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 year ended December 31, 2004
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 51-0448969
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [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 June 30, 2004
(computed by reference to the closing price of such stock on The Nasdaq Small
Cap Market on such date) was approximately $34,175,358.
The number of shares outstanding of the registrant's common stock, $0.01 par
value, as of March 17, 2005 was 8,995,441 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the registrant's 2005 annual
meeting of shareholders to be filed with the SEC in April 2005 are incorporated
by reference into Part III, Items 10-14 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 anticipated development, timing and success of new product and service
introductions;
o the anticipated development and expansion of our existing technologies,
markets and sales channels;
o investment in resources for product design in foreign markets;
o the development of new competitive technologies, products and services;
o approvals, certifications and clearances for our products and services;
o production schedules for our products;
o market acceptance of new products and services;
o business strategies;
o the availability of debt and equity financing;
o general economic conditions;
o trends relating to our results of operations;
o our ability to service our debt obligations; and
o the sufficiency of our capital resources.
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. Except as otherwise required by law, 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, market, sell, and support broadband and dial-up modems,
Voice over Internet Protocol or "VoIP" products and services, and other
communication-related products. Our primary objective is to build upon our
position as a leading producer of Internet access devices, and to take advantage
of a number of trends in communications including enhanced Internet access,
higher data rates, and voice calls traveling over the Internet.
Dial-up modems were Zoom(R)'s highest revenue category for many years, but
generally our sales of dial-up modems have been declining and our sales of
broadband modems have been rising. The last quarter of 2004 was the first
quarter in which our broadband modem revenues were higher than our dial-up modem
revenues.
Our dial-up modems connect personal computers and other devices to the
local telephone line for transmission of data, fax, voice, and images. 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 up to 56,000 bits per second. 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, we have
expanded our product line to include DSL modems, cable modems, and related
broadband access products. Our Asymmetric Digital Subscriber Line modems, known
as DSL modems, provide a high-bandwidth connection to the Internet through a
telephone line that typically connects to compatible DSL equipment in or near
the central telephone office. Zoom(R) is shipping a broad line of DSL modems,
mostly external. Some are fairly basic, designed to connect to the USB port of a
Windows computer or the Ethernet port of a computer, router, or other device.
Other Zoom DSL modems are more complex, and may include a router, a four-port
switch, a firewall, or other enhanced features. For a given DSL hardware
platform, we often provide model variations with a different power supply,
filters, firmware, packaging, or other customer-specific items.
Cable modems provide a high-bandwidth connection to the Internet through a
cable-TV cable that connects to compatible equipment that is typically at or
near the cable service provider. We began shipping cable modems during 2000. Our
cable modem customers in the U.S., the U.K., and other countries now include
cable service providers, original equipment manufacturers, and retailers.
We are currently shipping Voice over IP products that enable broadband
users to make phone calls through the Internet, potentially lowering the cost of
the call and providing other benefits. We have designed VoIP capabilities into
one DSL modem and also into a router that can be used with either a DSL modem or
cable modem. Our VoIP products can be purchased with or without Zoom's Global
Village(TM) VoIP service. Global Village's VoIP service enables an end-user to
make free VoIP phone calls to end-users of several VoIP service providers,
including Global Village, and also allows a user to pay to call almost any phone
in the world.
We have been designing a new generation of telephone dialers and related
telephony products. In the early 1980s Zoom introduced its first generation of
dialers, including the Demon Dialer(R) and Hotshot(TM). Dialers simplify the
placing of a phone call by dialing digits automatically. Zoom's new generation
of dialers includes a model designed for alternative long distance companies,
and a second model designed for use with prepaid phone cards.
We are incorporated in Delaware under the name Zoom Technologies, Inc. In
2002 we changed our jurisdiction of incorporation from Canada to Delaware and
our name from Zoom Telephonics, Inc. to Zoom Technologies, Inc. We conduct our
business through our operating subsidiary, Zoom Telephonics, Inc. and its
subsidiaries. Zoom Telephonics, Inc. was originally incorporated in New York in
1977 and changed its state of incorporation to Delaware in 1993. Our principal
executive offices are located at 207 South Street, Boston, MA 02111 and our
telephone number is (617) 423-1072.
AVAILABLE INFORMATION
Our Internet website address is www.zoom.com. Through our website we make
available, free of charge, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the SEC. These SEC reports can be accessed through the
investor relations section of our website.
PRODUCTS
General
The vast majority of our products facilitate communication of data through
the Internet. Our dial-up modems and ISDN modems can also link computers,
point-of-purchase terminals, or other modem-equipped devices to each other
through the traditional network without using the Internet. Our cable modems use
the cable-TV cable and our DSL modems use the local telephone line to provide a
high-speed link to the Internet. Our dialers can be used to route voice calls to
a VoIP network that may include the Internet. Our modems and dialers typically
connect to a single phone line in a home, office, or other location.
Dial-Up Modems
We have a broad line of dial-up modems with top data speeds up to 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 almost any terminal or
computer, including Windows computers, the Apple Macintosh, Linux computers, and
other computers. Our PCMCIA modems are designed for use with notebook and
sub-notebook computers equipped with standard PCMCIA slots. When sold as
packaged retail products, our dial-up 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 ("56K") 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. Our 56K modems typically support the V.90 standard as well as
lower-speed standards, and many of our 56K modems also support the newer V.92
standard.
In March and April of 1999 we acquired substantially all of the modem
product and trademark assets of Hayes Microcomputer Products, Inc., an early
leader in the modem industry. In July 2000, we acquired the trademark and
product rights to Global Village products. Global Village was a modem brand for
Apple Macintosh computers. We now sell and market dial-up modems under the
Zoom(R), Hayes(R) and Global Village names, as well as under various other
private-label brands developed for some of our large accounts. In addition, we
offer a VoIP service under the Global Village name.
In 2002, 2003 and 2004, our dial-up modems and related products accounted
for approximately 84%, 73% and 52% of our net sales, respectively.
DSL Modems
Our DSL modems incorporate the ADSL standards that are currently most
popular worldwide, including G.dmt, G.Lite, and ANSI T1.413 issue 2. In 2000, we
designed and shipped our first DSL modems, an external USB model and an internal
PCI model. In 2002 we introduced new USB and PCI models, and also introduced an
Ethernet model and a USB/Ethernet model with router features. In 2003 we
introduced a DSL modem with a built-in router, a USB port, and four switched
Ethernet ports. In September 2004 Zoom began shipping its first DSL modem with
built-in VoIP, which also included a router, a 4-port switch, and a firewall.
During the fourth quarter of 2004, Zoom introduced new modem hardware designs
for its USB, Ethernet, Ethernet/USB, and 4-port router models, shifting to newer
modem chipsets and lowering Zoom's cost of goods. Zoom expects to continue to
add DSL modems to our product line during 2005. One new model is planned to
include wireless network capability incorporating the wireless standards 802.11b
and 802.11g.
