10-Q 1 zunicom_2010sept30-10q.txt SEPTEMBER 30, 2010 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, State D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the nine month period ended September 30, 2010 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number: 0-27210 Zunicom, Inc. ---------------------------------------------------- (Exact name of registrant as specified in its charter) TEXAS 75-2408297 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4315 West Lovers Lane, Dallas, Texas 75209 (Address of principal executive offices) (Zip Code) (214) 352-8674 (Registrant's telephone number, including area code) None (Former name,former address and former fiscal year,if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value ----------------------------- (Title of Class) Class A Preferred Stock, $1.00 Par Value ---------------------------------------- (Title of Class) Units, consisting of one (1) share of Common Stock and one (1) share of Class A Preferred Stock -------------------------------------------------- (Title of Class) 1 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) 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 October 31, 2010, 9,733,527 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE None 2 Zunicom, Inc. INDEX Page ---- PART I - Financial Information Item 1. Financial Statements Unaudited Consolidated Balance Sheet at September 30, 2010 and Consolidated Balance Sheet at December 31, 2009. . . . . . . . . . 4 Unaudited Consolidated Statements of Operations for the Three and nine months ended September 30, 2010 and 2009 . . . .. . . . 6 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009. . . . . . . . . . . . . . . . . . . 9 Notes to Unaudited Consolidated Financial Statements . . . . . . . . .10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 20 Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . 20 PART II - Other Information Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 21 Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . 21 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Certifications 3 PART I - FINANCIAL INFORMATION ---------------------------------- Item 1. Financial Statements ZUNICOM, INC. CONSOLIDATED BALANCE SHEETS ASSETS September 30, December 31, 2010 2009 (unaudited) ------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 4,479,130 $ 5,680,943 Accounts receivable - trade 66,560 7,723 Inventories - finished goods - 6,224 Prepaid expenses and other current assets 45,560 35,084 ------------ ------------ Total current assets 4,591,250 5,729,974 ------------ ------------ PROPERTY AND EQUIPMENT Business center equipment - 329,925 Machinery and equipment - 448,234 Computer equipment - 149,220 Furniture and fixtures 10,000 30,097 Leasehold improvements - 12,377 ------------ ------------ Total property and equipment 10,000 969,853 Less accumulated depreciation and amortization (833) (949,992) ------------ ------------ Net property and equipment 9,167 19,861 ------------ ------------ INTANGIBLE ASSETS, NET 436,250 -- INVESTMENT IN UNCONSOLIDATED INVESTEE 4,239,794 3,345,697 ------------ ------------ TOTAL ASSETS $ 9,276,461 $ 9,095,532 ============ ============ (Continued) 4 ZUNICOM, INC. CONSOLIDATED BALANCE SHEETS - Continued LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 2010 2009 (unaudited) ------------- ------------- CURRENT LIABILITIES Accounts payable $ 325,921 $ 275,196 Accrued liabilities 32,971 114,989 Customer deposits 22,553 -- ------------ ------------ Total current liabilities 381,445 390,185 ------------ ------------ DEFERRED TAX LIABILITY 2,596,899 2,461,396 ------------ ------------ TOTAL LIABILITIES 2,978,344 2,851,581 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock - $1.00 par value, 1,000,000 shares authorized; 60,208 (2009 - 60,208) Class A Preferred Shares issued and outstanding; liquidation preference of $316,092 as of September 30, 2010 60,208 60,208 Common stock - $0.01 par value; 50,000,000 shares authorized; 9,733,527 (2009 - 9,733,527) shares issued and out- standing 97,335 97,335 Additional paid-in capital 9,140,554 9,102,096 Accumulated deficit (2,999,980) (3,015,688) ------------ ------------ Total stockholders' equity 6,298,117 6,243,951 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,276,461 $ 9,095,532 ============ ============ The accompanying footnotes are an integral part of these unaudited consolidated financial statements. 