Attached files
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
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number: 0-27210
Zunicom, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-2408297
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4315 W. Lovers Lane, Dallas, TX 75209
(Address of principal executive offices) (Zip Code)
(214) 352-8674
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
Registered on the NASD OTC Bulletin Board
-----------------------------
(Title of Class)
Class A Preferred Stock, $1.00 Par Value
----------------------------------------
(Title of Class)
1
Units, consisting of one (1) share of Common Stock and one (1)
share of Class A Preferred Stock
--------------------------------------------------
(Title of Class)
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 Exchange Act.
Yes [ ] No [X]
Note - Checking the box above will not relieve any registrant required to
file reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 definition 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]
As of June 30, 2010, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $2,850,719 (based on the
closing price of $0.50 per share on that date).
As of March 24, 2011, 9,733,527 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
2
ZUNICOM, INC.
Annual Report on Form 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 1A. Risk Factors 7
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for our Common Equity and Related
Stockholder Matters 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 21
Item 9A. Controls and Procedures 21
Item 9B. Other Information 22
PART III
Item 10. Directors, Executive Officers and Corporate
Governance 22
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 34
Item 13. Certain Relationship and Related Transactions,
and Director Independence 36
Item 14. Principal Accountant Fees and Services 37
PART IV
Item 15. Exhibits 37
Signatures 39
3
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange Act
of 1934 regarding the plans and objectives of management for future operations
and market trends and expectations. Such statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving the continued expansion
of our business. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved. The terms
"we," "our," "us," or any derivative thereof, as used herein shall mean Zunicom,
Inc., a Texas corporation.
Part I
ITEM 1. BUSINESS
GENERAL BUSINESS HISTORY
Zunicom, Inc. ("Zunicom") currently operates through its wholly-owned sub-
sidiary, AlphaNet Hospitality Systems, Inc.("AlphaNet"). As described more fully
under "Unconsolidated Investee" below, on December 27, 2006 our formerly
wholly-owned and consolidated subsidiary, UPG, completed its initial public
offering and now files stand alone reports as required by Section 13(a) or 15(d)
of the Exchange Act.
Zunicom, Inc., formerly Tech Electro Industries, Inc., was incorporated under
the laws of the State of Texas on January 10, 1992, for the purpose of acquiring
100% of the capital stock of Computer Components Corporation, a distributor of
electronic components incorporated in 1968. On October 29, 1996, Universal
Battery Corporation was incorporated for the purpose of expanding into new
markets for batteries and battery-related products. In May 1999, Universal
Battery Corporation merged into Computer Components Corporation. In January
2004, Computer Components Corporation changed its name to Universal Battery
Corporation. Subsequently, in May 2004, Universal Battery Corporation changed
its name to Universal Power Group, Inc.
On October 26, 1999, Zunicom completed the acquisition of AlphaNet Hospitality
Systems, Inc., to gain an entry into the information technology and hospitality
related business sector. Through August 31, 2010, AlphaNet was a provider of
guest communication services to the hospitality industry. AlphaNet discontinued
this business as of August 31, 2010. Accordingly, the results of this
discontinued operation are presented in our Audited Consolidated Statements of
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Operation below. In April of 2010, AlphaNet continued its participation in the
information technology and hospitality related business sector through the
purchase of the assets and business of Action Computer Systems. AlphaNet is now
a reseller of point-of-sale software and hardware to restaurants in southern
Connecticut, Westchester County, New York, and New York City (See Note N below).
Available Information
Zunicom's website is www.zunicom.com, and AlphaNet's website is
www.alphanet.net. References to "we", "us" and "our" refer to Zunicom, Inc. and
its subsidiary. The Company makes available, free of charge, through its
website, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after the Company electronically files such information with or furnishes it to
the Securities and Exchange Commission. Our principal executive offices are
located at 4315 W. Lovers Lane, Dallas, TX 75206, and our telephone number is
(214)352-8674.
BUSINESS OF THE COMPANY AND ITS SUBSIDIARY
ZUNICOM, INC. ("Zunicom")
Zunicom, through its wholly-owned subsidiary, AlphaNet, is a reseller of
point-of-sale software and hardware to restaurants in southern Connecticut,
Westchester County, New York, and New York City.
ALPHANET HOSPITALITY SYSTEMS, INC. ("AlphaNet")
Through August 31, 2010, AlphaNet was a provider of business services to the
hospitality industry. In April of 2010, AlphaNet purchased the assets and
business of Action Computer Systems and is now a reseller of point-of-sale
software and hardware to restaurants in southern Connecticut, Westchester
County, New York, and New York City
AlphaNet, doing business as Action Computer Systems ("ACS"), sells and installs
point of sale computer software and hardware to small and mid-size restaurants
in southern StateConnecticut, CityWestchester County, StateNew York, and
CityplaceNew York City. After the sale and installation of the point-of-sale
system, ACS provides service and support for the system with or without a
customer service contract, sells accessories and supplies to customers using the
system and installs software upgrades when the software developer issues new
versions.
Software
The software, Restaurant Manager, was developed by Action Systems Inc. ("ASI")
located in Silver Spring, Maryland. Restaurant Manager offers a total
point-of-sale restaurant software solution that can be easily tailored for use
in any sort of food service establishment, from fine dining and table service
restaurants to quick service restaurants, pizza delivery and take-out
establishments, as well as bars and clubs.
Equipment
The hardware necessary for operation of Restaurant Manager is obtained from
brand name manufacturers including Posiflex, Epson, G-Vision, and Touch Dynamic.
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Servers are assembled in-house using best-of-class components to ensure
reliability and durability as is required for 24/7 operation.
Customers
ACS sells and installs Restaurant Manager into small, mid-size restaurants,
including family, fine dining, take-out and delivery, and quick service
restaurants, as well as bars and clubs. Many customers own three or more
restaurants constituting a mini-chain. ACS currently has an installed base of
approximately 450 systems in Fairfield County, Connecticut, Westchester County,
New York and New York City.
Employees
ACS' office is in Larchmont, Westchester County, New York. ACS employs a total
of 11 full-time employees including sales, field installation, customer service
and support, accounting, and administration.
Sales and Marketing
ACS sells its products and services through a direct sales force of three
full-time and one part-time sales employees. The sales effort is supported by
multiple lead sources, extensive use of highly targeted direct mailings, and
intensive telephone follow-up.
Competition
There are many providers of point-of-sale software that can be used in
restaurant operations. According to a recent survey among its members by
RestaurantOwner.com, Restaurant Manager is ranked sixth with a four percent
share of the market. The two largest providers, Micros and Aloha, rank one and
two respectively, and have a combined total of 37% of the market. Micros and
Aloha are the two competitors most often encountered by ACS. ACS competes by
emphasizing the superior features and ease of use of the Restaurant Manager
software and the quality of the hardware provided as part of the system package,
and through its attentive customer service and support.
Governmental Matters
Except for the usual and customary business licenses and regulations, AlphaNet's
business is not subject to governmental regulations or approval of its products
or services.
UNCONSOLIDATED INVESTEE
On December 21, 2006, our wholly-owned subsidiary, Universal Power Group, Inc.
("UPG") sold 2,000,000 shares of its common stock in an underwritten initial
public offering, or IPO. In addition, Zunicom sold 1,000,000 shares of UPG's
common stock in the IPO. On December 27, 2006, the offering was completed at
$7.00 per share. UPG's stock is listed on the American Stock Exchange and is
traded under the symbol "UPG". As of December 31, 2006, UPG began filing stand
alone Annual Reports on Form 10-K, quarterly reports on Form 10-Q and other
reports as required pursuant to Section 13(a) or 15(d) of the Exchange Act.
6
Prior to the IPO, as our wholly-owned subsidiary, UPG's financial position,
results of operations and cash flows were consolidated with ours. As a result of
the IPO, our ownership interest in UPG was reduced to 40 percent. During 2008,
we acquired additional shares of UPG bringing our interest to 40.6%. We
deconsolidated UPG from our statements of operations and balance sheets
effective December 31, 2006 and simultaneously accounted for UPG under the
equity method of accounting. We will account for UPG under the equity method of
accounting in all future periods in which we maintain a significant ownership
interest.
General
UPG is (i) a third-party logistics company specializing in supply chain
management and value-added services and (ii) a leading supplier and distributor
of portable power supply products, such as batteries, security system components
and related products and accessories. UPG's principal product lines include:
- batteries of a wide variety of chemistries, battery chargers and related
accessories;
- portable battery-powered products, such as jump starters and 12-volt
power accessories;
- security system components, such as alarm panels, perimeter access
controls, horns, sirens, speakers, transformers, cabling and other
components; and
- electro-magnetic devices, capacitors, relays and passive electronic
components.
UPG's third-party logistics services, principally supply chain management
solutions and other value-added services, are designed to help customers
optimize performance by allowing them to outsource supply chain management
functions. UPG's supply chain management services include inventory sourcing and
procurement, warehousing and fulfillment. UPG's value-added services include
custom battery pack assembly, custom kitting and packing, private labeling,
component design and engineering, graphic design, and sales and marketing. UPG
also distributes batteries and portable power products under various
manufacturers' and private labels, as well as under its own proprietary brands.
UPG is one of the leading domestic distributors of sealed, or
"maintenance-free," lead acid batteries. UPG's customers include OEMs,
distributors and both online and traditional retailers. The products UPG
sources, manages and distributes are used in a diverse and growing range of
industries, including automotive, consumer goods, electronics and appliances,
marine and medical instrumentation, computer and computer-related products,
office and home office equipment, security and surveillance equipment, and
telecommunications equipment and other portable communication devices.
ITEM 1A. RISK FACTORS
In addition to other information in this Form 10-K, the following risk factors
should be carefully considered in evaluating us and our business because these
factors currently have or may in the future have a significant impact on our
business, operating results or financial condition. Actual results could differ
materially from those projected in the forward- looking statements contained in
this Form 10-K as a result of the risk factors discussed below and elsewhere in
this Form 10-K.
7
Risks Related to Our Business
AlphaNet is dependent upon the Restaurant Manager software developer.
AlphaNet depends upon ASI, the developer of the Restaurant Manager software, to
maintain and improve the software to keep pace with changing technology and the
needs and desires of restaurant owners and operators. If ASI is unable to
respond quickly and cost-effectively to changing technologies and devices and
changes in customer tastes and preferences, our business will be harmed. The
emerging nature of computer technologies requires ASI to continually update its
software, particularly in response to competitive offerings and to make sure it
is compatible with and takes advantage of new technologies and changes in
customer needs and preferences. ASI's inability to respond quickly and
cost-effectively to changing computer technologies and devices and changes in
customer needs and preferences, could make the existing software offerings less
competitive and may cause us to lose market share. We cannot be certain that ASI
will successfully develop, acquire and market new products and services that
respond to competitive and technological developments and changing customer
needs.
Most of our competitors have significantly greater resources than we do.
We face strong competition from existing competitors, many of whom are
substantially larger than us. New competitors or competitors' price reductions
or increased spending on marketing and product development, could have a
negative impact on our financial condition and our competitive position, as
larger competitors will be in a better position to bear these costs.
Our long-term growth strategy assumes that we make suitable acquisitions. If we
are unable to address the risks associated with these acquisitions our business
could be harmed.
Our long-term growth strategy includes identifying and, from time to time,
acquiring suitable candidates on acceptable terms. In particular, we intend to
acquire businesses that provide products and services that expand or complement
our existing business and expand our geographic reach. In pursuing acquisition
opportunities, we may compete with other companies having similar growth and
investment strategies. Competition for these acquisition targets could also
result in increased acquisition costs and a diminished pool of businesses,
technologies, services or products available for acquisition. Our long-term
growth strategy could be impeded if we fail to identify and acquire promising
candidates on terms acceptable to us. Assimilating acquired businesses involves
a number of other risks, including, but not limited to:
- disrupting our business;
- incurring additional expense associated with a write-off of all or a
portion of the related goodwill and other intangible assets due to
changes in market conditions or the economy in the markets in which we
compete or because acquisitions are not providing the benefits expected;
- incurring unanticipated costs or unknown liabilities;
- managing more geographically-dispersed operations;
- diverting management's resources from other business concerns;
- retaining the employees of the acquired businesses;
- maintaining existing customer relationships of acquired companies;
8
- assimilating the operations and personnel of the acquired businesses;
and
- maintaining uniform standards, controls, procedures and policies.
For all these reasons, our pursuit of an overall acquisition or any individual
acquisition could have a material adverse effect on our business, financial
condition and results of operations. If we are unable to successfully address
any of these risks, our business could be harmed.
Rapid growth in our business could strain our managerial, operational,
financial, accounting and information systems, customer service and support
staff and office resources. If we fail to manage our growth effectively, our
business may be negatively impacted.
In order to achieve our growth strategy, we will need to expand all aspects of
our business, including our computer systems and related infrastructure,
customer service and support capabilities and sales and marketing efforts. We
cannot assure you that our infrastructure, technical staff and technical
resources will adequately accommodate or facilitate our expanded operations. To
be successful, we will need to continually improve our financial and managerial
controls, billing systems, reporting systems and procedures, and we will also
need to continue to expand, train and manage our workforce. In addition, as we
offer new products and services, we will need to increase the size and expand
the training of our customer service and support staff to ensure that they can
adequately respond to customer inquiries. If we fail to adequately train our
customer service and support staff and provide staffing sufficient to support
our new products and services, we may lose customers.
If we are unable to attract and retain highly qualified management and technical
personnel, our business may be harmed.
Our success depends in large part on the contributions of our senior management
team, technology personnel and other key employees and on our ability to
attract, integrate, train, retain and motivate these individuals and additional
highly skilled technical and sales and marketing personnel. We face intense
competition in hiring and retaining quality management personnel. Many of these
companies have greater financial resources than we do to attract and retain
qualified personnel. If we are unable to retain our key employees or attract,
integrate, train and retain other highly qualified employees in the future, when
necessary, our business may be negatively impacted.
Risks Related to Our Securities
There is a lack of an active public market for our common stock and the trading
price of our common stock is subject to volatility.
There is a lack of an active public market for our common stock, and the trading
price of our common stock is subject to volatility. The quotation of shares of
our common stock on the Over-the-Counter Bulletin Board began in April 1999.