The maximum speed for the ADSL standard has been 8 megabits per second for
short phone lines, with lower speeds for longer phone lines. In 2005 Zoom
expects to begin shipping some models with ADSL 2 and 2+ standards. These modems
work with central site equipment incorporating the ADSL standard, and typically
offer enhanced functionality for central site equipment incorporating the ADSL 2
and ADSL 2+ standards. This enhanced functionality includes speeds up to 24
megabits per second for short phone lines, generally higher speeds for most
phone line lengths, the ability to transmit at high speeds for longer phone
lines (extended "reach"), and other features including lower overall power
consumption and better diagnostics. Zoom believes that it has completed the ADSL
2/2+ hardware design for Ethernet, Ethernet/USB, 4-port switch, and wireless
models, and that Zoom should be able to ship these models when the chipsets,
firmware, and testing are complete for these models.
In 2002, 2003 and 2004, our DSL modems and related products accounted for
approximately 3%, 14% and 38% of our net sales.
Bluetooth(R) Modems and Adapters
In 2003 we began shipping a Bluetooth modem, a Bluetooth USB adapter, and a
Bluetooth PC Card adapter. Bluetooth is a wire-elimination technology that is
increasingly popular for mobile phone and computer products. We plan to continue
expanding our Bluetooth product line.
ISDN Products
We have a family of modems for ISDN communications. Basic ISDN is a
telephone service that uses existing phone lines to provide two 64,000 bps
channels and one 16,000 bps channel. ISDN has higher data rates than dial-up
modems, and this can be particularly attractive for data-intensive applications
such as the transmission of graphics and video images, Internet browsing, or
video telephony. ISDN also provides much faster response times to a source of
data than those associated with dial-up modems. However, generally our ISDN
sales are declining due to competition from DSL and cable modem products and
services, which provide higher speeds than ISDN.
Cable Modems
Each cable service provider has its own approval process, in which the
cable service provider may require CableLabs(R) certification in addition to the
cable service provider's own company approval. We have obtained CableLabs(R)
certification for four types of DOCSIS-standard cable modems - PCI, USB,
Ethernet, and Ethernet/USB models. Some of these models have also received cable
service provider approvals; for instance, one Ethernet/USB model includes
approvals by AT&T, Adelphia, Charter, Comcast, Cox Communications, and Mediacom.
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 2004 we continued to sell cable modems to cable service providers and
original equipment manufacturers, both inside and outside the US, and to
computer retailers in the US. So far sales through the retail channel have been
handicapped by a number of factors, including the approval process described
above, the fact that most cable service providers offer cable modems with their
service, 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.
Voice Over Internet Protocol
In 2004 we introduced a line of products that support VoIP or "Voice over
Internet Protocol". Our first two VoIP products, the X5v and V3, use the
standards-based Session Initiation Protocol, or SIP protocol, and are thus
compatible with a wide range of other SIP-compatible VoIP products and services.
SIP allows devices to establish and manage voice calls on the internet. Both
products have a Teleport(TM) phone port that lets an end-user plug in a normal
phone to place and receive voice calls over the Internet, or to place and
receive calls over the familiar switched telephone network. Some versions of
these two products are bundled with Global Village phone service, a
Zoom-developed SIP-based service that includes a free VoIP phone service and an
optional paid service for communicating with phones that can be reached through
the switched phone network. Other versions of the X5v and V3 do not come with
Global Village service, since they are designed to be used by service providers
offering some other VoIP service. The X5v also includes a DSL modem, a router, a
firewall, a 4-port switching hub, and other features. The V3 has the same
features as the X5v, except instead of having a built-in DSL modem, the V3 has
an Ethernet port for connecting to the Ethernet port of an external DSL modem or
cable modem. Zoom devoted significant resources to the VoIP product area in
2004, and we continue to devote considerable resources to VoIP hardware,
firmware, and test, and to Zoom's Global Village phone service.
Our Global Village service has a wide array of features for routing calls,
recording voice mail, conference calling, and tracking customer usage and costs.
Global Village phone service helps Zoom to address the specific needs of its
end-user, retailer, and service provider customers. For instance, Zoom makes
Global Village available in a number of different languages and with a number of
payment options to address specific market needs. Global Village can be offered
to end-users, but it can also be offered to service providers either under the
Global Village brand or as a private-label VoIP service. Our Global Village
service has only been recently introduced and has not generated significant
revenues.
In 2005 Zoom expects to extend its VoIP product line by adding new hardware
products and by enhancing the functionality of Global Village. Zoom expects that
some of its products will be targeted toward businesses that want to add VoIP to
their existing phone system to save money on long distance calls.
Wireless Local Area Networking
In early 2005 Zoom expects to begin shipping DSL modems with Wireless-G
local area network capability. Zoom currently plans to also offer other
Wireless-G products, including USB and PC Card clients and a wireless access
point.
Dialers and Related Telephony Products
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. We recently began 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,
including prepaid phone card service providers.
International Products
Products for countries outside the US often differ from a similar product
for the US due to different regulatory requirements, country-specific phone
jacks and AC power, and language-related specifics. 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, including DSL modems and VoIP products and
services. We have received regulatory approvals for, and are currently selling
our products in a number of countries, including many European Union and South
American countries, Canada, Mexico, Poland, Saudi Arabia, Switzerland, Turkey,
the USA, and Vietnam. 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.
SALES CHANNELS
General
We sell our products primarily through high-volume distributors and
retailers, Internet service providers, voice service providers, value-added
resellers, PC system integrators, and original equipment manufacturers ("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.
During 2004 our customers who accounted for approximately 10% or more of
our total net sales were Olusum (Turkey), Dixons Group (Dixons, Currys, PC
World, and PC City), and Staples. Together these three customers accounted for
35.1% of our total net sales.
International Distributors and Retailers
In markets outside North America we sell our products primarily through
independent distributors and retailers. Our international distributors include
Computer 2000, Criterium, Informatics, Micro Peripherals, Olusum, Pouliadis, Tan
Thanh, and UMD. Our major European high-volume retailers include Business Logic,
Centromail, Dixons Group (Dixons, Currys, PC World, and PC City), and Granville
Technology Group Ltd. Our international net sales as a percentage of total net
sales have grown from 8% in 1994 to 55% in 2004. Our revenues from international
sales were $14.9 million in 2002, $15.1 million in 2003, and $17.4 million in
2004. See note 17 to our accompanying financial statements for further
information regarding our geographic sales. Approximately 75%, 69%, and 36% of
our international net sales in 2002, 2003 and 2004, respectively, were customers
in the United Kingdom. In 2004, sales to Turkey accounted for 28% of our net
sales outside North America. We believe sales growth outside of North America
will continue to 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.
We have made this investment in the past for many countries, and we expect to
make this investment for many countries and products in the future.
North American High-volume Retailers and Distributors
In the North America, we reach the PC retail market primarily through
high-volume retailers. Our North American retail distribution network includes
CDW, Fry's, Micro Electronics, PC Connection, Staples, and many others. Although
we offer a number of our products through high-volume retailers in North
America, most of our sales in North America to high-volume retailers have
historically been sales of our dial-up modems.