5 ZUNICOM, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months and Nine Months Ended September 30, 2010 and 2009 For the three months ended For the nine months ended ------------------------- ------------------------- September 30, September 30, -------- -------- 2010 2009 2010 2009 ---- ---- ---- ---- REVENUE Sales $ 252,844 $ -- $ 421,802 $ -- Service 94,120 -- 166,396 -- ------------ ------------ ------------ ------------ TOTAL REVENUE 346,963 -- 588,198 -- ------------ ------------ ------------ ------------ COST OF REVENUE Cost of sales 130,586 -- 227,439 -- Direct servicing costs 45,450 -- 76,867 -- ------------ ------------ ------------ ----------- TOTAL COST OF REVENUE 176,036 -- 304,306 -- ------------ ------------ ------------ ----------- GROSS PROFIT 170,927 -- 283,892 -- OPERATING EXPENSES Selling, general and administrative 295,552 98,927 727,877 349,730 Depreciation and amortization of property and equipment 29,750 180 49,583 871 ------------ ------------ ------------ ----------- 325,302 99,107 777,460 350,601 ------------ ------------ ------------ ----------- LOSS FROM OPERATIONS (154,375) (99,107) (493,568) (350,601) OTHER INCOME (EXPENSES) Interest income net, including $0, $66,353, $0, and $209,818, from related parties 4,573 67,414 16,591 212,949 Equity (loss) in earnings Of unconsolidated investee 361,567 241,287 894,098 (240,713) Loss on impairment -- -- -- (5,793,679) ------------ ------------ ------------ ----------- 366,141 308,702 910,689 (5,821,443) ------------ ------------ ------------ ----------- The accompanying footnotes are an integral part of these consolidated financial statements. 6 ZUNICOM, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months and Nine Months Ended September 30, 2010 and 2009 (Continued) For the three months ended For the nine months ended ------------------------- ------------------------- September 30, September 30, -------- -------- 2010 2009 2010 2009 ---- ---- ---- ---- INCOME (LOSS) BEFORE TAXES AND DISCONTINUED OPERATIONS 211,766 209,594 417,121 (6,172,044) PROVISION FOR RECOVERY OF INCOME TAXES (121,399) 38,588 (220,232) 2,225,075 ------------ ------------ ------------ ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS 90,367 248,182 196,889 (3,946,969) LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES (23,926) (60,768) (164,474) (168,072) ------------ ------------ ------------ ----------- NET INCOME (LOSS) $ 66,441 $ 187,414 $ 32,415 $(4,115,041) ============ ============ ============ =========== Net income (loss) attributable to common stockholders $ 61,022 $ 181,995 $ 15,707 $(4,131,922) ============ ============ ============ =========== Basic net income (loss) per share attributable to common stockholders: Income from continuing operations $ 0.01 $ 0.03 $ 0.03 $ (0.39) ============ ============ ============ =========== Loss from discontinued operations $ (*) $ (0.01) $ (0.03) $ (0.03) ============ ============ ============ =========== Net income (loss) per share $ 0.01 $ 0.02 $ * $ (0.42) ============ ============ ============ =========== Number of weighted average shares of common stock outstanding Basic 9,733,527 9,733,527 9,733,527 9,751,006 ============ ============ ============ =========== Diluted net income (loss) per share attributable to common stockholders: Income from continuing operations $ 0.01 $ 0.03 $ 0.03 $ (0.39) ============ =========== ============ =========== Loss from discontinued operations $ (*) $ (0.01) $ (0.03) $ (0.03) ============ =========== ============ =========== The accompanying footnotes are an integral part of these consolidated financial statements. 7 ZUNICOM, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months and Nine Months Ended September 30, 2010 and 2009 (Continued) For the three months ended For the nine months ended ------------------------- ------------------------- September 30, September 30, -------- -------- 2010 2009 2010 2009 ---- ---- ---- ---- Net income (loss) per share $ 0.01 $ 0.02 $ * $ (0.42) ============ =========== ============ =========== Number of weighted average shares of common stock outstanding Diluted 9,953,943 9,853,943 9,953,943 9,751,006 ============ =========== ============ =========== * Less than $0.01 per share The accompanying footnotes are an integral part of these consolidated financial statements. 8 ZUNICOM, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS For The Nine Months Ended September 30, 2010 and 2009 2010 2009 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ 32,416 $ (4,115,040) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property and equipment 58,695 36,510 Impairment of investment in UPG -- 4,367,891 Impairment in value of UPG notes -- 1,425,788 Write off of property and equipment 10,748 11,666 (Loss) equity in earnings of unconsolidated investee (894,098) 240,713 Non-cash stock-based compensation 38,456 38,456 Provision for income taxes 135,503 (2,311,658) Change in operating assets and liabilities: Accounts receivable - trade (58,837) (3,871) Accounts receivable - other -- 3,967 Inventories 6,226 (1,247) Prepaid expenses and other current assets (10,475) (14,073) Accounts payable 50,726 (58,800) Accrued liabilities (82,018) (105,667) Customer deposits 22,553 -- ------------ ------------ Net cash used in operating activities (690,105) (485,365) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (900) Purchase of business (495,000) -- Purchase of UPG stock -- (20,400) ------------ ----------- Net cash used in investing activities (495,000) (21,300) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on notes receivable -- 1,096,875 Dividends paid on preferred stock (16,708) (16,881) ------------ ----------- Net cash (used in)provided by financing activities (16,708) 1,079,994 ------------ ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,201,814) 573,328 Cash and cash equivalents at beginning of period 5,680,943 1,522,831 ------------ ----------- Cash and cash equivalents at end of period 4,479,130 2,096,159 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 46 $ -- ============ =========== The accompanying footnotes are an integral part of these consolidated financial statements. 9 ZUNICOM, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ORGANIZATION Zunicom, Inc., ("Zunicom" or the "Company") was formed on January 10, 1992 as a Texas corporation. Zunicom's consolidated wholly-owned subsidiary, AlphaNet Hospitality Systems Inc. ("AlphaNet"), has been a provider of guest communication services to the hospitality market. AlphaNet discontinued this business as of August 31, 2010. Accordingly, the results of this discontinued operation are presented in our Unaudited Consolidated Statements of Operation above. In April of 2010, AlphaNet purchased the assets and business of Action Computer Systems and is now a reseller of point-of-sale software and hardware to restaurants in southern Connecticut, Westchester County, New York, and New York City (Note K). Zunicom also holds a 41 percent ownership interest in 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. NOTE B - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included for the three and nine month periods ended September 30, 2010. The results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. The unaudited consolidated financial statements included in this filing should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's annual report on form 10-K for the year ended December 31, 2009. NOTE C - STOCK-BASED COMPENSATION Stock-based compensation expense recognized in the statements of operations for the three and nine months ended September 30, 2010 and 2009, of $12,959, $12,959,$38,456, and $38,456, respectively, represents the amortization of the restricted stock grant to the Company's chairman in 2007. As of September 30, 2010, $37,751 of the restricted stock grant to the Company's chairman remains unamortized, and $20,771 of the restricted stock grant to UPG employees remains unamortized. On January 21, 2009, the chief executive officer of UPG resigned, and according to the terms of the restricted stock agreement, forfeited his restricted stock grant. As a result 227,229 shares of Zunicom common stock were returned to the Company, and the investment in UPG was reduced by $132,925. Valuation Assumptions The fair values of option awards are estimated at the grant date using a Black-Scholes option pricing model. There were no options granted in the nine months ended september 30, 2010 or 2009. 10 NOTE C - STOCK-BASED COMPENSATION (CONTINUED) Activity and Summary Stock option activity under the 1999 and 2000 stock option plans was as follows: Weighted Average Number of Shares Exercise Price ---------------- ----------------- Options outstanding at December 31, 2009 525,000 $ 0.85 Granted -- $ -- Exercised -- $ -- Canceled, lapsed or forfeited 400,000 $ 0.90 --------------- ---------------- Options outstanding at September 30, 2010 125,000 $ 0.71 =============== ================ The following table summarizes stock options outstanding under the 1999 and 2000 stock option plans at September 30, 2010: Options Outstanding Options Exercisable -------------------------------- -------------------- Weighted Average Remaining Weighted Weighted Number of Contractual Average Number of Average Range of Options Life Exercise Options Exercise Exercise Prices Outstanding (in years) Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $ 1.75 25,000 6.4 $ 1.75 25,000 $ 1.75 $ 0.45 100,000 2.6 $ 0.45 100,000 $ 0.45 ----------- ----------- -------- ----------- -------- $ 0.45 - $ 1.75 125,000 3.4 $ 0.71 125,000 $ 0.71 =========== =========== ======== =========== ======== At September 30, 2010, the aggregate intrinsic value of options outstanding was $6,000 and the aggregate intrinsic value of options exercisable was $6,000. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's common stock for those awards that have an exercise price currently below the quoted price. At September 30, 2010, all outstanding options were fully vested. NOTE D - NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income (loss) decreased (increased) by the preferred stock dividends of $5,419, $5,419, $16,708, and $16,881 for the three and nine months ended September 30, 2010 and 2009,respectively, by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income decreased by the preferred stock dividends by the weighted average number of common shares and common stock equivalents outstanding for the period. The Company's common 11 NOTE D - NET INCOME (LOSS) PER SHARE (CONTINUED) stock equivalents include all common stock issuable upon conversion of preferred stock and the exercise of outstanding stock options. The dilutive effect of 100,000 in-the-money options and the dilutive effect of the conversion of 60,208 shares of preferred stock into 120,416 shares of common stock have been included in the computation of dilutive net income (loss) per share for the nine months ended September 30, 2010 but not for the nine month period ended September 30, 2009, as the effect would be anti-dilutive. However, 100,000 in-the-money options and the dilutive effect of the conversion of 60,208 shares of preferred stock into 120,416 shares of common stock were included in the computation of dilutive net income per share for the three months ended September 30, 2010 and 2009. NOTE E - UNCONSOLIDATED INVESTEE The Company's investment in UPG is accounted for under the equity method of accounting for the three and nine month periods ended September 30, 2010 and 2009. Following is a summary of financial information of UPG for the three and nine months ended September 30, 2010 and 2009: Three and Nine Months Ended September 30, ----------- ----------- ----------- ----------- 2010 2009 2010 2009 ----------- ----------- ----------- ----------- ($ in thousands) ----------------------------- ----------- ----------- ----------- ----------- Net revenues $ 28,304 $ 27,495 $ 82,733 $ 83,132 ----------------------------- ---------- ---------- ---------- ---------- Cost of revenues 22,833 22,958 67,768 68,682 ----------------------------- ---------- ---------- ---------- ---------- Gross profit 5,471 4,537 14,965 14,450 ----------------------------- ---------- ---------- ---------- ---------- Operating expenses 3,828 3,305 10,959 13,256 ----------------------------- ---------- ---------- ---------- ---------- Income (Loss) from operations 1,643 1,232 4,006 1,194 ----------------------------- ---------- ---------- ---------- ---------- Interest expense (36) (233) (435) (719) ----------------------------- ---------- ---------- ---------- ---------- Income (Loss) from operations before income tax provision 1,606 992 3,571 476 ----------------------------- ---------- ---------- ---------- ---------- Income tax provision (699) (380) (1,314) (998) ---------- ---------- ---------- ---------- Net income (Loss) $ 907 $ 612 $ 2,257 (522) ========== ========== ========== ========== Following is a summary of the balance sheets for UPG as of September 30, 2010 and December 31, 2009. September 30, 2010 December 31, 2009 ($ in thousands) -------------- ----------------- Current assets 49,352 46,706 Noncurrent assets 2,143 2,933 Current liabilities 29,410 29,303 Noncurrent liabilities 657 1,305 Shareholders' equity 21,427 19,031 12 NOTE E - UNCONSOLIDATED SUBSIDIARY - INVESTEE (CONTINUED) The Company evaluated its investment in UPG at March 31, 2009 to determine if an Other-than-temporary decline in fair value below the cost basis had occurred. The primary input in estimating the fair value of the investment was the quoted market value of UPG publicly-traded shares as at March 31, 2009, which declined significantly from the date of the initial investment in December 2006. As aresult of the severe decline in the quoted market value, the Company recognized impairment in other income (expense) of $4,367,891 to adjust the cost basis in the investment to its estimated fair value. The carrying value of the Company's investment in UPG as of September 30, 2010, is $4,239,794. NOTE F - FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES The Company utilizes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below: o Level 1: consists of financial instruments whose value is based on quoted market prices for identical financial instruments in an active market o Level 2: consists of financial instruments that are valued using models or other valuation methodologies. These models use inputs that are observable either directly or indirectly; Level 2 inputs include (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) pricing models whose inputs are observable for substantially the full term of the financial instrument and (iv) pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the financial instrument o Level 3: consists of financial instruments whose values are determined using pricing models that utilize significant inputs that are primarily unobservable, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and their classification within the fair value hierarchy. Financial instruments are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. There have been no changes in the classification of any financial instruments within the fair value hierarchy. The Company recognized an other-than-temporary impairment to other income (expense) of $4,367,891 to adjust the cost basis in the Company's investment in UPG of approximately $7,916,442 to its estimated fair value (see Note E ). The valuation methodology utilized the quoted market value of UPG's publicly traded shares. The Company's investment in UPG was classified as a Level 1 financial instrument in the fair value hierarchy, as the estimated fair value of the investment was based on observable inputs at the date of the impairment. 