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EX-32.2 - 906 CFO CERTIFICATION - ZUNICOM INCexhibit32-2.txt
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EX-31.2 - CERTIFICATION BY CHIEF FINANCIAL OFFICER - ZUNICOM INCexhibit31-2.txt
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                                  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, 2011

                                       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, 2011, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $2,292,306 (based on the closing price of $0.50 per share on that date). As of March 30, 2012, 9,901,257 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 7 Item 3. Legal Proceedings 8 PART II Item 5. Market for our Common Equity and Related Stockholder Matters 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 16 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 16 Item 9A. Controls and Procedures 16 Item 9B. Other Information 17 PART III Item 10. Directors, Executive Officers and Corporate Governance 17 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 29 Item 13. Certain Relationship and Related Transactions, and Director Independence 31 Item 14. Principal Accountant Fees and Services 32 PART IV Item 15. Exhibits 32 Signatures 34 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 4
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 in financial statements 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 Connecticut, Westchester County, New York, and New 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. 5
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 500 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 two 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 We are a "smaller reporting company" as defined by Regulation S-K and, as such, we are not required to provide the information contained in this item. ITEM 2. DESCRIPTION OF PROPERTIES Zunicom's executive office is located in Dallas, Texas and is leased on a month to month basis. 7
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 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 30, 2012, the last sales price of the Company's common stock was $.26. 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 2010 and 2011, as reported by the NASDAQ Trading and Market Services: -----|-------------------|----------|---------| | Calendar Period | High | Low | -----|-------------------|----------|---------| 2010 | First Quarter | $0.70 | $0.16 | -----|-------------------|----------|---------| | Second Quarter | $0.65 | $0.35 | -----|-------------------|----------|---------| | Third Quarter | $0.52 | $0.26 | -----|-------------------|----------|---------| | Fourth Quarter | $0.68 | $0.35 | -----|-------------------|----------|---------| 2011 | First Quarter | $0.79 | $0.55 | -----|-------------------|----------|---------| | Second Quarter | $0.65 | $0.26 | -----|-------------------|----------|---------| | Third Quarter | $0.50 | $0.33 | -----|-------------------|----------|---------| | Fourth Quarter | $0.35 | $0.24 | -----|-------------------|----------|---------| 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, 2011, 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, 2011, the Company had 9,901,257 shares of common stock issued and outstanding and held by 578 shareholders of record. 8
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 vested in full on June 25, 2011, but was extended for three years pursuant to a new agreement as described below. Accordingly, the deferred stock compensation to the Company's chairman has been fully amortized and the unrecognized compensation cost to certain UPG employees has been fully realized as of December 31, 2011. 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 were returned to the Company and the investment in UPG was reduced by $132,925. During 2011, two UPG employees resigned and according to the terms of the restricted stock agreement, forfeited their restricted stock grant. Accordingly, their shares have been returned to the Company and the investment in UPG has been reduced by $4,624. On June 24, 2011, the Company offered an additional grant of restricted shares to the grantees on condition that the grantees would agree that the original grant remain in escrow and subject to the original restrictions until June 30, 2014. The new grant will also be subject to the same restrictions and remain in escrow for the same period. All remaining grantees accepted the Company's offer. Accordingly, on June 24, 2011, the Company issued a grant of 87,952 restricted shares of common stock to the Company's chairman and a grant of 99,538 restricted shares of common stock to certain employees of UPG. These additional shares will vest on June 30, 2014 and will be held in escrow for the benefit of the grantee subject to the same restrictions and risk of forfeiture as the original shares until the vesting date. As of December 31, 2011, $5,201 of the restricted stock grant to the Company's chairman has been amortized and $24,966 remains unamortized and $3,473 of the restricted stock grant to UPG employees has been amortized and $16,670 remains unamortized. The Company accounted for the grant of the new restricted shares to our chairman as stock based compensation. We accounted for the grant of the new restricted shares to UPG officers and employees as a contribution of capital. The Company will amortize 59% of that capital contribution as additional equity in earnings (loss) of the investee over the vesting period. 9
Equity Compensation Plan Disclosure The following table summarizes equity compensation plans approved by security holders as of December 31, 2011: ---------------------|--------------------|-----------------|------------------| 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 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, 2011 COMPARED TO DECEMBER 31, 2010 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, 2011, Zunicom, through its wholly owned subsidiary Alphanet which, until August 31, 2010,consisted of two product lines, had consolidated revenues from continuing operations of $1,395,371 compared to 10
