Loss on short-term investments
     -       5  
Goodwill and asset impairment charges
     485       462  
Changes in operating assets and liabilities, net of acquisition:
                
Accounts receivable
     (444 )     (487 )
Inventories
     974       1,548  
Prepaid expenses and other assets
     (268 )     310  
Accounts payable
     (176 )     1,367  
Deferred revenue
     14       206  
Accrued expenses
     (710 )     646  
Income taxes payable
     (37 )     (136 )
Net cash used in operating activities-continuing operations
     (9,143 )     (3,229 )
Net cash used in operating activities-discontinued operations
     (1,040 )     (510 )
Net cash used in operating activities
     (10,183 )     (3,739 )
Investing Activities
                
Acquisition of business, net of cash acquired
     -       (1,863 )
Purchase of property and equipment
     (348 )     (430 )
Proceeds from (purchase of) short-term investments
     1,086       (82 )
Proceeds from sale of property and equipment
     -       1,524  
Payments for intangibles
     (2 )     (31 )
Net cash provided by (used in) investing activities-continuing operations
     736       (882 )
Net cash provided by investing activities-discontinued operations
     3,041       6,064  
Net cash provided by investing activities
     3,777       5,182  
Financing activities
                
Proceeds from short-term note and long-term debt
     1,443       -  
Payments on long-term debt and capital lease obligations
     (136 )     (93 )
Purchase and retirement of treasury stock
     (178 )     (350 )
Net cash provided by (used in) financing activities-continuing operations
     1,129       (443 )
Net cash used in financing activities-discontinued operations
     (448 )     (1,025 )
Net cash provided by (used in) financing activities
     681       (1,468 )
Net decrease in cash and cash equivalents
     (5,725 )     (25 )
Cash and cash equivalents at beginning of year
     8,289       8,314  
Cash and cash equivalents at end of year
   $ 2,564     $ 8,289  
 
The accompanying notes are an integral
part of these consolidated financial statements.

 
F-7
 
 
Mace Security International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

1.
Description of Business and Basis of Presentation

The accompanying consolidated financial statements include accounts of Mace Security International, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Mace”). All significant intercompany transactions have been eliminated in consolidation.

The Company currently operates in one business segment, the Security Segment, which consists of three operating or reporting units: Mace Personal Defense, Inc., which sells consumer safety and personal defense products; Mace Security Products, Inc., which sells electronic surveillance equipment and products; and Mace CS, Inc., which provides wholesale security monitoring services. The Company entered the wholesale security monitoring business with its acquisition of Central Station Security Systems, Inc. (“CSSS”) on April 30, 2009. See Note 4. Business Acquisitions and Divestitures.

The Company had a Digital Media Marketing Segment. The Company exited the digital media marketing business and sold the e-commerce division of the segment, Linkstar Corporation, on November 22, 2010. See Note 4. Business Acquisitions and Divestitures. This segment sold consumer products on the internet and provided online marketing services. The Company also had a Car Wash Segment which provided complete car care services (including car wash, detailing, lube, and minor repairs). As of December 31, 2010, there were only four remaining car washes all of which were located in Texas.

The assets and liabilities of our remaining car wash operations are classified as assets held for sale and liabilities related to assets held for sale in the balance sheet and the results of operations for the car washes and the discontinued Digital Media Marketing Segment are reflected as discontinued operations in the statements of operations and the statements of cash flows. The statement of operations and the statement of cash flows for the prior year have been restated to reflect the discontinued operations in accordance with accounting principles generally accepted in the United States (“GAAP”). See Note 5. Discontinued Operations and Assets Held for Sale.

2.
Liquidity
 
As of December 31, 2010, we had working capital of approximately $7.0 million including cash and cash equivalents of $2.6 million. Our business requires a substantial amount of capital, most notably to fund our losses.  We plan to meet these capital needs from various financing sources, including borrowings, cash generated from the sale of car washes and other assets, and the issuance of common stock.
 
The Company plans to raise working capital through a rights offering or other sale of securities.  On December 23, 2010, the Board of Directors of the Company approved a plan to prepare a rights offering to purchase shares of the Company’s common stock (the “Rights Offering”).  On March 25, 2011, the Company and Ancora Securities, Inc. ("Ancora") executed a Placement Agent and Dealer-Manager Agreement, under which Ancora will act as the placement agent for the planned Rights Offering. The basic terms of the Rights Offering being prepared is for each stockholder to be given the right to purchase three shares of common stock for each share of common stock owned as of the record date, at an exercise price to be established by the Company.  The record date and exercise price will be determined and set by the Board of Directors at a later date near the date of the mailing of the prospectus for the Rights Offering.  All new shares issued under the Rights Offering will be registered under the Securities Act of 1933, as amended (the “Securities Act”).  We have also entered into a Securities Purchase Agreement dated March 25, 2011 ("Securities Purchase Agreement") with Merlin, a hedge fund which is under common control with Ancora.  In accordance with the Securities Purchase Agreement, Merlin and up to three assignees of Merlin, will purchase $4,000,000 of our common stock, valued at the per share exercise price used in the Rights Offering at the conclusion of the Rights Offering.  There are conditions to Merlin's obligation to purchase, including: (i) that the Rights Offering occur; (ii) the stock sold to Merlin is registered under the Securities Act; and (iii) the Company expand its Board of Directors to seven persons with the two vacancies created by the expansion to be filled with individuals acceptable to Merlin. The Company is currently preparing a registration statement to register the Rights Offering stock and the stock to be sold to Merlin.  Richard Barone, a member of our Board of Directors, is a controlling owner of Ancora Securities, Inc and Ancora Advisors, LLC.  Ancora Advisors, LLC is the manager of Merlin.
 
 
F-8
 
 
Additionally, our debt covenants with JP Morgan Chase Bank, N.A. require us to maintain a total unencumbered cash and marketable securities balance of $1.5 million. We have been funding our losses to-date through the sale of assets.  In 2010, we generated $3.1 million in cash from the sale of assets, including $990,000 from the sale of Linkstar and $2.1 million from the sale of four car washes, net of related mortgages.  As of December 31, 2010, we had four remaining car washes for sale, two of which were under agreements of sale (See Note 4. Business Acquisitions and Divestitures and Note 21. Subsequent Events). A car wash was sold on March 8, 2011 with the sale of one of the three remaining car washes pending.  As of March 21, 2011, we had three remaining car washes for sale which we estimate will generate proceeds, net of related mortgages, in the range of approximately $1.7 million to $2.0 million. We also listed our Texas warehouse for sale in August, 2010 with a real estate broker, which we estimate will generate proceeds, net of related mortgage debt, of approximately $1.0 million to $1.2 million.

3.
Summary of Significant Accounting Policies

Revenue Recognition and Deferred Revenue

The Company recognizes revenue in general when the following criteria have been met: persuasive evidence of an arrangement exists, a customer contract or purchase order exists and the fees are fixed and determinable, no significant obligations remain and collection of the related receivable is reasonably assured.  Allowances for sales returns, discounts and allowances are estimated and recorded concurrent with the recognition of the sale and are primarily based on historic return rates.

Revenues from the Company’s Security Segment are recognized when shipments are made or security monitoring services are provided, or for export sales, when title has passed. More specifically, revenue is recognized and recorded by our electronic surveillance equipment business and personal defense spray and related products business when shipments are made and title has passed. Revenue within of our wholesale security monitoring operation is recognized and recorded on a monthly basis as security monitoring services are provided to its dealers under cancellable contracts with terms generally for two (2) to twenty-four (24) months. Revenues are recorded net of sales returns and discounts.

The Company’s discontinued Digital Media Marketing Segment’s e-commerce division recognized revenue and the related product costs for trial product shipments after the expiration of the trial period.  Marketing costs incurred by the e-commerce division were recognized as incurred. The online marketing division recognized revenue and cost of sales based on the gross amount received from advertisers and the amount paid to the publishers placing the advertisements as cost of sales.

Revenues from the Company’s discontinued Car Wash operations are recognized, net of customer coupon discounts, when services are rendered or fuel or merchandise is sold.  The Company records a liability for gift certificates, ticket books, and seasonal and annual passes sold at its car care locations but not yet redeemed.  The Company estimates these unredeemed amounts based on gift certificate and ticket book sales and redemptions throughout the year, as well as utilizing historic sales and tracking of redemption rates per the car washes’ point-of-sale systems. Seasonal and annual passes are amortized on a straight-line basis over the time during which the passes are valid.

Shipping and handling costs related to the Company’s Security Segment of $486,000 and $535,000 in the years ended December 31, 2010 and 2009 respectively, are included in cost of revenues.

Fair Value Measurements

The Company’s nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis include goodwill, intangible assets and long-lived tangible assets including property, plant and equipment. The Company recorded impairment charges for certain of these assets during the years ended December 31, 2010 and 2009.  See Note 6. Goodwill and Note 19. Asset Impairment Charges.

 
F-9
 
 
Accounts Receivable

The Company’s accounts receivable are due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is not required. Payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts.  Accounts which are outstanding longer than the payment terms are considered past due.  The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole.  The Company writes off accounts receivable when they are deemed uncollectible.  Any payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Risk of losses from international sales within the Security Segment are reduced by requiring substantially all international customers to provide either irrevocable confirmed letters of credit or cash advances.

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined using the first-in first-out (FIFO) method for security and e-commerce products.  Inventories at the Company’s car wash locations consist of various chemicals and cleaning supplies used in operations and merchandise and fuel for resale to consumers.  Inventories within the Company’s Security Segment consist of defense sprays, child safety products, electronic security monitors, cameras and digital recorders, and various other consumer security and safety products. The Company continually, and at least on a quarterly basis, reviews the book value of slow moving inventory items, as well as discontinued product lines, to determine if inventory is properly valued. The Company identifies slow moving or discontinued product lines by a detail review of recent sales volumes of inventory items as well as a review of recent selling prices versus cost and assesses the ability to dispose of inventory items at a price greater than cost. If it is determined that cost is less than market value, then cost is used for inventory valuation.  If market value is less than cost, then an adjustment is made to the Company’s obsolescence reserve to adjust the inventory to market value. When slow moving items are sold at a price less than cost, the difference between cost and selling price is charged against the established obsolescence reserve.

Property and Equipment

Property and equipment are stated at cost.  Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which are generally as follows: buildings and leasehold improvements - 15 to 40 years; machinery and equipment - 5 to 20 years; and furniture and fixtures - 5 to 10 years.  Significant additions or improvements extending assets' useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation expense from continuing operations was approximately $309,000 and $303,000 for the year ended December 31, 2010 and 2009, respectively. Maintenance and repairs are charged to expense as incurred and amounted to approximately $19,000 and $33,000 for the years ended December 31, 2010 and 2009, respectively.
 
Advertising and Marketing Costs

The Company expenses advertising costs in its Security Segment and in its discontinued Car Wash operations, including advertising production cost, as the costs are incurred or the first time the advertisement appears.  Marketing costs in the Company’s discontinued Digital Media Marketing Segment, which consisted of the costs to acquire new members for its e-commerce business, were expensed as incurred rather than deferred and amortized over the expected life of a customer. Prepaid advertising costs were $1,600 and $41,400 at December 31, 2010 and 2009, respectively.  Advertising expense was approximately $513,400 and $858,900 for the years ended December 31, 2010 and 2009, respectively.

Impairment of Long-Lived Assets

We periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, when events and circumstances warrant such a review. If significant events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows.  Cash flow projections are sometimes based on a group of assets, rather than a single asset.  If cash flows cannot be separately and independently identified for a single asset, we determine whether an impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded.

 
F-10
 

Goodwill

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets we have acquired in business combinations.  We perform a goodwill impairment test on at least an annual basis for each of our reporting units as previously disclosed. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of our weighted average cost of capital.  Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for each reporting unit. As of December 31, 2010, wholesale security monitoring business is our only remaining business unit with recorded goodwill.  The Company conducts its annual goodwill impairment test of this remaining reporting unit as of April 30 of each year or more frequently if indicators of impairment exist.  We periodically analyze whether any such indicators of impairment exist.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred.  Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, among others.  The Company compares the fair value of its reporting unit to its respective carrying value, including related goodwill.  Future changes in the industry could impact the results of future annual impairment tests. Goodwill was $2.0 million at December 31, 2010 and $7.9 million at December 31, 2009.  There can be no assurance that future tests of goodwill impairment will not result in impairment charges.

Other Intangible Assets

Other intangible assets consist primarily of deferred financing costs, non-compete agreements, customer lists, software costs, product lists, patent costs, and trademarks.  Our trademarks are considered to have indefinite lives, and as such, are not subject to amortization. These assets are tested for impairment using discounted cash flow methodology annually and whenever there is an impairment indicator.  Estimating future cash flows requires significant judgment and projections may vary from cash flows eventually realized.  Several impairment indicators are beyond our control, and determining whether or not they will occur cannot be predicted with any certainty.  Customer lists, product lists, software costs, patents and non-compete agreements are amortized on a straight-line or accelerated basis over their respective assigned estimated useful lives.

Income Taxes

Deferred income taxes are determined based on the difference between the financial accounting and tax bases of assets and liabilities.  Deferred income tax expense (benefit) represents the change during the period in the deferred income tax assets and deferred income tax liabilities.  In establishing the provision for income taxes and deferred income tax assets and liabilities, and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted laws, published tax guidance and estimates of future earnings. Deferred income tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, trade receivables, trade payables and debt instruments.  The carrying values of cash and cash equivalents, trade receivables, and trade payables are considered to be representative of their respective fair values.

Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the carrying values and fair values of the Company’s fixed and variable rate debt instruments at December 31, 2010 and 2009, including debt recorded as liabilities related to assets held for sale, were as follows (in thousands):

 
F-11
 
 
   
December 31, 2010
    
December 31, 2009
  
   
Carrying
Value
    
Fair
Value
    
Carrying
Value
    
Fair
Value
  
Fixed rate debt
   $ 1,432     $ 1,525     $ 186     $ 211  
Variable rate debt
     2,037       2,040       2,734       2,738  
Total
   $ 3,469     $ 3,565     $ 2,920     $ 2,949  
 
Supplementary Cash Flow Information

Interest paid on all indebtedness, including discontinued operations, was approximately $134,000 and $252,000 for the years ended December 31, 2010 and 2009, respectively.

Noncash investing and financing activity of the Company within discontinued operations includes the recording of a $750,000 note receivable recorded as part of the consideration received from the sale of the Company’s San Antonio, Texas car washes during the three months ended March 31, 2009. Additionally, noncash investing and financing activity of the Company includes the acquisition of communication equipment under a note payable for $78,000 during the three months ended March 31, 2010.

Stock-Based Compensation
 
The Company has two stock-based employee compensation plans.  The Company recognizes compensation expense for all share-based awards on a straight-line basis over the life of the instruments, based upon the grant date fair value of the equity or liability instruments issued. Total stock compensation expense was approximately $80,000 and $116,000 for the years ended December 31, 2010 and 2009, respectively ($66,000 in SG&A expense, and $14,000 in discontinued operations in 2010 and $115,000 in SG&A expense and $1,000 in discontinued operations in 2009). Additionally, as a result of the arbitration award to Louis D. Paolino Jr. (See Note 18.  Commitments and Contingencies), the Company evaluated the restored stock options that were previously cancelled and found the value of these restored options to be insignificant. Accordingly, no additional expense was recorded.
 
The fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

   
Year Ended December 31,
  
   
2010
    
2009
  
Expected term (years)
  
5 to 10
    
6.5 to 10
  
Risk-free interest rate
   1.78% - 2.97%     2.75%-3.40%  
Volatility
   48%    
47% to 49%
  
Dividend yield
   0%     0%  
Forfeiture Rate
   30%     30%  

Expected term: The Company’s expected life is based on the period the options are expected to remain outstanding. The Company estimated this amount based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements and expectations of future behavior.

 
F-12
 
 
Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.

Volatility: The Company calculates the volatility of the stock price based on historical value and corresponding volatility of the Company’s stock price over the prior six years, to correspond with the Company’s focus on the Security Segment.

Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

During the years ended December 31, 2010 and 2009, the Company granted 130,000 and 433,000 stock options, respectively. The weighted-average of the fair value of stock option grants are $0.44 and $0.55 per share for the years ended December 31, 2010 and 2009, respectively.  As of December 31, 2010, total unrecognized stock-based compensation expense is $66,000, which has a weighted average period to be recognized of approximately 0.9 years.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

New Accounting Standards

In October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-13,  Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force, which amends the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. This ASU is effective for fiscal years beginning on or after June 15, 2010, which is January 1, 2011 for the Company. The Company is currently evaluating the impact of adopting the guidance.

4.
Business Acquisitions and Divestitures

Acquisitions

On April 30, 2009, the Company completed the purchase of all of the outstanding common stock of CSSS from CSSS’s shareholders. Total consideration was approximately $3.7 million, consisting of $1.7 million in cash at closing, $224,000 paid subsequent to closing, potential additional payments of up to $1.2 million upon the settlement of certain contingencies as set forth in the Stock Purchase Agreement, and the assumption of approximately $590,000 of liabilities.  In May 2010, the Company adjusted a contingent purchase price payout originally recorded at $276,000 after determining that acquired recurring monthly revenue (“RMR”) calculated at the acquisition’s one-year anniversary date was less than the required amount as defined in the Stock Purchase Agreement.  Accordingly, the Company recorded a reduction in selling, general, and administrative (“SG&A”) expenses during the second quarter ended June 30, 2010 of $276,000 and reduced a portion of the previously recorded contingent liability recorded at the date of the acquisition. Accrued contingencies related to the acquisition as of December 31, 2010 total $951,000, which are recorded in accrued expenses and other current liabilities.

 
F-13
 
 
CSSS, which was renamed Mace CS, is reported within the Company’s Security Segment, is a national wholesale monitoring company located in Anaheim, California, with approximately 400 security dealer clients. Mace CS owns and operates a UL-listed monitoring center that services over 41,000 end-user accounts. Mace CS’s primary assets are accounts receivable, equipment, customer contracts, and its business methods. The acquisition of Mace CS enables the Company to expand the marketing of its security products through cross-marketing of the Company’s surveillance equipment products to Mace CS’s dealer base as well as offering the Company’s current customers monitoring services. The purchase price was allocated as follows: approximately (i) $19,000 for cash; (ii) $112,000 for accounts receivable; (iii) $63,000 for prepaid expenses and other assets; (iv) $443,000 for fixed assets and capital leased assets; (v) the assumption of $590,000 of liabilities; and (vi) the remainder, or $3.04 million, allocated to goodwill and other intangible assets. Within the $3.04 million of acquired intangible assets, $1.98 million was assigned to goodwill, which is not subject to amortization expense. The amount assigned to goodwill was deemed appropriate based on several factors, including: (i) multiples paid by market participants for businesses in the security monitoring business; (ii) levels of Mace CS’s current and future projected cash flows; (iii) the Company’s strategic business plan, which included cross-marketing the Company’s surveillance equipment products to Mace CS’s dealer base as well as offering monitoring services to the Company’s current customers, thus potentially increasing the value of its existing business segment; and (iv) the Company’s plan to substitute for the cash flows of the Car Wash Segment, which the Company is exiting.  The remaining intangible assets were assigned to customer contracts and relationships for $940,000, trade name for $70,000, and a non-compete agreement for $50,000.  Customer relationships, trade name, and the non-compete agreement were assigned a life of fifteen, three, and five years, respectively.

Divestitures

On January 14, 2009, the Company sold its two remaining San Antonio, Texas car washes for $1.0 million, resulting in a loss of approximately $7,000.  The sale price was paid by the buyer issuing the Company a secured promissory note in the amount of $750,000, bearing interest at 6% per annum plus cash of $250,000, less closing costs.

On September 16, 2009, the Company sold an Arlington, Texas car wash for a sale price of $979,000.  The net book value of this car wash was approximately $925,000.  Simultaneously with the sale, $461,000 of cash was used to pay down related mortgage debt.  The sale resulted in a net gain of $15,000. On July 31, 2009, the Company sold a cell tower easement located at one of the Company’s Arlington, Texas car wash properties for a sale price of $292,000.  The sale resulted in a net gain of $9,600.

On November 30, 2009 the Company sold all three of its Austin, Texas car washes for a sale price of $8.0 million. Costs at closing were approximately $328,000, consisting of $240,000 of broker commissions, approximately $17,000 of non-reimbursed environmental costs, and approximately $71,000 of other closing costs.  Cash proceeds received were $5,585,000, consisting of $5,145,000 of cash received at closing on November 30, 2009 and $440,000 received through previously released escrow deposits.  Approximately $2,149,000 of the $8.0 million sale proceeds was used to pay-off existing bank debt in addition to payment of closing costs.  The sale resulted in a net gain of approximately $1,000.

On March 10, 2010, the Company sold one of its Lubbock, Texas car washes for cash consideration of $750,000.  Cash proceeds of $733,000 were received, net of closing costs.  The sale resulted in a net loss of approximately $1,000.

On June 2, 2010, the Company completed the sale of one of its Lubbock, Texas car washes for a total sale price of $650,000.  The net book value of this car wash site was approximately $428,000.  The cash proceeds of the sale were $641,000, net of closing costs.  The sale resulted in a gain of approximately $211,000.

On June 1, 2010, the Company entered into an agreement of sale for a car wash in Arlington, Texas for a sale price of $2.1 million.  The current book value of this car wash is approximately $2.0 million with outstanding debt of approximately $820,000.  The agreement of sale provides the buyer a forty-five (45) day inspection period which expired on August 15, 2010.     The closing date is forty-five (45) days after the inspection period.  The buyer was able to exercise up to three thirty (30) day extension periods beyond the defined closing date with additional escrow deposits required of $10,000 for each extension period requested. The buyer has exercised all three extensions with an extended closing date of the later of December 28, 2010 or the date final environmental clearance is obtain from the Texas Commission on Environmental Quality for fuel tanks removed from the site at the request of the buyer.  Escrow deposits, including the three extension deposits, of $70,000 have been made by the buyer.  The deposits are payable to the Company under certain default conditions as defined in the agreement of sale.  Although the Company has received final environmental clearance and anticipates that this sale will be completed in the second quarter of 2011, no assurance can be given that this transaction will be consummated.

 
F-14
 
 
On July 26, 2010, the Company completed the sale of one of its Arlington, Texas car washes for a sale price of $625,000.  The cash proceeds of the sale were $413,000, net of paying off existing debt of $195,000 and certain closing costs.  The sale resulted in a net gain of approximately $13,000.

On November 22, 2010, the Company, through its subsidiaries, Linkstar Interactive Inc., and Linkstar Corporation, (the “Subsidiaries”), entered into a Stock Purchase Agreement with Silverback Network, Inc. (the “Purchaser”) for the sale of the e-commerce division of its Digital Media Marketing Segment, Linkstar Corporation, for a sale price of $1.1 million. Under terms of the Stock Purchase Agreement, the Purchaser paid a purchase price of $1.1 million for the stock of Linkstar Corporation, $990,000 of which was received at closing with ten percent (10%) of the purchase price, or $110,000, placed into escrow, which funds will be released to the Company in six months provided there are no unsatisfied indemnity claims under the Stock Purchase Agreement. Costs at closing were approximately $40,000, consisting of broker commissions. As a result of the sale, the Company’s cash increased by approximately $950,000. The sale resulted in a loss of approximately $191,000.

On December 27, 2010, the Company completed the sale for an oil lubrication facility and self-serve car wash in Arlington, Texas for a sale price of $350,000.  The current book value of this facility was approximately $335,000, with outstanding debt of approximately $54,000. The sale resulted in a net gain of approximately $8,000.

5. Discontinued Operations and Assets Held for Sale

The Company reviews the carrying value of its long-lived assets held and used, and its assets to be disposed of, for possible impairment when events and circumstances warrant such a review.  We also follow the applicable guidance in determining when to reclass assets to be disposed of to assets and related liabilities held for sale as well as when an operation disposed of or to be disposed of is classified as a discontinued operation in the statements of operations and the statements of cash flows.

As of December 31, 2010, the assets of the Company’s former Car Wash Segment consisted of four car washes, two of which were under contracts for sale under separate agreements of sale. The sale of one car wash under an agreement of sale at December 31, 2010, the Lubbock, Texas car wash, was completed on March 8, 2011.  Also, on November 22, 2010, the Company sold the e-commerce division of its Digital Media Marketing Segment, Linkstar Corporation. Additionally, during the quarter ended September 30, 2010, the Company made a decision to sell its warehouse located in Farmers Branch, Texas (the “Texas warehouse”) and has listed the warehouse with a real estate broker.  The results for the car wash operations and the discontinued Digital Media Marketing Segment’s operations have been classified as discontinued operations in the statements of operations and the statements of cash flows.  These classifications are based on the remaining car washes, the remaining component of the Digital Media Marketing business, Promopath, as well as the Texas warehouse, all currently being marketed and ready for sale or being under an agreement of sale.  The Company’s Board of Directors is committed to a plan to dispose of the remaining car washes, the remaining component of the Digital Media Marketing business, and the Texas warehouse within the next twelve months.  The statement of operations and the statement of cash flows for the prior year have been restated to reflect the discontinued operations in accordance with GAAP.

Revenues from discontinued operations were $11.0 million and $20.3 million for the years ended December 31, 2010 and 2009, respectively.  Operating loss from discontinued operations, including asset impairment charges, was $8.4 million and $2.8 million for the years ended December 31, 2010 and 2009, respectively.
 
 
F-15
 
 
Assets and liabilities held for sale were comprised of the following (in thousands):

   
As of December 31, 2010
  
   
Car Wash Segment
                    
Assets held for sale:
  
Dallas and
Fort Worth,
Texas
    
Lubbock,
Texas
    
Digital Media Marketing
Segment
    
Security
Segment
Texas
Warehouse
    
Total
  
                               
Inventory
   $ 117     $ 5     $ -     $ -     $ 122  
Other current assets
     -       -       58       -       58  
Property, plant and equipment, net
     2,820       1,707       3       1,615       6,145  
Intangible assets
     5       -       -       -       5  
Total assets
   $ 2,942     $ 1,712     $ 61     $ 1,615     $ 6,330  
                                         
Liabilities related to assets held for sale:
                                        
Other current liabilities
   $ -     $ -     $ 103     $ -     $ 103  
Current portion of long-term debt
     615       172       -       58       845  
Long-term debt, net of current portion
     114       524       -       495       1,133  
Total liabilities
   $ 729     $ 696     $ 103     $ 553     $ 2,081  

   
As of December 31, 2009
  
Assets held for sale:
  
Dallas and
Fort Worth,
Texas
    
Lubbock,
Texas
    
Total
  
                   
Inventory
   $ 245     $ 136     $ 381  
Property, plant and equipment, net
     3,796       2,997       6,793  
Intangible assets
     6       -       6  
Total assets
   $ 4,047     $ 3,133     $ 7,180  
                         
Liabilities related to assets held for sale:
                        
Current portion of long-term debt
   $ 293     $ 166     $ 459  
Long-term debt, net of current portion
     967       697       1,664  
Total liabilities
   $ 1,260     $ 863     $ 2,123  

6.
Goodwill

In assessing goodwill for impairment, we first compare the fair value of our final reporting unit containing goodwill, our wholesale monitoring business, with its net book value. We estimate the fair value of the reporting unit using discounted expected future cash flows, supported by the results of various market approach valuation models. If the fair value of the reporting unit exceeds its net book value, goodwill is not impaired, and no further testing is necessary. If the net book value of this reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we determine the implied fair value of goodwill in the same manner as if our reporting unit was being acquired in a business combination. Specifically, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our balance sheet, we record an impairment charge for the difference.

 
F-16
 
 
We performed extensive valuation analyses, utilizing both income and market approaches, in our goodwill assessment process. The following describes the valuation methodologies used to derive the fair value of the reporting units.

 
·
Income Approach: To determine fair value, we discounted the expected cash flows of the reporting unit. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our reporting units and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our model, we used a terminal value approach. Under this approach, we used estimated operating income before interest, taxes, depreciation and amortization in the final year of our model, adjusted to estimate a normalized cash flow, applied a perpetuity growth assumption and discounted by a perpetuity discount factor to determine the terminal value. We incorporated the present value of the resulting terminal value into our estimate of fair value.

 
·
Market-Based Approach: To corroborate the results of the income approach described above, we estimated the fair value of our reporting unit using several market-based approaches, including the value that we derive based on our consolidated stock price as described above. We also used the guideline company method which focuses on comparing our risk profile and growth prospects to select reasonably similar/guideline publicly traded companies.
 
The determination of the fair value of the reporting unit requires us to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating income before depreciation and amortization and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. In addition, changes in underlying assumptions would have a significant impact on either the fair value of the reporting units or the goodwill impairment charge.

The allocation of the fair value of the reporting unit to individual assets and liabilities within the reporting unit also requires us to make significant estimates and assumptions. The allocation requires several analyses to determine fair value of assets and liabilities including, among others, customer relationships, non-competition agreements and current replacement costs for certain property, plant and equipment.

Due to continuing challenges in our Mace Security Products, Inc. reporting unit, we performed certain impairment testing of our remaining intangible assets, specifically, the value assigned to customer lists, product lists, and trademarks as of June 30, 2009, December 31, 2009,  June 30, 2010 and December 31, 2010. We recorded an impairment charge to trademarks of approximately $80,000 and an impairment charge of $142,000 to customer lists, both principally related to our consumer direct electronic surveillance operations as of June 30, 2009 and an impairment charge of $30,000 for trademarks related to our high end digital and machine vision cameras and professional imaging component operations at December 31, 2009.  With continuing deterioration in 2010, we recorded an additional impairment charge of $74,000 to customer lists, $81,000 to product lists, and $70,000 for trademarks as of June 30, 2010, and impairment charges of $260,000 relating to trademarks, all principally related to our consumer direct electronic surveillance operations and our high end digital and machine vision cameras and professional imaging component operation.

