UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 0-18672
ZOOM TECHNOLOGIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-2621506
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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 a 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]
The aggregate market value of the common stock, $0.01 par value, of the
registrant held by non-affiliates of the registrant as of March 20, 2002
(computed by reference to the closing price of such stock on The Nasdaq National
Market on such date) was approximately $8,646,953.
The number of shares outstanding of the registrant's common stock, $0.01 par
value, as of March 20, 2002 was 7,860,866 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the registrant's 2002 annual
meeting of shareholders to be filed with the SEC in April 2002 are incorporated
by reference into Part III, Items 10-13 of this Form 10-K.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements involve known and
unknown risks, uncertainties and other factors which may cause our or our
industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to statements regarding:
o the timing of and anticipated introduction of our advanced cable and
ADSL modems and other broadband products;
o timing of our goal of returning to profitability;
o the development of new competitive technologies and products;
o approvals, certifications and clearances for our products;
o production schedules for our products;
o market acceptance of new products;
o business strategies;
o dependence on significant suppliers;
o dependence on significant manufacturers, distributors and customers;
o the availability of debt and equity financing;
o general economic conditions;
o the realization of cash improvement from the sale of excess inventory;
o the realization of cash improvement from the utilization of no-charge
components;
o the impact of our cost-savings initiatives; and
o our financial condition or results of operations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking statements are
based. Factors that could cause or contribute to differences in our future
financial results include those discussed in the risk factors set forth in Item
7 below as well as those discussed elsewhere in this report. We qualify all of
our forward-looking statements by these cautionary statements.
PART I
ITEM 1 - BUSINESS
Overview
We design, produce and market dial-up and broadband modems, wireless local area
network products, and other communications products. Our primary objective is to
build upon our position as a leading supplier of Internet access devices and to
take advantage of a number of emerging trends in computer connectivity including
Internet access, higher data rates, broadband applications, and alternatives to
traditional wired local area networks.
To date our revenues have come primarily from sales of our dial-up modems. Our
dial-up modems connect personal computers and other devices to the local
telephone line for transmission of data, fax, voice, and video. Our dial-up
modems enable personal computers and other devices to connect to other computers
and networks, including the Internet and local area networks, at top data speeds
of 56,000 bits per second. Most of our modems connect to a single telephone
line, but we also make multi-line modems which can connect to up to sixteen
telephone lines. We also have a line of integrated services digital network
("ISDN") products, which can transmit and receive data simultaneously at up to
128,000 bits per second.
In response to increased demand for faster connection speeds and increased modem
functionality, we have invested resources to expand our product line to include
cable and ADSL modems and other broadband access products. Cable modems provide
a high-bandwidth connection to the Internet through a cable-TV cable that
connects to compatible equipment at or near the cable service provider. We began
shipping cable modems during 2000. Our cable modem customers in the US, the UK,
and other countries now include cable service providers, original equipment
manufacturers, and retailers.
Our Asymmetric Digital Subscriber Line modems, known as ADSL modems, provide a
high-bandwidth connection to the Internet through a standard telephone line that
connects to compatible ADSL equipment in or near the central telephone office.
We are currently shipping a USB model, and plan to introduce during the first
half of 2002 an Ethernet/USB model designed to work with either normal phone
service or ISDN service.
Other products that we market and sell include wireless local area network
products and a new generation of dialers. Our ZoomAirtm wireless products enable
the connection of a notebook or desktop computer to another computer or an
existing local area network using wireless data technology. We currently ship a
variety of ZoomAirtm models, and are continuing to develop and introduce new
ZoomAirtm products. Our dialers are a new generation of the Demon Dialertm and
Hotshottm dialers that we designed and produced in the early 1980s. Dialers
simplify the placing of a phone call by dialing digits automatically.
We were incorporated in British Columbia under the name 1519 Holdings Ltd. on
July 7, 1986 and subsequently changed our name to Zoom Telephonics, Inc. on
October 1, 1987. On June 28, 1991, we changed our jurisdiction of incorporation
from British Columbia to Canada. In February 2002, we completed a transaction to
change our jurisdiction of incorporation from Canada to the State of Delaware
and changed our corporate name to Zoom Technologies, Inc. Our operations
continue to be carried out by our wholly owned subsidiary, Zoom Telephonics,
Inc., a Delaware corporation. Our principal executive offices are located at 207
South Street, Boston, MA 02111 and our telephone number is (617) 423-1072.
Products
General
The vast majority of our products facilitate communication of data through the
Internet. Our dial-up modems and integrated services digital network, or ISDN,
modems link PCs and portable information devices through the telephone network
and connected networks, including the Internet and local area networks.
Similarly, our cable modems use the cable-TV cable and our ADSL modems use the
local telephone line to provide a high-speed link to the Internet. Our advanced
networking products, including wireless local area network, or LAN, products,
help to link PCs and other computing devices to each other and to the Internet.
Starting with our acquisition of Tribe Computer Works in 1996, we began shipping
business products that provide remote users shared access to the resources of a
LAN, and connect users of the LAN to the Internet and to remote LANs and
computers.
Dial-Up Modems
We have a broad line of dial-up modems with top data speeds of 56,000 bps,
available in internal, external and PCMCIA models. PC-oriented internal modems
are designed primarily for installation in the PCI or ISA slot of IBM
PC-compatibles. Embedded internal modems are designed to be embedded in non-PC
equipment such as point-of-purchase terminals, kiosks, and set-top boxes. Many
of our external modems are designed to work with any terminal or computer,
including IBM PC-compatibles, the Apple Macintosh and other computers. Our
external models include desktop models and multi-line modems with up to sixteen
modems in an enclosure. Our PCMCIA modems are designed for use with notebook and
sub-notebook computers as well as PDAs (personal digital assistants) equipped
with standard PCMCIA slots. When sold as packaged retail products, our modems
are shipped complete with third-party software that supports the hardware
capabilities of the modem.
56K modems allow users connected to standard phone lines to download data at
speeds up to 56,000 bps when communicating with compatible central sites
connected to digital lines such as ISDN or T1 lines. Those central sites are
typically online services, Internet Service Providers, or remote LAN access
equipment. We began shipping pre-standard K56flextm 56K modems in the second
quarter of 1997. In February 1998, a committee of the International
Telecommunications Union ("ITU") agreed upon the V.90 standard for 56K. V.90 is
now widely deployed in equipment made by central site manufacturers, and most of
our dial-up modem sales include V.90. We are now also shipping V.92 modems,
which offer increased functionality and faster upstream data rates. We expect
V.92 modems to take an increasing and ultimately large share of the dial-up
modem market because of these increased functions.
In March and April of 1999, we acquired substantially all of the modem assets of
Hayes Microcomputer Products, Inc., a former leader in the modem industry. In
July 2000, we acquired the trademark and product rights to Global Village
products. Global Village is a leading modem brand for Apple MacIntosh computers.
We now sell and market dial-up modems under the Zoom, Hayes and Global Village
names, as well as under various other private-label brands developed for some of
our large accounts.
The following sets forth some of the key features incorporated in one or more of
our dial-up modems:
o ZoomGuardtm. ZoomGuard represents the protective circuitry added to our
modems to improve their ability to withstand the effects of lightning
striking a phone line to which the modem is connected. For most modem
manufacturers, lightning is the number one cause of field failures.
o PC Card Guard tm. PC Card Guard represents the protective circuitry added
to our PCMCIA modems to protect against destruction caused by plugging the
modem into a digital PBX phone jack. We were one of the first companies to
develop this useful feature.
o Voice Mail. Voice mail capability allows a PC to serve as an answering
machine with message storage and local or remote message retrieval.
o Channel 2tm. Channel 2 is our trademark for a feature that works with the
optional Call Waiting feature available from some phone companies. Channel
2 permits the modem to recognize an incoming call when the modem is
on-line, so that the user can determine how to handle the call.
o Distinctive Ring. Distinctive Ring is a service offered by telephone
companies that assigns more than one phone number to a single phone
line, with each number ringing differently. This service along with
appropriate modem functionality allows someone to arrange for one phone
number to be answered as a phone line, a second number to be answered
as a fax line, and a third number to be answered as a data line. We
have been issued a United States patent related to our distinctive ring
technology.
o Plug & Play. Microsoft's Windows software supports Plug & Play, a standard
that is intended to allow the installation of Plug & Play-compatible
peripherals like modems with limited hardware configuration by the
end-user.
International Modems.
Most foreign countries have their own telecommunications standards and
regulatory approval requirements for sales of communications products such as
those we offer. As a result, the introduction of new products into international
markets can be costly and time-consuming. In 1993, we introduced our first
dial-up modem approved for selected Western European countries. Since then we
have continued to expand our product offerings internationally. We have received
regulatory approvals for, and are currently selling dial-up modems in a number
of countries, including Australia, Austria, Belgium, Denmark, Finland, Germany,
Hungary, India, Ireland, Italy, Japan, the Netherlands, Poland, Portugal,
Russia, Slovenia, South Africa, Spain, Sweden, Switzerland, and the United
Kingdom. We intend to continue to expand and enhance our product line for our
existing markets and to seek approvals for the sale of our products in new
countries throughout the world.
Multi-line Modems.
In 1996 we began shipping a family of multi-line dial-up modems targeted for
local area network fax and data server applications, computer bulletin boards,
multi-line voice mail, and other applications. The Zoom/MultiLine products hold
up to eight voice dial-up faxmodems in one small external case that includes
status indicators for each dial-up modem. The Hayes Century product line
provides up to 16 dial-up modems in a single enclosure.
ISDN Products.
We have a family of modems for Integrated Service Digital Network, or ISDN,
communications. ISDN is a telephone service that allows existing phone lines to
be used to transmit data digitally. ISDN service permits much higher data
transmission rates than conventional analog telephone service. Basic ISDN
service provides two 64,000 bps channels and one 16,000 bps channel. The higher
rates of data transmission achievable with ISDN can be particularly attractive
for data-intensive applications such as the transmission of graphics and video
images, World Wide Web browsing, or video telephony. In February 1997 we shipped
our first ISDN product. We continue to expand our ISDN product line,
particularly for Europe. In addition, we have integrated ISDN capability into
some of our LAN-oriented business products, including the ZoomAir AP128 wireless
access point.
We have a line of ISDN products, which can transmit and receive data
simultaneously at up to 128,000 bits per second. In addition, in late 2000 we
introduced the following ISDN products:
o a PCI model that plugs into the PCI slot of a Windows PC,
o a USB model that plugs into the USB port of a PC, and
o a serial port model that plugs into the serial port of a PC.
Cable Modems
In general, cable service providers do not allow cable modems to be used on
their networks, unless they have been approved for use on their cable network.
Each cable service provider has its own and evolving approval process, in which
they may require CableLabs(R) certification in addition to their own company
approval. We have obtained CableLabs(R) certification for four types of
DOCSIS-standard cable modems - PCI, USB, Ethernet, and Ethernet/USB models. We
are continuing to work with cable service providers to further expand our reach
and the breadth of our approved product offerings. The approval process has been
and continues to be a significant barrier to entry, as are the strong
relationships with cable service providers enjoyed by incumbent cable equipment
providers like Motorola and Scientific Atlanta.
In 2002 we expect to continue to sell cable modems to cable service providers
and original equipment manufacturers both inside and outside the US. We are
already selling cable modems through some high-volume retailers in the US, and
we hope to expand sales through that channel. So far sales through the retail
channel have been handicapped by a number of factors, including the approval
process described above and the fact that some cable service providers do not
provide a financial incentive to a customer who purchases his own modem rather
than leasing it from the cable service provider. By providing a financial
incentive, typically $10 to $15 per month, some cable service providers
encourage purchase of the cable modem by their customers.
ADSL Modems.
Our ADSL modems incorporate the standards that are most popular with U.S.
telephone companies and Internet Service providers, including G.DMT and G.Lite.
In 2000, we designed and shipped our first ADSL modems, an external USB model
and an internal PCI model. In 2002 we expect to introduce an ADSL Ethernet/USB
model with advanced router features.
Wireless LAN Products.
In December 1998 we began shipping the first models in our ZoomAirtm line of
wireless local area network products. These products connect a notebook or
desktop computer to another computer or an existing local area network using a
wireless data communication standard. Our most recent wireless LAN products
provide an 11 Mbps data rate using the IEEE 802.11b standard. We currently ship
network interface cards that plug into a USB port, or a PCMCIA or PCI slot. We
recently began shipping a wireless gateway with built-in firewall security. Our
product line also includes building-to-building wireless bridges and an access
point for connecting wireless network devices to a wired local area network.
Many of our competitors' wireless products have been difficult to install and
use and we attempt to design products that are exceptionally easy to install and
use.
Full-Color Live-Motion Cameras and Other Video Products.
In late 1997, we shipped the Zoom/Video Cam, a full-color live-motion camera.
The Zoom/Video Cam can be used for video phone calls, video conferences, video
mail, and still image capture. We have limited product development in the video
area, and our primary sales come from cameras that connect to a USB port. We do
not view cameras as key to our product strategy, and do not intend to make a
significant product development effort in this area.
Dialers.
Our dialers simplify the placing of a phone call by dialing digits
automatically. We shipped our first telephone dialer, the Demon Dialer(R), in
1981, and, in 1983, began shipping the Hotshot(TM) dialer. As the dialer market
diminished due to equal access, we focused on modems and other peripherals for
the personal computer market. In the second quarter of 2002, we expect to
commence shipping a new generation of dialers incorporating proprietary
technology. Our proprietary technology includes proprietary hardware, firmware,
and software, and is currently protected by one U.S. patent. These dialers are
well suited to easily route appropriate calls through money-saving long-distance
service providers. In 2001, dialer products represented under 1% of Zoom's
sales.
Sales Channels
General
We sell our products primarily through high-volume retailers and distributors,
value-added resellers, PC system integrators, and OEMs. We support our major
accounts in their efforts to discern strategic directions in the market, to
maintain appropriate inventory levels, and to offer a balanced selection of
products. As we expand our product offerings, particularly in cable, ADSL and
other broadband modems, we are seeking to expand and strengthen our market
channels to include cable service providers, phone companies, and Internet
Service Providers. Expanding our market channels to include significant sales to
these customers has been challenging and we cannot assure that we will be
successful.
During 2001, our customers which accounted for more than 10% of our total
sales were Best Buy Co., Inc., Ingram Micro, Inc., DSG Retail Limited, and
Staples, Inc. Together, these 4 customers accounted for 52.7% of our total
sales. The loss of any of these customers, or a significant reduction in
sales to these customers, could have a material adverse effect on our
business.
High-volume Retailers.
In the United States, we reach the PC retail market primarily through
high-volume retailers. Our extensive United States retail distribution network
includes Best Buy, CDW, Fry's, Micro Electronics, PC Connection, Staples, and
many others.
Distributors.
We sell significant quantities of dial-up modems through distributors, who often
sell to corporate accounts, value-added resellers and other channels that are
generally not served by our high-volume retailers. Our North American
distributors include D&H Distributing, Gates-Arrow, Ingram Micro, and Tech Data.
System Integrators and Original Equipment Manufacturers.
Our OEM customers sell our products under their own name or incorporate our
products as a component of their systems. We seek to be responsive to the needs
of personal computer manufacturers including on-time delivery of high-quality,
reliable, cost-effective products with strong engineering and sales support. We
believe many of these customers also appreciate the improvement in their
products' image due to use of a Zoom or Hayes brand modem.
International Channels.
In international markets, we sell our products primarily through independent
distributors and retailers. Our international distributors include Computer
2000, Criterium, Infotide International, Northamber, and others. Our major
European high-volume retailers include Business Logic, Centromail, DSG Retail
Limited (Dixons and PC World), and others. Our international net sales as a
percentage of total have grown from 8% in 1994 to 37% in 2001. Our revenues from
international sales were $16.5 million in 2001 and $17.2 million in 2000. We
believe sales growth outside of the United States will require substantial
additional investments of resources for product design and testing, regulatory
approvals, and native-language instruction manuals, software, packaging, sales
support, and technical support.
Sales, Marketing and Support
Our sales, support, and marketing are primarily managed from our headquarters in
Boston, Massachusetts. In North America we sell our Zoom, Hayes, Global Village,
and private-label dial-up modem products primarily through commissioned
independent sales representatives managed and supported by our own staff. Most
major cable service providers are serviced by our employees. North American
technical support is primarily handled from our Boston headquarters location and
from our technical support offices in Boca Raton, Florida. We also maintain a
sales, support, and logistics office in the United Kingdom. Warehousing, customs
clearance, shipping, and invoicing for the United Kingdom and some other
European countries are primarily handled by contract with an unaffiliated
specialist in these services located in England. For countries outside North
America and Europe, our in-house staff typically works directly with
country-specific distributors. Our worldwide OEM sales are primarily handled by
our staff in the United States and United Kingdom, who are at times assisted by
our sales staff or commissioned sales representatives. See note 17 to our
accompanying financial statements for geographic information regarding our
sales.
We believe that Zoom, Hayes, and Global Village are widely recognized brand
names. We build upon our brand equity in a variety of ways, including
cooperative advertising, product packaging, trade shows, and public relations.
We generally provide our high-volume retailers with funds to advertise our
products in conjunction with the customers' general advertising. We believe that
this type of advertising efficiently and effectively targets the end-user market
for our products.
We attempt to develop quality products that are user-friendly and require
minimal support. We typically support our claims of quality with product
warranties of one to seven years, depending upon the product. To address the
needs of those end-users of our products who require assistance, we have our own
staff of technical specialists who provide telephone support six days per week.
Our technical support specialists also maintain a significant World Wide Web
support facility that includes email, firmware and software downloads, and the
SmartFactstm Q&A search engine. In 2001 we expanded our European technical
support to enable users in other countries to access support in their own
language. This support is generally provided by our support staff in Boston,
Florida, and the United Kingdom.
Research and Development
Our research and development efforts are focused on developing new products for
PC communications markets, further enhancing the capabilities of existing
products, and reducing production costs. We have developed close collaborative
relationships with certain of our OEM customers and component suppliers, who
work with us to identify and respond to emerging technologies and market trends
by developing products that address these trends. In addition, we purchase modem
and other chipsets that incorporate sophisticated technology, thereby
eliminating the need for us to develop this technology in-house. As of December
31, 2001 we had 33 employees engaged primarily in research and development. Our
research and development team performs electronics hardware design and layout,
mechanical design, prototype construction and testing, component specification,
firmware and software development, product testing, foreign and domestic
regulatory approval efforts, end-user and internal documentation, and
third-party software selection and testing.
During 1999, 2000, and 2001 we expended $6.4 million, $6.2 million, and $5.3
million, respectively, on research and development activities.