$848,828 for the same period in 2010. This revenue is from Action Computer Systems which was acquired in April 2010. Revenue in 2010 is from eight months of operation while 2011 is a full year. Annualized amounts would be substantially consistent from year to year. COST OF REVENUES For the year ended December 31, 2011, Zunicom, through its wholly owned subsidiary Alphanet doing business as Action Computer Systems, had cost of revenue from continuing operations of $725,723, compared to $448,383 for the same period in 2010. Cost of revenue in 2010 is from eight months of operation while 2011 is a full year. Annualized amounts would be substantially consistent from year to year. OPERATING EXPENSES For the year ended December 31, 2011, Zunicom's consolidated operating expenses from continuing operations, consisting of selling, general and administrative expenses and depreciation and amortization increased to $1,423,915 compared to $1,085,583 for the same period in 2010, an increase of $338,332 or 31.2%. The increase is due to an increase of Action Computer Systems' operating expenses of $340,997 offset by a decrease in Zunicom expenses of $2,665. Operating expenses in 2010 are from eight months of operation while 2011 is a full year. Annualized amounts would be substantially consistent from year to year. Zunicom's selling, general and administrative expenses for the year ended December 31, 2011 were $609,039 compared to $611,704 for the same period in 2010, a decrease of $2,665 or 0.4%. The decrease is primarily attributable to Reduced stock based compensation, accounting, travel expenses, and directors and officers insurance, offset by increased professional fees. Action Computer Systems general and administrative expenses for the year ended December 31, 2011 were $695,561 for a full year compared to $394,546 for the eight months of operation in 2010. Annualized amounts would be substantially consistent from year to year. For the year ended December 31, 2011, the Company recorded $119,315 in depreciation and amortization expense from continuing operations compared to $79,333 in 2010. The depreciation and amortization expense is from the assets acquired in the acquisition of Action Computer Systems. Depreciation and amortization expense are from eight months of operation in 2010 while 2011 is a full year. OTHER INCOME / EXPENSE Zunicom's consolidated other income (expense) for the year ended December 31, 2011 was income of $85,770 compared to $1,163,933 for the year ended December 31, 2010, an decrease of $1,078,163 or 92.6%. The decrease is due to a decrease in the equity in investee of $1,069,253, and lower interest income of $8,910 due to lower cash balances. Equity in earnings of investee of $74,090 represents Zunicom's share of UPG's net income for the year ended December 31, 2011 recorded in accordance with the equity method of accounting for an unconsolidated investee. For the year ended December 31, 2010 Zunicom's equity in the earnings of UPG was $1,143,343. 11
LIQUIDITY - YEAR ENDED DECEMBER 31, 2011 Zunicom had cash and cash equivalents of $3,793,507 and $4,427,227 at December 31, 2011 and 2010 respectively. Net cash used in operating activities was $608,446 for the year ended December 31, 2011 compared to cash used in operating activities of $736,590 for the year ended December 31, 2010. Cash used in operating activities in 2011 is net loss of $457,040, depreciation and amortization of $119,315, stock-based compensation of $29,993, provision for bad debt of $14,241 offset by deferred income taxes of $211,457, equity in earnings of investee of $74,090 and a decrease in working capital of $29,408. Net cash used in investing activities of $3,147 represents the purchase of laptop computers for use by the technicians. Net cash used in financing activities of $22,127 is the dividends paid on the preferred stock. Net cash decreased in 2011 by $633,720. 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. 12
The cost of software licenses 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. Computer components and parts are carried in inventory at the lower of cost or market and expensed to cost of sales in the period in which they were sold to customers. 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. 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 carry-forwards 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 2008. 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 recognizedduring the year ended December 31, 2011. Stock-Based Compensation The Company accounts for its stock-based compensation under the provisions of FASB ASC 718, "Share-Based Payment", 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. 13
Fair Value of Financial Instruments Effective January 1, 2008, the Company partially adopted FASB ASC 820-10-65 , "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 FASB ASC 820-10-65 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, ASC 820-10-65 establishes 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; 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 FASB ASC 820-10-65. Recent Accounting Pronouncements 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 (level 3), 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. 14
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's adoption of this guidance did not have a material impact on its 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 been evaluated. The updated guidance was effective upon issuance, and did not have a material impact on the Company's financial statements. In December 2010, the Financial Accounting Standards Board (FASB) issued accounting Standards Update 2010-29, Business Combinations (Topic 805), Disclosure of supplementary Pro Forma Information for Business Combinations. The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company's adoption of this update did not have a material impact on its financial statements. In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820). the amendments in this Update are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). The amendments in this Update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company has determined that this amendment will not have a material effect on its financial statements. In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-08, Intangibles - Goodwill and Other (Topic 350) Testing Goodwill for impairment. The objective of this Update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not 15
threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company has determined that this amendment will not have a material effect on its financial statements. In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-11, Disclosures about Offsetting Assets and Liabilities. This update seeks to minimize differences between U.S. General Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS) with regard to offsetting (netting) of assets and liabilities in the presentation of financial statements to improve the comparability of financial statements. This amendment is effective for reporting periods beginning on or after January 1, 2013. The Company has determined that this amendment will not have a material effect on its 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. In the second quarter of 2011, the Company changed auditors from MNP LLP (formerly, Meyers Norris Penny LLP) to Holtz Rubenstein Reminick LLP. At its annual meeting on September 29, 2011, the Company's shareholders voted to ratify Holtz Rubenstein Reminick LLP as the Company's 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. 16
