Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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Operation below. In April of 2010, AlphaNet continued its participation in the
information technology and hospitality related business sector through the
purchase of the assets and business of Action Computer Systems. AlphaNet is now
a reseller of point-of-sale software and hardware to restaurants in southern
Connecticut, Westchester County, New York, and New York City (See Note N 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