Manufacturing and Suppliers
Our products are currently designed for high-volume automated assembly in China,
Mexico, and the United States to help assure reduced costs, rapid market entry,
short lead times, and reliability. For some products we supply large kits of
parts to one of several automated contract manufacturers. For other products,
particularly those manufactured in China, our contract manufacturers also obtain
certain material required to assemble the products based upon a Zoom Telephonics
Approved Vendor List and Parts List. The contract manufacturers insert parts
onto the printed circuit board, with most parts automatically inserted by
machine, solder the circuit board, and in-circuit test the completed assemblies.
Functional test and packaging are sometimes performed by the contract
manufacturer. For the United States and many other markets, functional test and
packaging are more commonly performed at our facilities in Boston, allowing us
to tailor the packaging and its contents for our customers immediately before
shipping. We also perform circuit design, circuit board layout, and strategic
component sourcing in our Boston office.
We usually use one primary contract manufacturer for a given design. We
sometimes maintain back-up production tooling at a second assembler for our
highest-volume products. Our contract manufacturers are normally adequate to
meet reasonable and properly planned production needs; but a fire, natural
calamity, strike, or other significant event at an assembler's facility could
adversely affect our shipments and revenues. Currently, a substantial percentage
of our manufacturing is done by Vtech Communication LTD ("Vtech"). The loss of
Vtech's services or a material adverse change in Vtech's business or in our
relationship with Vtech could materially and adversely harm our business.
Our products include a large number of parts, most of which are available from
multiple sources with varying lead times. However, most of our products include
a sole-sourced chipset as the most critical component of the product. We
currently buy dial-up modem chipsets exclusively from the two highest-volume
dial-up modem chipset manufacturers, Conexant Systems, Inc. (formerly Rockwell)
and Agere Systems Inc. (formerly Lucent). Conexant and Agere have significant
resources for semiconductor design and fabrication, analog and digital signal
processing, and communications firmware development. Integrated circuit product
areas covered by one or both companies include dial-up modems, ADSL modems,
cable modems, wireless networking, home phone line networking, routers, and
gateways. We also buy chipsets from Globespan for some of our ADSL modems and
from Intersil Corporation for our ZoomAir wireless network interface cards.
Due to capacity constraints, we have experienced delays in receiving shipments
of modem chipsets in the past, and we may experience such delays in the future.
Moreover, there can be no assurance that a chipset supplier will, in the future,
sell chipsets to us in quantities sufficient to meet our needs or that we will
purchase the specified dollar amount of products necessary to receive
concessions and incentives from a chipset supplier. An interruption in a chipset
supplier's ability to deliver chipsets, a failure of our suppliers to produce
chipset enhancements or new chipsets on a timely basis and at competitive
prices, a material increase in the price of the chipsets, our failure to
purchase a specified dollar amount of products or any other adverse change in
our relationship with modem component suppliers could have a material adverse
effect on our results of operations.
Competition
The PC communication products industry is intensely competitive and
characterized by aggressive pricing practices, continually changing customer
demand patterns and rapid technological advances and emerging industry
standards. These characteristics result in frequent introductions of new
products with added capabilities and features, and continuous improvements in
the relative functionality and price of modems and other PC communications
products. Our operating results and our ability to compete could be adversely
affected if we are unable to:
o successfully anticipate customer demand accurately;
o manage our product transitions, inventory levels and manufacturing
process efficiently;
o distribute or introduce our products quickly in response to customer
demand and technological advances;
o differentiate our products from those of our competitors; or
o otherwise compete successfully in the markets for our products.
Our primary competitors by product group include the following:
o Dial-up modem competitors: Actiontec, Askey, Best Data, Creative Labs,
Elsa, GVC, Intel, SONICblue, and US Robotics.
o Cable modem competitors: Motorola, Samsung, Scientific Atlanta, Thomson
and Toshiba.
o ADSL modem competitors: Siemens (formerly Efficient Networks) and
Westell.
o Wireless Local Area Network competitors: 3Com, Agere, Buffalo
Technologies, Cisco Systems, D-link, Intel, Linksys, Proxim, and SMC.
Many of our competitors and potential competitors have more extensive financial,
engineering, product development, manufacturing, and marketing resources than we
do.
The principal competitive factors in our industry include the following:
o product performance, features and reliability;
o price;
o brand image;
o product availability and lead times;
o size and stability of operations;
o breadth of product line and shelf space;
o sales and distribution capability;
o technical support and service;
o product documentation and product warranties;
o relationships with providers of broadband access services; and
o compliance with industry standards.
We believe we are competitive in each of these areas with respect to our dial-up
modems. We believe we are competitive in many of these areas with respect to
cable modems, ADSL modems, and wireless local area networking products. We
believe, however, that with the decline of the dial-up modem market, our future
success will depend in large part on our ability to more successfully compete in
and penetrate the broadband, cable, and ADSL modem markets.
Cable and ADSL modems transmit data at significantly faster speeds than dial-up
modems, which still account for the vast majority of our revenues. Cable and
ADSL modems, however, are generally more expensive than dial-up modems and
cannot be used with conventional telephone service. In addition, the use of
cable and ADSL modems is currently impeded by a number of technical and
infrastructure limitations. We began shipping both cable and ADSL modems in the
year 2000. In the year 2001, our competitors' cable and ADSL modem products were
sold in the greatest number through cable service operators, phone companies,
and Internet Service Providers. Large quantities of cable modems and ADSL modems
are still not sold through retailers and distributors, our strongest market
channels. We are continuing to attempt to sell our broadband products through
these new sales channels, as well as our traditional sales channels, but these
new sales channels have been challenging markets. The high volume purchasers of
cable and ADSL modems are concentrated in a relatively few large cable,
telecommunications and internet service providers which offer broadband modem
services to their customers. The cable, telecommunications and internet service
providers also have extensive and varied approval processes for modems to be
approved for use on their network. These approval processes are expensive, time
consuming and continually changing. Successfully penetrating the broadband modem
market, therefore presents a number of challenges, including:
o the current limited retail market for broadband modems;
o the relatively small number of cable, telecommunications and internet
service providers that make up a substantial part of the market for
broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive, uncertain and varied approval process of
the various cable service providers; and
o the strong relationships with cable service providers enjoyed by incumbent
cable equipment providers like Motorola and Scientific Atlanta.
Our initial sales of broadband products have been adversely affected by all of
these factors. There can be no assurance that we will compete effectively or be
able to successfully penetrate these new market channels.
Intellectual Property Rights
We rely primarily on a combination of copyrights, trademarks, trade secrets and
patents to protect our proprietary rights. We have trademarks and copyrights for
our firmware (software on a chip), printed circuit board artwork, instructions,
packaging, and literature. We also have four patents and one pending patent
application in the United States. There can be no assurance that any patent
application will be granted or that any patent obtained will provide protection
or be of commercial benefit to us, or that the validity of a patent will not be
challenged. Moreover, there can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop comparable or superior technologies.
We license certain technologies used in our products, typically bundled
software, on a non-exclusive basis. In addition we purchase chipsets that
incorporate sophisticated technology. We have received, and may receive in the
future, infringement claims from third parties relating to our products and
technologies. We investigate the validity of these claims and, if we believe the
claims have merit, we respond through licensing or other appropriate actions.
Certain of these past claims have related to technology included in modem
chipsets. We forwarded these claims to the appropriate vendor. If we or our
component manufacturers were unable to license necessary technology on a
cost-effective basis, we could be prohibited from marketing products containing
that technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action taken
against it.
Government Regulation
In addition to obtaining approvals and certifications of our broadband products
from CableLabs(R) and, in some cases, the actual cable, telephone or internet
service provider, all of our North American products are required to meet United
States government regulations, including regulations of the United States
Federal Communication Commission, known as the FCC, which regulate equipment,
such as modems, that connects to the public telephone network. The FCC also
regulates electromagnetic radiation emissions. For each of our products sold in
most foreign countries, specific regulatory approvals must be obtained for
matters such as electrical safety, manufacturing standards, country-specific
telecommunications equipment requirements and electromagnetic radiation and
susceptibility requirements. We have received regulatory approvals for certain
modems in Australia, Austria, Belgium, Bulgaria, China, Cypress, Denmark,
Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Israel,
Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, Russia,
Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland,
Turkey, and the United Kingdom. We expect to continue to seek and receive
approvals for new products in a large number of countries throughout the world.
The regulatory process can be time-consuming and can require the expenditure of
substantial resources. In many foreign countries, obtaining required regulatory
approvals may take significantly longer than in the United States. There can be
no assurance that the FCC or foreign regulatory agencies will grant the
requisite approvals for any of our products on a timely basis, if at all. United
States and foreign regulations regarding the manufacture and sale of
telecommunications devices are subject to future change. We cannot predict what
impact, if any, such changes may have upon its business.
Seasonality
We believe our sales are somewhat seasonal, with increased sales generally
occurring in mid-August through November. We expect that our quarterly results
will continue to fluctuate in the future as a result of seasonality and other
factors.
Backlog
Our backlog as of March 1, 2002 was $1.1 million, and on March 1, 2001 was $2.9
million. Many orders included in backlog may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of our net sales for any future period.
Employees
As of December 31, 2001 we had 214 full-time employees (including employees
hired on a temporary basis) versus 313 in 2000. Of the 2001 total, 33 were
engaged in research and development, 95 were involved in purchasing, assembly,
packaging, shipping and quality control, 51 were engaged in sales, marketing and
technical support, and the remaining 35 performed accounting, administrative,
management information systems, and executive functions. Our temporary employees
were comprised of 4 individuals at December 31, 2001. Most of these temporary
employees were employed in manufacturing. None of our employees are represented
by a labor union.
Our Executive Officers
The names and biographical information of our current executive officers, are
set forth below:
Name Age Position with Zoom
------------------------------------------------------------------------------
Frank B. Manning 53 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 50 Executive Vice President and Director
Robert A. Crist 58 Vice President of Finance and Chief
Financial Officer
Terry J. Manning 50 Vice President of Sales and Marketing
Dean N. Panagopoulos 44 Vice President of Network Products
Deena Randall 48 Vice President of Operations
Richard Kumpf 52 Vice President of Engineering
Frank B. Manning is a co-founder of our company. Mr. Manning has been our
president, chief executive officer, and a director since May 1977. He has served
as our chairman of the board since 1986. He earned his BS, MS and PhD degrees in
Electrical Engineering from the Massachusetts Institute of Technology, where he
was a National Science Foundation Fellow. Mr. Manning was a director of
MicroTouch Systems, a NASDAQ-listed leader in touchscreen technology, from 1993
until their acquisition by 3M in early 2001. Since 1998 Mr. Frank Manning has
also been a director of the Massachusetts Technology Development Corporation, a
public purpose venture capital firm that invests in seed and early-stage
technology companies in Massachusetts.
Peter R. Kramer is a co-founder of our Company. Mr. Kramer has been our
executive vice president and a director since May 1977. He earned his BA
degree in 1973 from SUNY Stony Brook and his MFA degree from C.W. Post
College in 1975.
Robert A. Crist joined us in July 1997 as vice president of finance and chief
financial officer. From April 1992 until joining us, Mr. Crist served in various
capacities at Wang Laboratories, Inc., a computer software and services company,
including chief financial officer for the software business. Prior to 1992 Mr.
Crist served in various capacities at Unisys Corporation, including assistant
corporate controller, corporate director of business planning and analysis, and
corporate manufacturing and engineering controller. Mr. Crist earned his BA
degree from Pennsylvania State University and he earned his MBA from the
University of Rochester in 1971.
Terry J. Manning joined us in 1984 and served as corporate communications
director from 1984 until 1989 when he became the director of our sales and
marketing department. Terry Manning is Frank Manning's brother. Terry Manning
earned his BA degree from Washington University in St. Louis in 1974 and his
MPPA degree from the University of Missouri at St. Louis in 1977.
Dean N. Panagopoulos joined us in February 1995 as director of information
systems. In July 2000 Mr. Panagopoulos was promoted to the position of vice
president of network products. From 1993 to 1995, Mr. Panagopoulos worked as an
independent consultant. From 1991 to 1993, Mr. Panagopoulos served as director
of technical services for Ziff Information Services, a major outsourcer of
computing services. He attended the Massachusetts Institute of Technology from
1975 to 1978 and earned his BS degree in Information Systems from Northeastern
University in 1983.
Deena Randall joined us in 1977 as our first employee. Ms. Randall has served in
various senior positions within our organization and has directed our operations
since 1989. Ms. Randall earned her BA degree from Eastern Nazarene College in
1975.
Richard Kumpf joined us in July 2000 as vice president of engineering. From
March 1995 until joining us Mr. Kumpf served in various capacities at Agilent
Technologies (formerly part of Hewlett-Packard), most recently as general
manager of the cable-rf business unit. Prior to 1995 Mr. Kumpf served in various
capacities at Motorola Inc., including director of product development &
information technology. Mr. Kumpf earned a BS degree in Engineering from
Northeastern University in 1972 and an MS degree in Engineering from Washington
University in St. Louis in 1974.
ITEM 2 - PROPERTIES
Our corporate headquarters occupies approximately 56,000 square feet out of
approximately 72,000 square feet in adjacent, connected buildings at 201 and 207
South Street, Boston, Massachusetts. Approximately 16,000 square feet of this
property is leased to third parties. We purchased these buildings in April 1993.
In January 2001, we received $6.0 million in financing by securing a mortgage on
this property. This is a 20 year direct reduction mortgage. The interest rate is
fixed for one year, based on the one year Federal Home Loan Bank rate plus 2.5 %
per annum. The rate is adjusted on January 10th of each calendar year commencing
on January 10, 2002. In 2001, the interest rate was 7.76%. As of January 10,
2002, the rate of interest was changed to 4.97%.
In August 1996, we entered into a five-year lease for a 77,428 square foot
manufacturing and warehousing facility at 645 Summer Street, Boston, MA. On
February 28, 2001, we exercised our option to extend this lease for an
additional five years. We believe that this space provides us with enough
manufacturing space for our current operations and could support significant
growth.
In March 1999, we assumed an office lease from Hayes Microcomputer Products,
Inc. at 430 Frimley Business Park, Camberly Surrey, UK. The landlord has
notified us that they would like to exercise their option to exercise the break
clause in the lease in February 2003. We have agreed to this contract
termination since the leased space exceeds our current requirements. We are
looking for a smaller office to lease which should result in savings in rent
expenses. We do not expect the moving expenses to be significant.
In July 2000, we entered into a sublease, as a tenant at will, for approximately
4,500 square feet at 1601 Clint Moore Road, Boca Raton, Florida. We primarily
use this facility as a technical support facility. We entered into this sublease
when we acquired the modem assets of Global Village and Boca Global.
ITEM 3 - LEGAL PROCEEDINGS
No material litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered in this report.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"ZOOM." The following table sets forth, for the periods indicated, the high and
low sale prices per share of common stock, as reported by the Nasdaq National
Market.
Fiscal Year Ending December 31, 2000 High Low
---- ---
First Quarter...................... $ 18.875 $ 7.188
Second Quarter..................... 14.125 4.250
Third Quarter...................... 10.500 5.813
Fourth Quarter..................... 8.125 3.125
Fiscal Year Ending December 31, 2001
First Quarter...................... $ 4.500 $ 2.188
Second Quarter..................... 3.320 2.250
Third Quarter...................... 3.100 1.050
Fourth Quarter..................... 1.800 1.100
As of March 20, 2002, there were 7,860,866 shares of our common stock
outstanding and approximately 264 holders of record of our common stock.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the fourth quarter of 2001.
Dividend Policy
We have never declared or paid cash dividends on our capital stock and do not
plan to pay any cash dividends in the foreseeable future. Our current policy is
to retain all of our earnings to finance future growth.
ITEM 6 - SELECTED FINANCIAL DATA
The following table contains our selected consolidated financial data and is
qualified in its entirety by the more detailed consolidated financial statements
and notes thereto included elsewhere in this report. Our statement of operations
data for the years ending December 31, 1999, 2000, and 2001 and our balance
sheet data as of December 31, 2000 and 2001 have been derived from our
consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants, and are included elsewhere in this
report. Our statement of operations data for the years ending December 31, 1997
and 1998 and our balance sheet data as of December 31, 1997, 1998, and 1999 have
been derived from our consolidated financial statements, which have been audited
by KPMG LLP and are not included in this report. This data should be read in
conjunction with the consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
Years Ending December 31,
----------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands) except share amounts
Statement of Operations Data:
Net sales............................. $ 63,816 $ 61,894 $ 64,088 $ 59,750 $ 43,709
Cost of goods sold.................... 55,636 45,181 40,550 39,404 35,193
------ ------ ------ ------ ------
Gross profit....................... 8,180 16,713 23,538 20,346 8,516
----- ------ ------ ------ -----
Operating expenses:
Selling............................ 11,103 11,801 13,571 12,714 9,620
General and administrative......... 4,957 4,976 6,276 6,228 7,938
Research and development........... 4,182 4,449 6,425 6,249 5,328
----- ----- ----- ----- -----
Total operating expenses 20,242 21,226 26,272 25,191 22,886
------ ------ ------ ------ ------
Operating income (loss)............ (4,513) (2,734) (4,845) (14,370) (12,062)
Other income (expense) net............ 741 1,074 737 469 (159)
--- ----- --- --- -----
Income (loss) before income taxes.. (11,321) (3,439) (1,997) (4,376) (14,529)
Income tax expense (benefit).......... (4,189) (1,287) (588) (1,299) 3,800
------- ------- ----- ------- -----
Net income (loss).................. (7,132) (2,152) (1,409) (3,077) (18,329)
======= ======= ======= ======= ========
Earnings (loss) per common and
common equivalent share:
Basic and diluted.................. $ (0.95) $ (0.29) $ (0.19) $ (0.40) $ (2.33)
====== ====== ====== ====== ======
Weighted average common and
common equivalent shares:
Basic and diluted.................. 7,469 7,474 7,483 7,757 7,861
Years Ending December 31,
----------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $ 35,064 $ 33,376 $ 29,573 $ 23,562 $ 18,218
Total assets 48,515 43,560 43,072 46,960 29,185
Long-term obligations - - 481 369 6,001
Total stockholders' equity 40,503 38,425 37,514 36,747 18,416
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the consolidated financial statements included
elsewhere in this report and the information described under the caption "Risk
Factors" below.
Overview
On February 28, 2002, we completed a change in our jurisdiction of incorporation
from Canada to the State of Delaware. In connection with the change in
jurisdiction, we changed our corporate name from Zoom Telephonics, Inc. to Zoom
Technologies, Inc. These changes were accomplished through a process called a
continuance under the laws of Canada and domestication under the laws of the
State of Delaware. The Company continues to trade on the Nasdaq National Market
under the symbol "ZOOM", and to operate through its wholly owned Delaware
subsidiary, Zoom Telephonics, Inc., which has not changed its name.
