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ZUNICOM INC - Recent Material Event
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, 2008, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $3,081,054 (based on the
closing price of $0.52 per share on that date).
As of March 24, 2009, 9,960,756 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 8
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for our Common Equity and Related
Stockholder Matters 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 20
Item 9A. Controls and Procedures 20
Item 9B. Other Information 21
PART III
Item 10. Directors, Executive Officers and Corporate
Governance 21
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 34
Item 13. Certain Relationship and Related Transactions,
and Director Independence 36
Item 14. Principal Accounting Fees and Services 37
PART IV
Item 15. Exhibits 38
Signatures 40
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. AlphaNet is a leading provider of guest communication
services to the hospitality industry.
4
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 key provider of
business communication services to the hospitality industry.
ALPHANET HOSPITALITY SYSTEMS, INC. ("AlphaNet")
AlphaNet is a leading provider of business services to the hospitality industry.
Founded in 1992, AlphaNet invented and created the market for in-room fax
machines through its patented InnFaxTM technology that allowed for sending and
receiving of faxes in the guest room using temporary, private DID numbers. The
market grew internationally through the use of high profile licensees.
Leveraging on its initial creative success, AlphaNet now provides a
comprehensive suite of products that meet the explosive demand for 24/7 self
service business centers through its offerings of The Office(TM), Laptop
Connect(TM), and GuestPrint(TM).
Products
The Office(TM) is a fully featured, unattended, "self-serve" credit card
activated business center. Available 24 hours a day, guests are able to use an
Intel P4 PC, access the Internet and e-mail as well as print, copy, fax and
scan. Microsoft Office is available with a full suite of programs as well as
other commonly used tools such as Acrobat Reader. The offering is further
enhanced by USB connectivity and, where Laptop Connect (TM)is not used (see
below), network connectivity and printing for laptop computers. Each user of the
PC works from a virtual C drive that is refreshed between users. This eliminates
all viruses as well as any trace of the previous user.
LapTop Connect(TM) allows hotel guests the ability to connect their laptop
computers to high-speed internet access points located in the business center.
By connecting the supplied cable to the laptop LAN card the user is ready to use
the features offered by LapTop Connect(TM). Logging on using any major credit
card, the user can surf the Internet, pick up e-mail and print documents. With
Laptop Connect(TM)'s auto configuration ability, the laptop user just plugs and
plays. There is no need to change network or browser settings. To further
enhance the experience, users can set up their laptop for network printing in
two easy steps without having to download drivers or use slower web-based
printing solutions.
5
InnFax(TM) provided for in-room faxing, copying and printing through the use of
the IBC 5000 multifunction machine. InnFax(TM) is a technology that is not in
high demand by the business traveler and demand has fallen steadily over the
past several years. In-room Internet is the key competing technology that has
eroded usage of this service. The Company has reviewed the operations of
InnFax(TM) and discontinued the product and service as of December 31, 2007.
Revenue from InnFax(TM) was $0 in 2008 and $95,577 in 2007.
Equipment
The hardware and software necessary for The Office(TM) product line is obtained
from brand name manufacturers including Brother, HP, Cherry and Viewsonic. The
Pentium P4 class PCs are assembled in-house using best-of-class components to
ensure reliability and durability as is required for 24/7 operation. The
Office(TM) software allows for virus and artifact free operation for each user
and tracks usage statistics for billing purposes.
AlphaNet embraces new technologies and products to provide users with the latest
technologies available in the market. Innovations such as cost-effective color
laser multifunction machines provide hotels economical ways to offer color
printing to its guests.
Customers
AlphaNet sells or places its product line to both chain/management companies and
individual properties. AlphaNet provides services to chains such as Hilton,
Hyatt, Intercontinental, Marriott, Westin and Fairmont. Individual properties of
note include Waldorf-Astoria, Fairmont Dallas, Westin Michigan Avenue Chicago,
Intercontinental Dallas and the newly renovated Hilton San Francisco Financial
District. AlphaNet has been selected as a preferred Hilton vendor.
Employees
AlphaNet's primary offices are in Toronto, Canada. AlphaNet also maintains a
repair integration and shipping facility in Woodbridge, Virginia. AlphaNet
employs a total of 10 full-time employees that include engineering, accounting,
customer support, field installation and sales.
Alphanet also contracts the use of cost-effective local third parties on an
as-needed basis to provide on-site field support in key regions within the USA
and Canada.
Sales and Marketing
AlphaNet sells its products and services through direct sales. AlphaNet's sales
effort is supported by extensive use of highly targeted direct mailings as well
as intensive telephone follow-up.
Patents and Trademarks
AlphaNet has patent rights over the InnFax(TM) technology, whereby individual
fax machines work in concert with communications networks. Although these patent
rights have been of value in the past, with the discontinuance of InnFax(TM),
they are not expected to be of value in the future. These patents are carried on
AlphaNet's books at "0" value. AlphaNet also utilizes the following trade names
6
for its products: The Office(TM), Laptop Connect(TM), and GuestPrint(TM).
Alphanet believes that these trademarks are important in assisting customers in
recognizing Alphanet's products.
Pursuant to a purchase agreement dated January 28, 2008, the Company sold two
patents which it does not require to conduct its business. The Company received
net proceeds of $666,667 after commissions.
Competition
AlphaNet's The Office(TM) product has several established competitors. AlphaNet
competes through service, pricing and marketing to their large, established
customer base. Innovation, such as being the first to offer small foot print
business centers (which have now become standard), helps AlphaNet maintain a
competitive advantage in the market.
Sources and Availability of Services
AlphaNet relies upon the facilities and services of various telephony and
communications common carriers. The product components used in The Office(TM)
product are readily available and adaptable to the latest industry computer
standards.
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.
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.
Zunicom received net proceeds of $6,510,000 from the IPO and recognized a gain
of $5,686,929 which represented the excess proceeds received over the carrying
value of UPG's shares we sold in the IPO. In accordance with SEC Staff
Accounting Bulletin (SAB) NO. 51 we also recognized a gain on UPG's equity
transactions related to the IPO in the amount of $6,654,201 which represented
the difference between the carrying value of our investment in UPG and our
ownership interest in UPG's net book value.
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.
7
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:
o batteries of a wide variety of chemistries, battery chargers and related
accessories;
o portable battery-powered products, such as jump starters and 12-volt
power accessories;
o security system components, such as alarm panels, perimeter access
controls, horns, sirens, speakers, transformers, cabling and other
components; and
o electro-magnetic devices, capacitors, relays and passive electronic
components.
UPG's third-party logistics services, principally supply chain management
solutions and other value-added services, are designed to help customers
optimize performance by allowing them to outsource supply chain management
functions. UPG's supply chain management services include inventory sourcing and
procurement, warehousing and fulfillment. UPG's value-added services include
custom battery pack assembly, custom kitting and packing, private labeling,
component design and engineering, graphic design, and sales and marketing. UPG
also distributes batteries and portable power products under various
manufacturers' and private labels, as well as under its own proprietary brands.
UPG is one of the leading domestic distributors of sealed, or
"maintenance-free," lead acid batteries. UPG's customers include OEMs,
distributors and both online and traditional retailers. The products UPG
sources, manages and distributes are used in a diverse and growing range of
industries, including automotive, consumer goods, electronics and appliances,
marine and medical instrumentation, computer and computer-related products,
office and home office equipment, security and surveillance equipment, and
telecommunications equipment and other portable communication devices.
ITEM 1A. RISK FACTORS
In addition to other information in this Form 10-K, the following risk factors
should be carefully considered in evaluating us and our business because these
factors currently have or may in the future have a significant impact on our
business, operating results or financial condition. Actual results could differ
materially from those projected in the forward- looking statements contained in
this Form 10-K as a result of the risk factors discussed below and elsewhere in
this Form 10-K.
Risks Related to Our Business
AlphaNet depends largely on its ability to keep pace with changing technologies.
If we are unable to respond quickly and cost-effectively to changing
communications technologies and devices and changes in customer tastes and
preferences, our business will be harmed.
8
The emerging nature of communications technologies requires us to continually
update our AlphaNet products and service offerings, particularly in response to
competitive offerings and to make sure they are compatible with and take
advantage of new technologies and changes in consumer tastes and preferences.
Our inability or the inability of our suppliers to respond quickly and
cost-effectively to changing communications technologies and devices and changes
in customer tastes and preferences, could make our existing service offerings
less competitive and may cause us to lose market share. We cannot be certain
that we will successfully develop, acquire and market new products and services
that respond to competitive and technological developments and changing customer
needs.
Most of our competitors have significantly greater resources than we do.
We face strong competition from existing competitors, many of whom are
substantially larger than us. New competitors or competitors' price reductions
or increased spending on marketing and product development, could have a
negative impact on our financial condition and our competitive position, as
larger competitors will be in a better position to bear these costs.
Our long-term growth strategy assumes that we make suitable acquisitions. If we
are unable to address the risks associated with these acquisitions our business
could be harmed.
Our long-term growth strategy includes identifying and, from time to time,
acquiring suitable candidates on acceptable terms. In particular, we intend to
acquire businesses that provide products and services that expand or complement
our existing business and expand our geographic reach. In pursuing acquisition
opportunities, we may compete with other companies having similar growth and
investment strategies. Competition for these acquisition targets could also
result in increased acquisition costs and a diminished pool of businesses,
technologies, services or products available for acquisition. Our long-term
growth strategy could be impeded if we fail to identify and acquire promising
candidates on terms acceptable to us. Assimilating acquired businesses involves
a number of other risks, including, but not limited to:
o disrupting our business;
o incurring additional expense associated with a write-off of all or a
portion of the related goodwill and other intangible assets due to
changes in market conditions or the economy in the markets in which we
compete or because acquisitions are not providing the benefits expected;
o incurring unanticipated costs or unknown liabilities;
o managing more geographically-dispersed operations;
o diverting management's resources from other business concerns;
o retaining the employees of the acquired businesses;
o maintaining existing customer relationships of acquired companies;
o assimilating the operations and personnel of the acquired businesses;
and
o maintaining uniform standards, controls, procedures and policies.
For all these reasons, our pursuit of an overall acquisition or any individual
acquisition could have a material adverse effect on our business, financial
condition and results of operations. If we are unable to successfully address
any of these risks, our business could be harmed.
9
Rapid growth in our business could strain our managerial, operational,
financial, accounting and information systems, customer service staff and office
resources. If we fail to manage our growth effectively, our business may be
negatively impacted.
In order to achieve our growth strategy, we will need to expand all aspects of
our business, including our computer systems and related infrastructure,
customer service capabilities and sales and marketing efforts. We cannot assure
you that our infrastructure, technical staff and technical resources will
adequately accommodate or facilitate our expanded operations. To be successful,
we will need to continually improve our financial and managerial controls,
billing systems, reporting systems and procedures, and we will also need to
continue to expand, train and manage our workforce. In addition, as we offer new
products and services, we will need to increase the size and expand the training
of our customer service staff to ensure that they can adequately respond to
customer inquiries. If we fail to adequately train our customer service staff
and provide staffing sufficient to support our new products and services, we may
lose customers.