Additionally, we conduct our annual assessment of goodwill for impairment for our wholesale security monitoring business reporting unit as of April 30 of each year. This is our remaining business reporting unit with recorded goodwill. With respect to our assessment of goodwill impairment for our wholesale security monitoring business as of April 30, 2010, we determined that there was no impairment in that the fair value for this reporting unit exceeded the book value of its invested capital. Our wholesale security monitoring business has recorded goodwill of $1.98 million, which exceeds the book value of its invested capital by $249,000, or 7.8%. Subsequent to our most recent annual testing date of April 30, 2010, the operating results of this reporting unit have performed at expected levels and no impairment indicators were deemed present at December 31, 2010. The determination of the fair value of this reporting unit requires us to make significant estimates and assumptions that affect the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, expected future revenues and expense levels, the discount rate, terminal growth rates, operating income before depreciation and amortization and capital expenditures forecasts. We periodically update our forecasted cash flows of the wholesale security monitoring reporting unit considering current economic conditions and trends, estimated future operating results, our views of growth rates, anticipated future economic and relevant regulatory conditions.  The key or most significant assumption is our estimate of future recurring revenues. If monthly recurring revenue from security monitoring services within this reporting unit were to be adversely affected by the ongoing economic climate or by other events and we were unable to adjust operating costs to compensate for such revenue loss, this reporting unit would be adversely affected which would negatively impact the fair value of this business. Based on the Company’s April 30, 2010 assessment, a hypothetical reduction in the annual recurring revenue growth rate from a range of 5% to 6% to an annual recurring revenue growth rate of 3% to 4%, without a corresponding decrease in operating expenses, would result in an approximate $500,000 impairment charge.  Additional events or circumstances that could have a negative effect on estimated fair value of this reporting unit include, but are not limited to, a loss of customers due to competition, pressure from our customers to reduce pricing, the purchase of our dealers by third parties who choose to obtain monitoring services elsewhere, the current adverse financial and economic conditions on revenues and costs, inability to continue to employ a competent workforce at current rates of pay, changes in government regulations, and accelerating costs beyond management’s control.

 
F-17
 
 
Discontinued Operations

Prior to the disposition of our Digital Media Marketing Segment in the fourth quarter of 2010, we conducted our annual assessment of goodwill for impairment for this reporting unit as of June 30 of each year.  We updated our forecasted cash flows of these reporting units during the second quarter of each year.  These updates considered current economic conditions and trends, estimated future operating results for the launch of new products as well as non-product revenue growth, and anticipated future economic and regulatory conditions.  Based on the results of our assessment of goodwill impairment at June 30, 2009 and June 30, 2010, the net book value of our Digital Media Marketing Segment reporting unit exceeded its fair value at both measurement dates.  With the noted potential impairment at June 30, 2009 and June 30, 2010, we performed the second step of the impairment test to determine the implied fair value of goodwill.  The resulting implied goodwill was $5.9 million at June 30, 2009 and $2.8 million at June 30, 2010, which were less than the recorded value of goodwill at these respective dates. Accordingly, we recorded impairments to write down goodwill of this reporting unit by $1.0 million and $3.1 million at June 30, 2009 and June 30, 2010, respectively. Additionally, during our June 30, 2010 review of intangible assets, we determined that trademarks within our Digital Media Marketing Segment were also impaired by $275,000. Finally, as noted in Note 5. Discontinued Operations and Assets Held for Sale, we entered into an agreement of sale on November 11, 2010 to sell the e-commerce division of our Digital Media Marketing Segment, Linkstar, for a sale price of $1.1 million. Accordingly, an impairment loss of $3.6 million was recorded as of September 30, 2010 and included in the results from discontinued operations in the accompanying consolidated statements of operations. The $3.6 million impairment charge included a write-off of the remaining goodwill of the Digital Media Marketing Segment of $2.8 million and $800,000 related to other intangible assets, including software, trademarks, and non-compete agreements. With the closing of the sale of the e-commerce division of our Digital Media Marketing Segment on November 22, 2010, a final loss of $191,000 on disposal was recorded in the fourth quarter of 2010.

 
F-18
 
 
The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009 are as follows (in thousands):
 
   
Digital Media
Marketing
Segment
    
Security
Monitoring
Services
Reporting
Unit
    
Total
  
                   
Balance at December 31, 2008
   $ 6,887     $  -     $ 6,887  
Acquisition of CSSS, Inc.
     -       1,982       1,982  
Impairment loss
     (1,000 )     -       (1,000 )
Balance at December 31, 2009
   $ 5,887     $ 1,982     $ 7,869  
Impairment loss
     (5,887 )     -     $ (5,887 )
Balance at December 31, 2010
   $ -     $ 1,982     $ 1,982  
 
7.
Allowance for Doubtful Accounts

The changes in the allowance for doubtful accounts are summarized as follows:
   
Year Ended December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
Balance at beginning of year
   $ 785     $ 760  
Additions (charged to expense)
     170       571  
Adjustments
     13       (3 )
Deductions
     (406 )     (543 )
Balance at end of year
   $ 562     $ 785  

8. 
Inventories

Inventories, net of reserves for obsolete inventory, consist of the following:
 
   
As of December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
Finished goods
   $ 2,517     $ 4,269  
Work in process
     74       77  
Raw materials and supplies
     682       886  
    $ 3,273     $ 5,232  
 
 
F-19
 
 
The changes in the reserve for obsolete inventory are summarized as follows:
 
   
Year Ended December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
Balance at beginning of year
   $ 1,379     $ 1,463  
Additions (charged to expense)
     117       163  
Deductions
     (192 )     (247 )
Balance at end of year
   $ 1,304     $ 1,379  

9.
Other Intangible Assets

   
December 31, 2010
    
December 31, 2009
  
   
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Gross
Carrying
Amount
    
Accumulated
Amortization
  
   
(In thousands)
  
Amortized intangible assets:
                        
Non-compete agreements
   $ 148     $ 115     $ 515     $ 231  
Customer and Product lists
     2,417       1,398       2,572       1,156  
Software
     -       -       883       356  
Patent Costs and Trademarks
     97       39       106       16  
Deferred financing costs
     123       123       123       122  
Total amortized intangible assets
     2,785       1,675       4,199       1,881  
Non-Amortized intangible assets:
                                
Trademarks - Security Segment
     657       -       984       -  
Trademarks - Digital Media Marketing Segment
     -       -       478       -  
Total Non-Amortized intangible assets
     657       -       1,462       -  
Total other intangible assets
   $ 3,442     $ 1,675     $ 5,661     $ 1,881  

The following sets forth the estimated amortization expense on intangible assets for the fiscal years ending December 31, (in thousands):
2011
   $ 150  
2012
   $ 135  
2013
   $ 127  
2014
   $ 86  
2015
   $ 63  

Amortization expense of other intangible assets was approximately $442,000 and $468,000 for the years ended December 31, 2010 and 2009, respectively. The weighted average useful life of amortizing intangible assets was 4.3 years at December 31, 2010.

 
F-20
 
 
10.
Long-Term Debt, Notes Payable, and Capital Lease Obligations

Long-term debt notes and capital lease obligations, including debt related to discontinued operations, totaling $3.5 million consist of the following:
 
   
As of December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
                 
Promissory note payable to Merlin Partners, LP, interest rate of 12.0% due by April 28, 2011 as extended, collateralized by second liens on two car washes and a security interest in the trade name “Mace.”
   $ 1,288     $ -  
                 
Notes payable to Chase, interest rate of prime plus 0.75% (4.0% at  December 31, 2010) payable in monthly  principal payments totaling $14,951 plus interest maturing from April 2011 to March, 2013, collateralized by real property and equipment of  certain of the Colonial Car Wash locations and Mace CS.
     640       1,080  
                 
Note payable to Western National Bank, interest rate of 3.75%, (the interest rate is established every 5 years, based on prime rate plus 0.5%),  due in monthly installments of $16,921 including interest,  through October 2014, collateralized by real property and equipment in Lubbock, Texas.
     697       862  
                 
Note payable to Chase, interest rate of prime plus 0.95% (4.2% at December 31, 2010) due in monthly fixed principal payments of $4,847 plus interest through May 2012, collateralized by real property and equipment of Mace Security Products, Inc. in Farmers Branch, Texas.
     553       611  
                 
Note Payable to Chase, interest rate of prime plus 0.25% (3.5% at December 31, 2010) due in monthly installments of $3,132, including interest (adjusted annually) through February 2013, collateralized by real property and equipment of certain of the Colonial Car Wash locations.
     148       181  
                 
Various capital lease obligations related to equipment at Mace CS, Inc. at various interest rates from 9.06% to 13.27%, due in monthly installments totaling $5,810 maturing from August 2012 through February, 2014, collateralized by equipment.
    128       166  
                 
Note payable to Lyon Financial Services, interest rate of 7.99% due in monthly installments of $510 including interest, through September 2013, collateralized by a vehicle.
     15       20  
      3,469       2,920  
Less: current portion, including debt related to discontinued operations
     3,356       2,232  
    $ 113     $ 688  

Of the four car washes owned or leased by us at December 31, 2010, two properties and related equipment with a net book value totaling $3.7 million are secured by first mortgage loans totaling $1.4 million.

At December 31, 2010, we had borrowings, including borrowings related to discontinued operations, of approximately $3.5 million, substantially all of which are secured by mortgages against certain of our real property.  Of such borrowings, approximately $3.4 million, including $2.0 million of debt included in liabilities related to assets held for sale, is reported as current as it is due or expected to be repaid in less than twelve months from December 31, 2010.

 
F-21
 

The Company funded a portion of the payment to Mr. Paolino by borrowing $1.35 million from Merlin Partners, LP (“Merlin”).  The loan was payable in two installments of $675,000 each upon the closing of each of two car washes that are under agreements of sale.  The Company make a payment of $675,000 to Merlin upon the sale of the Lubbock, Texas car wash on March 8, 2011 and expects to pay the remaining balance plus accrued interest Merlin from the proceeds generated by the sale of Dallas, Texas area car wash under an agreement of sale and expected to close in the second quarter of 2011. The loan which had an original maturity date of March 28, 2011 was extended to April 28, 2011.  Merlin is a fund managed by Ancora Advisors, a subsidiary of the Ancora Group.  Richard Barone, a Company director, is Chairman of the Ancora Group.  The loan bears interest at a rate of 12% per annum, and is secured by second liens on the two car washes and a security interest in the trade name “Mace”.  As part of the consideration for the financing, Merlin was also granted a Common Stock Purchase Warrant (the “Warrant”) to purchase up to 314,715 shares of the Company’s common stock at an exercise price of $0.20 per share, expiring December 28, 2015.  The Warrant contains anti-dilution provisions providing that Merlin will receive additional warrants exercisable into 2% of any common stock of the Company issued by the Company through December 28, 2011.  The exercise price of the Warrant will be adjusted lower to equal the stock issuance price of any stock issued through December 28, 2011 at a price below $0.20.  The warrants were accounted for under the equity method with the Black-Scholes fair value of the warrants of $63,274 recorded as a discount to the $1.35 million Merlin loan and as additional paid-in capital. The discount will be charged to interest expense over the three month maturity period of the loan with an offsetting credit to the loan balance.

We have two letters of credit outstanding at December 31, 2010, totaling $308,000 as collateral relating to workers’ compensation insurance policies. We maintain a $500,000 revolving credit facility to provide financing for additional electronic surveillance product inventory purchases and for commercial letters of credit. There were five commercial letters of credit outstanding for inventory purchase under the revolving credit facility at December 31, 2010 totaling $399,000.

Maturities of long-term debt and capital lease obligations including debt related to discontinued operations, are as follows: 2011 - $2,223; 2012 - $801; 2013 - $285; and 2014 - $160.

11.
Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

   
As of December 31,
  
   
2010
    
2009
  
       
Accrued compensation
   $ 235     $ 302  
Accrued acquisition consideration
     951       766  
Other
     1,719       1,960  
    $ 2,905     $ 3,028  

 
F-22
 
 
12.
Interest Expense, net

Interest expense, net of interest income consists of the following (in thousands):
   
Year Ended December 31,
  
   
2010
    
2009
  
       
Interest expense
   $ (65 )   $ (51 )
Interest income
     14       44  
    $ (51 )   $ (7 )
 
13.
Other Income

Other income consists of the following (in thousands):

   
Year Ended December 31,
  
   
2010
    
2009
  
       
Investment  income
   $ 1     $ -  
Rental income
     4       -  
    $ 5     $ -  

14.
Stock Option Plans

During September 1993, the Company adopted the 1993 Stock Option Plan (the “1993 Plan”). The 1993 Plan provides for the issuance of up to 630,000 shares of common stock upon exercise of the options. The Company has reserved 630,000 shares of common stock to satisfy the requirements of the 1993 Plan. The options are non-qualified stock options and are not transferable by the recipient.  The 1993 Plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors, which may grant options to employees, directors and consultants to the Company. The term of each option may not exceed fifteen years from the date of grant. Options are exercisable over either a 10 or 15 year period and exercise prices are not less than the market value of the shares on the date of grant.

In December 1999, the Company’s stockholders approved the 1999 Stock Option Plan (the “1999 Plan”) providing for the granting of incentive stock options or nonqualified stock options to directors, officers, or employees of the Company.  Under the 1999 Plan, 15,000,000 shares of common stock are reserved for issuance.  Incentive stock options and nonqualified options have terms which are determined by the Committee with exercise prices not less than the market value of the shares on the date of grant.  The options generally expire ten years from the date of grant and are exercisable based upon graduated vesting schedules as determined by the Committee.

As of December 31, 2010, 3,152,374 options have been granted under the 1993 and 1999 Plans including 3,141,874 nonqualified stock options.

 
F-23
 
 
Activity with respect to these plans is as follows:
  
   
2010
    
2009
  
   
Number
    
Weighted
Average
Exercise 
Price
    
Number
    
Weighted
Average Exercise 
Price
  
Options outstanding beginning of period
     3,205,208     $ 2.18       3,362,999     $ 3.22  
Options granted
     130,000     $ 0.74       433,000     $ 0.84  
Options exercised
     -     $ -       -     $ -  
Options forfeited
     (80,333 )   $ 1.14       (183,835 )   $ 1.71  
Options expired
     (102,501 )   $ 4.58       (406,956 )   $ 9.52  
Options outstanding end of period
     3,152,374     $ 2.07       3,205,208     $ 2.18  
Options exercisable
     2,873,708               2,795,209          
Shares available for granting of options
     3,867,788               3,814,954          

Stock options outstanding at December 31, 2010 under both plans are summarized as follows:

   
Options Outstanding
    
Options Exercisable
  
Range of 
Exercise Prices
  
Number
Outstanding
    
Weighted Avg.
Remaining
Contractual Life
    
Weighted 
Avg. Exercise
Price
    
Number
Exercisable
    
Weighted Avg.
Remaining
Contractual Life
    
Weighted 
Avg. Exercise
Price
  
$0.58-$0.85
     239,000       5.4     $ 0.75       158,667       8.0     $ 0.79  
$0.90-$1.32
     808,334       3.1     $ 1.16       616,667       4.1     $ 1.22  
$1.38-$2.06
     776,792       5.1     $ 1.60       770,126       5.2     $ 1.60  
$2.08-$3.10
     1,007,915       4.5     $ 2.60       1,007,915       4.5     $ 2.60  
$3.18-$4.45
     79,833       3.5     $ 4.30       79,833       3.5     $ 4.30  
$5.00-$5.60
     240,500       3.8     $ 5.31       240,500       3.8     $ 5.31  

During 2010, the Company granted a total of 130,000 stock options at a weighted average fair value of $0.44. Also, during the year ended December 31, 2010, a total of 181,000 shares vested at a weighted average fair value of $1.00. As of December 31, 2010, there are a total of 279,000 options that remain non-vested at a weighted average fair value of $0.88.

In 2004, the Company issued warrants to purchase a total of 383,000 shares of the Company’s common stock at a weighted average price of $6.65 per share which expired in 2009.

In 2010, the Company issued warrants to purchase a total of 314,715 shares of the Company’s stock at an exercise price of $0.20 per share in connection with a Promissory Note with Merlin Partners, LP. The warrants were accounted for under the equity method at a Black-Scholes’ fair value of $.20 per share or a total value of $63,274.  No warrants to purchase common stock related to the note have been exercised through December 31, 2010. These warrants were issued with an expiration date of December 28, 2015.

During the exercise period, the Company will reserve a sufficient number of shares of its common stock to provide for the exercise of the rights represented by option holders.
 
 
F-24
 
 
15.
Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 2010 and 2009 are as follows:
 
   
As of December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
Deferred tax assets:
            
Allowance for doubtful accounts
   $ 268     $ 447  
Inventories
     467       436  
Net operating loss carryforwards
     19,851       14,249  
Deferred revenue
     3       7  
Car damage reserve
     1       7  
Federal tax credit
     5       53  
Vesting stock options
     1,354       1,324  
Other, net
     37       111  
Total deferred tax assets
     21,986       16,634  
Valuation allowance for deferred tax assets
     (22,234 )     (18,421 )
Deferred tax liability after valuation allowance
     (248 )     (1,787 )
Deferred tax liabilities:
                
Property, equipment and intangibles
     248       1,787  
Net deferred tax assets
   $ -     $ -  
 
At December 31, 2010, the Company had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $51.3 million. The U.S. federal net operating loss carryforwards expire as follows:
 
 
F-25
 
 
Year of
Expiration
  
Amount
  
(In thousands)
  
2011
   $ 625  
2012
     1,530  
2018
     1,393  
2019
     4,507  
2020
     3,241  
2021
     1,584  
2022
     2,797  
2023
     4,114  
2024
     5  
2025
     934  
2026
     6,823  
2027
     15  
2028
     2,489  
2029
     6,078  
2030
     15,172  
         
    $ 51,307  

Realization of the future tax benefits related to the deferred tax assets is dependent upon many factors, including the Company’s ability to generate taxable income in future years. The Company performed a detailed review of the considerations influencing our ability to realize the future benefit of the NOLs, including the extent of recently used NOLs, the turnaround of future deductible temporary differences, the duration of the NOL carryforward period, and the Company’s future projection of taxable income. Utilization of our net operating loss and tax credit carryforwards may be subject to annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss or tax credits before utilization. The Company increased its valuation allowance against deferred tax assets by $3.8 million in 2010 and $3.4 million in 2009 with a total valuation allowance of $22.2 million at December 31, 2010 representing the amount of its deferred income tax assets in excess of the Company’s deferred income tax liabilities. The valuation allowance was recorded because management was unable to conclude that realization of the net deferred income tax asset was more likely than not. This determination was a result of the Company’s continued losses in its fiscal year ended December 31, 2010, and the uncertainty of and the ultimate extent of growth in the Company’s Security Segment.

The Company follows the appropriate accounting pronouncements which prescribe a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on recognition, classification, interest and penalties, disclosure and transition. At December 31, 2010, the Company did not have any significant unrecognized tax benefits. The total amount of interest and penalties recognized in the statements of operations for each of the years in the three-year period ended December 31, 2010 was insignificant and when incurred is reported as interest expense.

The components of income tax expense (benefit) are:
 
   
Year Ended December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
Current (principally state taxes)
   $ 30     $ -  
Deferred
     -       -  
                 
Total income tax expense (benefit)
   $ 30     $ -  
 
 
F-26
 
 
The significant components of deferred income tax expense (benefit) attributed to the loss for the years ended December 31, 2010 and 2009, are as follows:
 
   
Year Ended December 31,
  
   
2010
    
2009
  
   
(In thousands)
Deferred tax (benefit) expense
   $ 1,789     $ (993 )
Loss carryforward
     (5,602 )     (2,396 )
Valuation allowance for deferred tax assets
     3,813       3,389  
    $ -     $ -  

A reconciliation of income tax benefit computed at the U.S. federal statutory tax rates to total income tax expense is as follows:

   
Year Ended December 31,
  
   
2010
    
2009
  
   
(In thousands)
  
Tax at U.S. federal statutory rate
   $ (6,073 )   $ (3,833 )
State taxes, net of federal benefit
     26       26  
Nondeductible costs and other acquisition accounting adjustments
     2,312       418  
Realization of federal tax credit
     (48 )     -  
Valuation allowance for deferred tax assets
     3,813       3,389  
Total income tax expense
   $ 30     $ -  
 
 
F-27
 
 
16.
Loss Per Share

The following table sets forth the computation of basic and diluted loss per share (in thousands except loss per share):

   
Year Ended December 31,
  
   
2010
    
2009
  
Numerator (In Thousands):
            
Net loss
   $ (18,098 )   $ (10,951 )
                 
Denominator:
                
Denominator for basic loss per share - weighted average shares
     15,749,465       16,202,254  
Dilutive effect of options and warrants
     -       -  
Denominator for diluted loss per share - weighted average shares
     15,749,465       16,202,254  
                 
Basic loss per share:
                
Net loss
   $ (1.15 )   $ (0.68 )
                 
Diluted loss per share:
                
Net loss
   $ (1.15 )   $ (0.68 )

The dilutive effect of options and warrants of 6,370 and 9,811, at December 31, 2010 and 2009, respectively, have not been included in the calculation of diluted earnings per share because they are anti-dilutive.

17.
Concentration of Credit Risk

The Company maintains its cash accounts in high quality financial institutions.  At times, these balances may exceed insured amounts.

18.
Commitments and Contingencies

The Company and its former Chief Executive Officer, Louis D. Paolino, Jr., have settled the various legal actions they had filed against each other.  The settlement was entered into on October 26, 2010.  As part of the settlement, the Company paid Mr. Paolino $2,300,000 on November 1, 2010 and the additional $2,310,000 on December 29, 2010 (the “Second Payment”).  With Mace’s final payment under the Settlement Agreement, all legal actions between Mr. Paolino and the Company have been dismissed with prejudice and mutual releases between the Company and Mr. Paolino became effective. As previously disclosed in the Company's filings under the Exchange Act, an arbitration panel of the American Arbitration Association awarded Mr. Paolino the sum of $4,148,912 on May 4, 2010 as damages and a supplemental award of $738,835 for legal fees in connection with various claims filed by Mr. Paolino in connection with his termination as the Company’s Chief Executive Officer on May 20, 2008 (the “Arbitration Awards”).  The Arbitration Awards were confirmed on October 8, 2010 by the Court of Common Pleas of Philadelphia County.  As of the quarter ended March 31, 2010, the Company recorded an accrual of $4,500,000 million for the payment of the Arbitration Awards, increased to $4,600,000 in the quarter ended June 30, 2010. The Court also ruled that Mr. Paolino had until December 8, 2010 to exercise 1,769,682 stock options which were cancelled by the Company upon Mr. Paolino's termination.  These stock options were not exercised by Mr. Paolino by December 8, 2010 and accordingly expired and became null and void.
 
 
F-28
 
 
During January 2008, the United States Environmental Protection Agency (the “EPA”) conducted a site investigation at the Company’s Bennington, Vermont location and the building within which the facility is located.  The Company leases 33,476 square feet of the building from Vermont Mill Properties, Inc. (“Vermont Mill”).  The site investigation was focused on whether hazardous substances were being improperly stored.  After the site investigation, the EPA notified the Company and the building owner, Benmont Mill Properties, Inc. (“Benmont”), that remediation of certain hazardous wastes was required.  Vermont Mill and Benmont are both owned and controlled by Jon Goodrich, the President of the Company’s defense spray division.  The EPA, the Company, and the building owner entered into an Administrative Consent Order under which the hazardous materials and waste were remediated. All remediation required by the Administrative Consent Order was completed within the time allowed by the EPA and a final report regarding the remediation was submitted to the EPA in October 2008, as required by the Administrative Consent Order.  On September 29, 2009, the EPA accepted the final report. On February 23, 2010, the EPA issued the Company an invoice for $240,096 representing the total of the EPA's oversight costs that the Company and Benmont were obligated to pay under the Administrative Consent Order.  On April 8, 2010, the Company negotiated a reduction in the oversight cost reimbursement and, on April 13, 2010, the Company paid a negotiated amount of $216,086 to the EPA.  During the quarter ended September 30, 2010, Benmont reimbursed the Company 15% of the amount paid to the EPA or $32,413.  A total estimated cost of approximately $786,000 relating to the remediation, which includes disposal of the waste materials, as well as expenses incurred to engage environmental engineers and legal counsel and reimbursement of the EPA’s costs, has been recorded through December 31, 2010.
 
The United States Attorney for the District of Vermont (the “U.S. Attorney”) conducted an investigation of the Company relating to possible violations of the Resource Conservation and Recovery Act (“RCRA”) at the Company’s Bennington, Vermont location. On November 16, 2010, the U.S. Attorney filed a one count indictment charging Mace Security International, Inc. and Jon Goodrich with a felony of storing hazardous waste without a permit under 42 U.S.C. Section 6928(d)(2)(A).   Mr. Goodrich is the President of Mace Personal Defense, Inc., the Company's defense spray division located in Bennington, Vermont. The Company has resolved the indictment through a Plea Agreement entered into between the Company's subsidiary, Mace Personal Defense, Inc. and the U.S. Attorney.  The Plea Agreement was made under Fed. R. Crim. P. 11(c)(1)(C), and provides in part, for (i) Mace Personal Defense, Inc., to plead guilty to one count of violating 42 U.S.C. § 6928(d)(2)(A) (Storage of Hazardous Waste Without a Permit); (ii) Mace Personal Defense, Inc. to pay a fine of $100,000 (the "Fine") and a court assessment of $400, the Fine to be paid $34,000 on sentencing, and two additional installments of $33,000 each, at six months and twelve months from January 4, 2011; (iii) the Company to guarantee the payment of the Fine; (iv) the United States to dismiss the indictment against the Company at time of sentencing of Mace Personal Defense, Inc.; and (v) the United States not to prosecute Mace Personal Defense, Inc. (excluding the guilty plea) or the Company for any criminal offenses known to the United States Attorney's Office of Vermont as of the date of signing of the Plea Agreement committed by the Company or Mace Personal Defense, Inc. in the District of Vermont relative to the storage, shipment, handling or disposal of hazardous waste, including any associated record keeping or reporting offenses.  The Plea Agreement is not final until it is accepted by the Court. A hearing date for sentencing has been scheduled for May 26, 2011.  In addition to the Company incurring $83,000 in legal expenses in 2010 relating to this matter, the Company has recorded an accrual of $100,000 at December 31, 2010 as a result of its agreement to pay a $100,000 Fine as part of the Plea Agreement.

The Company is a party to various other legal proceedings related to its ordinary business activities.  In the opinion of the Company’s management, none of these proceedings are material in relation to the Company’s results of operations, liquidity, cash flows, or financial condition.

19.
Asset Impairment Charges

Management periodically reviews the carrying value of our long-lived assets held and used, and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. Assets classified as held for sale are measured at the lower of carrying value or fair value, net of costs to sell.
 
Continuing Operations

Due to continuing challenges in our Mace Security Products, Inc. reporting unit, we performed certain impairment testing of our remaining intangible assets, specifically, the value assigned to customer lists, product lists, and trademarks as of June 30, 2009, December 31, 2009, June 30, 2010, and December 31, 2010. We recorded an impairment charge to trademarks of approximately $80,000 and an impairment charge of $142,000 to customer lists, both principally related to our consumer direct electronic surveillance operations as of June 30, 2009 and an impairment charge of $30,000 for trademarks related to our high end digital and machine vision cameras and professional imaging component operations at December 31, 2009.  With continuing deterioration in 2010, we recorded an additional impairment charge of $74,000 to customer lists, $81,000 to product lists, and $70,000 for trademarks as of June 30, 2010, and impairment charges of $260,000 at December 31, 2010 relating to trademarks, all principally related to our consumer direct electronic surveillance operations and our high end digital and machine vision cameras and professional imaging component operation.

 
F-29
 
 
In the fourth quarter of 2008, we consolidated the inventory in our Fort Lauderdale, Florida warehouse into our Farmers Branch, Texas facility.  Certain of our administrative and sale staff of our Security Segment’s electronic surveillance products division remain in the Fort Lauderdale, Florida building, which we listed for sale with a real estate broker.  We performed an updated market evaluation of this property, listing the facility for sale at a price of $1,950,000.  We recorded an impairment charge of $275,000 related to this property at December 31, 2008, and additional impairment charges totaling $210,000 in 2009 to write-down the property to our estimate of net realizable value based on updated market valuations of the property.  On December 4, 2009, the Company sold the Fort Lauderdale, Florida building, subject to an Agreement of Sale entered into on October 5, 2009, and recorded a loss of $107,000 in the fourth quarter of 2009 after closing costs and broker commissions.

Discontinued Operations

As noted in Note 4. Business Acquisitions and Divestitures, in the accompanying financial statements, the agreements of sale related to the three car washes the Company owned in Austin, Texas were amended to modify the sale price to $8.0 million. This amended sale price, less costs to sell, was estimated to result in a loss upon disposal of approximately $175,000. Accordingly, an impairment loss of $175,000 was recorded as of September 30, 2009 and included in the results from discounted operations in the accompanying consolidated statement of operations. The sale of the Austin, Texas car washes was completed on November 30, 2009. During the quarter ended December 31, 2009, we wrote down three Arlington, Texas car wash sites for a total of $1.2 million, including a $200,000 write down of a car wash site for which the Company entered into an agreement of sale on January 27, 2010 for a sale price below its net book value; and a $37,000 write down related to a Lubbock, Texas car wash sold on March 10, 2010. In April 2010, we reduced the sale price of a Lubbock, Texas car wash location based on recent offers of $1.7 million for this location and our decision to negotiate a sale of this site at this price, which was below the net book value of $1.85 million.  Accordingly, we recorded an impairment charge of $150,000 related to this site at March 31, 2010. Finally, in October 2010, we accepted an offer to purchase our Arlington, Texas oil lubrication and self serve car wash facility for a sale price of $340,000, which was below the site’s net book value. Accordingly, we recorded an impairment charge of $53,000 related to this site as of September 30, 2010.  We have determined that, due to further reductions in car wash volumes at these sites resulting from increased competition and a deterioration in demographic in the immediate geographic areas of these sites, current economic pressures, along with current data utilized to estimate the fair value of these car wash facilities, future expected cash flows would not be sufficient to recover their carrying values.