We were established in 1977, and initially produced and marketed speed dialers
and other specialty telephone accessories. We shipped our first dial-up modem in
1983 and our first dial-up faxmodem in 1990. In 2001, sales of dial-up faxmodems
and related products comprised approximately 83% of our net sales. We sell our
dial-up modems and related products both domestically and internationally
through high-volume retailers and distributors, and to PC manufacturers and
other OEMs. In 2000 and 2001, we made a significant investment in broadband
modems, namely cable modems and ADSL modems, and wireless networking products.
Our hope is to increase our sales of these products, in addition to other
products including PC cameras and telephone dialers.
We continually seek to improve our product designs and manufacturing approach in
order to reduce our costs. We pursue a strategy of outsourcing rather than
internally developing our faxmodem chipsets, which are application-specific
integrated circuits that form the technology base for our modems. By outsourcing
the chipset technology, we are able to concentrate our research and development
resources on modem system design, leverage the extensive research and
development capabilities of our chipset suppliers, and reduce our development
time and associated costs and risks. As a result of this approach, we are able
to quickly develop new and innovative products while maintaining a relatively
low level of research and development expense as a percentage of sales. We also
outsource aspects of our manufacturing to contract manufacturers as a means of
reducing our fixed labor costs and capital expenditures, and to provide us with
greater flexibility in our production capacity.
The markets for dial-up faxmodems have been characterized by rapid technological
change, frequent product introductions, evolving industry requirements, short
product life cycles, and declining average selling prices. In recent years, the
market for after-market sales of dial-up faxmodems has declined, as personal
computer (PC) manufacturers have incorporated a modem as a built-in component in
most consumer PCs. A new dial-up modem standard, known as V.92 may provide an
improvement in after-market dial-up modem sales, but this improvement is
dependent on the installation of compatible equipment by the Internet Service
Providers. The installation of V.92 equipment by the Internet Service Providers
has begun, but so far this has been deployed slowly.
In response to increased demand for faster connection speeds and increased modem
functionality, we have invested resources to expand our product line to include
cable and ADSL modems and other broadband access products. We are also planning
to introduce a new generation of telephone dialers in the second quarter of
2002.
Critical Accounting Policies
The following is a discussion of what we view as our more significant accounting
policies. These policies are also described in the notes to our consolidated
financial statements. As described below, management judgments and estimates
must be made and used in connection with the preparation of our financial
statements. Material differences could result in the amount and timing of our
revenue and expenses for any period if we made different judgments or used
different estimates.
Revenue Recognition. We sell hardware products to our customers. The products
include dial-up modems, embedded modems, cable modems, PC cameras, ISDN and ADSL
modems, telephone dialers, and wireless and wired networking equipment. We
generally do not sell software or services. We earn a small amount of royalty
revenue. We derive our revenue primarily from the sales of hardware products to
three types of customers:
o computer peripherals retailers,
o computer product distributors, and
o original equipment manufacturers (OEMs).
We sell a very small amount of our hardware products to direct consumers or to
any customers via the Internet. We recognize revenue for all three types of
customers at the point when the customers take legal ownership of the delivered
products. Legal ownership passes from Zoom to the customer based on the
contractual FOB point specified in signed contracts and purchase orders, which
are both used extensively. Many of our customer contracts or purchase orders
specify FOB destination. Since it would be impractical to verify ownership
change for each individual delivery to the FOB destination point, we estimate
the day the customer receives delivery based on our ship date and the carrier's
published delivery schedule specific to the freight class and location.
Our revenues are reduced by certain events which are characteristic of hardware
sales to computer peripherals retailers. These events are product returns, price
protection refunds, store rebates, and consumer mail-in rebates. Each of these
is accounted for as a reduction of revenue based on careful management
estimates, which are reconciled to actual customer or end-consumer refunds and
credits on a monthly or quarterly basis. The estimates for product returns are
based on recent historical trends plus estimates for returns prompted by new
product introductions, announced stock rotations, announced customer store
closings, etc. Management analyzes historical returns, current economic trends,
and changes in customer demand and acceptance of our products when evaluating
the adequacy of sales return allowances. Our estimates for price protection
refunds require a detailed understanding and tracking by customer, by sales
program. Estimated price protection refunds are recorded in the same period as
the announcement of a pricing change. Information from customer
inventory-on-hand reports or from direct communications with the customers is
used to estimate the refund, which is recorded as a reserve against accounts
receivable and a reduction of current period revenue. Our estimates for consumer
mail-in rebates are comprised of actual rebate claims processed by the rebate
redemption centers plus an accrual for an estimated lag in processing. Our
estimates for store rebates are comprised of actual credit requests from the
eligible customers.
For the quarter ending March 31, 2002, we plan to adopt FASB Emerging Issues
Task Force Issue No. 00-14 "Accounting for Certain Sales Incentives" and Issue
No. 00-25 "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products." The
application of the guidance in Issue No. 00-14 and No. 00-25 will result in a
change in the manner in which we record certain types of discounts and sales and
marketing incentives that are provided to our customers. We have historically
recorded certain types of these incentives as marketing expenses. Under Issue
No. 00-14 and No. 00-25, we will record these incentives as reductions of
revenue for the current and prior periods. This change will reduce revenues,
which, in turn, will reduce gross margins. The offset will be an equal reduction
of selling expenses. There will not be a change in net income (loss) for either
the historical periods restated or the quarter ending March 31, 2002. The impact
of the adoption of Issue No. 00-14 and 00-25 on the years 2000 and 2001 is shown
in footnote 4 to our accompanying audited consolidated financial statements. To
ensure that the discounts and sales and marketing incentives are recorded in the
proper period, we do extensive tracking and documenting by customer, by period,
and by type of marketing event. This tracking includes reconciliation to the
accounts receivable records for deductions taken by our customers for these
discounts and incentives.
Accounts Receivable Valuation. We establish accounts receivable reserves for
product returns, store rebates, consumer mail-in rebates, price protection
refunds, and bad debt. These reserves are drawn down as actual credits are
issued to the customer's accounts. We purchase accounts receivable insurance on
virtually all of our invoices. In recent years, if any customer receivable could
not be insured and we determined that collection of a fee was not reasonably
assured, we did not accept the customer's order. Our bad-debt write-offs for
2000 and 2001 were .3% and .2% of total revenue, respectively.
Inventory Valuation and Cost of Goods Sold. Inventory is valued on a standard
cost basis where the material standards are periodically updated for current
material pricing. Reserves for obsolete inventory are established by management
based on usability reviews performed each quarter. Our reserves against this
inventory range from 0% to 100%, based on management's estimate of the
probability that the materials will not be consumed. At December 31, 2001, 44%
of the cost value of the excess over the projected five month usage was covered
by our obsolescence reserve. We follow a different process for our broadband and
wireless inventory. We do not believe that at the present time we can reliably
determine the usability of our broadband inventory because of the inherent
unpredictability of securing orders with the large cable operators and telephone
companies that currently represent the majority of our opportunities for
broadband product sales. In the second half of 2000, when industry expectations
were very high for expansion of the broadband and wireless markets, we purchased
parts to support our aggressive forecast for a ramp-up of sales of cable modems,
ADSL modems, and wireless networking products. This resulted in a significant
excess inventory position of materials. During 2001, the market selling prices
for the broadband and wireless products declined significantly because of an
industry-wide oversupply. During the year the sales prices for many of the
products dropped below our cost and we then valued our inventory on a "lower of
cost or market" basis. Our valuation process is to compare our cost to the
selling prices each quarter, and if the selling price of a product is less than
the "if completed" cost of our inventory, we permanently write-down the
inventory on a "lower of cost or market" basis. At December 31, 2001, after the
write-downs and the recording of excess and obsolete reserves, the net value of
our broadband and wireless inventory is $4.1 million. Inventories, once
reserved, are not written back up as such reserve adjustments are considered to
be a permanent decrease to the cost basis of the excess or obsolete inventory.
We have entered into supply arrangements with suppliers of some components that
include price and other concessions, including no-charge components, for meeting
certain purchase requirements or commitments. Under these arrangements, we are
committed to purchase at least $8.0 million of components over the 30-month
period commencing on January 1, 2002, provided that those components are offered
at competitive terms and prices. We are also required to purchase either a
minimum percentage, as measured by unit purchases or dollar amount of a certain
type of component from a supplier over a two-year period commencing on January
1, 2002. In connection with these arrangements, we are entitled to receive at
least $3.0 million of no-charge components, based upon the supplier's market
price for the components, and other pricing concessions based upon our purchase
volumes. We received $1.2 million of these no-charge components in the fourth
quarter of 2001. At December 31, 2001, the gross inventory value of $1.2 million
was offset by a $1.2 million profit reserve in inventory, yielding a net
inventory value of zero. We have received an additional $1.8 million of
no-charge components during the first quarter of 2002. We expect that the $3.0
million total market value of "no charge" components will be consumed in our
manufacturing process and shipped in finished products to customers in 2002. If
this occurs, our cash flow in 2002 will improve by $3.0 million, as we expect to
avoid the purchase and payment of an equivalent dollar amount. Our statement of
operations will not reflect this same impact in 2002. The favorable impact to
the Company's statement of operations will be recognized on a delayed basis as a
purchase discount over the total number of components acquired through the
supply agreement (see note 7 (b) to the consolidated financial statements).
Valuation and Impairment of Intangible Assets. We assess the impairment of our
goodwill assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. We recorded goodwill for two
acquisitions, Tribe Computer Works, Inc. in 1996 and certain assets of Hayes
Microcomputer Products, Inc. in 1998. The goodwill values for Tribe and Hayes
were being amortized over 13 years and 5 years, respectively. In 2001, we
decided that based on our history of negative cash flows from operations, a
forecast of future positive cash flows could not be sufficiently relied upon to
justify retaining the remaining goodwill assets on the consolidated balance
sheet. Therefore, we recorded an impairment charge of $2.3 million in 2001. As
of December 31, 2001, our net goodwill asset value on our consolidated balance
sheet was zero.
Valuation and Impairment of Deferred Tax Assets.
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes. This process involves the estimation of
our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in our consolidated balance sheet. We must then assess the likelihood
that our deferred tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations.
Significant management judgment is required in determining our provision for
income taxes and any valuation allowance recorded against our net deferred tax
assets. In 2001, we recorded a $3.8 million income tax charge to reflect an
additional increase in our deferred tax asset valuation allowance. This is equal
to 100% of the tax benefits derived from our 2001 pre-tax losses and certain of
our pre-tax losses prior to 2001. Management's decision to record the valuation
allowance was based on the uncertain recoverability of the deferred tax asset
balance. There is an exception for our specific tax planning strategy to sell
our headquarters building in Boston. The amount of the projected tax profit from
this sale has been used to support the $2.012 million deferred tax asset
remaining on our balance sheet as of December 31, 2001. We believe that our
accounting treatment is in accordance with the provisions of the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Results of Operations
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales:
Years Ending December 31,
------------------------------
1999 2000 2001
---- ---- ----
Net sales................................. 100.0% 100.0% 100.0%
Cost of goods sold........................ 63.3 65.9 80.5
---- ---- ----
Gross profit.......................... 36.7 34.1 19.5
Operating expenses:
Selling............................... 21.2 21.3 22.0
General and administration............ 9.8 10.4 18.2
Research and development.............. 10.0 10.5 12.2
---- ---- ----
Total operating expenses.............. 41.0 42.2 52.4
---- ---- ----
Operating loss............................ (4.3) (8.1) (32.9)
Other income, net.................... 1.2 .8 (.3)
--- -- ----
Loss before income taxes.................. (3.1) (7.3) (33.2)
Income tax benefit................... (0.9) (2.2) 8.7
----- ----- ---
Net loss.................................. (2.2)% (5.1)% (41.9)%
===== ===== ======
Year Ending December 31, 2001 Compared to Year Ending December 31, 2000
Net Sales. Our net sales decreased 26.8% to $43.7 million in 2001 from $59.8
million in 2000. Our sales decline resulted primarily from our 22%
year-over-year net sales decline of dial-up modem units combined with a 10%
average sales price decline. Our sales mix shifted slightly away from dial-up
modems in 2001 compared to 2000. In 2000, 92% of our net sales were generated
from sales of dial-up modem products. In 2001, 83% of our net sales were
generated from sales of dial-up modem products. The change was due to an
increased mix of sales for cable modems, embedded modems, and ISDN modems.
Our net sales in North America decreased by 36.0% to $27.2 million in 2001,
compared to our net sales in 2000. Our 2001 international sales decreased by
4.2% to $16.5 million, compared to our net sales in 2000. The net sales decline
in 2001 compared to 2000 in North America resulted from the overall dial-up
modem U.S. market decline, the loss of Office Depot as a customer, and a decline
in the average selling price of dial-up modems.
Gross Profit. Our gross profit was $8.5 million in 2001 compared to $20.3
million in 2000. Our gross profit as a percentage of net sales decreased to
19.5% in 2001 from 34.1% in 2000. The primary reason for this decline of 14.6
percentage points was $4.6 million of obsolescence and inventory revaluation
expenses in 2001 compared to $.3 million in similar types of expenses in 2000.
The major portion of the $4.6 million expense was for "lower of cost or market"
write-downs of broadband inventory. The inventories in question were purchased
in 2000. Excluding the $4.6 million and $.3 million of inventory obsolescence
and revaluation in 2001 and 2000, respectively, our gross profit as a percentage
of net sales in 2001 was 30.0% compared to 34.6% in 2000. This year-over-year
4.6 percentage points drop was primarily due to a production volume decrease,
which resulted in higher fixed manufacturing costs per unit shipped, and the 10%
average selling price decline for dial-up modems.
Selling Expenses. Selling expenses decreased 24.3% to $9.6 million in 2001 from
$12.7 million in 2000. Selling expenses as a percent of net sales increased to
22.0% in 2001 from 21.3% in 2000. The $3.1 million decrease was the result of
significant reductions in both variable and fixed selling expenses, including
staff reductions, cooperative advertising, and sales commissions. The staff
reductions took place throughout the year.
General and Administrative Expenses. General and administrative expenses
increased $1.7 million to $7.9 million in 2001 from $6.2 million in 2000. The
year-over-year increase resulted from a $2.3 million write-off of all of our
positive goodwill assets discussed above under the caption "Critical Accounting
Policies". Excluding the goodwill asset write-offs, general and administrative
expenses decreased $.5 million, or 10%, to $5.7 million in 2001 from $6.2
million in 2000, or to 13.0% from 10.3% as a percentage of net sales,
respectively. The $.5 million reduction of general and administrative expenses
resulted primarily from reductions in personnel and related expenses, partially
offset by increased legal expense and filing expenses associated with our recent
change of our jurisdiction of incorporation from Canada to the United States.
Staff reductions occurred throughout the year.
Research and Development Expenses. Research and development expenses decreased
14.7% to $5.3 million in 2001 from $6.2 million in 2000. Research and
development expenses as a percent of net sales increased to 12.2% in 2001 from
10.5% in 2000. The dollar decrease in research and development expenses was due
to reduced personnel and related expenses and industry and government approval
costs, primarily associated with decreased engineering activity on broadband and
wireless product development. Staff reductions occurred throughout the year.
Other income (expense). Other income (loss), net changed from income of $.47
million in 2000 to a loss of $.16 million in 2001. Included in other income
(loss) are interest income (expense), other income and non-interest income, and
equity losses of an affiliate.
o Interest Income. Interest income decreased to $.20 million in 2001 from
$.48 million in 2000. The decrease was the result of our lower earned
interest rate and lower average invested cash balance during 2001 compared
to 2000. The average interest rate earned in 2001 was approximately 250
basis points lower in 2001 than in 2000.
o Interest expense. Interest expense increased to $.45 million in 2001 from
$0 in 2000. The interest expense increase is due to the interest payments
for the $6.0 million mortgage taken out in January 2001 on our
headquarters building.
o Equity in losses of Affiliate. Our affiliate equity losses were $.14
million in 2001 compared to $.22 million in 2000. Our investment balance
in the affiliate has been reduced to $.06 million at December 31, 2001.
o Other Income, Net. Other income and non-interest income remained constant
at $.24 million in 2001 and 2000. Activity in this account includes other
income of $.12 million for an unexpected recovery of funds in a dispute.
There was slightly lower rental income in 2001 compared to 2000.
Income Tax Expenses (Benefit). We did not record any net tax benefit to offset
our $14.3 million pre-tax loss in 2001. In addition, we recorded a $3.8 million
income tax charge to increase our valuation allowance against our net deferred
tax asset due to our operating results, both recent and projected, and the lower
market value of our real estate. This accounting treatment is described in
further detail under the caption "Critical Accounting Policies" above and in
footnote 12 to the audited consolidated financial statements.
Year Ending December 31, 2000 Compared to Year Ending December 31, 1999
Net Sales. Our net sales decreased 6.8% to $59.8 million in 2000 from $64.1
million in 1999. Our sales decline resulted from overall lower average selling
prices for our products, which offset an approximate 7% increase in unit sales
in 2000 compared to 1999. In both 2000 and 1999, more than 90% of our sales were
dial-up modem products.
Our net sales to retailers and distributors in the United States decreased by
5.9% to $40.2 million in 2000. Our sales decline was considerably less than the
total retail market sales decline of dial-up modems in the USA. According to PC
Data, a point-of-sale market tracking organization for the computer industry,
our market share of dial-up modems at surveyed USA retailers increased in 2000
versus 1999 both in dollars and in unit sales.
Our worldwide net sales to OEM customers increased by 84.7% to $4.5 million in
2000, reflecting our first significant sale in the OEM embedded modem market.
Our international sales to retailers and distributors decreased by 21.0% to
$15.0 million in 2000.
Gross Profit. Gross profit as a percentage of net sales decreased to 34.1% in
2000 from 36.7% in 1999. Our average selling prices declined year over year by
more than 10%. Materials cost and manufacturing cost were also reduced but they
could not be reduced to the same extent, yielding a gross profit reduction.
Selling Expenses. Selling expenses decreased 6.3% to $12.7 million in 2000 from
$13.6 million in 1999. Selling expenses as a percent of net sales increased
slightly to 21.3% in 2000 from 21.2% in 1999. The dollar decrease was primarily
the result of reduced selling expenses in our United Kingdom office and reduced
commissions.
General and Administrative Expenses. General and administrative expenses
decreased .8% to $6.2 million in 2000 from $6.3 million in 1999. General and
administrative expenses as a percent of net sales increased to 10.4% in 2000
from 9.8% in 1999. The dollar decrease was primarily due to the result of
reduced legal expenses, administrative support costs in our office in the United
Kingdom, and bad debt expense, which were partially offset by increases in
depreciation and amortization expenses and employee health insurance.