If we are unable to attract and retain highly qualified management and technical
personnel, our business may be harmed.
Our success depends in large part on the contributions of our senior management
team, technology personnel and other key employees and on our ability to
attract, integrate, train, retain and motivate these individuals and additional
highly skilled technical and sales and marketing personnel. We face intense
competition in hiring and retaining quality management personnel. Many of these
companies have greater financial resources than we do to attract and retain
qualified personnel. If we are unable to retain our key employees or attract,
integrate, train and retain other highly qualified employees in the future, when
necessary, our business may be negatively impacted.
Risks Related to Our Securities
There is a lack of an active public market for our common stock and the trading
price of our common stock is subject to volatility.
There is a lack of an active public market for our common stock, and the trading
price of our common stock is subject to volatility. The quotation of shares of
our common stock on the Over-the-Counter Bulletin Board began in April 1999.
There can be no assurances, however, that a market will develop or continue for
our common stock. Our common stock may be thinly traded, if traded at all, even
if we achieve full operation and generate significant revenue and is likely to
experience significant price fluctuations. In addition, our stock may be defined
as a "penny stock" under Rule 3a51-1 adopted by the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended. In
general, a "penny stock" includes securities of companies which are not listed
on the principal stock exchanges or the National Association of Securities
Dealers Automated Quotation System, or Nasdaq, National Market System and have a
bid price in the market of less than $5.00; and companies with net tangible
assets of less than $2,000,000 ($5,000,000 if the issuer has been in continuous
operation for less than three years), or which have recorded revenues of less
than $6,000,000 in the last three years. "Penny stocks" are subject to Rule
15g-9, which imposes additional sales practice requirements on broker-dealers
that sell such securities to persons other than established customers and
"accredited investors" (generally, individuals with net worth in excess of
10
$1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their
spouses, or individuals who are officers or directors of the issuer of the
securities). For transactions covered by Rule 15g-9, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, this
Rule may adversely affect the ability of broker-dealers to sell our common
stock, and therefore, may adversely affect the ability of our stockholders to
sell common stock in the public market. The trading price of our common stock is
likely to be subject to wide fluctuation. Factors affecting the trading price of
our common stock may include:
o variations in our financial results;
o announcements of innovations, new solutions, strategic alliances or
significant agreement by us or by our competitors;
o recruitment or departure of key personnel;
o changes in estimates of our financial results or changes in the
recommendations of any securities analysts that elect to follow our
common stock;
o market conditions in our industry, the industries of our customers and
the economy as a whole; and
o sales of substantial amounts of our common stock, or the perception that
substantial amounts of our common stock will be sold, by our existing
stockholders in the public market.
ITEM 2. DESCRIPTION OF PROPERTIES
Zunicom's executive office is located in Dallas, Texas and is leased on a month
to month basis.
From January 1 through April 30, 2007, AlphaNet occupied 4,900 square feet of
leased office space in Toronto,Canada at approximately $13,300 per month. This
lease expired April 30, 2007. On March 1, 2007 AlphaNet leased 2,810 square feet
of new office space in Toronto, Canada for approximately $7,000 per month. This
lease expires April 30, 2009. During the third quarter of 2008, the Company
extended the office lease for one year to April 30, 2010 at the same rent and
terms. AlphaNet also has a repair and service facility in Woodbridge, Virginia,
which is leased on an annual basis with a monthly rent from July, 2008 to July,
2009 of $800.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Zunicom, Inc. was held at the office of
the Company at 4315 West Lovers Lane, Dallas Texas 75209 at 10:00a.m. on
December 14, 2007. Two proposals were presented and voted on by the
shareholders. The first proposal was the election of directors to serve until
the next annual meeting of shareholders and until their successors are elected
and qualify. For the election of directors the following votes were cast.
For Abstained Against
--------- ----------- --------
William Tan 5,522,520 -0- -0-
Ian Edmonds 5,522,520 -0- -0-
John Rudy 5,522,520 -0- -0-
11
The second proposal for consideration was the ratification of Horwath Orenstein
LLP as the Company's auditor. For the ratification of Horwath Orenstein the
following votes were cast. Horwath Orenstein has since merged into a successor
firm, Meyers Norris Penny LLP, which is now our auditor.
For Abstained Against
--------- --------- -------
5,522,520 -0- -0-
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 24, 2009, the last sales price of the Company's
common stock was $.28.
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 2007 and 2008, as
reported by the NASDAQ Trading and Market Services:
-----|-------------------|----------|---------|
| Calendar Period | High | Low |
-----|-------------------|----------|---------|
2007 | First Quarter | $1.95 | $0.93 |
-----|-------------------|----------|---------|
| Second Quarter | $1.24 | $0.77 |
-----|-------------------|----------|---------|
| Third Quarter | $0.85 | $0.70 |
-----|-------------------|----------|---------|
| Fourth Quarter | $0.85 | $0.63 |
-----|-------------------|----------|---------|
2008 | First Quarter | $0.66 | $0.36 |
-----|-------------------|----------|---------|
| Second Quarter | $0.60 | $0.36 |
-----|-------------------|----------|---------|
| Third Quarter | $0.55 | $0.41 |
-----|-------------------|----------|---------|
| Fourth Quarter | $0.44 | $0.20 |
-----|-------------------|----------|---------|
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Dividends were declared and paid on March 23, 2007 on the Company's common stock
(see Notes to Consolidated Financial Statements - NOTE G SHAREHOLDERS' EQUITY.
As of December 31, 2008, the Company has 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.
12
As of December 31, 2008, the Company had 9,960,756 shares of common stock issued
and outstanding and held by 562 shareholders of record.
Restricted Stock
On June 25, 2007, the Board of Directors of Zunicom approved a grant of 996,940
restricted shares of Zunicom's common stock to our chairman and certain officers
and employees of UPG. Several of the officers and employees of UPG had been
officers and employees of Zunicom prior to the deconsolidation of UPG in
December 2006. The Company attributed a value of $205,801 to the restricted
stock granted to our chairman and $377,392 to the restricted stock granted to
the officers and employees of UPG. The grant was made in recognition of past and
future performance especially with regard to the initial public offering of
UPG's common stock in which Zunicom was able to sell 1,000,000 shares of UPG
common stock resulting in a $0.80 dividend to shareholders paid in the first
quarter of 2007. The restricted stock vests in full on June 25, 2011, and is
subject to certain restrictions and obligations up to the point of vesting. The
stock will not be registered and will be held in escrow for the benefit of the
grantee until the vesting date. Our chairman agreed not to exercise options on
400,000 shares of Zunicom common stock, and the officers and employees of UPG
held options on 653,000 shares of Zunicom common stock which lapsed after the
deconsolidation of UPG. In accordance with FASB 123R, we accounted for the grant
of restricted shares to our chairman as stock based compensation. We accounted
for the grant of restricted shares to UPG officers and employees as a
contribution of capital in accordance with EITF 00-12, "Accounting by an
Investor for Stock-Based Compensation Granted to Employees of an Equity Method
Investor." We will amortize 60% of that capital contribution as additional
equity in earnings (loss) of the investee over the vesting period. The Company
concluded that it is reasonable to discount the value of these restricted shares
by 29.52%. Of the 29.52% discount, the Company considers the risk of forfeiture
to be 10% and illiquidity to be 19.52%. The Company applied this discount to the
grant date market value of a freely tradable share to arrive at the fair value
of a restricted share.
Equity Compensation Plan Disclosure
The following table summarizes equity compensation plans approved by security
holders as of December 31, 2008:
---------------------|--------------------|-----------------|-- ---------------|
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 | 525,000 | $0.85 | 2,775,000 |
---------------------|--------------------|-----------------|------------------|
Total | 525,000 | $0.85 | 2,775,000 |
---------------------|--------------------|-----------------|---- -------------|
13
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, 2008 COMPARED TO DECEMBER 31, 2007
Currently, the operations of Zunicom are conducted through its
wholly-owned subsidiary, AlphaNet Hospitality Systems, Inc. Accordingly, all
revenue and cost of revenue are generated by AlphaNet.
REVENUES
Revenue for the year ended December 31, 2008 was $962,470 compared to revenue of
$1,522,183 for the year ended December 31, 2007, a decrease of $559,713, or
36.8%. Of the $559,713 decrease in revenue, $95,577 is due to the decline of the
InnFax(TM) product driven by the competition of in-room internet service. As of
December 31, 2007, we discontinued the InnFax(TM) product. The remaining
$464,136 of the revenue decrease is due to a decline in the number of new
installations of the Office(TM)product and a decrease in the renewal of service
contracts.
COST OF REVENUES
For the year ended December 31, 2008, cost of revenues was $309,426 compared to
cost of revenues of $441,389 for the year ended December 31, 2007, a decrease of
$131,963 or 30.0%. Approximately $54,000 of the decrease in the cost of revenues
is due to a decline in network and support costs for InnFax(TM) reflecting its
decreased usage. The remainder of the decrease in cost of revenue is due to a
decline in installation and support costs for the Office(TM)product reflecting
the decrease in installations. The InnFax(TM) product has been discontinued as
of December 31, 2007.
OPERATING EXPENSES
Total selling, general and administrative expenses were $1,539,129 for the year
ended December 31, 2008 compared to $1,691,942 for the year ended December 31,
2007, a decrease of $152,813, or 9.0%.
14
AlphaNet's selling, general and administrative expenses for the year ended
December 31, 2008 were $942,438 compared to $1,042,393 for the year ended
December 31, 2007, a decrease of $99,955 or 10.0%. The decrease is primarily
attributable to a decrease in occupancy costs of approximately $18,000 due to
the reduction in rent achieved through the relocation of the Toronto office in
the second quarter of 2007, a decrease in employment costs of approximately
$20,000 due to the reduction of one position in 2008, a decrease of
approximately $28,000 in State and local taxes due to reduced revenue and a
settlement with the State of Texas with regard to tax liabilities from 2001 and
2002 paid in 2007, and a decrease of approximately $34,000 in maintenance,
support, travel and other administrative costs due to the reduced volume of
business.
Zunicom's selling, general and administrative expenses for the year ended
December 31, 2008 were $596,691 compared to $649,549 for the year ended December
31, 2007, representing an decrease of $52,858 or 8.1%. The decrease is primarily
attributable to a decrease of approximately $78,000 in legal and accounting fees
reflecting less activity in 2008 compared to 2007 when higher legal and
accounting fees were incurred in connection with the payment of the dividend in
February 2007 and the issuance of restricted stock in June 2007, and the receipt
of a Federal tax refund of approximately $34,000. The decrease in legal and
accounting fees and Federal tax refund were partially offset by increases in
stock compensation reflecting the issuance of stock options in 2008, and
increases in travel expenses and directors and officers insurance.
Depreciation expense was $96,413 for the year ended December 31, 2008 compared
to $127,909 for the year ended December 31, 2007, a decrease of $31,496, or
24.6%. The decrease is due to a reduction in the amount of equipment required by
AlphaNet due to the decreasing number of installations of the Office(TM)
product.