13 NOTE G - RELATED PARTY NOTES Through December 15, 2009, the Company held two unsecured promissory notes from UPG, one in the amount of $3,000,000 and a second note in the amount of $2,850,000 for a total of $5,850,000. Both notes were dated December 20, 2006 and carried the same terms. These terms provided for quarterly interest payments at an annual interest rate of 6% and principal payments in 16 equal quarterly installments of $365,625 each, beginning September 20, 2008. On December 16, 2009, both notes were paid in full, and the Company received cash of $3,771,141. The Company recorded $1,124,146 as a reversal of a valuation charge and a reduction in the impairment charge and an expense in general and administrative expenses of $301,641 for the discount on the notes. NOTE H - SHAREHOLDERS' EQUITY During the three and nine months ended September 30, 2010 and 2009, the Company paid a cash dividend of $5,419, $16,708, $5,419 and $16,881, respectively, to the holders of its class A Preferred Stock. NOTE I - LEGAL PROCEEDINGS The Company is subject to legal proceedings and claims that arise in the ordinary course of business. As of September 30, 2010, the Company is not subject to any ongoing legal proceedings. NOTE J - COMMITTMENTS Leases 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. In January 2010, AlphaNet vacated the leased premises. AlphaNet leased certain equipment located at customer sites as part of its Office (TM) product. As of August 31, 2010, the Company discontinued its office (TM) product. As a result, the Company has no further commitments related to its office (TM) product. On April 23, 2010, AlphaNet closed on the acquisition of Action Computer Systems (Note K) and now provides point-of-sale software, hardware systems and maintenance and support to restaurants in the New York metropolitan area and southern Connecticut. The Company assumed Action Computer Systems' lease on approximately 1,200 square feet of office space in Larchmont, New York. The Company's commitment for rent is as follows. ------------- --------- ------- ------- ------- ------- -------- Remainder of 2010 2011 2012 2013 2014 Total ------------- --------- ------- ------- ------- ------- -------- Office lease $5,910 $23,818 $25,892 $26,669 $25,117 $113,314 ------------- --------- ------- ------- ------- ------- -------- 14 NOTE K - PURCHASE OF BUSINESS On March 30, 2010, AlphaNet entered into a binding agreement to acquire the business and the assets of Advanced Computer Software, Inc., a New York corporation, doing business as Action Computer Systems for a purchase price of $495,000. Action Computer Systems is a reseller of point-of-sale software to restaurants in the New York metropolitan area and southern Connecticut. The software, Restaurant Manager, was developed by Action Systems Inc., Silver Spring, Maryland. On April 23, 2010, AlphaNet closed on the acquisition and now provides point-of-sale software, hardware systems and maintenance and support to restaurants in the New York metropolitan area and southern Connecticut. The following represents the preliminary purchase price allocation at the date of the acquisition: Customer Lists $335,000 Covenant not to compete 150,000 Fixed Assets 10,000 --------------------------------------- Purchase price $495,000 ======== The purchase price is not considered final as of the date of this report, as the Company is still reviewing all of the underlying assumptions and calculations used in the allocation. However, the Company believes the final purchase price allocation will not be materially different than that presented herein. The total revenue of Action Computer Systems since the date of acquisition, included in the consolidated income statement for the three and nine months ended September 30, 2010 was $346,963 and $588,198 respectively. Supplemental pro-forma information regarding the results of the combined entity for the current reporting periods and the comparative periods presented in these consolidated financial statements has not been presented, as the financial information is not available, and it is impracticable for management to reasonably estimate the effect for such disclosure. Management does not believe the pro forma results are materially different from actual results for the periods ended September 30, 2010 and September 30, 2009. NOTE L - DISCONTINUED