There can be no assurances, however, that a market will develop or continue for
our common stock. Our common stock may be thinly traded, if traded at all, even
if we achieve full operation and generate significant revenue and is likely to
experience significant price fluctuations. In addition, our stock may be defined
as a "penny stock" under Rule 3a51-1 adopted by the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended. In
9
general, a "penny stock" includes securities of companies which are not listed
on the principal stock exchanges or the National Association of Securities
Dealers Automated Quotation System, or Nasdaq, National Market System and have a
bid price in the market of less than $5.00; and companies with net tangible
assets of less than $2,000,000 ($5,000,000 if the issuer has been in continuous
operation for less than three years), or which have recorded revenues of less
than $6,000,000 in the last three years. "Penny stocks" are subject to Rule
15g-9, which imposes additional sales practice requirements on broker-dealers
that sell such securities to persons other than established customers and
"accredited investors" (generally, individuals with net worth in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their
spouses, or individuals who are officers or directors of the issuer of the
securities). For transactions covered by Rule 15g-9, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, this
Rule may adversely affect the ability of broker-dealers to sell our common
stock, and therefore, may adversely affect the ability of our stockholders to
sell common stock in the public market. The trading price of our common stock is
likely to be subject to wide fluctuation. Factors affecting the trading price of
our common stock may include:
- variations in our financial results;
- announcements of innovations, new solutions, strategic alliances or
significant agreement by us or by our competitors;
- recruitment or departure of key personnel;
- changes in estimates of our financial results or changes in the
recommendations of any securities analysts that elect to follow our
common stock;
- market conditions in our industry, the industries of our customers and
the economy as a whole; and
- sales of substantial amounts of our common stock, or the perception that
substantial amounts of our common stock will be sold, by our existing
stockholders in the public market.
ITEM 2. DESCRIPTION OF PROPERTIES
Zunicom's executive office is located in Dallas, Texas and is leased on a month
to month basis.
AlphaNet previously leased 2,810 square feet of office space in Toronto, Canada
for approximately $7,000 per month. On January 31, 2010, AlphaNet vacated its
leased premises and terminated the lease.
With the acquisition of Action Computer Systems in April 2010, AlphaNet assumed
Action Computer System's lease of approximately 1,200 square feet of office
space in Larchmont, New York.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company is traded on the NASD OTC Bulletin Board Market
under the symbol ZNCM. On March 28, 2011, the last sales price of the Company's
common stock was $.70.
The following table sets forth the high and low bid prices of the Company's
common stock on a quarterly basis for the calendar years 2009 and 2010, as
reported by the NASDAQ Trading and Market Services:
-----|-------------------|----------|---------|
| Calendar Period | High | Low |
-----|-------------------|----------|---------|
2009 | First Quarter | $0.35 | $0.25 |
-----|-------------------|----------|---------|
| Second Quarter | $0.51 | $0.18 |
-----|-------------------|----------|---------|
| Third Quarter | $0.49 | $0.33 |
-----|-------------------|----------|---------|
| Fourth Quarter | $0.51 | $0.35 |
-----|-------------------|----------|---------|
2010 | First Quarter | $0.65 | $0.16 |
-----|-------------------|----------|---------|
| Second Quarter | $0.65 | $0.35 |
-----|-------------------|----------|---------|
| Third Quarter | $0.52 | $0.26 |
-----|-------------------|----------|---------|
| Fourth Quarter | $0.68 | $0.35 |
-----|-------------------|----------|---------|
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
As of December 31, 2010, the Company had 60,208 shares of Class A preferred
stock outstanding and held by two record shareholders. There is no trading
market for the preferred stock. The Class A preferred stock carries an annual
dividend of $0.3675 per share, payable in cash or shares of common stock. A
share of preferred stock is convertible into two shares of common stock at the
option of the holder. The Company has paid all dividends due on the Class A
preferred stock.
As of December 31, 2010, the Company had 9,733,527 shares of common stock issued
and outstanding and held by 578 shareholders of record.
Restricted Stock
On June 25, 2007, the Board of Directors of Zunicom approved a grant of 996,940
restricted shares of Zunicom's common stock to our chairman and certain officers
and employees of UPG. Several of the officers and employees of UPG had been
officers and employees of Zunicom prior to the deconsolidation of UPG in
December 2006. The Company attributed a value of $205,801 to the restricted
stock granted to our chairman and $377,392 to the restricted stock granted to
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the officers and employees of UPG. The grant was made in recognition of past and
future performance especially with regard to the initial public offering of
UPG's common stock in which Zunicom was able to sell 1,000,000 shares of UPG
common stock resulting in a $0.80 dividend to shareholders paid in the first
quarter of 2007. The restricted stock vests in full on June 25, 2011, and is
subject to certain restrictions and obligations up to the point of vesting. The
stock will not be registered and will be held in escrow for the benefit of the
grantee until the vesting date. Our chairman agreed not to exercise options on
400,000 shares of Zunicom common stock, and the officers and employees of UPG
held options on 653,000 shares of Zunicom common stock which lapsed after the
deconsolidation of UPG. We accounted for the grant of restricted shares to our
chairman as stock based compensation. We accounted for the grant of restricted
shares to UPG officers and employees as a contribution of capital. On January
21, 2009, the chief executive officer of UPG resigned and according to the terms
of the restricted stock agreement, forfeited his restricted stock grant.
Accordingly, his shares have been returned to the Company and the investment in
UPG has been reduced by $132,925.
We will amortize 60% of that capital contribution as additional equity in
earnings (loss) of the investee over the vesting period. The Company concluded
that it is reasonable to discount the value of these restricted shares by
29.52%. Of the 29.52% discount, the Company considers the risk of forfeiture to
be 10% and illiquidity to be 19.52%. The Company applied this discount to the
grant date market value of a freely tradable share to arrive at the fair value
of a restricted share.
Equity Compensation Plan Disclosure
The following table summarizes equity compensation plans approved by security
holders as of December 31, 2010:
---------------------|--------------------|-----------------|------------------|
Plan Category |Number of Securities|Weighted-Average | Number of |
| to be Issued Upon |Exercise Prices | Securities |
| Exercise of |of Outstanding | available |
| Outstanding | Options, | for future |
| Options, | Warrants | issuance under |
| Warrants | and Rights | equity |
| and Rights | |compensation plans|
---------------------|--------------------|-----------------|------------------|
Equity compensation | | | |
plans (stock options)| | | |
approved by | | | |
stockholders | 125,000 | $0.71 | 3,175,000 |
---------------------|--------------------|-----------------|------------------|
Total | 125,000 | $0.71 | 3,175,000 |
---------------------|--------------------|-----------------|------------------|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT
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This report includes "forward-looking" information, as that term is defined in
the Private Securities Litigation Reform Act of 1995 or by the Securities and
Exchange Commission in its rules, regulations and releases, regarding, among
other things, Zunicom's plans, objectives, expectations and intentions. These
statements include, without limitation, statements concerning the potential
operations and results of the Company. The Company cautions investors that any
such statements are based on currently available operational, financial and
competitive information, and are subject to various risks and uncertainties.
Actual future results and trends may differ materially depending on a variety of
factors. Those factors include, among others, those matters disclosed as Risk
Factors in Item 1A contained in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2010 COMPARED TO DECEMBER 31, 2009
Currently, the operations of Zunicom are conducted through its wholly-owned
subsidiary, AlphaNet. AlphaNet has been a provider of guest communication
services to the hospitality market. AlphaNet discontinued this business as of
August 31, 2010. Accordingly, the results of this discontinued operation are
presented in our Consolidated Statements of Operation below. In April 2010,
AlphaNet continued its participation in the hospitality market through the
purchase of the assets and business of Action Computer Systems. AlphaNet is now
a reseller of point of sale software and hardware to restaurants in southern
Connecticut, Westchester County, New York, and New York City.
REVENUE
For the year ended December 31, 2010, Zunicom, through its wholly owned
subsidiary Alphanet which, until August 31, 2010,consisted of two product lines,
had consolidated revenues from continuing operations of $848,828 compared to $0
for the same period in 2009. This revenue is from Action Computer Systems which
was acquired in April 2010.
Revenues of the Office (TM) product line have been declining sharply in recent
years due to increasing use of laptops by business travelers, increasing numbers
of hotels turning their business centers into a "free to the guest" model for
competitive reasons, and competition from large "full service" providers who
include business centers as part of a complete package of outsourced
administrative services to hotels. In April 2010, AlphaNet acquired a product
line as a reseller of point-of-sale software to restaurants continuing its
history of providing services to the hospitality industry. (See Footnote N,
Purchase of Business, to the Consolidated Financial Statements below.)
Management has determined that the Office (TM) product line is no longer viable
and discontinued that product line effective August 31, 2010.
COST OF REVENUES
For the year ended December 31, 2010, Action Computer Systems had cost of
revenue from continuing operations of $448,383, compared to $0 for the same
period in 2009.
OPERATING EXPENSES
For the year ended December 31, 2010, Zunicom's consolidated operating expenses
from continuing operations, consisting of selling, general and administrative
13
expenses and depreciation and amortization of property and equipment increased
to $1,085,583 compared to $809,717 for the same period in 2009, an increase of
$275,866 or 34.1%. The increase is due to the addition of Action Computer
Systems operating expenses of $473,879 offset by a decrease in Zunicom expenses
of $198,013.
Zunicom's selling, general and administrative expenses for the year ended
December 31, 2010 were $611,704 compared to $808,847 for the same period in
2009, a decrease of $198,013 or 24.4%. The decrease is primarily attributable to
the discount on settlement of the UPG note in 2009 for $301,641, offset by
increases in professional fees of approximately $75,000 and travel expenses of
approximately $11,700, all related to the acquisition and integration of Action
Computer Systems, an increase of approximately $7,000 in communication and
filing expenses, absence of a tax credit of approximately $17,300 received in
2009, offset by a decrease of approximately $6,800 in directors and officers
insurance.
For the year ended December 31, 2010, the Company recorded $79,333 in
depreciation and amortization expense from continuing operations compared to
$870 in 2009. The increase is due to depreciation and amortization of the assets
acquired in the acquisition of Action Computer Systems.
OTHER INCOME / EXPENSE
Zunicom's consolidated other income (expense)for the year ended December 31,
2010 was income of $1,163,933 compared to a loss of $4,198,264 for the year
ended December 31, 2009, an increase of $5,362,197 or 127.7%. The increase is
due to the loss on impairment of assets of $4,367,891, increase in equity in
investee of $1,233,672, and lower interest income of $239,366 due to the
settlement of the UPG notes in 2009.
Equity in earnings of investee of $1,143,343 represents Zunicom's share of UPG's
net income for the year ended December 31, 2010 recorded in accordance with the
equity method of accounting for an unconsolidated investee. For the year ended
December 31, 2009 Zunicom's equity in the earnings of UPG was a loss of $90,329.
LIQUIDITY - YEAR ENDED DECEMBER 31, 2010
Zunicom had cash and cash equivalents of $4,427,227 and $5,680,943 at December
31, 2010 and 2009 respectively.
Net cash used in operating activities was $736,590 for the year ended December
31, 2010 compared to cash used in operating activities of $613,457 for the year
ended dateYear2009Day31Month12December 31, 2009. Cash used in operating
activities in 2010 is net income of $264,095, depreciation of $88,445, write off
of property and equipment of $10,748, and stock-based compensation of $51,415,
offset by a decrease in deferred income taxes of $36,533,and equity in earnings
of investee of $1,143,343 and an increase in working capital of $28,583.
Net cash used in investing activities of $495,000 represents the acquisition of
Action Computer Systems.
Net cash used in financing activities of $22,126 is the dividends paid on the
preferred stock.
14
Net cash decreased in 2010 by $1,253,716.
In December 2009, the Company reached agreement with UPG under which UPG agreed
to pay the two unsecured notes in full less a 7.5% discount. The Company
received a cash payment of $3,771,141 of principal and accrued interest.
Accordingly, the
Company recorded $1,124,146 as a reversal of a valuation allowance against the
impairment charge and a recorded an expense in operating expenses of $301,641
for the discount on the notes.
Zunicom management believes its cash on hand will be sufficient to meet its
operational needs over the next twelve months.
CAPITAL RESOURCES
At December 31, 2010 the Company did not have any material commitments for
capital expenditures. The Company has no off balance sheet financing
arrangements.
INTERNATIONAL CURRENCY FLUCTUATION
The Company has no exchange rate risk as our customers are all located in the
U.S. and we source all of our software licenses and computer equipment and
components in the U.S.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial
statements, and revenues and expenses during the periods reported. Actual
results could differ from those estimates. The Company believes the following
are the critical accounting policies which could have the most significant
effect on the Company's reported results and require the most difficult,
subjective or complex judgments by management.
Revenue Recognition
AlphaNet sells and installs point-of-sale software and related hardware to
restaurants. AlphaNet also services and supports those systems and provides
software upgrades when released by the software developer. For sales and
installations of new systems, AlphaNet recognizes revenue when the system is
installed and accepted by the restaurant owner. For service and support,
AlphaNet recognizes revenue when the service and support are provided. For sales
of parts, accessories and supplies, AlphaNet recognizes revenue when the item is
shipped and invoiced.
The cost of software licenses, equipment and components purchased for the
installation of new systems in an accounting period prior to the period in which
it is installed, is carried as a deferred cost on the Company's balance sheet
until the system is installed and the revenue recognized. At that point the
deferred costs are charged to cost of sales. Customer deposits represent
deposits made by customers in an accounting period prior to the period in which
the system is installed. Upon installation, the customer deposit is recognized
as revenue.
15
Income Taxes
The Company utilizes the asset and liability approach in accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial and tax basis of assets
and liabilities as well as loss carryforwards that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense or benefit is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is no longer subject to U.S. federal
tax and state tax examinations for years before 2007. Management does not
believe there will be any material changes in our unrecognized tax positions
over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, there was no accrued interest or penalties associated
with any unrecognized tax benefits, nor was any interest expense recognized
during the year ended December 31, 2010.