OTHER INCOME / EXPENSE
Zunicom's consolidated other income (expense)for the year ended December 31,
2008 was $1,446,180 compared to $1,338,269 for the year ended December 31, 2007,
an increase of $107,911 or 8.1%. The increase is due to the gain on sale of
patents in 2008 of $666,667 offset by a decrease of $85,254 in interest income
due to lower bank balances in 2008, a decrease of $254,046 in equity earnings of
UPG due to lower earnings in 2008, a decrease of $209,416 in gain on equity
transactions of UPG, and an increase in loss on foreign exchange of $1,131.
Equity in earnings of investee of $616,007 represents Zunicom's share of UPG's
net income for the year ended December 31, 2008 and the loss of $162,125
represents changes in equity of UPG, both recorded in accordance with the equity
method of accounting for an unconsolidated investee. The change in equity of UPG
is due to issuance of stock options and Zunicom restricted stock, and
accumulated other comprehensive loss of UPG. For the year ended December 31,
2007, Zunicom's equity in the earnings of UPG was $870,053 and the change in
equity of UPG was a gain of $47,291.
LIQUIDITY - YEAR ENDED DECEMBER 31, 2008
Zunicom had cash and cash equivalents of $1,522,831 and $516,276 at December 31,
2008 and 2007 respectively.
15
Net cash provided by operating activities was $53,588 for the year ended
December 31, 2008 compared to cash used in operating activities of $308,609 for
the year ended December 31, 2007. Cash provided by operating activities in 2008
is primarily net income and depreciation of $328,227 plus write off of property
and equipment of $8,910, gain on equity transactions of investee of $162,125,
stock-based compensation of $90,355, deferred income taxes of $231,867, decrease
in restricted cash of $351,000, and changes in working capital of $163,778,
offset by equity in earnings of investee of $616,007 and gain on sale of patents
of $666,667. Net cash provided by investing activities of $595,497 consists of
the proceeds from the sale of patents in 2008 of $666,667 offset by AlphaNet
asset purchases in 2008 to support the Office(TM)product of $28,729 and Zunicom
purchases of UPG stock of $42,441. For the year ended December 31, 2007, net
cash used in investing activities consisted of $276,121 representing asset
purchases by AlphaNet to support the office(TM) product.
Net cash provided by financing activities was $708,469 in 2008. Cash provided by
financing activities is the principal payments on the UPG notes of $731,250
offset by the payment of cash dividends on the preferred stock in 2008 of
$22,781. For the year ended December 31, 2007, cash used in financing activities
consisted of dividends on common stock of $7,153,122 and dividends on preferred
stock of $5,579 for a total of $7,158,701.
The net increase in cash in 2008 was $1,357,554 compared to a net decrease in
cash in 2007 of $7,743,433.
The Company, through UPG, had a $16 million line of credit with Compass Bank
that expired on May 5, 2007, but was renewed in June 2007. The line of credit
was secured by the assets of UPG, however, the Company had been a guarantor of
the line of credit. At July 31,2007, the Company signed a subordination
agreement with the bank whereby the Company agreed to subordinate its notes (in
the principal amount of $5,118,750 at December 31,2008) from UPG to the line
owed by UPG to the bank. The agreement contains a provision under which UPG may,
if not in default under the line of credit, pay interest and principal on its
notes to the Company as they become due, but the Company must hold any amounts
received in trust for the benefit of the Bank while the line of credit is
outstanding. In return, the bank released the Company from its guarantee. The
Company sought rescission or modification of this subordination agreement by the
bank. Until the resolution of this issue, the Company accounted for all payments
by UPG on the notes as "restricted cash." On June 17, 2008, the Company, the
bank, and UPG signed a "Second Amended and Restated Creditors' Subordination
Agreement" under which the Company continues to subordinate its $5,850,000 in
UPG notes to any Compass Bank loan but removes the provision under which the
Company was to hold in trust the principal and interest payments received from
UPG on the UPG notes. The Company now shall receive and may spend all regular
payments on the UPG notes. Accordingly, the Company no longer classifies
receipts under the UPG notes as restricted cash. UPG secured a $30 million line
of credit with Compass Bank and has an outstanding loan under the line.
Zunicom management believes that cash on hand, the proceeds of the sale of
patents on January 28, 2008, and interest and principal payments on the UPG
notes will be sufficient to meet its operational needs over the next year.
16
CAPITAL RESOURCES
At December 31, 2008 the Company did not have any material commitments for
capital expenditures. The Company has no off balance sheet financing
arrangements.
INTERNATIONAL CURRENCY FLUCTUATION
Our customers are primarily located in the U.S. and a few customers in Canada.
Our exchange rate risk between the US and Canadian dollar is minimal because we
conduct so little business in Canada. In addition, the aggregate impact of any
likely exchange rate fluctuations would be immaterial as most payments are made
in U.S. dollars. We have not used derivative instruments to hedge our foreign
exchange risks though we may choose to do so in the future.
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 provides computer related access services to hotels. AlphaNet places
computer components in the hotel properties which allow hotel guests access to
facsimile machines, computers and other office machinery. The hotel guests use
the equipment on a fee per minute basis which AlphaNet tracks. AlphaNet bills
either the hotel property or the customer directly at the end of each fee per
minute session. Much of this business is conducted through credit cards.
AlphaNet records the sale upon completion of the session.
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 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 adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ("FIN 48"), on January 1, 2007. There
were no unrecognized tax benefits and, accordingly, there was no effect on the
Company's financial condition or results of operations as a result of
implementing FIN 48.
17
The Company files income tax returns in the U.S. federal jurisdiction and
various state and foreign jurisdictions. The Company is no longer subject to
U.S. federal tax and state tax examinations for years before 2005. Management
does not believe there will be any material changes in our unrecognized tax
positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, there was no accrued interest or penalties associated
with any unrecognized tax benefits, nor was any interest expense recognized
during the year ended December 31, 2008.
Stock-Based Compensation
The Company accounts for its stock-based compensation under the provisions of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment"
(FAS 123(R)), which requires the recognition of the fair value of stock-based
compensation. Under the fair value recognition provisions for FAS 123(R),
stock-based compensation cost is estimated at the grant date based on the fair
value of the awards expected to vest and recognized as expense ratably over the
requisite service period of the award. We have used the Black-Scholes valuation
model to estimate fair value of our stock-based awards which requires various
judgmental assumptions including estimating stock price volatility, forfeiture
rates and expected life. Our computation of expected volatility is based on a
combination of historical and market-based implied volatility. In addition, we
consider many factors when estimating expected forfeitures and expected life,
including types of awards, employee class and historical experience. If any of
the assumptions used in the Black-Scholes model change significantly,
stock-based compensation expense may differ materially in the future from that
recorded in the current period.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company partially adopted SFAS No. 157, "Fair
Value Measurements". This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. As permitted by FSP FAS
157-2, the Company elected to defer the adoption of the nonrecurring fair value
measurement disclosure of nonfinancial assets and liabilities. The partial
adoption of SFAS No. 157 did not have a material impact on the Company's results
of operations, cash flows or financial position. To increase consistency and
comparability in fair value measurements, SFAS No. 157 establishes a fair value
hierarchy that prioritizes the inputs to valuation 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.
18
Observable inputs are based on market data obtained from independent sources,
while unobservable inputs are based on the Company's market assumptions.
Unobservable inputs require significant management judgment or estimation. In
some cases, the inputs used to measure an asset or liability may fall into
different levels of the fair value hierarchy. In those instances, the fair value
measurement is required to be classified using the lowest level of input that is
significant to the fair value measurement. Such determination requires
significant management judgment. There were no changes in the Company's
valuation techniques used to measure fair value on a recurring basis as a result
of partially adopting SFAS 157.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
-- Including an amendment of FASB Statement No. 115," (SFAS 159). This standard
allows a company to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities on
a contract-by-contract basis, with changes in fair value recognized in earnings.
The provisions of this standard are effective as of the beginning of a reporting
entity's first fiscal year beginning after November 15, 2007. We did not apply
the fair value option to any of our outstanding instruments and, therefore, SFAS
159 did not have an impact on our consolidated financial statements.
In December 2007, the FASB issues SFAS 141(R), Business Combinations. SFAS 141
(R) provides companies with principles and requirements on how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquire as
well as the recognition and measurement of goodwill acquired in a business
combination. SFAS 141(R) also requires certain disclosures to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. Acquisition costs associated with the business combination
will generally be expensed as incurred. SFAS 141(R) is effective for business
combinations occurring in fiscal years beginning after December 15, 2008, which
will require the Company to adopt these provisions for business combinations
occurring in fiscal 2010 and thereafter. Early adoption of SFAS 141(R) is not
permitted. The Company is currently evaluating the impact that SFAS 141(R) will
have on its consolidated financial statements and disclosures but does not
expect the adoption of this standard to have a material impact unless the
Company enters into a business acquisition in the future.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated financial Statements - an amendment of ARB No. 51. This Statement
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This Statement changes the way the
consolidated income statement is presented by requiring net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest and to disclose those amounts on the face of the
income statement . SFAS 160 is effective for fiscal years beginning after
December 15, 2008. Early adoption of SFAS 160 is not permitted. The Company is
currently evaluating the impact that SFAS 160 will have on its consolidated
financial statements and disclosures.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No. 133".
19
SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company is currently evaluating the impact of SFAS No. 161 on
its financial statements, and the adoption of this statement is not expected to
have a material effect on the Company's consolidated financial statements and
disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange
Our customers and suppliers are primarily located in the U.S. Canada is the only
other country in which we do business and that is very limited. We do pay
expenses in Canada but those amounts are exceeded by our payments in US dollars.
The aggregate impact of any likely exchange rate fluctuations would be
immaterial as most payments are made in U.S. dollars. We have not used
derivative instruments to hedge our foreign exchange risks though we may choose
to do so in the future.
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.
In 2007, the Company changed its auditing firm from KBA Group LLP, Dallas, Texas
to Horwath Orenstein LLP, Toronto, Canada, which subsequently merged into Meyers
Norris Penny LLP. Meyers Norris Penny LLP are currently the Company's auditors.
The Company does not have any disagreement with its auditors.
ITEM 9A. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining effective
internal control over financial reporting as defined in Rules 13a-15(f) under
the Exchange Act. Our internal control over financial reporting is designed to
ensure that material information regarding our operations is made available to
management and the board of directors to provide them reasonable assurance that
the published financial statements are fairly presented. There are limitations
inherent in any internal control, such as the possibility of human error and the
circumvention or overriding of controls. As a result, even effective internal
controls can provide only reasonable assurance with respect to financial
statement preparation. As conditions change over time so too may the
effectiveness of internal controls.
20
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness or our disclosure controls and
procedures as of the end of the period covered by this annual report on Form
10K, (December 31, 2008). In making this assessment, management used the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act), as of the end of such period, are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. Also, based on this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our internal control over financial
reporting as of December 31, 2008, 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
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 65 Chairman - Board of Directors / Chief
Executive Officer
Ian Colin Edmonds 37 Director
John Rudy (a) 66 Vice President, Chief Financial Officer
and Director
(a) On January 24, 2007, Zunicom's Board of Directors appointed John Rudy
Vice-President and Chief Financial Officer. On December 14, 2007, he was
reelected as a director and reappointed as Vice President and Chief Financial
Officer of Zunicom.