We sell significant quantities of dial-up and DSL modems through
distributors, who often sell to corporate accounts, retailers, value-added
resellers and other customers. Our North American distributors include Border
State Electric Supply, D&H Distributing, Ingram Micro, and Tech Data.
Internet Service Providers and Voice Service Providers
A rapidly growing portion of our business has been sale of DSL modems to
DSL service providers. We plan to continue to devote significant efforts toward
selling and supporting these customers in the U.S. and in many other countries.
In addition, we expect to offer some of our VoIP products and services to voice
service providers.
System Integrators and Original Equipment Manufacturers
Our system integrator and 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 these customers by providing 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.
SALES, MARKETING AND SUPPORT
Our sales, marketing, and support 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 through Zoom's sales
force and through commissioned independent sales representatives managed and
supported by our own staff. Most Internet service providers are serviced by
Zoom's sales force. North American technical support is primarily handled from
our Boston headquarters 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, and shipping 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.
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 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 currently provide telephone support six days
per week. Our technical support specialists also maintain a significant Internet
support facility that includes email, firmware and software downloads, and the
SmartFacts(TM) Q&A search engine. In 2001 we expanded our European technical
support to enable users in other countries to access support in languages other
than English. 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
communications network access products and VoIP services, 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. We work with these partners and other sources 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 from third parties, thereby
eliminating the need for us to develop this technology in-house. As of December
31, 2004 we had 24 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, VoIP service development, product testing,
foreign and domestic regulatory approval efforts, end-user and internal
documentation, and third-party software selection and testing.
During 2002, 2003 and 2004 we expended $3.5 million, $2.8 million and $2.9
million, respectively, on research and development activities.
MANUFACTURING AND SUPPLIERS
Our products are currently designed for high-volume automated assembly to
help assure reduced costs, rapid market entry, short lead times, and
reliability. High-volume assembly typically occurs in China, Taiwan, or Korea.
For some products we supply large kits of parts to one of several automated
contract manufacturers. For other products, our contract manufacturers obtain
some or all of the material required to assemble the products based upon a Zoom
Technologies Approved Vendor List and Parts List. Our manufacturers typically
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 manufacturing facilities
in Boston, Massachusetts 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 at our Boston facility.
Wherever the product is built, our quality systems are used to help assure that
the product meets our specifications.
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, financial problem, or other significant event at an
assembler's facility could adversely affect our shipments and revenues.
Currently a substantial percentage of our manufacturing is performed by SameTime
Electronics ("SameTime") and Vtech. The loss of these services or a material
adverse change in their business or in our relationship could materially and
adversely harm our business. To lessen the risk associated with these companies
being the primary manufacturers of a substantial portion of our products and for
a number of other reasons including cost and availability, we are also using
contract manufacturers to manufacture various products.
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 two high-volume dial-up
modem chipset manufacturers, Conexant Systems, Inc. and Agere Systems Inc. We
also buy the majority of our DSL and cable modem chipsets from Conexant. We also
purchase DSL chipsets from Analog Devices and LSI Logic. We believe Conexant,
Agere, and Analog Devices have significant resources for semiconductor design
and production, analog and digital signal processing, communications firmware
development, and application sales and support. Integrated circuit product areas
covered by these companies together include dial-up modems, DSL modems, cable
modems, wireless networking, home phone line networking, routers, and gateways.
Some of our chipset suppliers have provided us certain concessions and
incentives, such as reduced prices or free chipsets, if we purchased or agreed
to purchase a certain dollar amount of products from these suppliers.
We have experienced delays in receiving shipments of modem chipsets in the
past, and we may experience such delays in the future. Moreover, we cannot
assure 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.
We are also subject to price fluctuations in our cost of goods. Our costs
may increase if component shortages develop or lead-times stretch out.
COMPETITION
The communications network access 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 and accurately anticipate customer demand;
o manage our product transitions, inventory levels, and manufacturing
processes 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.
Some of our primary competitors by product group include the following:
o Dial-up modem competitors: Best Data, Creative Labs, Lite-On, Sitecom, and
US Robotics.
o Cable modem competitors: Arris Systems, D-Link, Hon Hai Network Systems
(formerly Ambit Microsystems), Linksys, Motorola, Netgear, Scientific
Atlanta, SMC Networks, Terayon, and Thomson.
o DSL modem competitors: 3Com, Actiontec, D-Link, Linksys, Netgear, Sagem,
Siemens (formerly Efficient Networks), Thomson, US Robotics, Westell and
ZyXEL Communications.
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, reliability and quality of service;
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 able to provide a competitive mix of the above factors
for dial-up modems, particularly when they are sold through retailers or
computer product distributors. We are less successful in selling directly to
providers of broadband access services and to PC Manufacturers.
DSL and cable modems transmit data at significantly faster speeds than
dial-up modems, which still account for a significant portion of our revenues.
DSL and cable, however, typically require a more expensive Internet access
service. In addition, the use of DSL and cable modems is currently impeded by a
number of technical and infrastructure limitations. We began shipping both cable
and DSL modems in the year 2000. We have had some success in selling to smaller
phone companies and to Internet service providers, but we have not sold
significant quantities to large phone companies or to cable service providers.
Only about one out of eighteen new US cable modem placements in 2004 were sold
at retail, and an even lower percentage were sold through retailers in most
other countries. DSL had even less success at retail in the US. Some European
countries, however, sell significant volumes of DSL modems through retailers. In
the U.K., for instance, this has resulted in Zoom placing five DSL modem models
into retailer Dixons Group. Similarly Zoom, through its distributor Olusum in
Turkey, has been successful in placing most of its DSL modem models into Turkey
for sale by a large number of retailers.
Successfully penetrating the broadband modem market 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 the majority part of the market for
broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive and uncertain approval processes of the
various cable and DSL service providers; and
o the strong relationships with service providers enjoyed by some incumbent
equipment providers, including Motorola and Scientific Atlanta for cable
modems.
Our initial sales of broadband products have been adversely affected by all
of these factors. Nevertheless, we experienced significant growth in DSL modem
sales in 2004, primarily in Turkey and other European countries.
The use of the Internet to provide voice communications services is a
relatively recent market development. We have only recently introduced our Voice
over IP Global Village products and services and are still learning the
marketplace. A substantial number of companies have emerged to provide VoIP
services, and many of these companies have more extensive financial,
engineering, product development, and marketing resources than we do. The
principal competitive factors in the market include: price, brand recognition,
quality of service, features, distribution, customer service, reliability,
network capacity and the availability of enhanced communications services.