Prior to the disposition of our Digital Media Marketing Segment in the fourth quarter of 2010, we conducted our annual assessment of goodwill for impairment for this reporting unit as of June 30 of each year.  We updated our forecasted cash flows of these reporting units during the second quarter of each year.  These updates considered current economic conditions and trends, estimated future operating results for the launch of new products as well as non-product revenue growth, and anticipated future economic and regulatory conditions.  Based on the results of our assessment of goodwill impairment at June 30, 2009 and June 30, 2010, the net book value of our Digital Media Marketing Segment reporting unit exceeded its fair value at both measurement dates.  With the noted potential impairment at June 30, 2009 and June 30, 2010, we performed the second step of the impairment test to determine the implied fair value of goodwill.  The resulting implied goodwill was $5.9 million at June 30, 2009 and $2.8 million at June 30, 2010, which were less than the recorded value of goodwill at these respective dates. Accordingly, we recorded impairments to write down goodwill of this reporting unit by $1.0 million and $3.1 million at June 30, 2009 and June 30, 2010, respectively. Additionally, during our June 30, 2010 review of intangible assets, we determined that trademarks within our Digital Media Marketing Segment were also impaired by $275,000. Finally, as noted in Note 5. Discontinued Operations and Assets Held for Sale, we entered into an agreement of sale on November 11, 2010 to sell the e-commerce division of our Digital Media Marketing Segment, Linkstar, for a sale price of $1.1 million. Accordingly, an impairment loss of $3.6 million was recorded as of September 30, 2010 and included in the results from discontinued operations in the accompanying consolidated statements of operations. The $3.6 million impairment charge included a write-off of the remaining goodwill of the Digital Media Marketing Segment of $2.8 million and $800,000 related to other intangible assets, including software, trademarks, and non-compete agreements. With the closing of the sale of the e-commerce division of our Digital Media Marketing Segment on November 22, 2010, a final loss of $191,000 on disposal was recorded in the fourth quarter of 2010.
 
 
F-30
 
 
20. 
Related Party Transactions

The Company’s Security Segment leases manufacturing and office space under a lease between Vermont Mill and the Company.  The lease, as extended, expires on November 14, 2011.  Vermont Mill is controlled by Jon E. Goodrich, a former director and current employee of the Company. The original lease was entered into in November 1999 for a five year term. In November 2004, the Company exercised an option to continue the lease through November 2009 at a rate of $10,576 per month. The Company amended the lease in 2008 to occupy additional space for an additional $200 per month.  The Company also leased from November 2008 to May 2009, on a month-to-month basis, approximately 3,000 square feet of temporary inventory storage space at a monthly cost of $1,200. In September 2009, the Company and Vermont Mill extended the term of the lease to November 14, 2010 at a monthly rate of $10,776 per month and modified the square footage rented to 33,476 square feet. The Company entered into a Lease Extension Agreement on December 20, 2010 to extend the lease through November 14, 2011 at a monthly rate of $11,315 and to provide an option to further extend the lease to May 14, 2012 at the same monthly rate. Rent expense under this lease was $129,857 and $135,318 for the years ended December 31, 2010 and 2009, respectively.

The Company funded a portion of the payment to Mr. Paolino by borrowing $1.35 million from Merlin Partners, LP (“Merlin”).  The loan which had an original maturity date of March 28, 2011 was extended to April 28, 2011.   The loan was payable in two installments of $675,000 each upon the closing of each of two car washes that were under agreements of sale at December 31, 2010.  The Company made a payment of $675,000 to Merlin upon the sale of the Lubbock, Texas car wash on March 8, 2011. The Company expects to pay the remaining balance owed plus accrued interest from the proceeds generated by the sale of a Dallas, Texas area car wash that is under an agreement of sale and expected to close in the second quarter of 2011. Merlin is a fund managed by Ancora Advisors, a subsidiary of the Ancora Group.  Richard Barone, a Company director, is Chairman of the Ancora Group.  The loan bears interest at a rate of 12% per annum, and is secured by second liens on the Dallas, Texas area car wash and a security interest in the trade name “Mace”.  As part of the consideration for the financing, Merlin was also granted a Common Stock Purchase Warrant (the “Warrant”) to purchase up to 314,715 shares of the Company’s common stock at an exercise price of $0.20 per share, expiring December 28, 2015.  The Warrant contains anti-dilution provisions providing that Merlin will receive additional warrants exercisable into 2% of any common stock of the Company issued by the Company through December 28, 2011.  The exercise price of the Warrant will be adjusted lower to equal the stock issuance price of any stock issued through December 28, 2011 at a price below $0.20.

21.
Subsequent Events

On March 8, 2011, the Company completed the sale of its remaining car wash it owned in Lubbock, Texas for a sale price of $1.7 million.  The net book value of this car wash was approximately $1.7 million.  The cash proceeds of the sale were approximately $300,000 net of payment of the related mortgage for $670,000, a payment of $675,000 towards the $1.35 million promissory note with Merlin, and closing costs.  The sale resulted in a net loss of approximately $54,000 after customary closing costs and broker commissions.
 
On March 25, 2011, the Company and Ancora executed a Placement Agent and Dealer-Manager Agreement, under which Ancora will act as the placement agent for the planned Rights Offering approved by the Company’s Board of Directors on December 23, 2010. The Company also entered into a Securities Purchase Agreement on March 25, 2011 with Merlin Partners, LP, a hedge fund which is under common control with Ancora.  In accordance with the Securities Purchase Agreement, Merlin and up to three assignees of Merlin, will purchase $4,000,000 of the Company’s common stock, valued at the per share exercise price used in the Rights Offering at the conclusion of the Rights Offering.
 
 
F-31
 
 
22.
Selected Quarterly Financial Information (In thousands, except per share information) (Unaudited)

Year Ended December 31, 2010
            
    
1st Quarter
    
2nd Quarter
    
3rd Quarter
    
4th Quarter
    
Total
  
Revenues
   $ 4,267     $ 4,353     $ 4,727     $ 5,048     $ 18,395  
Gross profit
   $ 1,251     $ 1,259     $ 1,460     $ 1,551     $ 5,521  
Loss from continuing operations
   $ (6,276 )   $ (1,378 )   $ (974 )   $ (1,172 )   $ (9,800 )
Loss from discontinued operations
   $ (539 )   $ (3,509 )   $ (3,932 )   $ (318 )   $ (8,298 )
Net loss
   $ (6,815 )   $ (4,887 )   $ (4,906 )   $ (1,490 )   $ (18,098 )
Diluted loss per share:
                                        
Continuing operations
   $ (0.40 )   $ (0.09 )   $ (0.06 )   $ (0.07 )   $ (0.62 )
Discontinued operations
   $ (0.03 )   $ (0.22 )   $ (0.25 )   $ (0.03 )   $ (0.53 )
Net loss
   $ (0.43 )   $ (0.31 )   $ (0.31 )   $ (0.10 )   $ (1.15 )

Year Ended December 31, 2009
            
   
1st Quarter
    
2nd Quarter
    
3rd Quarter
    
4th Quarter
    
Total
  
Revenues
   $ 4,177     $ 4,458     $ 4,821     $ 5,135     $ 18,591  
Gross profit
   $ 1,235     $ 1,273     $ 1,473     $ 1,612     $ 5,593  
Loss from continuing operations
   $ (1,680 )   $ (2,538 )   $ (1,890 )   $ (2,026 )   $ (8,134 )
Income( loss) from discontinued operations
   $ 82     $ (794 )   $ (468 )   $ (1,637 )   $ (2,817 )
Net loss
   $ (1,598 )   $ (3,332 )   $ (2,358 )   $ (3,663 )   $ (10,951 )
Diluted loss per share:
                                        
Continuing operations
   $ (0.10 )   $ (0.16 )   $ (0.12 )   $ (0.12 )   $ (0.50 )
Discontinued operations
   $ -     $ (0.04 )   $ (0.03 )   $ (0.11 )   $ (0.18 )
Net loss
   $ (0.10 )   $ (0.20 )   $ (0.15 )   $ (0.23 )   $ (0.68 )

All quarters have been restated to reflect our car wash segment and the digital media marketing segment as discontinued operations, consistent with our presentation at December 31, 2010.

 
F-32
 
 
EXHIBIT INDEX

Exhibit
    
No.
  
Description
     
11
  
Statement Regarding Computation of Per Share Earnings.
     
21
  
Subsidiaries of the Company.
     
23.1
  
Consent of Grant Thornton LLP.
     
31.1
  
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
  
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
  
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
  
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
10.31
  
Promissory Term Note Agreement dated December 28, 2010, between the Company and Merlin Partners, LP in the amount of $1,350,000 and related Security Agreement and Common Stock Purchase Warrant.
     
10.32
  
Line of Credit Note in the amount of $500,000 and related Amendment to Credit Agreement dated December 17, 2010 between the Company, its subsidiary, Mace Security Products, Inc., and JP Morgan Chase Bank N.A.
     
10.33
  
Securities Purchase Agreement dated March 25, 2011, between the Company and Merlin Partners, LP.
     
10.34
  
Placement Agent and Dealer-Manager Agreement dated March 25, 2011, between the Company and Ancora Securities, Inc.

 
F-33
 
 
 EX-10.31 2 v216600_ex10-31.htm

EXHIBIT 10.31

Promissory Term Note ("Note")
$1,350,000.00
Date of Issuance: December 28, 2010
 
Promise to Pay.
  
On or before March 28, 2011, for value received, the undersigned Mace Security International, Inc., a Delaware corporation (the "Borrower"), whose address is 240 Gibraltar Road, Suite 220, Horsham, Pennsylvania 19044, promises to pay to Merlin Partners, LP, a Delaware limited partnership, or its assigns, whose address is One Chagrin Highlands, 2000 Auburn Drive, Suite 300, Cleveland, Ohio 44122 (the "Lender") or order, in lawful money of the United States of America, the sum of One Million Three Hundred Fifty Thousand and No/100 Dollars ($1,350,000.00) plus interest computed on the basis of the actual number of days elapsed in a year of 360 days at the rate of 12% per annum ( the "Note Rate"), and at the rate of 15% per annum, upon the occurrence of any default under this Note, whether or not the Lender elects to accelerate the maturity of this Note, from the date of such default.
  
The Borrower will pay this sum as follows:
 
1.           The sum of Six Hundred Seventy Five Thousand and No/100 Dollars ($675,000.00) within three (3) days of the date that the Borrower sells or causes to be sold the real property known as Colonial 1 Car Wash, having the street address of 3022 S. Cooper Street, Arlington, Texas and 3011 Medlin Street, Arlington, Texas; and
 
2.           The sum of Six Hundred Seventy Five Thousand and No/100 Dollars ($675,000.00) within three (3) days of the date that the Borrower sells or causes to be sold the real property known as Crystal Falls Car Wash, having the street address of 7027 South Quaker Avenue, Lubbock, Texas; and
 
3.           The balance of all unpaid principal and accrued interest on or before March 28, 2011.
 
If the total accrued interest due under this Note calculated at the Note Rate, is less than $20,250.00 in the aggregate, Borrower shall pay to Lender at maturity, as a loan fee, the difference between the total interest accrued at the Note Rate and $20,250.00 ("Minimum Amount").
 
All payments shall first be applied to accrued interest and then to reduce the principal owed.  After a default that is not cured, payments shall be allocated first to Lender’s costs of collection, including, without limitation attorney fees, then to interest and finally to principal, unless otherwise required by applicable law.
 
The Borrower will make all payments hereunder to the Lender, without setoff, deduction, or counterclaim, at the Lender's address above or at such other place as the Lender may designate in writing.  If any payment of principal or interest on this Note shall become due on a day that is not a Business Day, the payment will be made on the next succeeding Business Day.  The term ("Business Day") in this Note means a day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed.     Acceptance by the Lender of any payment that is less than the payment due at that time shall not constitute a waiver of the Lender's right to receive payment in full at that time or any other time.
 
 
1
 
 
Late Fee.
 
If any payment is not received by the Lender within ten (10) days after its due date, the Lender may assess and the Borrower agrees to pay a late fee equal to $500.00 for each payment not received on time.
 
Business Loan.
 
The Borrower acknowledges and agrees that this Note evidences a loan for a business, commercial, or similar commercial enterprise purpose, and that none of the proceeds loaned under this Note shall be used for any personal, family or household purpose.

Liabilities.
 
The term "Liabilities" in this Note means all obligations, indebtedness and liabilities of the Borrower to the Lender now existing or later arising, including, without limitation, all loans, and advances received by Borrower and all obligations and liabilities owed by Borrower to Lender under all Related Documents, and all monetary obligations accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations or substitutions of any of the foregoing, whether voluntarily or involuntarily incurred, due or not due, absolute or contingent, direct or indirect, liquidated or un-liquidated.
 
Related Documents.
 
The term "Related Documents" in this Note means all of the following documents dated even date with this Note: (a) a Deed of Trust executed by Borrower's subsidiary Colonial Full Service Car Wash, Inc., creating a junior lien on the real property known as Colonial 1 Car Wash, having the street address of 3022 S. Cooper Street, Arlington, Texas and 3011 Medlin Street, Arlington, Texas; (b) a Deed of Trust executed by Borrower's subsidiary Crystal Falls Car Wash, Inc. creating a junior lien on the real property known as Crystal Falls Car Wash, having the street address of 7027 South Quaker Avenue, Lubbock, Texas; (c) a Security Agreement executed by Borrower and Mace Trademark, II, Inc. creating a first priority security interest on the "Mace" trademark; and (d) a Warrant Agreement executed by Borrower.
 
Security.
 
The term "Collateral" in this Note means all real or personal property described in all security agreements, assignments, and deeds of trust, now or hereafter executed in connection with this Note or in connection with any of the Liabilities, including, without limitation, in the Related Documents.  The Collateral secures the payment of this Note and the Liabilities.
 
 
2
 
 
Prepayment. 
 
Lender agrees that the Borrower may prepay all or any portion of the principal balance of this Note, without notice or penalty at any time.   Notwithstanding the foregoing, if the Borrower shall be obligated to pay the Minimum Amount, if due, notwithstanding any prepayment.
 
Representations by Borrower.
 
Borrower represents that: (a) the execution and delivery of this Note and the performance of the obligations it imposes do not violate any law, conflict with any agreement by which it is bound, or require the consent or approval of any governmental authority or other third party; and (b) this Note is a valid and binding agreement, enforceable according to its terms.  Borrower further represents that: (a) it is duly organized, existing and in good standing pursuant to the laws under which it is organized; and (b) the execution and delivery of this Note and the performance of the obligations it imposes (i) are within its powers and have been duly authorized by all necessary action of its governing body, and (ii) do not contravene the terms of its articles of incorporation, its by-laws, or any other agreement governing its affairs.
 
Events of Default/Acceleration.
 
If any of the following events occurs this Note shall become due immediately, without further notice, at the Lender's option, and the Borrower hereby waives notice of intent to accelerate maturity of this Note and notice of acceleration of this Note upon any of the following events:
 
1.
The Borrower fails to pay, within ten (10) days of when due, any amount payable under this Note, or under any of the Liabilities.
 
2.
The Borrower fails to observe or perform any other term of this Note and Borrower does not cure the failure within thirty (30) days after its occurrence.
 
3.
In the event there is a breach, default or event of default (after applicable notice and cure) under the terms of any Related Document.
 
4.
The Borrower (a) makes an assignment for the benefit of creditors; (b) consents to the appointment of a custodian, receiver, or trustee for itself or for a substantial part of its assets; or (c) commences any proceeding under any bankruptcy, reorganization, liquidation, insolvency or similar laws of any jurisdiction.
 
5.
A custodian, receiver, or trustee is appointed for the Borrower or for a substantial part of its assets.
 
6.
Proceedings are commenced against the Borrower under any bankruptcy, reorganization, liquidation, or similar laws of any jurisdiction, and they remain un-dismissed for sixty (60) days after commencement; or the Borrower consents to the commencement of those proceedings.
 
7.
Any judgment is entered against the Borrower, or any attachment, levy, or garnishment is issued against any property of the Borrower, in each case, in an amount equal to or greater than Fifty Thousand ($50,000) Dollars and the judgment, attachment, levy or garnishment is not discharged within thirty (30) days of its date of entry.
 
 
3
 
 
8.
The Borrower, without the Lender's written consent (a) is dissolved, (b) merges or consolidates with any third party, (c) leases, sells or otherwise conveys a thirty five percent (35%) or more of its assets or business outside the ordinary course of its business and fails to pay off the remaining balance of this Note; or (d)  agrees to do any of the foregoing (notwithstanding the foregoing, any subsidiary may merge or consolidate with any other subsidiary, or with the Borrower, so long as the Borrower is the survivor).
 
Remedies.
 
If this Note is not paid at maturity, whether by acceleration or otherwise, the Lender shall have all of the rights and remedies provided by any law or agreement.  The Lender is authorized to cause all or any part of the Collateral to be transferred to or registered in its name or in the name of any other person or business entity, with or without designating the capacity of that nominee.  Without limiting any other available remedy, the Borrower is liable for any deficiency remaining after disposition of any Collateral.  The Borrower is liable to the Lender for all reasonable costs and expenses of every kind incurred in the making or collection of this Note, including without limitation reasonable attorneys' fees and court costs.  These costs and expenses include without limitation any costs or expenses incurred by the Lender in any bankruptcy, reorganization, insolvency or other similar proceeding.
 
Waivers.
 
Except for those matters set forth in this Note where Lender has granted Borrower a specific right of notice and cure, any party liable on this Note waives (a) to the extent permitted by law, all rights defenses and benefits (including anti-deficiency laws) by reason of a non-judicial sale of any of the Collateral; (b) any right to receive notice of the following matters before the Lender enforces any of its rights:  (i) the Lender's acceptance of this Note, (ii) any credit that the Lender extends to the Borrower, (iii) any demand, diligence, presentment, dishonor and protest, or (iv) any action that the Lender takes regarding the Borrower, anyone else, any Collateral, or any of the Liabilities, that it might be entitled to by law or under any other agreement; (c) any right to require the Lender to proceed against the Borrower, any other obligor or guarantor of the Liabilities, or any Collateral, or pursue any remedy in the Lender's power to pursue; (d) any defense based on any claim that any endorser or other parties' obligations exceed or are more burdensome than those of the Borrower; (e) the benefit of any statute of limitations affecting liability of any endorser or other party liable hereunder or the enforcement hereof (f) any defense arising by reason of any disability or other defense of the Borrower or by reason of the cessation from any cause whatsoever (other than payment in full) of the obligation of the Borrower for the Liabilities; and (g) any defense based on or arising out of any defense that the Borrower may have to the payment or performance of the Liabilities or any portion thereof.  Any party liable on this Note consents to any extension or postponement of time of its payment without limit as to the number or period, to any substitution, exchange or release of all or any part of the Collateral, to the addition of any other party, and to the release or discharge of, or suspension of any rights and remedies against, any person who may be liable for the payment of this Note.  The Lender may waive or delay enforcing any of its rights without losing them.  Any waiver affects only the specific terms and time period stated in the waiver.  No modification or waiver of any provision of this Note is effective unless it is in writing and signed by the party against whom it is being enforced.
 
 
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Standstill.
 
Any party liable on this Note agrees to stand still with regard to the Lender’s enforcement of its rights, including taking no action to delay, impede or otherwise interfere with the Lender’s rights to realize on the Collateral.
 
Reinstatement.
 
All parties liable on this Note agree that to the extent any payment is received by the Lender in connection with the Liabilities, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by the Lender or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise ( any such payment is hereinafter referred to as a "Preferential Payment"), then this Note shall continue to be effective or shall be reinstated, as the case may be, and whether or not the Lender is in possession of this Note, and, to the extent of such payment or repayment by the Lender, the Liabilities or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made.

Governing Law and Venue.
 
This Note is delivered in the State of Ohio and governed by Ohio law (without giving effect to its laws of conflicts).  The Borrower agrees that any legal action or proceeding with respect to any of its obligations under this Note may be brought by the Lender in any state or federal court located in Ohio. By the execution and delivery of this Note, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the state of Ohio is not a convenient forum or the proper venue for any such suit, action or proceeding.
 
Usury.
 
The Lender does not intend to charge, collect or receive any interest that would exceed the maximum rate allowed by law.  If the effect of any applicable law is to render usurious any amount called for under this Note or the other Related Documents, or if any amount is charged or received with respect to this Note, or if any prepayment by the Borrower results in the Borrower having paid any interest in excess of that permitted by law, then all excess amounts collected by the Lender shall be credited on the principal balance of this Note (or, if this Note and all other indebtedness arising under or pursuant to the other Related Documents have been paid in full, refunded to the Borrower), and the provisions of this Note and the other Related Documents immediately shall be deemed reformed and the amounts thereafter collectable reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law.  All sums paid, or agreed to be paid, by the Borrower for the use, forbearance, or detention of money under this Note or the other Related Documents shall, to the maximum extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the usury ceiling from time to time in effect and applicable to such indebtedness for so long as such indebtedness is outstanding.
 
 
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Miscellaneous.

This Note binds the Borrower and its successors, and benefits the Lender, its successors and assigns.  Any reference to the Lender includes any holder of this Note.  Section headings are for convenience of reference only and do not affect the interpretation of this Note.  Any notices and demands under or related to this document shall be in writing and delivered to the intended party at its address stated herein, and if to the Lender, at its main office if no other address of the Lender is specified herein, by one of the following means: (a) by hand, (b) by a nationally recognized overnight courier service, or (c) by certified mail, postage prepaid, with return receipt requested.  Notice shall be deemed given: (a) upon receipt if delivered by hand, (b) on the Delivery Day after the day of deposit with a nationally recognized courier service, or (c) on the third (3rd) Delivery Day after the notice is deposited in the mail.  "Delivery Day" means a Business Day.  Any party may change its address for purposes of the receipt of notices and demands by giving notice of such change in the manner provided in this provision.  This Note and any Related Documents embody the entire agreement between the Borrower and the Lender regarding the terms of the loan evidenced by this Note and supersedes all oral statements and prior writings relating to that loan.  If any provision of this Note cannot be enforced, the remaining portions of this Note shall continue in effect.  The Borrower agrees that the Lender may at any time sell, assign or transfer one or more interests or participations in all or any part of its rights and obligations in this Note to one or more purchasers whether or not related to the Lender.  The Borrower agrees that the Lender may provide any information or knowledge the Lender may have about the Borrower or about any matter relating to this Note or the Related Documents to any one or more purchasers or potential purchasers of this Note or the Related Documents.

WAIVER OF SPECIAL DAMAGES.

THE BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT THE UNDERSIGNED MAY HAVE TO CLAIM OR RECOVER FROM THE LENDER IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

JURY WAIVER.

THE BORROWER AND THE LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN THE BORROWER AND THE LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE LENDER TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE.
 
"BORROWER"
MACE SECURITY INTERNATIONAL, INC.
 
By:
/s/Dennis R. Raefield
Name:
Dennis R. Raefield
Title:
CEO and President
 
 
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SECURITY AGREEMENT

THIS SECURITY AGREEMENT has been executed on December 28, 2010, between Mace Security International, Inc. (the "MSI"), a Delaware corporation, whose address is 240 Gibraltar Road, Suite 220, Horsham, Pennsylvania 19044, Mace Trademark II, Inc. ("MSI Trademark II"), a Delaware corporation which is a wholly owned corporation of Debtor and Merlin Partners, LP, a Delaware limited partnership whose address is One Chagrin Highlands, 2000 Auburn Drive, Suite 300, Cleveland, Ohio 44122 (the "Secured Party").  For purposes of this Security Agreement, MSI and MSI Trademark II are hereinafter collectively referred to as (the "Debtor").

1.           THE COLLATERAL

FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND HEREBY, and as security for the prompt payment and performance of all Obligations (as defined in Paragraph 2 below), Debtor hereby grants and conveys to Secured Party a continuing security interest in and lien upon all of Debtor's rights, title and interests in and to the trade name of "MACE", including all of Debtor's rights to and in the U.S. Trademark, Serial No 77689,274, now owned or hereafter acquired by Debtor and any proceeds therof.

All of the property described in this Paragraph 1 is hereinafter collectively called the "Collateral."

2.       OBLIGATIONS SECURED

The Collateral secures all of the following:

2.1           The liabilities of MSI to the Secured Party under the Related Documents, as hereafter defined, now existing or later arising, including, without limitation, all loans, and advances received by MSI and all obligations and liabilities owed by MSIor its subsidiaries under all Related Documents.  The term "Related Documents" means all of the following documents dated even date with this Security Agreement: (a) a Promissory Note executed by MSI in the principal amount of One Million Three Hundred Fifty Thousand Dollars ($1,350,000); (b) a Deed of Trust executed by Borrower's subsidiary Colonial Full Service Car Wash, Inc., creating a junior lien on the real property known as Colonial 1 Car Wash, having the street address of 3022 S. Cooper Street, Arlington, Texas and 3011 Medlin Street, Arlington, Texas; (c) a Deed of Trust executed by Borrower's subsidiary Crystal Falls Car Wash, Inc. creating a junior lien on the real property known as Crystal Falls Car Wash, having the street address of 7027 South Quaker Avenue, Lubbock, Texas; (c) this Security Agreement; and (e) a Warrant Agreement executed by MSI.

2.2  The liabilities of Debtor to Secured Party arising out of existing and future loans and/or advances, if any, made by Secured Party to Debtor or Debtor's subsidiaries.
 
 
 
 

2.3  All other existing and future liabilities and obligations of Debtor or any of them to Secured Party, whether absolute or contingent, direct or indirect, sole, joint or several, of any nature whatsoever, and out of whatever transactions arising, including without limitation any debt, liability or obligation owing from Debtor to others which Secured Party may obtain by assignment or otherwise, continuing interest accruing on any of the foregoing, and any costs, legal fees and expenses incurred by Secured Party in the enforcement of any of the foregoing.

2.4  The liabilities of MSI and its subsidiaries also include all monetary obligations accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations or substitutions of any of the foregoing, whether voluntarily or involuntarily incurred, due or not due, absolute or contingent, direct or indirect, liquidated or un-liquidated.

2.5  The cost of curing any Event of Default hereunder which Secured Party elects to cure.

All of the foregoing liabilities and obligations are hereinafter collectively referred to as the "Obligations."  The security interests granted herein shall continue in full force and effect until all of the Obligations have been satisfied in full.

3.     REPRESENTATIONS, WARRANTIES, AND COVENANTS

In order to induce Secured Party to enter into this Agreement, Debtor warrants, represents and covenants and, until all of the Obligations have been satisfied in full, continues to warrant, represent and covenant, as follows:

3.1     Debtor will execute immediately upon Secured Party's request such UCC financing statements, and trademark assignments as are deemed necessary or desirable in Secured Party's sole judgment to perfect and maintain perfected the liens and security interests granted herein.  Debtor hereby appoints Secured Party, its officers, employees and agents, as Debtor's attorney-in-fact, at Secured Party's option and at Debtor's sole expense, in Debtor's or Secured Party's name, to do all acts and things which Secured Party deems necessary or desirable to perfect and maintain perfected the liens and security interests granted herein and to protect the Collateral.  Debtor will pay to Secured Party upon demand the costs and reasonable fees associated with filing the same with appropriate governmental agencies.

3.2  If the Collateral or any part of the Collateral is purchased or to be purchased by Debtor with the proceeds of any of the Obligations, Debtor will join with Secured Party in executing all notices and other documents necessary to enable Secured Party to obtain a Purchase Money Security Interest of first priority in such Collateral.

3.3  Debtor's chief executive office is the address stated after the name of Debtor above.   If Debtor changes its chief executive office Debtor will immediately advise Secured Party in writing of any change in any of Debtor's place(s) of business, the opening of any new or additional place(s) of business, and the locations of all places wherein Debtor keeps Debtor's Books and Records.
 
 
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3.4  Debtor shall keep complete and accurate books and records of the Collateral.  Debtor shall permit Secured Party, its officers, employees and agents to have access to all of Debtor's books and records pertaining to the Collateral which Secured Party may request.

3.5  Debtor shall immediately notify Secured Party of any event causing deterioration, loss or depreciation in value of any of the Collateral.

3.6  Debtor has or will acquire absolute good and marketable title to the Collateral free and clear of all liens, encumbrances and security interests except the security interests granted to Secured Party hereunder and other rights, if any, of Secured Party, and Debtor will defend the Collateral against the claims and demands of all persons except Secured Party.

3.7  Debtor will, at its sole cost and expense, preserve the Collateral and Debtor's rights in the Collateral.  Debtor will not grant to anyone other than Secured Party any lien upon or security interest in the Collateral nor allow any person other than Secured Party to obtain a lien or levy upon the Collateral.

3.8  Debtor will permit Secured Party to inspect and audit the Collateral at any time and from time to time and Debtor will pay the expenses of such inspections and audits upon Secured Party's request.

3.9  Debtor warrants that the Collateral is now and will later be used for the sole purpose of conducting Debtor's business.

3.10  Debtor is duly organized, validly existing and in good standing under the laws of the State of Delaware, has the power and authority to make and perform this Security Agreement, and is duly qualified in all jurisdictions in which it conducts business or where such qualification is required.  The execution, delivery and performance of the Related Documents have been duly authorized by all requisite corporate action and will not violate any provision of law or regulation, or of the Articles of Incorporation, By-Laws of Debtor, or any agreement, indenture or instrument to which Debtor is a party.  The Related Documents evidencing the Obligations when executed and delivered by Debtor, will be legal, valid and binding obligations of Debtor, enforceable against Debtor in accordance with their respective terms.