David Parke was elected to serve as a director in October 2006. He did not stand
for re-election at the Company's annual shareholders' meeting on December 14,
2007.
21
WILLIAM TAN has been chairman of the board of directors and chief executive
officer since January 1999. He has served as the chairman of Zunicom since
February 1997 and of AlphaNet since October 1999. Mr. Tan's principal business
has been private investments and he has held senior executive positions in a
number of financing, insurance, textile, property development and related
businesses. Mr. Tan is the father-in-law of Ian Edmonds.
IAN COLIN EDMONDS has been a director since January 1999, and from July 1997
through December 2006 served as an officer, first as vice president and from
April 2003 as executive vice president. He also served as a director of AlphaNet
from October 1999 through December 2006. Mr. Edmonds is currently the chief
executive officer of UPG in which the Company holds a 40.6% 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., 21
Matawan, New Jersey, a consulting firm specializing in providing financial,
accounting and business advisory services to small companies. From August 1998
through April 2000 Mr. Rudy served as interim chief financial officer of
Hometown Auto Retailers, Inc., a publicly-traded automobile dealer group. From
August 2005 until May 2006 he served as interim chief financial officer of Sona
Mobile Holdings Corp., a publicly traded wireless technology company. From July
2005 to August 2008, Mr. Rudy served as a director of AdStar, Inc., a
publicly-traded company engaged in internet ad placement products and services.
From May 2005 to May 2008, he served as a director of Trey Resources, Inc., a
publicly-traded software reseller. Since May 2005, Mr. Rudy has served as a
director of Jesup & Lamont, Inc., a publicly-traded broker-dealer, where he
serves as Chairman of the Audit Committee. Mr. Rudy received an M.B.A. from
Emory University and a B.S. in economics from Albright College and is a
certified public accountant in New York State.
Directors of the Company are elected at the annual shareholder meeting and serve
as directors until the next annual meeting of shareholders. Directors may be
re-elected at succeeding annual meetings so as to succeed themselves. No
material changes have occurred with regard to procedures by which security
holders may recommend nominees to our board of directors.
The Board acts as the Company's audit committee as well as the Company's
executive compensation committee. Neither Mr. Tan, nor Mr. Edmonds qualifies as
an "audit committee financial expert" as defined in SEC Regulation S-K. Mr. Rudy
qualifies but is no longer independent since being appointed Vice - President
and Chief Financial Officer in January, 2007.
Other Significant and Key Employees:
The following table sets forth-certain information concerning significant
employees of the Company's wholly-owned subsidiary.
Age Position
Ian Kindred 62 COO of AlphaNet
Effective February 12, 2009, Mr. Kindred has taken a three month leave of
absence for medical reasons.
22
IAN KINDRED, Chief Operating Officer and Vice President, joined AlphaNet in 1992
to create and manage InnFax(TM) operations, engineering and customer service in
North America, as well as to provide operations support to AlphaNet's InnFax(TM)
licensees around the world. Mr. Kindred has 19 years experience in the high-tech
sector, and has held management positions at Panacom Automation, Hewlett-Packard
and Varity Corporation.
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, 2008, 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 comprehensive 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, dental, vision care, disability
insurance, and life insurance benefits. 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.
23
Provide fair and equitable compensation.
We provide a total compensation program that we believe will be perceived by
both our executive officers and our shareholders as fair and equitable. In
addition to market pay levels and considering individual circumstances related
to each executive officer, we also consider the pay of each executive officer
relative to each other executive officer and relative to other members of the
management team. We have designed the total compensation programs to be
consistent for our executive management team.
Our Executive Compensation Process
Our board of directors acts as our compensation committee. Our executive
officers are elected by our board of directors. The following discussions are
generally the company's and the board of directors' historical practices.
Based on their understanding of executive compensation for comparable positions
at similarly situated companies, experience in making these types of decisions
and 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.
24
Element Characteristics Purpose
----------- ---------------------------------- ---------------------------------
Base Fixed annual cash compensation; Keep our annual compensation
salary all executives are eligible for competitive with the market for
periodic increases in base salary skills and experience necessary
based on performance and market to meet the requirements of the
pay levels. executive's role with us.
Long-term Performance-based equity award Align interest of management with
equity which has value to the extent our shareholders; motivate and reward
incentive common stock price increases over management to increase the
plan awards time; targeted at the market pay shareholder value of the company
(stock level and/or competitive practices over the long term.
options) at similar companies.
Health Fixed component. The same/compar- Provides benefits to meet the
& welfare able health & welfare benefits health and & welfare needs of
benefits (medical, dental, vision, disabil- employees and their families.
ity insurance and life insurance)
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
25
another employer, the relevance of the executive officer's experience to other
potential employers and the readiness of the executive officer to assume a more
significant role with another organization. In addition, we consider the
executive officer's current base salary in relation to the market pay of similar
companies.
Compensation or amounts realized by executives from prior compensation from us,
such as gains from previously awarded stock options or options awards, are taken
into account in setting other elements of compensation, such as base pay, or
awards of stock options under our long-term equity incentive program. With
respect to new executive officers, we take into account their prior base salary
and annual cash incentive, as well as the contribution expected to be made by
the new executive officer, the business needs and the role of the executive
officer with us. We believe that our executive officers should be fairly
compensated each year relative to market pay levels of similar companies and
equity among all our executive officers. Moreover, we believe that our long-term
incentive compensation program furthers our significant emphasis on pay for
performance compensation.
Annual Cash Compensation
To attract and retain executives with the ability and the experience necessary
to lead us and deliver strong performance to our shareholders, we provide a
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, 2008, cash compensation to our named executive officers
was $77,250, with our chief executive officer receiving $0 of that. We believe
that the base salary paid to our executive officers during 2008 achieves our
executive compensation objectives, compares favorably to similar companies and
is within our objective of providing a base salary at market levels.
26
Long-term Equity Incentive Compensation
We award long-term equity incentive grants to executive officers and directors,
including certain named executive officers, as part of our total compensation
package. These awards are consistent with our pay for performance principles and
align the interests of the executive officers to the interests of our
shareholders. The board of directors reviews the amount of each award to be
granted to each named executive officer and approves each award. Long-term
equity incentive awards are made pursuant to our stock option plans.
Our long-term equity incentive compensation is currently exclusively in the form
of options to acquire our common stock. The value of the stock options awarded
is dependent upon the performance of our common stock price. The board of
directors and management believe that stock options currently are the
appropriate vehicle to provide long-term incentive compensation to our executive
officers. Other types of long-term equity incentive compensation may be
considered in the future as our business strategy evolves. Stock options are
awarded on the basis of anticipated service to us and vest as determined by the
board of directors.
Options are granted with an exercise price equal to the fair market value of our
common stock on the date of grant. Fair market value is defined as the closing
market price of a share of our common stock on the date of grant. We do not have
any program, plan or practice of setting the exercise price based on a date or
price other than the fair market value of our common stock on the grant date.
Like our other pay components, long-term equity incentive award grants are
determined based on competitive market levels of comparable companies.
Generally, we do not consider an executive officer's stock holdings or previous
stock option grants in determining the number of stock options to be granted. We
believe that our executive officers should be fairly compensated each year
relative to market pay levels of comparable companies and relative to our other
executive officers. Moreover, we believe that our long-term incentive
compensation program furthers our significant emphasis on pay for performance
compensation. We do not have any requirement that executive officers hold a
specific amount of our common stock or stock options.
The board of directors retains discretion to make stock option awards to
executive officers at other times, including in connection with the hiring of a
new executive officer, the promotion of an executive officer, to reward
executive officers, for retention purposes or for other circumstances
recommended by management. The exercise price of any such grant is the fair
market value of our stock on the grant date.
For accounting purposes, we apply the guidance in Statement of Financial
Accounting Standard 123 (revised December 2004), or SFAS 123(R), to record
compensation expense for our stock option grants. SFAS 123(R) is used to develop
the assumptions necessary and the model appropriate to value the awards as well
as the timing of the expense recognition over the requisite service period,
generally the vesting period, of the award.
Executive officers recognize taxable income from stock option awards when a
vested option is exercised. We generally receive a corresponding tax deduction
for compensation expense in the year of exercise. The amount included in the
executive officer's wages and the amount we may deduct is equal to the common
27
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 2008 Compensation
We believe that the total compensation paid to our named executive officers for
the fiscal year ended December 31, 2008 achieves the overall objectives of our
executive compensation program. In accordance with our overall objectives,
executive compensation for 2008 was competitive with comparable companies. See
"Summary of Compensation."
Other Benefits
Health and Welfare Benefits
All full-time employees, including our named executive officers, may participate
in our health and welfare benefit programs, including medical, dental and vision
care coverage, disability insurance and life 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 $1 million in the year the
compensation becomes taxable to the executive officer. There is an exception to
the limit on deductibility for performance-based compensation that meets certain
requirements.
Although deductibility of compensation is preferred, tax deductibility is not a
primary objective of our compensation programs. We believe that achieving our
compensation objectives set forth above is more important than the benefit of
tax deductibility and we reserve the right to maintain flexibility in how we
compensate our executive officers that may result in limiting the deductibility
of amounts of compensation from time to time.
Summary of Compensation
The following table sets forth certain information with respect to compensation
for the years ended December 31, 2008 and 2007 earned by or paid to our chief
28
executive officer, chief financial officer and our only two other most highly
compensated executive officers that qualify as, and are referred to as, the
named executive officers.
Summary Compensation Table
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Change in
Non- Pension
Equity Value
Incentive and Non-
Plan Qualified All
Name & Cash Stock Option Compen- Deferred Other
Principal Salary Bonus Awards Awards sation Compensation Compensa-
Position Year ($) ($) ($)(1) ($) ($) Earnings ($) tion ($) Total ($)
-------------------------------------------------------------------------------------------
William Tan - 2008 - - - 9,700 - - - 9,700
Chairman of 2007 - - 205,801 - - - 205,801
the Board of
Directors
and CEO
John Rudy - 2008 77,250 - - 9,700 - - - 86,950
VP/CFO and 2007 62,500 - 38,986 - - - 101,486
Director
Ian Edmonds - 2008 7,500 - - 9,700 - - - 17,200
Director 2007 7,500 - 115,587 - - - 123,087
Mimi Tan 2008 - - - - - - - -
Former EVP 2007 - - 86,691 - - - - 86,691
</TABLE>
(1) Grants of restricted stock (See note C "Stock Options and Warrants" to the
consolidated financial statements) Mimi Tan is the wife of Ian Edmonds.