Research and Development Expenses. Research and development expenses decreased
2.8% to $6.2 million in 2000 from $6.4 million in 1999. Research and development
expenses as a percent of net sales increased to 10.5% in 2000 from 10.0% in
1999. The dollar decrease in research and development expenses was primarily due
to reduced expenses in our United Kingdom office and lower spending for
reproduction materials, consultants, and recruiting which was partially offset
by increases in spending for industry and government approvals.
Interest Income. Net interest income decreased to $.45 million in 2000 from $.55
million in 1999. The decrease was the result of our lower average cash balances
during 2000 compared to 1999. The interest income impact of lower average cash
balances was partially offset by higher interest rates. The interest rate earned
in 2000 was approximately 90 basis points higher than earned in 1999.
Equity in Losses of Affiliate. Our affiliate equity losses were $.22 million in
2000 compared to $.02 million in 1999. Our original investment in the affiliate
was $.3 million.
Other Income, Net. Other income and non-interest income increased to $.24
million in 2000 from $.22 million in 1999. The increase was primarily the result
of higher rental income in 2000 compared to 1999.
Income Tax Benefit. Our tax benefit of $1.3 million in 2000 represents an
effective tax rate of 29.7% compared to a 29.5% rate in 1999. In both 1999 and
2000, we determined that it was more likely than not that certain state tax
benefits would not be realized. In assessing the realizability of deferred tax
assets, we consider whether it is more likely than not that some or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during
periods in which those temporary differences become deductible. We consider the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and other matters in making this assessment. As a result of our evaluation of
these factors, we recorded an additional valuation allowance of $.4 million
against our deferred tax asset. The additional valuation allowance was the
result of our assessment that some portion of the benefits from the net
operating losses for state tax purposes incurred by us might not be realized in
future periods.
Liquidity and Capital Resources
For the past three years, we have incurred negative cash flows from operations.
On December 31, 2001, we had working capital of $18.2 million, including $5.3
million in cash and cash equivalents.
In 2001, our net cash used in operating activities was $2.6 million. Uses of
cash were our operating loss of $18.3 million, a decrease of accounts payable of
$5.2 million, and an increase in prepaid expenses of $.3 million. Sources of
cash included a decrease of inventory of $10.8 million (see below), a decrease
in accounts receivable of $2.3 million, and the following 2001 non-cash
expenses: an impairment of deferred tax assets of $3.8 million, an impairment of
goodwill of $2.3 million, depreciation and amortization of $1.8 million, and
other non-cash expenses of $.2 million.
Our significant inventory reduction of $10.8 million included a non-cash
write-down of $4.6 million related to the write-down to the lower of cost or
market and the recording of excess and obsolescence reserves of $4.6 million,
reduced inventories needed to support our lower sales level in 2001, an
operational improvement in dial-up modem inventory turnover, and to a lesser
extent, the usage of excess broadband and wireless inventories that were largely
purchased in 2000. The excess inventories were purchased in 2000 to support an
aggressive production plan for new broadband cable and ADSL modem products and
wireless networking products. The production plan was a key element of our
overall plan to aggressively enter the broadband modem and wireless networking
markets. In 2000, these markets were widely forecasted to begin dramatic growth
in 2001, which was expected to continue throughout the decade. The market
expansion in 2001 was more modest than expected and, partly as a result, we were
not as successful as we had planned. At December 31, 2001, after the consumption
of some of the excess inventory in 2001, the write-down for lower of cost or
market valuation, and the recording of excess and obsolescence reserves, the
remaining value of the excess broadband and wireless inventories was $4.1
million.
In 2001, our net cash used in investing activities was $.8 million, which
consisted of additions to property, plant and equipment of $.7 million and the
investment in an affiliate of $.1 million.
In 2001, we obtained a mortgage on our corporate headquarters, which provided
financing of $6 million. Currently we do not have a debt facility from which we
can borrow, and we do not expect to obtain one on acceptable terms unless there
is operating performance improvement. However, we believe we would be able to
obtain funds, if and when required, by factoring accounts receivable. We have
engaged in preliminary negotiations with a financial organization, but we do not
plan to put anything in place until and unless it is necessary since there would
be an up-front cost to finalize the arrangement.
To conserve cash and manage our liquidity, we have implemented expense
reductions throughout 2001 and in the first quarter of 2002. Our employee
headcount was 313 at December 31, 2000, which has been reduced to 199 at March
20, 2002. We will continue to assess our cost structure as it relates to our
revenues and cash position in 2002, and we may make further reductions if the
actions are deemed necessary.
In addition to expense reductions, our liquidity in 2002 is expected to be
enhanced by the utilization of approximately $3.0 million of "no charge"
components, as a result of supply agreements entered in 2001. Under these
arrangements, we are committed to purchase at least $8.0 million of components
over the 30-month period commencing January 1, 2002, provided that those
components are offered at competitive terms and prices. The utilization of
"no-charge" components will supplement our cash flow in 2002, as we will be able
to avoid the purchase and payment of an equivalent dollar amount of inventory.
The favorable impact to our statement of operations will be recognized on a
delayed basis as a purchase discount over the total number of components
acquired through the supply agreement (see note 7 (b) to the consolidated
financial statements).
On December 31, 2001 we had a $4.1 million net inventory in broadband and
wireless products and components. This inventory was paid for in 2000 and 2001.
Sales of products in 2002 using any portion of this inventory will enhance our
liquidity in 2002, as we will be able to avoid the purchase and payment of an
equivalent dollar amount of new materials. We are currently selling cable modems
and wireless products that consume a portion of this inventory and we are
aggressively pursuing additional orders in markets worldwide.
Trends including the bundling of dial-up modems into computers and the increased
popularity of broadband modems lower the total available market through our
sales channels. Because of this, our dial-up modem sales are unlikely to grow
unless we grow our market share, or the new V.92 and V.44 modem standards grow
sales through our channels. If our dial-up modem sales do not grow, our future
success will depend in large part on our ability to successfully penetrate the
broadband modem, networking and dialer markets.
Our cash position at December 31, 2001 was $5.3 million. Management believes it
has sufficient resources to fund its planned operations over the next 12 months.
However, if we are unable to increase our revenues, reduce our expenses, or
raise capital, our longer-term ability to continue as a going concern and
achieve our intended business objectives could be adversely affected. See "Risk
Factors" below, for further information with respect to events and uncertainties
that could harm our business, operating results, and financial condition.
Commitments
We lease a manufacturing and warehousing facility in Boston, Massachusetts, an
office facility in Camberley, United Kingdom, and a technical support facility
in Boca Raton, Florida. The Boston, Massachusetts lease expires in August 2006
and the Boca Raton lease is a "tenant at will" lease. In March 1999, we assumed
an office lease from Hayes Microcomputer Products, Inc. at 430 Frimley Business
Park, Camberley Surrey, UK. The landlord has notified us that they would like to
exercise their option to exercise the break clause in the lease in February
2003. We have agreed to this contract termination since the leased space exceeds
our current requirements. We are looking for a smaller office to lease which
should result in savings in rent expenses. We do not expect the moving expenses
to be significant. Our total rent expense under our operating leases was
approximately $0.5 million in 2001.
Our estimated future minimum rental payments, excluding executory costs, under
these operating leases are set forth in the table below. We are currently in
dispute over the amount of rent due under our lease for our Boston,
Massachusetts facility. Our estimates below use as an assumption the amount of
rent that is being sought by our landlord. For our Camberley UK lease, the
estimates use the assumption that our future lease costs will be the same as our
current lease costs.
See discussion of purchase commitments under Liquidity and Capital Resources.
The purchase commitment column reflects management's estimate of the timing of
purchases under the 30 month purchase commitment.
Operating Purchase
Year Leases Commitments Total
---- ---------- ----------- -----
2002 $ 696,735 $2,500,000 $3,196,735
2003 678,647 5,500,000 6,178,647
2004 691,174 - 691,174
2005 692,313 - 692,313
2006 466,481 - 466,481
Thereafter $ 170,488 - 170,488
During 2001, we paid $513,500 in escrow as a deposit on a building in Boston,
Massachusetts we were seeking to acquire. Of this deposit, $25,000 was
nonrefundable. Subsequently, negotiations stalled. While we believe that we are
entitled to a return of the $488,500 refundable portion of the deposit, plus
interest, the property-owner has objected, and the funds are being retained in
escrow. Without pursuit of the arrangement, described below, we would likely
need to seek legal remedies to obtain a return of the refundable portion of our
original deposit. The arrangement being pursued is that we, along with other
investors related to us, including Frank Manning, our President and a director,
and Peter Kramer, our Executive Vice President and a director, have engaged in
further ongoing negotiations with the property owner, whereby the group of
investors are intending to acquire the building, with Zoom participating as a
minority investor. Under this arrangement, upon acceptance, we would receive a
pro rata portion, anticipated to be $390,800, of the refundable portion of our
deposit plus interest from the other investors. If the group ultimately acquires
the building, the $390,000 plus interest would be applied to our investment in
the entity acquiring the property, which we would not expect to exceed $540,000.
We would also have a right to sell our investment to the other investors through
January 5, 2003. Should we exercise our sale right, we would recover the full
amount of the refundable portion of our deposit and any additional investment we
make in the entity acquiring the property. In addition, under this arrangement,
we would have the right to purchase the other investors' interests in the
building through December 31, 2005 in accordance with a prearranged formula.
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" (SFAS 141)
and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the amortization and impairment provisions of SFAS 142 are
effective upon the adoption of SFAS 142. We are required to adopt SFAS 141 and
SFAS 142 at the beginning of 2002. We believe the adoption of these accounting
standards will not have any material effect on our consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment on
Disposal of Long-Lived Assets (SFAS 144), effective for fiscal years beginning
after December 15, 2001. This statement addresses the financial accounting and
reporting for the impairment and disposal of long-lived assets. It supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed (SFAS 121). Under the new rules, the criteria required for
classifying an asset as held-for-sale have been significantly changed. Assets
held-for-sale are stated at the lower of their fair values or carrying amounts,
and depreciation is no longer recognized. In addition, the expected future
operating losses from discontinued operations will be displayed in discontinued
operations in the period in which the losses are incurred rather than as of the
measurement date. More dispositions will qualify for discontinued operations
treatment in the statement of operations under the new rules. This statemenT
will not have a material impact on our operations or financial position.
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain Sales
Incentives" addresses the recognition, measurement, and income statement
classification for certain types of sales incentives. The application of the
guidance in Issue No. 00-14 will result in a change in the manner in which the
Company records certain types of discounts and sales and marketing incentives
that are provided to its customers. The Company has historically recorded
certain types of these incentives as marketing expenses. Under Issue No. 00-14,
the Company will record these discounts and incentives as reductions of revenue.
In April 2001, the FASB Emerging Issues Task Force reached a consensus on Issue
No. 00-25 "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products". Issue No.
00-25 addresses whether certain consideration offered by a vendor to a
distributor, including slotting fees, cooperative advertising arrangements and
"buy-down" programs, should be characterized as operating expenses or reductions
of revenue. Issue No. 00-14 and 00-25 are required to be implemented no later
than the first fiscal quarter of 2002, at which time prior period reported
amounts will be reclassified to conform to the new presentation. Pro forma
disclosures reflecting the reclassification of both previously reported as well
as current year reported revenues and sales and marketing expenses based on the
application of the guidance in Issue No. 00-14 and Issue No. 00-25 are presented
in note 4 to the audited consolidated financial statements. There is no current
year or historical impact on our consolidated balance sheets.
Years ending December 31,
1999 2000 2001
Revenues:
As previously reported....... $ 64,088,384 $ 59,750,187 $ 43,709,528
As reclassified.............. 62,228,216 57,708,456 41,570,276
Sales and Marketing expenses:
As previously reported....... 13,571,083 12,713,756 9,619,549
As reclassified 11,710,915 10,672,025 7,480,297
RISK FACTORS
This report contains forward-looking statements that involve risks and
uncertainties, such as statements of our objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applicable to all forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this report.
Our revenues have declined and we have incurred significant losses and used
significant cash in operations over the last three years.
We incurred net losses of approximately $18.3 million in fiscal 2001, $3.1
million in fiscal 2000 and $1.4 million in fiscal 1999. During these periods our
revenue declined from $64.1 million in 1999 to $59.8 million in 2000 and $43.7
million in 2001. The cash used in operations during these periods was $2.6
million in 2001, $8.0 million in 2000 and $2.7 million in 1999. As of December
31, 2001 we had net working capital of $18.2 million including cash and cash
equivalents of $5.3 million.
We attribute the decline of our business primarily to a decline in the retail
dial-up modem market, and delays in our penetration of the broadband modem and
wireless local area network markets. We anticipate that we will continue to
incur significant expenses for the foreseeable future as we:
o continue to develop and seek appropriate approvals for our dial-up
modem, broadband access, wireless local area network, Internet gateway,
and dialer products; and
o continue to make efforts to expand our sales channels internationally,
and into new channels appropriate to our new product areas.
Although we have reduced our operating expense levels significantly, our
revenues must increase or we will continue to incur operating losses. We cannot
guarantee that our expenditures will significantly increase or halt the decline
in our revenues. Although we believe that we have sufficient resources to fund
our planned operations over the next year, if we fail to increase our revenues,
our longer-term ability to stay in business and to achieve our intended business
objectives could be adversely effected. Our continuing losses and use of cash
could also adversely affect our ability to fund the growth of our business
should our strategies prove successful.
To stay in business we may require future additional funding which we may be
unable to obtain on favorable terms, if at all.
Over the next twelve months, we may require additional financing for our
operations either to fund losses beyond those we anticipate or to fund growth in
our inventory and accounts receivable should growth occur. We currently do not
have a debt facility from which we can borrow and we do not expect to obtain one
on acceptable terms unless our operating performance improved. Additional
financing may not be available to us on a timely basis if at all, or on terms
acceptable to us. If we fail to obtain acceptable additional financing when
needed, we may be required to further reduce planned expenditures or forego
business opportunities, which could reduce our revenues, increase our losses,
and harm our business. Moreover, additional equity financing could dilute the
per share value of our common stock held by current shareholders, while
additional debt financing could restrict our ability to make capital
expenditures or incur additional indebtedness, all of which would impede our
ability to succeed.
Our existing indebtedness could prevent us from obtaining additional financing
and harm our liquidity.
In January 2001, we obtained a $6 million, 20 year direct reduction mortgage
from a bank, secured by our owned real estate in Boston, Massachusetts. Our
outstanding indebtedness could adversely affect our ability to obtain additional
financing for working capital, acquisitions or other purposes. Our existing
indebtedness could also make us more vulnerable to economic downturns and
competitive pressures, make it more difficult to obtain additional debt
financing, and adversely affect our liquidity. In the event of a cash shortfall,
we could be forced to reduce other expenditures to meet our requirements with
respect to our outstanding debt. Our ability to meet our obligations will be
dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations. Many of these factors are
beyond our control. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may be required to refinance
all or a portion of these obligations or obtain additional financing in order to
stay in business.
Our revenues and operating results have been adversely affected because of a
decline in average selling prices for our dial-up modems and because of the
decline in the retail market for dial-up modems.
The dial-up modem industry has been characterized by declining average selling
prices and a declining retail market. The decline in average selling prices is
due to a number of factors, including technological change, lower component
costs, and competition. The decline in the size of the retail market for dial-up
modems is primarily due to the inclusion of dial-up modems as a standard feature
contained in new PCs, and the advent of broadband products. As the market for
cable and ADSL modems matures and competition between cable and ADSL service
providers intensifies, it is likely that there will be increased retail
distribution of cable and ADSL modems. While increased retail sale of broadband
modems could increase our sales of these products, it could further reduce
demand for our dial-up modems. Decreasing average selling prices and reduced
demand for our dial-up modems would result in decreased revenue for dial-up
modems. In addition, we have experienced and we may in the future experience
substantial period to period fluctuations in operating results.
We believe that our future success will depend in large part on our ability to
more successfully penetrate the broadband modem markets, which have been
challenging markets, with significant barriers to entry.
With the shrinking of the dial-up modem market, we believe that our future
success will depend in large part on our ability to more successfully penetrate
the broadband, cable and ADSL, modem markets. These markets have been
challenging markets, with significant barriers to entry, that have adversely
affected our sales to these markets. Although some cable and ADSL modems are
sold at retail, the high volume purchasers of these modems are concentrated in a
relatively few large cable, telecommunications and internet service providers
which offer broadband modem services to their customers. These customers,
particularly cable services providers, also have extensive and varied approval
processes for modems to be approved for use on their network that can be
expensive, time consuming, and continue to evolve. Successfully penetrating the
broadband modem market therefore presents a number of challenges including:
o the current limited retail market for broadband modems;
o the relatively small number of cable, telecommunications and internet
service provider customers that make up a substantial part of the market
for broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive, uncertain and varied approval process of
the various cable service providers; and
o the strong relationships with cable service providers enjoyed by
incumbents cable equipment providers like Motorola and Scientific Atlanta.
Our initial sales of broadband products have been adversely affected by all of
these factors. We cannot assure that we will be able to successfully penetrate
these markets.
Continued fluctuations in our operating results could cause the market price of
our common stock to fall.
Our operating results have fluctuated in the past and are likely to fluctuate in
the future. It is possible that our revenues and operating results will be below
the expectations of investors in future quarters. If we fail to meet or surpass
the expectations of investors, the market price of our common stock will most
likely fall. Factors that have affected and may in the future affect our
operating results include:
o the overall demand for dial-up, cable and ADSL modems, wireless local
area network products, Internet gateway products, dialers, and other
communications products;
o the timing of new product announcements and releases by us and our
competitors;
o successful testing, qualification and approval of our products, such as
Cablelabs(R) qualification of cable modems, telephone company qualification
of ADSL modems, approval by service providers for use on their networks,
and governmental approvals;
o variations in the number and mix of products we sell;
o the timing of customer orders and adjustments of delivery schedules to
accommodate our customers' programs;
o the availability of components, materials and labor necessary to produce
our products;
o the timing and level of expenditures in anticipation of future sales;
o pricing and other competitive conditions; and
o seasonality.
Our customer base is concentrated and the loss of one or more of our customers
could harm our business.
Relatively few customers have accounted for a significant portion of our net
sales. In fiscal 2001, approximately 53% of our net sales were attributable to
four customers, each of whom accounted for more than 10% of our net sales.
Because our customer base is concentrated, a loss of one or more of these
significant customers or a reduction or delay in orders or a default in payment
from any of our top customers could significantly reduce our sales which would
materially harm our business, results of operations, and financial condition.
Our failure to meet changing customer requirements and emerging industry
standards would adversely impact our ability to sell our products.
The market for PC communications products and high-speed broadband access
products is characterized by aggressive pricing practices, continually changing
customer demand patterns, rapid technological advances, emerging industry
standards and short product life cycles. Some of our product developments and
enhancements have taken longer than planned and have delayed the availability of
our products, which adversely affected our sales and profitability in the past.