Stock-Based Compensation
The Company accounts for its stock-based compensation under the provisions of
FASB ASC 718 (SFAS 123R), "Share-Based Payment" FASB ASC 718, which requires the
recognition of the fair value of stock-based compensation. Under the fair value
recognition provisions for FASB ASC 718,stock-based compensation cost is
estimated at the grant date based on the fair value of the awards expected to
vest and recognized as expense ratably over the requisite service period of the
award. We have used the Black-Scholes valuation model to estimate fair value of
our stock-based awards which requires various judgmental assumptions including
estimating stock price volatility, forfeiture rates and expected life. Our
computation of expected volatility is based on a combination of historical and
market-based implied volatility. In addition, we consider many factors when
estimating expected forfeitures and expected life, including types of awards,
employee class and historical experience. If any of the assumptions used in the
Black-Scholes model change significantly, stock-based compensation expense may
differ materially in the future from that recorded in the current period.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company partially adopted FASB ASC 820-10-65
(SFAS No. 157), "Fair Value Measurements". This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. As
permitted by FASB ASC 820-10-65, the Company elected to defer the adoption of
the nonrecurring fair value measurement disclosure of nonfinancial assets and
liabilities. The partial adoption of SFAS No. 157 did not have a material impact
on the Company's results of operations, cash flows or financial position. To
increase consistency and comparability in fair value measurements, SFAS No. 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
16
techniques used to measure fair value into three levels as follows:
Level 1 -- quoted prices (unadjusted) in active markets for identical
asset or liabilities;
Level 2 -- observable inputs other than Level I, quoted prices for
similar assets or liabilities in active markets, quoted
prices for identical or similar assets and liabilities in
markets that are not active, and model-derived prices
whose inputs are observable or whose significant value
drivers are observable; and
Level 3 -- assets and liabilities whose significant value drivers are
unobservable.
Observable inputs are based on market data obtained from independent sources,
while unobservable inputs are based on the Company's market assumptions.
Unobservable inputs require significant management judgment or estimation. In
some cases, the inputs used to measure an asset or liability may fall into
different levels of the fair value hierarchy. In those instances, the fair value
measurement is required to be classified using the lowest level of input that is
significant to the fair value measurement. Such determination requires
significant management judgment. There were no changes in the Company's
valuation techniques used to measure fair value on a recurring basis as a result
of partially adopting SFAS 157.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued FASB
ASC 820 (SFAS No. 157), Fair Value Measurements ("SFAS 157"), which was
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and for all interim periods within those fiscal years. The
Company adopted FASB ASC 820 on January 1, 2008. In February 2008, the FASB
issued FASB Staff Position ("FSP")FAS157-2 ("FSP FAS 157-2"), which delayed for
one year the effective date of SFAS 157 for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company adopted FSP FAS
157-2 on January 1, 2009.
On January 1, 2009, the Company adopted FASB ASC 815 (EITF 07-5), Determining
Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own
Stock ("EITF 07-5"), which requires the application of a two-step approach in
evaluating whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity's own stock, including evaluating the instrument's
contingent exercise and settlement provisions. The adoption of FASB ASC 815 did
not have any impact on the Company's consolidated financial statements.
In April 2009, the FASB issued FASB ASC 820-10-65 Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability has Significantly
Decreased and Identifying Transactions That Are Not Orderly,FASB ASC 820-10-65-1
(FSP FAS 115-2 and FAS 124-2) Recognition and Presentation of
Other-Than-Temporary Impairments. These FSPs were issued to provide additional
guidance about (1) measuring the fair value of financial instruments when the
markets become inactive and quoted prices may reflect distressed transactions,
and (2) recording impairment charges on investments in debt instruments.
Additionally, the FASB issued FASB ASC 825-10-65-1(FSP No. 107-1/APB 28-1)
17
Interim Disclosures about Fair Value of Financial Instruments ("FSP 107-1"), to
require disclosures of fair value of certain financial instruments in interim
financial statements. The Company does not anticipate the adoption of these
FSP's to materially impact the consolidated financial statements. These FSPs are
effective for financial statements issued for interim and/or annual reporting
periods ending after June 15, 2009.
The Company adopted FASB ASC 805 (SFAS 141(R)), Business Combinations on January
1, 2009. SFAS 141(R) provides companies with principles and requirements on how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, liabilities assumed, and any non-controlling interest in the
acquire as well as the recognition and measurement of goodwill acquired in a
business combination. FASB ASC 805 also requires certain disclosures to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. Acquisition costs associated with the business
combination will generally be expensed as incurred. The adoption of this
standard did not have an impact on the accompanying audited financial statements
as the Company did not enter into a business combination during the twelve
months ended December 31, 2009.
The Company adopted FASB ASC 810 (SFAS 160), "Non-controlling Interests in
Consolidated Financial Statements - an amendment of ARB No.51 "on January 1,
2009. This statement clarifies that a non-controlling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. This statement changes the way
the consolidated income statement is presented by requiring net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest and to disclose those amounts on the face of the
income statement. The adoption of this standard did not have a material impact
on the Company's consolidated financial statements for the twelve months ended
December 31, 2009.
The Company adopted FASB ASC 810 (SFAS No. 161), "Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No. 133" on
January 1, 2009. FASB ASC 815 is intended to improve financial standards for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b)how derivative instruments and related hedged items are
accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities and its related interpretations; and (c) how derivative instruments
and related hedged items affect an entity's financial position, financial
performance, and cash flows. The adoption of this standard did not have a
material impact on the Company's financial statements or its disclosures therein
for the twelve months ended December 31, 2009.
SFAS 166, "Accounting for Transfers of Financial Assets" (FASB Codification
Topics 860-10 & 405-20) - Statement 166 is a revision to FASB Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," and will require more information about transfers of financial
assets, including securitization transactions, and where entities have
continuing exposure to the risks related to transferred financial assets. It
eliminates the concept of a "qualifying special-purpose entity," changes the
requirements for derecognizing financial assets, and requires additional
18
disclosures. Effective at the start of a reporting entity's first fiscal year
beginning after November 15, 2009, or January 1, 2010, for a calendar year-end
entity. Early application is not permitted.
SFAS 167, "Amendments to FASB Interpretation No. 46(R) " (FASB Codification
Topics 323, 460, 810, 860, 712, 715, 954, & 958) - Statement 167 is a revision
to FASB Interpretation No. 46 (Revised December 2003), "Consolidation of
Variable Interest Entities," and changes how a reporting entity determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based on, among
other things, the other entity's purpose and design and the reporting entity's
ability to direct the activities of the other entity that most significantly
impact the other entity's economic performance.
Effective at the start of a reporting entity's first fiscal year beginning after
November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early
application is not permitted.
Accounting Standards Update No. 2009-05, "Fair Value Measurements and
Disclosures (Topic 820) Measuring Liabilities at Fair Value" - provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the following techniques:
1. A valuation technique that uses: The quoted price of the identical liability
when traded as an asset, or quoted prices for similar liabilities or similar
liabilities when traded as assets.
2. Another valuation technique that is consistent with the principles of Topic
820. Two examples would be an income approach, such as a present value
technique, or a market approach, such as a technique that is based on the amount
at the measurement date that the reporting entity would pay to transfer the
identical liability or would receive to enter into the identical liability.
Accounting Standards Update No. 2009-13, "Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging
Issues Task Force."
- the amendments:
* permit vendors to account for products and services separately rather than as
a combined unit.
* result in requirements multiple-deliverable arrangements to be separated in
more circumstances than under existing guidance.
* eliminate the residual method of allocation and instead requires entities to
allocate the arrangement consolidation at the inception of the arrangement to
all deliverables using the relative selling price method. Vendors will be
required to determine their best estimate of the selling price consistently
with the method they use to determine the selling price when the good or
service is sold separately.
This Update was issued on October 12, 2009 and will be effective for revenue
arrangements that begin or are changed in fiscal years that start June 15, 2010,
or later. Entities that adopt the changes before then will have to apply them to
their results from the beginning of their fiscal years.
19
Accounting Standards Update No. 2009-14, "Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements-a consensus of the FASB Emerging
Issues Task Force." - revises the scope of FASB ASC 985-605, "Software: Revenue
Recognition," to exclude all tangible products containing both software and non-
software components that operate together to deliver the product's functions. As
a result of the changes, vendors will be permitted to recognize revenue earlier
than they had previously because of the changes to the accounting literature for
allocation, measurement, and recognition of revenue.
This Update was issued on October 12, 2009 and will be effective for revenue
arrangements that begin or are changed in fiscal years that start June 15, 2010,
or later. Entities that adopt the changes before then will have to apply them to
their results from the beginning of their fiscal years.
Accounting Standards Update No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements." -
This ASU requires some new disclosures and clarifies some existing disclosure
requirements about fair value measurement as set forth in Codification Subtopic
820-10. The FASB's objective is to improve these disclosures and, thus, increase
the transparency in financial reporting. Specifically, ASU 2010-06 amends
Codification Subtopic 820-10 to now require:
A reporting entity should disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers; and In the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should
present separately information about purchases, sales, issuances, and
settlements. In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures: For purposes of reporting fair value measurement
for each class of assets and liabilities, a reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities; and A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
application is permitted.
In January 2010, the FASB issued new guidance which improves disclosures about
fair value measurements. The new standard is effective for interim and annual
periods beginning after December 15, 2009, except for certain disclosures
regarding Level 3 measurements, which are effective for fiscal years beginning
after December 15, 2010. The Company is evaluating the impact of this guidance
on its financial statements and does not expect this new guidance to have a
material effect on the financial statements.
In February 2010, the FASB issued updated guidance to address certain
implementation issues related to an entity's requirements to perform and
disclose subsequent events. This update requires SEC filers to evaluate
subsequent events through the date the financial statements were issued and
exempts SEC filers from disclosing the date through which subsequent events have
20
been evaluated. The updated guidance was effective upon issuance, and did not
have a material impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange
Our customers and suppliers are located in the U.S. and we pay all of our
vendors in U.S. dollars. We have no foreign currency exchange exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item appears in the Consolidated Financial
Statements and Report of Independent Registered Public Accounting Firm contained
in Item 15(a) (1 and 2).
ITEM 9. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
The Company does not have any disagreement with its auditors.
ITEM 9A. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining effective
internal control over financial reporting as defined in Rules 13a-15(f) under
the Exchange Act. Our internal control over financial reporting is designed to
ensure that material information regarding our operations is made available to
management and the board of directors to provide them reasonable assurance that
the published financial statements are fairly presented. There are limitations
inherent in any internal control, such as the possibility of human error and the
circumvention or overriding of controls. As a result, even effective internal
controls can provide only reasonable assurance with respect to financial
statement preparation.
As conditions change over time so too may the effectiveness of internal
controls.
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this annual report on Form
10K, (December 31, 2010). In making this assessment, management used the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act), as of the end of such period, are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. Also, based on this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our internal control over financial
reporting as of December 31, 2010, is effective.
21
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
ITEM 9B. OTHER INFORMATION
None
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ZUNICOM, INC.
The names, ages and titles of our executive officers and directors subsequent to
the Deconsolidation Date are as follows:
Name Age Positions
------- ------ ----------
William Tan 67 Chairman - Board of Directors / Chief
Executive Officer
Ian Colin Edmonds 39 Director
John Rudy 68 Vice President, Chief Financial Officer
and Director
WILLIAM TAN has been chairman of the board of directors and chief executive
officer since January 1999. He has served as the chairman of Zunicom since
February 1997 and of AlphaNet since October 1999. Mr. Tan's principal business
has been private investments and he has held senior executive positions in a
number of financing, insurance, textile, property development and related
businesses. Mr. Tan is the father-in-law of Ian Edmonds.
IAN COLIN EDMONDS has been a director since January 1999, and from July 1997
through December 2006 served as an officer, first as vice president and from
April 2003 as executive vice president. He also served as a director of AlphaNet
from October 1999 through December 2006. Mr. Edmonds is currently the chief
executive officer of UPG in which the Company holds a 41.0% interest. Mr.
Edmonds holds a Bachelors Degree in Marketing with a Minor in Statistics from
the University of Denver. Mr. Edmonds is the son-in-law of William Tan.
JOHN RUDY was elected to serve as a director in October, 2006. He is founder and
owner and has been President since 1992, of Beacon Business Services, Inc.,
Matawan, New Jersey, a consulting firm specializing in providing financial,
accounting and business advisory services to small companies. From August 1998
through April 2000 Mr. Rudy served as interim chief financial officer of
Hometown Auto Retailers, Inc., a publicly-traded automobile dealer group. From
August 2005 until May 2006 he served as interim chief financial officer of Sona
Mobile Holdings Corp., a publicly traded wireless technology company. From July
2005 to August 2008, Mr. Rudy served as a director of AdStar, Inc., a
publicly-traded company engaged in internet ad placement products and services.
From May 2005 to May 2008, he served as a director of Trey Resources, Inc., a
publicly-traded software reseller. Since May 2005, Mr. Rudy has served as a
22
director of Jesup & Lamont, Inc., a publicly-traded broker-dealer, where he
serves as Chairman of the Audit Committee. Mr. Rudy received an M.B.A. from
Emory University and a B.S. in economics from Albright College and is a
certified public accountant in New York State.
Directors of the Company are elected at the annual shareholder meeting and serve
as directors until the next annual meeting of shareholders. Directors may be
re-elected at succeeding annual meetings so as to succeed themselves. No
material changes have occurred with regard to procedures by which security
holders may recommend nominees to our board of directors.
The Board acts as the Company's audit committee as well as the Company's
executive compensation committee. Neither Mr. Tan, nor Mr. Edmonds qualifies as
an "audit committee financial expert" as defined in SEC Regulation S-K. Mr. Rudy
qualifies but is no longer independent since being appointed Vice - President
and Chief Financial Officer in January, 2007.
Other Significant and Key Employees:
The following table sets forth-certain information concerning significant
employees of the Company's wholly-owned subsidiary.
Age Position
John Vitiello 44 Vice President Operations of Action Computer Systems
Roger Crawford 40 Vice President Sales and Marketing of Action Computer
Systems
John Vitiello is Vice President Operations of Action Computer Systems. He
manages system installations and customer service and support. Mr. Vitiello has
been with Action Computer Systems since 1997. Prior to joining Action Computer
Systems, Mr. Vitiello managed his family's restaurant in Greenwich, Connecticut.