29
Grants of Plan Based Awards
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------
Estimated Future Payouts Estimated Future All All
Under Non-Equity Payouts Other Other
Incentive Under Equity Incentive Stock Option
Plan Awards(1) Plan Awards Awards: Awards: Exercise
Grant ------------------------ ----------------------- Number Number of or Base
Date of shares Securities Price of
Name & Fair Thres- Thres- or stock Underlying Option
Principal Grant Value hold Target Maximum hold Target Maximum Units Options Awards
Position Date ($) ($) ($) ($) (#) (#) (#) (#) (#)(2) ($/share)
------------ --------- ------ ------- ------ -------- ------ ------ ------- ---------- ----------- ---------
William Tan
-President
and CEO Mar 10, 08 $9,700 25,000 $0.45
----------------------------------------------------------------------------------------------------------------
Ian Edmonds
-EVP, COO Mar 10, 08 $9,700 25,000 $0.45
----------------------------------------------------------------------------------------------------------------
John Rudy, VP, CFO and
Director Mar 10, 08 $9,700 25,000 $0.45
Feb 1, 07 $38,986 25,000 $1.75
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All Option Awards were fully vested as of December 31, 2008.
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 March 10, 2008, Mr. Rudy's agreement was renewed on the same terms
and he was granted options to purchase 25,000 shares of our common stock at the
closing price on March 10. For the year ended December 31, 2008, Mr. Rudy was
paid $77,250 for his services as our chief Financial Officer. As an executive of
the Company, Mr. Rudy no longer receives compensation for his services as a
director.
30
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, 2008.
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, 2008 and 2007, there are 525,000 and 425,000,
options, respectively, outstanding under the 1999 Plan.
Material Terms of Plan-Based Awards
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, 2008 there are 525,000 compensatory stock options outstanding
with a weighted-average exercise price of $0.85 and all of these compensatory
stock options are exercisable. The weighted-average remaining contractual life
of the compensatory options outstanding and exercisable approximated 2.5 years
at December 31, 2008.
The following table sets forth certain information with respect to outstanding
equity awards at December 31, 2008 with respect to the named executive officers.
31
Outstanding Equity Awards at Fiscal Year-End
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Option Awards Stock Awards
-----------------------------------------------------------------------------------------------------------------------
Name Number Number Equity Number Market Equity Equity
of of Incentive of Value of Incentive Incentive Plan
Securities Securities Plan Shares Shares Plan Awards:
Underlying Underlying Awards: or Units or Awards: Market or
Unexercised Unexercised Number of of Units of Number of Payout Value
Options Options Securities Stock Stock Unearned of Unearned
(#) (#) Underlying That That Shares, Shares,
Exercisable Unexercisable Unexercised Option Have Have Units or Units or
(1) Unearned Exercise Option Not Not Other Rights Other Rights
Options Price Expiration Vested Vested That Have That Have
(#) ($) Date (#) ($) Not Vested Not Vested
(#) ($)
-----------------------------------------------------------------------------------------------------------------------
William Tan -
President and
CEO 25,000 $ .45 3/10/2013
400,000 $ .90 8/10/2009
-----------------------------------------------------------------------------------------------------------------------
John Rudy -
VP, CFO 25,000 $ .45 3/10/2013
25,000 $1.75 2/1/2012
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options are fully vested at December 31, 2008.
Option Exercises
The following table sets forth certain information with respect to option and
stock exercises during the fiscal year ended December 31, 2008 with respect to
the named executive officers.
Option Exercises and Stock Vested (1)
Option Awards Stock Awards
Name Number of Value Number of Value
Shares Realized Shares Realized
Aquired on On Aquired on On
Exercise (#) Exercise ($) 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.
32
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 2008.
Director Compensation Table
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Change in
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 -- -- $ 9,700 -- -- -- $ 9,700
Ian Edmonds $ 7,500 -- $ 9,700 -- -- -- $ 17,200
John Rudy -- -- $ 9,700 -- -- -- $ 9,700
</TABLE>
(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.
The following summarizes the grant date fair value of each award granted during
2008, computed in accordance with SFAS No. 123(R) for recognition in financial
statement reporting and grant date fair value for the individual directors:
33
GRANT OF PLAN BASED AWARDS
Exercise
Number of or Base
Securities Price of
Underlying Option Grant Date
Grant Options Awards Fair Value
Name Date (#) ($/share) ($)
---------------------- -------- ----------- ---------- ------------
William Tan, Chairman Mar 10, 08 25,000 $ 0.45 $9,700
-------------------------------------------------------------------
John Rudy
VP/CFO and Director Mar 10, 08 25,000 $ 0.45 $9,700
-------------------------------------------------------------------
Ian Edmonds,
Director Mar 10, 08 25,000 $ 0.45 $9,700
-------------------------------------------------------------------
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve as a member of the board of directors or
compensation committee, or other committee serving an equivalent function, of
any other entity that has one or more of its executive officers serving as a
member of our board of directors. Mr. William Tan, our CEO and Mr. Ian Edmonds,
our former COO both serve as members of our board of directors and participated
in deliberations concerning executive compensation.
Compensation Committee Report
The Board of Directors has reviewed and discussed the Compensation Discussion
and Analysis with management and based on the review and discussion, the Board
of Directors has recommended that the Compensation Discussion and Analysis be
included in this annual report on Form 10-K.
William Tan, Chairman
Ian Edmonds
John Rudy
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information concerning the beneficial ownership
of the Company's Common Stock and Preferred Stock as of March 31, 2009 by(i)
each person who is known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each director of Zunicom, Inc., (iii) each of the executive
officers of Zunicom, and (iv) all directors and executive officers of Zunicom as
a group.
34
Common Series A Preferred
Stock Stock
------ --------
Amount Amount
and and
Nature of Nature of
Beneficial % of Beneficial % of
Name and Address Ownership(1) Class(2) Ownership(1) Class(2)
--------------------- ------------ -------- ---------------- ------
William Tan 2,860,273 (3) 28.47% 0 0
President and CEO Direct and
1720 Hayden Drive Indirect
Carrollton, TX 75006
--------------------- ------------ -------- ---------------- ------
Kim Yeow Tan 991,818 (4) 9.96% 0 0
11 Jalan Medang Indirect
Bukit Bandaraya
59100 Kuala Lumpur,
Malaysia
--------------------- ------------ -------- ---------------- ------
All Directors 2,860,273 28.47% 0 0
and Executive
Officers as a Group
(1 person)
--------------------- ------------ -------- ---------------- ------
(1) Except as otherwise indicated and subject to applicable community property
and similar laws, the Company assumes that each named person has the sole voting
and investment power with respect to his or her shares, other than shares
subject to options.
(2) Percent of Class for the Common Stock is based on the 9,960,756 shares
outstanding as of March 24, 2009. Percent of Class for the Series A Preferred
Stock is based on 60,208 shares outstanding as of March 24, 2009. 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, 2009.
(3) Represents (i) 75,000 shares directly held by Mr. Tan, (ii) stock options to
acquire 425,000 shares of common stock,(iii) 1,383,000 shares of common stock
held by Placement & Acceptance, Inc., a company of which Mr. Tan is a director
and officer, (iv) 977,273 shares of common stock held by Ventures International,
Ltd., a company of which Mr. Tan is a director and officer, of which 250,000
shares of common stock were assigned by Caspic International, Inc., an
affiliated company, upon exercise of warrants on February 23, 2006.
(4) Represents (i) 581,818 shares of common stock held by Gin Securities, Ltd.,
a company of which Kim Yeow Tan is a principal, (ii) 205,000 shares of common
stock attributed to Eurasia Securities Ltd., and 205,000 shares of common stock
attributed to Asean Brokers, Ltd. of which Kim Yeow Tan is a director and
officer.
35
Equity Compensation Plan Disclosure
We reserved 1,300,000 shares of our common stock to be issued under our 1999
Incentive Stock Option Plan and granted 525,000 options to certain employees and
directors with an average exercise price of $0.85 per share. The options expire
August 10, 2009.
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, 2007.
------------------- ------------- -------------------- ---------------------
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 525,000 $0 .85 2,775,000
-------------------- ------------ ----------- --------------
Equity compensation
plans not approved
by stockholders N/A N/A N/A
-------------------- ------------ ----------- --------------
Total 525,000 $0 .85 2,775,000
-------------------- ------------ ----------- --------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Related Party transactions
The Company does not have an established policy for the approval of related
party transactions. However, transactions that the board considers to be
significant in nature are generally negotiated and approved by the board of
directors.
See NOTE F in the Notes to Consolidated Financial Statements for details and
discussion of related party transactions during 2008.
Corporate Governance
Our board consists of 3 directors, Messrs. William Tan, Ian Edmonds, and John
Rudy. Only Mr. Edmonds is considered independent.
36
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board has reviewed the following audit and non-audit fees the Company has
paid to the independent public accountants for purposes of considering whether
such fees are compatible with maintaining the auditor's independence. The policy
of the Board is to pre-approve all audit and non-audit services performed by its
independent public accountants before the services are performed.
Audit Fees. Estimated fees billed for services rendered by Meyers Norris Penny
LLP for reviews of the forms 10Q for the first, second and third quarters of
2008 and the audit of the year ended 2008 are approximately $100,000. Estimated
fees billed for service rendered by KBA Group LLP for the review of Form 10-Q
for the first quarter of 2007 and by Horwath Orenstein for the reviews of the
second, third and fourth quarters and the form 10-K for 2007 and for the audits
of the consolidated financial statements of the Company for the year ended
December 31, 2007 were approximately $95,000 for 2007.
Audit-Related Fees. Aggregate fees billed for all audit-related services
rendered by KBA Group LLP were approximately $0 for 2008 and approximately
$3,000 for 2007. The amount for 2007 related primarily to the issuance of
restricted stock.
Tax Fees. Aggregate fees billed for permissible tax services rendered by KBA
Group LLP were approximately $38,000 for 2008 and $18,000 for 2007. These
amounts include tax consulting, preparation of federal and state income tax
returns and franchise tax returns.
37
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:
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheets as of December 31, 2008 and 2007
o Consolidated Statements of Operations for the years ended December
31, 2008 and 2007
o Consolidated Statement of Changes in Stockholders' Equity for the
years ended December 31, 2008 and 2007
o Consolidated Statements of Cash Flows for the years ended December
31, 2008 and 2007
o 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.
(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)
38
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.
39
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Company has caused this report to be signed on its behalf by the undersigned,
Thereunto duly authorized.
Date: March 31, 2009
Zunicom, Inc.
By: /s/ William Tan
-------------------------
William Tan
President and CEO
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ William Tan Director, Chairman of the Board, March 31, 2009
----------------- President and Chief Executive
William Tan Officer (principal executive officer)
/s/ Ian Edmonds Director March 31, 2009
-----------------
Ian Edmonds
/s/ John Rudy Chief Financial Officer March 31, 2009
----------------- (principal financial and principal
John Rudy accounting officer) and Director
40
ITEM 15 (a)(1)
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ZUNICOM, INC.
DECEMBER 31, 2008
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ZUNICOM, INC.
Page
----
Report of Independent Registered Public Accounting Firm ...............F-3
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2008 and 2007.......F-4
Consolidated Statements of Operations
for the years ended December 31, 2008 and 2007..................F-6
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2008 and 2007..................F-8
Consolidated Statements of Cash Flows
for the years ended December 31, 2008 and 2007..................F-9
Notes to Consolidated Financial Statements.........................F-11
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Zunicom , Inc.