Competitors for our VoIP service include AT&T, iConnectHere, Net2Phone,
Voicepulse, Vonage and 8x8, as well as incumbent telephone carriers, and other
providers of traditional telephone service. Many of our competitors have greater
name recognition and resources than we have and may be better positioned to more
aggressively develop, promote and sell their products, including by offering
more attractive pricing policies and bundled service arrangements. In addition,
if telecommunications rates continue to decrease, any competitive pricing
advantage of our services may be diminished or eliminated. We cannot assure that
will be able to compete effectively.
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. The patents that have been
issued expire between 2011 and 2015. We cannot assure 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, we cannot assure 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 rights to
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
Regulatory Approvals, Certifications and Other Industry Standards
Our modems and related products sold in the U.S are required to meet United
States government regulations, including regulations of the United States
Federal Communications Commission, known as the FCC, which regulates equipment,
such as modems, that connects to the public telephone network. The FCC also
regulates the electromagnetic radiation and susceptibility of communications
equipment. In addition, in order for our broadband products to be qualified for
use with a particular broadband Internet service, we are often required to
obtain approvals and certifications from the actual cable, telephone or Internet
service provider and from CableLabs(R) for cable modems. In addition to U.S.
regulations, many of our products sold abroad require us to obtain specific
regulatory approvals from foreign regulatory agencies for matters such as
electrical safety, country-specific telecommunications equipment requirements,
and electromagnetic radiation and susceptibility requirements. We submit
products to accredited testing laboratories and, when required, to specific
foreign regulatory agencies, to receive approvals for our products based on the
test standards appropriate to the target markets for a given product. We expect
to continue to seek and receive approvals for new products to allow us to reach
a large number of countries throughout the world, including countries in the
Americas, Europe, Asia, and Africa. The regulatory process can be time-consuming
and can require the expenditure of substantial resources. We cannot assure 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 change. Recent changes have been
announced by the European Union and the U.S. to reduce the use of hazardous
materials, such as lead, in electronic equipment. The implementation of these
new requirements, currently scheduled for 2006, would require Zoom and other
electronics companies to change or discontinue many products. We believe that
our transition process to comply with these new requirements may be difficult,
and may negatively impact our product costs. In addition, we may incur
additional costs involved with the disposal of inventory or returned products
that do not meet the new requirements. We cannot predict what impact, if any,
any other regulatory changes may have upon our business.
In addition to reliability, quality and content standards, the market
acceptance of our products and services is dependent upon the adoption of
industry standards so that products from multiple manufacturers are able to
communicate with each other. Our products and services, particularly our VoIP
products and services, rely heavily on a variety of communication, network and
voice compression standards to interoperate with other vendors' equipment. There
is currently a lack of agreement among industry leaders about which standard
should be used for a particular VoIP application, and about the definition of
the standards themselves. Moreover, these standards continue to evolve. The
failure of our products and services to comply, or delays in compliance, with
various existing and evolving standards could delay or interrupt volume
production of our VoIP telephony or other new products and services, expose us
to fines or other imposed penalties, or adversely affect the perception and
adoption rates of our products and service, any of which could harm our
business.
Internet Telephony Services
The use of the Internet and private IP networks to provide VoIP services is
a relatively recent development. Although providing such services is currently
permitted and largely unregulated within the U.S., several foreign governments
have adopted laws and regulations that could restrict or prohibit the providing
of VoIP services. More aggressive domestic or international regulation of the
Internet in general, and Internet telephony providers and services specifically,
may adversely affect our ability to introduce and market our VoIP services and
products successfully.
Our ability to provide VoIP communications services on the terms we
currently provide arise in large part from the fact VoIP services are not
currently subject to the same regulation as traditional telephony. Because these
services are not currently regulated to the same extent as traditional
telephony, VoIP providers can currently avoid paying charges that traditional
telephone companies must pay. Local exchange carriers are lobbying the FCC and
the states to regulate VoIP on the same basis as traditional telephone services.
The FCC and several states are examining this issue. If the FCC or any state
determines to regulate VoIP, they may impose surcharges, taxes or additional
regulations upon providers of Internet telephony. These surcharges could include
access charges payable to local exchange carriers to carry and terminate
traffic, contributions to the Universal Service Fund (USF) or other charges.
Regulations requiring compliance with the Communications Assistance for Law
Enforcement Act (CALEA), or provision of the same type of 911 services as
required for traditional telecommunications providers could also place a
significant financial burden on us depending on the technical changes required
to accommodate the requirements. The imposition of any such additional fees,
charges, taxes and regulations on IP communications services could materially
increase our costs, require us to modify our service, delay our products and may
limit or eliminate our competitive pricing.
In many countries outside the U.S. in which we operate or our services are
sold, the status of the laws that may relate to our VoIP services is unclear. We
cannot be certain that we will be able to comply with existing or future
requirements, or that we will be able to continue to be in compliance with any
such requirements. Our failure to comply with these requirements could
materially adversely affect our ability to continue to offer our VoIP service in
these jurisdictions.
Regulation of the Internet
In addition to regulations addressing our modems and related products and
our Internet telephony services, other regulatory issues relating to the
Internet in general could affect our ability to provide our services. Congress
has adopted legislation that regulates certain aspects of the Internet,
including online content, user privacy, taxation, liability for third-party
activities and jurisdiction. In addition, a number of initiatives pending in
Congress and state legislatures would prohibit or restrict advertising or sale
of certain products and services on the Internet, which may have the effect of
raising the cost of doing business on the Internet generally.
Federal, state, local and foreign governmental organizations are
considering other legislative and regulatory proposals that would regulate the
Internet. We cannot predict whether new taxes will be imposed on our services,
and depending on the type of taxes imposed, whether and how our services would
be affected thereafter. Increased regulation of the Internet may decrease its
growth and hinder technological development, which may negatively impact the
cost of doing business via the Internet or otherwise harm our business.
BACKLOG
Our backlog as of March 2, 2005 was $1.6 million, and on March 3, 2004 was
$1.8 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, 2004 we had 154 full-time employees (including 5
employees hired on a temporary basis) versus 159 in 2003. Of the 2004 total, 24
were engaged in research and development, 72 were involved in purchasing,
assembly, packaging, shipping and quality control, 36 were engaged in sales,
marketing and technical support, and the remaining 22 performed accounting,
administrative, management information systems, and executive functions. None of
our employees is 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 56 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 53 Executive Vice President and Director
Robert A. Crist 61 Vice President of Finance and Chief
Financial Officer
Terry J. Manning 53 Vice President of Sales and Marketing
Dean N. Panagopoulos 47 Vice President of Network Products
Deena Randall 51 Vice President of Operations
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. 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. Mr. Manning is the brother of Terry
Manning, our vice president of sales and marketing.
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. (now Getronics), 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.
ITEM 2 - PROPERTIES
Our corporate headquarters are located at 201 and 207 South Street, Boston,
Massachusetts. Approximately 11,000 square feet of this 62,000 square foot
facility 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. Our mortgage is a five-year balloon mortgage that is amortized on
a 20-year basis and is due in January 2006.