Mr. Vitiello attended the Culinary Institute of America and possesses the
licenses and certifications required for systems installations.
Roger Crawford is Vice President Sales and Marketing of Action Computer Systems.
He joined Action Computer Systems in 2007. Prior to joining Action Computer
Systems, Mr. Crawford was with the Yonkers Public School system in Yonkers, New
York, and the Lincoln Hall Residential Campus for Adolescent Boys in
Lincolndale, New York. Mr. Crawford received a Professional Certificate in
Essentials of Restaurant Management from the French Culinary Institute of NYC in
2003. Mr. Crawford also received a ServSafe Food Protection Manager
Certification from Westchester Community College in 2006. Mr. Crawford holds a
MsEd degree in Educational Leadership from City College of NY, a MSW degree in
Clinical Social Work from Yeshiva University, and a BS degree in Psychology from
Brooklyn College.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer and other persons performing similar
functions, as well as all of our other employees and directors. This Code of
Ethics is posted on our website at www.zunicom.com.
Section 16(a) Beneficial Ownership Reporting Compliance
23
Based on a review of the Forms 3, 4 and 5 submitted during and with respect to
the year ended December 31, 2010, there have been no untimely filings of such
required forms.
Item 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
General
We have provided what we believe is a competitive compensation package to our
executive management team through a combination of base salary, equity
participation and an employee benefits program.
This Compensation Discussion and Analysis explains our compensation philosophy,
policies and practices since the deconsolidation of UPG in December 2006.
Our objective is to attract and retain executives with the ability and the
experience necessary to lead us and deliver strong performance and value to our
shareholders, we strive to provide a total compensation package that is
competitive with total compensation generally provided to executives in our
industry and general industry companies of similar size in terms of revenue and
market capitalization. Those are the organizations against whom we generally
compete for executive talent.
The compensation package for our executive officers may include both cash and
equity incentive plans that align an executive's compensation with our
short-term and long-term performance goals and objectives.
Offer competitive benefits package to all full-time employees.
We provide a competitive benefits package to all full-time employees including
health and welfare benefits such as medical and disability insurance. We have no
structured executive perquisite benefits (e.g., club memberships or sports
tickets) for any executive officer, including the named executive officers, and
we currently do not provide any deferred compensation programs or supplemental
pensions to any executive officer, including the named executive officers.
Provide fair and equitable compensation.
We provide a total compensation program that we believe will be perceived by
both our executive officers and our shareholders as fair and equitable. In
addition to market pay levels and considering individual circumstances related
to each executive officer, we also consider the pay of each executive officer
relative to each other executive officer and relative to other members of the
management team. We have designed the total compensation programs to be
consistent for our executive management team.
Our Executive Compensation Process
Our board of directors acts as our compensation committee. Our executive
officers are elected by our board of directors. The following discussions are
generally the company's and the board of directors' historical practices. Based
on their understanding of executive compensation for comparable positions at
similarly situated companies, experience in making these types of decisions and
24
judgment regarding the appropriate amounts and types of executive compensation
to pay and in part on recommendations where appropriate, from our chief
executive officer, along with other considerations discussed below, the board of
directors approve the annual compensation package of our executive officers with
respect to the appropriate base salary, and the grants of long-term equity
incentive awards.
The annual performance review of our executive officers is considered by the
board of directors when making decisions on setting base salary, and grants of
long-term equity incentive awards. Our chief executive officer does not
currently take a salary. When making decisions on setting base salary, targets
for and payments under our bonus opportunity and initial grants of long-term
equity incentive awards for new executive officers, the board of directors
considers the importance of the position to us, the past salary history of the
executive officer and the contributions to be made by the executive officer to
us. The board of directors also reviews any analyses and recommendations from
other sources retained or consulted.
The board of directors review the annual performance of any parties related to
the CEO and consider the recommendations of the related person's direct
supervisor with respect to base salary, targets for and payments under our bonus
opportunity and grants of long-term equity incentive awards. The board of
directors review and may approve these recommendations with modifications as
deemed appropriate.
Our Executive Compensation Programs
Overall, our executive compensation programs are designed to be consistent with
the objectives and principles set forth above. The basic elements of our
executive compensation programs are summarized in the table below, followed by a
more detailed discussion of each compensation program.
Element Characteristics Purpose
----------- ---------------------------------- ---------------------------------
Base Fixed annual cash compensation; Keep our annual compensation
salary all executives are eligible for competitive with the market for
periodic increases in base salary skills and experience necessary
based on performance and market to meet the requirements of the
pay levels. executive's role with us.
Long-term Performance-based equity award Align interest of management with
equity which has value to the extent our shareholders; motivate and reward
incentive common stock price increases over management to increase the
plan awards time; targeted at the market pay shareholder value of the company
(stock level and/or competitive practices over the long term.
options) at similar companies.
Health Fixed component. The same/compar- Provides benefits to meet the
& welfare able health & welfare benefits health and & welfare needs of
benefits (medical and disability insurance) employees and their families.
are available for all full-time
employees.
25
Allocation Between Long-Term and Currently Paid Out Compensation
The compensation we currently pay consists of base pay. The long-term
compensation consists entirely of awards of stock options pursuant to our stock
option plans. The allocation between long-term and currently paid out
compensation is based on our objectives and how comparable companies use
long-term and currently paid compensation to pay their executive officers.
Allocation Between Cash and Non-Cash Compensation
It is our policy to allocate all currently paid compensation in the form of cash
and all long-term compensation in the form of awards of options to purchase our
common stock. We consider competitive markets when determining the allocation
between cash and non-cash compensation.
Other Material Policies and Information
All pay elements are cash-based except for the long-term equity incentive
program, which is an equity-based (stock options) award. We consider market pay
practices and practices of comparable companies in determining the amounts to be
paid, what components should be paid in cash versus equity, and how much of a
named executive officer's compensation should be short-term versus long-term
compensation opportunities for our executive officers, including our named
executive officers, are designed to be competitive with comparable companies. We
believe that a substantial portion of each named executive officer's
compensation should be in performance-based pay.
In determining whether to increase or decrease compensation to our executive
officers, including our named executive officers, annually we take into account
the changes (if any) in the market pay levels, the contributions made by the
executive officer, the performance of the executive officer, the increases or
decreases in responsibilities and roles of the executive officer, the business
needs for the executive officer, the transferability of managerial skills to
another employer, the relevance of the executive officer's experience to other
potential employers and the readiness of the executive officer to assume a more
significant role with another organization. In addition, we consider the
executive officer's current base salary in relation to the market pay of similar
companies.
Compensation or amounts realized by executives from prior compensation from us,
such as gains from previously awarded stock options or options awards, are taken
into account in setting other elements of compensation, such as base pay, or
awards of stock options under our long-term equity incentive program. With
respect to new executive officers, we take into account their prior base salary
and annual cash incentive, as well as the contribution expected to be made by
the new executive officer, the business needs and the role of the executive
officer with us. We believe that our executive officers should be fairly
compensated each year relative to market pay levels of similar companies and
equity among all our executive officers. Moreover, we believe that our long-term
incentive compensation program furthers our significant emphasis on pay for
performance compensation.
Annual Cash Compensation
To attract and retain executives with the ability and the experience necessary
to lead us and deliver strong performance to our shareholders, we provide a
26
competitive total compensation package. Base salaries and total compensation are
targeted at market levels of similar companies, considering individual
performance and experience, to ensure that each executive is appropriately
compensated.
Base Salary
Annually we review salary ranges and individual salaries for our executive
officers. We establish the base salary for each executive officer based on
consideration of market pay levels of similar companies and internal factors,
such as the individual's performance and experience, and the pay of others on
the executive team.
We consider market pay levels among individuals in comparable positions with
transferable skills within our industry and comparable companies in general
industry. When establishing the base salary of any executive officer, we also
consider business requirements for certain skills, individual experience and
contributions, the roles and responsibilities of the executive and other
factors. We believe a competitive base salary is necessary to attract and retain
an executive management team with the appropriate abilities and experience
required to lead us. Approximately 30% to 90% of an executive officer's total
cash compensation, depending on the executive's role with us, is paid as a base
salary.
The base salaries paid to our named executive officers are set forth below in
the Summary Compensation Table - See "Summary of Compensation." For the fiscal
year ended December 31, 2010, cash compensation to our named executive officers
was $125,300, with our chief executive officer receiving $0 of that. We believe
that the base salary paid to our executive officers during 2010 achieves our
executive compensation objectives, compares favorably to similar companies and
is within our objective of providing a base salary at market levels.
Long-term Equity Incentive Compensation
We award long-term equity incentive grants to executive officers and directors,
including certain named executive officers, as part of our total compensation
package. These awards are consistent with our pay for performance principles and
align the interests of the executive officers to the interests of our
shareholders. The board of directors reviews the amount of each award to be
granted to each named executive officer and approves each award. Long-term
equity incentive awards are made pursuant to our stock option plans.
Our long-term equity incentive compensation is currently exclusively in the form
of options to acquire our common stock. The value of the stock options awarded
is dependent upon the performance of our common stock price. The board of
directors and management believe that stock options currently are the
appropriate vehicle to provide long-term incentive compensation to our executive
officers. Other types of long-term equity incentive compensation may be
considered in the future as our business strategy evolves. Stock options are
awarded on the basis of anticipated service to us and vest as determined by the
board of directors.
Options are granted with an exercise price equal to the fair market value of our
common stock on the date of grant. Fair market value is defined as the closing
market price of a share of our common stock on the date of grant. We do not have
27
any program, plan or practice of setting the exercise price based on a date or
price other than the fair market value of our common stock on the grant date.
Like our other pay components, long-term equity incentive award grants are
determined based on competitive market levels of comparable companies.
Generally, we do not consider an executive officer's stock holdings or previous
stock option grants in determining the number of stock options to be granted. We
believe that our executive officers should be fairly compensated each year
relative to market pay levels of comparable companies and relative to our other
executive officers. Moreover, we believe that our long-term incentive
compensation program furthers our significant emphasis on pay for performance
compensation. We do not have any requirement that executive officers hold a
specific amount of our common stock or stock options.
The board of directors retains discretion to make stock option awards to
executive officers at other times, including in connection with the hiring of a
new executive officer, the promotion of an executive officer, to reward
executive officers, for retention purposes or for other circumstances
recommended by management. The exercise price of any such grant is the fair
market value of our stock on the grant date.
For accounting purposes, we apply the guidance in Statement of Financial
Accounting Standard 123 (revised December 2004), or SFAS 123(R), to record
compensation expense for our stock option grants. SFAS 123(R) is used to develop
the assumptions necessary and the model appropriate to value the awards as well
as the timing of the expense recognition over the requisite service period,
generally the vesting period, of the award.
Executive officers recognize taxable income from stock option awards when a
vested option is exercised. We generally receive a corresponding tax deduction
for compensation expense in the year of exercise. The amount included in the
executive officer's wages and the amount we may deduct is equal to the common
stock price when the stock options are exercised less the exercise price
multiplied by the number of stock options exercised. We currently do not pay or
reimburse any executive officer for any taxes due upon exercise of a stock
option.
Overview of 2010 Compensation
We believe that the total compensation paid to our named executive officers for
the fiscal year ended December 31, 2010 achieves the overall objectives of our
executive compensation program. In accordance with our overall objectives,
executive compensation for 2010 was competitive with comparable companies. See
"Summary of Compensation."
Other Benefits
Health and Welfare Benefits
All full-time employees, including our named executive officers, may participate
in our health and welfare benefit programs, including medical and disability
insurance.
28
Stock Ownership Guidelines
Stock ownership guidelines have not been implemented by the board of directors
for our executive officers. We continue to periodically review best practices
and re-evaluate our position with respect to stock ownership guidelines.
Securities Trading Policy
Our securities trading policy states that executive officers, including the
named executive officers, and directors may not purchase or sell puts or calls
to sell or buy our stock, engage in short sales with respect to our stock, or
buy our securities on margin.
Tax Deductibility of Executive Compensation
Limitations on deductibility of compensation may occur under Section 162(m) of
the Internal Revenue Code which generally limits the tax deductibility of
compensation paid by a public company to its chief executive officer and certain
other highly compensated executive officers to $1 million in the year the
compensation becomes taxable to the executive officer. There is an exception to
the limit on deductibility for performance-based compensation that meets certain
requirements.
Although deductibility of compensation is preferred, tax deductibility is not a
primary objective of our compensation programs. We believe that achieving our
compensation objectives set forth above is more important than the benefit of
tax deductibility and we reserve the right to maintain flexibility in how we
compensate our executive officers that may result in limiting the deductibility
of amounts of compensation from time to time.
Summary of Compensation
The following table sets forth certain information with respect to compensation
for the years ended December 31, 2010 and 2009 earned by or paid to our chief
executive officer, chief financial officer and our only two other most highly
compensated executive officers that qualify as, and are referred to as, the
named executive officers.
29
Summary Compensation Table
Change in
Non- Pension
Equity Value
Incentive and Non-
Plan Qualified All
Name & Cash Stock Option Compen- Deferred Other
Principal Salary Bonus Awards Awards sation Compensation Compensa-
Position Year ($) ($) ($) ($) ($) Earnings ($) tion ($) Total ($)
-------------------------------------------------------------------------------------------
William Tan - 2010 - - - - - - - -
Chairman of 2009 - - - - - - -
the Board of
Directors
and CEO
John Rudy - 2010 125,300 - - - - - - 125,300
VP/CFO and 2009 115,532 - - - - - 115,532
Director
Ian Edmonds - 2010 7,500 - - - - - - 7,500
Director 2009 7,500 - - - - - - 7,500
Grants of Plan Based Awards
-----------------------------------------------------------------------------------------
Estimated Future Payouts Estimated Future All All
Under Non-Equity Payouts Other Other
Incentive Under Equity Incentive Stock Option
Plan Awards(1) Plan Awards Awards: Awards: Exercise
Grant ------------------------ ----------------------- Number Number of or Base
Date of shares Securities Price of
Name & Fair Thres- Thres- or stock Underlying Option
Principal Grant Value hold Target Maximum hold Target Maximum Units Options Awards
Position Date ($) ($) ($) ($) (#) (#) (#) (#) (#) ($/share)
------------ --------- ------ ------- ------ -------- ------ ------ ------- --------- ----------- ---------
William Tan
President
and CEO None
-----------------------------------------------------------------------------------------
Ian Edmonds
Director None
-----------------------------------------------------------------------------------------
John Rudy, VP, CFO and
Director None
30
(1) There were no option grants in 2010. All Option Awards were fully vested
as of December 31, 2010.