3.11  No Event of Default (as this term is defined in Paragraph 7 below) has occurred and no event has occurred which, with the passage of time, could be an Event of Default hereunder.

3.12  MSI Trademark II acknowledges and agrees that (1) MSI Trademark II is a wholly owned subsidiary of MSI, (2) MSI Trademark II is benefited by the loans and other financial accommodations made by Secured Party to MSI pursuant to the Related Documents (the “Financial Accommodations”), (3) MSI Trademark II’s execution and delivery of this Agreement is a material inducement to Secured Party to provide the Financial Accommodations, and (4) without this Agreement, Secured Party would not have provided the Financial Accommodations.
 
 
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4.    SIGNATORY AUTHORIZATION

Debtor hereby appoints any employee, officer or agent of Secured Party as Debtor's true and lawful attorney-in-fact, with power:

4.1  To sign and endorse the name of Debtor upon any UCC Financing Statement and continuations thereof, and any other instrument or document required by Secured Party to perfect and continue perfected the liens and security interests granted to Secured Party hereunder or otherwise in connection with the Obligations or other instruments regarding disposition or sale of any Collateral which come into possession of Secured Party; and

4.2  To sign and endorse the name of Debtor upon any registration or document required to keep the Collateral in good standing and effect.

This power of attorney shall be deemed to be coupled with an interest and irrevocable until all of Debtor's Obligations to Secured Party are paid and performed in full.

5.   EVENTS OF DEFAULT

Each of the following shall be an "Event of Default" hereunder:

5.1  The nonpayment as and when due of any amount payable under or on any of the Obligations and all accrued interest thereon or the failure of any Obligor (the term "Obligor," as used herein, shall include the Debtor and all other persons liable, either absolutely or contingently, on the Obligations, including endorsers, sureties and guarantors) at any time to observe or perform any of its warranties, representations or covenants contained in this Security Agreement or the Related Documents, or a breach, default or event of default shall occur under any Related Document, subject to applicable grace and cure periods, if any.

5.2  The failure of any Debtor to observe or perform any agreement of any nature whatsoever with Secured Party.

5.3  If the Debtor becomes insolvent or makes an assignment for the benefit of creditors, or if any petition is filed by or against the Debtor under any provision of any state or federal law or statute alleging that such Debtor is insolvent or unable to pay debts as they mature or under any provision of the Federal Secured Bankruptcy Code.

5.4  The entry of any judgment or tax lien against any Debtor which remains unsatisfied for thirty (30) days, or the issuing of any attachment or garnishment against any property of Debtor, or the appointment of any receiver, trustee, conservator or other court officer over the Debtor or any of Debtor's property for any purpose.
 
 
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5.5  The Collateral or any rights therein shall be subject to or threatened with any judicial process, condemnation or forfeiture proceedings.

5.6  The dissolution, merger, consolidation or reorganization of Debtor.
 
6.   SECURED PARTY'S RIGHTS UPON DEFAULT

Upon or after the occurrence of any Event of Default, Secured Party may do any or all of the following, all of which rights and remedies shall be cumulative and any and all of which may be exercised from time to time and as often as Secured Party shall deem necessary or desirable:

6.1  Exercise any or all rights, privileges and remedies available to Secured Party under this Security Agreement, or the Related Documents, and of a secured party under the UCC (which remedies shall be cumulative), as well as those under any other applicable agreement with respect to any of the Collateral then held for the Obligations, and to apply such monies and the net proceeds of the Collateral to any of the Obligations then due Secured Party as provided below.

6.2  Declare the entire unpaid amount of such of the Obligations as are not then due and payable to become immediately due and payable, without notice to or demand on any Obligor.

6.3  Upon thirty (30) days' prior written notice to Debtor, which notice Debtor acknowledges is sufficient, proper and commercially reasonable, sell, lease or otherwise dispose of the Collateral, at any time and from time to time, in whole or in part, at an advertised public sale.

6.4  Cure any default in any reasonable manner and add the cost of any such cure to the Obligations and accrue interest thereon at the rate then being charged by Secured Party for loans and extensions of credit hereunder.

The waiver of any Event of Default or Secured Party's failure to exercise any right or remedy hereunder shall not be deemed a waiver of any subsequent Event of Default or of the right to exercise that or any other right or remedy available to Secured Party.

7.  PAYMENT OF COSTS AND ATTORNEY'S FEES

In the event that Secured Party engages an attorney to represent it in connection with (1) any alleged default by any Obligor under any of the Related Documents issued in connection with or arising out of any of the Obligations, (2) the enforcement of any of the Secured Party's rights and remedies under any of the Related Documents, (3) any potential and/or actual Bankruptcy or other insolvency proceedings commenced by or against any Obligor and/or (4) any potential and/or actual litigation arising out of or related to any of the foregoing, the Related Documents or any of the Obligations, then Debtor shall be liable, and shall reimburse Secured Party on demand, for all attorneys' fees, costs and expenses incurred by Secured Party in connection with any of the foregoing.  Debtor shall also be liable and shall reimburse Secured Party on demand for all other costs and expenses incurred by Secured Party in connection with the collection, preservation and/or liquidation of any collateral security for any of the Obligations and/or in the enforcement of any Obligor's obligations hereunder and under any of the Related Documents.
 
 
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8.  MISCELLANEOUS

8.1  This Agreement shall inure to the benefit of, and is and shall continue to be binding upon, the parties, their successors, endorsers, personal representatives, receivers, trustees, heirs and assigns, but nothing contained herein shall be construed to permit Debtor to assign this Agreement or any of Debtor's rights or obligations hereunder without first obtaining Secured Party's prior written approval.

8.2  All warranties, representations and covenants of Debtor contained in this Agreement are joint and several if Debtor is more than one person, and shall bind Debtor's personal representatives, heirs, successors and assigns and shall remain in full force and effect until all the Obligations to Secured Party are paid in full and all of the undertakings of Debtor hereunder have been satisfactorily performed in full.

8.3  This Agreement  has been executed pursuant to, delivered in and shall be governed by and construed under the laws of the State of Ohio.  The parties agree to the exclusive jurisdiction of the federal, state and local courts located within Ohio over controversies arising from or relating to this Agreement.

8.4  If any provision of this Agreement shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, but this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein.

8.5  The rights, powers and remedies of Secured Party hereunder are cumulative and not alternative and shall not be exhausted by the single assertion or exercise thereof and the failure of Secured Party to exercise any such right, power or remedy will not be deemed a waiver thereof nor preclude any further or additional exercise of such right, power or remedy at any other time.  The waiver of any default hereunder shall not be a waiver of any subsequent default.

8.6  No modifications of this Agreement shall be binding or enforceable unless in writing and signed by duly authorized representatives of Debtor and Secured Party.
 
[signature page follows]
 
 
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IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be duly executed and sealed as of the day and year first above written.

MACE SECURITY INTERNATIONAL, INC.
 
By:
/s/ Dennis R. Raefield
Name:
Dennis R. Raefield
Title:
CEO and President

MACE TRADEMARK, II, INC.
 
By:
/s/ Dennis R. Raefield
Name:
Dennis R. Raefield
Title:
President
 
 
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NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.  THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.
 
COMMON STOCK PURCHASE WARRANT
 
To Purchase 314,715 Shares of Common Stock of
 
Mace Security International, Inc.
 
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) CERTIFIES that, for value received, Merlin Partners, LP, a Delaware limited parthership, (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after December 28, 2010 (the “Initial Exercise Date”) and on or prior to December 28, 2015 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Mace Security International, Inc., a Delaware corporation (the “Company”), up to 314,715 shares (the “Warrant Shares”) of Common Stock, par value $0.01 per share, of the Company (the “Common Stock”).  The purchase price of one share of Common Stock (the “Exercise Price”) under this Warrant shall be $.20, subject to adjustment hereunder and provided, if any new shares of Common Stock are issued between December 28, 2010 and December 28, 2011 for a price below $.20 per share, then the Exercise Price shall be reduced to equal the price paid for such new shares.  The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein.
 
1.          Consideration and Issuance of Additional Warrants.  This Warrant has been issued to Holder in consideration for the Holder making a $1,350,000.00 loan to the Company, as evidenced by a Promissory Note dated December 28, 2010.  The number of Warrant Shares has been calculated to be two percent (2%) of the Company's issued and outstanding shares of common stock.  As of December 28, 2010, the Company's issued and outstanding shares of its common stock are 15,735,725.  The Company hereby agrees that it shall issue the Holder additional warrants exercisable into two percent (2%) of any Common Stock issued by the Company from December 28, 2010 through, December 28, 2011 (the "Additional Warrant Shares").  All Additional Warrant Shares shall be issued by the Company to Holder on a form of Common Stock Purchase Warrant which is identical to this Common Stock Purchase Warrant, with the exception that this Paragraph 1 shall not be included.  The Additional Warrant Shares shall be delivered to Holder by the delivery of an executed Common Stock Purchase Warrant meeting the terms of this Paragraph 1, within fifteen days of the Company having issued additional shares of Common Stock.
 
 
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2.            Title to Warrant.  Prior to the Termination Date and subject to compliance with applicable laws and Section 8 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at and only at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. No assignment will be effective, until the transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company.
 
3.      Authorization of Shares.  The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
 
4.      Exercise of Warrant.

(a)  Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); provided, however, within 5 Trading Days of the date said Notice of Exercise is delivered to the Company, the Holder shall have surrendered this Warrant to the Company and the Company shall have received  payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank.  Certificates for shares purchased hereunder shall be delivered to the Holder within 5 Trading Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above (“Warrant Share Delivery Date”).  This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company.  The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid.  If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.  In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise by the Warrant Share Delivery Date, and if after such day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall as partial liquidated damages (1) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder.  For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company.  Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
 
 
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(b)      If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the un-purchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

5.      No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.

6.      Charges, Taxes and Expenses.  Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

 
 
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7.      Closing of Books.  The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

8.      Transfer, Division and Combination.

(a)       Subject to compliance with any applicable securities laws and the conditions set forth in Sections 2 and 8(e) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled.  A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
 
(b)       This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney.  Subject to compliance with Section 8(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.
 
(c)       The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 8.
 
(d)       The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.
 
(e)       If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act.
 
 
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9.      No Rights as Shareholder until Exercise.  This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof.  Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

10.      Loss, Theft, Destruction or Mutilation of Warrant.  The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

11.      Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

12.      Adjustments of Exercise Price and Number of Warrant Shares.  The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following.  In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock (such distributions do not include rights offerings where holders are given a right to purchase additional shares), (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof.  Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company that are purchasable pursuant hereto immediately after such adjustment.  An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.
 
 
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13.      Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets.  In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“Other Property”), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 13.  For purposes of this Section 13, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock.  The foregoing provisions of this Section 13 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.

14.      Notice of Adjustment.  Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.

15.      Notice of Corporate Action.  If at any time:

(a)           the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or
 
 
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(b)           there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or,
 
(c)           there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;
 
then, in any one or more of such cases, the Company shall give to Holder  prompt notice of the  record date of such transaction on the date and in the manner it provides notice to its other shareholders; provided, however, any such notice is provided in such a way as to give the Holder reasonable opportunity to exercise any of its rights under this Warrant.  Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 18(d).
 
16.      Authorized Shares.  The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed.

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.  Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.
 
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
 
 
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17.      Miscellaneous.

(a)      Jurisdiction.  This Warrant is issued by a Delaware corporation  and governed by Delaware  law (without giving effect to its laws of conflicts).  The Holder and the Company agree that any legal action or proceeding with respect to any of their respective obligations or rights under this Warrant may be brought in any state or federal court located in the Delaware. The parties waive any claim that the State of Delaware is not a convenient forum or the proper venue for any such suit, action or proceeding.
 
(b)      Restrictions.  The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.
 
(c)      Nonwaiver and Expenses.  No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date.  If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
 
(d)      Notices.  Any notices and demands under or related to this Warrant shall be in writing and delivered to the intended party at its address stated herein, by one of the following means: (a) by hand, (b) by a nationally recognized overnight courier service, or (c) by certified mail, postage prepaid, with return receipt requested.  Notice shall be deemed given: (a) upon receipt if delivered by hand, (b) on the day after the day of deposit with a nationally recognized courier service, or (c) on the third (3rd) day after the notice is deposited in the mail.    Any party may change its address for purposes of the receipt of notices and demands by giving notice of such change in the manner provided in this provision.
 
(e)      Limitation of Liability.  No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
 
(f)      Remedies.  Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.
 
(g)      Successors and Assigns.  Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.
 
 
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(h)      Amendment.  This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
 
(i)      Severability.  Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
 
(j)      Headings.  The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
 
********************
 
 
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated:  December 28, 2010

MACE SECURITY INTERNATIONAL, INC.
     
By:
/s/ Dennis R. Raefield
  
 
Name: Dennis Raefield
  
 
Title: President
  
 
 
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NOTICE OF EXERCISE
 
To:           Mace Security International, Inc.
 
(1)      The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
 
(2)      Payment shall take the form of (check applicable box):
 
o in lawful money of the United States; or
 
o the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 4(d), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 4(d).
 
(3)      Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:
 
_______________________________
 
The Warrant Shares shall be delivered to the following:
 
_______________________________
 
_______________________________
 
_______________________________
 
(4)  Accredited Investor.  The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended.
 
[PURCHASER]
 
By:
 
Name:
Title:
Dated:
  
 
 
 
 
 
 
ASSIGNMENT FORM
 
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
 
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is
 
_______________________________________________________________.
 
_______________________________________________________________
 
Dated:  ______________, _______
 
Holder's Signature:              _____________________________
 
Holder's Address:                _____________________________

                                                                                        _____________________________
Signature Guaranteed:  ___________________________________________
 
NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company.  Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
 
 
 
 
 
 
 EX-10.32 3 v216600_ex10-32.htm
 
Exhibit 10.32
Line of Credit Note
   
 
$500,000.00
 
Date: December 17, 2010

Promise to Pay. On or before June 15, 2011, for value received, Mace Security Products, Inc. (the "Borrower") promises to pay to JPMorgan Chase Bank, N.A., whose address is 420 Throckmorton, Suite 400, Fort Worth, TX 76102 (the "Bank") or order, in lawful money of the United States of America, the sum of Five Hundred Thousand and 00/100 Dollars ($500,000.00) or so much thereof as may be advanced and outstanding, plus interest on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days unless that calculation would result in a usurious interest rate, in which case interest will be calculated on the basis of a 365 or 366 day year, as the case may be at the rate of 0.25% per annum (the "Applicable Margin") above the CB Floating Rate (the interest rate of this Note on any day is referred to herein as the "Note Rate"), and at the rate of 3.00% per annum above the Note Rate, at the Bank's option, upon the occurrence of any default under this Note, whether or not the Bank elects to accelerate the maturity of this Note, from the date such increased rate is imposed by the Bank.

In no event shall the interest rate exceed the maximum rate allowed by law. Any interest payment that would for any reason be unlawful under applicable law shall be applied to principal.

Interest will be computed on the unpaid principal balance from the date of each borrowing.

Until maturity, the Borrower will pay consecutive monthly installments of interest only commencing January 15, 2011.

The Borrower shall make all payments on this Note and the other Related Documents, without setoff, deduction, or counterclaim, to the Bank at the Bank's address above or at such other place as the Bank may designate in writing. If any payment of principal or interest on this Note shall become due on a day that is not a Business Day, the payment will be made on the next succeeding Business Day. Payments shall be allocated among principal, interest and fees at the discretion of the Bank unless otherwise agreed or required by applicable law. Acceptance by the Bank of any payment that is less than the payment due at that time shall not constitute a waiver of the Bank's right to receive payment in full at that time or any other time.

Authorization for Direct Payments (ACH Debits). To effectuate any payment due under this Note or under any other Related Documents, the Borrower hereby authorizes the Bank to initiate debit entries to Account Number 638331439 at the Bank and to debit the same to such account. This authorization to initiate debit entries shall remain in full force and effect until the Bank has received written notification of its termination in such time and in such manner as to afford the Bank a reasonable opportunity to act on it. The Borrower represents that the Borrower is and will be the owner of all funds in such account. The Borrower acknowledges: (1) that such debit entries may cause an overdraft of such account which may result in the Bank’s refusal to honor items drawn on such account until adequate deposits are made to such account; (2) that the Bank is under no duty or obligation to initiate any debit entry for any purpose; and (3) that if a debit is not made because the above-referenced account does not have a sufficient available balance, or otherwise, the payment may be late or past due.

Late Fee. Any principal or interest which is not paid within 10 days after its due date (whether as stated, by acceleration or otherwise) shall be subject to a late payment charge of five percent (5.00%) of the total payment due, in addition to the payment of interest, up to the maximum amount of One Thousand Five Hundred and 00/100 Dollars ($1,500.00) per late charge. The Borrower agrees to pay and stipulates that five percent (5.00%) of the total payment due is a reasonable amount for a late payment charge. The Borrower shall pay the late payment charge upon demand by the Bank or, if billed, within the time specified.

Purpose of Loan. The Borrower acknowledges and agrees that this Note evidences a loan for a business, commercial, agricultural or similar commercial enterprise purpose, and that no advance shall be used for any personal, family or household purpose. The proceeds of the loan shall be used only for the Borrower's working capital purposes.

Credit Facility. The Bank has approved a credit facility to the Borrower in a principal amount not to exceed the face amount of this Note. The credit facility is in the form of advances made from time to time by the Bank to the Borrower. This Note evidences the Borrower's obligation to repay those advances. The aggregate principal amount of debt evidenced by this Note is the amount reflected from time to time in the records of the Bank. Until the earliest to occur of maturity, any default, event of default, or any event that would constitute a default or event of default but for the giving of notice, the lapse of time or both, the Borrower may borrow, pay down and reborrow under this Note subject to the terms of the Related Documents.
 
 
 
 
 
General Definitions. As used in this Note, the following terms have the following respective meanings:

1.
"Adjusted One Month LIBOR Rate" means, for any day, the sum of (i) 2.50% per annum plus (ii) the quotient of (a) the interest rate determined by the Bank by reference to the Page to be the rate at approximately 11:00 a.m. London time, on such date or, if such date is not a Business Day, on the immediately preceding Business Day for dollar deposits with a maturity equal to one (1) month, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to dollar deposits in the London interbank market with a maturity equal to one (1) month.

2.
"Affiliate" means any Person which, directly or indirectly, Controls or is Controlled by or under common Control with, another Person, and any director or officer thereof. The Bank is under no circumstances to be deemed an Affiliate of the Borrower or any of its Subsidiaries.

3.
"Business Day" means (i) with respect to the Adjusted One Month LIBOR Rate, a day (other than a Saturday or Sunday) on which banks generally are open in Texas and/or New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed.

4.
"CB Floating Rate" means the Prime Rate; provided that the CB Floating Rate shall, on any day, not be less than the Adjusted One Month LIBOR Rate. The CB Floating Rate is a variable rate and any change in the CB Floating Rate due to any change in the Prime Rate or the Adjusted One Month LIBOR Rate is effective from and including the effective date of such change in the Prime Rate or the Adjusted One Month LIBOR Rate, respectively.

5.
"Collateral" means all Property, now or in the future subject to any Lien in favor of the Bank, securing or intending to secure, any of the Liabilities.

6.
"Control" as used with respect to any Person, means the power to direct or cause the direction of, the management and policies of that Person, directly or indirectly, whether through the ownership of Equity Interests, by contract, or otherwise. "Controlling" and "Controlled" have meanings correlative thereto.

7.
"Equity Interests" means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such equity interest.

8.
"GAAP" means generally accepted accounting principles in effect from time to time in the United States of America, consistently applied.

9.
"Liabilities" means all debts, obligations, and liabilities of every kind and character of the Borrower, whether individual, joint and several, contingent or otherwise, now or hereafter existing in favor of the Bank, including without limitation, all liabilities, interest, costs and fees, arising under or from any note, open account, overdraft, credit card, lease, Rate Management Transaction, letter of credit application, endorsement, surety agreement, guaranty, acceptance, foreign exchange contract or depository service contract, whether payable to the Bank or to a third party and subsequently acquired by the Bank, any monetary obligations (including interest) incurred or accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, regardless of whether allowed or allowable in such proceeding, and all renewals, extensions, modifications, consolidations, rearrangements, restatements, replacements or substitutions of any of the foregoing.

10.
"Lien" means any mortgage, deed of trust, pledge, charge, encumbrance, security interest, collateral assignment or other lien or restriction of any kind.

11.
"Obligor" means any Borrower, guarantor, surety, co-signer, endorser, general partner or other Person who may now or in the future be obligated to pay any of the Liabilities.

12.
"Page" means Reuters Screen LIBOR01, formerly known as Page 3750 of the Moneyline Telerate Service (together with any successor or substitute, the "Service") or any successor or substitute page of the Service providing rate quotations comparable to those currently provided on such page of the Service, as determined by the Bank from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market.

13.
"Person" means any individual, corporation, partnership, limited liability company, joint venture, joint stock association, association, bank, business trust, trust, unincorporated organization, any foreign governmental authority, the United States of America, any state of the United States and any political subdivision of any of the foregoing or any other form of entity.

14.
"Pledgor" means any Person providing Collateral.
 
 
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15.
"Prime Rate" means the rate of interest per annum announced from time to time by the Bank as its prime rate. The Prime Rate is a variable rate and each change in the Prime Rate is effective from and including the date the change is announced as being effective. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE THE BANK’S LOWEST RATE.

16.
"Property" means any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible.

17.
"Rate Management Transaction" means any transaction (including an agreement with respect thereto) that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option, derivative transaction or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures.

18.
"Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System.

19.
"Reserve Requirement" means the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D.

20.
"Related Documents" means this Note, all loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, and any other instrument or document executed in connection with this Note or in connection with any of the Liabilities.

21.
"Subsidiary" means, as to any particular Person (the "parent"), a Person the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of the date of determination, as well as any other Person of which fifty percent (50%) or more of the Equity Interests is at the time of determination directly or indirectly owned, Controlled or held, by the parent or by any Person or Persons Controlled by the parent, either alone or together with the parent.

Bank's Right of Setoff. The Borrower grants to the Bank a security interest in the Deposits, and the Bank is authorized to setoff and apply, all Deposits, Securities and Other Property, and Bank Debt against any and all Liabilities. This right of setoff may be exercised at any time and from time to time after the occurrence of any default, without prior notice to or demand on the Borrower and regardless of whether any Liabilities are contingent, unmatured or unliquidated. In this paragraph: (a) the term "Deposits" means any and all accounts and deposits of the Borrower (whether general, special, time, demand, provisional or final) at any time held by the Bank (including all Deposits held jointly with another, but excluding any IRA or Keogh Deposits, or any trust Deposits in which a security interest would be prohibited by law); (b) the term "Securities and Other Property" means any and all securities and other personal property of the Borrower in the custody, possession or control of the Bank, JPMorgan Chase & Co. or their respective Subsidiaries and Affiliates (other than Property held by the Bank in a fiduciary capacity); and (c) the term "Bank Debt" means all indebtedness at any time owing by the Bank, to or for the credit or account of the Borrower and any claim of the Borrower (whether individual, joint and several or otherwise) against the Bank now or hereafter existing.

Representations by Borrower. The Borrower represents and warrants that each of the following is and will remain true and correct until the later of maturity or the date on which all Liabilities evidenced by this Note are paid in full: (a) the execution and delivery of this Note and the performance of the obligations it imposes do not violate any law, conflict with any agreement by which it is bound, or require the consent or approval of any other Person; (b) this Note is a valid and binding agreement of the Borrower, enforceable according to its terms, except as may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditor’s rights generally and by general principles of equity; (c) all balance sheets, profit and loss statements, other financial statements and applications for credit furnished to the Bank in connection with the Liabilities are accurate and fairly reflect the financial condition of the Persons to which they apply on their effective dates, including contingent liabilities of every type, which financial condition has not materially and adversely changed since those dates; and, if the Borrower is not a natural Person: (i) it is duly organized, validly existing and in good standing under the laws of the state where it is organized and in good standing in each state where it is doing business; and (ii) the execution and delivery of this Note and the performance of the obligations it imposes (A) are within its powers and have been duly authorized by all necessary action of its governing body, and (B) do not contravene the terms of its articles of incorporation or organization, its by-laws, regulations or any partnership, operating or other agreement governing its organization and affairs.

Events of Default/Acceleration. If any of the following events occurs, this Note shall become due immediately, without notice, at the Bank's option, and the Borrower hereby waives notice of intent to accelerate the maturity of this Note and notice of acceleration of this Note upon the occurrence of any of the following events:
 
 
3
 
 
1.
Any Obligor fails to pay when due any of the Liabilities or any other debt to any Person, or any amount payable with respect to any of the Liabilities, or under this Note, any other Related Document, or any agreement or instrument evidencing other debt to any Person.
2.
Any Obligor or any Pledgor: (a) fails to observe or perform or otherwise violates any other term, covenant, condition or agreement of any of the Related Documents; (b) makes any materially incorrect or misleading representation, warranty, or certificate to the Bank; (c) makes any materially incorrect or misleading representation in any financial statement or other information delivered to the Bank; or (d) defaults under the terms of any agreement or instrument relating to any debt for borrowed money (other than the debt evidenced by the Related Documents) and the effect of such default will allow the creditor to declare the debt due before its stated maturity.
3.
In the event (a) there is a default under the terms of any Related Document, (b) any Obligor terminates or revokes or purports to terminate or revoke its guaranty or any Obligor's guaranty becomes unenforceable in whole or in part, (c) any Obligor fails to perform promptly under its guaranty, or (d) any Obligor fails to comply with, or perform under any agreement, now or hereafter in effect, between the Obligor and the Bank, or any Affiliate of the Bank or their respective successors and assigns.
4.
There is any loss, theft, damage, or destruction of any Collateral not covered by insurance.
5.
Any event occurs that would permit the Pension Benefit Guaranty Corporation to terminate any employee benefit plan of any Obligor or any Subsidiary of any Obligor.
6.
Any Obligor or any of its Subsidiaries or any Pledgor: (a) becomes insolvent or unable to pay its debts as they become due; (b) makes an assignment for the benefit of creditors; (c) consents to the appointment of a custodian, receiver, or trustee for itself or for a substantial part of its Property; (d) commences any proceeding under any bankruptcy, reorganization, liquidation, insolvency or similar laws; (e) conceals or removes any of its Property, with intent to hinder, delay or defraud any of its creditors; (f) makes or permits a transfer of any of its Property, which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (g) makes a transfer of any of its Property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid.
7.
A custodian, receiver, or trustee is appointed for any Obligor or any of its Subsidiaries or any Pledgor or for a substantial part of their respective Property.
8.
Any Obligor or any of its Subsidiaries, without the Bank's written consent: (a) liquidates or is dissolved; (b) merges or consolidates with any other Person; (c) leases, sells or otherwise conveys a material part of its assets or business outside the ordinary course of its business; (d) leases, purchases, or otherwise acquires a material part of the assets of any other Person, except in the ordinary course of its business; or (e) agrees to do any of the foregoing; provided, however, that any Subsidiary of an Obligor may merge or consolidate with any other Subsidiary of that Obligor, or with the Obligor, so long as the Obligor is the survivor.
9.
Proceedings are commenced under any bankruptcy, reorganization, liquidation, or similar laws against any Obligor or any of its Subsidiaries or any Pledgor and remain undismissed for thirty (30) days after commencement; or any Obligor or any of its Subsidiaries or any Pledgor consents to the commencement of those proceedings.
10.
Any judgment is entered against any Obligor or any of its Subsidiaries, or any attachment, seizure, sequestration, levy, or garnishment is issued against any Property of any Obligor or any of its Subsidiaries or of any Pledgor or any Collateral.
11.
Any individual Obligor or Pledgor dies, or a guardian or conservator is appointed for any individual Obligor or Pledgor or all or any portion of their respective Property, or the Collateral.
12.
Any material adverse change occurs in: (a) the reputation, Property, financial condition, business, assets, affairs, prospects, liabilities, or operations of any Obligor or any of its Subsidiaries; (b) any Obligor's or Pledgor's ability to perform its obligations under the Related Documents; or (c) the Collateral.

Remedies. If this Note is not paid at maturity, whether by acceleration or otherwise, the Bank shall have all of the rights and remedies provided by any law or agreement, in equity or otherwise. The Bank is authorized to cause all or any part of the Collateral to be transferred to or registered in its name or in the name of any other Person, with or without designating the capacity of that nominee. Without limiting any other available remedy, the Borrower is liable for any deficiency remaining after disposition of any Collateral. The Borrower is liable to the Bank for all reasonable costs and expenses of every kind incurred (or charged by internal allocation) in connection with the negotiation, preparation, execution, filing, recording, modification, supplementing and waiver of this Note or the other Related Documents and the making, servicing and collection of this Note or the other Related Documents and any other amounts owed under this Note or the other Related Documents, including without limitation reasonable attorneys' fees and court costs. These costs and expenses include without limitation any costs or expenses incurred by the Bank in any bankruptcy, reorganization, insolvency or other similar proceeding.