We have audited the accompanying consolidated balance sheet of Zunicom, Inc.
(the "Company") as at December 31, 2008 and 2007 , and the related consolidated
statements of operations , stockholders' equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Zunicom, Inc. as of December 31, 2008 and 2007 and the consolidated results of
their operations and their cash flows for the years then ended , in conformity
with United States generally accepted accounting principles.
Toronto, Canada /s/ Meyers Norris Penny, LLP
March 27, 2009 Chartered Accountants
Licensed Public Accountants
F-3
ZUNICOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 and 2007
ASSETS
2008 2007
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,522,831 $ 165,276
Restricted cash (J) -- 351,000
Accounts receivable - trade, net of allowance
for doubtful accounts of $0 and $6,300 2,585 11,278
Interest receivable from unconsolidated investee 10,578 10,578
Note receivable from unconsolidated investee
- current portion 1,462,500 731,250
Inventories - finished goods 7,146 21,595
Prepaid expenses and other current assets 47,463 56,854
----------- -----------
Total current assets 3,053,103 1,347,831
----------- -----------
PROPERTY AND EQUIPMENT
Business center equipment 487,321 666,142
Machinery and equipment 447,506 719,615
Computer equipment 147,107 146,709
Furniture and fixtures 30,097 30,097
Leasehold improvements 12,377 12,377
----------- -----------
1,124,408 1,574,940
Less accumulated depreciation and amortization (1,052,157) (1,426,095)
----------- -----------
Net property and equipment 72,251 148,845
----------- -----------
NOTES RECEIVABLE FROM UNCONSOLIDATED INVESTEE (J) 3,656,250 5,118,750
INVESTMENT IN UNCONSOLIDATED INVESTEE 7,916,442 7,420,119
----------- -----------
TOTAL ASSETS $14,698,046 $14,035,545
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ZUNICOM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 and 2007
LIABILITIES AND STOCKHOLDERS' EQUITY
2008 2007
------------ ------------
CURRENT LIABILITIES
Accounts payable 333,757 239,159
Accrued liabilities 184,054 141,827
Dividends payable -- 5,579
----------- -----------
Total current liabilities 517,811 386,565
----------- -----------
NON-CURRENT DEFERRED TAX LIABILITY 4,299,878 4,068,011
------------ -----------
TOTAL LIABILITIES 4,817,689 4,454,576
------------ -----------
STOCKHOLDERS' EQUITY
Preferred stock - $1.00 par value,
1,000,000 shares authorized; 60,208
and 61,988 Class A Shares issued and out-
standing; liquidation preference of
$316,092 as of December 31, 2008 60,208 61,988
Common stock - $0.01 par value;
50,000,000 shares authorized;
9,960,758 and 9,957,196
shares issued and out-
standing 99,607 99,571
Additional paid-in capital 9,181,333 9,089,234
Accumulated earnings 539,209 330,176
------------ -----------
Total stockholders' equity 9,880,357 9,580,969
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,698,046 $14,035,545
============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008 and 2007
2008 2007
------------ ------------
REVENUES
Service revenue $ 962,470 $ 1,522,183
----------- -----------
962,470 1,522,183
COST OF REVENUES
Direct servicing costs 309,426 441,389
----------- -----------
309,426 441,389
----------- -----------
GROSS PROFIT 653,044 1,080,794
OPERATING EXPENSES
Selling, general and administrative 1,539,129 1,691,942
Depreciation and amortization of
property and equipment 96,413 127,909
----------- -----------
1,635,542 1,819,851
----------- -----------
LOSS FROM OPERATIONS (982,498) (739,057)
OTHER INCOME (EXPENSES)
Interest income, other 356,340 441,594
Equity in earnings of investee 616,007 870,053
Gain (Loss) on equity transactions of
unconsolidated investee (162,125) 47,291
Loss on foreign exchange (21,800) (20,669)
Gain on sale of assets 657,757 --
----------- -----------
1,446,179 1,338,269
----------- -----------
INCOME BEFORE PROVISON FOR
INCOME TAXES 463,681 599,212
----------- -----------
PROVISION FOR INCOME TAXES (231,867) (243,789)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 2008 and 2007
2008 2007
------------ ------------
NET INCOME $ 231,814 $ 355,423
=========== ===========
Net income attributable to
common stockholders $ 209,034 $ 330,176
=========== ===========
Net income per share
attributable to common stockholders
Basic $ .02 $ .04
=========== ===========
Diluted $ .02 $ .03
=========== ===========
Number of weighted average shares of
common stock outstanding
Basic 9,957,605 9,457,246
=========== ===========
Diluted 10,078,021 9,617,334
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2008 AND 2007
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock
------------------ ----------------- Additional
Number of Number of Paid-in Accumulated Total
Shares Amount Shares Amount Capital Earnings (deficit)
-------- --------- --------- ------- ----------- ----------- ------------
Balances
at January
1,2007 86,988 $ 86,988 8,891,394 $88,914 $14,818,893 $ 946,451 $15,941,246
Conversion of
preferred
stock into
common stock (25,000) (25,000) 50,000 500 24,500 -- --
Dividends paid
by issuance of
common stock -- -- 18,857 188 19,480 (19,668) --
Dividends paid
on Common stock -- -- -- -- (6,206,671) (946,451) (7,153,122)
Dividends paid
on Preferred
stock -- -- -- -- -- (5,579) (5,579)
Stock based
Compensation -- -- 351,807 3,518 62,091 -- 65,609
Stock
Contribution
to UPG -- -- 645,133 6,451 370,941 -- 377,392
Rounding
adjustment 5
Net income
for 2007 -- -- -- -- -- 355,423 355,423
------- -------- --------- ------- ----------- ---------- -----------
Balances at
December
31,2007 61,988 $ 61,988 9,957,196 $99,571 $ 9,089,234 $ 330,176 $ 9,580,969
Dividends
paid on
Preferred
stock -- -- -- -- -- (22,781) (22,781)
Stock based
compensation -- -- -- -- 90,355 -- 90,355
Conversion of
preferred to
common stock (1,780) (1,780) 3,560 36 1,744 -- --
Net income
for 2008 -- -- -- -- -- 231,814 231,814
------- -------- --------- ------- ----------- ---------- -----------
Balances at
December
31, 2008 60,208 $ 60,208 9,960,756 $99,607 $ 9,181,333 $ $539,209 $ 9,880,357
======= ======== ========= ======= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008 and 2007
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 231,814 $ 355,423
Adjustments to reconcile net income to net
cash (used in) operating activities:
Depreciation and amortization of property and
equipment 96,413 352,836
Write off of property and equipment 8,910 --
(Gain) loss on equity transactions of investee 162,125 (47,291)
Non-cash stock-based compensation 90,355 65,609
Equity in earnings of investee (616,007) (870,053)
Deferred income taxes 231,867 243,789
Gain on sale of intangible asset (included
in other net) (666,667) --
Decrease in restricted cash 351,000 --
Change in operating assets and liabilities
Accounts receivable - trade 8,693 11,955
Inventories 14,449 (1,453)
Prepaid expenses and other current assets 9,391 13,573
Accounts payable 94,598 1,849
Accrued liabilities 42,227 (253,806)
Due to Investee -- (186,619)
Dividend payable (5,579) 5,579
----------- -----------
Net cash provided by (used in) operating activities 53,589 (308,609)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of UPG stock (42,441) --
Purchase of property and equipment (28,729) (276,121)
Sale of intangible asset 666,667 --
----------- -----------
Net cash provided by (used in) investing activities 595,497 (276,121)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on common stock -- (7,153,122)
Principal payments on notes receivable 731,250 --
Dividends paid on preferred stock (22,781) (5,579)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
ZUNICOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
Net cash provided by (used in) financing activities 708,469 (7,158,701)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,357,555 (7,743,433)
Cash and cash equivalents at beginning of year 165,276 8,259,709
----------- -----------
Cash and cash equivalents at end of year $ 1,522,831 $ 516,276
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 795 $ 973
Income taxes paid $ -- $ 230,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Preferred stock dividends paid through
issuance of common stock $ -- $ 19,668
=========== ===========
Conversion of preferred stock to common stock $ 1,780 $ 25,000
=========== ===========
Capital contribution to unconsolidated investee $ -- $ 377,392
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
ZUNICOM, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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"), is a provider of guest communication services to the hospitality
market. Zunicom holds a 40.6 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 its present ownership interest
of 40 percent. 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 Company has adopted the income statement gain recognition Method
of accounting for issuances of a subsidiary's stock in accordance with SEC Staff
Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary"
("SAB 51")
The accompanying audited 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 significant inter-company
accounts and transactions have been eliminated in consolidation. The Company's
investments in non-controlled entities (investees) in which it has the ability
to exercise significant influence over operating and financial policies are
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, 2008, we held 2,032,320 shares of common stock representing a
40.6 percent interest in UPG. We consolidated UPG in our financial statements as
a business segment until the Deconsolidation Date. We deconsolidated UPG
effective December 20, 2006 and simultaneously accounted for UPG under the
equity method of accounting in accordance with Accounting Principles Board
("APB") Opinion No. 18 "The Equity Method of Accounting for Investments in
Common Stock". At December 31, 2008 and 2007 the carrying value of the Company's
investment in UPG is reported as a long-term investment in the accompanying
consolidated balance sheet. Future earnings and losses in our investment in UPG
will be recorded in the statement of operations. In November and December 2008,
we purchased an additional 32,320 shares of UPG common stock.
F-11
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, litigation
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 Hospitality Systems,
transacts the majority of its business through credit cards and therefore has
minimal accounts receivable. The existing trade accounts receivable are stated
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
Inventories consist of computer components, parts and supplies related to the
Company's Office(TM) product. All items are stated at the lower of cost,
determined using the average cost method by specific part, or market. The
Company performs periodic evaluations, based upon business trends, to
specifically identify obsolete components and parts. Components and parts
identified as obsolete are written off.
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. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the related asset.
F-12
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company utilizes the asset and liability approach to accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial and tax basis of assets
and liabilities 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 and foreign jurisdictions. The Company is no longer subject to
U.S. federal tax and state tax examinations for years before 2005. 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 are no accrued interest or penalties associated with any
unrecognized tax benefits, nor was any interest expense recognized during the
years ended December 31, 2008 and 2007.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance
with SFAS No. 144, 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. For the years ended December 31, 2008 and 2007 there was no
impairment of the value of such assets.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin
("SAB") No. 104 when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed and determinable and collectibility is reasonably
assured.
AlphaNet provides computer related access services to hotels. AlphaNet places
computer components in the hotel properties which allow hotel guests access to
facsimile machines, computers and other office machinery. The hotel guests use
the equipment on a fee per minute basis which AlphaNet tracks. AlphaNet bills
either the hotel property or the customer directly at the end of each fee per
minute session. Much of this business is conducted through credit cards.
Generally, AlphaNet records the sale upon completion of the session.
F-13
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shipping and Handling Costs
Shipping and handling costs are charged to cost of revenues in the Accompanying
consolidated statements of income.