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 more
manufacturing space than we require for our current operations. The term of this
lease is due to expire in August 2006. In the event this lease is not further
extended, we believe we will be able to find alternative space that is suitable
and adequate for our manufacturing and warehousing operations.
In March 1999 we assumed an office lease from Hayes Microcomputer Products,
Inc. at 430 Frimley Business Park, Camberley, Surrey, U.K. We have been offered
an extension of this lease term for 5 years commencing March 2005. We expect to
extend this lease, which has an option for either party to terminate with 6
months notice in March 2007 or later.
In September 2002 we entered into a five-year lease, as a tenant, for
approximately 3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton,
Florida. We primarily use this facility as a technical support facility.
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, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the Nasdaq Small Cap 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 Small Cap
Market.
Fiscal Year Ended December 31, 2003 High Low
---- ---
First Quarter...................... $ 0.870 $ 0.650
Second Quarter..................... 1.310 0.640
Third Quarter...................... 3.750 1.040
Fourth Quarter..................... 4.450 1.790
Fiscal Year Ended December 31, 2004 High Low
---- ---
First Quarter...................... $ 6.400 $ 3.620
Second Quarter..................... 5.680 3.510
Third Quarter...................... 5.010 2.020
Fourth Quarter..................... 4.450 3.190
As of March 17, 2005, there were 8,995,441 shares of our common stock
outstanding and approximately 245 holders of record of our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
We did not sell any unregistered securities during the fourth quarter of
2004.
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. The payment of
dividends is also restricted by the covenants in our Silicon Valley Bank line of
credit agreement.
REPURCHASES BY THE COMPANY
During the fourth quarter of 2004, we did not repurchase any shares of our
common stock on our own behalf or for any affiliated purchaser.
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 ended December 31, 2002, 2003 and 2004 and our
balance sheet data as of December 31, 2003 and 2004 have been derived from our
consolidated financial statements, which have been audited by KPMG LLP, an
independent registered public accounting firm, and are included elsewhere in
this report. Our statement of operations data for the years ended December 31,
2000 and 2001 and our balance sheet data as of December 31, 2000, 2001, and 2002
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 Ended December 31,
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(In thousands) except per share amounts
Statement of Operations Data:
Net sales............................. $ 57,708 $ 41,570 $ 37,274 $ 33,335 $ 31,412
Cost of goods sold.................... 39,404 35,193 27,937 23,120 23,346
------ ------ ------ ------ ------
Gross profit....................... 18,304 6,377 9,337 10,215 8,066
------ ------ ------ ------ ------
Operating expenses:
Selling............................ 10,672 7,480 5,848 5,271 4,800
General and administrative......... 6,228 7,938 3,405 3,118 3,620
Research and development........... 6,249 5,328 3,527 2,767 2,927
------ ------ ------ ------ ------
Total operating expenses........... 23,149 20,746 12,780 11,156 11,347
------ ------ ------ ------ ------
Operating income (loss)............ (4,845) (14,370) (3,443) (941) (3,281)
Other income (expense), net........... 469 (159) 67 273 209
------ ------ ------ ------ -----
Income (loss) before income taxes.. (4,376) (14,529) (3,376) (668) (3,072)
Income tax expense (benefit).......... (1,299) 3,800 2,015 - -
------ ------ ------ ------ -----
Income (loss) before extraordinary
item............................... (3,077) (18,239) (5,391) (668) (3,072)
Extraordinary gain on elimination
of negative goodwill.................. - - 255 - -
------ ------ ------ ------- ------
Net income (loss).................. (3,077) (18,329) (5,136) (668) (3,072)
====== ====== ====== ====== ======
Earnings (loss) per common and common equivalent share:
Income (loss) before extraordinary item:
Basic and diluted.................. $ (.40) $ (2.33) $ (.68) $ (.08) $ (.36)
Extraordinary gain on elimination of
negative goodwill.................. $ - $ - $ .03 $ - $ -
========= ========= ========= ========= =========
Net income (loss):
Basic and diluted.................. $ (.40) $ (2.33) $ (.65) $ (.08) $ (.36)
========= ========= ========= ========= =========
Weighted average common and common equivalent shares:
Basic and diluted.................. 7,757 7,861 7,861 7,883 8,590
Years Ended December 31,
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital....................... $ 23,562 $ 18,218 $ 15,341 $ 15,647 $ 14,837
Total assets.......................... 46,960 29,185 22,633 21,974 21,052
Long-term obligations................. 369 6,001 5,342 5,096 4,872
Total stockholders' equity............ 36,747 18,416 13,485 13,470 12,668
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
We derive our net sales primarily from sales of Internet related hardware
products, principally modems, to retailers, distributors, Internet Service
Providers and Original Equipment Manufacturers. We sell our products through a
small direct sales force and third party sales agents. Our employees are
primarily located at our headquarters in Boston, Massachusetts, and we have a
sales office in the United Kingdom. We obtain our hardware components from third
party suppliers and we outsource most of the product assembly work to contract
manufacturers, currently in Asia. We perform most of the packaging and
distribution effort at our production and warehouse facility in Boston,
Massachusetts. We also utilize a third party distribution facility in the United
Kingdom.
Historically we derived a majority of our net sales from the retail
after-market sale of dial-up modems to customers seeking to add or upgrade a
modem in their personal computers. In recent years the size of this market,
along with our sales to this market has declined, as personal computer
manufacturers have incorporated a modem as a built-in component in most consumer
personal computers and as increasing numbers of consumers world-wide have
switched to broadband Internet access. The general consensus of communications
industry analysts is that after-market sales of dial-up modems will continue to
decline. There is also consensus among industry analysts that the market for
broadband Internet connection devices, such as cable modems and DSL modems, will
grow rapidly during the decade. In response to increased and forecasted demand
for faster connection speeds and increased modem functionality, we have invested
and continue to invest resources to advance our product line of broadband
modems, especially DSL modems, and we have experienced increased sales of these
modems that has partially offset our declining sales of dial-up modems. The last
quarter of 2004 was the first quarter in which our broadband modem revenues were
higher than our dial-up modem revenues.
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 modem 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 net sales. We also outsource aspects of our manufacturing to
contract manufacturers as a means of reducing our costs of production, and to
provide us with greater flexibility in our production capacity.
In recent years we have realized the benefit of reduced unit costs for our
dial-up modems. A portion of the cost reduction realized in our financial
statements has been derived from purchase discount programs with our chipset
suppliers. From the first quarter of 2002 through the fourth quarter of 2004, we
realized significant benefits as a result of our volume purchases under these
programs. These initial programs and their financial benefits expired during
2004, and in late 2004, we negotiated new reduced pricing for modem chipsets, if
we achieve certain targets.
During 2003 and 2004 the downward pressure on retail pricing for dial-up
modems moderated, likely because fewer suppliers were active in the market.