OPERATIONS During the three months ended September 30, 2010, the Company discontinued its guest communications services business. The Company chose to abandon the assets associated with this business and accordingly has written these assets off and recorded a corresponding loss of $6,392 and $10,748 in the consolidated statements of operations for the three and nine months ended September 30, 2010, respectively, which is included in the loss from discontinued operations for the corresponding periods. Total revenues from discontinued operations were $$7,575 and $114,025 for the three and nine months ended September 30, 2010. Pre-tax loss from discontinued operations was $36,252 and $249,203 for the three and nine months ended September 30, 2010. 15 Total revenues from discontinued operations were $120,027 and $428,181 for the three and nine months ended September 30, 2009. Pre-tax loss from discontinued operations was $92,073 and $254,655 for the three and nine months ended September 30, 2009. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with Zunicom's Unaudited Consolidated Interim Financial Statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements that involve risks and uncertainties, such as statements of Zunicom's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. These statements include, without limitation, statements concerning the potential operations and results of the Company described below. Zunicom's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein and in Zunicom's Annual Report on Form 10-K for the year ended December 31, 2009. RESULTS OF OPERATIONS Currently, the operations of Zunicom are conducted through its wholly-owned subsidiary, AlphaNet. AlphaNet has been a provider of guest communication services to the hospitality market. AlphaNet discontinued this business as of August 31, 2010. Accordingly, the results of this discontinued operation are presented in our Unaudited Consolidated Statements of Operation above. In April 2010, AlphaNet purchased the assets and business of Action Computer Systems and is now a reseller of point of sale software and hardware to restaurants in southern Connecticut, Westchester County, New York, and New York City. Three months ended September 30, 2010 REVENUE For the three month period ended September 30, 2010, Zunicom, through its wholly owned subsidiary Alphanet which, until August 31, 2010,consisted of two product lines, had consolidated revenues from continuing operations of $346,963 compared to $0 for the same period in 2009. This revenue is from Action Computer Systems which was acquired in April 2010. Revenues of the Office (TM) product line have been declining sharply in recent years due to increasing use of laptops by business travelers, increasing numbers of hotels turning their business centers into a "free to the guest" model for competitive reasons, and competition from large "full service" providers who include business centers as part of a complete package of outsourced administrative services to hotels. In April 2010, AlphaNet acquired a product line as a reseller of point-of-sale software to restaurants continuing its history of providing services to the hospitality industry. (See Footnote K, Purchase of Business, to the Consolidated Financial Statements above.) Management has determined that the Office (TM) product line is no longer viable and discontinued that product line effective August 31, 2010. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COST OF REVENUE For the three month period ended September 30, 2010, Action Computer Systems had cost of revenue from continuing operations of $176,036, compared to $0 for the same period in 2009. OPERATING EXPENSES For the three month period ended September 30, 2010, Zunicom's consolidated operating expenses from continuing operations, consisting of selling, general and administrative expenses and depreciation and amortization of property and equipment increased to $325,302 compared to $99,107 for the same period in 2009, an increase of $226,195 or 228.2%. The increase is due to an increase in Zunicom's expenses of $43,722, and Action Computer Systems operating expenses for the three month period ended September 30, 2010, of $182,473. Zunicom's selling, general and administrative expenses for the three month period ended September 30, 2010 were $142,651 compared to $98,929 for the same period in 2009, an increase of $43,722 or 44.2%. The increase is primarily attributable to increased consulting and accounting fees related to the wind down of the Office (TM) product and the integration of Action Computer Systems. For the three month period ended September 30, 2010, the Company recorded $29,750 in depreciation and amortization expense from continuing operations compared to $180 in 2009. The increase is due to depreciation and amortization of the assets acquired in the acquisition of Action Computer Systems. OTHER INCOME / EXPENSE Zunicom's consolidated interest income for the three month period ended September 30, 2010 was $4,573 compared to interest income of $67,414 for the same period in 2009, a decrease of $62,841, or 93.2%. The decrease is due to the payoff of the UPG notes. Since the note payoff date of December 16, 2009, interest income consists only of interest on bank cash balances. Equity in earnings of investee of $361,567 represents Zunicom's share of UPG's net income for the three month period ended September 30, 2010 recorded in accordance with the equity method of accounting for an unconsolidated investee. Zunicom recorded a loss from discontinued operations of $36,252 for the three months ended September 30, 2010 compared to $92,073 for the same period in 2009. The Office (TM) product line was discontinued as of August 31, 2010. Nine months ended September 30, 2010 REVENUES For the nine month period ended September 30, 2010, Zunicom, through its wholly owned subsidiary Alphanet, had consolidated revenues of $588,198 from continuing operations compared to $0 for the same period in 2009. This revenue is from Action Computer Systems which was acquired in April 2010. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Revenues of the Office (TM) product line have been declining sharply in recent years due to increasing use of laptops by business travelers, increasing numbers of hotels turning their business centers into a "free to the guest" model for competitive reasons, and competition from large "full service" providers who include business centers as part of a complete package of outsourced administrative services to hotels. On April 23, 2010, AlphaNet acquired a product line as a reseller of point-of-sale software to restaurants continuing its history of providing services to the hospitality industry. (See Footnote K, Purchase of Business, to the Consolidated Financial Statements above.) Management has determined that the Office (TM) product line is no longer viable and discontinued that product line effective August 31, 2010. COST OF REVENUES For the nine month period ended September 30, 2010, Zunicom's consolidated cost of Revenues from continuing operations is $304,306 compared to $0 for the same period in 2009. This increase is due to the acquisition of Action Computer Systems on April 23, 2010. OPERATING EXPENSES For the nine month period ended September 30, 2010, Zunicom's consolidated operating expenses, consisting of selling, general and administrative expenses and depreciation and amortization of property and equipment from continuing operations increased to $777,460 compared to $350,601 for the same period in 2009, an increase of $426,859 or 121.8%. The increase is due to an increase in Zunicom's expenses of $121,139, and Action Computer Systems operating expenses from the acquisition date through September 30,2010, of $305,720. Zunicom's selling, general and administrative expenses for the nine month period ended September 30, 2010 were $470,871 compared to $349,732 for the same period in 2009, an increase of $121,139 or 34.6%. The increase is attributable to increased accounting, legal, and consulting fees. The increased fees are related to the acquisition of Action Computer Systems. For the nine month period ended September 30, 2010, the Company recorded $49,583 in depreciation and amortization expense from continuing operations compared to $871 in 2009. The increase is due to depreciation and amortization of the assets acquired in the acquisition of Action Computer Systems. OTHER INCOME / EXPENSE Zunicom's consolidated interest income for the nine month period ended September 30, 2010 was $16,591 compared to interest income of $212,949 for the same period in 2009, a decrease of $196,358, or 92.2%. The decrease is due to the repayment of the UPG notes. Since repayment of the note on December 16, 2009, interest income consists only of interest on bank cash balances. Equity in earnings of investee of $894,098 represents Zunicom's share of UPG's net income for the nine month period ended September 30, 2010 recorded in accordance with the equity method of accounting for an unconsolidated investee. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Zunicom recorded a loss from discontinued operations of $249,203 for the nine months ended September 30, 2010 compared to $254,655 for the same period in 2009. The Office (TM) product line was discontinued as of August 31, 2010. The Company evaluated its investment in UPG at March 31, 2009 to determine if an other than temporary decline in fair value below the cost basis had occurred. The primary input in estimating the fair value of the investment was the quoted market value of UPG publicly traded shares as at March 31, 2009, which declined significantly from the date of the initial investment in December 2006. As a result of the severe decline in the quoted market value, the Company recognized an