Earnings Per Share
Basic earnings per common share is computed by dividing net income attributable
to common shareholders by the weighted average number of common shares
outstanding during each year.
Diluted earnings per common share is computed by dividing net income
attributable to common shareholders by the weighted average number of common
shares and common stock equivalents outstanding for the year. The Company's
common stock equivalents include all common stock issuable upon exercise of
outstanding stock options and common stock issuable upon conversion of preferred
stock.
For the years ended December 31, 2008 and 2007, 425,000 stock options are not
included in the diluted net income per share calculation as they are
out-of-the-money, i.e. the stock price is below the exercise price. The effect
of the "as if" conversion of the preferred stock into 120,416 shares of common
stock has been included in the diluted net income per share computation.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company partially adopted SFAS No. 157, "Fair
Value Measurements". This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. As permitted by FSP FAS
157-2, the Company elected to defer the adoption of the nonrecurring fair value
measurement disclosure of nonfinancial assets and liabilities. The partial
adoption of SFAS No. 157 did not have a material impact on the Company's results
of operations, cash flows or financial position. To increase consistency and
comparability in fair value measurements, SFAS No. 157 establishes a fair value
hierarchy that prioritizes the inputs to valuation 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
F-14
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
significant to the fair value measurement. Such determination requires
significant management judgment. There were no changes in the Company's
valuation techniques used to measure fair value on a recurring basis as a result
of partially adopting SFAS 157.
The estimated fair value of cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities 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 the
FASB issued Statement of Financial Accounting Standards No. 123 ((revised 2004),
"Share-Based Payment"(SFAS No. 123R)). SFAS No. 123(R) 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.
The Company granted 100,000 options during 2008 and 25,000 options during 2007.
All options vested immediately. Stock-based compensation expense recognized in
the consolidated statement of operations for the year ended December 31, 2008
includes compensation expense of $38,800 for fully vested stock options granted
on March 10, 2008 and $51,555 for amortization of restricted stock. The
stock-based compensation for the year ended December 31, 2007 was
$65,609,representing $16,975 for stock options issued and fully vested in the
first quarter of 2007 and $48,634 for amortization of restricted stock.
As of December 31, 2008, $127,622 of the restricted stock grant to our chairman
remains unamortized and $320,047 of the restricted stock grant to UPG employees
remains unamortized. The grant date was June 25, 2007.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
Including an amendment of ASB Statement No. 115," (SFAS 159). This standard
allows a company to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities on
a contract-by-contract basis, with changes in fair value recognized in earnings.
The provisions of this standard are effective as of the beginning of a reporting
entity's first fiscal year beginning after November 15, 2007. We did not apply
the fair value option to any of our outstanding financial instruments and,
therefore, SFAS 159 did not have an impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS 141
(R) provides companies with principles and requirements on how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
as well as the recognition and measurement of goodwill acquired in a business
combination. SFAS 141(R) also requires certain disclosures to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. Acquisition costs associated with the business combination
F-15
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
will generally be expensed as incurred. SFAS 141(R) is effective for business
combinations occurring in fiscal years beginning after December 15, 2008, which
will require the Company to adopt these provisions for business combinations
occurring in fiscal 2010 and thereafter. Early adoption of SFAS 141(R) is not
permitted. The Company is currently evaluating the impact that SFAS No. 141 (R)
will have on its consolidated financial statements and disclosures but does not
expect the adoption of this statement to have a material impact unless the
Company enters into a business acquisition in the future.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated financial Statements - an amendment of ARB No. 51. This statement
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This statement changes the way the
consolidated income statement is presented by requiring net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest and to disclose those amounts on the face of the
income statement. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. Early adoption of SFAS 160 is not permitted. The Company is
currently evaluating the impact that SFAS 160 will have on its consolidated
financial statements and disclosures.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No. 133".
SFAS No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under SFAS
133, Accounting for Derivative Instruments and Hedging Activities and its
related interpretations; and (c) how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years
beginning after November 15, 2008, with early adoption encouraged. The Company
is currently evaluating the impact of SFAS No. 161 on its consolidated financial
statements, and the adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements and
disclosures.
NOTE C - STOCK OPTIONS AND WARRANTS
Stock-based compensation expense for the years ended December 31, 2008 and 2007
was $90,355 and $65,609, respectively. The stock-based compensation expense for
the year ended December 31, 2008 relates to the amortization of restricted stock
issued as deferred compensation of $51,555 and $38,800 for fully vested stock
options granted in March 2008. The stock-based compensation expense for the year
ended December 31, 2007 relates to the vesting of restricted stock issued as
deferred compensation of $26,623 and $38,986 for stock options granted in
February 2007.
F-16
NOTE C - STOCK OPTIONS AND WARRANTS (CONTINUED)
Valuation Assumptions
The Company granted options to purchase 100,000 shares of its common stock on
March 10, 2008. These options immediately vested. The Company granted options to
purchase 25,000 shares of its common stock on February 1, 2007. These options
immediately vested. The fair value of option awards were estimated at the grant
date using a Black-Scholes option pricing model with the following assumptions
for the years ended December 31, 2008 and 2007:
-----------------------
Year Ended December 31,
-----------------------
----------------------------------------- -----------------------
2008 2007
----------------------------------------- ---------- --------
Weighted average grant date fair value $ 0.39 $ 1.56
----------------------------------------- -----------------------
Weighted average assumptions used:
----------------------------------------- -----------------------
Expected dividend yield 0.00% 0.00%
----------------------------------------- -----------------------
Risk-free interest rate 4.50% 4.60%
----------------------------------------- -----------------------
Expected volatility 131.0% 138.0%
----------------------------------------- -----------------------
Expected life (in years) 5 5
----------------------------------------- -----------------------
Expected volatility is based on historical volatility. The expected term
considers the contractual term of the option as well as historical exercise and
forfeiture behavior. The risk-free interest rate is based on the rates in effect
on the grant date for U.S. Treasury instruments with maturities matching the
relevant expected term of the award.
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, 2008 and 2007 there are 525,000 and 425,000 options,
respectively, outstanding under the 1999 Plan. The fair value of stock options
that vested in 2008 is $38,800 and in 2007 is $38,986.
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, 2008 and 2007 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.
F-17
NOTE C - STOCK OPTIONS AND WARRANTS (CONTINUED)
Stock Incentive Plan Summary
A summary of the Company's compensatory stock option plans as of and for the
years ended December 31, 2008 and 2007 are as follows:
Stock option activity under the 1999 Stock Option Plan was as follows:
Weighted Average Range of
Options Exercise Price Exercise Prices
--------- ---------------- -------------
Outstanding at January 1, 2007 1,054,500 0.84 0.81 - 0.90
Granted 25,000 1.75 1.75
Exercised - - -
Canceled, lapsed or forfeited (654,500) 0.81 0.81
---------
Options outstanding and exercisable
at December 31, 2007 425,000 0.95 0.90 - 1.75
Granted 100,000 0.45 0.45
Exercised - - -
---------
Options outstanding and exercisable
At December 31, 2008 525,000 0.85 0.45 - 1.75
=========
Stock Options Outstanding and Exercisable
Information related to stock options outstanding at December 31, 2008 is
summarized below:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Outstanding Remaining Exercise Exercisable Exercise
Exercise Price At 12/31/08 Contractual Life Price At 12/31/08 Price
----------- ---------------- ---------- ----------- ---------
$0.90 400,000 1.7 Years $0.90 400,000 $0.90
$1.75 25,000 8.1 Years $1.75 25,000 $1.75
$0.45 100,000 4.25 Years $0.45 100,000 $0.45
--------- ------------- -------- ---------- --------
$0.45 - $1.75 525,000 2.5 Years $0.85 525,000 $0.85
At December 31, 2008, the aggregate intrinsic value of options outstanding was
$0. 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, 2008, all outstanding options were fully vested.
F-18
NOTE C - STOCK OPTIONS AND WARRANTS (CONTINUED)
Restricted Stock
On June 25, 2007, the Board of Directors approved a grant of 996,940 restricted
shares of Zunicom's common stock to our chairman and certain officers and
employees of UPG. Several of the officers and employees of UPG had been officers
and employees of Zunicom prior to the deconsolidation of UPG in December 2006.
The Company attributed a value of $205,801 to the restricted stock granted to
our chairman and $377,392 to the restricted stock granted to the officers and
employees of UPG. The grant was made in recognition of past and future
performance especially with regard to the initial public offering of UPG's
common stock in which Zunicom was able to sell 1,000,000 shares of UPG common
stock resulting in a $0.80 dividend to shareholders paid in the first quarter of
2007. The restricted stock vests in full on June 25, 2011, and is subject to
certain restrictions and obligations up to the point of vesting. As of December
31, 2008, there was $127,622 of unrecognized compensation costs related to
non-vested share-based compensation arrangements. The unrecognized compensation
cost is expected to be realized over a period of two and a half years. The stock
will not be registered and will be held in escrow for the benefit of the grantee
until the vesting date. Our chairman agreed not to exercise options on 400,000
shares of Zunicom common stock, and the officers and employees of UPG held
options on 653,000 shares of Zunicom common stock which lapsed after the
deconsolidation of UPG. In accordance with SFAS 123R, we accounted for the grant
of restricted shares to our chairman as stock based compensation. We accounted
for the grant of restricted shares to UPG officers and employees as a
contribution of capital in accordance with Emerging Issues Task Force ("EITF")
00-12, "Accounting by an Investor for Stock-Based Compensation Granted to
Employees of an Equity Method Investor." We will amortize 60% of that capital
contribution as additional equity in earnings (loss) of the investee over the
vesting period. The Company concluded that it is reasonable to discount the
value of these restricted shares by 29.52%. Of the 29.52% discount, the Company
considers the risk of forfeiture to be 10% and illiquidity to be 19.52%. The
Company applied this discount to the grant date market value of a freely
tradable share to arrive at the fair value of a restricted share.
NOTE D - NET INCOME PER SHARE
Basic net income per share is computed by dividing net income decreased by the
preferred stock dividends of $22,781 and $25,247 for the years ended December
31, 2008 and 2007 respectively, by the weighted average number of common shares
outstanding for the period. Diluted net income per share is computed by dividing
net income decreased by the preferred stock dividends by the weighted average
number of common shares and common stock equivalents outstanding for the period.
NOTE E - UNCONSOLIDATED SUBSIDIARY - INVESTEE
UPG was a consolidated subsidiary of the Company through December 20, 2006 and
since its deconsolidation is accounted for under the equity method of
accounting. After the deconsolidation, the Company owned a 40% interest in UPG.
During 2008, the Company purchased an additional 32,320 shares of UPG raising
its interest in UPG to 40.6% Following is a summary of financial information for
UPG for the years ended December 31, 2008 and 2007:
F-19
------------------------------------
Year Ended December 31,
------------------------------------
2008 2007
------------------- ----------------
Net sales $117,897,644 $108,517,097
Cost of sales 99,599,576 92,541,735
----------------- ---------------
Gross profit 18,298,068 15,975,362
Operating expenses 15,063,398 11,761,427
---------------- ---------------
Operating income 3,234,670 4,213,935
Other income (expense):
Interest expense (1,003,195) (1,195,079)
Interest income 569 396,083
Other, net 45,069 --
---------------- ---------------
Total other expense 957,557 (798,996)
---------------- ---------------
Income before
provision for income taxes 2,277,113 3,414,939
Provision for income taxes (1,050,990) (1,190,986)
---------------- ---------------
Net income $1,226,123 $2,223,953
================ ===============
Following is a summary of the balance sheets for UPG for the years ended
December 31, 2008 and 2007.