However, the competition for broadband modem sales continues to be intense,
characterized by continuing price pressures. As a result, in the past several
years, we generally are able to realize higher margins on our dial-up modems
than with our broadband modems.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following is a discussion of what we view as our more significant
accounting policies and estimates. These policies and estimates 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 consolidated financial statements. Where noted,
material differences could result in the amount and timing of our net sales,
costs, and expenses for any period if we made different judgments or used
different estimates.
REVENUE (NET SALES) RECOGNITION. We primarily sell hardware products to our
customers. The hardware products include dial-up modems, DSL modems, cable
modems, embedded modems, ISDN modems, telephone dialers, and wireless and wired
networking equipment. We earn a small amount of royalty that is included in our
net sales, primarily from internet service providers. We generally do not sell
software. We began selling services in 2004. We introduced our Global Village
VoIP service in late 2004, but sales of those services in 2004 were not
material.
We derive our net sales 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 recognize hardware net sales 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. We verify the delivery date on all significant FOB destination
shipments made during the last 10 business days of each quarter.
Our net sales of hardware are reduced by certain events which are
characteristic of the sales of hardware to retailers of computer peripherals.
These events are product returns, certain sales and marketing incentives, price
protection refunds, and consumer and in-store mail-in rebates. Each of these is
accounted for as a reduction of net sales based on detailed management
estimates, which are reconciled to actual customer or end-consumer credits on a
monthly or quarterly basis.
Our 2004 VoIP service revenues were recorded as the end-user-customer
consumed billable VoIP services. No sales of VoIP services were made to
resellers in 2004. The end-user-customer became a service customer by electing
to sign up for the Global Village billable service on the Internet. Zoom
recorded revenue either as billable services were consumed or as a monthly
flat-fee service was billed.
Product Returns. Products are returned by retail stores and distributors
for inventory balancing, contractual stock rotation privileges, and warranty
repair or replacements. We estimate the sales and cost value of expected future
product returns of previously sold products. Our estimates for product returns
are based on recent historical trends plus estimates for returns prompted by,
among other things, new product introductions, announced stock rotations and
announced customer store closings, etc. Management reviews historical returns,
current economic trends, and changes in customer demand and acceptance of our
products when estimating sales return allowances. The estimate for future
returns is recorded as a reserve against accounts receivable, a reduction of net
sales, and the corresponding change to inventory and cost of sales. The
relationship of quarterly physical product returns to quarterly product sales
remained relatively stable for many years, but has been declining from a high of
10.6% to a low of 5.4% in the past two years as retail sales as a percent of
total sales have declined.
Price Protection Refunds. We have a policy of offering price protection to
certain of our retailer and distributor customers for some or all their
inventory. Under the price protection policies, when we reduce our prices for a
product, the customer receives a credit for the difference between the original
purchase price and our reduced price for their unsold inventory of that product.
Our estimates for price protection refunds are based on a detailed understanding
and tracking by customer and 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 reduction of net sales and a reserve against accounts receivable.
Reductions in our net sales due to price protection were $.7 million in 2002,
$.2 million in 2003, and $.1 million in 2004.
Sales and Marketing Incentives. Many of our retailer customers require
sales and marketing support funding, usually set as a percentage of our sales in
their stores. The incentives were reported as reductions in our net sales and
were $1.7 million in 2002, $1.5 million in 2003, and $1.3 million in 2004. The
decline in 2004 was primarily due to lower retailer sales.
Consumer Mail-In and In-Store Rebates and Store Rebates. Our estimates for
consumer mail-in rebates are based on a detailed understanding and tracking by
customer and sales program, supported by actual rebate claims processed by the
rebate redemption centers plus an accrual for an estimated lag in processing at
the redemption centers. Our estimates for store rebates are comprised of actual
credit requests from the eligible customers. The estimate for mail-in and store
rebates is recorded as a reserve against accounts receivable and a reduction of
net sales in the same period that the rebate obligation was triggered.
Reductions in our net sales due to the consumer rebates were $1.6 million in
2002, $2.1 million in 2003, and $1.4 million in 2004. The decline in 2004 was
primarily due to lower retailer sales.
To ensure that the sales, discounts, and marketing incentives are recorded
in the proper period, we perform 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
equal to the above-discussed net sales adjustments for estimates of product
returns, price protection refunds, and consumer and store rebates. These
reserves are drawn down as actual credits are issued to the customer's accounts.
Our bad-debt write-offs have not been significant during 2002, 2003 and
2004.
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 the inventory of a particular product range from 0% to 100%, based on
management's estimate of the probability that the material will not be consumed
or that it will be sold below cost. 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 write-down the inventory
on a "lower of cost or market" basis. In 2002, 2003 and 2004 we recorded charges
against inventory of $.7 million, $.3 million and $0 million, respectively, as a
result of lower of cost or market valuation issues.
During the last three years we benefited from various component supply
arrangements that provided us with free products based on the amount of goods we
purchased from the supplier. The favorable impact to our statement of operations
was recognized as the products employing the acquired components were sold. A
new supply arrangement for 2005, with free products to be earned on purchases,
will receive similar accounting treatment.
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 tax expense and deferred income tax position. 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. We have recorded a 100% valuation allowance against our deferred tax
assets. It is management's estimate 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. If we establish a record of continuing profitability, at some point we
will be required to reverse the valuation allowance and restore the deferred
asset value to the balance sheet, recording an equal income tax benefit which
will increase net income in that period(s).
On December 31, 2004, the Company had federal net operating loss
carryforwards of approximately $28,638,000. These federal net operating losses
are available to offset future taxable income, and are due to expire beginning
2019. The Company had Massachusetts net operating loss carryforwards of
approximately $26,824,000. These state net operating losses are available to
offset future taxable income, and are primarily due to expire in years ranging
from 2005 to 2009.
VALUATION OF INVESTMENT IN AFFILIATES. We have a minority interest in a
privately held software company, which we have been accounting for under the
equity method of accounting. Under the equity method of accounting, our
investment is increased or decreased, not below zero, based upon our
proportionate share of the net earnings or losses of the investee company. We
made our original investment in 1999, at the time of the company's formation,
and have subsequently made additional investments which have resulted in our
ownership interest of 23% to 28%, depending on the treatment of employee stock
options. As a result of the losses incurred by the investee subsequent to our
investments, our investment balance was reduced to zero during 2002. We
discontinued applying the equity method when the investment was reduced to zero
and did not provide for additional losses, as we have not guaranteed obligations
of the investee and are not committed to provide further financial support. The
investee has recently reported to us that it is beginning to achieve
profitability and that its prospects have been improving in recent months. We
have requested that management of the investee provide us with audited financial
statements in the near term to allow us to verify this financial information. If
the investee reports net income in future periods, we will resume applying the
equity method only after our share of that net income exceeds the share of net
losses not recognized during the period the equity method was suspended.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of net sales:
Years Ended December 31,
2002 2003 2004
---- ---- ----
Net sales............................... 100.0% 100.0% 100.0%
Cost of goods sold...................... 75.0 69.4 74.3
---- ---- ----
Gross profit.......................... 25.0 30.6 25.7
Operating expenses:
Selling............................... 15.7 15.8 15.3
General and administration............ 9.1 9.3 11.5
Research and development.............. 9.5 8.3 9.3
---- ---- ----
Total operating expenses.............. 34.3 33.5 36.1
---- ---- ----
Operating income (loss)................. (9.3) (2.8) (10.4)
Other income (expense), net.......... .2 .8 .6
--- ---- ----
Loss before income taxes.. ............ (9.1) (2.0) (9.8)
Income tax expense (benefit)......... 5.4 - -
Extraordinary Gain...................... .7 - -
----- ----- ------
Net income (loss) ...................... (13.8)% (2.0)% (9.8)%
===== ===== ======
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
The following is a discussion of the major categories of our consolidated
statement of operations, comparing the financial results for the year ended
December 31, 2004 with the year ended December 31, 2003. The major categories
discussed are: Net Sales, Cost of Goods Sold and Gross Profit, Operating
Expenses, Other Income (Expense), Income Tax Expense (Benefit), and Net Income
(Loss).