Any significant delays in the future may adversely impact our ability to sell
our products, and our results of operations and financial condition may be
adversely affected. Our future success will depend in large part upon our
ability to:
o identify and respond to emerging technological trends in the market;
o develop and maintain competitive products that meet changing customer
demands;
o enhance our products by adding innovative features that differentiate
our products from those of our competitors;
o bring products to market on a timely basis;
o introduce products that have competitive prices;
o manage our product transitions, inventory levels and manufacturing
processes efficiently;
o respond effectively to new technological changes or new product
announcements by others; and
Our product cycles tend to be short, and we may incur significant
non-recoverable expenses or devote significant resources to sales that do not
occur when anticipated. In the rapidly changing technology environment in which
we operate, product cycles tend to be short. Therefore, the resources we devote
to product development, sales and marketing may not generate material revenues
for us. In addition, short product cycles has resulted in and may in the future
result in excess and obsolete inventory, which has had and may in the future
have an adverse affect on our results of operations. In an effort to develop
innovative products and technology, we have incurred and may in the future incur
substantial development, sales, marketing, and inventory costs. If we are unable
to recover these costs, our financial condition and operating results could be
adversely affected. In addition, if we sell our products at reduced prices in
anticipation of cost reductions and we still have higher cost products in
inventory, our business would be harmed and our results of operations and
financial condition would be adversely affected.
Our operating results have been adversely affected because of price protection
programs.
Our operating results have been adversely affected by reductions in average
selling prices because we gave credits to some of our customers as a result of
contractual price protection guarantees. Specifically, when we reduce the price
for a product, the customer receives a credit for the difference between the
customer's most recent purchase price and our reduced price for the product, for
all unsold product at the time of the price reduction. For fiscal 2001, we
recorded a reduction of revenue of $.9 million for customer price protection.
We may be subject to product returns resulting from defects, or from
overstocking of our products. Product returns could result in the failure to
attain market acceptance of our products, which would harm our business.
If our products contain undetected defects, errors or failures, we could face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in market
acceptance of our products, either of which would reduce our sales and harm our
business. We are also exposed to the risk of product returns from our customers
as a result of contractual stock rotation privileges and our practice of
assisting some of our customers in balancing their inventories. Overstocking has
in the past led and may in the future lead to higher than normal returns.
Our failure to effectively manage our inventory levels could materially and
adversely affect our liquidity and harm our business.
During fiscal 2000, in anticipation of future sales of our recently introduced
broadband access products, particularly cable modems, we significantly increased
our inventory for these products. We also built up this inventory in response to
shortages of components for these products earlier in that year. Since that
time, most of these component shortages have been alleviated. We have also had
difficulty in generating significant orders for some of our products,
particularly broadband products, and as a result, we experienced a significant
increase in our inventory, to $21.9 million on December 31, 2000 from $14.3
million on December 31, 1999. During fiscal 2001, we were able to reduce our
inventory levels to $11.1 million as a result of sales, and raw material returns
to suppliers and the writedown of some of our inventory by $4.6 million. Our
failure to effectively manage our inventory may adversely affect our liquidity
and increases the risk of inventory obsolescence, a decline in market value of
the inventory, or losses from theft, fire or other casualty.
We may be unable to produce sufficient quantities of our products because we
depend on third party manufacturers. If these third party manufacturers fail to
produce quality products in a timely manner, our ability to fulfill our customer
orders would be adversely impacted.
We use contract manufacturers to partially manufacture our products. We use
these third party manufacturers to help ensure low costs, rapid market entry,
and reliability. Any manufacturing disruption could impair our ability to
fulfill orders, and failure to fulfill orders would adversely affect our sales.
Although we currently use four contract manufacturers for the bulk of our
purchases, in some cases a given product is only provided by one of these
companies. The loss of the services of our any of our significant third party
manufacturers or a material adverse change in the business of or our
relationships with any of these manufacturers could harm our business. Since
third parties manufacture our products and we expect this to continue in the
future, our success will depend, in part, on the ability of third parties to
manufacture our products cost effectively and in sufficient quantities to meet
our customer demand.
We are subject to the following risks because of our reliance on third party
manufacturers:
o reduced management and control of component purchases;
o reduced control over delivery schedules;
o reduced control over quality assurance;
o reduced control over manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices;
o interruption of supplies from assemblers as a result of a fire, natural
calamity, strike or other significant event; and
o misappropriation of our intellectual property.
We may be unable to produce sufficient quantities of our products because we
obtain key components from, and depend on, sole or limited source suppliers.
We obtain certain key parts, components and equipment from sole or limited
sources of supply. For example, we purchase dial-up and broadband modem chipsets
from Conexant Systems (formerly Rockwell) and Agere Systems (formerly Lucent
Technologies). Integrated circuit product areas covered by one or both companies
include dial-up modems, ADSL modems, cable modems, networking, routers, and
gateways. We also purchase ADSL chipsets from Globespan and we purchase chipsets
for our wireless network interface cards from Intersil Corporation. In the past,
we have experienced delays in receiving shipments of modem chipsets from our
sole source suppliers. We may experience similar delays in the future. In
addition, some products may have other components that are available from only
one source. If we are unable to obtain a sufficient supply of components from
our current sources, we could experience difficulties in obtaining alternative
sources or in altering product designs to use alternative components. Resulting
delays or reductions in product shipments could damage relationships with our
customers and our customers could decide to purchase products from our
competitors. Inability to meet our customers' demand or a decision by one or
more of our customers to purchase products from our competitors could harm our
operating results.
Our failure to satisfy minimum purchase requirements or commitments we have with
our sole source suppliers could have an adverse affect on our results of
operations.
We have entered into supply arrangements with suppliers of some components that
include price and other concessions, including no-charge components, for meeting
minimum purchase requirements or commitments. Our business and results of
operations could be harmed if we fail to satisfy the minimum purchase
requirements or commitments contained in our supply arrangements.
The market for high-speed communications products and services has many
competing technologies and, as a result, the demand for our products and
services is uncertain.
The market for high-speed communications products and services has a number of
competing technologies. For instance, Internet access can be achieved by:
o using a standard telephone line and appropriate service for dial-up
modems, ISDN modems, or ADSL modems, possibly in combination;
o using a cable modem with a cable TV line and cable modem service;
o using a router and some type of modem to service the computers connected
to a local area network; or
o other approaches, including wireless links to the Internet.
Although we currently sell products that include these technologies, the market
for high-speed communication products and services is fragmented and still in
its development stage. The introduction of new products by competitors, market
acceptance of products based on new or alternative technologies, or the
emergence of new industry standards could render and have in the past rendered
our products less competitive or obsolete. If any of these events occur, we may
be unable to sustain or grow our business. In addition, if any of one or more of
the alternative technologies gain market share at the expense of another
technology, demand for our products may be reduced, and we may be unable to
sustain or grow our business.
We face significant competition, which could result in decreased demand for our
products or services.
We may be unable to compete successfully. A number of companies have developed,
or are expected to develop, products that compete or will compete with our
products. Furthermore, many of our current and potential competitors have
significantly greater resources than we do. Intense competition, rapid
technological change and evolving industry standards could decrease demand for
our products or make our products obsolete.
Our competitors by product group include the following:
o Dial-up modem competitors: Actiontec, Askey, Best Data, Creative Labs,
Elsa, GVC, Intel, SONICblue, and US Robotics.
o Cable modem competitors: Motorola, Samsung, Scientific Atlanta, Thomson,
and Toshiba.
o ADSL modem competitors Siemens (formerly Efficient Networks) and
Westell.
o Wireless Local Area Network competitors: 3Com, Agere, Buffalo
Technologies, Cisco Systems, D-link, Intel, Linksys, Proxim, and SMC.
The principal competitive factors in our industry include the following:
o product performance, features and reliability;
o price;
o product availability and lead times;
o size and stability of operations;
o breadth of product line;
o sales and distribution capability;
o tailoring of product to local market needs, sometimes including packaging,
documentation, software, and support in the local language;
o ease of use and technical support and service;
o relationships with providers of broadband access services; and
o compliance with industry standards.
Our business is dependent on the Internet and the development of the Internet
infrastructure.
Our success will depend in large part on increased use of the Internet to
increase the demand for high-speed communications products. Critical issues
concerning the commercial use of the Internet remain largely unresolved and are
likely to affect the development of the market for our products. These issues
include security, reliability, cost, ease of access, and quality of service.
Our success also will depend on the continued growth of the use of the Internet
by businesses, particularly for applications that utilize multimedia content and
that require high bandwidth. The recent growth in the use of the Internet has
caused frequent periods of performance degradation. This has required the
upgrade of routers, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet.
Any perceived degradation in the performance of the Internet as a whole could
undermine the benefits of our products. Potentially increased performance
provided by our products and the products of others ultimately is limited by and
reliant upon the speed and reliability of the Internet backbone itself.
Consequently, the emergence and growth of the market for our products will
depend on improvements being made to the entire Internet infrastructure to
alleviate overloading.
Changes in current or future laws or governmental regulations that negatively
impact our products and technologies could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC, extends
to the entire United States communications industry including our customers and
their products and services that incorporate our products. Our products are also
required to meet the regulatory requirements of other countries throughout the
world where our products are sold. Obtaining government regulatory approvals is
time-consuming and very costly. In the past, we have encountered delays in the
introduction of our products, such as our cable modems, as a result of
government certifications. We may face further delays if we are unable to comply
with governmental regulations. Delays caused by the time it takes to comply with
regulatory requirements may result in cancellations or postponements of product
orders or purchases by our customers, which would harm our business.
Our international operations are subject to a number of risks inherent in
international activities.
Our international sales accounted for approximately 29% of our revenues in
fiscal 1999, 28% in fiscal 2000 and 37% in fiscal 2001. The revenues we received
from international sales were significantly impacted by our Hayes European
operation, which we began operating in March 1999. Currently our operations are
significantly dependent on our international operations, and may be materially
and adversely affected by many factors including:
o international regulatory and communications requirements and policy
changes;
o favoritism towards local suppliers;
o local language and technical support requirements;
o difficulties in inventory management, accounts receivable collection and
the management of distributors or representatives;
o difficulties in staffing and managing foreign operations;
o political and economic changes and disruptions;
o governmental currency controls;
o shipping costs;
o currency exchange rate fluctuations; and
o tariff regulations.
We anticipate that our international sales will continue to account for a
significant percentage of our revenues. If foreign markets for our current and
future products develop more slowly than currently expected, our future results
of operations may be harmed.
Fluctuations in the foreign currency exchange rates in relation to the U.S.
dollar could have a material adverse effect on our operating results.
Changes in currency exchange rates that increase the relative value of the U.S.
dollar may make it more difficult for us to compete with foreign manufacturers
on price, or may otherwise have a material adverse effect on our sales and
operating results. A significant increase in our foreign currency denominated
sales would increase our risk associated with foreign currency fluctuations.
Our future success will depend on the continued services of our executive
officers and key research and development personnel with expertise in hardware
and software development.
The loss of any of our executive officers or key research and development
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring skilled personnel could harm our business. Competition for
skilled personnel is significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition, the loss
of Frank B. Manning, our president and chief executive officer, or Peter Kramer,
our executive vice president, some other member of the management team, a key
engineer, or other key contributors, could harm our relations with our
customers, our ability to respond to technological change, and our business.
Our business may be harmed by acquisitions we may complete in the future.
We may pursue acquisitions of related businesses, technologies, product lines or
products. Our identification of suitable acquisition candidates involves risk
inherent in assessing the values, strengths, weaknesses, risks and profitability
of acquisition candidates, including the effects of the possible acquisition on
our business, diversion of our management's attention, risk of increased
leverage, shareholder dilution, risk associated with unanticipated problems; and
risks associated with liabilities we assume.
We may have difficulty protecting our intellectual property.
Our ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements to
protect our intellectual property. The steps we take to protect our technology
may be inadequate. Existing trade secret, trademark and copyright laws offer
only limited protection. Our patents could be invalidated or circumvented. We
have more intellectual property assets in some countries than we do in others.
In addition, the laws of some foreign countries in which our products are or may
be developed, manufactured or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. This may
make the possibility of piracy of our technology and products more likely. We
cannot assure that the steps that we have taken to protect our intellectual
property will be adequate to prevent misappropriation of our technology.
We could infringe the intellectual property rights of others.
Particular aspects of our technology could be found to infringe on the
intellectual property rights or patents of others. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. We cannot predict the extent to which we
may be required to seek licenses. We cannot assure that the terms of any
licenses we may be required to seek will be reasonable. We are often indemnified
by our suppliers relative to certain intellectual property rights; but these
indemnifications do not cover all possible suits, and there is no guarantee that
a relevant indemnification will be honored by the indemnifying company.
Our executive officers and directors may control certain matters to be voted on
by the shareholders. These officers and directors may vote in a manner that is
not in your best interests.
Our executive officers and directors beneficially own, in the aggregate as of
March 20, 2002, approximately 22.3% of our outstanding common stock. As a
result, these shareholders could significantly influence certain matters to be
voted on by the shareholders. These matters include the election of directors,
amendments to our certificate of incorporation and approval of significant
corporate transactions. These executive officers and directors may vote as
shareholders in a manner that is not in your best interests.
The volatility of our stock price could adversely affect an investment in our
common stock.
The market price of our common stock has been and may continue to be highly
volatile. We believe that a variety of factors have caused and could in the
future cause the stock price of our common stock to fluctuate, including:
o announcements of developments related to our business, including
announcements of certification by the FCC or other regulatory
authorities of our products or our competitors products;
o quarterly fluctuations in our actual or anticipated operating results,
assets, liabilities, and order levels;
o general conditions in the US and worldwide economies;
o announcements of technological innovations;
o new products or product enhancements introduced by us or our competitors;
o developments in patents or other intellectual property rights and
litigation; and
o developments in our relationships with our customers and suppliers.
In addition, in recent years the stock market in general and the markets for
shares of small capitalization and "high-tech" companies in particular, have
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Any fluctuations in the future
could adversely affect the market price of our common stock and the market price
of our common stock may decline.
ITEM 7A.
We own financial instruments that are sensitive to market risks as part of our
investment portfolio. The investment portfolio is used to preserve our capital
until we are required to fund operations, including our research and development
activities. None of these market-risk sensitive instruments are held for trading
purposes. We do not own derivative financial instruments in our investment
portfolio. The investment portfolio contains instruments that are subject to the
risk of a decline in interest rates.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Index to Consolidated Financial Statements 36
Independent Auditors' Report 37
Consolidated Balance Sheets as of December 31, 2000 and 2001 38
Consolidated Statements of Operations for the years ending December 31, 39
1999, 2000 and 2001
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 1999, 2000 and 40
2001
Consolidated Statements of Cash Flows for the years ending December 31, 41
1999, 2000 and 2001
Notes to Consolidated Financial Statements 42-57
Schedule II: Valuation and Qualifying Accounts for Fiscal Years Ending
December 31, 1999, 2000 and 2001 61
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting or
financial disclosure during the period covered by this report.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item appears under the caption "Our Executive
Officers " in Part 1, Item 1 -- Business, and under the captions "Election of
Directors" and "Compliance With Section 16(a) of the Securities Exchange Act" in
our definitive proxy statement for our 2002 annual meeting of shareholders which
will be filed with the SEC in April 2002, pursuant to Regulation 14A, and is
incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item appears under the captions "Executive
Compensation," "Directors' Compensation", in our definitive proxy statement for
our 2002 annual meeting of shareholders which will be filed with the SEC in
April 2002, pursuant to Regulation 14A, and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item appears under the captions "Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management"
in our definitive proxy statement for our 2002 annual meeting of shareholders
which will be filed with the SEC in April 2002, pursuant to Regulation 14A, and
is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item may appear under the caption "Certain
Transactions" in our definitive proxy statement for our 2002 annual meeting of
shareholders which will be filed with the SEC in April 2002, pursuant to
Regulation 14A, and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits:
(1), (2) The consolidated financial statements and required schedules
are indexed on page F-1.
(3) Exhibits required by the Exhibit Table of Item 601 of SEC
Regulation S-K. (Exhibit numbers refer to numbers in the Exhibit
Table of Item 601.)
2.1 Asset Purchase Agreement Between Zoom Telephonics, Inc. and Hayes
Microcomputer Products, Inc. dated March 8, 1999, filed as Exhibit
2.1 to the Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1999 (the "March 1999 Form 10-Q"). *
2.2 Asset Purchase Agreement Between Zoom Telephonics, Inc. and Hayes
Microcomputer Products, Inc. dated March 28, 1999, filed as
Exhibit 2.2 to the March 1999 Form 10-Q. *
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 (the "June 1996 Form
10-Q") * and as further amended on June 14, 2001.
10.3 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the June 1996 Form 10-Q. *
10.4 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.5 Letter Agreement between Zoom and an executive officer, filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal
quarter ending September 30, 2000. *
**10.6 Employment Agreement, filed as Exhibit 10.9 to the 1997 Form 10-K.
*
10.7 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001 (the "March 2001 Form 10-Q"). *
10.8 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
21. Subsidiaries. *
23. Consent of KPMG LLP.
(b) Reports on Form 8-K.
No current reports on Form 8-K have been filed during the last
quarter for the period covered by this report.
(c) Exhibits - See Item 14(a)(3) above for a list of Exhibits
incorporated herein by reference or filed with this Report.
(d) Schedules - Schedule II: Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted since
they are either inapplicable or not required.
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ZOOM TELEPHONICS, INC.