Waivers. Each Obligor waives: (a) to the extent not prohibited by law, all rights and benefits under any laws or statutes regarding sureties, as may be amended; (b) any right to receive notice of the following matters before the Bank enforces any of its rights: (i) the Bank's acceptance of this Note, (ii) any credit that the Bank extends to the Borrower, (iii) the Borrower's default, (iv) any demand, diligence, presentment, dishonor and protest, or (v) any action that the Bank takes regarding the Borrower, anyone else, any Collateral, or any of the Liabilities, that it might be entitled to by law, under any other agreement, in equity or otherwise; (c) any right to require the Bank to proceed against the Borrower, any other Obligor, or any Collateral, or pursue any remedy in the Bank's power to pursue; (d) any defense based on any claim that any endorser's or other Obligor's obligations exceed or are more burdensome than those of the Borrower; (e) the benefit of any statute of limitations affecting liability of any endorser or other Obligor or the enforcement hereof; (f) any defense arising by reason of any disability or other defense of the Borrower or by reason of the cessation from any cause whatsoever (other than payment in full) of the obligation of the Borrower for the Liabilities; and (g) any defense based on or arising out of any defense that the Borrower may have to the payment or performance of the Liabilities or any portion thereof. Each Obligor consents to any extension or postponement of time of its payment without limit as to the number or period, to any substitution, exchange or release of all or any part of the Collateral, to the addition of any other Person, and to the release or discharge of, or suspension of any rights and remedies against, any Obligor. The Bank may waive or delay enforcing any of its rights without losing them. Any waiver affects only the specific terms and time period stated in the waiver. No modification or waiver of any provision of this Note is effective unless it is in writing and signed by the Person against whom it is being enforced.

 
4
 
 
Cooperation. The Borrower agrees to fully cooperate with the Bank and not to delay, impede or otherwise interfere with the efforts of the Bank to secure payment from the Collateral including actions, proceedings, motions, orders, agreements or other matters relating to relief from automatic stay, abandonment of Property, use of cash Collateral and sale of the Collateral free and clear of all Liens.

Additional Waivers. To the extent not prohibited by applicable law, the Borrower waives (a) to the extent the Borrower is subject to the Texas Revised Partnership Act (“TRPA”) or Section 152.306 of the Texas Business Organizations Code (“BOC”), compliance by the Bank with Section 3.05(d) of TRPA and Section 152.306(b) of BOC; and (b) if the Liabilities are secured by an interest in real property, all rights of the Borrower under Sections 51.003, 51.004, and 51.005 of the Texas Property Code (as amended from time to time).

Rights of Subrogation. Each Obligor waives and agrees not to enforce any rights of subrogation, contribution or indemnification that it may have against the Borrower, any other Obligor, or the Collateral, until the Borrower and such Obligor have fully performed all their obligations to the Bank, even if those obligations are not covered by this Note.

Reinstatement. The Borrower agrees that to the extent any payment or transfer is received by the Bank in connection with the Liabilities evidenced by this Note, and all or any part of the payment or transfer is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be transferred or repaid by the Bank or transferred or paid over to a trustee, receiver or any other Person, whether under any bankruptcy act or otherwise (any of those payments or transfers is hereinafter referred to as a "Preferential Payment"), then this Note shall continue to be effective or shall be reinstated, as the case may be, even if all those Liabilities have been paid in full and whether or not the Bank is in possession of this Note, or whether the Note has been marked paid, released or canceled, or returned to the Borrower and, to the extent of the payment, repayment or other transfer by the Bank, the Liabilities or part intended to be satisfied by the Preferential Payment shall be revived and continued in full force and effect as if the Preferential Payment had not been made.

Governing Law and Venue. This Note shall be governed by and construed in accordance with the laws of the State of Texas (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under this Note may be brought by the Bank in any state or federal court located in the State of Texas, as the Bank in its sole discretion may elect. By the execution and delivery of this Note, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Texas is not a convenient forum or the proper venue for any such suit, action or proceeding.

Renewal and Extension. This Note is given in replacement, renewal and/or extension of, but not in extinguishment of the indebtedness evidenced by, that Line of Credit Note dated December 12, 2009 executed by the Borrower in the original principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00), including previous renewals or modifications thereof, if any (the "Prior Note" and together with all loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, and any other instrument or document executed in connection with the Prior Note, the "Prior Related Documents"), and is not a novation thereof. All interest evidenced by the Prior Note shall continue to be due and payable until paid. The Borrower fully, finally, and forever releases and discharges the Bank and its successors, assigns, directors, officers, employees, agents, and representatives (each a "Bank Party") from any and all causes of action, claims, debts, demands, and liabilities, of whatever kind or nature, in law or equity, of the Borrower, whether now known or unknown to the Borrower (i) in respect of the Liabilities evidenced by the Prior Note and the Prior Related Documents, or of the actions or omissions of any Bank Party in any manner related to the Liabilities evidenced by the Prior Note or the Prior Related Documents and (ii) arising from events occurring prior to the date of this Note ("Claims"); provided, however, that the foregoing RELEASE SHALL INCLUDE ALL CLAIMS ARISING OUT OF THE NEGLIGENCE OF ANY BANK PARTY, but not the gross negligence or willful misconduct of any Bank Party. If applicable, all Collateral continues to secure the payment of this Note and the Liabilities. The provisions of this Note are effective on the date that this Note has been executed by all of the signers and delivered to the Bank.

 
5
 
 
Usury. The Bank does not intend to charge, collect or receive any interest that would exceed the maximum rate allowed by law. If the effect of any applicable law is to render usurious any amount called for under this Note or the other Related Documents, or if any amount charged or received with respect to this Note, or if any prepayment by the Borrower, results in the payment of any interest in excess of that permitted by law, then all excess amounts collected by the Bank shall be credited on the principal balance of this Note (or, if this Note and all other indebtedness arising under or pursuant to the other Related Documents shall have been paid in full, refunded to the Borrower), and the provisions of this Note and the other Related Documents shall immediately be deemed reformed and the amounts thereafter collectable reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law. All sums paid, or agreed to be paid, by the Borrower for the use, forbearance, or detention of money under this Note or the other Related Documents shall, to the maximum extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the usury ceiling from time to time in effect and applicable to such indebtedness for so long as such indebtedness is outstanding. To the extent federal law permits the Bank to contract for, charge or receive a greater amount of interest, the Bank will rely on federal law instead of the Texas Finance Code. To the extent that Chapter 303 of the Texas Finance Code is applicable to this Note, the "weekly ceiling" specified in Chapter 303 is the applicable ceiling.

Inability to Determine Interest Rate. If the Bank determines on any day that quotations of interest rates for the relevant deposits referred to in the definition of Adjusted One Month LIBOR Rate are not being provided for purposes of determining the interest rate on any advance on any day, then each advance evidenced by this Note shall bear interest at the Prime Rate plus the Applicable Margin until the Bank determines that quotations of interest rates for the relevant deposits referred to in the definition of Adjusted One Month LIBOR Rate are being provided.

Miscellaneous. If more than one Borrower executes this Note: (i) each Borrower is liable jointly and severally for the Liabilities evidenced by this Note; (ii) the term "Borrower" means any one or more of them; and (iii) the receipt of value by any one of them constitutes the receipt of value by the others. This Note binds the Borrower and its successors, and benefits the Bank, its successors and assigns. Any reference to the Bank includes any holder of this Note. This Note is subject to that certain Credit Agreement by and between the Borrower and the Bank, dated October 31, 2006, and all amendments, restatements and replacements thereof (the "Credit Agreement") to which reference is hereby made for a more complete statement of the terms and conditions under which the loan evidenced hereby is made and is to be repaid. The terms and provisions of the Credit Agreement are hereby incorporated and made a part hereof by this reference thereto with the same force and effect as if set forth at length herein. No reference to the Credit Agreement and no provisions of this Note or the Credit Agreement shall alter or impair the absolute and unconditional obligation of the Borrower to pay the principal and interest on this Note as herein prescribed. Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. Section headings are for convenience of reference only and do not affect the interpretation of this Note. Any notices and demands under or related to this Note shall be in writing and delivered to the intended party at its address stated herein, and if to the Bank, at its main office if no other address of the Bank is specified herein, by one of the following means: (a) by hand; (b) by a nationally recognized overnight courier service; or (c) by certified mail, postage prepaid, with return receipt requested. Notice shall be deemed given: (a) upon receipt if delivered by hand; (b) on the Delivery Day after the day of deposit with a nationally recognized courier service; or (c) on the third Delivery Day after the notice is deposited in the mail. "Delivery Day" means a day other than a Saturday, a Sunday, or any other day on which national banking associations are authorized to be closed. Any party may change its address for purposes of the receipt of notices and demands by giving notice of such change in the manner provided in this provision. This Note and the other Related Documents embody the entire agreement between the Borrower and the Bank regarding the terms of the loan evidenced by this Note and supercede all oral statements and prior writings relating to that loan. No delay on the part of the Bank in the exercise of any right or remedy waives that right or remedy. No single or partial exercise by the Bank of any right or remedy precludes any other future exercise of it or the exercise of any other right or remedy. No waiver or indulgence by the Bank of any default is effective unless it is in writing and signed by the Bank, nor shall a waiver on one occasion bar or waive that right on any future occasion. The rights of the Bank under this Note and the other Related Documents are in addition to other rights (including without limitation, other rights of setoff) the Bank may have contractually, by law, in equity or otherwise, all of which are cumulative and hereby retained by the Bank. If any provision of this Note cannot be enforced, the remaining portions of this Note shall continue in effect. The Borrower agrees that the Bank may provide any information or knowledge the Bank may have about the Borrower or about any matter relating to this Note or the Related Documents to JPMorgan Chase & Co., or any of its Subsidiaries or Affiliates or their successors, or to any one or more purchasers or potential purchasers of this Note or the Related Documents. The Borrower agrees that the Bank may at any time sell, assign or transfer one or more interests or participations in all or any part of its rights and obligations in this Note to one or more purchasers whether or not related to the Bank. Time is of the essence under this Note and in the performance of every term, covenant and obligation contained herein.

Government Regulation. The Borrower shall not (a) be or become subject at any time to any law, regulation, or list of any government agency (including, without limitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits the Bank from making any advance or extension of credit to the Borrower or from otherwise conducting business with the Borrower, or (b) fail to provide documentary and other evidence of the Borrower's identity as may be requested by the Bank at any time to enable the Bank to verify the Borrower's identity or to comply with any applicable law or regulation, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.

USA PATRIOT ACT NOTIFICATION. The following notification is provided to the Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318:

 
6
 
 
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each Person that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. What this means for the Borrower: When the Borrower opens an account, if the Borrower is an individual, the Bank will ask for the Borrower's name, taxpayer identification number, residential address, date of birth, and other information that will allow the Bank to identify the Borrower, and if the Borrower is not an individual, the Bank will ask for the Borrower's name, taxpayer identification number, business address, and other information that will allow the Bank to identify the Borrower. The Bank may also ask, if the Borrower is an individual, to see the Borrower's driver's license or other identifying documents, and if the Borrower is not an individual, to see the Borrower's legal organizational documents or other identifying documents.

WAIVER OF SPECIAL DAMAGES. THE BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT THE UNDERSIGNED MAY HAVE TO CLAIM OR RECOVER FROM THE BANK IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

JURY WAIVER. THE BORROWER AND THE BANK (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN THE BORROWER AND THE BANK ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE BANK TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE.
 
THIS NOTE AND THE OTHER RELATED DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.


     
Borrower:
       
Address:
240 Gibraltar Road, Suite 220
Horsham, PA 19044-2343
  
Mace Security Products, Inc.
     
By:
/s/ Gregory M. Krzemien
           
       
Gregory M. Krzemien
Treasurer
       
Printed Name
Title

Date Signed:
12/23/10
 
The Bank is executing this Note for the purpose of acknowledging and agreeing to the Jury Waiver, the notice given under §26.02 of the Texas Business and Commerce Code and to comply with the waiver requirements of TRPA and BOC, and the Bank’s failure to execute or authenticate this Note will not invalidate this Note.

Bank:
 
JPMorgan Chase Bank, N.A.
   
By:
/s/ R. Alan Green
     
 
R. Alan Green
S.V.P
 
Printed Name
Title
 
 
7
 
Amendment to Credit Agreement

This agreement is dated as of December 17, 2010, by and between Mace Security Products, Inc. (the "Borrower") and JPMorgan Chase Bank, N.A. (together with its successors and assigns the "Bank"). The provisions of this agreement are effective on the date that this agreement has been executed by all of the signers and delivered to the Bank (the "Effective Date").

WHEREAS, the Borrower and the Bank entered into a credit agreement dated October 31, 2006, as amended (if applicable) (the "Credit Agreement"); and

WHEREAS, the Borrower has requested and the Bank has agreed to amend the Credit Agreement as set forth in this agreement;

NOW, THEREFORE, in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows:

1.
DEFINED TERMS. Capitalized terms used in this agreement shall have the same meanings as in the Credit Agreement, unless otherwise defined in this agreement.

2.
MODIFICATION OF CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows:

 
2.1
From and after the Effective Date, the second paragraph of Section 1.2 of the Credit Agreement is hereby amended as follows:

The sentence now reading, “(a) the aggregate maximum amount which is drawn and remains unreimbursed under all Letters of Credit plus the aggregate maximum available amount which may be drawn under all Letters of Credit which are outstanding at any time (the "L/C Obligations"), shall not exceed $300,000.00” is hereby amended and restated to read as follows:

“(a) the aggregate maximum amount which is drawn and remains unreimbursed under all Letters of Credit plus the aggregate maximum available amount which may be drawn under all Letters of Credit which are outstanding at any time (the "L/C Obligations"), shall not exceed $500,000.00.”

3.
RATIFICATION. The Borrower ratifies and reaffirms the Credit Agreement and the Credit Agreement shall remain in full force and effect as modified by this agreement.

4.
BORROWER REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants that (a) the representations and warranties contained in the Credit Agreement are true and correct in all material respects as of the date of this agreement, (b) no condition, event, act or omission which could constitute a default or an event of default under the Credit Agreement, as modified by this agreement, or any other Related Document exists, and (c) no condition, event, act or omission has occurred and is continuing that with the giving of notice, or the passage of time or both, would constitute a default or an event of default under the Credit Agreement, as modified by this agreement, or any other Related Document.

5.
FEES AND EXPENSES. The Borrower agrees to pay all fees and out-of-pocket disbursements incurred by the Bank in connection with this agreement, including legal fees incurred by the Bank in the preparation, consummation, administration and enforcement of this agreement.

6.
EXECUTION AND DELIVERY. This agreement shall become effective only after it is fully executed by the Borrower and the Bank, and the Bank shall have received from the Borrower the following documents: Line of Credit Note; Continuing Security Agreement; Resolution of Board of Directors; Deed Of Trust, Assignment of Leases and Rents, Security Agreement and Financing Statement and Standard Notification Form.

7.
ACKNOWLEDGEMENTS OF BORROWER / RELEASE. The Borrower acknowledges that as of the date of this agreement it has no offsets with respect to all amounts owed by the Borrower to the Bank arising under or related to the Credit Agreement, as modified by this agreement, or any other Related Document on or prior to the date of this agreement. The Borrower fully, finally and forever releases and discharges the Bank, its successors and assigns and their respective directors, officers, employees, agents and representatives (each a "Bank Party") from any and all claims, causes of action, debts, demands and liabilities, of whatever kind or nature, in law or in equity, of the Borrower, whether now known or unknown to the Borrower, which may have arisen in connection with the Credit Agreement or the actions or omissions of any Bank Party related to the Credit Agreement on or prior to the date hereof. ("Claims"); provided, however, that the foregoing RELEASE SHALL INCLUDE ALL CLAIMS ARISING OUT OF THE NEGLIGENCE OF ANY BANK PARTY, but not the gross negligence or willful misconduct of any Bank Party. The Borrower acknowledges and agrees that this agreement is limited to the terms outlined above, and shall not be construed as an agreement to change any other terms or provisions of the Credit Agreement. This agreement shall not establish a course of dealing or be construed as evidence of any willingness on the Bank's part to grant other or future agreements, should any be requested.
 
 
 
 
 
8.
INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER. The Credit Agreement, as modified by this agreement, and the other Related Documents contain the complete understanding and agreement of the Borrower and the Bank in respect of the Credit Facilities and supersede all prior understandings and negotiations. If any one or more of the obligations of the Borrower under this agreement or the Credit Agreement, as amended by this agreement, is invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower shall not in any way be affected or impaired, and the invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrower under this agreement, the Credit Agreement, as modified by this agreement, or any other Related Document in any other jurisdiction. No provision of the Credit Agreement, as modified by this agreement, or the other Related Documents, may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the party against whom it is being enforced.

9.
Governing Law and Venue. This agreement shall be governed by and construed in accordance with the laws of the State of Texas (without giving effect to its laws of conflicts). The Borrower agrees that any legal action or proceeding with respect to any of its obligations under this agreement may be brought by the Bank in any state or federal court located in the State of Texas, as the Bank in its sole discretion may elect. By the execution and delivery of this agreement, the Borrower submits to and accepts, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. The Borrower waives any claim that the State of Texas is not a convenient forum or the proper venue for any such suit, action or proceeding.

10.
NOT A NOVATION. This agreement is a modification only and not a novation. Except as expressly modified by this agreement, the Credit Agreement, any other Related Documents, and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein. This agreement is to be considered attached to the Credit Agreement and made a part thereof. This agreement shall not release or affect the liability of any guarantor of any promissory note or credit facility executed in reference to the Credit Agreement or release any owner of collateral granted as security for the Credit Agreement. The validity, priority and enforceability of the Credit Agreement shall not be impaired hereby. To the extent that any provision of this agreement conflicts with any term or condition set forth in the Credit Agreement, or any other Related Documents, the provisions of this agreement shall supersede and control. The Bank expressly reserves all rights against all parties to the Credit Agreement and the other Related Documents.

11.
TIME IS OF THE ESSENCE. Time is of the essence under this agreement and in the performance of every term, covenant and obligation contained herein.

THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

Borrower:
Mace Security Products, Inc.
     
By:
/s/ Gregory M. Krzemien
  
     
 
Gregory M. Krzemien
Treasurer
 
Printed Name
Title

Date Signed:
12/23/10

Bank:
JPMorgan Chase Bank, N.A.
     
By:
/s/ R. Alan Green
  
     
 
R.Alan Green
S.V.P
 
Printed Name
Title

Date Signed:
12/24/10
 
 
2
 
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EXHIBIT 10.33
 
SECURITIES PURCHASE AGREEMENT
 
This SECURITIES PURCHASE AGREEMENT (this “Agreement”) dated as of March 25, 2011, has been executed by Mace Security International, Inc., ("Company") and Merlin Partners, LP ("Investor”).
 
RECITALS
 
WHEREAS, Investor wishes to purchase, and the Company wishes to sell that number of shares of the Company’s common stock, par value $.01, (the “Additional Stock”) equal to Four Million ($4,000,000.00) Dollars, for the per share price and upon the other terms and conditions set forth in this Agreement;
 
WHEREAS, the Company is in the process of registering under the Securities Act of 1933, as amended (the "Securities Act"): (i) a rights offering ("Rights Offering") to its shareholders pursuant to which the Company will distribute to holders of record of its common stock non-transferable subscription rights (the “Rights”) to purchase three shares of the Company’s common stock for each share held of record by each shareholder, at a subscription price and on the other terms to be set forth in the registration statement on Form S-1 (the “Registration Statement”); (ii) an amount of the Company's common stock equal to three times its currently outstanding common stock ("Rights Offering Stock"); and (iii) the Additional Stock, being an amount of the Company's common stock equal to $4,000,000, valued at the Offering Price; and
 
WHEREAS, the Company intends to file the Registration Statement with respect to the Rights Offering Stock and the Additional Stock (collectively, the "Registered Stock"), and for the Rights Offering, with the Securities and Exchange Commission (the “Commission”).
 
WHEREAS, the sale and purchase of the Stock to the Investor ("Closing") shall take place on the conclusion or termination of the Rights Offering.
 
WHEREAS, Company and the Investor are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and the rules promulgated by the U.S. Securities and Exchange Commission (the “Commission”) under the Securities Act; and
 
NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto hereby agree as follows:

AGREEMENT

Section 1.          Definitions.

The capitalized and certain other terms used herein shall have the meanings ascribed to them in Schedule I to this Agreement.

Section 2.          Purchase; Closing.
  
(a)       Purchase and Sale of the Additional Stock, the Per Share Price and Assignment.           At the Closing, and on the terms and subject to the conditions set forth herein, the Investor shall purchase from the Company, and the Company hereby agrees to sell to the Investor, the Additional Stock.  The per share price of the Additional Stock shall be the same amount as the per share subscription exercise price that the Company's shareholders are granted in the Rights Offering ("Per Share Price").  The number of shares of the Additional Stock to be sold by the Company and purchased by the Investor shall be the number equal to 4,000,000 divided by the Per Share Price.  The Additional Stock shall be registered under the Securities Act.
 
 
1
 
 
(b)      Assignment.  The Investor may assign the right to purchase a maximum of One Million Dollars ($1,000,000) in amount of the Additional Stock to three or less assigns.  The assignees may be assigned such portions of the One Million Dollars ($1,000,000) in amount of Additional Stock, as determined by the Investor.  The assignees may be individual or entities and the entities may have multiple equity owners.  The Investor must notify the Company in writing of the name of the person or entity to which the Investor has assigned a portion of the Additional Stock and of the amount assigned.  If a person or entity is assigned a portion of the Additional Stock by the Investor, the person or entity will not be a party to this Agreement, but will consummate its purchase of its portion of the Additional Stock by executing the subscription documents used by the Company in the Rights Offering.  The portion of Additional Stock purchased by the assignees shall be deducted from the amount of Additional Stock that the Investor is obligated to purchase under this Agreement.
 
(c)       Purchase Price and Fee.    The Company hereby agrees to pay the Investor a Two Hundred Fifty Thousand ($250,000) fee in exchange for the Investor's obligation to purchase the Additional Stock as set forth in this Agreement ("Fee").  The Fee shall be due and earned if, and only if, the Closing occurs.  The total purchase price of the Additional Stock is Four Million ($4,000,000) Dollars, less the portion of Additional Stock purchased by assignees under Section 2(b) above  ("Purchase Price").  At Closing, in exchange for the Additional Stock, the Investor shall pay the Company, in good funds, by wire transfer the Purchase Price less the Fee.  If the Investor makes a partial assignment of its right to purchase a portion of the Additional Stock, as set forth in Section 2(b) above, the Investor may also make a pro-rata assignment of a portion of the fee to the assignee.
 
(d)      Closing. Subject to the satisfaction or waiver of the conditions set forth in Section 5 of this Agreement, the Closing will occur after the conclusion or termination of the Rights Offering,  at the offices of the Company.
 
Section 3.          Representations and Warranties of the Company.
 
The Company represents and warrants to the Investor as follows, as of the Closing Date:

(a)       Filing Registration Statement.  The Registration Statement, as amended: (i) has and will be prepared by the Company in conformity with the requirements of the Securities Act in all material respects, (ii) be filed with the Commission under the Securities Act; and (iii) the Company shall uses its best commercially reasonable efforts to have the Registration become effective under the Securities Act.
 
 
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(b)      Contents of Registration Statement.  The Registration Statement will conform, as of the Effective Time, in all material respects to the requirements of the Securities Act and will not, as of the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made not misleading; and the Prospectus and any further amendments or supplements to such Registration Statement will conform, as of their respective dates or when they are declared effective by the Commission, as the case may be, in each case, in all material respects to the requirements of the Securities Act and collectively do not and will not, as of the applicable date thereof or when declared effective by the Commission, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein (with respect to the applicable Prospectus, in the light of the circumstances under which they were made) not misleading; provided that no representation or warranty is made by the Company as to information contained in or omitted from such Registration Statement or the applicable Prospectus in reliance upon and in conformity with written information regarding Investor furnished to the Company by or on behalf of Investor specifically for inclusion therein (collectively, the “Investor Information”) under appropriate headings and in its final form as approved by Investor and its counsel.
 
(c)      Exhibits to Registration Statement.  There are no contracts, agreements, plans or other documents which are required to be described in the Prospectus for, or filed as exhibits to either Registration Statement by the Securities Act which have not been described in the Prospectus or filed as exhibits to such Registration Statement or referred to in, or incorporated by reference into, the exhibit table of such Registration Statement as permitted by the Securities Act.
 
(d)      Valid Existence.  The Company and each of its Subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all corporate power and authority necessary to own or hold their respective properties and to conduct their businesses as described in the Registration Statements and the Prospectuses, except where the absence of such power or authority (either individually and in the aggregate) would not have a Material Adverse Effect.
 
(e)      Authorization.  This Agreement has been duly authorized, executed and delivered by the Company and, assuming the due authorization, execution and delivery by Investor, constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally and by general principles of equity.

(f)       No Defaults.  Neither the Company nor any of its Subsidiaries: (i) is in violation of its charter or by-laws, (ii) in default under or in breach of, and no event has occurred which, with notice or lapse of time or both, would constitute a default or breach under or result in the creation or imposition of any Lien upon any of their property or assets pursuant to, any material contract, agreement, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets are subject or (iii) is in violation in any respect of any law, rule, regulation, ordinance, directive, judgment, decree or order, foreign and domestic, to which the Company or its Subsidiaries or any of its respective properties or assets is subject, except, in the case of clauses (ii) and (iii) above, any violation or default that would not have a Material Adverse Effect.
 
 
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(g)      Authorization of Rights.  The Rights to be issued and distributed by the Company pursuant to the Offering have been duly and validly authorized and, when issued and delivered in accordance with the terms of the Offer Documents, will be duly and validly issued, and will constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms, no holder of the Rights is or will be subject to personal liability by reason of being such a holder, and the Rights will conform in all material respects to the description thereof contained in the Registration Statement and the related Prospectus.
 
(h)       Authorization of Common Stock.  The shares of Common Stock registered in the Registration Statement has been duly and validly authorized and reserved for issuance and are free of statutory and contractual preemptive rights and are sufficient in number to meet the exercise requirements of the Offering and the shares of Common Stock, when so issued and delivered against payment therefor in accordance with the terms of the Offering, will be duly and validly issued, fully paid and non-assessable, with no personal liability attaching to the ownership thereof. The shares of common stock will conform in all material respects to the descriptions thereof contained in the Prospectuses.
 
(i)        OTCQB Quotation System.  The Company's common stock is quoted on the OTCQB™ system.  The Company has not received an oral or written notification from the Financial Industry Regulatory Authority, Inc. (“FINRA”) or any Governmental Authority having jurisdiction over the Company or any of its Subsidiaries or any of their properties or assets of any inquiry or investigation or other action that would cause the common stock registered in the Registration Statements to not be quoted on OTCQBTM.
 
(j)        Capitalization.  The Company has an authorized capitalization as set forth under the caption “Capitalization” in the Prospectuses, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and have been issued in compliance with federal and state securities laws.  None of the outstanding shares of Company capital stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in all material respects in the Registration Statement and the Prospectuses. The description of the Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Registration Statement and the Prospectuses accurately and fairly presents in all material respects the information required to be shown with respect to such plans, arrangements, options and rights.
 
(k)       Properties.  The Company owns or leases all such assets or properties as are necessary to the conduct of its business as presently operated and as proposed to be operated as described in the Registration Statement and the Prospectuses. The Company has good and marketable title in fee simple to all material assets, real property and personal property owned by it, in each case free and clear of any Lien, except for such Liens or loans as are described in the Registration Statement and the Prospectuses or as do not materially diminish the value of such property or materially interfere with the Company’s use thereof. Any assets or real property and buildings held under lease or sublease by the Company is held under valid, subsisting and enforceable leases with such exceptions as are not material to, and do not materially interfere with, the use of such assets or property by the Company, in each case except as described in the Registration Statement and the Prospectuses.  Neither the Company nor any Subsidiary has received any notice of any material claim adverse to its ownership of any real or personal property or of any material claim against the continued possession of any real property, whether owned or held under lease or sublease by the Company or any Subsidiary.
 
 
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(l)        Consents.  Except as described in the Registration Statement or the Prospectuses, the Company and its Subsidiaries have all material required Consents, to own, lease and operate their properties and conduct their businesses as presently being conducted, and each such Consent is valid and in full force and effect.  The Company has not received notice of any investigation or proceedings which results in or, if decided adversely to the Company, could reasonably be expected to result in, the revocation or modification of any Consent that would have a Material Adverse Effect, except as described in the Registration Statement or the Prospectuses.
 
(m)      Conflicts.  The execution, delivery and performance of this Agreement by the Company, the issuance of the Rights in accordance with the terms of the Offer Documents, and the issuance of shares of Common Stock in accordance with the terms of the Offering, and the consummation by the Company of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or to which any of the properties or assets of the Company or any of its Subsidiaries is subject, except where such conflict, breach, violation or default would not cause or constitute a Material Adverse Effect; nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any of its Subsidiaries or any statute or any order, rule or regulation of any Governmental Authority (except, in the case of any such statute, order, rule or regulation, where such violation would not cause or constitute a Material Adverse Effect); and except for the registration of the shares of common stock on the Registration Statement under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the distribution of the Rights and the sale of the shares of common stock by the Company, no consent, approval, authorization or order of, or filing or registration with, any such court or Governmental Authority is required for the execution, delivery and performance of this Agreement by the Company and the consummation by it of the transactions contemplated hereby.
 
(n)      Registration Rights.  Except as otherwise set forth in the Registration Statement and the Prospectuses, there are no contracts, agreements or understandings between the Company and any Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such Person or to require the Company to include such securities in the securities registered pursuant to the Registration Statements or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act.  No holder of any security of the Company has any rights of rescission or similar rights with respect to such securities held by them.
 
 
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(o)      Damage and Loss.  Except as disclosed in the filings made by the Company under the Exchange Act or in the Prospectuses, neither the Company nor any of its Subsidiaries has sustained, since the latter of the date of the filings made by the Company under the Exchange Act or the Prospectuses any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and, since such date or after such date and except as disclosed in the filings made under the Exchange Act or the Prospectuses, there has not been any material change in the capital stock or long-term debt of the Company or any of its Subsidiaries or any Material Adverse Change.  Since the date of the latest balance sheet presented in or incorporated into the Prospectuses by reference, the Company has not incurred or undertaken any liabilities or obligations, whether direct or indirect, liquidated or contingent, matured or un-matured, or entered into any transactions, including any acquisition or disposition of any business or asset, which are material to the Company, except for liabilities, obligations and transactions which are disclosed in the Registration Statements, any Preliminary Prospectus and the Prospectuses.
 