Discussion of Summary Compensation and Plan-Based Awards Tables
Our executive compensation policies and practices, pursuant to which the
compensation set forth in the Summary Compensation Table and the grants of Plan
Based Awards table was paid or awarded, are described above under "Compensation
Discussion and Analysis." A summary of certain material terms of our
compensation plans and arrangements is set forth below.
Employment Agreements and Arrangements
In February 2007, Zunicom entered into a one year employment agreement with John
Rudy, our Vice President and Chief Financial Officer and a director. Under the
agreement, Mr. Rudy receives $5,000 per month for defined services as our Chief
Financial Officer and to oversee the operations of our subsidiary, AlphaNet
Hospitality Systems, Inc. Services outside of the scope as defined in the
agreement will be paid at an hourly rate of $150. In addition, Mr. Rudy received
options to purchase 25,000 shares of our common stock at an exercise price of
$1.75. The agreement stipulates that Mr. Rudy has other interests and his
services to Zunicom are not on a full-time basis. At our Board of Directors
meeting on April 27, 2009, Mr. Rudy's agreement was renewed with the change that
Mr. Rudy will no longer receive stock options and his monthly fee for defined
services was increased to $5,500. Mr. Rudy received $125,300 for his services as
Chief Financial Officer in 2010. In addition, the Company engaged Mr. Rudy's
services through his firm, Beacon Business Services, Inc. to manage the
day-to-day operations of Action Computer Systems at a fixed fee of $7,000 per
month. Beacon Business Services was paid $35,000 in 2010. As an executive of the
Company, Mr. Rudy does not receives compensation for his services as a director.
Option Re-Pricing
There has been no re-pricing or other material modification of any features or
characteristics of any of our outstanding stock options during the year ended
December 31, 2009.
Bonus and Salary
Our board of directors has established a pay for performance approach for
determining executive pay. Base salaries and total annual cash compensation are
targeted at market levels of competitive practice based on companies in similar
lines of business in similar geographies, as well as similar in size in terms of
revenue and market capitalization. See - "The Objectives of our Executive
Compensation Program."
Equity Incentive Compensation Plan
On August 13, 1999, the Board of Directors approved the 1999 Incentive Stock
Option Plan ("1999 Plan") which provided for 1,300,000 common stock options to
be issued. At December 31, 2009 and 2008, there are 525,000 and 525,000,
options, respectively, outstanding under the 1999 Plan.
Material Terms of Plan-Based Awards
31
The 1999 Incentive Stock Option Plan, approved on August 13, 1999 originally
provided for options that expired in November, 2005. In November, 2005 the Board
of Directors granted new options pursuant to the 1999 Plan expiring August 10,
2009.
Outstanding Equity Awards
Summary
At December 31, 2010 there are 125,000 compensatory stock options outstanding
with a weighted-average exercise price of $0.71 and all of these compensatory
stock options are exercisable. The weighted-average remaining contractual life
of the compensatory options outstanding and exercisable approximated 3.02 years
at December 31, 2010.
The following table sets forth certain information with respect to outstanding
equity awards at December 31, 2010 with respect to the named executive officers.
Outstanding Equity Awards at Fiscal Year-End
Option Awards Stock Awards
------------- ----------- ------------- ------------ -------- ---------- ------ ------ ----------- ----------
Name Number of Number of Equity Option Option Number Market Equity Equity
securities securities incentive exercise expiration of value incentive incentive
underlying underlying plan awards: price date shares of plan plan
unexercised unexercised Number of ($) or shares awards: awards:
options options securities units or Number of market or
# # underlying of units shares payout
Exercisable Unexercisable unexercised stock of units or value of
(1) unearned that stock other unearned
options have that rights that shares,
# not have have not units or
vested not vested other
# vested # rights
($) that have
not vested
($)
------------- ----------- ------------- ------------ -------- ---------- ------ ------ ----------- ----------
William Tan - 25,000 $0.45 3/10/2013
President
and CEO
------------- ----------- ------------- ------------ -------- ---------- ------ ------ ----------- ----------
John Rudy - 25,000 $0.45 3/10/2013
VP, CFO
------------- ----------- ------------- ------------ -------- ---------- ------ ------ ----------- ----------
25,000 $1.75 2/1/2012
------------- ----------- ------------- ------------ -------- ---------- ------ ------ ----------- ----------
(1) Options are fully vested at December 31, 2010.
32
Option Exercises
The following table sets forth certain information with respect to option and
stock exercises during the fiscal year ended December 31, 2010 with respect to
the named executive officers.
Option Exercises and Stock Vested (1)
Option Awards Stock Awards
Name Number of Value Number of Value
Shares Realized Shares Realized
Aquired on On Aquired on On
Exercise (#) Exercise ($) Vesting (#) Vesting ($)
---------------------------------------------------------------------
William Tan - - - -
John Rudy - - - -
(1) No options were exercised and no stock was awarded or vested.
Pension Benefits
We do not have any plan that provides for payments or other benefits at,
following, or in connection with, retirement.
Non-Qualified Deferred Compensation
We do not have any plan that provides for the deferral of compensation on a
basis that is not tax-qualified.
Post-Employment and Change in Control Provisions
Provisions and Triggers
Compensation of Directors
Our newly elected directors received an initial fee of $7,500 to serve 1 year,
plus reimbursement for actual out-of-pocket expenses in connection with each
board meeting attended. Directors who are also employees of the Company do not
receive additional remuneration for serving as a director. Following is a table
summarizing compensation to members of our board of director for 2010.
Director Compensation Table
Pension
Fees Non-Equity Value &
Earned Incentive Non-qualified
or Plan Deferred All Other
Paid in Stock Option Compensation Compensation Compensation
Name Cash(1) Awards Awards (2) Earnings (3) Tota1
------------ ------- ------ ------ ------------ ------------- ----------- ------
William Tan -- -- $ -- -- -- -- $ --
Ian Edmonds $ 7,500 -- $ -- -- -- -- $7,500
--
John Rudy -- -- $ -- -- -- -- $
(1) Messrs. Tan and Rudy, as officers of the Company, receive no
additional remuneration for serving as a director.
(2) Zunicom does not currently have a Non-Equity Incentive Compensation Plan.
(3) Zunicom does not currently have a Pension or Deferred Compensation Plan.
33
The following summarizes the grant date fair value of each award granted during
2010, computed in accordance with SFAS No. 123(R) for recognition in financial
statement reporting and grant date fair value for the individual directors:
There were no option grants in 2009.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve as a member of the board of directors or
compensation committee, or other committee serving an equivalent function, of
any other entity that has one or more of its executive officers serving as a
member of our board of directors. Mr. William Tan, our CEO and Mr. Ian Edmonds,
our former COO both serve as members of our board of directors and participated
in deliberations concerning executive compensation.
Compensation Committee Report
The Board of Directors has reviewed and discussed the Compensation Discussion
and Analysis with management and based on the review and discussion, the Board
of Directors has recommended that the Compensation Discussion and Analysis be
included in this annual report on Form 10-K.
William Tan, Chairman
Ian Edmonds
John Rudy
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information concerning the beneficial ownership
of the Company's Common Stock and Preferred Stock as of March 31, 2011 by(i)
each person who is known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each director of Zunicom, Inc., (iii) each of the executive
officers of Zunicom, and (iv) all directors and executive officers of Zunicom as
a group.
34
Common Series A Preferred
Stock Stock
------ --------
Amount Amount
and and
Nature of Nature of
Beneficial % of Beneficial % of
Name and Address Ownership(1) Class(2) Ownership(1) Class(2)
--------------------- ------------ -------- ---------------- ------
William Tan 2,460,273 (3) 25.28% 0 0
President and CEO Direct and
1720 Hayden Drive Indirect
Carrollton, TX 75006
--------------------- ------------ -------- ---------------- ------
Kim Yeow Tan 991,818 (4) 10.19% 0 0
11 Jalan Medang Indirect
Bukit Bandaraya
59100 Kuala Lumpur,
Malaysia
--------------------- ------------ -------- ---------------- ------
All Directors 2,460,273 25.28% 0 0
and Executive
Officers as a Group
(1 person)
--------------------- ------------ -------- ---------------- ------
(1) Except as otherwise indicated and subject to applicable community property
and similar laws, the Company assumes that each named person has the sole voting
and investment power with respect to his or her shares, other than shares
subject to options.
(2) Percent of Class for the Common Stock is based on the 9,733,527 shares
outstanding as of March 24, 2011. Percent of Class for the Series A Preferred
Stock is based on 60,208 shares outstanding as of March 24, 2011. In addition,
shares which a person had the right to acquire within 60 days are also deemed
outstanding in calculating the percentage ownership of the person but not deemed
outstanding as to any other person. Does not include shares assumable upon
exercise of any warrants, options or other convertible rights, which are not
exercisable within 60 days from March 31, 2011.
(3) Represents (i) 75,000 shares directly held by Mr. Tan, (ii) stock options to
acquire 25,000 shares of common stock,(iii) 1,383,000 shares of common stock
held by Placement & Acceptance, Inc., a company of which Mr. Tan is a director
and officer, (iv) 977,273 shares of common stock held by Ventures International,
Ltd., a company of which Mr. Tan is a director and officer, of which 250,000
shares of common stock were assigned by Caspic International, Inc., an
affiliated company, upon exercise of warrants on February 23, 2006.
(4) Represents (i) 581,818 shares of common stock held by Gin Securities, Ltd.,
a company of which Kim Yeow Tan is a principal, (ii) 205,000 shares of common
stock attributed to Eurasia Securities Ltd., and 205,000 shares of common stock
attributed to Asean Brokers, Ltd. of which Kim Yeow Tan is a director and
officer.
35
Equity Compensation Plan Disclosure
We reserved 1,300,000 shares of our common stock to be issued under our 1999
Incentive Stock Option Plan and granted 125,000 options to certain employees and
directors with an average exercise price of $0.71 per share.
We reserved 2,000,000 shares of our common stock to be issued under our 2000
Incentive Stock Option Plan. No options have been granted under the plan.
The following table summarizes equity compensation plans approved by security
holders and equity compensation plans that were not approved by security holders
as of December 31, 2010.
------------------- ------------- -------------------- ---------------------
Number of
Securities Weighted- Number of
to be Average Securities
Issued Upon Exercise available
Exercise of Prices of for future
Outstanding Outstanding issuance
Options, Options, under equity
Warrants Warrants compensation
Plan Category and Rights and Rights plans
-------------------- ------------ ----------- -------------
Equity compensation
plans (stock
options) approved
by stockholders 125,000 $0 .71 3,175,000
-------------------- ------------ ----------- --------------
Equity compensation
plans not approved
by stockholders N/A N/A N/A
-------------------- ------------ ----------- --------------
Total 125,000 $0 .71 3,175,000
-------------------- ------------ ----------- --------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Related Party transactions
The Company does not have an established policy for the approval of related
party transactions. However, transactions that the board considers to be
significant in nature are generally negotiated and approved by the board of
directors.
See NOTE G in the Notes to Consolidated Financial Statements for details and
discussion of related party transactions during 2010.
Corporate Governance
Our board consists of 3 directors, Messrs. William Tan, Ian Edmonds, and John
Rudy. Only Mr. Edmonds is considered independent.
36
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board has reviewed the following audit and non-audit fees the Company has
paid to the independent registered public accounting firm for purposes of
considering whether such fees are compatible with maintaining the auditor's
independence. The policy of the Board is to pre-approve all audit and non-audit
services performed by its independent public accountants before the services are
performed.
Audit Fees. Estimated fees billed for services rendered by Meyers Norris Penny
LLP for reviews of the Forms 10-Q for the first, second and third quarters of
2010 and the audit of the year ended December 31, 2010 are approximately
$90,000. Fees billed for service rendered by Meyers Norris Penny LLP for reviews
of the Forms 10-Q for the first, second and third quarters of 2009 and the audit
of the year ended December 31, 2009 are approximately $100,000.
Tax Fees. Aggregate fees billed for permissible tax services rendered by BKD
Group LLP were approximately $60,000 for 2010 and $44,000 for 2009. These
amounts include tax consulting, preparation of federal and state income tax
returns and franchise tax returns.
PART IV
Item 15. Exhibits, FINANCIAL STATEMENTS and Reports on Form 8-K
(a) 1. Consolidated Financial Statements.
The following consolidated financial statements of Zunicom, Inc. and subsidiary,
are submitted as a separate section of this report (See F-pages) and are
incorporated by reference in Item 8:
- Report of Independent Registered Public Accounting Firm
- Consolidated Balance Sheets as of December 31, 2010 and 2009
- Consolidated Statements of Operations for the years ended December
31, 2010 and 2009
- Consolidated Statement of Changes in 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
All other schedules are omitted because they are either not required or not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits
The following exhibits pursuant to Rule 601 of Regulation SB are incorporated by
reference to the Company's Registration Statement on Form SB-2, Commission File
No.33-98662, filed on October 30, 1995, and amended on January 5, 1996, January
23, 1996.
37
(c) Exhibits
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation, as amended (incorporated by reference to
the Company's Registration Statement on Form SB-2, Commission File
No. 33-98662, filed on October 30, 1995 and amended on January 5,
1996 January 23, 1996)
3.2 Certificate of Designation (incorporated by reference to the
Company's Registration Statement on Form SB-2, Commission File No.
33-98662, filed on October 30, 1995 and amended on January 5, 1996
and January 23, 1996)
3.2(a) Amended Certificate of Designation (incorporated by reference to
the Company's Registration Statement on Form SB-2, Commission File
No.33-98662, filed on October 30, 1995 and amended on January 5,
1996 and January 23, 1996)
3.3 Bylaws (incorporated by reference to the Company's Registration
Statement on Form SB-2, Commission File No. 33-98662, filed on
October 30, 1995 and amended on January 5, 1996, January 23, 1996)
10.1 Second Amended and Restated Creditors Subordination Agreement
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2008, Commission File No.