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of the end of the period covered by this annual report on Form 10K, (December 31, 2011). 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, which included a review of the Company's accounting and financial processes and procedures, 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, 2011, is effective. 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 68 Chairman - Board of Directors / Chief Executive Officer Ian Colin Edmonds 40 Director John Rudy 69 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 17
from October 1999 through December 2006. Mr. Edmonds is currently the chief executive officer of UPG in which the Company holds a 40.8% 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. From May 2005 to October 2011, Mr. Rudy served as a director of Jesup & Lamont, Inc., a publicly-traded broker-dealer, where he served 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 45 Vice President Operations of Action Computer Systems Roger Crawford 41 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 18
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 Based on a review of the Forms 3, 4 and 5 submitted during and with respect to the year ended December 31, 2011, 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. 19
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 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. 20
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. 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 21
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 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, 2011, cash compensation to our named executive officers was $74,650, with our chief executive officer receiving $0 of that. We believe that the base salary paid to our executive officers during 2011 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. 22
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 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 FASB ASC 718, to record compensation expense for our stock option grants. FASB ASC 718 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 2011 Compensation We believe that the total compensation paid to our named executive officers for the fiscal year ended December 31, 2011 achieves the overall objectives of our executive compensation program. In accordance with our overall objectives, executive compensation for 2011 was competitive with comparable companies. See "Summary of Compensation." 23
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. 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 $1 million in the year the compensation becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements. Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time. Summary of Compensation The following table sets forth certain information with respect to compensation for the years ended December 31, 2011 and 2010 earned by or paid to our chief executive officer and chief financial officer who qualify as, and are referred to as, the named executive officers. 24
Summary Compensation Table Non- Pension Equity Value Incentive and Non- Plan Qualified All Name & Cash Stock Option Compen- Deferred Other Principal Salary Bonus Awards Awards sation Compensation Compensa- Position Year ($) ($) ($) ($) ($) Earnings ($) tion ($) Total ($) ------------------------------------------------------------------------------------------- William Tan - 2011 - - - - - - - - Chairman of 2010 - - - - - - - the Board of Directors and CEO John Rudy - 2011 74,650 - - - - - - 74,650 VP/CFO and 2010 125,300 - - - - - 125,300 Director Ian Edmonds - 2011 7,500 - - - - - - 7,500 Director 2010 7,500 - - - - - - 7,500 Grants of Plan Based Awards ----------------------------------------------------------------------------------------- Estimated Future Payouts Estimated Future All All Under Non-Equity Payouts Other Other Incentive Under Equity Incentive Stock Option Plan Awards(1) Plan Awards Awards: Awards: Exercise Grant ------------------------ ----------------------- Number Number of or Base Date of shares Securities Price of Name & Fair Thres- Thres- or stock Underlying Option Principal Grant Value hold Target Maximum hold Target Maximum Units Options Awards Position Date ($) ($) ($) ($) (#) (#) (#) (#) (#) ($/share) ------------ --------- ------ ------- ------ -------- ------ ------ ------- --------- ----------- --------- William Tan President and CEO None ----------------------------------------------------------------------------------------- Ian Edmonds Director None ----------------------------------------------------------------------------------------- John Rudy, VP, CFO and Director None (1) There were no option grants in 2011. All Option Awards were fully vested as of December 31, 2011. 25
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 $74,650 for his services as Chief Financial Officer in 2011. 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 plus $150 per hour for services outside of the scope of managing the day-to-day operations of Action Computer Systems. Beacon Business Services was paid $105,488 in 2011. As an executive of the Company, Mr. Rudy does not receive 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, 2011. 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, 2011 and 2010, there are 125,000 and 125,000, options, respectively, outstanding under the 1999 Plan. 26
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, 2011 there are 125,000 compensatory stock options outstanding with a weighted-average exercise price of $0.71 and all of these compensatory stock options are exercisable. The weighted-average remaining contractual life of the compensatory options outstanding and exercisable approximated 1.02 years at December 31, 2011. The following table sets forth certain information with respect to outstanding equity awards at December 31, 2011 with respect to the named executive officers. Outstanding Equity Awards at Fiscal Year-End Option Awards Stock Awards ------------- ----------- ------------- ------------ -------- ---------- ------ ------ ----------- ---------- Name Number of Number of Equity Option Option Number Market Equity Equity securities securities incentive exercise expiration of value incentive incentive underlying underlying plan awards: price date shares of plan plan unexercised unexercised Number of ($) 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 $1.75 2/1/2012 ------------- ----------- ------------- ------------ -------- ---------- ------ ------ ----------- ---------- (1) Options are fully vested at December 31, 2011. 27