(p)      Obligations.  Since the date of the latest balance sheet presented in or incorporated into the Registration Statement by reference, the Company has not incurred or undertaken any liabilities or obligations, whether direct or indirect, liquidated or contingent, matured or un-matured, or entered into any transactions, including any acquisition or disposition of any business or asset, which are material to the Company, except for liabilities, obligations and transactions which are disclosed in the Registration Statement or which do not have a Material Adverse Effect.
 
(q)      Accountants.  Grant Thornton, LLP (“Grant Thornton”) whose report relating to the Company is incorporated by reference into the Registration Statement, is or were independent public accountants as required by the Securities Act, the Exchange Act and the rules and regulations promulgated by the Public Company Accounting Oversight Board (the “PCAOB”).  To the best of the Company’s knowledge, Grant Thornton is duly registered and in good standing with the PCAOB.  Grant Thornton has, during the periods covered by the financial statements on which they reported incorporated by reference into the Registration Statement, the Preliminary Prospectuses and the Prospectuses, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
 
(r)       Financial Statements.  The financial statements, including the notes thereto, and any supporting schedules included in or incorporated by reference into the Registration Statement, any Preliminary Prospectuses and the Prospectuses present fairly, in all material respects, the financial position as of the dates indicated and the cash flows and results of operations for the periods specified of the Company.  Except as otherwise stated in the Registration Statement, any Preliminary Prospectus and the Prospectuses, said financial statements have been prepared in conformity with United States generally accepted accounting principles applied on a consistent basis throughout the periods involved. Any supporting schedules included in the Registration Statement, any Preliminary Prospectus and the Prospectuses present fairly, in all material respects, the information required to be stated therein. No other financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement. The other financial and statistical information included in the Registration Statement, any Preliminary Prospectus and the Prospectuses present fairly, in all material respects, the information included therein and have been prepared on a basis consistent with that of the financial statements that are incorporated by reference into the Registration Statement, such Preliminary Prospectus and the Prospectuses and the books and records of the respective entities presented therein.
 
 
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(s)       Pro Forma Adjustments.  There are no pro forma or as adjusted financial statements which are required to be included in or incorporated by reference into the Registration Statement, any Preliminary Prospectus and the Prospectuses in accordance with Regulation S-X under the Securities Act.
 
(t)       Accounting System.  Except as disclosed in the Registration Statement and the Prospectuses, the Company maintains a system of internal accounting and other controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorizations, and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain accountability for assets.
 
(u)      Internal Controls.  The Company has not been informed of: (i) except as disclosed in the Registration Statement and the Prospectuses, any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
 
(v)      Sarbanes Oxley.  The Company is in material compliance with the provisions of the Sarbanes-Oxley Act of 2002, as amended applicable to the Company, and the rules and regulations promulgated thereunder and related or similar rules and regulations promulgated by any other Governmental Authority or self regulatory entity or agency, except for violations which, singly or in the aggregate, are disclosed in the Prospectuses or would not have a Material Adverse Effect.
 
(w)      Certain Relationships.  To the best of the Company’s knowledge, no relationship, direct or indirect, exists between or among any of the Company or any of its Subsidiaries, on the one hand, and any director, officer, shareholder, customer or supplier of the Company or its Subsidiaries, on the other hand, which is required by the Securities Act or the Exchange Act to be described in the Registration Statement or the Prospectuses which is not so described as required.  Except as disclosed in the Registration Statement and the Prospectuses, there are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members. The Company has not, in violation of Sarbanes Oxley, directly or indirectly, including through any Affiliate of the Company (other than as permitted under the Sarbanes Oxley for depositary institutions), extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer of the Company.
 
(x)       Legal Proceedings.  Except as described in the Registration Statement and the Prospectuses, there are no legal or governmental proceedings pending to which the Company or any of its Subsidiaries is a party or of which any property or asset of the Company or any of its Subsidiaries is the subject which, if determined adversely to the Company or any of its Subsidiaries, are reasonably likely to have a Material Adverse Effect; and to the best of the Company’s knowledge, except as disclosed in the Prospectuses, the Company does not know of any such proceedings that are threatened or contemplated by Governmental Authorities or others.
 
 
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(y)      Taxes.  The Company and its Subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them, except where the failure to make such filings or make such payments, either individually or in the aggregate, would not have a Material Adverse Effect.  The Company believes in good faith that it has made adequate charges, accruals and reserves in its financial statements above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its Subsidiaries has not been finally determined.
 
(z)       Insurance.  Each of the Company and its Subsidiaries maintains insurance of the types and in the amounts which the Company believes to be reasonable and sufficient for a company of its size operating in the Company’s industry. There are no material claims by the Company or any of its Subsidiaries under any policy or instrument described in this paragraph as to which any insurance company is denying liability or defending under a reservation of rights clause.  All of the insurance policies described in this paragraph are in full force and effect in all material respects.  The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.
 
(aa)     Intellectual Property.  Subject to the statements and disclosures made in the Registration Statement and the Prospectuses, the Company and its Subsidiaries own or possess or have the right to use on reasonable terms all Intellectual Property necessary to carry on their respective businesses as described in the Registration Statement or Prospectus.  Except as described in the Registration Statement or the Prospectuses, neither the Company nor any of its Subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interests of the Company or any of its Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, might result in a Material Adverse Effect. To the knowledge of the Company, there is no unauthorized use, infringement or misappropriation of any of the Intellectual Property by any third party, employee or former employee that would result in a Material Adverse Effect. Each agreement and instrument pursuant to which any Intellectual Property is licensed to the Company or any of its subsidiaries is in full force and effect, has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company or the applicable subsidiary, as the case may be, enforceable against the Company or such subsidiary in accordance with its terms, except as enforcement thereof may be subject to bankruptcy, insolvency or other similar laws relating to or affecting creditors rights generally or by general equitable principles; the Company and its subsidiaries are in compliance in all material respects with their respective obligations under all license agreements for Intellectual Property and, to the knowledge of the Company, all other parties to any of such license agreements are in compliance in all material respects with all of their respective obligations there under; to the knowledge of the Company, no event or condition has occurred or exists that gives or would give any party to any license agreement for Intellectual Property the right, either immediately or with notice or passage of time or both, to terminate or limit (in whole or in part) any such license agreement or any rights of the Company or any of its subsidiaries there under, to exercise any of such party’s remedies thereunder, or to take any action that would adversely affect any rights of the Company or any of its subsidiaries thereunder or that might have a Material Adverse Effect and the Company is not aware of any facts or circumstances that would result in any of the foregoing or give any party to any license agreement for Intellectual Property any such right; and neither the Company nor any of its subsidiaries has received any notice of a material default, breach or non-compliance under any license agreement for Intellectual Property.
 
 
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(bb)    Applicable Laws.  Except as described in any Preliminary Prospectus, the Prospectuses or the Registration Statement or except as would not have a Material Adverse Effect, the  Company: (i) is and at all times has been in material compliance with all Applicable Laws (ii) has not received any notice of adverse finding, warning letter, untitled letter or other correspondence or notice from any Governmental Authority alleging or asserting noncompliance with any Applicable Laws or Authorizations; (iii) possesses all Authorizations and such Authorizations are valid and in full force and effect and are not in violation of any term of any such Authorizations; (iv) has not received notice of any claim, suit, proceeding, hearing, enforcement, audit, investigation, arbitration or other action from any Governmental Authority or third party alleging that any product, operation or activity of the Company is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Authority or third party is considering any such claim, suit, proceeding, hearing, enforcement, audit, investigation, arbitration or other action; (v) has not received notice that any Governmental Authority has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Authority is considering such action; (vi) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission).
 
(cc)     Other Securities Offers.  Neither the Company nor any of its Affiliates has, prior to the date hereof, made any offer or sale of any securities which are required to be “integrated” pursuant to the Securities Act with the offer and sale of the shares of common stock pursuant to the Registration Statement.
 
(dd)    Fees.  Except as described in the Registration Statement and the Prospectuses, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee or other compensation by the Company with respect to the issuance or exercise of the Rights or the sale of the shares of common stock included in the Registration Statement or pursuant to any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, the Company’s officers, directors and employees or Affiliates
 
(ee)     Brokers.  There are no contracts, agreements or understandings between the Company and any Person that would give rise to a valid claim against the Company or the Investor for a brokerage commission, finder’s fee or other like payment in connection with the transactions contemplated by this Agreement. Other than Ancora Securities, Inc., the Company has not employed any brokers, dealers or underwriters in connection with solicitation of exercise of Rights in the Rights Offering.
 
 
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(ff)      Political Contributions.  Neither the Company nor, to the Company’s knowledge, any of the Company’s officers, directors, employees or agents has at any time during the last ten (10) years: (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other Person charged with similar public or quasi-public duties, other than payments that are not prohibited by the laws of the United States or any jurisdiction thereof.
 
(gg)    Price Stabilization.  The Company has not and will not, directly or indirectly through any officer, director or Affiliate of the Company or through any other Person: (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the issuance of the Rights or the sale or resale of the shares of the Company's common stock included in the Registration Statements, (ii) since the filing of the Registration Statements sold, bid for or purchased, or paid any Person (other than Ancora Securities, Inc.) any compensation for soliciting exercises or purchases of, the Rights, or shares of Common Stock included in the Registration Statement and (iii) until the later of the expiration of the Rights or the completion of the distribution (within the meaning of Regulation M under the Exchange Act) of the shares of common stock  included in the Registration Statements sell, bid for or purchase, apply or agree to pay to any Person (other than Ancora Securities, Inc.) any compensation for soliciting another to purchase any other securities of the Company (except for the solicitation of the exercises of Rights pursuant to this Agreement). The foregoing shall not apply to the offer, sale, agreement to sell or delivery with respect to: (i) shares of common stock included in the Registration Statements, as described in the Prospectuses, or (ii) any shares of common stock sold pursuant to the Company’s employee benefit plans.
 
(hh)    Forward Looking Statements.  Each “forward-looking statement” (within the meaning of Section 27A of the Securities Act or Section 21E of the Exchange Act) included in the Registration Statement and the Prospectuses has been made or reaffirmed with a reasonable basis and has been disclosed in good faith.
 
Section 4.          Representations and Warranties of Investor. The Investor represents and warrants to the Company as follows:
 
(a)       Organization and Authority. The Investor is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and has all requisite power and authority to enter into and perform its obligations under this Agreement.
 
(b)      Authorization. This Agreement has been duly and validly authorized, executed and delivered by the Investor and constitutes a binding obligation of the Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).
 
 
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(c)       Purchase for Investment.  The Investor (i) is acquiring its Additional Stock solely for investment with no present intention to distribute any of the Additional Stock to any Person, (ii) will not sell or otherwise dispose of any of the Additional Stock, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (iii) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision and (iv) is an “accredited investor” (as that term is defined by Rule 501 of the Securities Act).
 
(d)      Sufficient Funds.  The Investor has and will have prior to the applicable Closing Date, sufficient cash, available lines of credit or other sources of immediately available funds to enable it to timely deliver to the Company the Purchase Price payable hereunder by the Investor.
 
(e)       Ownership.  As of the close of business on the Business Day immediately preceding the date hereof, the Investor beneficially owns (as determined in accordance with Rule 13d-3 under the Exchange Act) the number of shares of Common Stock set forth next to the Investor’s name on Schedule 2 and, other than as set forth on Schedule 2, does not beneficially own (as determined in accordance with Rule 13d-3 under the Exchange Act) or have the right to vote with respect to any equity securities of the Company.
 
(f)       No Conflict.  The execution, delivery and performance by the Investor of this Agreement and the consummation by it of the transactions contemplated hereby will not require any material approval or otherwise violate any statute, order, rule or regulation of any Governmental Authority having jurisdiction over the Investor or any of its properties.
 
(g)      No Broker.   The Investor has not employed any broker or finder in connection with the transactions contemplated by this Agreement.
 
Section 5.          Deliveries at Closings.
 
(a)       Company Deliverables.  At the Closing, the Company will deliver to the Investor the following:
 
(i)          A certificate of a senior officer of the Company on the Company's behalf to the effect that (A) the representations and warranties of the Company in Section 3 are true and correct on and as of the Closing Date as if made on such date, except for representations and warranties made as of a specified date, which will be true and correct as of such specified date, and except, in all cases, as would not result in a Material Adverse Change, (B) the conditions set forth in Section 8, have been satisfied in all material respects and (C) the Company has complied in all material respects with its obligations hereunder that are required to be complied with by it at or prior to the Closing;
 
(ii)         One or more stock certificates, free and clear of all restrictive and other legends, evidencing the number of shares of Additional Stock purchased and registered in the name of the Investor, or at the election of the Investor, the number of shares to by electronically provided by the DTC system to the Investor's brokerage account; and
 
(iii)        a copy of resolutions duly adopted by the Board of Directors of the Company and certified by its corporate secretary, taking all corporate actions necessary to approve of this Agreement and the actions required to consummate closing under this Agreement.
 
 
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 (b)     Investor Deliverables. At the Closing, the Investor will deliver to the Company payment of the Purchase Price less the Fee, as set forth Section 2 of this Agreement in United States dollars by means of wire transfer of immediately available funds to an account specified in writing by the Company.
 
Section 6.          Covenants.
 
(a)       Registration Statement.  The Company will use its commercially reasonable efforts: to cause the Registration Statement and any amendments thereto to become effective; to advise Investor, promptly after it receives notice of the times when Registration Statement, or any amendments thereto, become effective, prepare the Prospectus and to file such Prospectus pursuant to Rule 424(b) under the Securities Act within the time prescribed by such rule and provide Investor with the filed Prospectus as required by the Securities Act.
 
(b)      Blue Sky Laws.  The Company shall qualify or register the Additional Stock, included in the Registration Statement, for sale under (or obtain exemptions from the application of) the state securities or blue sky laws of Ohio.
 
(c)       Rights Offering.  The Company shall commence mailing the Rights Offer Documents to record holders of the common stock not later than the fifth business day following the record date for the Rights Offering, and complete such mailing as soon as practicable.
 
(d)      Reservation of Common Stock.  The Company shall reserve and keep available for issue such number of authorized but unissued shares of Common Stock as will be sufficient to permit the sale of the Additional Stock and the exercise in full of all Rights, except as otherwise contemplated by the Rights Offer Prospectus.
 
(e)       Conduct of Business Prior to Closing.  From the date of this Agreement until the  Closing, except with the consent of the Investor,
 
i.           The Company shall conduct its business in the usual, ordinary course, in substantially the same manner as previously conducted, in accordance with applicable law;

ii.          The Company shall, renew, keep in full force and effect and preserve its corporate existence, business organization and material rights, franchises, permits, and licenses;

iii.         The Company will not sell, issue or otherwise permit to become outstanding any debt or equity securities of the Company or any Subsidiary or any rights or options to acquire or convert into such securities, except as contemplated by this Agreement and except for employee stock options and shares issued upon the exercise of employee stock options in accordance with their term existing as of the date of this Agreement;
 
iv.         The Company shall not violate any applicable law, or relinquish or terminate any rights, licenses, franchises, permits or other authorizations that would have a Material Adverse Effect on the Company; and
 
 
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v.          The Company shall not implement or adopt any change in its accounting principles, practices or methods, other than as may be required by changes in laws or regulations or GAAP.

Section 7.          Indemnification
 
(a)       Indemnification by Company.  The Company indemnifies the Investor, and each of their respective affiliates, officers, directors, partners, employees and agents against, and agrees to hold the Investor and each of their respective affiliates, officers, directors, partners, employees and agents harmless from, all losses, liabilities and expenses (including, but not limited to, reasonable fees and expenses of counsel and expenses of investigation) incurred directly or indirectly because (i) any matter that is the subject of a representation and warranty contained herein is not as represented and warranted, (ii) the Company fails to fulfill in any respect any of its obligations under this Agreement, or under any document delivered in accordance with this Agreement, or (iii) of actual or threatened claims brought against the Company, its subsidiaries, the Investor or its affiliates or any of their respective officers, directors, partners, employees and agents in connection with or arising out of the entering into of this Agreement and the transactions contemplated hereby, other than with regard to a failure or alleged failure of the Investor to fulfill its obligations under this Agreement.
 
(b)       Indemnification by Investor. The Investor indemnifies the Company and its affiliates and each of their respective officers, directors, partners, employees and agents against, and agrees to hold the Company and its affiliates and each of their respective officers, directors, partners, employees and agents harmless from, all losses, liabilities and expenses (including, but not limited to, reasonable fees and expenses of counsel and expenses of investigation) incurred directly or indirectly because (i) any matter that is the subject of a representation and warranty contained herein is not as represented and warranted, (ii) Investor fails to fulfill in any respect any of its obligations under this Agreement, or under any document delivered in accordance with this Agreement, or (iii) of actual or threatened claims brought against Investor, their subsidiaries, the Company or its affiliates or any of their respective officers, directors, partners, employees and agents in connection with or arising out of the entering into of this Agreement and the transactions contemplated hereby, other than with regard to a failure or alleged failure of the Company to fulfill its obligations under this Agreement.
 
(c)       Indemnification Sole Remedy. From and after the Closing, the indemnification in Section 7(a) or 7(b), as the case may be, will be the sole remedy of the injured party because any matter which is the subject of a representation and warranty contained herein is not as represented and warranted, unless resulting from intentional fraud. Any claim for indemnification must be made not later than 60 days after the first anniversary of the Closing Date, in a written notification to the party from which indemnification is sought which describes in reasonable detail the claim and the facts on which it is based.  If an indemnification claim is not brought within the time required by this Agreement, it may not be brought thereafter.
 
(d)      Limitation of Company's Liability.  Prior to Closing the Company's liability for any breach of this Agreement or the falseness of any representation or warranty is limited to the maximum amount of twenty thousand ($20,000) Dollars.  After Closing the Company's liability for any breach of this Agreement, the falseness of any representation or warranty or any claim of indemnity is limited to the amount of Three Million Seven Hundred Fifty Thousand ($3,750,000.00) Dollars.
 
 
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(e)       Limitation of Investor's Liability. Prior to Closing the Investor's liability for any breach of this Agreement or the falseness of any representation or warranty is limited, at the Company's election to either (i) an action of specific performance to require the Investor to consummate Closing; or (ii) the amount of One Million Three Hundred Fifty Thousand ($1,350,000) Dollars, which amount the Investor had loaned to the Company, and will be paid as liquidated damages, as actual damages resulting from a default by Investor are not possible for the parties to calculate.  After Closing the Investor's liability for any breach of this Agreement, the falseness of any representation or warranty or any claim of indemnity is limited to the amount of twenty thousand ($20,000) Dollars plus an amount, if any, up to the Purchase Price that the Company is required to pay to any third party due to the falseness of any representation or warranty of the Investor.
 
Section 8.          Conditions to Closings.
 
(a)       Conditions of the Company.  The obligation of the Company to sell the Additional Stock are subject to the fulfillment, prior to or at Closing, of the following conditions:
 
i.           The Investor paying the Purchase Price, less the Fee as set forth in this Agreement;
 
ii.          The representations and warranties of the Investor in Section 4 are true and correct as of the Closing Date, except for representations and warranties made as of a specified date, which will be true and correct as of such specified date;
 
iii.          No judgment, injunction, decree or other legal restraint shall prohibit, or have the effect of rendering unachievable, the consummation of the transactions contemplated by this Agreement; and
 
iv.         The Registration Statement has become effective.
 
(b)      Conditions of the Investor.  The obligation of the Investor to consummate the purchase of the Additional Stock at Closing are subject to the fulfillment, prior to or at Closing, of the following conditions:
 
i.           The Company's delivery of the Additional Stock as set forth in this Agreement;
 
ii.          The Company having (a) expanded its Board of Directors to seven members, and (b) the two members appointed to fill the two vacancies created by the expansion of the Board of Directors being satisfactory to the Investor, at the Investor's sole discretion.
 
iii.          The representations and warranties of the Company in Section 3 shall be true and correct as of the date hereof, except for representations and warranties made as of a specific date, which will be made as of such specified date;

iv.         The Company shall have complied in all material respects with its obligations under this Agreement that are required to be complied with at or prior to the Closing;
 
 
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v.          No judgment, injunction, decree or other legal restraint shall prohibit, or have the effect of rendering unachievable, the consummation of the transactions contemplated by this Agreement; and
 
vi.         The Registration Statement has become effective.
 
Section 9.          Termination.
 
This Agreement may be terminated at any time prior to the First Closing:
 
i.           By mutual consent of the Company and the Investor;
 
ii.          By the Investor or by the Company, if, without fault of the terminating party, the  Closing does not occur on or before December, 2011;
 
iii.         By the Investor, if any of the representations and warranties of the Company contained in this Agreement were not complete and accurate in all material respects;
 
iv.         By the Investor upon any breach of this Agreement by the Company;
 
v.          By the Company, if any of the representations and warranties of the Investor contained in this Agreement were not complete and accurate in all material respects; and
 
vi.         By the Company upon any breach of this Agreement by the Investor.
 
Section  10.       Further Assurances.
 
The Company and the Investor shall execute and deliver, such instruments and take such other actions as may reasonably be required in order to carry out the intent of this Agreement
 
Section  11.       Notices.

All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) sent by facsimile with immediate telephonic confirmation or (c) sent by registered or certified mail, return receipt requested, postage prepaid, to the parties hereto as follows.

If to Investor:
Attention: Richard Barone
2000 Auburn Drive, Suite 300
Cleveland, Ohio 44122

If to the Company:
Dennis Raefield
Mace Security International, Inc.
1530 No. Main Suite #230
Walnut Creek, CA 94596
Fax:  (925) 933-2730
 
 
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with a copy to:
Gregory Krzemien
Mace Security International, Inc.
240 Gibraltar Road, Suite 220
Horsham, Pennsylvania 19044
Fax:  (215) 672-8900
 Section 12.       Parties.

This Agreement shall inure to the benefit of and be binding upon Investor, the Company and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the Person or Persons, if any, who control Investor within the meaning of Section 15 of the Securities Act. Nothing in this Agreement shall be construed to give any Person, other than the Persons referred to in this Section, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein.

Section 13.        Amendment.

This Agreement may not be amended or modified except in writing signed by each of the parties hereto.

Section 14.        Governing Law; Venue.
 
This Agreement shall be deemed to have been executed and delivered in the State of Delaware and both this Agreement and the transactions contemplated hereby shall be governed as to validity, interpretation, construction, effect, and in all other respects by the laws of the State of Delaware, without regard to the conflicts of laws principles thereof.  Each of the Investor and the Company: (a) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement and/or the transactions contemplated hereby shall be instituted exclusively in the Chancery Court of the State of Delaware, or in any United States District Court having venue and jurisdiction, (b) waives any objection which it may have or hereafter to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the jurisdiction of Chancery Court of the State of Delaware, or in the United States District Court for any District having venue and jurisdiction in any such suit, action or proceeding.  Each of the Investor and the Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Chancery Court of the State of Delaware, or in the United States District Court for any District having venue and jurisdiction and agrees that service of process upon the Company mailed by certified mail to the Company’s address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding, and service of process upon the underwriters mailed by certified mail to the Investor’s address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service process upon Investor, in any such suit, action or proceeding.
 
 
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Section 15.        Assignment.
 
    This Agreement may not be assigned by the Investor without the advance written consent of the Company which shall be granted to without in the sole discretion of the Company, and any purported assignment shall be null and void in the absence of such consent; provided, however that no such consent shall be required for an assignment of a portion of Additional Stock under Section 2(b) of this Agreement, or resulting from merger or operation of law. This Agreement will be binding upon, and will inure to the benefit of and be enforceable by, the parties hereto and their respective successors and permitted assigns.
 
Section 16.        Severability.

If any term or provision of this Agreement or the performance thereof shall be invalid or unenforceable to any extent, such invalidity or unenforceability shall not affect or render invalid or unenforceable any other provision of this Agreement and this Agreement shall be valid and enforced to the fullest extent permitted by law.

Section  17.       Entire Agreement.

This Agreement, together with the exhibit attached hereto and as the same may be amended from time to time in accordance with the terms hereof, contains the entire agreement among the parties hereto relating to the subject matter hereof and there are no other or further agreements outstanding not specifically mentioned herein.
 
Section 17.        Construction.
 
(a)          the word “or” will not be exclusive;
 
(b)          inclusion of items in a list will not be deemed to exclude other terms of similar import;
 
(c)          all parties will be considered to have drafted this Agreement together, with the benefit of counsel, and no provision will be strictly construed against any Person by reason of having drafted such provision;
 
(d)          the word “include” and its correlatives means to include without limitation;
 
(e)          terms that imply gender will include all genders;
 
(f)          defined terms will have their meanings in the plural and singular case;
 
(g)          references to Sections, Schedules, Annexes and Exhibits are to the Sections, Schedules, Annexes and Exhibits to this Agreement;
 
(h)          financial terms that are not otherwise defined have the meanings ascribed to them under United States generally accepted accounting principles as of the date of this Agreement;
 
(i)          the use of “will” as an auxiliary will not be deemed to be a mere prediction of future occurrences; and
 
 
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(j)          the headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.

Section  19.       Counterparts.

This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. Delivery of a signed counterpart of this Agreement by facsimile or other electronic transmission shall constitute valid and sufficient delivery thereof.
 
SIGNATURES ON NEXT PAGE FOLLOWING
 
 
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.

 
MACE SECURITY INTERNATIONAL, INC.
   
 
By:
/s/ Dennis R. Raefield
   
Name: Dennis Raefield
   
Title: President
 
 
MERLIN PARTNERS, LP
   
 
By:
/s/ Richard A. Barone
   
Name: Richard A. Barone
   
Title: Chairman
 
 
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Schedule I - Definitions
 
"Additional Stock" has the meaning set forth in the recitals to this Agreement, and is defined as an amount of the Company's common stock required to be sold to and purchased by Merlin Partners, L.P. and its assignees, equal to $4,000,000 in amount, valued at the Offering Price and registered under the Securities Act.
 
“Affiliate” has the meaning set forth in Rule 12b-2 under the Exchange Act.
 
“Agreement” has the meaning set forth in the preamble and is defined as this Agreement executed between the Company and the Investor.
 
"Applicable Laws" all statutes, rules, regulations or guidance applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured, distributed or sold by the Company or any component thereof.
 
"Authorizations" mean any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any Applicable Laws for the Company to legally conduct its business.
 
“Beneficial Ownership” and “Beneficially Owned” shall be determined in accordance with Rule 13d-3 under the Exchange Act.
 
“Board of Directors” means the Board of Directors of the Company.
 
“Business Day” means any day that is not a Saturday, a Sunday or a day on which banking institutions are required or permitted by law or other governmental action to be closed in the State of Delaware.
 
“Closing” means the consummation of the Company's sale of the Additional Stock to the Investor to take place under this Agreement at the  Closing.
 
“Closing Date” means the date that the Closing takes place as set forth in this Agreement.

 “Code” means the Internal Revenue Code of 1986, as amended, in effect on the date hereof.

“Common Stock” means the common stock of the Company, par value $.01.
 
“Company” means Mace Security International, Inc.
 
“Company Financial Statements” has the meaning set forth in Section 3(f).
 
“Company SEC Documents” has the meaning set forth in Section 3(e).
 
 
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"Consents" means consents, approvals, authorizations, orders, registrations, qualifications, licenses, filings and permits of, with and from all judicial, regulatory and other Governmental Authorities and all third parties, foreign and domestic.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended. “Eligible Holders” has the meaning set forth in Section 10(a)(i).
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder.

“Effective Time” or "Effective Date" means the date and the time as of which the Registration Statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission.”

"Fee" has the meaning set forth in Section 2(b) and is the Two Hundred Fifty Thousand ($250,000) to be paid to Investor in exchange for the Investor's obligation to purchase the Additional Stock as set forth in this Agreement; which Fee is to be paid at Closing as a credit against the Purchase Price.

"FINRA" is defined in Section 3(i) of this Agreement and means the Financial Industry Regulatory Authority, Inc.
 
“Governmental Authority” means any court, administrative agency or commission or other governmental authority or instrumentality, whether federal, state, local or foreign.

"Grant Thorton" means the firm of Grant Thornton, LLP.

“Indemnified Person” means a Person who is indemnified under the provisions of  has the meaning set forth in Section 7.

“Indemnifying Parties” means the Persons who have the obligation to indemnify one or more Persons under the provisions of Section 7.
 
“Investor” means Merlin Partners, LP.
 
"Investor Information" is defined in Section 3(b) and means the written information regarding the Investor furnished to the Company by or on behalf of Investor specifically for inclusion in the Registration Statement.
 
“Investor's Beneficial Ownership” means the aggregate percent of the outstanding shares of Common Stock beneficially owned by the Investor and the Investors determined in accordance with Rule 13d-3 under the Exchange Act.
 
"Intellectual Property" means all patents, patent rights, patent applications, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names, service names and other intellectual property.
 
 
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“Lien” means any mortgage, hypothecation, pledge, security interest, agreement or arrangement, encumbrance, community property interest, equitable interest, claim, Tax, lien or charge, restriction or limitation of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof or any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership), any sale of receivables with recourse or any filing of a financing statement as debtor under the Uniform Commercial Code or any similar statute, or any agreement to grant, create, effect, enter into or file any of the foregoing.
 