0-27210, filed August 14, 2008)
10.2 Purchase and Sale agreement between AlphaNet Hospitality Systems,
Inc. Advanced Computer Software, Inc. dated March 30, 2010
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 2010, Commission File No.
0-27210,filed May 15, 2010)
14.1 Code of Ethics and Business Conduct as adopted March 30, 2004
(incorporated by reference to the Company's Annual Report on Form
10-K for the Fiscal Year ended December 31, 2003, Commission File
No. 0-27210, filed March 31, 2004)
21.1 Subsidiaries*
31.1 Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
32.1 Certification of Chief 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 Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002*
-----------------
* Filed herewith.
38
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Company has caused this report to be signed on its behalf by the undersigned,
Thereunto duly authorized.
Date: March 31, 2011
Zunicom, Inc.
By: /s/ William Tan
-------------------------
William Tan
President and CEO
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ William Tan Director, Chairman of the Board, March 31, 2011
----------------- President and Chief Executive
William Tan Officer (principal executive officer)
/s/ Ian Edmonds Director March 31, 2011
-----------------
Ian Edmonds
/s/ John Rudy Chief Financial Officer March 31, 2011
----------------- (principal financial and principal
John Rudy accounting officer) and Director
39
ITEM 15 (a)(1)
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ZUNICOM, INC.
DECEMBER 31, 2010 and 2009
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ZUNICOM, INC.
Page
----
Report of Independent Registered Public Accounting Firm ...............F-3
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2010 and 2009.......F-4
Consolidated Statements of Operations
for the years ended December 31, 2010 and 2009..................F-6
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2010 and 2009..................F-8
Consolidated Statements of Cash Flows
for the years ended December 31, 2010 and 2009..................F-9
Notes to Consolidated Financial Statements.........................F-11
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Zunicom, Inc.
We have audited the accompanying consolidated balance sheets of Zunicom, Inc.
(the "Company") as at 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 financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 financial statements referred to above present fairly, in
all material respects, the financial position of Zunicom, Inc. as of December
31, 2010 and 2009 and the results of their operations and their cash flows for
the years then ended, in conformity with United States generally accepted
accounting principles.
/s/ Meyers Norris Penny LLP
Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 31, 2011
F-3
ZUNICOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 and 2009
ASSETS
2010 2009
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 4,427,227 $5,680,943
Accounts receivable - trade, net of allowance 37,064 7,723
For doubtful accounts of $6,323 (2010) and $0 (2009)
Inventories - finished goods -- 6,224
Deferred costs 69,034 --
Prepaid expenses and other current assets 35,166 35,084
----------- -----------
Total current assets 4,568,491 5,729,974
----------- -----------
PROPERTY AND EQUIPMENT
Business center equipment -- 329,925
Machinery and equipment -- 448,234
Computer equipment -- 149,220
Furniture and fixtures 10,000 30,097
Leasehold improvements -- 12,377
----------- -----------
10,000 969,853
Less accumulated depreciation and amortization (1,333) (949,992)
----------- -----------
Net property and equipment 8,667 19,861
----------- -----------
Intangible assets - net of accumulated amortization 407,000 --
INVESTMENT IN UNCONSOLIDATED INVESTEE 4,489,039 3,345,697
----------- -----------
TOTAL ASSETS $ 9,473,197 $ 9,095,532
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ZUNICOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 and 2009
LIABILITIES AND STOCKHOLDERS' EQUITY
2010 2009
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 406,185 $ 275,196
Accrued liabilities 52,219 114,989
Customer deposits 52,586 --
---------- -----------
Total current liabilities 510,990 390,185
----------- -----------
NON-CURRENT DEFERRED TAX LIABILITY 2,424,863 2,461,396
------------ -----------
TOTAL LIABILITIES 2,935,853 2,851,581
------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock - $1.00 par value,
1,000,000 shares authorized; 60,208
Class A Shares issued and out-
standing; liquidation preference of
$316,092 as of December 31, 2010 60,208 60,208
Common stock - $0.01 par value;
50,000,000 shares authorized;
9,733,527
shares issued and out-
standing 97,335 97,335
Additional paid-in capital 9,153,520 9,102,096
Accumulated loss (2,773,719) (3,015,688)
------------ -----------
Total stockholders' equity 6,537,344 6,243,951
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,473,197 $ 9,095,532
============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010 and 2009
2010 2009
------------ ------------
REVENUES
Sales $ 595,628 $ --
Service 253,200 --
----------- -----------
848,828 --
COST OF REVENUES
Cost of sales 326,540 --
Direct servicing costs 121,843 --
----------- -----------
448,383 --
----------- -----------
GROSS PROFIT 400,445 --
OPERATING EXPENSES
Selling, general and administrative 1,006,250 808,847
Depreciation and amortization 79,333 870
----------- -----------
1,085,583 809,717
----------- -----------
LOSS FROM OPERATIONS (685,138) (809,717)
OTHER INCOME (EXPENSES)
Interest income 20,590 259,956
Equity (loss) in earnings of unconsolidated investee 1,143,343 (90,329)
Loss on impairment -- (4,367,891)
----------- -----------
1,163,933 (4,198,264)
----------- -----------
INCOME (LOSS) BEFORE PROVISON FOR
INCOME TAXES AND DISCONTINUED OPERATIONS 478,795 (5,007,981)
----------- -----------
INCOME TAXES (EXPENSE) BENEFIT (48,886) 1,715,028
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 2010 and 2009
2010 2009
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 429,909 $(3,292,953)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES (165,814) (239,645)
----------- -----------
NET INCOME(LOSS) $ 264,095 $(3,532,598)
=========== ===========
Net income (loss) attributable to
common stockholders $ 241,968 $(3,554,898)
=========== ===========
Basic net income (loss) per share
attributable to common stockholders:
Income (loss) from continuing operations $ 0.04 $ (0.34)
=========== ==========
Loss from discontinued operations $ (0.02) $ (0.02)
=========== ==========
Net income (loss) per share $ 0.02 $ (0.36)
=========== ==========
Number of weighted average shares of common stock
outstanding
Basic 9,733,527 9,746,601
=========== ==========
Diluted net income (loss) per share
attributable to common stockholders:
Income ( loss) from continuing operations $ 0.04 $ (0.34)
=========== ===========
Loss from discontinued operations $ (0.02) $ (0.02)
=========== ===========
Net income (loss) per share $ 0.02 $ (0.36)
=========== ===========
Number of weighted average shares of
common stock outstanding
Diluted 9,953,943 9,746,601
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2010 AND 2009
Preferred Stock Common Stock
------------------ ----------------- Additional
Number of Number of Paid-in Accumulated Total
Shares Amount Shares Amount Capital Loss equity(deficit)
-------- --------- --------- ------- ----------- ------------ ------------
Balances at
January
1, 2009 60,208 $ 60,208 9,960,756 $99,607 $ 9,181,333 $ 539,209 $ 9,880,357
======= ======== ========= ======= =========== =========== ===========
Dividends
paid on
Preferred
stock -- -- -- -- -- (22,301) (22,301)
Stock based
compensation -- -- -- -- 51,414 -- 51,414
Forfeiture of
restricted
stock -- -- (227,229) (2,272) (130,653) -- (132,925)
Net income
for 2009 -- -- -- -- -- (3,532,598) (3,532,598)
Rounding 2 (2) 4
------ -------- --------- ------- ---------- ----------- -----------
Balances at
December
31, 2009 60,208 $60,208 9,733,527 $97,335 $9,102,096 $(3,015,688) $ 6,243,951
====== ======== ========= ======= ========== =========== ===========
Dividends
paid on
Preferred
stock -- -- -- -- -- (22,126) (22,126)
Stock based
compensation -- -- -- -- 51,415 -- 51,415
Net income
for 2010 -- -- -- -- -- 264,095 264,095
Adjustment on
discontinued
operations 9 9
------ -------- --------- ------- ---------- ----------- -----------
Balances at
December
31, 2010 60,208 $60,208 9,733,527 $97,335 $9,153,520 $(2,773,719) $ 6,537,344
====== ======== ========= ======= ========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010 and 2009
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 264,095 $(3,532,598)
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization of property and
equipment 88,544 42,737
Write-off of property and equipment 10,748 12,495
Stock-based compensation 51,415 51,415
Equity in earnings of investee (1,143,342) 90,329
Deferred income taxes (36,533) (1,838,482)
Impairment of investment in UPG -- 4,367,891
Loss on settlement of note receivable -- 301,641
Change in operating assets and liabilities
Accounts receivable - trade (29,341) (5,137)
Interest receivable -- 10,579
Inventories 6,224 920
Prepaid expenses and other current assets (82) 12,379
Accounts payable 130,900 (58,561)
Accrued liabilities (62,770) (69,065)
Deferred costs (69,034) --
Customer deposits 52,586 --
------------ -----------
Net cash used in operating activities (736,590) (613,457)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of UPG stock -- (20,400)
Purchase of property and equipment -- (2,840)
Purchase of business (495,000) --
------------ -----------
Net cash used in investing activities (495,000) (23,240)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes receivable -- 4,817,109
Dividends paid on preferred stock (22,126) (22,300)
------------ -----------
Net cash (used in) provided by financing activities (22,126) 4,794,809
------------ -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2010 AND 2009
2010 2009
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,253,716) 4,158,112
Cash and cash equivalents at beginning of year 5,680,943 1,522,831
----------- -----------
Cash and cash equivalents at end of year $ 4,427,227 $ 5,680,943
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest received $ 20,544 $ 259,956
=========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
ZUNICOM, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
Zunicom, Inc., ("Zunicom" or the "Company"), formerly Tech Electro Industries,
Inc., was formed on January 10, 1992 as a Texas corporation. Zunicom's
consolidated wholly-owned subsidiary, AlphaNet Hospitality Systems Inc.
("Alphanet") was a provider of guest communication services to the hospitality
industry through August 31, 2010. AlphaNet discontinued this business as of
August 31, 2010. Accordingly, the results of this discontinued operation are
presented in our Consolidated Statements of Operations (Note O). In April of
2010, AlphaNet purchased the assets and business of Action Computer Systems and
is now a reseller of point-of-sale software and hardware to restaurants in
southern StateConnecticut, placeWestchester County, StateNew York, and
CityplaceNew York City (Note N).
Zunicom holds a 41.0 percent ownership interest in Universal Power Group, Inc.
("UPG"), a distributor and supplier to a diverse and growing range of industries
of portable power and related synergistic products, provider of third-party
logistics services, and a custom battery pack assembler.
In December 2006, the Company's previously wholly-owned subsidiary, UPG,
completed an initial public offering which resulted in the Company's ownership
interest in UPG being reduced from 100 percent to an ownership interest of 40
percent. The Company subsequently acquired additional shares of UPG stock
bringing its ownership percentage to 41.0%. The Company consolidated UPG in its
consolidated financial statements until December 20, 2006, (the "Deconsolidation
Date") and currently accounts for UPG as an unconsolidated investee under the
equity method of accounting.
The accompanying consolidated financial statements of Zunicom, Inc. and its
subsidiary, included herein have been prepared by the Company in accordance with
accounting principles generally accepted in the United States of America
("GAAP").
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying audited consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary. All inter-company accounts and
transactions have been eliminated in consolidation. The Company's investment in
a non-controlled entity (investee) is accounted for by the equity method. This
financial information reflects all adjustments which are, in the opinion of the
Company, normal, recurring and necessary to present fairly the statements of
financial position, results of operations and cash flows for the dates and
periods presented.
Investment in Unconsolidated Investee
As of December 31, 2010, we held 2,048,870 shares of common stock representing a
41.0 percent interest in UPG. We account for UPG under the equity method of
accounting. At December 31, 2010 and 2009, the carrying value of the Company's
investment in UPG is reported as a long-term investment in the accompanying
consolidated balance sheets. Earnings and losses in our investment in
F-11
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UPG are recorded in the statements of operations. In 2009, we purchased an
additional 16,550 shares of UPG common stock.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities for the reporting periods. Management evaluates estimates
on an on-going basis and believes the following represent its more significant
judgments and estimates used in preparation of its consolidated financial
statements: stock-based payments, allowance for doubtful accounts,investment in
an unconsolidated investee, and income taxes. Management bases its estimates on
historical experience and various other factors and assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Each estimate and its
financial impact, to the extent significant to financial results, are discussed
in the consolidated financial statements. It is at least reasonably possible
that each of the Company's estimates could change in the near term or that
actual results may differ from these estimates under different assumptions or
conditions, resulting in a change that could be material to the Company's
consolidated financial statements.
Cash and Cash Equivalents
The Company considers all unrestricted highly-liquid investments with original
maturities of three months or less to be cash and cash equivalents.
Accounts Receivable
The Company, through its wholly owned subsidiary AlphaNet records its trade
accounts receivable at the amount the Company expects to collect. The Company
maintains an allowance for doubtful accounts for estimated losses resulting from
nonpayment. Balances that remain outstanding after the Company has used
reasonable collection efforts are written off through a charge to the allowance
and a credit to accounts receivable.
Inventories
As of December 31, 2010, the Company does not maintain an inventory. In 2009,
the Company maintained an inventory of components and spare parts, carried at
lower of cost or market and accounted on the first in, first out basis.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization of
property and equipment is provided for using the straight-line method over the
estimated useful lives of the assets ranging from three to ten years.
F-12
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company utilizes the asset and liability approach to accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial and tax basis of assets
and liabilities and loss carryforwards that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense or benefit is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is no longer subject to U.S. federal
tax and state tax examinations for years before 2007. Management does not
believe there will be any material changes in our unrecognized tax positions
over the next 12 months. The Company's policy is to recognize interest and
penalties accrued on any unrecognized tax benefits as a component of income tax
expense. There is no accrued interest or penalties associated with any
unrecognized tax benefits, nor was any interest expense recognized during the
years ended December 31, 2010 and 2009.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with Statement of Financial Accounting Standards FASB ASC 360 (SFAS
No. 144),"Accounting for the Impairment or Disposal of Long-Lived Assets." In
accordance with FASB ASC 360, long-lived assets are reviewed when events or
changes in circumstances indicate that their carrying value may not be
recoverable. These evaluations include comparing the future undiscounted cash
flows of such assets to their carrying value. If the carrying value exceeds the
future undiscounted cash flows, the assets are written down to their fair value
using discounted cash flows.