(Registrant)
By: /s/ Frank B. Manning
----------------------------
Frank B. Manning, President
Date: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title(s) Date
/s/ Frank B. Manning Principal Executive Officer and March 29, 2002
-------------------- Chairman of the Board
Frank B. Manning
/s/ Robert A. Crist Principal Financial and March 29, 2002
-------------------- Accounting Officer
Robert A. Crist
/s/ Peter R. Kramer Director March 29, 2002
--------------------
Peter R. Kramer
Director March 29, 2002
--------------------
Bernard Furman
/s/ L. Lamont Gordon Director March 29, 2002
--------------------
L. Lamont Gordon
/s/ J. Ronald Woods Director March 29, 2002
--------------------
J. Ronald Woods
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Independent Auditors' Report 37
Consolidated Balance Sheets as of December 31, 2000 and 2001 38
Consolidated Statements of Operations for the years ending December 31, 39
1999, 2000 and 2001
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 1999, 2000 and 2001 40
Consolidated Statements of Cash Flows for the years ending December 31, 41
1999, 2000 and 2001
Notes to Consolidated Financial Statements 42-57
Schedule II: Valuation and Qualifying Accounts for Fiscal Years Ending
December 31, 1999, 2000 and 2001 61
Independent Auditors' Report
The Board of Directors and Stockholders
Zoom Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Zoom
Technologies, Inc. and subsidiary as of December 31, 2000 and 2001, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zoom Technologies,
Inc. and subsidiary as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Boston, Massachusetts
February 11, 2002, except as to Note 3 and Note 7
which are as of March 29, 2002
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
Assets 2000 2001
------ ---- ----
Current assets:
Cash and cash equivalents $ 2,906,270 $ 5,252,058
Investment securities - -
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $3,127,455
in 2000 and $2,816,449 in 2001 (note 12) 7,923,967 5,652,035
Inventories, net (note 4) 21,896,883 11,083,143
Prepaid expenses and other current assets 678,271 999,662
---------- ----------
Total current assets 33,405,391 22,986,898
---------- ----------
Property, plant and equipment, net (note 5) 4,580,634 4,128,916
Goodwill, net of accumulated amortization of
$1,827,459 in 2000 (note 7) 3,076,224 -
Net deferred tax assets (note 11) 5,812,844 2,012,844
Other assets 84,902 56,666
---------- ----------
Total assets $ 46,959,995 $ 29,185,324
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 7,428,832 $ 2,750,174
Accrued expenses 2,414,917 1,879,566
Current Portion of long term debt (note 9) - 139,201
---------- ----------
Total current liabilities 9,843,749 4,768,941
---------- ----------
Long-term debt, less current portion (note 9) - 5,745,368
Other non-current liabilities (note 7) 368,800 255,287
---------- ----------
Total liabilities 10,212,549 10,769,596
---------- ----------
Stockholders' equity (note 10):
Common stock, no par value. Authorized 25,000,000
shares; issued and outstanding 7,860,866 shares
at December 31, 2000 and 7,860,866 shares at
December 31, 2001 28,145,375 28,245,215
Retained earnings (accumulated deficit) 8,694,230 (9,634,692)
Accumulated other comprehensive loss (92,159) (194,795)
---------- ----------
Total stockholders' equity 36,747,446 18,415,728
---------- ----------
Total liabilities and stockholders'
equity $ 46,959,995 $ 29,185,324
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 1999, 2000 and 2001
1999 2000 2001
------------ ------------ ------------
Net sales (notes 4, 13 and 17) .............. $ 64,088,384 $ 59,750,187 $ 43,709,528
Cost of goods sold (note 5) ................. 40,549,909 39,404,320 35,193,449
------------ ------------ ------------
Gross profit ........... 23,538,475 20,345,867 8,516,079
------------ ------------ ------------
Operating expenses:
Selling ............................. 13,571,083 12,713,756 9,619,549
General and administrative .......... 6,275,827 6,228,317 7,938,175
Research and development ............ 6,425,584 6,249,092 5,327,968
------------ ------------ ------------
Total operating expenses 26,272,494 25,191,165 22,885,692
------------ ------------ ------------
Operating loss ......... (2,734,019) (4,845,298) (14,369,613)
------------ ------------ ------------
Other income (expense):
Interest income ..................... 546,329 447,148 198,805
Interest expense..................... - - (454,708)
Equity losses of affiliate .......... (24,000) (215,834) (145,165)
Other, net .......................... 214,999 237,820 241,759
------------ ------------ ------------
Total other income (expense), net 737,328 469,134 (159,309)
------------ ------------ ------------
Loss before income taxes (1,996,691) (4,376,164) (14,528,922)
Income tax expense (benefit)(note 12) ....... (587,935) (1,298,916) 3,800,000
------------ ------------ ------------
Net loss ............... $ (1,408,756) $ (3,077,248) $(18,328,922)
============ ============ ============
Net loss per share (note 2):
Basic and diluted.................... $ (.19) $ (.40) $ (2.33)
============ ============ ============
Weighted average common and common equivalent
shares:
Basic and diluted.................... 7,482,586 7,756,815 7,860,866
============ ============ ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Loss Equity
------ -------- -------- ------------- ------------
Balance at December 31, 1998 .......... 7,474,871 25,190,579 13,180,234 54,554 38,425,367
Net loss .............................. - - (1,408,756) - (1,408,756)
Foreign currency translation
adjustment ............................ - - - (11,318) (11,318)
Unrealized holding (loss) on
investments ........................... - - - (80,862) (80,862)
Comprehensive loss .................... (1,500,936)
Exercise of stock options (note 11).... 85,425 487,330 - - 487,330
Tax effect of exercises of nonqualified
stock options (notes 11 and 12) ....... - 102,322 - - 102,322
--------- ---------- ---------- --------- ----------
Balance at December 31, 1999 .......... 7,560,296 25,780,231 11,771,478 (37,626) 37,514,083
--------- ---------- ---------- --------- ----------
Net loss .............................. - - (3,077,248) - (3,077,248)
Foreign currency translation
adjustment ............................ - - - (80,788) (80,788)
Unrealized holding gain on
investments ........................... - - - 26,255 26,255
Comprehensive loss .................... (3,131,781)
Exercise of stock options (note 11).... 300,570 1,822,722 - - 1,822,722
Compensation expense related to
issuance of restricted stock .......... - 52,577 - - 52,577
Tax effect of exercises of nonqualified
stock options (notes 11 and 12) ....... - 489,845 - - 489,845
--------- ---------- ---------- --------- ----------
Balance at December 31, 2000 .......... 7,860,866 $ 28,145,375 $ 8,694,230 $ (92,159) $ 36,747,446
========== =========== ========== ========= ===========
Net loss .............................. - - (18,328,922) - (18,328,922)
Foreign currency translation
adjustment ............................ - - - (102,689) (102,689)
Unrealized holding gain on
investments ........................... - - - 53 53
Comprehensive loss .................... (18,431,558)
Exercise of stock options (note 11).... - - - - -
Compensation expense related to
issuance of restricted stock ......... - 99,840 - - 99,840
--------- ---------- ---------- --------- ----------
Balance at December 31, 2001 .......... 7,860,866 $ 28,245,215 $ (9,634,692) $ (194,795) $ 18,415,728
========== =========== ========== ========= ===========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 1999, 2000 and 2001
1999 2000 2001
---- ---- ----
Cash flows from operating activities:
Net loss $(1,408,756) $(3,077,248) $(18,328,922)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,318,450 1,665,853 1,769,608
Impairment of goodwill - - 2,294,881
Amortization of unearned compensation
expense - 52,577 99,840
Equity in losses of Affiliate 24,000 215,834 145,165
Net deferred income taxes (742,737) (1,843,874) 3,800,000
Tax benefit from exercise of
nonqualified stock options 102,322 489,845 -
Changes in assets and liabilities:
Accounts receivable 811,283 (2,514,401) 2,271,930
Inventories (1,978,308) (7,593,276) 10,813,741
Prepaid expenses and other
current assets 56,315 (106,651) (296,655)
Refundable income taxes 63,378 - -
Accounts payable and accrued
expenses (911,873) 4,766,116 (5,214,008)
---------- ---------- ----------
Net cash used in
operating activities (2,665,926) (7,997,802) (2,664,421)
---------- ---------- ----------
Cash flows from investing activities:
Cash paid for the acquisition of Hayes, net of
cash acquired (4,912,258) - -
Sales (purchases) of investment securities 10,259,116 3,215,329 53
Investment in affiliates (300,000) - (141,665)
Additions to licenses (40,000) - -
Additions to property, plant and equipment (912,400) (1,324,268) (650,060)
---------- ---------- ----------
Net cash provided by (used in)
investing activities 4,094,458 1,891,061 (791,672)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt - - 6,000,000
Repayment of long-term debt - - (115,430)
Exercise of nonqualified stock options 487,330 1,875,299 -
---------- ---------- ----------
Net cash provided by
financing activities 487,330 1,875,299 5,884,570
---------- ---------- ----------
Effect of exchange rate changes on cash ( 21,941) (80,788) (102,689)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,893,921 (4,312,230) 2,345,788
---------- ---------- ----------
Cash and cash equivalents at beginning of year 5,324,579 7,218,500 2,906,270
---------- ---------- ----------
Cash and cash equivalents at end of year $ 7,218,500 $ 2,906,270 $ 5,252,058
========== ========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ending December 31, 1999, 2000 and 2001
(1) Incorporation and Nature of Operations
Zoom Telephonics, Inc. (the "Company") was incorporated under the federal
laws of Canada (Canada Business Corporations Act). Its principal
business activity, the design, production, and marketing of faxmodems
and other communication peripherals, is conducted through its
wholly-owned subsidiary, Zoom Telephonics, Inc. ("Zoom US"), a Delaware
corporation based in Boston, Massachusetts.
In February 2002, the Company completed a transaction in which it changed
its jurisdiction of incorporation from Canada to the State of Delaware
effective March 1, 2002. In connection with the change in jurisdiction,
the Company changed its name to Zoom Technologies, Inc. These changes
were accomplished through a process called a continuance under the laws
of Canada and a domestication under the laws of the State of Delaware,
and were approved by the Company's shareholders at a stockholders'
meeting on February 15, 2002. The Company continues to trade on the
Nasdaq National Market under the symbol ZOOM; and continues to operate
through its wholly owned Delaware subsidiary, Zoom Telephonics, Inc.,
which has not changed its name.
As part of the continuation, each share of Zoom Telephonics, Inc.
automatically is converted into one share of Zoom Technologies, Inc. It
will not be necessary for stockholders to exchange their existing stock
certificates for stock certificates of the Delaware corporation. All
new shares will be issued by Zoom Technologies, Inc.
(2) Summary of Significant Accounting Policies
(a)Basis of Presentation and Use of Estimates
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
and are stated in US dollars. Any differences between US and Canadian
generally accepted accounting principles have an insignificant impact on
the consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results may differ from those
estimates. Significant estimates made by the Company include the useful
lives of property, plant and equipment and goodwill, the recoverability
of long-lived assets, the collectibility of accounts receivable, the
valuation allowance for deferred tax assets, the valuation of sales
returns and allowances, the reserves for obsolete and slow moving
inventory, and the write-downs of inventory valuation for the lower of
cost or market.
(b)Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Zoom US, and all of its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
(c)Cash and Cash Equivalents
The Company considers all investments with original maturities of less
than 90 days to be cash equivalents. Included in cash and cash
equivalents at December 31, 2001 was a deposit for approximately
$418,000 in a duty deferment account approved by HM Customs and Excise
in the United Kingdom for the deferment of value added taxes for
imports.
(d) Investment Securities
The Company's investment securities are classified as available-for-sale.
Available-for-sale securities are stated at fair value and unrealized
gains and losses are excluded from earnings, and are reported as a
separate component of other comprehensive income until realized. The
cost of securities sold is based on the specific identification method
and interest earned is included in other income.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(e) Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
(f)Property, plant and equipment
Property, plant and equipment is stated and recorded at cost. Depreciation
of property, plant and equipment is provided by using the straight-line
method at rates sufficient to amortize the costs of the fixed assets
over their estimated useful lives.
(g)Goodwill and Impairment of Long-lived Assets
Goodwill resulted from the excess of cost over fair value of net assets
acquired in purchase business combinations and is being amortized on a
straight-line basis over periods of 5 to 10 years. In accordance with
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the
Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management performs ongoing business reviews and
evaluates impairment indicators based on qualitative and quantitative
factors. If it is determined that the carrying amount of an asset cannot
be fully recovered, an impairment loss is recognized. The Company
periodically evaluates the recoverability and remaining life of its
goodwill and determines whether the goodwill should be completely or
partially written off or the amortization period accelerated. The
Company will recognize an impairment of goodwill if undiscounted
estimated future operating cash flows are determined to be less than the
carrying amount of goodwill. If the Company determines that the goodwill
has been impaired, the measurement of the impairment will be equal to
the excess of the carrying amount of the goodwill over the amount of
discounted estimated future cash flows. An appropriate discount rate,
determined through an analysis of the risks associated with the
goodwill, would be applied to the estimated future cash flows. If an
impairment of goodwill were to occur, the Company would reflect the
impairment through a reduction in the carrying value of goodwill. The
assessment of recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved (see note 8).
(h) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(i) Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. Diluted loss per share is computed by dividing net income by the
weighted average number of common shares and dilutive potential common
shares outstanding during the period. Under the treasury stock method,
the unexercised options are assumed to be exercised at the beginning of
the period or at issuance, if later. The assumed proceeds are then used
to purchase common shares at the average market price during the period.
1999 2000 2001
---- ---- ----
Basic weighted
average shares outstanding 7,482,586 7,756,815 7,860,866
Net effect of dilutive potential
common shares outstanding,
based on the treasury stock - - -
--------- --------- ---------
Diluted weighted
average shares outstanding 7,482,586 7,756,815 7,860,866
========= ========= =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are excluded
from the computation. The dilutive effect of options to purchase 661,355,
419,039 and 13,870 shares of common stock at December 31, 1999, 2000, and
2001, respectively, were outstanding, but not included in the computation
of diluted earnings per share as their effect would be antidilutive.
(j) Revenue Recognition
The Company sells hardware products to its customers. The products are
dial-up modems, embedded modems, cable modems, PC cameras, ISDN and ADSL
modems, telephone dialers, and wireless and wired networking equipment.
The Company does not sell software or services. The Company earns a small
amount of royalty revenue. The Company derives its revenue primarily from
the sales of hardware products to three types of customers (1) computer
peripherals retailers, (2) computer product distributors, and (3) original
equipment manufacturers (OEMs). The Company sells a very small amount of
its hardware products to direct consumers or to any customers via the
Internet. As described below, management judgments and estimates must be
made and used in connection with the revenue recognized in any accounting
period. Material differences may result in the amount and timing of the
Company's revenue for any period if its management makes different
judgments or utilizes different estimates.
Revenue is recognized by the Company for all three types of customers at the
point when the customers take legal ownership of the delivered products.
Legal ownership passes from the Company to the customer based on the
contractual FOB point specified in signed contracts and purchase orders,
which are both used extensively. Many of the Company's customer contracts
or purchase orders specify FOB destination. Since it would be impractical
to verify ownership change for each individual delivery to the FOB
destination point, the Company estimates the day of delivery receipt by
the customer based on its ship date and the carrier's published delivery
schedule specific to the freight class and location.
The Company's revenues are reduced by certain events which are characteristic
of hardware sales to computer peripherals retailers. These events are
product returns, price protection refunds, store rebates, and consumer
mail-in rebates. Each of these is accounted for as a reduction of revenue
based on careful management estimates, which are reconciled to actual
customer or end-consumer refunds and credits on a monthly or quarterly
basis. The estimates for product returns are based on recent historical
trends plus estimates for returns prompted by new product introductions,
announced stock rotations, announced customer store closings, etc.
Management analyzes historical returns, current economic trends, and
changes in customer demand and acceptance of the Company's products when
evaluating the adequacy of sales return allowances. The Company's
estimates for price protection refunds require a detailed understanding
and tracking by customer, by sales program. Estimated price protection
refunds are recorded in the same period as the announcement of a pricing
change. Information from customer inventory-on-hand reports or from direct
communications with the customers is used to estimate the refund, which is
recorded as a reserve against accounts receivable and a reduction of
current period revenue. The Company's estimates for consumer mail-in
rebates are comprised of actual rebate claims processed by the rebate
redemption centers plus an accrual for an estimated lag in processing. The
Company's estimates for store rebates are comprised of actual credit
requests from the eligible customers.
(k) Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
investment securities, accounts receivable, accounts payable, accrued
expenses, and borrowings. Due to the short term nature of these
instruments of conversion to cash or the corresponding variable interest
rate attached to the debt, the carrying amount of these financial
instruments approximates fair value.
(l) Stock-Based Compensation
The Company accounts for stock based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123,
the Company measures compensation cost in accordance with Accounting
Principles Board Opinion (APB) No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and FASB interpretation No. 44 (FIN 44).
Accordingly, no accounting recognition is given to stock options granted
at fair market value until they are exercised. Upon exercise, net
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
proceeds, including tax benefits realized, if any, are credited to equity.
(m) Advertising Costs
Advertising costs are expensed as incurred and reported in selling, general,
and administrative expenses in the accompanying consolidated statements of
operations and include costs of advertising, production, trade shows, and
other activities designed to enhance demand for the Company's products.
There are no deferred advertising costs in the accompanying consolidated
balance sheets.
(n) Investments in Affiliates
Investments in which the Company has no significant influence over the
investee are accounted for under the cost method of accounting.
Investments in which the Company exercises significant influence but which
the Company does not control are accounted for under the equity method of
accounting. Under the equity method, investments are stated at cost and
are adjusted for the Company's share of earnings and losses, contributions
and distributions.
(o) Foreign Currencies
The Company generates a portion of its revenues in international markets and
denominated in foreign currencies, which subjects its operations to
exposure to foreign currency fluctuations. The impact of currency
fluctuations can be positive or negative in any given period. Realized and
unrealized foreign exchange transaction gains and losses are recognized in
operating income and offset foreign gains and losses on the underlying
exposures. During the years ending December 31, 1999, 2000, and 2001
foreign currency transaction activity, gains, and losses were not
material. At December 31, 2001, the Company's foreign currency-denominated
net assets were not material. The Company has no involvement with
derivative financial instruments.
The Company considers the local currency to be the functional currency for
its international subsidiary. Assets and liabilities denominated in
foreign currencies are translated using the exchange rate of the balance
sheet date. Revenues and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments resulting from this
process are charged or credited to accumulated other comprehensive loss.
(p) Warranty Costs
The Company provides currently for the estimated costs that may be incurred
under its standard warranty obligations.
(3) Liquidity
For the past three years, the Company has incurred negative cash flows from
operations. In 2001, the Company's net cash used in operating activities
was $2.6 million and net cash used in investing activities was $.8
million. In 2001, the Company obtained a mortgage on its corporate
headquarters, which provided financing of $6 million. On December 31, 2001
Zoom had cash and cash equivalents of approximately $5.3 million.
Currently the Company does not have a debt facility from which it can
borrow, and it does not expect to obtain one on acceptable terms unless
there is operating performance improvement.
In 2000 the Company made a significant investment to build up its broadband
access products, particularly cable modems. However, the Company was not
able to penetrate the broadband modem and wireless local area network
markets to the extent it had expected. This resulted in the write down of
the inventory values by approximately $4.6 million in 2001. Additionally,
during the past several years, the Company has experienced a declining
demand for our dial-up modem products.
To conserve cash and manage our liquidity, the Company has implemented
expense reductions throughout 2001 and in the first quarter of 2002. The
employee headcount was 313 at December 31, 2000, which has been reduced to
199 at March 20, 2002. The Company will continue to assess its cost
structure as it relates to its revenues and cash position in 2002,
and may make further reductions if these actions are deemed necessary.
In addition to expense reductions, the Company's liquidity in 2002 is
expected to be enhanced by the utilization of approximately $3 million of
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
"no charge" components, as a result of supply agreements entered in 2001.