“Material Adverse Effect” or “Material Adverse Change” means any circumstance, event, change, development or effect that, individually or in the aggregate, (i) is material and adverse to the business, assets, results of operations or financial condition of the Company and its subsidiaries taken as a whole, (ii) would materially impair the ability of the Company to perform its obligations under this Agreement or to consummate the Closing; provided, however, that in determining whether a Material Adverse Effect or Material Adverse Change has occurred, there shall be excluded any effect or change to the extent resulting from the following: (A) changes, after the date hereof, in U.S. generally accepted accounting principles (“GAAP”), (B) changes, after the date hereof, in applicable laws, rules and regulations or interpretations thereof, (C) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Investor, (D) changes in general economic, monetary or financial conditions, including changes in prevailing interest rates, or credit markets, (E) changes in the market price of the Common Stock (but not the underlying causes of such changes), and (F) the failure of the Company to meet any internal or public projections, forecasts, estimates or guidance for any period ending on or after the date hereof (but not the underlying causes of such failure).

          “knowledge of the Company” (or similar language) shall mean the knowledge of the officers of the Company who are named in the Prospectuses, with the assumption that such officers shall have made reasonable and diligent inquiry of the matters presented (with reference to what is customary and prudent for the applicable individuals in connection with the discharge by the applicable individuals of their duties as officers or directors of the Company).

          “Offering” means the offering for sale and the registration under of Securities Act of: (i) the Rights Offering Stock, plus (ii) the Additional Stock, as set forth in the Registration Statement.

          "Offering Documents" means the soliciting and subscription materials relating to the Offering including any related preliminary prospectus, subscription agreements, rights certificate and the related final Prospectus.

          “OTCQB” means the electronic stock quotation market operated by OTC Market, Inc which is only available to Over-the-Counter securities that are registered and fully reporting with the Commission or that report to banking or insurance regulators for.

          "PCAOB" is defined in Section 3(q) and means the Public Company Accounting Oversight Board.

          "Per Share Price"  is defined in Section 2(a) of this Agreement and means the amount equal to the per share subscription exercise price that the Company's shareholders are granted in the Rights Offering.
 
 
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“Person” means an individual, corporation, partnership, association, joint stock company, limited liability company, joint venture, trust, Governmental Entity, unincorporated organization or other legal entity.
 
“Prospectus” or "Prospectuses" means such final prospectus and multiple copies thereof, as are filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Securities Act with respect to Registration Statement and Offering.

"Purchase Price" is defined in Section 2(b) and means the amount of Four Million ($4,000,000) Dollars.

“Registration Expense” has the meaning set forth in Section 10(f).
 
“Registration Statement” is defined in the recitals of this Agreement and means the registration statement on Form S-1, as amended, filed by the Company with respect to the Registered Stock and all documents incorporated by reference into the Registration Statement.
 
"Registered Stock" is defined in the recitals of this Agreement and means the Rights Offering Stock and the Additional Stock.

“Regulatory Approvals” means all approvals and authorizations of, filings and registrations with or notifications to, Governmental Entities, to the extent applicable and required to permit the Company to sell to the Investor, and to permit the Investor to acquire, the Committed Shares without being in violation of applicable law.

"Rights" is defined in the recitals of this Agreement and means the non-transferable subscription rights distributed by the Company to its stockholders of record, as set forth in the Registration Statement.
 
"Rights Offering" is defined in the recitals of this Agreement and means the Company's offer to its shareholders pursuant to which the Company will distribute to holders of record of its common stock non-transferable subscription rights to purchase shares of the Company's common stock, at a subscription price and as set forth in the Registration Statement.
 
"Rights Offering Stock"  has the meaning set forth in the recitals to this Agreement, and is defined an amount of the Company's common stock equal to three times the Company's currently outstanding common stock, as of the record date of the Rights Offering.

“Regulation S-K” means Regulation S-K of the Commission.

 “Regulation S -X” means  Regulation S-X of the Commission.

"Sarbanes Oxley" means the provisions of the Sarbanes-Oxley Act of 2002, as amended.
 
“Securities Act” means the Securities Act of 1933, as amended.
 
 
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“Tax” or “Taxes” means any federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add on minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any Governmental Entity.
 
“Tax Return” means any return, report, information return or other document (including any related or supporting information) required to be filed with any taxing authority with respect to Taxes, any claims for refunds of Taxes and any amendments or supplements to any of the foregoing.
 
 
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Schedule 2

Number of shares of Common Stock beneficially owned by the Investor

 
 
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EX-10.34 6 v216600_ex10-34.htm

EXHIBIT 10.34

MACE SECURITY INTERNATIONAL, INC.
PLACEMENT AGENT AND DEALER-MANAGER AGREEMENT
 
March 25, 2011
Ancora Securities, Inc.
As Placement Agent and Dealer-Manager
2000 Auburn Drive, Suite 300
Cleveland, Ohio 44122

Ladies and Gentlemen:
 
Mace Security International, Inc. (the "Company") is in the process of preparing a rights offering to its shareholders ("Rights Offering"), as set forth in a registration statement on Form S-1 (the "Registration Statement") to be filed with the Securities and Exchange Commission (the "Commission").  As set forth in the Registration Statement, the Company will distribute to holders of record of its common stock non-transferable subscription rights (the “Rights”) to subscribe for and purchase three shares of the Company’s common stock for each share owned on the record date.  The purchase price for each share of common offered in the Rights Offering will be at the per share price set forth in the Registration Statement ("Offering Price").
 
The following will confirm our agreement relating to the proposed offering of common stock (the “Offering”) to be undertaken by the Company of: (i) an amount of the Company's common stock equal to three times its currently outstanding common stock ("Rights Offering Stock"), and (ii) a further amount of the Company's common stock ("Additional Stock") equal to $4,000,000 in amount (valued at the Offering Price). The Rights Offering Stock and Additional Stock is hereafter referred to as the ("Registered Stock").

1.
The Offering.
 
The Company proposes to undertake the Offering, as set forth in the Company's Registration Statement, upon the effective date of the Registration Statement.
 
2.             The Rights Offering.
 
(a)           Basic Provisions.  As part of the Offering, the Company proposes to undertake a issuance of the Rights, pursuant to which each holder of the Company's common stock shall receive a Right to purchase shares of the Company's common stock for each share of common stock held of record at the close of business on the record date of the Rights Offering (the “Record Date”). Each Right will entitle the holder to subscribe for and purchase, at the Offering Price, three shares of Common Stock for every Right granted to such holder on the Record Date.
 
(b)           Non Transferable.  The Rights are non-transferrable and will not be quoted on any market.
 
(c)           Expiration.  The Rights will expire at 5:00 p.m., Eastern Standard time, on the twenty fifth day following the mailing of the prospectus for the Rights Offering subscription period (the “Expiration Date”). The Company shall have the right to extend the Expiration Date for up to an additional 30 trading days in its sole discretion.
 
 
 
 
 
(d)           Subscription Agent.  All funds from the exercise of Rights will be deposited with American Stock Transfer & Trust Company, LLC, as the subscription agent (the “Subscription Agent”) and held in a segregated account with the Subscription Agent pending a final determination of the number of shares of Common Stock to be issued pursuant to the exercise of Rights. As soon as is practicable, the Company shall conduct a closing of the Rights Offering (a “Closing”). In no event will the Company raise more than an aggregate of $14,000,000 in the Offering, including the Rights Offering.
 
(e)           Additional Stock.  Merlin Partners, LP ("Merlin") and the Company have executed a Securities Purchase Agreement dated even date hereof.  Pursuant to the terms of the Securities Purchase Agreement, the Company has agreed to sell to Merlin and Merlin's assignees the Additional Stock, valued at Four Million Dollars ($4,000,000) at the Offering Price.
 
(f)           Follow-On Offering.  If the Company does not sell all of the Rights Offering Stock in the Rights Offering, the Company reserves the right to offer such unsold shares to the public at the Offering Price, all as more fully described in the Registration Statement (the “Follow-On Offering”).  Ancora Securities, Inc. (“Ancora”) is being appointed under Section 3 of this Placement Agent and Dealer-Manager Agreement (this "Agreement") as the Company's exclusive placement agent and the dealer manager for the Offering.  The Company agrees not to make any Follow-On Offering, unless Ancora agrees in writing that a Follow-On Offering should be made.
 
(g)           Offering.  For purposes of clarification, the term Offering, as defined above in the first paragraph of this Agreement, shall mean the offering and sale of the Rights Offering Stock, and the Additional Stock, including the offering and sale to shareholders under the Rights, to Merlin Partners, L.P. and it assigns under the Securities Purchase Agreement dated the same date as this Agreement and to the public in the Follow-On Offering.
 
3.
Appointment as Placement Agent and Dealer-Manager; Roles of Placement Agent and Dealer-Manager.

The Company hereby engages and authorizes Ancora to be the sole exclusive placement agent for the Offering (“Placement Agent”) and the sole exclusive dealer-manager (the “Dealer-Manager”) for the Offering, in accordance with this Agreement.  During the period commencing with the date of this Agreement and ending ninety (90) days after the completion or termination of the Offering ("Exclusive Period"), the Company will not solicit, negotiate with or enter into any agreement with any other placement agent, financial advisor, dealer manager, brokers, dealers or underwriters or any other person or entity in connection with the Offering.  On the basis of the representations and warranties and agreements of the Company contained in this Agreement and subject to and in accordance with the terms and conditions hereof, Ancora agrees that: (i) as Placement Agent it will, to the extent requested by the Company, use its best efforts to provide Offering Advisor Services (as defined below) in connection with the Offering; and (ii) as Dealer-Manager Ancora will, to the extent requested by the Company, use Ancora's best efforts to (a) advise and assist the Company in soliciting exercise of the Rights for subscriptions for shares of the Company's common stock registered in the Offering, (b) advise and assist the Company in connection with the solicitation of offers to purchase any shares of common stock not subscribed for by the holders of Rights, and (c) advise and assist the Company in soliciting subscriptions in connection with the Follow-On Offering at the Offering Price.  “Offering Advisory Services” means (i) advising on pricing and other terms and conditions of the Offering, including the Rights Offering and Follow-On Offering, (ii) providing guidance on general market conditions and their impact on the Offering, including the Rights Offering and Follow-On Offering and (iii) assisting the Company in drafting a presentation that may be used to market the Offering to potential investors.  For the avoidance of doubt and notwithstanding anything that may be to the contrary in this Agreement, Ancora has no obligation to underwrite the Offering, either in its capacity as the Placement Agent or as the Dealer-Manager or purchase the shares of the Company's common stock offered in connection with the Offering. The Company agrees that it will not hold Ancora liable or responsible for the failure of the Offering, including the Rights Offering and the Follow-On Offering, in the event that the Offering is not successfully consummated for any reason other than Ancora’s failure to use its best efforts in connection with its obligations under this Agreement.
 
 
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4.           No Liability for Acts of Brokers, Dealers, Banks and Trust Companies.
 
Ancora shall not be subject to any liability to the Company or any of the Company’s Subsidiaries (as defined below) or “affiliates” (“Affiliates”, as such term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”)) for any act or omission on the part of any broker or dealer in securities (other than Ancora) or any bank or trust company or any other management, shareholders, creditors or any other natural person, partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, or other entity or organization (each, a “Person”), and Ancora shall not be liable for its own acts or omissions in performing its obligations as advisor, Placement Agent or Dealer-Manager hereunder or otherwise in connection with the Offerings, except for any losses, claims, damages, liabilities and expenses determined in a final judgment by a court of competent jurisdiction to have resulted primarily from any such acts or omissions undertaken or omitted to be taken by Ancora through its gross negligence, bad faith or willful misconduct. In soliciting or obtaining exercises of Rights, the Dealer-Manager shall not be deemed to be acting as the agent of any broker, dealer, bank or trust company, and no broker, dealer, bank or trust company shall be deemed to be acting as the Dealer-Manager’s agent or as the agent of the Company.  As used herein, the term “Subsidiary” means a Subsidiary of the Company as defined in Rule 405 of the Securities Act.  Unless the context specifically requires otherwise, the term “Company” as used in this Agreement means the Company and its Subsidiaries collectively on a consolidated basis.
 
5.           The Offer Documents.
 
(a)           Documents.  There will be used in connection with the Offering certain materials in addition to the  Registration Statement, any Preliminary Prospectus or the Prospectus relating to the Registration Statement (each as defined herein), including: (i) all exhibits to the Registration Statement which pertain to the conduct of the Offering and (ii) any soliciting materials relating to the Offering approved by the Company (collectively with the Registration Statement, any related Preliminary Prospectus and the related Prospectus, the “Offer Documents”). The Placement Agent shall be given an opportunity to review and comment upon the Offer Documents.
 
 
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(b)           Copies.  The Company agrees to furnish Ancora, as the Placement Agent and Dealer-Manager with as many copies as it may reasonably request of the final forms of the Offer Documents, and Ancora is authorized to use copies of the Offer Documents in connection with its acting as Placement Agent and Dealer-Manager.  Ancora hereby agrees that it will not disseminate any written material for or in connection with the solicitation of subscriptions for shares of common stock pursuant to the Offering other than the Offer Documents.
 
(c)           Solicitation Materials; No other Documents. The Company represents and agrees that no solicitation material, other than the Offer Documents and the documents to be filed therewith as exhibits thereto (each in the form of which has been approved by Ancora), will be used in connection with the Offering by or on behalf of the Company without the prior approval of the Ancora, acting as the Placement Agent and Dealer-Manager, which approval will not be unreasonably delayed or withheld.  In the event that the Company uses or permits the use of any such solicitation material in connection with the Offering without the Ancora’s approval, then Ancora shall be entitled to withdraw as Placement Agent and Dealer-Manager in connection with the Offering and the related transactions without any liability or penalty to Ancora or any other Person identified in Section 12 hereof as an “indemnified party,” and Ancora shall be entitled to receive the payment of all expenses payable under this Agreement incurred up to the date of termination.
 
6.           Representations and Warranties.

The Company represents and warrants to Ancora that:

(a)           Filing Registration Statement.  The Registration Statement, as amended: (i) has and will be prepared by the Company in conformity with the requirements of the Securities Act in all material respects, (ii) be filed with the Commission under the Securities Act; and (iii) become effective under the Securities Act. Copies of such Registration Statements as amended to date have been delivered or made available by the Company to Ancora.  For purposes of this Agreement, “Effective Time” means the date and the time as of which the Registration Statements, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; “Effective Date” means the date of the Effective Time; “Preliminary Prospectus” means each prospectus included in such Registration Statement, or amendments thereof, before it becomes effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of Ancora pursuant to Rule 424(a) of the Securities Act; “Registration Statement” means the Registration Statement, as amended at the Effective Time, including any documents which are exhibits thereto or incorporated by reference; and “Prospectus” means such final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Securities Act.  The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus. All references in this Agreement to the Registration Statement, the Preliminary Prospectus, and the Prospectus, or any amendments or supplements to any of the foregoing shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”). The Prospectus delivered to Ancora, as Placement Agent and Dealer-Manager for use in connection with the Offering (the “Offering Prospectus”) will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T promulgated by the Commission.  As used in this Agreement, the term “Prospectuses” means the Offering Prospectus used in the Rights Offer on the Follow-On Offering.
 
 
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(b)           Contents of Registration Statement.  The Registration Statement will conform, as of the Effective Time, in all material respects to the requirements of the Securities Act and will not, as of the Effective Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made not misleading; and the Prospectus and any further amendments or supplements to such Registration Statement will conform, as of their respective dates or when they are declared effective by the Commission, as the case may be, in each case, in all material respects to the requirements of the Securities Act and collectively do not and will not, as of the applicable date thereof or when declared effective by the Commission, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein (with respect to the applicable Prospectus, in the light of the circumstances under which they were made) not misleading; provided that no representation or warranty is made by the Company as to information contained in or omitted from such Registration Statement or the applicable Prospectus in reliance upon and in conformity with written information regarding Ancora furnished to the Company by or on behalf of Ancora specifically for inclusion therein (collectively, the “Ancora Information”) under appropriate headings and in its final form as approved by Ancora and its counsel.
 
(c)           Exhibits to Registration Statement.  There are no contracts, agreements, plans or other documents which are required to be described in the Prospectus for, or filed as exhibits to either Registration Statement by the Securities Act which have not been described in the Prospectus or filed as exhibits to such Registration Statement or referred to in, or incorporated by reference into, the exhibit table of such Registration Statement as permitted by the Securities Act.
 
(d)           Valid Existence.  The Company and each of its Subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all corporate power and authority necessary to own or hold their respective properties and to conduct their businesses as described in the Registration Statements and the Prospectuses, except where the absence of such power or authority (either individually and in the aggregate) would not have a material adverse effect on: (i) the business, condition (financial or otherwise), results of operations, material properties or prospects (as such prospects are disclosed or described in the relevant Prospectus) of the Company and its Subsidiaries, taken as a whole or (ii) the Offering, or consummation of any of the transactions contemplated by this Agreement, the Registration Statements or the Prospectuses (any such effect being a “Material Adverse Effect”); provided, however, that in determining whether a Material Adverse Effect has occurred, there shall be excluded any effect to the extent resulting from the following: (A) changes, after the date hereof, in U.S. generally accepted accounting principles (“GAAP”), (B) changes, after the date hereof, in applicable laws, rules and regulations or interpretations thereof, (C) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Ancora, (D) changes in general economic, monetary or financial conditions, including changes in prevailing interest rates, or credit markets, (E) changes in the market price of the Common Stock (but not the underlying causes of such changes), and (F) the failure of the Company to meet any internal or public projections, forecasts, estimates or guidance for any period ending on or after the date hereof (but not the underlying causes of such failure).
 
 
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(e)           Authorization.  This Agreement has been duly authorized, executed and delivered by the Company and, assuming the due authorization, execution and delivery by Ancora, constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally and by general principles of equity.
 
(f)           No Defaults.  Neither the Company nor any of its Subsidiaries: (i) is in violation of its charter or by-laws, (ii) in default under or in breach of, and no event has occurred which, with notice or lapse of time or both, would constitute a default or breach under or result in the creation or imposition of any lien, charge, mortgage, pledge, security interest, claim, equity, trust or other encumbrance, preferential arrangement, defect or restriction of any kind whatsoever (each, a “Lien”) upon any of their property or assets pursuant to, any material contract, agreement, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets are subject or (iii) is in violation in any respect of any law, rule, regulation, ordinance, directive, judgment, decree or order, foreign and domestic, to which the Company or its Subsidiaries or any of its respective properties or assets is subject, except, in the case of clauses (ii) and (iii) above, any violation or default that would not have a Material Adverse Effect.
 
(g)           Authorization of Rights.  The Rights to be issued and distributed by the Company pursuant to the Offering have been duly and validly authorized and, when issued and delivered in accordance with the terms of the  Offer Documents, will be duly and validly issued, and will constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms, no holder of the Rights is or will be subject to personal liability by reason of being such a holder, and the Rights will conform in all material respects to the description thereof contained in the Registration Statement and the related Prospectus.
 
(h)           Authorization of Common Stock.  The shares of Common Stock registered in the Registration Statement has been duly and validly authorized and reserved for issuance and are free of statutory and contractual preemptive rights and are sufficient in number to meet the exercise requirements of the Offering and the shares of common stock, when so issued and delivered against payment therefore in accordance with the terms of the Offering, will be duly and validly issued, fully paid and non-assessable, with no personal liability attaching to the ownership thereof. The shares of common stock will conform in all material respects to the descriptions thereof contained in the Prospectuses.
 
(i)           OTCQB Quotation System.  The Company's common stock is quoted on the OTCQB™ market.  The Company has not received an oral or written notification from the Financial Industry Regulatory Authority, Inc. (“FINRA”) or any court or any other federal, state, local or foreign governmental or regulatory authority having jurisdiction over the Company or any of its Subsidiaries or any of their properties or assets (“Governmental Authority”) of any inquiry or investigation or other action that would cause the common stock registered in the Registration Statements to not be quoted on OTCQBTM.
 
 
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(j)           Capitalization.  The Company has an authorized capitalization as set forth under the caption “Capitalization” in the Prospectuses, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and have been issued in compliance with federal and state securities laws. None of the outstanding shares of Company capital stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in all material respects in the Registration Statement and the Prospectuses. The description of the Company’s stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted there under, set forth in the Registration Statement and the Prospectuses accurately and fairly presents in all material respects the information required to be shown with respect to such plans, arrangements, options and rights.
 
(k)           Properties.  The Company owns or leases all such assets or properties as are necessary to the conduct of its business as presently operated and as proposed to be operated as described in the Registration Statement and the Prospectuses. The Company has good and marketable title in fee simple to all material assets, real property and personal property owned by it, in each case free and clear of any Lien, except for such Liens or loans as are described in the Registration Statement and the Prospectuses or as do not materially diminish the value of such property or materially interfere with the Company’s use thereof. Any assets or real property and buildings held under lease or sublease by the Company is held under valid, subsisting and enforceable leases with such exceptions as are not material to, and do not materially interfere with, the use of such assets or property by the Company, in each case except as described in the Registration Statement and the Prospectuses. Neither the Company nor any Subsidiary has received any notice of any material claim adverse to its ownership of any real or personal property or of any material claim against the continued possession of any real property, whether owned or held under lease or sublease by the Company or any Subsidiary.
 
(l)           Consents.  Except as described in the Registration Statement or the Prospectuses, the Company and its Subsidiaries have all material consents, approvals, authorizations, orders, registrations, qualifications, licenses, filings and permits of, with and from all judicial, regulatory and other Governmental Authorities and all third parties, foreign and domestic (collectively, the “Consents”), to own, lease and operate their properties and conduct their businesses as presently being conducted, and each such Consent is valid and in full force and effect. The Company has not received notice of any investigation or proceedings which results in or, if decided adversely to the Company, could reasonably be expected to result in, the revocation or modification of any Consent that would have a Material Adverse Effect, except as described in the Registration Statement and the Prospectuses.
 
 
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(m)          Conflicts.  The execution, delivery and performance of this Agreement by the Company, the issuance of the Rights in accordance with the terms of the Offer Documents, and the issuance of shares of common stock in accordance with the terms of the Offering, and the consummation by the Company of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or to which any of the properties or assets of the Company or any of its Subsidiaries is subject, except where such conflict, breach, violation or default would not cause or constitute a Material Adverse Effect; nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any of its Subsidiaries or any statute or any order, rule or regulation of any Governmental Authority (except, in the case of any such statute, order, rule or regulation, where such violation would not cause or constitute a Material Adverse Effect); and except for the registration of the shares of common stock on the Registration Statement under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and applicable state securities laws in connection with the distribution of the Rights and the sale of the shares of common stock by the Company, no consent, approval, authorization or order of, or filing or registration with, any such court or Governmental Authority is required for the execution, delivery and performance of this Agreement by the Company and the consummation by it of the transactions contemplated hereby.
 
(n)           Registration Rights.  Except as otherwise set forth in the Registration Statement and the Prospectuses, there are no contracts, agreements or understandings between the Company and any Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such Person or to require the Company to include such securities in the securities registered pursuant to the Registration Statements or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act.  No holder of any security of the Company has any rights of rescission or similar rights with respect to such securities held by them.
 
(o)           Damage and Loss.  Except as disclosed in filings made by the Company under the Exchange Act or the Prospectuses, neither the Company nor any of its Subsidiaries has sustained, since the latter of the date of the filings made by the Company under the Exchange Act or the date of the  Prospectuses any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and, since such date or after such date and except as disclosed in the filings made under the Exchange Act or the Prospectuses, there has not been any material change in the capital stock or long-term debt of the Company or any of its Subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, condition (financial or otherwise), results of operations, material properties or prospects (as such prospects are disclosed or described in the Prospectus) of the Company and its Subsidiaries, taken as a whole (a “Material Adverse Change”); provided, however, that in determining whether a Material Adverse Change has occurred, there shall be excluded any change to the extent resulting from the following: (A) changes, after the date hereof, in U.S. generally accepted accounting principles (“GAAP”), (B) changes, after the date hereof, in applicable laws, rules and regulations or interpretations thereof, (C) actions or omissions of the Company expressly required by the terms of this Agreement or taken with the prior written consent of the Ancora, (D) changes in general economic, monetary or financial conditions, including changes in prevailing interest rates, or credit markets, (E) changes in the market price of the Common Stock (but not the underlying causes of such changes), and (F) the failure of the Company to meet any internal or public projections, forecasts, estimates or guidance for any period ending on or after the date hereof (but not the underlying causes of such failure).
 
 
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(p)           Obligations.  Since the date of the latest balance sheet presented in or incorporated into the Registration Statement by reference, the Company has not incurred or undertaken any liabilities or obligations, whether direct or indirect, liquidated or contingent, matured or unmatured, or entered into any transactions, including any acquisition or disposition of any business or asset, which are material to the Company, except for liabilities, obligations and transactions which are disclosed in the Registration Statement or which do not have a Material Adverse Effect.
 
(q)           Accountants.  Grant Thornton, LLP (“Grant Thornton”) whose report relating to the Company is incorporated by reference into the Registration Statement, is or were independent public accountants as required by the Securities Act, the Exchange Act and the rules and regulations promulgated by the Public Company Accounting Oversight Board (the “PCAOB”).  To the best of the Company’s knowledge, Grant Thornton is duly registered and in good standing with the PCAOB.  Grant Thornton has, during the periods covered by the financial statements on which they reported incorporated by reference into the Registration Statement, the Preliminary Prospectuses and the Prospectuses, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
 
(r)           Financial Statements.  The financial statements, including the notes thereto, and any supporting schedules included in or incorporated by reference into the Registration Statement, any Preliminary Prospectuses and the Prospectuses present fairly, in all material respects, the financial position as of the dates indicated and the cash flows and results of operations for the periods specified of the Company. Except as otherwise stated in the Registration Statement, any Preliminary Prospectus and the Prospectuses, said financial statements have been prepared in conformity with United States generally accepted accounting principles applied on a consistent basis throughout the periods involved. Any supporting schedules included in the Registration Statement, any Preliminary Prospectus and the Prospectuses present fairly, in all material respects, the information required to be stated therein. No other financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement. The other financial and statistical information included in the Registration Statement, any Preliminary Prospectus and the Prospectuses present fairly, in all material respects, the information included therein and have been prepared on a basis consistent with that of the financial statements that are incorporated by reference into the Registration Statement, such Preliminary Prospectus and the Prospectuses and the books and records of the respective entities presented therein.
 
(s)           Pro Forma Adjustments.  There are no pro forma or as adjusted financial statements which are required to be included in or incorporated by reference into the Registration Statement, any Preliminary Prospectus and the Prospectuses in accordance with Regulation S-X under the Securities Act.
 
(t)           Accounting System.  Except as disclosed in the Registration Statement and the Prospectuses, the Company maintains a system of internal accounting and other controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorizations, and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain accountability for assets.
 
 
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(u)           Internal Controls.  The Company has not been informed of: (i) except as disclosed in the Registration Statement and the Prospectuses, any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
 
(v)           Sarbanes Oxley.  The Company is in material compliance with the provisions of the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes Oxley”) applicable to the Company, and the rules and regulations promulgated there under and related or similar rules and regulations promulgated by any other Governmental Authority or self regulatory entity or agency, except for violations which, singly or in the aggregate, are disclosed in the Prospectuses or would not have a Material Adverse Effect.
 
(w)           Certain Relationships.  To the best of the Company’s knowledge, no relationship, direct or indirect, exists between or among any of the Company or any of its Subsidiaries, on the one hand, and any director, officer, shareholder, customer or supplier of the Company or its Subsidiaries, on the other hand, which is required by the Securities Act or the Exchange Act to be described in the Registration Statement or the Prospectuses which is not so described as required. Except as disclosed in the Registration Statement and the Prospectuses, there are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members. The Company has not, in violation of Sarbanes Oxley, directly or indirectly, including through any Affiliate of the Company (other than as permitted under the Sarbanes Oxley for depositary institutions), extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer of the Company.
 
(x)           Legal Proceedings.  Except as described in the Registration Statement and the Prospectuses, there are no legal or governmental proceedings pending to which the Company or any of its Subsidiaries is a party or of which any property or asset of the Company or any of its Subsidiaries is the subject which, if determined adversely to the Company or any of its Subsidiaries, are reasonably likely to have a Material Adverse Effect; and to the best of the Company’s knowledge, except as disclosed in the Prospectuses, the Company does not know of any such proceedings that are threatened or contemplated by Governmental Authorities or others.
 
(y)           Taxes.  The Company and its Subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them, except where the failure to make such filings or make such payments, either individually or in the aggregate, would not have a Material Adverse Effect.  The Company believes in good faith that it has made adequate charges, accruals and reserves in its financial statements above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its Subsidiaries has not been finally determined.
 
 
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(z)           Insurance.  Each of the Company and its Subsidiaries maintains insurance of the types and in the amounts which the Company believes to be reasonable and sufficient for a company of its size operating in the Company’s industry. There are no material claims by the Company or any of its Subsidiaries under any policy or instrument described in this paragraph as to which any insurance company is denying liability or defending under a reservation of rights clause.  All of the insurance policies described in this paragraph are in full force and effect in all material respects.  The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.
 