Option Exercises The following table sets forth certain information with respect to option and stock exercises during the fiscal year ended December 31, 2011 with respect to the named executive officers. Option Exercises and Stock Vested (1) Option Awards Stock Awards Name Number of Value Number of Value Shares Realized Shares Realized Aquired on On Aquired on On Exercise (#) Exercise ($) 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 2011. 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. 28
The following summarizes the grant date fair value of each award granted during 2011, computed in accordance with FASB ASC 718 for recognition in financial statement reporting and grant date fair value for the individual directors: There were no option grants in 2011. 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 participate 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, 2012 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. 29
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 2,927,044 (3) 29.56% 0 0 President and CEO Direct and 1720 Hayden Drive Indirect Carrollton, TX 75006 --------------------- ------------ -------- ---------------- ------ Kim Yeow Tan 991,818 (4) 10.01% 0 0 11 Jalan Medang Indirect Bukit Bandaraya 59100 Kuala Lumpur, Malaysia --------------------- ------------ -------- ---------------- ------ Ian Collin Edmonds 271,988 (5) 2.75% 0 0 Director Direct 4315 W. Lovers Lane Dallas. TX 75209 --------------------- ------------ -------- ---------------- ------ John Rudy 50,000 (6) 0.50% 0 0 Director and Chief Direct Financial Officer 4315 W. Lovers Lane Dallas. TX 75209 --------------------- ------------ -------- --------------- ------ All Directors 3,249,032 32.81% 0 0 and Executive Officers as a Group (3 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 9,901,257 shares outstanding as of March 31, 2012. Percent of Class for the Series A Preferred Stock is based on 60,208 shares outstanding as of March 31, 2012. 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, 2012. (3) Represents (i) 514,759 shares directly held by Mr. Tan, (ii) stock options to acquire 25,000 shares of common stock, (iii) 1,410,012 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. (4) Represents (i) 991,818 shares of common stock held by Gin Securities, Ltd., a company of which Kim Yeow Tan is a principal, (5) Represents (i) 246,988 shares directly held by Mr. Edmonds, and (ii) stock options to acquire 25,000 shares of common stock, (6) Represents stock options to acquire 50,000 shares of common stock. 30
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. Corporate Governance Our board consists of 3 directors, Messrs. William Tan, Ian Edmonds, and John Rudy. Only Mr. Edmonds is considered independent. 31
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'sindependence. 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. All audit fees billed for services rendered by Holtz Rubenstein Reminick LLP for reviews of the first, second and third quarters of 2011 are approximately $36,000. In addition, the Company has accrued $40,000 for the 2011 year-end audit. Fees billed for services rendered by MNP LLP (formerly, 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. 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 for 2011 - Report of Independent Registered Public Accounting Firm for 2010 - Consolidated Balance Sheets as of December 31, 2011 and 2010 - Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 - Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2011 and 2010 - Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 - 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. 32
(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. 33
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: April 16, 2012 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, April 16, 2012 ----------------- President and Chief Executive William Tan Officer (principal executive officer) /s/ Ian Edmonds Director April 16, 2012 ----------------- Ian Edmonds /s/ John Rudy Chief Financial Officer April 16, 2012 ----------------- (principal financial and principal John Rudy accounting officer) and Director 34
ITEM 15 (a)(1) CONSOLIDATED FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS ZUNICOM, INC. DECEMBER 31, 2011 and 2010 F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ZUNICOM, INC. Page ---- Reports of Independent Registered Public Accounting Firms .............F-3-4 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2011 and 2010.......F-5 Consolidated Statements of Operations for the years ended December 31, 2011 and 2010..................F-7 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2011 and 2010..................F-9 Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010..................F-10 Notes to Consolidated Financial Statements.........................F-12 F-2
Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Zunicom, Inc. We have audited the accompanying consolidated balance sheet of Zunicom, Inc. (the "Company") as of December 31, 2011, and the related statements of operations, changes in stockholders' equity, and cash flows for the year then ended. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zunicom, Inc. as of December 31, 2011 and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ HOLTZ RUBENSTEIN REMINICK LLP New York, New York April 16, 2012 F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Zunicom, Inc. We have audited the accompanying consolidated balance sheet of Zunicom, Inc. (the "Company") as at December 31, 2010, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audit provides 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 the results of their operations and their cash flows for the year then ended, in conformity with United States generally accepted accounting principles. /s/ MNP LLP Chartered Accountants Licensed Public Accountants Toronto, Canada March 31, 2011 F-4
ZUNICOM, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2011 and 2010 ASSETS 2011 2010 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 3,793,507 $ 4,427,227 Accounts receivable - trade, net of allowance 44,283 37,064 for doubtful accounts of $12,000 and $6,323 Inventories - finished goods 28,621 -- Deferred costs 67,780 69,034 Prepaid expenses and other current assets 29,494 35,166 ----------- ----------- Total current assets 3,963,685 4,568,491 ----------- ----------- PROPERTY AND EQUIPMENT Computer equipment 3,147 -- Furniture and fixtures 10,000 10,000 ----------- ----------- 13,147 10,000 Less accumulated depreciation (3,648) (1,333) ----------- ----------- Net property and equipment 9,499 8,667 ----------- ----------- Intangible assets - net of accumulated amortization 290,000 407,000 INVESTMENT IN UNCONSOLIDATED INVESTEE 4,575,977 4,489,039 ----------- ----------- TOTAL ASSETS $ 8,839,161 $ 9,473,197 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-5