---------------------- ---------------------------- ----------------------------
Year ended December 31, 2008 Year ended December 31, 2007
---------------------- ---------------------------- ----------------------------
Current assets 53,633,363 47,643,378
---------------------- ---------------------------- ----------------------------
Noncurrent assets 2,107,406 1,767,174
---------------------- ---------------------------- ----------------------------
Current liabilities 32,975,258 26,429,934
---------------------- ---------------------------- ----------------------------
Noncurrent liabilities 4,055,178 5,324,981
---------------------- ---------------------------- ----------------------------
Shareholders' equity 18,710,333 17,655,637
---------------------- ---------------------------- ----------------------------
At December 31, 2008 the carrying value of the Company's investment in UPG was
$7,916,442. The market value of the 2,032,320 shares of UPG's common stock the
Company owns was approximately $5,243,000 based on the closing price per share
at December 31, 2008 of $2.58. The carrying value of the Company's investment in
UPG is in excess of the underlying equity in net assets by approximately
$320,000 as of December 31, 2008 ($350,000 as of December 31, 2007). The Company
has attributed this difference to goodwill as of December 31, 2008.
F-20
NOTE F - RELATED PARTY TRANSACTIONS
During 2006 UPG declared $3,964,000 of dividends to Zunicom. $964,000 was
received in cash in 2006 and $3,000,000 of these dividends was recorded as an
unsecured note receivable, which has a maturity date of June 20, 2012 and which
bears interest at the rate of 6% per annum. Interest on the unpaid principal
amount of this note is payable quarterly, in arrears, and the principal amount
will be repaid in 16 equal quarterly installments of $187,500 beginning
September 20, 2008.
At December 31, 2006 UPG also owed Zunicom an additional $2,850,000, reflecting
the tax benefit of the consolidated losses used to offset UPG's taxable income.
The obligation is evidenced by an unsecured note bearing interest at 6% per
annum and maturing June 20, 2012. Interest on the unpaid principal amount of
this note is payable quarterly, in arrears, and the principal amount will be
repaid in 16 equal quarterly installments of $178,125 beginning September 20,
2008.
As of December 31, 2008, the Company has received two principal payments of
$365,625 each, and $1,462,500 of the principal is classified as current, leaving
$3,656,250 classified as long term.
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, 2008 the Company has paid all dividends which have
accrued on the preferred stock, with the exception of the fourth quarter payment
of $5,579 which was paid in January 2009. The voting rights are equal to common
shares, other than with respect to certain matters; generally amending the
rights or powers of the preferred stock. The preferred stock is convertible at
the option of the holder into two shares of common stock subject to adjustment
(the "Conversion Rate") (as more fully described in the Certificate of
Designation) at any time after one year from the date of issue. The Company may
compel conversion at the Conversion Rate at any time after one year from the
date of issue if the closing market price of the common stock is $5.25 or higher
for 30 consecutive trading days. During the years ended December 31, 2008 and
2007 1,780 and 25,000, respectively, shares of outstanding preferred stock were
converted into 3,560 and 50,000, respectively, shares of common stock. In
addition, 0 and 18,857, respectively, shares of common stock were issued to pay
dividends of 0 and $19,668, respectively, on the preferred stock during the
years ended December 31, 2008 and 2007.
During 2008, the Company paid $22,781 in cash dividends on the class A Preferred
Stock. During 2007, the Company paid a cash dividend of $0.80 per share,
totaling $7,153,122 to shareholders of its common stock. The dividend was paid
on March 23, 2007 primarily from proceeds received from the sale of 1,000,000
shares of common stock of UPG that the Company sold in UPG's IPO. During 2007,
the Company paid dividends of $19,668 on the class A Preferred Stock through the
issuance of 18,857 shares of the Company's common stock and a class A Preferred
Stock dividend of $5,579 was paid in cash. Also in 2007, certain preferred
stockholders converted 25,000 shares of the Company's preferred stock into
50,000 shares of the Company's common stock.
F-21
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. As most of the Company's business is through credit
cards, accounts receivable are minimal.
During the years ended December 31, 2008 and 2007, one customer accounted for
27% and 17%, respectively, of the Company's total revenues.
NOTE I - INCOME TAXES
Deferred tax assets and liabilities at December 31, 2008 and 2007 consist of the
following:
2008 2007
----------- -----------
Current deferred tax asset $ -- $ --
Current deferred tax liability -- --
Valuation allowance -- --
----------- -----------
Net current deferred tax asset $ -- $ --
=========== ===========
Non-current deferred tax asset $ 1,730,270 $ 1,723,455
Non-current deferred tax liability (6,030,147) (5,791,464)
Valuation allowance -- --
----------- -----------
Net non-current deferred tax asset (liability) $(4,299,877) $(4,068,009)
=========== ===========
Significant components of our deferred tax assets and liabilities as of December
31, 2008 and 2007 are as follows:
2008 2007
----------- -----------
Net operating loss carry forwards $ 1,513,074 $ 1,520,437
Book/tax difference in investment in UPG (2,202,908) (2,048,588)
Excess loss account (3,827,239) (3,742,876)
Depreciation 88,629 92,318
Deferred Stock Compensation 100,694 69,973
Accrued bonus 7,951 14,386
Allowance for doubtful accounts -- 2,142
Other 19,922 24,199
----------- -----------
$(4,299,877) $(4,068,009)
The Company's provision for income taxes for the years ended December 31, 2008
and 2007 is comprised as follows:
F-22
2008 2007
---------- ----------
Current income tax expense $ -- $ --
Deferred income tax expense 231,867 243,789
---------- ----------
Provision for income taxes $ 231,867 $ 243,789
========== ==========
At December 31, 2008 Zunicom has recorded deferred tax liabilities totaling
$4,299,877. These liabilities consist primarily of the book/tax differences in
Zunicom's investment in UPG totaling $2,202,908 and the excess loss account
totaling $3,827,239. 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, 2008
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 of AlphaNet. Future changes in Zunicom's
investment in AlphaNet may effect the balance of this excess loss account and
related deferred tax liability.
During the years ended December 31, 2008 and 2007 the Company utilized
approximately $22,000 and $0 of net operating loss carryforwards, respectively,
to offset taxable income. The net operating loss available at December 31, 2008
totals approximately $4,450,000 and begins to expire in 2022.
The Company's income tax expense for the years ended December 31, 2008 and 2007
differed from the statutory federal rate of 34 percent as follows:
2008 2007
----------- -----------
Statutory rate applied to income (loss)
before income taxes $ 146,028 $ 203,732
Increase (decrease) in income taxes
resulting from:
Amounts not deductible for federal income
tax purposes 85,839 $ (10,534)
Change in valuation allowance -- --
Effect of deconsolidation of UPG -- --
Effect of excess loss account -- --
Change of prior year estimate -- 31,793
Other -- 18,798
----------- -----------
Income tax expense $ 231,867 $ 243,789
----------- -----------
The Company adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ("FIN 48"), on January 1, 2007. For the
years ended December 31, 2008 and 2007, there were no unrecognized tax benefits
and, accordingly, there was no effect on the Company's financial condition or
results of operations as a result of implementing FIN 48.
F-23
NOTE J - COMMITTMENTS
NOTE SUBORDINATION
In 2006, UPG (then a wholly owned subsidiary of the Company) obtained a $16
million line of credit from Compass Bank (guaranteed by the Company ) that was
to expire on May 5, 2007, but was extended for 45 days. On July 31, 2007, the
bank terminated the Company's guaranty of UPG bank indebtedness.
On July 31, 2007, (UPG now only 40% owned by the Company) a subordination
agreement with the bank was signed that provides for the Company (i) to
subordinate its $5,850,000 UPG notes to any Compass Bank loan and (ii) to hold
in trust for the benefit of the bank the principal and interest payments
received by the Company from UPG on the UPG notes payable to the Company. The
Company sought rescission or modification of this subordination agreement by the
bank. Until the resolution of this issue, the Company accounted for all payments
by UPG on the notes as "restricted cash." On June 17, 2008, the Company, the
bank, and UPG signed a "Second Amended and Restated Creditors' Subordination
Agreement" under which the Company continues to subordinate its $5,850,000 in
UPG notes to any Compass Bank loan but removes the provision under which the
Company was to hold in trust the principal and interest payments received from
UPG on the UPG notes. The Company now shall receive and may spend all regular
payments on the UPG notes. Accordingly, the Company no longer classifies
receipts under the UPG notes as restricted cash. UPG secured a $30 million line
of credit with Compass Bank and has an outstanding loan under the line.
LEASES
During the second quarter of 2007, AlphaNet moved into new office space in
Toronto, reducing its occupancy cost. The lease commenced on March 1, 2007 and
will end on April 30, 2009. During the third quarter of 2008, the Company
extended the office lease for one year to April 30, 2010 at the same rent and
terms. AlphaNet leases certain equipment located at customer sites as part of
its Office(TM) product. The following table presents the Company's commitments
on those leases.
------------- --------- ---------- --------- --------- -----------
Lease 2009 2010 2011 2012 Total
------------- --------- ---------- --------- --------- -----------
Office Space $66,729 $22,243 - - $88,972
------------- --------- ---------- --------- --------- -----------
Equipment $14,751 $ 5,240 $1,504 $ 376 $21,871
------------- --------- ---------- --------- --------- -----------
Total $81,480 $27,483 $1,504 $ 376 $110,843
------------- --------- ---------- --------- --------- -----------
NOTE K - LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management does not believe that the outcome of
these matters will have a material adverse effect on the Company's consolidated
financial position, operating results, or cash flows. However, there can be no
assurance that such legal proceedings will not have a material impact.
F-24
NOTE L - ECONOMIC DEPENDENCE
The Company's primary source of cash is from the interest and principal payments
on the UPG notes. UPG relies on one customer for a significant portion of its
business, representing approximately 35% and 41% of its net revenues for the
years ended December 31, 2008 and 2007, respectively. Also, the Company is
subject to a subordination agreement among the Company, UPG and UPG's bank.
Should UPG default on its obligations to its bank, it would be unable to
continue its interest and principal payments to the Company. Any event which
would cause UPG to be unable to continue its interest and principal payments
would have an adverse financial impact on the Company.
NOTE K - SALE OF INTANGIBLE ASSET
Pursuant to a purchase agreement dated January 28, 2008, the Company sold to a
third party two patents which it does not require to conduct its business. The
Company received net proceeds of $666,667 after commissions. Those proceeds are
included as Other - net in the Company's consolidated statement of operations
for the year ended December 31, 2008.
F-25
</TEXT>
</DOCUMENT>
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