Under these arrangements, the Company is committed to purchase at least $8
million of components over the 30-month period commencing January 1, 2002,
provided that those components are offered at competitive terms and
prices. The utilization of "no-charge" components will supplement the
Company's cash flow in 2002, as it will be able to avoid the purchase and
payment of an equivalent dollar amount of inventory. The favorable impact
to the Company's statement of operations will be recognized on a delayed
basis as a purchase discount over the total number of components acquired
through the supply agreement (see note 7 (b)).
On December 31, 2001 the Company had a $4.1 million net inventory in broadband
and wireless products and components. This inventory was paid for in 2000
and 2001. Sales of products in 2002 using any portion of this inventory
will enhance The Company's liquidity in 2002, as the Company will be able
to avoid the purchase and payment of an equivalent dollar amount of new
materials. The Company is currently selling cable modems and wireless
products that consume a portion of this inventory and is aggressively
pursuing additional orders in markets worldwide.
Trends including the bundling of dial-up modems into computers and the
increased popularity of broadband modems lower the total available market
through our sales channels. Because of this, our dial-up modem sales are
unlikely to grow unless the Company's market share grows, or the new V.92
and V.44 modem standards grow sales through the Company's channels. If the
Company's dial-up modem sales do not grow, the Company's future success
will depend in large part on its ability to successfully penetrate the
broadband modem, networking, and dialer markets.
The Company's cash position at December 31, 2001 was $5.3 million. Management
believes it has sufficient resources to fund its planned operations over
the next 12 months. However, if the Company is unable to increase its
revenues, reduce its expenses, or raise capital, the Company's longer-
term ability to continue as a going concern and achieve its intended
business objectives could be adversely affected.
(4) New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" (SFAS 141)
and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001,
the amortization and impairment provisions of SFAS 142 are effective upon
the adoption of SFAS 142. The Company is required to adopt SFAS 141 and
SFAS 142 at the beginning of 2002. We believe the adoption of these
accounting standards will not have any material effect on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No.144, Accounting for the Impairment on
Disposal of Long-Lived Assets (SFAS 144), effective for fiscal years
beginning after December 15, 2001. This statement addresses the financial
accounting and reporting for the impairment and disposal of long-lived
assets. It supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed (SFAS 121). Under
the new rules, the criteria required for classifying an asset as
held-for-sale have been significantly changed. Assets held-for-sale are
stated at the lower of their fair values or carrying amounts, and
depreciation is no longer recognized. In addition, the expected future
operating losses from discontinued operations will be displayed in
discontinued operations in the period in which the losses are incurred
rather than as of the measurement date. More dispositions will qualify for
discontinued operations treatment in the statement of operations under the
new rules. This statement will not have a material impact on our operations
or financial position.
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain
Sales Incentives" addresses the recognition, measurement, and income
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
statement classification for certain types of sales incentives. The
application of the guidance in Issue No. 00-14 will result in a change in
the manner in which the Company records certain types of discounts and
sales and marketing incentives that are provided to its customers. The
Company has historically recorded certain types of these incentives as
marketing expenses. Under Issue No. 00-14, the Company will record these
discounts and incentives as reductions of revenue. In April 2001, the FASB
Emerging Issues Task Force reached a consensus on Issue No. 00-25
"Accounting for Consideration from a Vendor to a Retailer in Connection
with the Purchase or Promotion of the Vendor's Products". Issue No. 00-25
addresses whether certain consideration offered by a vendor to a
distributor, including slotting fees, cooperative advertising arrangements
and "buy-down" programs, should be characterized as operating expenses or
reductions of revenue. Issue No. 00-14 and 00-25 are required to be
implemented no later than the first fiscal quarter of 2002, at which time
prior period reported amounts will be reclassified to conform to the new
presentation. The pro forma disclosures below reflect the reclassification
of both previously reported as well as current year reported revenues and
sales and marketing expenses based on the application of the guidance in
Issue No. 00-14 and Issue No. 00-25. There is no current year or historical
impact on our consolidated balance sheets.
Years ending December 31,
1999 2000 2001
Revenues:
As previously reported $ 64,088,384 $ 59,750,187 $ 43,709,528
As reclassified 62,228,216 57,708,456 41,570,276
Sales and Marketing
expenses:
As previously reported 13,571,083 12,713,756 9,619,549
As reclassified 11,710,915 10,672,025 7,480,297
(5) Inventories
Inventories consist of the following at December 31:
2000 2001
---- ----
Raw materials $ 10,335,673 $ 6,276,480
Work in process 5,101,037 462,389
Finished goods 6,460,173 4,344,274
---------- -----------
Net Inventory $ 21,896,883 $ 11,083,143
========== ==========
During 2001 the Company recorded lower of cost or market write-downs of
$4.6 million related to broadband and wireless inventory.
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
Estimated
2000 2001 useful lives
---- ---- ------------
Land $ 309,637 $ 309,637 -
Buildings and improvements 2,491,667 2,643,457 31.5 years
Leasehold improvements 470,777 473,723 5 years
Computer hardware and software 3,251,335 3,509,445 3 years
Machinery and equipment 1,597,355 1,751,453 5 years
Molds, tools and dies 1,422,073 1,489,484 5 years
Office furniture and fixtures 259,811 275,516 5 years
---------- -----------
9,802,655 10,452,715
Less accumulated depreciation (5,222,021) (6,323,799)
--------- ---------
$ 4,580,634 $ 4,128,916
========= =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(7) Commitments and Contingencies
(a) Lease Obligations
The Company leases a manufacturing and warehousing facility in Boston,
Massachusetts, an office facility in Camberley, United Kingdom, and a
technical support facility in Boca Raton, Florida. The Boston,
Massachusetts lease expires in August 2006 and the Boca Raton lease is an
at-will lease. In March 1999, the Company assumed an office lease from
Hayes Microcomputer Products, Inc. at 430 Frimley Business Park, Camberley
Surrey, UK. The Camberley landlord has notified the Company that they
would like to exercise their option to exercise the break clause in the
lease in February 2003. The Company has agreed to this contract
termination since the leased space exceeds its current requirements. The
Company is looking for a smaller office to lease which should result in
savings in rent expenses. The Company does not expect the moving expenses
to be significant. The Boca Raton, Florida lease is a sublease of 4,500
square feet as a tenant-at-will, and is used primarily as a technical
support facility. Total rent expense, under non-cancelable operating
leases, was $420,086, $463,693, and $546,034 for the years ending December
31, 1999, 2000, and 2001, respectively.
The Company's total rent expense under its operating leases was
approximately $0.5 million in 2001. The Company's estimated future minimum
rental payments, excluding executory costs, under these operating leases
are set forth in the table below. As a result of a dispute with its
landlord, the Company has withheld certain payments under its lease for
its Boston, Massachusetts manufacturing facility, in the amount of
approximately $150,000. The landlord recently notified the Company of a
lease default and asserted its termination right under the lease. The
Company has tendered payment in full of the amount demanded by landlord,
but has reserved its rights to dispute maintenance issues and the renewal
term rent rate. There is a risk that landlord could refuse the tendered
payment and take legal action asserting a default from the delay of
payment.
The Company's estimates below use as an assumption the amount of rent that
is being sought by its landlord. For the Camberley UK lease, the estimates
use the assumption that the Company's future lease costs will be the same
as its current lease costs.
Year Total
2002 $ 696,735
2003 678,647
2004 691,174
2005 692,313
2006 466,481
Thereafter $ 170,488
(b) Purchase Commitments
The Company has entered into supply arrangements with suppliers of some
components that include price and other concessions, including no-charge
components, for meeting certain purchase requirements or commitments.
Under these arrangements, the Company is committed to purchase at least
$8.0 million of components over the 30-month period commencing on January
1, 2002, provided that those components are offered at competitive terms
and prices. The Company is also required to purchase either a minimum
percentage, as measured by unit purchases or dollar amount of a certain
type of component from a supplier over a two-year period commencing on
January 1, 2002. In connection with these arrangements, the Company is
entitled to receive at least $3.0 million of no-charge components, based
upon the supplier's market price for the components, and other pricing
concessions based upon its purchase volumes. The Company received $1.2
million of these no-charge components in the fourth quarter of 2001. At
December 31, 2001, the gross inventory value of $1.2 million was offset by
a $1.2 million profit reserve in inventory, yielding a net inventory value
of zero. The Company received an additional $1.8 million of no-charge
components during the first quarter of 2002. The Company expects that the
$3.0 million total market value of "no charge" components will be consumed
in its manufacturing process and shipped in finished products to customers
in 2002. The favorable impact to the Company's statement of operations
will be recognized on a delayed basis as a purchase discount over the
total number of components acquired through the supply agreement.
(c) Contingencies
During 2001, the Company paid $513,500 in escrow as a deposit on a building
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
in Boston, Massachusetts the Company was seeking to acquire. Of
this deposit, $25,000 was nonrefundable. Subsequently, negotiations
stalled. While the Company believes that it is entitled to a return of
the $488,500 refundable portion of the deposit, plus interest, the
property-owner has objected, and the funds are being retained in escrow.
Without pursuit of the arrangement, described below, the Company would
likely need to seek legal remedies to obtain a return of its refundable
portion of the original deposit. The arrangement being pursued is that the
Company, along with other investors related to the Company, including
Frank Manning, President and a director of the Company, Peter Kramer,
Executive Vice President and a director of the Company, have engaged in
further ongoing negotiations with the property owner, whereby the group
of investors are intending to acquire the building, with the Company
participating as a minority investor. Under this arrangement, upon
acceptance, the Company would receive a pro rata portion, anticipated to
be $390,800, of the refundable portion of its deposit plus interest from
the other investors. If the group ultimately acquires the building, the
$390,000 plus interest would be applied to its investment in the acquired
property.
If this arrangement is successfully negotiated, the Company anticipates that
its initial required investment would not exceed $.54 million. The Company
would also have a right to sell its investment to the other investors
through January 5, 2003 for the Company's original purchase price. Should
the Company exercise its sale right, the Company would recover the full
amount of the refundable portion of the Company's deposit and any
additional investment the Company makes in the entity acquiring the
property. In addition, under this arrangement, the Company would
have the right to purchase the other investors' interests in the building
through December 31, 2005 in accordance with a prearranged formula.
Additionally, the Company is party to various lawsuits and administrative
proceedings arising in the ordinary course of business. The Company
evaluates such lawsuits and proceedings on a case-by-case basis, and its
policy is to vigorously contest any such claims which it believes are
without merit. The Company's management believes that the ultimate
resolution of such pending matters will not materially and adversely
affect the Company's business, financial position, results of operations
or cash flows.
The Company had no Letters of Credit outstanding at December 31, 2001.
(d) Concentrations
The Company participates in the PC peripherals industry, which is
characterized by aggressive pricing practices, continually changing
customer demand patterns and rapid technological developments. The
Company's operating results could be adversely affected should the Company
be unable to successfully anticipate customer demand accurately; manage
its product transitions, inventory levels and manufacturing process
efficiently; distribute its product quickly in response to customer
demand; differentiate its products from those of its competitors or
compete successfully in the markets for its new products.
The Company depends on many third-party suppliers for key components
contained in its product offerings. For some of these components, the
Company may only use a single source supplier, in part due to the lack of
alternative sources of supply. If the supply of a key material component
is delayed or curtailed, the Company's ability to ship the related product
or solution in desired quantities and in a timely manner could be
adversely affected, possibly resulting in reductions in net sales. In
cases where alternative sources of supply are available, qualification of
the sources and establishment of reliable supplies could result in delays
and possible reduction in net sales. In the event that the financial
condition of the Company's third-party suppliers for key components was to
erode, the delay or curtailment of deliveries of key material components
could occur. Additionally, the Company's reliance on third-party suppliers
of key material components exposes the Company to potential product
quality issues that could affect the reliability and performance of its
products and solutions. Any lesser ability to ship its products in desired
quantities and in a timely manner due to a delay or curtailment of the
supply of material components, or product quality issues arising from
faulty components manufactured by third-party suppliers, could adversely
affect the market for the Company's products and lead to a reduction in
the Company's net sales.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(8) Impairment
In March 1999, the Company entered into a series of independent agreements
to acquire most of the modem assets of Hayes Microcomputer Products, Inc.
for $5.0 million in cash. The purchase included the Hayes, Practical
Peripherals, Accura, Optima, Century 2, and Cardinal brands and product
rights for the USA, Canada, South & Central America, Europe, and the Middle
East. In July 1999 the Company finalized the purchase of Hayes Asia Pacific
for $1.1 million in cash. The acquisitions were accounted for as purchases.
The excess of cost over fair value of net assets acquired was being
amortized on a straight-line method over five years. In 2001, the Company
determined that based on its history of negative cash flows from
operations, a forecast of future positive cash flows could not be
sufficiently relied upon to support retaining the remaining goodwill assets
on the consolidated balance sheet. Therefore, the Company recorded an
impairment charge of $2.3 million in 2001. As of December 31, 2001, the
Company's net goodwill asset value on its consolidated balance sheet is
zero.
The Company also recorded negative goodwill that resulted from the purchase
of the Hayes UK., business, where the value of the net assets acquired
exceeded the cost. This transaction was independent of other Hayes
purchases. The negative goodwill is reflected on the consolidated balance
sheets as a non-current liability. The negative goodwill is being
amortized on a straight-line method over five years.
The Company assesses the impairment of its goodwill assets whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. The Company recorded goodwill for two acquisitions, Tribe
Computer Works, Inc. in 1996 and certain assets of Hayes Microcomputer
Products, Inc. in 1998. The goodwill values for Tribe and Hayes were being
amortized over 13 years and 5 years, respectively. In 2001, the Company
determined that based on its history of negative cash flows from
operations, a forecast of future positive cash flows could not be
sufficiently relied upon to support retaining the remaining goodwill
assets on the consolidated balance sheet. Therefore, the Company recorded
an impairment charge of $2.3 million in 2001. As of December 31, 2001, the
Company's net goodwill asset value on its consolidated balance sheet is
zero.
(9) Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows:
1999 2000 2001
---- ---- ----
Net loss $(1,408,756) $(3,077,248) $(18,328,922)
Foreign currency translation
adjustment (11,318) (80,788) (102,689)
Net unrealized holding gain
(loss) on investment securities (80,862) 26,255 53
--------- --------- ----------
Comprehensive loss $(1,500,936) $(3,131,781) $(18,431,558)
========== ========== ===========
(10) Long-Term Debt
On January 10, 2001, the Company obtained a mortgage for $6 million on the
real estate property located at 201and 207 South Street, Boston,
Massachusetts. This is a 20 year direct reduction mortgage. The interest
rate is fixed for one year, based on the one year Federal Home Loan Bank
rate plus 2.5 % per annum. The rate is adjusted on January 10th of each
calendar year commencing on January 10, 2002. The rate was adjusted to
4.97% on January 10, 2002. Future minimum principle payments are due as
follows at December 31, 2001.
Year Total
2002 $ 139,201
2003 151,360
2004 163,532
2005 176,683
2006 190,892
Thereafter $ 5,062,901
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(11) Stock Option Plans
At December 31, 2001 the Company had three stock option plans, which are
described below:
Employee Stock Option Plan
The Employee Stock Option Plan (the "Employee Stock Option Plan") is for
officers and certain full-time and part-time employees of the Company.
Non-employee directors of the Company are not entitled to participate
under this plan. The Employee Stock Option Plan provides for the
availability of 2,800,000 shares of common stock for issuance upon the
exercise of stock options granted under the plan. Shares of common stock
were registered for issuance under this plan in accordance with the
Securities Act of 1933. Under this plan, stock options are granted at the
discretion of the Stock Option Committee of the Board of Directors at an
option price not less than the fair market value of the stock. The options
are exercisable in accordance with terms specified by the Stock Option
Committee not to exceed ten years from the date of grant. Options
outstanding under this plan are as follows:
EMPLOYEE STOCK OPTION PLAN
Weighted average
Number of shares exercise price
Balance at December 31, 1998 1,130,002 $ 7.27
Granted 65,000 4.33
Exercised (80,775) 5.80
Expired (82,760) 7.06
--------- ----
Balance at December 31, 1999 1,031,467 $ 7.21
========= ====
Granted 377,000 7.43
Exercised (196,181) 7.09
Expired (254,675) 10.67
------- -----
Balance at December 31, 2000 957,611 $ 6.40
======= =====
Granted 631,000 2.77
Exercised - -
Expired (550,611) 5.85
-------- ----
Balance at December 31, 2001 1,038,000 $ 4.48
========= ====
The following table summarizes information about fixed stock options under
the Employee Stock Option Plan outstanding on December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.75 to $ 3.50 380,000 2.60 $ 2.20 - $ -
3.50 to 5.25 296,000 1.80 3.74 45,000 4.35
5.25 to 7.00 100,000 1.50 6.36 50,000 6.36
7.00 to 8.75 260,000 1.10 7.90 131,000 7.90
---------------- ------- ---- ---- ------- ----
$ 1.75 to $ 8.63 958,001 1.90 years $ 4.48 226,000 $ 6.86
================ ======= ========== ====== ======= ======
The Company recognized a tax benefit of $489,845 in 2000, upon the exercise
of nonqualified stock options under the Employee Stock Option Plan. These
benefits have been recorded as an increase to the value of common stock.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
1991 Director Stock Option Plan
In 1991, the Company established the Director Stock Option Plan (the
"Directors Plan"). Shares of common stock were registered for issuance
under this plan in accordance with the Securities Act of 1933. The
Directors Plan was established for all directors of the Company except for
any director who is a full-time employee or full-time officer of the
Company. Under the Directors Plan, each eligible director is automatically
granted an option to purchase 6,000 shares of common stock on July 10 and
January 10 of each year, beginning July 10, 1991. The option price is the
fair market value of the common stock on the date the option is granted.
There are 198,000 shares authorized for issuance. Each option expires two
years from the grant date. Options outstanding under this plan are as
follows:
Weighted average
Number of shares exercise price
Balance at December 31, 1998 72,000 $ 7.39
Granted 36,000 4.95
Exercised - -
Expired (36,000) 7.88
-------- ----
Balance at December 31, 1999 72,000 $ 5.93
Granted 36,000 7.69
Exercised (42,000) 5.99
Expired (6,000) 7.75
-------- ----
Balance at December 31, 2000 60,000 $ 6.76
Granted 36,000 3.26
Exercised - -
Expired (24,000) 5.37
-------- ----
Balance at December 31, 2001 72,000 $ 5.48
====== ====
The following table summarizes information about fixed stock options under
the Directors Plan on December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.75 to $ 3.50 18,000 1.500 $ 2.40 - $ -
3.50 to 5.25 18,000 1.000 4.13 18,000 4.13
5.25 to 7.00 18,000 0.500 6.75 18,000 6.75
7.00 to 8.75 18,000 0.001 8.63 18,000 8.63
---------------- ------- ----- ---- ------ ----
$ 1.75 to $ 8.75 72,000 .8 years $ 5.48 54,000 $ 6.50
================ ====== ======== ====== ====== ======
1998 Employee Equity Incentive Stock Option Plan
The 1998 Employee Equity Incentive Stock Option Plan (the "1998 Plan") was
adopted to attract and retain employees and provide an incentive for them
to assist the Company to achieve long-range performance goals, and to
enable them to participate in the long-term growth of the Company.