ZUNICOM, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2011 and 2010 LIABILITIES AND STOCKHOLDERS' EQUITY 2011 2010 ------------ ------------ CURRENT LIABILITIES Accounts payable $ 404,750 $ 406,185 Accrued expenses 55,402 52,219 Customer service contracts 13,463 -- Customer deposits 51,121 52,586 ----------- ----------- Total current liabilities 524,736 510,990 ----------- ----------- NON-CURRENT DEFERRED TAX LIABILITY 2,213,406 2,424,863 ----------- ----------- TOTAL LIABILITIES 2,738,142 2,935,853 ----------- ----------- 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, 2011 60,208 60,208 Common stock - $0.01 par value; 50,000,000 shares authorized; 9,901,257 and 9,733,527 shares issued and outstanding, respectively 99,013 97,335 Additional paid-in capital 9,194,684 9,153,520 Accumulated loss (3,252,886) (2,773,719) ----------- ----------- Total stockholders' equity 6,101,019 6,537,344 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,839,161 $ 9,473,197 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-6
ZUNICOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2011 and 2010 2011 2010 ------------ ------------ REVENUE Sales $ 1,080,706 $ 595,628 Service 314,665 253,200 ----------- ----------- Total revenue 1,395,371 848,828 COST OF REVENUE Cost of sales 505,464 326,540 Direct servicing cost 220,259 121,843 ----------- ----------- Total cost of revenue 725,723 448,383 ----------- ----------- GROSS PROFIT 669,648 400,445 OPERATING EXPENSES Selling, general and administrative 1,304,600 1,006,250 Depreciation and amortization 119,315 79,333 ----------- ----------- 1,423,915 1,085,583 ----------- ----------- LOSS FROM OPERATIONS (754,267) (685,138) OTHER INCOME (EXPENSE) Interest income 11,680 20,590 Equity in earnings of unconsolidated investee 74,090 1,143,343 ----------- ----------- 85,770 1,163,933 ----------- ----------- INCOME (LOSS) BEFORE PROVISON FOR INCOME TAXES AND DISCONTINUED OPERATIONS (668,497) 478,795 ----------- ----------- INCOME TAXES BENEFIT 211,457 (48,886) ------------ ------------ The accompanying notes are an integral part of these consolidated financial statements. F-7
ZUNICOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) YEARS ENDED DECEMBER 31, 2011 and 2010 2011 2010 ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS $ (457,040) 429,909 LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES -- (165,814) ----------- ----------- NET INCOME(LOSS) $ (457,040) $ 264,095 =========== =========== Preferred stock dividend (22,127) (22,127) ----------- ----------- Net income (loss) attributable to common stockholders $ (479,167) $ 241,968 =========== =========== Basic net income (loss) per share attributable to common stockholders: Income (loss) from continuing operations $ (0.05) $ 0.04 =========== ========== Loss from discontinued operations $ -- $ (0.02) =========== ========== Net income (loss) per share $ (0.05) $ 0.02 =========== ========== Number of weighted average shares of common stock outstanding Basic 9,820,839 9,733,527 =========== ========== Diluted net income (loss) per share attributable to common stockholders: Income ( loss) from continuing operations $ (0.05) $ 0.04 =========== =========== Loss from discontinued operations $ -- $ (0.02) =========== =========== Net income (loss) per share $ (0.05) $ 0.02 =========== =========== Number of weighted average shares of common stock outstanding Diluted 9,820,839 9,953,943 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-8
ZUNICOM, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2011 AND 2010 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, 2010 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 ====== ======== ========= ======= ========== =========== =========== Issued restricted stock -- -- 187,490 1,876 45,590 -- 47,466 Restricted Stock Forfeited -- -- (19,760) (198) (4,426) -- (4,624) Dividends paid on Preferred stock -- -- -- -- -- (22,127) (22,127) Net income for 2011 -- -- -- -- -- (457,040) (457,040) Balances at December 31, 2011 60,208 $60,208 9,901,257 $99,013 $9,194,684 $(3,252,886) $ 6,101,019 ====== ======== ========= ======= ========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-9
ZUNICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2011 and 2010 2011 2010 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (457,040) $ 264,095 Adjustments to reconcile net income to net Cash used in operating activities: Depreciation and amortization 119,315 88,544 Write-off of property and equipment -- 10,748 Stock-based compensation 29,993 51,415 Provision for bad debt 14,241 14,177 Equity in earnings of investee (74,090) (1,143,342) Deferred income taxes (211,457) (36,533) Change in operating assets and liabilities Accounts receivable - trade (21,460) (43,518) Inventories (28,621) 6,224 Prepaid expenses and other current assets 5,672 (82) Accounts payable (1,437) 130,900 Accrued liabilities 3,186 (62,770) Deferred costs 1,254 (69,034) Customer deposits (1,465) 52,586 Customer service contracts 13,463 -- ------------ ----------- Net cash used in operating activities (608,446) (736,590) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (3,147) -- Purchase of business -- (495,000) ------------ ----------- Net cash used in investing activities (3,147) (495,000) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid on preferred stock (22,127) (22,126) ------------ ----------- Net cash (used in) financing activities (22,127) (22,126) ------------ ----------- The accompanying notes are an integral part of these consolidated financial statements. F-10
ZUNICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2011 AND 2010 2011 2010 ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (633,720) (1,253,716) Cash and cash equivalents at beginning of year 4,427,227 5,680,943 ----------- ----------- Cash and cash equivalents at end of year $ 3,793,507 $ 4,427,227 =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION Interest received $ 11,680 $ 20,590 =========== ============ Issued restricted stock $ 64,309 $ - =========== ============ Taxes paid $ 11,017 $ - =========== ============ The accompanying notes are an integral part of these consolidated financial statements. F-11