Investment and notes receivable from unconsolidated investee
Through November 2009, the Company had notes receivable from the unconsolidated
investee which were recorded at amortized cost. The Company conducts regular
reviews of notes receivable for impairment and records a valuation allowance
when there is evidence of impairment and when the amount can be reasonably
estimated.
The Company evaluated its investment in UPG and its two unsecured promissory
notes from UPG at March 31, 2009 to determine if an other than temporary decline
in fair value below the cost basis had occurred. The Company determined that an
other than temporary decline had occurred and recognized an impairment to adjust
the cost basis in the investment and a valuation allowance to reduce the notes
to their estimated fair value. In December 2009, the Company's two unsecured
promissory notes from UPG were settled for their full value less a discount for
early payment. Accordingly, the Company recorded a charge to in the statement of
operations in the amount of $301,641 representing the final discount on the
notes.
Intangible assets
The Company recorded intangible assets at their fair value upon the acquisition
of Action Computer Systems and amortizes them over their estimated useful lives.
As part of its acquisition of the assets of Action Computer Systems, the Company
acquired a covenant not to compete on the part of the former owner (amortized
over three years), and a customer list (amortized over five years). The
amortization of those assets follows.
Intangible Asset 2011 2012 2013 2014 2015 Total
------------------- -------- -------- -------- -------- -------- --------
Covenant not to $ 50,000 $ 50,000 $ 16,667 -- -- $116,667
compete
------------------- -------- -------- -------- -------- -------- --------
Customer list 67,000 67,000 67,000 67,000 22,333 290,333
------------------- -------- -------- -------- -------- -------- --------
Total $117,000 $117,000 $ 83,667 $ 67,000 $ 22,333 $407,000
======== ======== ======== ======== ======== ========
F-13
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 104 when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed and determinable and collectibility is reasonably
assured.
AlphaNet sells and installs point-of-sale software and related hardware to
restaurants. AlphaNet also services and supports those systems and provides
software upgrades when released by the software developer. For sales and
installations of new systems, AlphaNet recognizes revenue when the system is
installed and accepted by the restaurant owner. For service and support,
AlphaNet recognizes revenue when the service and support are provided. For sales
of parts, accessories and supplies, AlphaNet recognizes revenue when the item is
shipped and invoiced.
The cost of software licenses, equipment and components purchased for the
installation of new systems in an accounting period prior to the period in which
it is installed, is carried as a deferred cost on the Company's balance sheet
until the system is installed and the revenue recognized. At that point the
deferred costs are charged to cost of sales.
Customer deposits represent deposits made by customers in an accounting period
prior to the period in which the system is installed. Upon installation, the
customer deposit is recognized as revenue.
Earnings Per Share
Basic earnings per common share is computed by dividing net income attributable
to common shareholders by the weighted average number of common shares
outstanding during each year.
Diluted earnings per common share is computed by dividing net income
attributable to common shareholders by the weighted average number of common
shares and common stock equivalents outstanding for the year. The Company's
common stock equivalents include all common stock issuable upon exercise of
outstanding stock options and common stock issuable upon conversion of preferred
stock.
Fair Value of Financial Instruments
The Company utilizes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three levels as follows:
Level 1-- quoted prices (unadjusted) in active markets for identical asset or
liabilities;
F-14
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Level 2-- observable inputs other than Level I, quoted prices for
similar assets or liabilities in active markets, quoted prices for
identical or similar assets and liabilities in markets that are not
active, and model-derived prices whose inputs are observable or whose
significant value drivers are observable; and
Level 3-- assets and liabilities whose significant value drivers are
unobservable.
Observable inputs are based on market data obtained from independent sources,
while unobservable inputs are based on the Company's market assumptions.
Unobservable inputs require significant management judgment or estimation. In
some cases, the inputs used to measure an asset or liability may fall into
different levels of the fair value hierarchy. In those instances, the fair value
measurement is required to be classified using the lowest level of input that is
significant to the fair value measurement. Such determination requires
significant management judgment. There were no changes in the Company's
valuation techniques used to measure fair value on a recurring basis.
The estimated fair value of cash and cash equivalents, accounts receivable, and
accounts payable approximate their carrying amounts due to the relatively short
maturity of these instruments. None of these instruments are held for trading
purposes.
Stock-Based Compensation
The Company accounts for its stock based compensation in accordance with FASB
ASC 718. FASB ASC 718 requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values.
As of December 31, 2010, $24,792 of the restricted stock grant to our chairman
remains unamortized and $10,271 of the restricted stock grant to UPG employees
remains unamortized. The grant date was June 25, 2007.
Recent Accounting Pronouncements
The Company adopted ASC 805, Business Combinations on January 1, 2009. ASC 805
provides companies with principles and requirements on how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
as well as the recognition and measurement of goodwill acquired in a business
combination. ASC 805 also requires certain disclosures to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. Acquisition costs associated with the business combination
will generally be expensed as incurred. The adoption of this standard did not
have an impact on the accompanying audited financial statements as the Company
did not enter into a business combination during the twelve months ended
December 31, 2009.
F-15
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted ASC 810, on January 1, 2009. This statement clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated income
statement is presented by requiring net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling
interest and to disclose those amounts on the face of the income statement. The
adoption of this standard did not have a material impact on the Company's
consolidated financial statements for the twelve months ended December 31, 2009.
Accounting Standards Update No. 2009-13, "Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging
Issues Task Force." - the amendments:
* permit vendors to account for products and services separately rather than as
a combined unit.
* result in requirements multiple-deliverable arrangements to be separated in
more circumstances than under existing guidance.
* eliminate the residual method of allocation and instead requires entities to
allocate the arrangement consolidation at the inception of the arrangement to
all deliverables using the relative selling price method. Vendors will be
required to determine their best estimate of the selling price consistently
with the method they use to determine the selling price when the good or
service is sold separately.
Accounting Standards Update No. 2009-14, "Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements"a consensus of the FASB Emerging
Issues Task Force." - revises the scope of FASB ASC 985-605, "Software: Revenue
Recognition," to exclude all tangible products containing both software and
non-software components that operate together to deliver the product's
functions. As a result of the changes, vendors will be permitted to recognize
revenue earlier than they had previously because of the changes to the
accounting literature for allocation, measurement, and recognition of revenue.
This Update was issued on October 12, 2009 and will be effective for revenue
arrangements that begin or are changed in fiscal years that start June 15, 2010,
or later. Entities that adopt the changes before then will have to apply them to
their results from the beginning of their fiscal years.
Accounting Standards Update No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements."
- This ASU requires some new disclosures and clarifies some existing disclosure
requirements about fair value measurement as set forth in Codification
Subtopic 820-10. The
FASB's objective is to improve these disclosures and, thus, increase the
transparency in financial reporting. Specifically, ASU 2010-06 amends
Codification Subtopic 820-10 to now require: A reporting entity should disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the transfers; and In the
reconciliation for fair value measurements using significant unobservable
F-16
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
inputs, a reporting entity should present separately information about
purchases, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies
the requirements of the following existing disclosures: For purposes of
reporting fair value measurement for each class of assets and liabilities, a
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities; and A reporting entity should provide disclosures about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years.
In January 2010, the FASB issued new guidance which improves disclosures about
fair value measurements. The new standard is effective for interim and annual
periods beginning after December 15, 2009, except for certain disclosures
regarding Level 3 measurements, which are effective for fiscal years beginning
after December 15, 2010. The Company does not expect this new guidance to have a
material effect on the financial statements.
NOTE C - STOCK OPTIONS AND WARRANTS
Stock-based compensation expense for the years ended December 31, 2010 and 2009
was $51,415 and $51,415, respectively. The stock-based compensation expense for
the years ended December 31, 2010 and 2009 relates to the amortization of
restricted stock issued as deferred compensation.
Valuation Assumptions
There were no stock options granted in 2010 or 2009. The fair value of option
awards were estimated at the grant date using a Black-Scholes option pricing
model.
Compensatory Stock Options
On August 13, 1999, the Board of Directors approved the 1999 Incentive Stock
Option Plan ("1999 Plan") which provided for 1,300,000 common stock options to
be issued. At December 31, 2010 and 2009 there are 125,000 and 525,000 options,
respectively, outstanding under the 1999 Plan. The fair value of stock options
that vested prior to 2010 is $15,000 and in 2009 is $0.0.
F-17
NOTE C - STOCK OPTIONS AND WARRANTS (CONTINUED)
On June 24, 2000, the Board of Directors approved the 2000 Incentive Stock
Option Plan ("2000 Plan") under which 2,000,000 common stock options may be
issued. At December 31, 2009 and 2008 there are no options outstanding under the
2000 Plan.
The Board of Directors determines for all option grants, the term of each
option, the option exercise price within limits set forth under the option
plans, the number of shares for which each option is granted and the rate at
which each option is exercisable.
Stock Incentive Plan Summary
A summary of the Company's compensatory stock option plans as of and for the
years ended December 31, 2010 and 2009 are as follows:
Stock option activity under the 1999 Stock Option Plan was as follows:
Weighted Average Range of
Options Exercise Price Exercise Prices
--------- ---------------- -------------
Options outstanding and exercisable
at January 1, 2009 525,000 0.85 0.45 - 1.75
---------
Options outstanding and exercisable
At December 31, 2009 525,000 0.85 0.45 - 1.75
Canceled, 400,000 0.90 0.90
---------
Options outstanding and exercisable
At December 31, 2010 125,000 0.71 0.45 - 1.75
=========
Stock Options Outstanding and Exercisable
Information related to stock options outstanding at December 31, 2010 is
summarized below:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Outstanding Remaining Exercise Exercisable Exercise
Exercise Price At 12/31/10 Contractual Life Price At 12/31/10 Price
----------- ---------------- ---------- ----------- ---------
$1.75 25,000 6.10 Years $1.75 25,000 $1.75
$0.45 100,000 2.25 Years $0.45 100,000 $0.45
--------- ------------- -------- --------- --------
$0.45 - $1.75 125,000 3.02 Years $0.71 125,000 $0.71
-------- --------
At December 31, 2010, the aggregate intrinsic value of options outstanding was
$15,000. The aggregate intrinsic value is calculated as the difference between
the exercise price of the underlying awards and the quoted price of the
Company's common stock for those awards that have an exercise price currently
below the quoted price. At December 31, 2010, all outstanding options were fully
vested.
F-18
NOTE C - STOCK OPTIONS AND WARRANTS (CONTINUED)
Restricted Stock
On June 25, 2007, the Board of Directors approved a grant of 996,940 restricted
shares of the Company's common stock to our chairman and certain officers and
employees of UPG. Several of the officers and employees of UPG had been officers
and employees of the Company prior to the deconsolidation of UPG in December
2006. The Company attributed a value of $205,801 to the restricted stock granted
to our chairman and $377,392 to the restricted stock granted to the officers and
employees of UPG. The grant was made in recognition of past and future
performance, especially with regard to the initial public offering of UPG's
common stock in which Zunicom was able to sell 1,000,000 shares of UPG common
stock resulting in an $0.80 dividend to shareholders paid in the first quarter
of 2007. The restricted stock vests in full on June 25, 2011, and is subject to
certain restrictions and obligations up to the point of vesting. As of December
31, 2010, there was $35,063 of unrecognized compensation cost related to
non-vested share-based compensation arrangements. The unrecognized compensation
cost is expected to be realized over a period of six months. The stock will not
be registered and will be held in escrow for the benefit of the grantee until
the vesting date. In 2007, our chairman relinquished options on 400,000 shares
of Zunicom common stock. These options have expired. The officers and employees
of UPG held options on 653,000 shares of Zunicom common stock which lapsed after
the deconsolidation of UPG. On January 21, 2009, the chief executive officer of
UPG resigned and according to the terms of the restricted stock agreement,
forfeited his restricted stock grant. Accordingly, his shares have been returned
to the Company and the investment in UPG has been reduced by $132,925.
The Company accounted for the grant of restricted shares to our chairman as
stock based compensation. We accounted for the grant of restricted shares to UPG
officers and employees as a contribution of capital. The Company has been
amortizing 60% of that capital contribution as additional equity in earnings
(loss) of the investee over the vesting period. The Company concluded that it is
reasonable to discount the value of these restricted shares by 29.52%. Of the
29.52% discount, the Company considers the risk of forfeiture to be 10% and
illiquidity to be 19.52%. The Company applied this discount to the grant date
market value of a freely tradable share to arrive at the fair value of a
restricted share.
NOTE D - NET INCOME (LOSS) PER SHARE
Basic net income per share is computed by dividing net income decreased by the
preferred stock dividends of $22,126 and $22,300 for the years ended December
31, 2010 and 2009 respectively, by the weighted average number of common shares
outstanding for the period. For the year ended December 31, 2010, 25,000 stock
options are not included in the diluted net income per share calculation as they
are out-of-the-money, the stock price is below the exercise price. The diluted
net income per share calculation includes 100,000 in-the-money stock options as
well as the effect of the "as if" conversion of the preferred stock into 120,416
shares of common stock.
F-19
NOTE D - NET INCOME (LOSS) PER SHARE (CONTINUED)
For the year ended December 31, 2009, 525,000 stock options and the effect of
the "as if" conversion of the preferred stock into 120,416 shares of common
stock are not included in the diluted net income per share calculation as the
Company's loss attributable to common shareholders, along with the dilutive
effect of potentially issuable common stock due to the outstanding options,
causes the normal computation of diluted loss per share to be smaller than the
basic loss per share; thereby yielding a result that is counterintuitive.
Consequently, the diluted loss per share amount presented does not differ from
basic loss per share due to this "anti-dilutive" effect.
