Watch The Video To Learn How To Trade Penny Stocks

TRY HOTSTOCKED PRECISION NOW

Hotstocked Precision Software
Rating:
Platform: Win/Mac
Price: FREE
Size: 656KB
Downloads: 800,000+

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>

Watch The Video To Learn How To Trade Penny Stocks

TRY HOTSTOCKED PRECISION NOW

Rating:
Platform: Win/Mac
Price: FREE
Size: 656KB
Downloads: 800,000+
Hotstocked Precision Software

TRY IT FOR FREE