impairment in other income (loss) of $4,367,891 to adjust the costs basis in the investment to its estimated fair value. The carrying cost of the Company's investment in UPG as of September 30, 2010 is $4,239,794. In conjunction with its evaluation of its investment in UPG described above, the Company also evaluated its two unsecured promissory notes from UPG in the amount of $4,753,125 to determine if an other than temporary decline in the fair value of the notes had occurred. The principle inputs in estimating the fair value of the UPG notes was the possible impairment of UPG's ability to service the notes in the future given the revenue decline in the first quarter of 2009, especially from its largest customer, and the profitability decline from 2007 to the first quarter of 2009. As a result, the Company recognized a valuation loss in other income (loss) of $1,425,788 to adjust the cost basis of the notes to their estimated fair value. As a result, the carrying value of the UPG notes as of March 31, 2009, was $3,327,338. The notes were paid off on December 16, 2009 (See Note G above). LIQUIDITY Zunicom, on a consolidated basis, had cash and cash equivalents of $4,479,130 at September 30, 2010. Net cash used in operating activities was $690,105 for the nine month period ended September 30, 2010 as compared to $485,365 for the same period in 2009. The cash used in operating activities is primarily attributable to the net income of $32,416 plus depreciation of $58,695, write off of property and equipment of $10,748, non-cash stock based compensation of $38,456, provision for federal income taxes of $135,503, offset by a decrease in working capital of $71,825, and a decrease in equity in earnings of investee of $894,098. For the nine months ended September 30, 2010 cash flow used in investing activities was $495,000 representing the acquisition of Action Computer Systems. Net cash used in financing activities for the nine month period ended September 30, 2010 was $16,708 representing payment of a cash dividend on the Company's preferred stock. Zunicom management believes that cash on hand will be sufficient to meet its operational needs over the next year. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Our customers are primarily located in the United States. Up until August 31, 2010, we had one customer in Canada our exchange rate risk between the US and Canadian dollar was minimal. We have not used derivative instruments to hedge our foreign exchange risks. Since August 31, 2010, all of our customers are in the United States and we will no longer be subject to any foreign currency risk. Interest Rates We currently have no direct borrowings and therefore are not exposed to market rate risk for changes in interest rates. ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Company's principal executive officer and principal financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13(a) - 15(e) and 15(d) - 15(e) under the Securities Exchange Act of 1934) as of the nine months ended September 30, 2010. Based upon that evaluation, the Company's principal executive officer and principal financial officer have concluded that the disclosure controls and procedures were effective as of September 30, 2010 to insure that the information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized or reported within the time periods specified in the rules and regulations of the SEC, and included controls and procedures designed to ensure that information required to be disclosed by us in such reports was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None Item 6. Exhibits. a. The following exhibits are filed as part of this report or incorporated herein as indicated. 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 and 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). 3.2A 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 and January 23, 1996). 10.1 Second Amended and Restated Creditors Subordination Agreement (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2008, Commission File No. 0-27210, filed August 14, 2008) 10.2 Purchase and Sale agreement between AlphaNet Hospitality Systems, Inc. Advanced Computer Software, Inc. dated March 30, 2010 (incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal year ended December 31, 2009, Commission File No. 000-27210, filed April 7, 2010) 14.1 Code of Ethics and Business Conduct as adopted March 30, 2004 (incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 2003, Commission File No. 0-27210, filed March 31, 2004) 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* 21 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. 22 Signature --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Zunicom, Inc. ----------------------------- (Registrant) Date: November 14, 2010 /s/ John C. Rudy -------------------------------- John C. Rudy Chief Financial Officer (principal financial officer) 23