ZUNICOM, INC. NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 2011 AND 2010 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 N). 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 (Note M). Zunicom holds a 40.8 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 40.8%. 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, 2011, we held 2,048,870 shares of common stock representing a 40.8 percent interest in UPG. We account for UPG under the equity method of accounting. At December 31, 2011 and 2010, 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 UPG are recorded in the statements of operations. F-12
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 Since January 1, 2011 the Company maintains an inventory of computer components and parts available for sale. The inventory is carried at the lower of cost or market and accounted for 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-13
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 2008. 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, 2011 and 2010. 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. 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 2012 2013 2014 2015 Total ------------------- -------- -------- -------- -------- -------- Covenant not to $ 50,000 $ 16,667 -- -- $ 66,667 compete ------------------- -------- -------- -------- -------- -------- Customer list 67,000 67,000 67,000 22,333 223,333 ------------------- -------- -------- -------- -------- -------- Total $117,000 $ 83,667 $ 67,000 $ 22,333 $290,000 ======== ======== ======== ======== ======== F-14
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The intangible gross amount, amortization and net amount for the years ended December 31, 2011 and 2010 are presented below. ---------------------- ------------------- ----------------- ------------------- Covenant not to Gross Amount Accumulated Net Amount Compete: Amortization ---------------------- ------------------- ----------------- ------------------- 2010 $150,000 $33,333 $116,667 ---------------------- ------------------- ----------------- ------------------- 2011 150,000 83,333 66,667 ---------------------- ------------------- ----------------- ------------------- ---------------------- ------------------- ----------------- ------------------- Customer List: Gross Amount Accumulated Net Amount Amortization ---------------------- ------------------- ----------------- ------------------- 2010 $335,000 $44,667 $290,333 ---------------------- ------------------- ----------------- ------------------- 2011 335,000 111,667 223,333 ---------------------- ------------------- ----------------- ------------------- ---------------------- ------------------- ----------------- ------------------- Total: Gross Amount Accumulated Net Amount Amortization ---------------------- ------------------- ----------------- ------------------- 2010 $485,000 $78,000 $407,000 ---------------------- ------------------- ----------------- ------------------- 2011 485,000 195,000 290,000 ---------------------- ------------------- ----------------- ------------------- As of December 31, 2011, the weighted average remaining life is 2.9 years. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 605-10 when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable and collectability 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 and monthly for the maintenance and support agreements. For sales of parts, accessories and supplies, AlphaNet recognizes revenue when the item is shipped and invoiced. The cost of software licenses 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. Computer components and parts are carried in inventory at the lower of cost or market and expensed to cost of sales in the period in which they were sold to customers. 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. Customer service contracts represent prepaid maintenance and support contracts. Earnings Per Share F-15
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The dilutive effect of the preferred shares and options are excluded as they would be antidilutive. 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; 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. Recent Accounting Pronouncements F-16
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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's adoption of this guidance did not have a material impact on its 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 been evaluated. The updated guidance was effective upon issuance, and did not have a material impact on the Company's financial statements. In December 2010, the Financial Accounting Standards Board (FASB) issued accounting Standards Update 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations. The objective of this Update is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company's adoption of this update did not have a material impact on its financial statements. F-17
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820). the amendments in this Update are the result of the work by the FASB and the IASB to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). The amendments in this Update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company has determined that this amendment will not have a material effect on its financial statements. In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-08, Intangibles - Goodwill and Other (Topic 350) Testing Goodwill for impairment. The objective of this Update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company has determined that this amendment will not have a material effect on its financial statements. In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-11, Disclosures about Offsetting Assets and Liabilities. This update seeks to minimize differences between U.S. General Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS) with regard to offsetting (netting) of assets and liabilities in the presentation of financial statements to improve the comparability of financial statements. This amendment is effective for reporting periods beginning on or after January 1, 2013. The Company has determined that this amendment will not have a material effect on its financial statements. NOTE C - STOCK OPTIONS AND WARRANTS Valuation Assumptions There were no stock options granted in 2011 or 2010. 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, 2011 and 2010 there were 125,000 outstanding under the 1999 Plan. F-18