Non-employee directors of the Company and certain officers of the Company
are not entitled to participate under this plan. In 2000 the Board of
Directors increased the authorized number of shares available for issuance
under the 1998 Plan from 600,000 to 950,000 shares of common stock. Shares
of common stock were registered for issuance under the 1998 Plan in
accordance with the Securities Act of 1933. Under this plan, stock options
may be granted at the discretion of the Stock Option Committee of the
Board of Directors at an option price determined by the Stock Option
Committee. In addition, in 1999, the Board of Directors authorized the
Chief Executive Officer of the Company to grant up to an aggregate of
100,000 stock options to employees who are not executive officers or
directors of the Company and in 2000, the Board of Directors authorized
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
the Chief Executive Officer to grant to such persons stock options to
purchase up to 100,000 shares in any fiscal quarter, not to exceed an
aggregate of 350,000 stock options in any fiscal year. All options under
this grant have been at fair market value on the date of the grant. The
options are exercisable in accordance with terms specified by the Stock
Option Committee or, in certain cases, the Chief Executive Officer.Options
outstanding under this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 1998 27,650 $ 4.13
Granted 338,350 4.26
Exercised (4,650) 4.13
Expired (33,300) 4.25
-------- ----
Balance at December 31, 1999 328,050 $ 4.25
Granted 514,650 6.36
Exercised (42,050) 4.27
Expired (150,275) 5.01
-------- ----
Balance at December 31, 2000 650,375 $ 5.74
Granted 248,825 2.45
Exercised - -
Expired (199,300) 5.82
-------- ----
Balance at December 31, 2001 699,900 $ 4.55
======= ====
The following table summarizes information about fixed stock options under the
1998 Plan outstanding on December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.13 to $ 1.75 34,500 2.80 $ 1.18 - $ -
1.75 to 3.50 231,250 2.30 2.73 24,337 3.31
3.50 to 5.25 154,025 0.60 4.21 142,025 4.26
5.25 to 7.00 198,625 1.40 5.83 101,750 5.82
7.00 to 8.75 54,000 1.10 7.97 28,750 7.94
8.75 to 10.50 27,500 0.90 10.00 17,500 10.00
---------------- ------- ---- ----- ------ -----
$ 1.13 to $10.50 699,900 1.6 years $ 4.55 314,112 $ 5.35
================ ======= ======== ====== ======= ======
On December 31, 2001 there were 886,046 additional shares available for
issuance under all three stock option plans. The per share
weighted-average fair value of stock options granted during 1999, 2000,
and 2001 was $4.33, $6.84 and $2.70, respectively, on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1999 - expected dividend yield 0.00%,
risk-free interest rate of 6.16%, volatility 90% and an expected life of
2.75 years; 2000 - expected dividend yield 0.0%, risk-free interest rate
of 5.90%, volatility 110% and an expected life of 3.0 years; 2001 -
expected dividend yield 0.0%, risk-free interest rate of 4.63%, volatility
101% and an expected life of 1.7 years.
The Company applies APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized in the
accompanying consolidated financial statements for stock grants issued at
fair market value. Had the Company determined compensation cost based on
the fair value at the grant date for its options under SFAS No. 123, the
Company's net loss and basic and diluted net loss per share would have
been reduced to the pro forma amounts indicated below:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
1999 2000 2001
---- ---- ----
Net loss As reported $ (1,408,756) $ (3,077,248) $ (18,328,922)
Pro forma $ (1,869,478) $ (3,914,789) $ (19,012,443)
Net loss per share As reported-basic $ (.19) $ (.40) $ (2.33)
and diluted
Pro forma-basic
and diluted (.25) (.50) (2.42)
(12) Income Taxes
The provision for income taxes consists of the following:
Current Deferred Total
Year ending December 31, 1999:
US federal $ 63,699 $ (532,146) $ (468,447)
State and local (6,571) (112,917) (119,488)
------- --------- ---------
$ 57,128 $ (645,063) $ (587,935)
====== ========= =========
Year ending December 31, 2000:
US federal $ 48,160 $ (1,539,591) $ (1,491,431)
State and local - 192,515 192,515
------- ----------- -----------
$ 48,160 $ (1,347,076) $ (1,298,916)
====== =========== ===========
Year ending December 31, 2001:
US federal $ (0) $ 3,337,900 $ 3,337,900
State and local - 462,100 462,100
--------- ----------- -----------
$ (0) $ 3,800,000 $ 3,800,000
========= =========== ===========
Income tax expense (benefit) was ($587,935), ($1,298,916) and $3,800,000
for the years ending December 31, 1999, 2000 and 2001, respectively, and
differed from the amounts as computed by applying the US statutory tax
rate of 34% to pretax loss as a result of the following:
1999 2000 2001
---- ---- ----
Computed "expected" US tax benefit $ (678,980) $ (1,487,896) $ (4,939,834)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit (78,862) 127,061 304,986
Increase in valuation allowance - - 8,427,351
Other, net 169,907 61,919 7,497
--------- ------- ------
$ (587,935) $ (1,298,916) $ 3,800,000
=========== ========= ===========
Income Tax Expense
Total income tax expense (benefit) was allocated
as follows:
1999 2000 2001
---- ---- ----
Loss from operations $ (587,935) $ (1,298,916) $ 3,800,000
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes (102,322) (489,845) -
----------- --------- -----------
$ (690,257) $ (1,788,761) $ 3,800,000
=========== ========= ===========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999, 2000, and 2001 are presented below:
1999 2000 2001
---- ---- ----
Deferred tax assets:
Inventories, primarily
non-deductible reserves $ 1,832,101 $ 1,830,940 $ 2,862,364
Accounts receivable,
primarily returns and allowances 645,517 534,204 497,510
Accrued expenses, principally provisions
not currently deductible 367,761 392,011 345,249
Net operating loss carryforwards and
credits 1,542,861 3,697,196 8,307,793
Other 350,846 525,493 1,224,952
------- ------- ---------
Total gross deferred tax assets 4,739,086 6,979,844 6,979,844
--------- --------- ----------
Less valuation allowance (770,116) (1,167,000) (11,225,024)
--------- ----------- ------------
Net deferred tax assets $ 3,968,970 $ 5,812,844 $ 2,012,844
========= ========= =========
On December 31, 2001 the Company has federal and state net operating loss
carryforwards of approximately $17,720,517 and $29,656,069, respectively.
These federal and state net operating losses are available to offset
future taxable income, and are due to expire beginning 2018 and 2002,
respectively. The Company recorded a deferred tax asset valuation
allowance against a portion of the deferred tax assets that management
believes may expire unused. The valuation allowance reduces deferred tax
assets to reflect the estimated amount of deferred tax assets, which will
more likely not be realized. Realization of deferred tax assets is
dependent upon the generation of future taxable income or gains from the
sale or certain real estate.The Company has recorded a valuation allowance
against its deferred tax assets because management believes that, after
considering all the available objective evidence, historical and
prospective, with greater weight given to historical evidence, it is more
likely than not that these assets will not be realized.
(13) Significant Customers
Two customers accounted for approximately 17% and 10% of net sales for the
year ending December 31, 1999. Two customers accounted for approximately
15% and 11% of net sales for the year ending December 31, 2000. Four
customers each comprised over 10% of net sales for the year ending
December 31, 2001. On December 31, 2000, two customers comprised
approximately 48% of net accounts receivable. On December 31, 2001, two
customers comprised approximately 40% of net accounts receivable.
(14) Investment in Affiliates
In September 1999, the Company made an investment in a limited liability
company ("LLC"). The Company granted the LLC the rights to a software
license in exchange for 300,000 Class A shares of the LLC, which were
valued by the Company at $300,000. The value at which the outside
investors paid cash for shares received as part of the same equity
infusion was used by the Company to value their shares received. A gain of
$75,000 was recognized on the transaction, which was reported as other
income in fiscal 1999. In May 2000, the LLC converted to a "C"
corporation. In March 2001, and December 2001, the Company made additional
investments in the affiliate for a total of $141,665, maintaining the same
percent of ownership. As a result of the recognition of the Company's
share of equity in losses of the affiliate, the investment balance as of
December 31, 2001 has been reduced to $56,666.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(15) Supplemental Disclosure of Cash Flow Information
1999 2000 2001
---- ---- ----
Cash paid during year for interest $ - $ - $ 426,803
====== ====== =======
Cash paid during year for income taxes $ - $ - $ -
====== ====== =======
The tax benefit of the exercise of stock options resulted in increases to
common stock of $102,322 in 1999 and $ 489,845 in 2000. No options were
exercised in 2001.
(16) Dependence on Key Suppliers and Contract Manufacturers
The Company produces its products using components or subassemblies purchased
from third-party suppliers. An important factor in the Company's liquidity
is the receipt and use of "no-charge components". The Company has entered
into supply arrangements with suppliers of some components that include
price and other concessions, including no-charge components, for meeting
certain purchase requirements or commitments. Under these arrangements,
the Company is committed to purchase at least $8.0 million of components
over the 30-month period commencing on January 1, 2002, provided that
those components are offered at competitive terms and prices. The Company
is also required to purchase either a minimum percentage, as measured by
unit purchases or dollar amount of a certain type of component from a
supplier over a two-year period commencing on January 1, 2002. In
connection with these arrangements, the Company is entitled to receive at
least $3.0 million of no-charge components, based upon the supplier's
market price for the components, and other pricing concessions based upon
the Company's purchase volumes. The Company received $1.2 million of these
no-charge components in the fourth quarter of 2001. At December 31, 2001,
the gross inventory value of $1.2 million was offset by a $1.2 million
profit reserve in inventory, yielding a net inventory value of zero. The
Company expects to receive an additional $1.8 million of no-charge
components in the first quarter of 2002. The Company expects that the $3.0
million total market value of "no charge" components will be consumed in
its manufacturing process and shipped in finished products to customers in
2002. If this occurs, the Company's cash flow in 2002 will improve by $3.0
million, as it expects to avoid the purchase and payment of an equivalent
dollar amount. The Company's statement of operations will not reflect this
same impact in 2002. The favorable impact to operations will be amortized
over the life of the supply agreement.
A substantial percentage of the Company's manufacturing in 2001was done by a
contract manufacturer, Vtech Communications LTD ("Vtech"); the loss of
Vtech's services or a material adverse change in Vtech's business or in
the Company's relationship with Vtech could materially and adversely harm
the Company's business.
(17) Segment and Geographic Information
The Company's operations are classified into one reportable segment.
Substantially all of the Company's operations and long-lived assets reside
primarily in the United States. The Company's net sales to North America
and net sales to international locations for 1999, 2000, and 2001 were
comprised as follows:
1999 % of Total 2000 % of Total 2001 % of Total
---- ---------- ---- ---------- ---- ----------
North America $ 45,624,737 71% $ 42,566,187 72% $ 27,240,528 63%
International 18,463,647 29% 17,184,000 28% 16,469,000 37%
---------- --- ---------- --- ---------- ---
Total $ 64,088,384 100% $ 59,750,187 100% $ 43,709,528 100%
========== ==== ========== ==== ========== ====
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(18) Retirement Plan
The Company established a 401(k) retirement savings plan for employees in
January 1996. Under the provisions of the plan, the Company matches 25% of
an employee's contribution, up to a maximum of $350 per employee per year.
Total Company contributions in 1999, 2000 and 2001 were $56,605, $55,314,
and $46,749, respectively.
(19) Selected Quarterly Financial Information (in thousands, except per share
data, unaudited)
The following table sets forth selected quarterly financial for the years
ended December 31, 2000 and 2001. The operating results for any given
quarter are not necessarily indicative of results for any future period.
Fiscal 2000 Quarter Ending Fiscal 2001 Quarter Ending
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept.30 Dec. 31
------- ------- -------- ------- ------- ------- ------- -------
Net sales $14,033 $13,267 $16,178 $16,272 $10,265 $10,825 $12,318 $10,301
Costs of goods sold 9,652 8,682 9,992 11,078 9,875 8,091 8,889 8,338
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 4,381 4,585 6,186 5,194 390 2,734 3,429 1,963
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling 2,943 2,852 3,540 3,379 2,462 2,392 2,401 2,365
General and administrative 1,346 1,454 1,601 1,827 1,635 1,505 1,433 3,367
Research and development 1,591 1,814 1,256 1,588 1,479 1,341 1,334 1,174
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses 5,880 6,120 6,397 6,794 5,576 5,236 5,168 6,906
------ ------ ------ ------ ------ ------ ------ ------
Operating loss (1,499) (1,535) (211) (1,600) (5,186) (2,502) (1,739) (4,934)
Other income, net 115 168 136 50 (29) (128) 22 (24)
--- --- --- -- -- --- -- --
Loss before income taxes (1,384) (1,367) (75) (1,550) (5,215) (2,630) (1,717) (4,967)
Income tax expense (benefit) (443) (430) (25) (401) - - 3,800 -
------ ------ ------ ------ ------ ------ ------ ------
Net loss $ (941) $ (937) $ (50) $(1,149) $(5,215) $(2,630) $(5,517) $(4,967)
====== ====== ====== ====== ====== ====== ====== ======
Net loss per common share:
Basic and diluted $ (0.12) $ (0.12) $ (0.01) $ (0.15) $ (0.66) $ (0.33) $ (0.70) $ (0.63)
Weighted average common
And common equivalent
Shares:
Basic and diluted 7,640 7,745 7,799 7,860 7,860 7,860 7,860 7,860
EXHIBIT INDEX
2.1 Asset Purchase Agreement Between Zoom Telephonics, Inc. and Hayes
Microcomputer Products, Inc. dated March 8, 1999, filed as Exhibit
2.1 to the Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1999 (the "March 1999 Form 10-Q"). *
2.2 Asset Purchase Agreement Between Zoom Telephonics, Inc. and Hayes
Microcomputer Products, Inc. dated March 28, 1999, filed as
Exhibit 2.2 to the March 1999 Form 10-Q. *
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 (the "June 1996 Form
10-Q") * and as further amended on June 14, 2001.
10.3 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the June 1996 Form 10-Q.*
10.4 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.5 Letter Agreement between Zoom and an executive officer, filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal
quarter ending September 30, 2000. *
**10.6 Employment Agreement, filed as Exhibit 10.9 to the 1997 Form 10-K.
*
10.7 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001 (the "March 2001 Form 10-Q"). *
10.8 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
21. Subsidiaries. *
23. Consent of KPMG LLP.
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
Exhibit 10.2. Amendment to Zoom Telephonics, Inc., 1991 Directors
Stock Option Plan
AMENDMENT
TO
ZOOM TELEPHONICS, INC.
1991 DIRECTORS STOCK OPTION PLAN
The following amendment to the Zoom Telephonics, Inc., 1991 Directors
Stock Option Plan (the "Directors Plan") was approved by the Board of Directors
of the Company on March 26, 2001, subject to the receipt of stockholder
approval, which was obtained on June 14, 2001:
1. Article 15 of the Directors Plan is amended by replacing the
first sentence of Article 15 in its entirety, so that the first
sentence reads in its entirety as follows:
"The Plan shall expire on April 30, 2011 (except as to options
outstanding on that date)."
2. All other terms of the Directors Plan remain unaffected by this
amendment.
ZOOM TELEPHONICS, INC.
By: /s/ Frank B. Manning
--------------------------------
Name: Frank B. Manning
Title: President and Chief Executive Officer
Exhibit 23. Report on Financial Statement Schedule and Consent of
KPMG LLP
REPORT ON FINANCIAL STATEMENT SCHEDULE AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors;
Zoom Technologies, Inc.
The audits referred to in our report dated February 11, 2002, except as to Note
3 and Note 7, which are as of March 29, 2002, included the related financial
statement schedule for each of the years in the three-year period ended December
31, 2001 included in the annual report on Form 10-K. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to incorporation by reference in the registration statements (No.
33-42834, No. 33-90930, No. 333-60565, No. 333-75575, No. 33-90191 and No.
333-47188) on Form S-8 and No. 333-38590 on Form S-3 of Zoom Technologies, Inc.,
of our report dated February 11, 2001, except for Note 3 and Note 7, which are
as of March 29, 2002, relating to the consolidated balance sheets of Zoom
Technologies, Inc. and subsidiary as of December 31, 2000 and 2001, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows and related schedule for each of the years in
the three-year period ended December 31, 2001, which report appears in the
December 31, 2001 annual report on Form 10-K of Zoom Technologies, Inc.
KPMG LLP
Boston, Massachusetts
March 29, 2002
Schedule II
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 1999, 2000 and 2001
Balance at Charged Balance
Beginning (Credited) to Amount at end
Description of year Expense Other written off of year
-------- ------- ----- ----------- -------
Reserve for doubtful accounts $ 805,000 $ 1,289,244 (a)$ 761,901 $ 1,897,482 $ 958,663
Reserve for price protection 1,567,115 653,007 - 1,570,436 649,686
Reserve for sales returns 3,513,285 5,893,014 - 6,472,280 2,934,019
COOP advertising and other
allowances 2,367,049 4,714,611 - 4,853,437 2,228,223
--------- ---------- ------- ---------- ---------
Year ending December 31, 1999 $ 8,252,449 $12,549,876 $ 761,901 $14,793,635 $ 6,770,591
========= ========== ======= ========== =========
Reserve for doubtful accounts $ 958,663 $ (43,608) - $ 560,849 $ 354,206
Reserve for price protection 649,686 235,651 - 686,588 198,749
Reserve for sales returns 2,934,019 7,532,526 - 9,401,130 1,065,415
COOP advertising and other
allowances 2,228,223 6,566,840 - 7,285,978 1,509,085
--------- --------- ------- ---------- ---------
Year ending December 31, 2000 $ 6,770,591 $14,291,409 $ - $17,934,545 $ 3,127,455
========= ========== ======= ========== =========
Reserve for doubtful accounts $ 354,206 $ 162,416 - $ 284,351 $ 232,271
Reserve for price protection 198,749 943,820 - 403,456 739,113
Reserve for sales returns 1,065,415 5,628,163 - 6,013,536 680,042
COOP advertising and other
allowances 1,509,085 4,332,751 - 4,676,813 1,165,023
--------- --------- ------- ---------- ---------
Year ending December 31, 2001 $ 3,127,455 $11,067,150 $ - $11,378,156 $ 2,816,449
========= ========== ======= ========== =========
(a) Represents allowance for doubtful accounts of Hayes Microcomputer Products,
Inc. as of March 9, 1999.