NET SALES. Our total net sales declined year-over-year by 5.8%. In 2004, we
primarily generated our sales by selling dial-up modems to the electronics
after-market via distributors and retailers. As noted in the overview, the
dial-up modem market continues to decline and Zoom sales of dial-up modems
declined due to declines of both unit sales volume and average selling prices.
Our growing sales category, broadband modems, did not grow sufficiently in 2004
to offset the decline in our dial-up modem sales, as our total net sales
decreased 5.8% to $31.4 million in 2004 from $33.3 million in 2003.
As shown in the table below, our net sales for dial-up modems declined $7.7
million, or 32.0%, from $24.2 million in 2003 to $16.5 million in 2004. This
decline was primarily attributable to both lower unit sales and lower prices,
reflecting the declining retail market for these modems. Our broadband net sales
increased $6.1 million, or 91.7%, from $6.6 million in 2003 to $12.7 million in
2004. This increase was primarily attributable to increased unit sales of DSL
modems, particularly in international markets. Our DSL sales increased 161% from
$4.5 million in 2003 to $11.8 million in 2004. Net sales in our other product
sales categories, which include ISDN modems, cameras, wireless networking
equipment, and telephone dialers, declined 10.3%, from $2.5 million to $2.3
million.
$000 Total Year Total Year $ %
Net Sales 2003 2004 Change Change
-------------- ---------- ---------- --------- --------
Dial-up $ 24,198 $ 16,456 $( 7,742) ( 32.0)%
Broadband 6,629 12,706 6,077 91.7 %
Other Products 2,508 2,250 ( 258) ( 10.3)%
========= ========= ========= ========
Total Net Sales $ 33,335 $ 31,412 $( 1,923) ( 5.8)%
As shown in the table below, our net sales in North America decreased by
23.0% to $14.0 million in 2004, compared to our net sales in 2003. Our 2004
international net sales increased by 15% to $17.4 million, compared to our net
sales in 2003. These changes reflect our declining sales of dial-up modems
worldwide, our stronger broadband sales in the international markets, and the
positive currency translation impact, for converting British Pounds and Euros to
dollars (a $.9 million benefit), of a significant portion of our international
sales. Our international sales benefited from strong growth in Turkey, primarily
relating to DSL modem sales, accounting for 28% of our total 2004 international
sales.
$000 Total Year Total Year $ %
Net Sales 2003 2004 Change Change
--------------- ---------- ---------- -------- --------
North America 18,212 14,027 (4,185) (23.0)%
International 15,123 17,385 2,262 15.0 %
========== ========== ======== ========
Total Net Sales $ 33,335 $ 31,412 $(1,923) ( 5.8)%
GROSS PROFIT. Our gross profit was $8.1 million in 2004 compared to $10.2
million in 2003. Our gross profit as a percentage of net sales decreased to
25.7% in 2004 from 30.6% in 2003. The primary reason for this decline was a
shift in the sales mix from dial-up modems, our highest margin product category,
to broadband modems, which have lower margins.
OPERATING EXPENSE. Total operating expense increased by $.2 million to
$11.3 million in 2004 from $11.2 million in 2003. Total operating expense as a
percentage of net sales increased to 36.1% in 2004 from 33.5% in 2003. The table
below shows total operating expenses and its three major categories: selling
expense, general and administrative expense, and research and development
expense.
$000 Total Year % Net Total Year % Net $000 %
Operating Expenses 2003 Sales 2004 Sales Change Change
-------------------------- ---------- ----- ---------- ----- -------- -------
Selling Expense $ 5,270 15.8% $ 4,800 15.3% $( 470) ( 8.9)%
General and Administrative
Expense $ 3,118 9.4% $ 3,620 11.5% $ 502 16.1 %
Research and Development
Expense $ 2,767 8.3% $ 2,927 9.3% $ 160 5.8 %
======= ====== ======= ==== ======= ======
Total Operating Expense $11,155 33.5% $11,347 36.1% $ 192 1.7 %
Selling Expense. Selling expense decreased to $4.8 million in 2004 from
$5.3 million in 2003. Selling expense as a percentage of net sales was 15.3% in
2004 and 15.8% in 2003. The $.5 million decrease in selling expense was
primarily due to reduced outbound freight ($.2 million), marketing costs ($.1
million), personnel costs ($.1 million), and sales commissions ($.1 million) as
a result of lower overall sales volume and lower sales in the retail channel.
These decreases were partially offset by an adjustment to our estimated European
Value Added Tax expense ($.1 million).
General and Administrative Expense. General and administrative expense
increased to $3.6 million in 2004 from $3.1 million in 2003. General and
administrative expense as a percentage of net sales were 11.5% in 2004 and 9.4%
in 2003. The $.5 million increase in general and administrative expense was
primarily due to acquisition-related expense for a non-consummated transaction
($.3 million) and salaries and benefits for increased personnel costs for
Information Systems and Sarbanes-Oxley compliance ($.1 million).
Research and Development Expense. Research and development expense
increased to $2.9 million in 2004 from $2.8 million in 2003. Research and
development expenses as a percentage of net sales increased to 9.3% in 2004 from
8.3% in 2003. The $.16 million increase in research and development expenses was
primarily due to increased personnel costs ($.1 million) and related expenses.
OTHER INCOME (EXPENSE). Other income, net declined to $.21 million in 2004
from $.27 million in 2003. The decline was primarily the result of an increased
foreign exchange loss and the sale in 2003 of a web domain name, partially
offset by increased interest income on our cash investments.
INCOME TAX EXPENSE (BENEFIT). We did not record any net tax expense or
benefit in 2004 or 2003. This accounting treatment is described in further
detail under the caption "Critical Accounting Policies and Estimates" above and
in note 12 to the consolidated financial statements.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET SALES. Our total net sales declined year-over-year. Our year-over-year
sales decline was comprised of declines of both unit sales volume and average
selling prices. Our growing sales category, broadband modems, did not grow
sufficiently in 2003 to offset the decline in our dial-up modem sales, as our
total net sales decreased 10.6% to $33.3 million in 2003 from $37.3 million in
2002.