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, 2011 and 2010 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, 2011 and 2010 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, 2010 125,000 0.71 0.45 - 1.75 --------- Options outstanding and exercisable At December 31, 2010 125,000 0.71 0.45 - 1.75 --------- Options outstanding and exercisable At December 31, 2011 125,000 0.71 0.45 - 1.75 ========= Stock Options Outstanding and Exercisable Information related to stock options outstanding at December 31, 2011 is summarized below: Options Outstanding Options Exercisable ----------------------------------------- ---------------------- Weighted Weighted Weighted Average Average Average Outstanding Remaining Exercise Exercisable Exercise Exercise Price At 12/31/11 Contractual Life Price At 12/31/11 Price ----------- ---------------- ---------- ----------- --------- $1.75 25,000 0.10 Years $1.75 25,000 $1.75 $0.45 100,000 1.25 Years $0.45 100,000 $0.45 --------- ------------- -------- --------- -------- $0.45 - $1.75 125,000 1.02 Years $0.71 125,000 $0.71 -------- -------- At December 31, 2011, the aggregate intrinsic value of options outstanding was $0.00. 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, 2011, all outstanding options were fully vested. F-19
NOTE D - STOCK BASED COMPENSATION Stock-based compensation expense for the years ended December 31, 2011 and 2010 was $29,993 and $51,415, respectively. The stock-based compensation expense for the years ended December 31, 2011 and 2010 relates to the amortization of restricted stock issued as deferred compensation. Of the $29,993 in stock based compensation for the year ended December 31, 2011, $5,201 relates to the June 24, 2011 grant of restricted stock and $24,792 relates to the June 25, 2007 grant of restricted stock which has now been fully amortized. Amortization of the restricted stock granted to UPG employees for the years ended December 31. 2011 and 2010 was $13,745 and $41,656, respectively. Of the $13,745 in amortization of the restricted stock granted to UPG employees for the year ended December, 31, 2011, $3,474 relates to the June 24, 2011 grant of restricted stock and $10,271 relates to the June 25, 2007 grant of restricted stock which has now been fully amortized. 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 vested in full on June 25, 2011, but was extended for three years pursuant to a new agreement as described below. Accordingly, the deferred stock compensation to the Company's chairman has been fully amortized and the unrecognized compensation cost to certain UPG employees has been fully realized as of December 31, 2011. 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 were returned to the Company and the investment in UPG was reduced by $132,925. During 2011, two UPG employees resigned and according to the terms of the restricted stock agreement, forfeited their restricted stock grant. Accordingly, their shares have been returned to the Company and the investment in UPG was reduced by $4,624. On June 24, 2011, the Company offered an additional grant of restricted shares to the grantees on condition that the grantees would agree that the original grant remain in escrow and subject to the original restrictions until June 30, 2014. The new grant will also be subject to the same restrictions and remain in escrow for the same period. All remaining grantees accepted the Company's offer. Accordingly, on June 24, 2011, the Company issued a grant of 87,952 restricted shares of common stock to the Company's chairman and a grant of 99,538 restricted shares of common stock to certain employees of UPG. These additional shares will vest on June 30, 2014 and will be held in escrow for the benefit of the grantee subject to the same restrictions and risk of forfeiture as the original shares until the vesting date. As of December 31, 2011, $5,201 of the restricted stock grant to the Company's chairman has been amortized and $24,966 remains unamortized and $3,474 of the restricted stock grant to UPG employees has been amortized and $16,670 remains unamortized. F-20
The Company accounted for the grant of the new restricted shares to our chairman as stock based compensation. We accounted for the grant of the new restricted shares to UPG officers and employees as a contribution of capital. The Company will amortize 59% of that capital contribution as additional equity in earnings (loss) of the investee over the vesting period. NOTE E - NET INCOME (LOSS) PER SHARE Basic net income per share is computed by dividing net income decreased by the preferred stock dividends of $22,127 and $22,127 for each of the years ended December 31, 2011 and 2010, by the weighted average number of common shares outstanding for the period. For the year ended December 31, 2010, 25,000 stock options are not included in the diluted net income per share calculation as they are out-of-the-money, the stock price is below the exercise price. However, 100,000 in-the-money options are included. The diluted net income per share calculation also includes the effect of the "as if" conversion of the preferred stock into 120,416 shares of common stock. For the year ended December 31, 2011, 125,000 stock options and the effect of the "as if" conversion of the preferred stock into 120,416 shares of common stock are not included in the diluted net income per share calculation as the Company's loss attributable to common shareholders, along with the dilutive effect of potentially issuable common stock due to the outstanding options, causes the normal computation of diluted loss per share to be smaller than the basic loss per share; thereby yielding a result that is counterintuitive. Consequently, the diluted loss per share amount presented does not differ from basic loss per share due to this "anti-dilutive" effect. NOTE F - INVESTMENT IN UNCONSOLIDATED INVESTEE Following is a summary of financial information for UPG for the years ended December 31, 2011 and 2010: ------------------------------------ Year Ended December 31, ($ in 000's) ------------------------------------ 2011 2010 ------------------- ---------------- Net sales $ 89,274 $ 107,257 Cost of sales 71,852 87,356 ----------------- -------------- Gross profit 17,422 19,901 Operating expenses 16,291 14,770 ---------------- -------------- Operating income 1,131 5,131 Other income (expense): Interest expense (568) (681) Other, net (7) 2 ---------------- -------------- Total other (expense) income (575) (679) ---------------- -------------- Income before provision for income taxes 556 4,452 Provision for income taxes (342) (1,562) ---------------- -------------- Net income $ 214 $ 2,890 ================ ============== F-21