NOTE E - INVESTMENT IN UNCONSOLIDATED INVESTEE
Following is a summary of financial information for UPG for the years ended
December 31, 2010 and 2009: ------------------------------------
Year Ended December 31,
------------------------------------
2010 2009
------------------- ----------------
Net sales $107,256,461 $111,170,726
Cost of sales 87,355,871 91,797,823
----------------- --------------
Gross profit 19,900,590 19,372,903
Operating expenses 14,769,442 17,244,025
---------------- --------------
Operating income 5,131,148 2,128,878
Other income (expense):
Interest expense (681,213) (953,252)
Other, net 2,187 (2,623)
---------------- --------------
Total other (expense) income (679,026) 955,875
---------------- --------------
Income before
provision for income taxes 4,452,122 1,173,003
Provision for income taxes (1,561,882) (1,138,545)
---------------- --------------
Net income $2,890,240 $ 34,458
================ ==============
Following is a summary of balance sheet information for UPG as of December 31,
2010 and 2009:
---------------------- ---------------------------- ----------------------------
As atDecember 31, 2010 As atDecember 31, 2009
---------------------- ---------------------------- ----------------------------
Current assets $46,126,015 $ 47,029,737
---------------------- ---------------------------- ----------------------------
Noncurrent assets 1,484,624 2,376,163
---------------------- ---------------------------- ----------------------------
Current liabilities 25,177,097 29,302,742
---------------------- ---------------------------- ----------------------------
Noncurrent liabilities 266,673 1,071,736
---------------------- ---------------------------- ----------------------------
Shareholders' equity 22,166,869 19,031,422
F-20
NOTE E - UNCONSOLIDATED SUBSIDIARY - INVESTEE (CONTINUED)
The Company evaluated its investment in UPG at March 31, 2009 to determine if an
other than temporary decline in fair value below the cost basis had occurred.
The primary input in estimating the fair value of the investment was the quoted
market value of UPG publicly traded shares as at March 31, 2009, which declined
significantly from the date of the initial investment in December 2006. As a
result of the severe decline in the quoted market value, the Company recognized
an impairment in the investment of $4,367,891 presented in other income
(expense) to adjust the cost basis in the investment to its estimated fair
value. As a result the carrying value of the Company's investment in UPG as of
March 31, 2009, was $2,644,416.
At December 31, 2010, the carrying value of the Company's investment in UPG was
$4,489,039. The market value of the 2,048,870 shares of UPG's common stock the
Company owns was approximately $7,560,330, based on the closing price per share
at December 31, 2010 of $3.69.
F-21
Note F: FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Nonrecurring Fair Value Measures
March 31, Total
(in millions) 2009 Level 1 Level 2 Level 3 Losses
------------------------------------------------------------------------------
Assets:
Equity method investments $2,644,416 $2,644,416 $ -- $ -- $(4,367,891)
------------------------------------------------------------------------------
In accordance with ASC 323 "Investments - Equity Method and Joint Ventures",
previously Accounting Principles Board ("APB") No. 18, "The Equity Method of
Accounting for Investments in Common Stock," we recognized as at March 31, 2009,
an other than temporary impairment to other income (expense) of $4,367,891 to
adjust our cost basis in our investment in UPG of approximately $7,916,442 to
its estimated fair value (see Note E ). The valuation methodology utilized the
quoted market value of UPG's publicly traded shares. The Company's investment in
UPG is classified as a Level 1 financial instrument in accordance SFAS No. 157
in the fair value hierarchy, as the estimated fair value of the investment is
based on observable inputs. We believe the estimated fair value is
representative of the exit price from a marketplace participant's perspective.
The Company has determined that there are no further impairments in the year
ended December 31, 2010.
NOTE G - RELATED PARTY NOTES
In conjunction with its evaluation of its investment in UPG described in Note E
above, the Company evaluated its two unsecured promissory notes from UPG in the
amount of $4,753,125 as of March 31, 2009, to determine if an other than
temporary decline in the fair value of the notes had occurred. The principle
inputs in estimating the fair value of the UPG notes was the possible impairment
of UPG's ability to service the notes in the future given the revenue decline in
the first quarter of 2009, especially from its largest customer, and
F-22
NOTE G - RELATED PARTY NOTES (CONTINUED)
the profitability decline from 2007 to the first quarter of 2009. As a result,
the Company recognized an impairment in other income (loss) of $1,425,788 to
adjust the cost basis of the notes to their estimated fair value. As a result,
the carrying value of the UPG notes as of March 31, 2009, was $3,327,338.
In November 2009, Zunicom entered into negotiations with UPG, its former 100%
owned subsidiary (now 41% owned) to pay the balance of the note obligations
prior to maturity. After multiple discussions, including offers and
counter-offers, Zunicom agreed to relieve/forgive UPG for a portion of the note
payable, $301,640, in exchange for the receipt of a lump-sum cash payment for
the remainder of the notes payable plus all accrued interest. The balance of the
notes payable plus accrued interest was calculated and paid in cash on December
16, 2009 as shown below.
Description Note 1 Note 2 Total
--------------------------------------------------------------------------------
9/30/09 Principal Balance $ 2,062,500 $ 1,959,375 $ 4,021,875
7.5% Forgiveness of Principal (154,687) (146,953) (301,640)
Interest - OCT 10,510 9,984 20,495
Interest - NOV 10,171 9,662 19,833
Interest - DEC 1-16 5,424 5,153 10,578
Total Payoff Amount 1,933,918 1,837,222 3,771,141
The Company recorded $1,124,146 as a reversal of a valuation charge and a
reduction in the impairment charge and an expense in general and administrative
expenses of $301,641 for the discount on the notes in 2009.
NOTE H - SHAREHOLDERS' EQUITY
The outstanding Class A preferred stock bears cumulative dividends of 36 3/4
cents per share payable annually and has a liquidation preference of $5.25 per
share. Through December 31, 2010, the Company has paid all dividends which have
accrued on the preferred stock. The voting rights are equal to common shares,
other than with respect to certain matters; generally amending the rights or
powers of the preferred stock. The preferred stock is convertible at the option
of the holder into two shares of common stock subject to adjustment (the
"Conversion Rate") (as more fully described in the Certificate of Designation)
at any time after one year from the date of issue. The Company may compel
conversion at the Conversion Rate at any time after one year from the date of
issue if the closing market price of the common stock is $5.25 or higher for 30
consecutive trading days. During the years ended December 31, 2010 and 2009 no
shares of outstanding preferred stock were converted into shares of common
stock. All dividends in 2010 and 2009, were paid in cash.
During 2010, the Company paid $22,126 in cash dividends on the class A Preferred
Stock. In 2009, the Company paid $22,300 in cash dividends on the class A
Preferred Stock.
F-23
NOTE I - CREDIT CONCENTRATIONS AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable.
Cash and cash equivalent deposits are at risk to the extent that they exceed
Federal Deposit Insurance Corporation insured amounts. To minimize this risk,
the Company places its cash and cash equivalents with high credit quality
financial institutions.
During the years ended December 31, 2010 and 2009, there were no customers who
accounted for more than 3% of the Company's total revenues.
NOTE J - INCOME TAXES
Deferred tax assets and liabilities at December 31, 2010 and 2009 consist of the
following:
2010 2009
------------ ------------
Current deferred tax asset $ 2,150 $ --
----------- -----------
Net current deferred tax asset $ 2,150 $ --
=========== ===========
Non-current deferred tax asset $ 2,348,422 $ 2,039,338
Non-current deferred tax liability (4,775,435) (4,500,734)
----------- -----------
Net non-current deferred tax asset (liability) $(2,427,013) $(2,461,396)
=========== ===========
Significant components of our deferred tax assets and liabilities as of December
31, 2010 and 2009 are as follows:
2010 2009
------------ ------------
Net operating loss carry forwards $ 2,188,795 $ 1,861,144
Book/tax difference in investment in UPG (1,030,655) (641,919)
Excess loss account (3,743,261) (3,858,815)
Depreciation (1,518) 43,427
Deferred Stock Compensation 135,656 118,175
Accrued bonus -- --
Allowance for doubtful accounts 2,150 --
Other 23,970 16,592
----------- -----------
$(2,424,863) $(2,461,396)
============ ============
The Company's provision for income taxes for the
years ended December 31, 2010 and 2009 is comprised as follows:
2010 2009
---------- ------------
Current income tax expense $ -- $ --
Deferred income tax expense ( 36,533) (1,838,481)
---------- -----------
Income taxes (expense) benefit $( 36,533) $(1,838,481)
========== ===========
F-24
NOTE J - INCOME TAXES (CONTINUED)
At December 31, 2010 the Company has recorded deferred tax liabilities totaling
$2,424,863. These liabilities consist primarily of the book/tax differences in
Zunicom's investment in UPG totaling $(1,030,655) and the excess loss account
totaling $(3,743,261). This excess loss account is related to Zunicom's use of
AlphaNet's net operating losses in excess of Zunicom's tax basis in its
investment in AlphaNet. These net operating losses were used primarily in 2006
to offset Zunicom's taxable income. The liability recorded at December 31, 2010
represents Zunicom's liability to the Internal Revenue Service for the use of
these net operating losses in the event that the excess loss account is
triggered by a change in control or worthlessness of AlphaNet. Future changes in
Zunicom's investment in AlphaNet may effect the balance of this excess loss
account and related deferred tax liability.
Net operating loss carryforwards available at December 31, 2010
totals approximately $6,437,000 and begins to expire in 2022.
The Company's income tax expense for the years ended December 31, 2010 and 2009
differed from the statutory federal rate of 34 percent as follows:
2010 2009
----------- ------------
Statutory rate applied to income (loss)
before income taxes $ 77,370 $(1,826,167)
Increase (decrease) in income taxes
resulting from:
Permanent Differences 1,651 1,304
Amounts not deductible for federal income (115,554) (13,618)
tax purposes
---------- -----------
Income tax expense (recovery) $ (36,533) $(1,838,481)
---------- -----------
F-25
NOTE K - COMMITMENTS
LEASES
During 2008, the Company extended the office lease for one year to April 30,
2010 at the same rent and terms. In January 2010, AlphaNet vacated the leased
premises. AlphaNet leased certain equipment located at customer sites as part of
its Office (TM) product. As of August 31, 2010, the Company discontinued its
office (TM) product. As a result, the Company has no further commitments related
to its office (TM) product.
On April 23, 2010, AlphaNet closed on the acquisition of Action Computer Systems
(Note K) and now provides point-of-sale software, hardware systems and
maintenance and support to restaurants in the New York metropolitan area and
southern Connecticut. The Company assumed Action Computer Systems' lease on
approximately 1,200 square feet of office space in Larchmont, New York. The
Company's commitment for rent is as follows.
------- ------- ------- ------- --------
2011 2012 2013 2014 Total
------------- ------- ------- ------- ------- --------
Office lease $23,818 $25,892 $26,669 $25,117 $113,314
------------- ------- ------- ------- ------- --------
NOTE L - LEGAL PROCEEDINGS
The Company may be subject to legal proceedings and claims that arise in the
ordinary course of business. Management does not believe that the outcome of
these matters will have a material adverse effect on the Company's consolidated
financial position, operating results, or cash flows. However, there can be no
assurance that such legal proceedings will not have a material impact. As of
December 31, 2010, the Company was not subject to any such legal proceedings or
claims.
F-26
NOTE M - ECONOMIC DEPENDENCE
With the purchase of the business of Action Computer Systems in April 2010, the
Company is now a reseller for Action Systems Inc. (ASI) in Silver Spring,
Maryland, the developer of Restaurant Manager, a point-of-sale computer software
system designed for restaurants. Should ASI fail to develop and issue
improvements for the Restaurant Manager software to keep pace with technological
developments and the operational needs of restaurants, Restaurant Manager's
competitive position could be diminished and the Company's business would be
harmed.
Should ASI cease operation of its business, the Company would be forced to
identify other point-of-sale software that it could offer to the restaurant
industry. The Company has an effective sales and marketing, and service and
support infrastructure in place and an installed system base in excess of 450
customers which could make it an attractive reseller for one of the many
point-of-sale software systems offered to restaurants. However, there is no
guarantee that the Company would be able to identify such a replacement system
or, if identified, complete an arrangement satisfactory to the Company or to the
system developer.
NOTE N - PURCHASE OF BUSINESS
On March 30, 2010, AlphaNet entered into a binding agreement to acquire the
business and the assets of Advanced Computer Software, Inc., a New York
corporation, doing business as Action Computer Systems for a purchase price of
$495,000. Action Computer Systems is a reseller of point-of-sale software to
restaurants in the New York metropolitan area and southern Connecticut. The
software, Restaurant Manager, was developed by Action Systems Inc., Silver
Spring, Maryland. On April 23, 2010, AlphaNet closed on the acquisition and now
provides point-of-sale software, hardware systems and maintenance and support to
restaurants in the New York metropolitan area and southern Connecticut.
The Company accounted for this purchase under the acquisition method of
accounting. The following represents the purchase price allocation at the date
of the acquisition:
Customer Lists $335,000
Covenant not to compete 150,000
Fixed Assets 10,000
---------------------------------------
Purchase price $495,000
========
The total revenue of Action Computer Systems since the date of acquisition,
included in the consolidated income statement for the year ended December 31,
2010 was $848,828.
Supplemental pro-forma information regarding the results of the combined entity
for the current reporting periods and the comparative periods presented in these
consolidated financial statements has not been presented, as the financial
information of the business prior to acquisition is not available, and it is
impracticable for management to reasonably estimate the effect for such
disclosure.
F-27
NOTE O - DISCONTINUED OPERATIONS
In August 2010, the Company discontinued its guest communications services
business. The Company chose to abandon the assets associated with this business
and accordingly has written these assets off and recorded a corresponding loss
of $10,748 in the consolidated statements of operations for the year ended
December 31, 2010, which is included in the loss from discontinued operations.
Total revenue from discontinued operations was $114,025 for the year ended
December 31, 2010. Pre-tax loss from discontinued operations was $251,233 and
income tax benefit was $85,419 for the year ended December 31, 2010. The asset
related to discontinued operations in 2010 is a deposit of $5,000. In 2009,
assets related to discontinued operations included cash of $8,806, accounts
receivable of $7,723, inventory of $6,225, deposits of $6,245 and prepaid
expenses of $6,222. The liabilities related to discontinued operations in 2010
includes accounts payable of $289,102 and sales tax payable of $2,460. In 2009,
liabilities related to discontinued operations included accounts payable of
$263,205 and accrued liabilities of $67,989. Capital assets in 2009 were $19,860
of which $9,112 were written off in 2009 and $10,748 were written off in 2010.
F-2