(aa)           Intellectual Property.  Subject to the statements and disclosures made in the Registration Statement and the Prospectuses, the Company and its Subsidiaries own or possess or have the right to use on reasonable terms all patents, patent rights, patent applications, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names, service names and other intellectual property (collectively, “Intellectual Property”) necessary to carry on their respective businesses as described in the Registration Statement and the Prospectus.  Except as described in the Registration Statement and the Prospectuses, neither the Company nor any of its Subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interests of the Company or any of its Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, might result in a Material Adverse Effect. To the knowledge of the Company, there is no unauthorized use, infringement or misappropriation of any of the Intellectual Property by any third party, employee or former employee that would result in a Material Adverse Effect. Each agreement and instrument pursuant to which any Intellectual Property is licensed to the Company or any of its subsidiaries is in full force and effect, has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company or the applicable subsidiary, as the case may be, enforceable against the Company or such subsidiary in accordance with its terms, except as enforcement thereof may be subject to bankruptcy, insolvency or other similar laws relating to or affecting creditors rights generally or by general equitable principles; the Company and its subsidiaries are in compliance in all material respects with their respective obligations under all license agreements for Intellectual Property and, to the knowledge of the Company, all other parties to any such license agreements are in compliance in all material respects with all of their respective obligations there under; to the knowledge of the Company, no event or condition has occurred or exists that gives or would give any party to any license agreement for Intellectual Property the right, either immediately or with notice or passage of time or both, to terminate or limit (in whole or in part) any such license agreement or any rights of the Company or any of its subsidiaries there under, to exercise any of such party’s remedies there under, or to take any action that would adversely affect any rights of the Company or any of its subsidiaries there under or that might have a Material Adverse Effect and the Company is not aware of any facts or circumstances that would result in any of the foregoing or give any party to any license agreement for Intellectual Property any such right; and neither the Company nor any of its subsidiaries has received any notice of a material default, breach or non-compliance under any such license agreement.
 
 
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(bb)           Applicable Laws.  Except as described in any Preliminary Prospectus, the Prospectuses and the Registration Statement or except as would not have a Material Adverse Effect, the  Company: (i) is and at all times has been in material compliance with all statutes, rules, regulations or guidance applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured, distributed or sold by the Company or any component thereof (such statutes, rules, regulations or guidance, collectively, “Applicable Laws”); (ii) has not received any notice of adverse finding, warning letter, untitled letter or other correspondence or notice from any Governmental Authority alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws for the Company to legally conduct its business (“Authorizations”); (iii) possesses all Authorizations and such Authorizations are valid and in full force and effect and are not in violation of any term of any such Authorizations; (iv) has not received notice of any claim, suit, proceeding, hearing, enforcement, audit, investigation, arbitration or other action from any Governmental Authority or third party alleging that any product, operation or activity of the Company is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Authority or third party is considering any such claim, suit, proceeding, hearing, enforcement, audit, investigation, arbitration or other action; (v) has not received notice that any Governmental Authority has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Authority is considering such action; (vi) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission).
 
(cc)           Other Security Offers.  Neither the Company nor any of its Affiliates has, prior to the date hereof, made any offer or sale of any securities which are required to be “integrated” pursuant to the Securities Act with the offer and sale of the shares of common stock pursuant to the Registration Statement.
 
(dd)           Fees.  Except as described in the Registration Statement and the Prospectuses, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee or other compensation by the Company with respect to the issuance or exercise of the Rights or the sale of the shares of common stock included in the Registration Statement or pursuant to any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, the Company’s officers, directors and employees or Affiliates that may affect Ancora’s compensation, as determined by FINRA.  Except as previously disclosed by the Company to Ancora in writing, no officer, director, or beneficial owner of 5% or more of any class of the Company’s securities (whether debt or equity, registered or unregistered, regardless of the time acquired or the source from which derived) or any other Affiliate is a member or a Person associated, or affiliated with a member of FINRA.  No proceeds from the exercise of the Rights will be paid to any FINRA member, or any Persons associated or affiliated with a member of FINRA, except as specifically contemplated herein.  Except as previously disclosed by the Company to Ancora, no Person to whom securities of the Company have been privately issued within the 180-day period prior to the initial filing date of the Registration Statement has any relationship or affiliation or association with any member of FINRA.
 
 
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(ee)           Brokers.  There are no contracts, agreements or understandings between the Company and any Person that would give rise to a valid claim against the Company or Ancora for a brokerage commission, finder’s fee or other like payment in connection with the transactions contemplated by this Agreement. Other than Ancora, the Company has not employed any brokers, dealers or underwriters in connection with solicitation of exercise of Rights in the Rights Offering, and except as provided for in this Agreement and in the Securities Purchase Agreement entered into between the Company and Merlin Partners, LP.
 
(ff)           Political Contributions.  Neither the Company nor, to the Company’s knowledge, any of the Company’s officers, directors, employees or agents has at any time during the last ten (10) years: (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other Person charged with similar public or quasi-public duties, other than payments that are not prohibited by the laws of the United States or any jurisdiction thereof.
 
(gg)           Price Stabilization.  The Company has not and will not, directly or indirectly through any officer, director or Affiliate of the Company or through any other Person: (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the issuance of the Rights or the sale or resale of the shares of the Company's common stock included in the Registration Statements, (ii) since the filing of the Registration Statements sold, bid for or purchased, or paid any Person (other than Ancora) any compensation for soliciting exercises or purchases of, the Rights, or shares of Common Stock included in the Registration Statement and (iii) until the later of the expiration of the Rights or the completion of the distribution (within the meaning of Regulation M under the Exchange Act) of the shares of common stock  included in the Registration Statements sell, bid for or purchase, apply or agree to pay to any Person (other than Ancora) any compensation for soliciting another to purchase any other securities of the Company (except for the solicitation of the exercises of Rights pursuant to this Agreement). The foregoing shall not apply to the offer, sale, agreement to sell or delivery with respect to: (i) shares of common stock included in the Registration Statements, as described in the Prospectuses, or (ii) any shares of common stock sold pursuant to the Company’s employee benefit plans.
 
(hh)           Forward Looking Statements.  Each “forward-looking statement” (within the meaning of Section 27A of the Securities Act or Section 21E of the Exchange Act) included in the Registration Statement and the Prospectuses has been made or reaffirmed with a reasonable basis and has been disclosed in good faith.
 
As used in this Agreement, the term “knowledge of the Company” (or similar language) shall mean the knowledge of the officers of the Company who are named in the Prospectuses, with the assumption that such officers shall have made reasonable and diligent inquiry of the matters presented (with reference to what is customary and prudent for the applicable individuals in connection with the discharge by the applicable individuals of their duties as officers or directors of the Company).
 
 
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7.           Compensation.
 
Ancora shall not receive any compensation for acting as Dealer-Manager and Placement Agent, other than the reimbursement of expenses, as set forth Paragraph 8 of this Agreement.
 
8.           Expenses.

The Company will reimburse Ancora for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of any other independent experts retained by Ancora, including attorneys; provided such independent experts are retained with the Company’s advance consent) incurred by Ancora in connection Ancora's duties as the Placement Agent or Dealer-Manager, it being understood that any expense in excess of $1,000 shall have been approved in advance by the Company before incurred.
 
The Company shall also pay or cause to be paid:
 
(a)           all expenses (including any taxes) incurred in connection with the Offering and the preparation, issuance, execution, authentication and delivery of the Rights Offering Stock, the Additional Stock, the Rights, and the common stock issuable upon exercise of the Rights and the Follow-On Offering;

(b)           all fees, expenses and disbursements of the Company’s accountants, legal counsel and other third party advisors;

(c)           all fees, expenses and disbursements (including, without limitation, fees and expenses of the Company’s accountants and counsel) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including the financial statements include therein or incorporated there into and all amendments and exhibits thereto), each Preliminary Prospectus, the Prospectuses, the other Offer Documents and any amendments or supplements of the foregoing, and any printing, delivery and shipping of this Agreement by mail, fax or other means of communications;

(d)           all fees, expenses and disbursements relating to the registration or qualification of the Rights Offering Stock, Additional Stock and Rights, included in the Registration Statement under the “blue sky” securities laws of any states or other jurisdictions and all reasonable fees and expenses associated with the preparation of the preliminary and final forms of Blue Sky Memoranda;

(e)           all filing fees of the Commission;

(f)           all filing fees relating to the review of the Offering, the Rights Offering, or the Follow-On Offering by FINRA;
 
 
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(g)           any applicable listing or other fees;

(h)           the cost of printing certificates representing the Rights, and the shares of common stock, included in the Registration Statements;

(i)           the cost and charges of the Company’s transfer agent(s) or registrar(s); and

(j)           all other costs and expenses incident to the performance of the Company’s obligations hereunder for which provision is not otherwise made in this Section.
 
All payments to be made by the Company pursuant to this Section 8 shall be made promptly after the termination or expiration of the Rights Offering and Follow-On Offering, as the case may be, or, if later, promptly after the related fees, expenses or charges accrue and an invoice therefore is sent by Ancora.  The Company shall perform its obligations set forth in this Section 8 whether or not the Offering commences or any Rights are exercised pursuant to the Rights Offering.

9.           Shareholder Lists.
 
(a)           Names and Addresses.  The Company will cause Ancora to be provided with any cards or lists showing the names and addresses of, and the number of shares of common stock held by the holders of shares of common stock as of a recent date and will use its best efforts to cause Ancora to be advised from time to time during the periods, as Ancora shall request, of the Offering, including the Rights Offering, and the Follow-On Offering as to any transfers of record of shares of common stock.
 
(b)           Subscription Funds.  The Company (i) has arranged for the Transfer Agent to advise the Dealer-Manager regularly as to such matters as the Dealer-Manager may reasonably request, including the number of Rights that have been exercised.  The Transfer Agent will be responsible for receiving subscription funds paid.
 
10.           Covenants of the Company.
 
The Company covenants and agrees with Ancora:
 
(a)           Registration Statement. To use commercially reasonable efforts to cause the Registration Statement and any amendments thereto to become effective; to advise Ancora, promptly after it receives notice thereof, of the times when Registration Statement, or any amendments thereto, become effective or any supplement to the Prospectuses or any amended Prospectuses has been filed and to furnish Ancora with copies thereof; to prepare Prospectuses in forms approved by Ancora (such approval not to be unreasonably withheld or delayed) and to file such Prospectuses pursuant to Rule 424(b) under the Securities Act within the time prescribed by such rule; to advise Ancora, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or Prospectus, of the suspension of the qualification of the Rights for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectuses or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or Prospectus or suspending any such qualification, to use promptly its reasonable best efforts to obtain its withdrawal;
 
 
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(b)           Offering Documents. To deliver promptly to Ancora, at any such location as reasonably requested by Ancora, such number of the following documents as Ancora shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement, any other Offer Documents filed as exhibits, (ii) each Preliminary Prospectus, the Prospectuses and any amended or supplemented Prospectuses and (iii) any document incorporated by reference into the Prospectuses (excluding exhibits thereto); and, if the delivery of a prospectus is required at any time during which the Prospectus relating to the Offering is required to be delivered under the Securities Act and if at such time any events shall have occurred as a result of which such Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the such Prospectus or to file under the Exchange Act any document incorporated by reference into such Prospectus in order to comply with the Securities Act or the Exchange Act, to notify Ancora and, upon its request, to file such document and to prepare and furnish without charge to Ancora as many copies as Ancora may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance;
 
(c)           Amendments to Registration Statement.  To file promptly with the Commission any amendment to the Registration Statement or the Prospectuses or any supplement to the Prospectuses that may, in the judgment of the Company, be necessary or advisable in connection with the distribution of the securities included in the Registration Statement or as is requested by the Commission;
 
the Prospectuses; and
 
(d)           Advance Copies.  Prior to filing with the Commission any: (i) Preliminary Prospectus, (ii) amendment to the Registration Statement, any document incorporated by reference into either of the Prospectuses or (iii) any Prospectus pursuant to Rule 424 of the Securities Act, to furnish a copy thereof to Ancora and counsel for Ancora;
 
(e)           Other Materials.  To furnish to Ancora copies of all materials not available via EDGAR furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange or automated quotation markets upon which any of the Company’s securities may be listed or quoted pursuant to requirements of or agreements with such exchange or market to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission there under;
 
 
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(f)           Blue Sky Laws.  To qualify or register the Rights, and the shares of common stock included in the Registration Statement for sale under (or obtain exemptions from the application of) the state securities or blue sky laws of those jurisdictions reasonably requested by Ancora, and to comply with such laws and cause such qualifications, registrations and exemptions to continue in effect so long as reasonably required for the distribution of the securities included in the Registration Statement. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation.  The Company will advise Ancora promptly of the suspension of the qualification or registration of (or any such exemption relating to) any of the securities included in the Registration Statement for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its reasonable best efforts to obtain the withdrawal thereof as promptly as practicable;
 
(g)          Use of Proceeds.  To apply the net proceeds from the sale of the securities included in the Registration Statement in the manner described under the caption “Use of Proceeds” in the Initial Offering Prospectus;
 
(h)          OTCQB.  Prior to the effective date of the Registration Statement, to apply for the quotation of the shares of common stock included in the Registration Statement on the OTCQBTM  and to use commercially reasonable efforts to complete that application, subject only to official notice of issuance (if applicable), prior to the expiration of the Offering;
 
(i)           Investment Company Act of 1940.  To take such steps as shall be necessary to ensure that neither the Company nor any Subsidiary shall become an “investment company” within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission there under;
 
(j)           Information as to Rights Offering.  To advise Ancora, directly or through the Transfer Agent, from time to time, as Ancora shall request, of the number of shares of common stock subscribed for, and arrange for the Transfer Agent to furnish Ancora with copies of written reports it furnishes to the Company concerning the Rights Offering;
 
(k)          Mailing Offer Documents.  To commence mailing the Rights Offer Documents to record holders of the common stock not later than the fifth business day following the record date for the Rights Offering, and complete such mailing as soon as practicable;
 
(l)           Reservation of Common Stock.  To reserve and keep available for issue upon the exercise of the Rights such number of authorized but unissued shares of common stock as will be sufficient to permit the exercise in full of all Rights, except as otherwise contemplated by the Rights Offer Prospectus; and
 
(m)         No Stabilization.  To not take, directly or indirectly, any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the issuance of the Rights or the sale or resale of the shares of the Company's common Stock.
 
 
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11.           Conditions of Ancora’s Obligations.
 
(a)           Accuracy of Representations and Warranties.  The obligations of Ancora hereunder are subject to and conditioned upon the accuracy, as of the date hereof and at all times during the Offering, including the Rights Offering, and the Follow-On Offering, of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder and to the following additional conditions: (i) the Registration Statement shall have become effective and the Prospectuses shall have been timely filed with the Commission in accordance with the Securities Act; (ii) all post-effective amendments to the Registration Statement shall have become effective; (iii) no stop order suspending the effectiveness of the Registration Statement or any amendment or supplement thereto shall have been issued and no proceedings for the issuance of any such order shall have been initiated or threatened, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectuses or otherwise) shall have been disclosed to Ancora and complied with to Ancora’s reasonable satisfaction.
 
(b)           Accuracy of Registration Statement.  The Registration Statements or the Prospectuses or any amendment or supplement thereto, shall not contain an untrue statement of fact which is material, or omit to state a fact which is material and is required to be stated therein or is necessary to make the statements therein not misleading.
 
(c)           Authorization.  All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the securities included in the Registration Statement, the Registration Statement and the Prospectuses, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for Ancora, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters.
 
(d)           Legal Opinion.  Concurrently with the execution of this Agreement, there shall have been furnished to Ancora the signed opinion (addressed to Ancora) of Ballard Spahr, LLP., counsel for the Company, dated the date hereof and in form and substance reasonably satisfactory to counsel for Ancora.
 
(e)           Officer Certificate.  The Company shall have furnished to Ancora a certificate, dated the date hereof, of its Chief Executive Officer or President and its Chief Financial Officer stating that:
 
i.  To the best of their knowledge after reasonable investigation, the representations, warranties, covenants and agreements of the Company hereof are true and correct in all material respects;
 
ii.  Subsequent to the respective dates as of which information is given in the Registration Statements and the Prospectuses, there has not been any Material Adverse Change or any development involving a prospective Material Adverse Change; and
 
iii. They have examined the Registration Statement and the Prospectuses and, in their opinion (A) the Registration Statement, as of their Effective Dates, and the related prospectuses did not include any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) since the Effective Date of the Registration Statement or the date of the relevant Prospectus, as applicable, no event has occurred which should have been set forth in a supplement or amendment to such Registration Statement or such Prospectus.
 
 
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(f)           No Material Adverse Change.  Neither the Company nor any of its Subsidiaries shall have sustained since the Effective Date any Material Adverse Change, the effect of which is so material and adverse as to make it impracticable or inadvisable to proceed with the Offering.

(g)          Form of Opinion, and Certificates.  All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for Ancora.
 
12.           Indemnification and Contribution.

(a)          Indemnification.  The Company agrees to indemnify and hold harmless Ancora and its affiliates and any officer, director, employee or agent of Ancora or any such affiliates and any Person controlling (within the meaning of Section 20(a) of the Exchange Act) Ancora or any of such affiliates (collectively, the “Indemnified Parties”) from and against any and all losses, claims, damages, liabilities and expenses whatsoever, under the Securities Act or otherwise (as incurred or suffered and including, but not limited to, any and all legal or other expenses incurred in connection with investigating, preparing to defend or defending any lawsuit, claim or other proceeding, commenced or threatened, whether or not resulting in any liability, which legal or other expenses shall be reimbursed by the Company promptly after receipt of any invoices therefore from Ancora), (A) arising out of or based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in the Offer Documents, or any amendment or supplement thereto, in any other solicitation material used by the Company or authorized by it for use in connection with the Offering, including the Rights Offering or the Follow-On Offering, or in any blue sky application or other document prepared or executed by the Company (or based on any written information furnished by the Company) specifically for the purpose of qualifying any or all of securities included in the Registration Statement under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a “Blue Sky Application”) or arising out of or based upon the omission or alleged omission to state in any such document a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (other than statements or omissions made in reliance upon and in conformity with the Ancora Information), (ii) any actions taken or omitted to be taken by an indemnified party with the consent of the Company or in conformity with actions taken or omitted to be taken by the Company or (iii) any failure by the Company to comply with any agreement or covenant, contained in this Agreement or (B) arising out of, relating to or in connection with or alleged to arise out of, relate to or be in connection with, the Offering, including the Rights Offering, the Follow-On Offering, any of the other transactions contemplated thereby or the performance of Ancora’s services to the Company with respect to the Offering. The Company will not, however, be responsible under the foregoing indemnity agreement for any losses, claims, damages, liabilities or expenses that have resulted from the gross negligence, bad faith or willful misconduct of Ancora or any Indemnified Party.
 
 
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(b)           Contribution.  If the indemnification provided for in the foregoing paragraph is judicially determined to be unavailable (other than in accordance with the terms hereof) to any Indemnified Party otherwise entitled to indemnity in respect of any losses, claims, damages or liabilities referred to herein, then, in lieu of indemnifying such person hereunder, whether or not Ancora is the person entitled to indemnification or reimbursement, the Company shall contribute to the amount paid or payable by the Indemnified Party as a result of such losses, claims, damages or liabilities (and expenses relating thereto) (i) in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and Ancora, on the other hand, of the Offering, including the Rights Offering and the Follow-On Offering, or (ii) if the allocation provided for in clause (i) above is not available, in such proportion as is appropriate to reflect not only the relative benefits referred to in such clause (i) but also the relative fault of each of the Company and Ancora, as well as any other relevant equitable considerations; provided, however, in no event shall Ancora’s aggregate contribution to the amount paid or payable exceed One Hundred Thousand ($100,000) Dollars.  For the purposes of this Agreement, the relative benefits to the Company and to Ancora of the engagement shall be deemed to be in the same proportion as the total value paid or contemplated to be paid or received or contemplated to be received by the Company in the Offering, whether or not the  Offering, the Rights Offering and the Follow-On Offering are consummated, bears to the fees and expenses paid or to be paid to Ancora under this Agreement.

(c)           Limitation of Liability Ancora. The Company also agrees that neither Ancora, nor any other Indemnified Party, shall have any liability to the Company for or in connection with Ancora’s engagement as Placement and the Dealer-Manager, except for any such liability for losses, claims, damages, liabilities or expenses incurred by the Company which have resulted primarily from Ancora’s bad faith, willful misconduct, or gross negligence.  The foregoing agreement shall be in addition to any rights that Ancora, the Company or any Indemnified Party may have at common law or otherwise, including, but not limited to, any right to contribution.

(d)           Limitation of Liability Company.  If the Offering is terminated by the Company, for any reason, without any Additional Stock having been sold by the Company, the Company's total liability under this Agreement, including its obligations for indemnification hereunder, shall be limited to the expenses it is to pay Ancora under Paragraph 8 of this Agreement.

(e)           Settlement of Third Party Claims.  The Company agrees that it will not, without the prior written consent of Ancora (which consent will not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not Ancora is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release, reasonably satisfactory in form and substance to Ancora, releasing Ancora from all liability arising out of such claim, action, suit or proceeding.
 
13.           Effective Date of Agreement; Termination.
 
(a)           Effective Date.  This Agreement shall become effective upon the later of the time on which Ancora shall have received notification of the effectiveness of the Registration Statement and the time which this Agreement shall have been executed by all of the parties hereto.
 
 
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(b)           Termination.  This Agreement shall terminate upon the earliest to occur of (a) the consummation, termination or withdrawal of the Offering, including the Rights Offering and the Follow-On Offering, and (b) the expiration of the Exclusive Period.
 
14.           Survival of Certain Provisions.
 
The agreements contained in Sections 3, 7, 8, 12 and 14 through 22 hereof and the representations, warranties and agreements of the Company contained in Section 6 hereof shall survive the consummation of or failure to commence the Offering and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement.
 
15.           Notices.
 
All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) sent by facsimile with immediate telephonic confirmation or (c) sent by registered or certified mail, return receipt requested, postage prepaid, to the parties hereto as follows.
 
If to Ancora:
Attention: Richard Barone
2000 Auburn Drive, Suite 300
Cleveland, Ohio 44122

If to the Company:
Dennis Raefield
Mace Security International, Inc.
1530 No. Main Suite #230
Walnut Creek, CA 94596
Fax:  (925) 933-2730
 
with a copy to:
Gregory Krzemien
Mace Security International, Inc.
240 Gibraltar Road, Suite 220
Horsham, Pennsylvania 19044
Fax:  (215) 672-8900
 
 
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16.           Parties.
 
This Agreement shall inure to the benefit of and be binding upon Ancora, the Company and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the Person or Persons, if any, who control Ancora within the meaning of Section 15 of the Securities Act. Nothing in this Agreement shall be construed to give any Person, other than the Persons referred to in this Section, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein.
 
17.           Amendment.
 
This Agreement may not be amended or modified except in writing signed by each of the parties hereto.
 
18.           Governing Law; Venue.
 
This Agreement shall be deemed to have been executed and delivered in the State of Delaware and both this Agreement and the transactions contemplated hereby shall be governed as to validity, interpretation, construction, effect, and in all other respects by the laws of the State of Delaware, without regard to the conflicts of laws principles thereof.  Each of Ancora and the Company: (a) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement and/or the transactions contemplated hereby shall be instituted exclusively in the Chancery Court of the State of Delaware, or in any United States District Court having venue and jurisdiction, (b) waives any objection which it may have or hereafter to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the jurisdiction of Chancery Court of the State of Delaware, or in the United States District Court for any District having venue and jurisdiction in any such suit, action or proceeding.  Each of Ancora and the Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Chancery Court of the State of Delaware, or in the United States District Court for any District having venue and jurisdiction and agrees that service of process upon the Company mailed by certified mail to the Company’s address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding, and service of process upon the underwriters mailed by certified mail to Ancora’s address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service process upon Ancora, in any such suit, action or proceeding.
 
19.           Entire Agreement.
 
This Agreement, together with the exhibit attached hereto and as the same may be amended from time to time in accordance with the terms hereof, contains the entire agreement among the parties hereto relating to the subject matter hereof and there are no other or further agreements outstanding not specifically mentioned herein.
 
 
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20.           Severability.
 
If any term or provision of this Agreement or the performance thereof shall be invalid or unenforceable to any extent, such invalidity or unenforceability shall not affect or render invalid or unenforceable any other provision of this Agreement and this Agreement shall be valid and enforced to the fullest extent permitted by law.
 
21.           Construction.
 
(a)           the word “or” will not be exclusive;
(b)           inclusion of items in a list will not be deemed to exclude other terms of similar import;
 
(c)           all parties will be considered to have drafted this Agreement together, with the benefit of counsel, and no provision will be strictly construed against any Person by reason of having drafted such provision;
 
(d)           the word “include” and its correlatives means to include without limitation;
 
(e)           terms that imply gender will include all genders;
 
(f)           defined terms will have their meanings in the plural and singular case;
 
(g)           references to Sections, Schedules, Annexes and Exhibits are to the Sections, Schedules, Annexes and Exhibits to this Agreement;
 
(h)           financial terms that are not otherwise defined have the meanings ascribed to them under United States generally accepted accounting principles as of the date of this Agreement;
 
(i)           the use of “will” as an auxiliary will not be deemed to be a mere prediction of future occurrences; and
 
(j)           the headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.
 
22.           Counterparts.
 
This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. Delivery of a signed counterpart of this Agreement by facsimile or other electronic transmission shall constitute valid and sufficient delivery thereof. If the foregoing correctly sets forth your understanding, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us.

SIGNATURES FOLLOW ON THE NEXT PAGE
 
 
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Very truly yours,
 
Mace Security International, Inc.
By:
/s/ Dennis R. Raefield
Name: Dennis Raefield
Title: Chief Executive Officer
 
Accepted and agreed as of the date first written above:
 
ANCORA CAPITAL GROUP, INC.
 
By:
/s/ Richard A. Barone
Name: Richard A. Barone
Title: Chairman
 
 
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EX-11 7 v216600_ex11.htm
Exhibit 11

   
Year Ended December 31,
  
   
2010
    
2009
  
Basic:
            
Weighted average shares outstanding
     15,749,465       16,202,254  
                 
Net loss
   $ (18,098 )   $ (10,951 )
                 
Basic loss per share
   $ (1.15 )   $ (0.68 )
                 
Diluted:
                
Weighted average shares outstanding
     15,749,465       16,202,254  
                 
Net effect of dilutive stock options and warrants based on the treasury stock method using the year-end market price, if higher than average market price
     -       -  
                 
Total
     15,749,465       16,202,254  
                 
Net loss
   $ (18,098 )   $ (10,951 )
                 
Diluted loss per share
   $ (1.15 )   $ (0.68 )
 
 
 
 
EX-21 8 v216600_ex21.htm
Exhibit 21

   
State of
Subsidiary
  
Incorporation
     
Mace Security International, Inc.
  
Delaware
Mace Personal Defense, Inc.
  
Delaware
Mace CSSS, Inc.
  
California
Car Care, Inc.
  
Delaware
Care Investment, Inc.
  
Delaware
Colonial Full Service Car Wash, Inc.
  
Texas
Crystal Falls Car Wash, Inc.
  
Delaware
CRCD, Inc.
  
Texas
Eager Beaver Car Wash, Inc.
  
Florida
Linkstar Interactive, Inc.
  
Delaware
50's Classic Car Wash of Lubbock, Inc.
  
Texas
Mace Car Wash - Arizona, Inc.
  
Arizona
Mace Car Wash, Inc.
  
Delaware
Mace Security Products, Inc.
  
Delaware
Mace Trademark Corp.
  
Delaware
Mace Truck Wash, Inc.
  
Delaware
Mace Wash, Inc.
  
Delaware
PromoPath, Inc.
  
California
ESG Marketing, LLC
  
Delaware
 
 
 
 
EX-23.1 9 v216600_ex23-1.htm
Exhibit 23.1

Consent of Independent Registered Public Accounting Firm
 
Board of Directors
Mace Security International, Inc.
 
We have issued our report dated March 30, 2011 with respect to the consolidated financial statements included in the Annual Report of Mace Security International, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2010.  We hereby consent to the incorporation by reference of said report in the Registration Statements of Mace Security International, Inc. on Forms S-3 (File No. 333-87981, effective September 28, 1999, amended December 27, 1999, File No. 333-34096, effective April 5, 2000, File No. 333-34536, effective April 11, 2000, File No. 333-116527, effective June 16, 2004, amended September 24, 2004, and File No. 333-122074, effective January 14, 2005, amended February 3, 2005) and Forms S-8 (File No. 333-31757, effective on July 22, 1997 and File No. 333-93311, effective on December 21, 1999).

Philadelphia, Pennsylvania
 
March 30, 2011
 
 
 
 
EX-31.1 10 v216600_ex31-1.htm
Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 I, Dennis R. Raefield, certify that:

 1. I have reviewed this report on Form 10-K of Mace Security International, Inc.;

 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

 a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 Date: March 30, 2011

/s/Dennis R. Raefield
Dennis R. Raefield
Principal Executive Officer & President
 
 
 
 
 
 EX-31.2 11 v216600_ex31-2.htm
 
Exhibit 31.2

CERTIFICATION OF PRINICPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gregory M. Krzemien, certify that:

1. I have reviewed this report on Form 10-K of Mace Security International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 30, 2011
 
/s/ Gregory M. Krzemien
Gregory M. Krzemien
Principal Financial Officer and Treasurer
 
 
 
 
 
 EX-32.1 12 v216600_ex32-1.htm    
Exhibit 32.1

Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002

I, Dennis R. Raefield, the Principal Executive Officer of Mace Security International, Inc., hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-K of Mace Security International, Inc. for the year ended December 31, 2010  (the “December 31, 2010 Form 10-K”), which this certification accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m (a) or 78o(d)) and information contained in the December 31, 2010 Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Mace Security International, Inc.

Dated: March 30, 2011

 
/s/Dennis R. Raefield
 
Dennis R. Raefield
 
Principal Executive Officer & President
 
 
 
 
 
 EX-32.2 13 v216600_ex32-2.htm
 
Exhibit 32.2  

Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002

I, Gregory Krzemien, the Principal Financial Officer of Mace Security International, Inc., hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-K of Mace Security International, Inc. for the year ended December 31, 2010 (the “December 31, 2010 Form 10-K”), which this certification accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m (a) or 78o(d)) and information contained in the December 31, 2010 Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Mace Security International, Inc.

Dated: March 30, 2011

/s/ Gregory M. Krzemien
Gregory M. Krzemien
Principal Financial Officer and Treasurer