NOTE F - INVESTMENT IN UNCONSOLIDATED INVESTEE (CONTINUED) Following is a summary of balance sheet information for UPG as of December 31, 2011 and 2010: ---------------------- ---------------------------- ---------------------------- As at December 31, 2011 As at December 31, 2010 ($ in 000's) ($ in 000's) ---------------------- ---------------------------- ---------------------------- Current assets $ 41,027 $ 46,126 ---------------------- ---------------------------- ---------------------------- Noncurrent assets 3,048 1,485 ---------------------- ---------------------------- ---------------------------- Current liabilities 21,086 25,178 ---------------------- ---------------------------- ---------------------------- Noncurrent liabilities 229 266 ---------------------- ---------------------------- ---------------------------- Shareholders' equity 22,760 22,167 At December 31, 2011, the carrying value of the Company's investment in UPG was $4,575,977. The market value of the 2,048,870 shares of UPG's common stock the Company owns was approximately $3,933,830, based on the closing price per share at December 31, 2011 of $1.92. NOTE G - 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, 2011, 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) 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, 2011 and 2010 no shares of outstanding preferred stock were converted into shares of common stock. All dividends in 2011 and 2010, were paid in cash. During 2011 and 2010, the Company paid $22,127 and $22,127, respectively, in cash dividends on the class A Preferred Stock. NOTE H - 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, 2011 and 2010, there were no customers who accounted for more than 3% of the Company's total revenues. F-22
NOTE I - INCOME TAXES Deferred tax assets and liabilities at December 31, 2011 and 2010 consist of the following: 2011 2010 ------------ ------------ Current deferred tax asset (liability) $ 4,080 $ 2,150 ----------- ----------- Net current deferred tax asset (liability) $ 4,080 $ 2,150 =========== =========== Non-current deferred tax asset $ 2,603,773 $ 2,348,422 Non-current deferred tax liability (4,821,259) (4,775,435) ----------- ----------- Net non-current deferred tax asset (liability) $(2,217,486) $(2,427,013) =========== =========== Significant components of our deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows: 2011 2010 ------------ ------------ Net operating loss carry forwards $ 2,406,313 $ 2,188,795 Book/tax difference in investment in UPG (1,060,214) (1,030,655) Excess loss account (3,758,856) (3,743,261) Depreciation (2,189) (1,518) Deferred Stock Compensation 145,854 135,656 Accrued bonus -- -- Allowance for doubtful accounts 4,080 2,150 Other 51,606 23,970 ----------- ----------- $(2,213,406) $(2,424,863) ============ ============ The Company's provision for income taxes for the years ended December 31, 2011 and 2010 is comprised as follows: 2011 2010 ---------- ------------ Current income tax expense $ -- $ -- Deferred income tax expense ( 211,457) ( 36,533) ---------- ----------- Income taxes (expense) benefit $( 211,457) $( 36,533) ========== =========== At December 31, 2011 the Company has recorded deferred tax liabilities totaling $2,213,406. These liabilities consist primarily of the book/tax differences in Zunicom's investment in UPG totaling $(1,060,214) and the excess loss account totaling $(3,758,856). 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, 2011 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, 2011 totals approximately $7,077,392 and begins to expire in 2022. F-23
NOTE I - INCOME TAXES (CONTINUED) The Company's income tax expense for the years ended December 31, 2011 and 2010 differed from the statutory federal rate of 34 percent as follows: 2011 2010 ----------- ------------ Statutory rate applied to income (loss) before income taxes $ (227,289) $ 77,370 Increase (decrease) in income taxes resulting from: Permanent Differences 1,251 1,651 Excess loss account 20,206 (115,554) Other adjustments (5,625) ---------- ----------- Income tax expense (recovery) $ (211,457) $ (36,533) ---------- ----------- F-24
NOTE J - 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 M) 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. ------- ------- ------- -------- 2012 2013 2014 Total ------------- ------- ------- ------- -------- Office lease $25,892 $26,669 $25,117 $77,678 ------------- ------- ------- ------- -------- Rent expense for the years ended December 31, 2011 and 2010 was $25,544 and $16,217, respectively. Rent expense reflects 12 months of occupancy in 2011 and 8 months in 2010. NOTE K - 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, 2011, the Company was not subject to any such legal proceedings or claims. NOTE L - 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 Springs, 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 475 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. F-25
NOTE M - 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 Springs, 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 ======== 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. NOTE N - 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 in the consolidated statements of operations for the year ended December 31, 2010. The asset related to discontinued operations was a deposit of $5,000 which was recovered in 2011. The liability related to discontinued operations in 2011 and 2010 is accounts payable of $282,725 and $289,102 respectively. NOTE O - INVENTORY Beginning with the period ended March 31, 2011, management is performing a monthly inventory of components and parts to be sold and installed in POS systems. Accordingly, the balance sheet as of December 31, 2011, includes inventory valued at the lower of cost or market. F-26
NOTE P - SUBSEQUENT EVENT Reverse/Forward Stock Split The Company's Board of Directors has approved a 1-for-12 reverse stock split of our Common Stock followed by a 12-for-1 forward stock split of our Common Stock (the" Reverse/Forward Stock Split"). In January 2012 shareholders owing in excees of 50% of the voting power of the Company approved the Reverse/Forward Stock Split. On February 10, 2012, the Company filed Schedules 14C and a 13E-3 Transaction Statement with the Security and Exchange Commission (SEC) in connection with the Reverse/Forward Stock Split. We cannot efectuate the Reverse/Forward Stock Split until twenty days after we mail our Schedule 14C Information Statement to our shareholders. If consummated, the Reverse/Forward Stock Split would provide that all shareholders owning less than 12 shares of our Common Stock would recive a payment of $.65 for each share and would thereafter no longer be shareholders of the Company. The shareholdings of all other shareholders would remain unchanged. The Reverse/Forward Stock Split is part of the Company's plan to terminate the registration of the Common Stock and suspend its reporting requirements under the Exchange Act ("Deregistration" or "Deregister"). Following the effective date of the Reverse/Forward Stock Split, the Company would have fewer than 300 Shareholders of record and would be eligible for Deregistration under the Exchange Act. Therefore, the Reverse/Forward Stock Split is considered a "going private" transaction as defined in Rule 13e-3 promulgated under the Exchange Act. F-27