Our net sales for dial-up modems declined $7.2 million, or 23.0%, from
$31.4 million in 2002 to $24.2 million in 2003. This decline was primarily due
to both lower unit sales and lower prices, reflecting the declining retail
market for these modems. Our broadband net sales increased $3.3 million, or 99%,
from $3.3 million in 2002 to $6.6 million in 2003. This increase was primarily
due to increased unit sales of DSL modems. Net sales in our other product sales
categories, which include ISDN modems, cameras, wireless networking equipment,
telephone dialers, etc., declined 1.0%, from $2.5 million to $2.5 million.
Our net sales in North America decreased by 18.5% to $18.2 million in 2003,
compared to our net sales in 2002. Our 2003 international net sales increased by
1.3% to $15.1 million, compared to our net sales in 2002. These changes reflect
our declining sales of dial-up modems worldwide, our stronger broadband sales in
the international markets, and the positive currency translation impact, for
converting British Pounds and Euros to dollars, of a significant portion of our
international sales.
GROSS PROFIT. Our gross profit was $10.2 million in 2003 compared to $9.3
million in 2002. Our gross profit as a percentage of net sales increased to
30.6% in 2003 from 25.0% in 2002. The primary reason for this improvement was a
marked improvement in the gross profit percentage of net sales of both dial-up
modems and broadband modems. The improved gross profit percentage for both
dial-up and broadband modems resulted from cost reductions which exceeded market
price reductions.
Selling Expense. Selling expense decreased to $5.3 million in 2003 from
$5.8 million in 2002. Selling expense as a percentage of net sales was 15.8% in
2003 and 15.7% in 2002. The $.6 million decrease in selling expense was
primarily due to reduced personnel costs, marketing costs, and sales
commissions, which were partially offset by higher freight delivery costs.
General and Administrative Expense. General and administrative expense
decreased to $3.1 million in 2003 from $3.4 million in 2002. General and
administrative expense as a percentage of net sales was 9.4% in 2003 and 9.1% in
2002. The $.3 million decrease in general and administrative expense was
primarily due to reduced personnel costs, depreciation and amortization,
insurance costs, and legal and audit costs.
Research and Development Expense. Research and development expense
decreased to $2.8 million in 2003 from $3.5 million in 2002.
Research and development expense as a percentage of net sales decreased to 8.3%
in 2003 from 9.5% in 2002. The $.8 million decrease in research and development
expense was primarily due to reduced personnel costs and related expenses.
OTHER INCOME (EXPENSE). Other income, net improved to $.27 million in 2003
from $.07 million in 2002. The improvement was primarily the result of higher
rental income from leased excess space at our headquarters facility and reduced
interest payments on our variable-rate mortgage note for our headquarters
facility.
INCOME TAX EXPENSE (BENEFIT). We did not record any net tax expense or
benefit in 2003. In 2002, we recorded a $2.0 million income tax expense to
increase our valuation allowance against our then remaining net deferred tax
asset, which has remained at a net zero value since that time. This accounting
treatment is described in further detail under the caption "Critical Accounting
Policies and Estimates" above and in note 12 to the consolidated financial
statements.
EXTRAORDINARY GAIN. In 2003 we did not record any extraordinary gain or
(loss). In 2002 we recorded an extraordinary gain of $.26 million from the
elimination of the remaining negative goodwill on our balance sheet related to a
previous acquisition.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2004, we had working capital of $14.8 million, including
$9.4 million in cash and cash equivalents.
In 2004 operating activities used $2.2 million in cash. Our net loss in
2004 was $3.1 million, which included non-cash depreciation and amortization
expense of $.4 million. Sources of cash from operations included a reduction of
accounts receivable of $.8 million and an increase of accounts payable and
accrued expenses of $.1 million. Uses of operating cash included an increase of
inventory of $.3 million and an increase of prepaid expenses of $.1 million. Our
decrease in accounts receivable reflected our lower sales. Our increase in
inventory was primarily related to DSL modem in-process inventory.
In 2004 our net cash used in investing activities was $.2 million, which
was used to purchase property, plant and equipment.
In 2004 cash was provided by financing activities of $1.9 million
consisting of proceeds from the exercise of employee stock options of $2.1
million, partially offset by $.2 million for monthly principal payments on our
$6.0 million mortgage on our headquarters facility. Our mortgage is a 5-year
balloon mortgage, payable in full in January, 2006, that is amortized on a
20-year basis. The interest rate is adjusted annually in January of each year
based on the Federal Home Loan Bank rate plus 2.5 % per annum. In 2004 the
interest rate was 3.99%. As of January 10, 2005 the rate of interest changed to
5.80%. Recently we renegotiated the rate to 5.0% effective February 10, 2005. As
of December 31, 2004, $5.1 million was outstanding on this loan, which will be
due and payable on January 10, 2006. Based upon recent indications of interest
from potential lenders, we believe we will be able to refinance the mortgage or,
in the alternative, sell our buildings for a purchase price significantly in
excess of the outstanding amounts under the loan.
To conserve cash and manage our liquidity, we have implemented expense
reductions throughout 2002, 2003, and 2004. The employee headcount was 329 at
December 31, 2000, which was reduced to 185 at December 31, 2002, 159 at
December 31, 2003, and to 154 at December 31 2004. We plan to continue to assess
the cost structure as it relates to our revenues and cash position in 2004, and
may make further reductions if these actions are deemed necessary.
On March 16, 2005 Zoom Telephonics, Inc., our wholly owned subsidiary,
entered into a Loan and Security Agreement with Silicon Valley Bank that
provides for a revolving line of credit of up to $2 million. The revolving line
of credit can be used to (i) borrow revolving loans for working capital and
general corporate purposes, (ii) issue letters of credit, (iii) enter into
foreign exchange forward contracts, and (iv) support certain cash management
services. Revolving loans will bear interest at a floating rate of interest
equal to Silicon Valley Bank's prime rate plus 1%. This interest rate will be
reduced to Silicon Valley Bank's prime rate plus .5% if we record two
consecutive quarters of combined profitability.
On March 15, 2006 Silicon Valley Bank's commitment to extend revolving
loans under the Loan and Security Agreement terminates and all outstanding
obligations under the agreement become due.
The revolving loans under the Loan and Security Agreement are secured by a
first priority lien on substantially all of our assets, excluding intellectual
property and real estate. We guaranteed the obligations of Zoom Telephonics
under the revolving line of credit and pledged all of the stock of Zoom
Telephonics in support of our guarantee. The Loan and Security Agreement
requires that Zoom Telephonics maintain a minimum adjusted quick ratio and a
minimum net worth. In addition, Zoom Telephonics is required to obtain Silicon
Valley Bank's prior written consent to among other things, dispose of assets,
make acquisitions, be acquired, incur indebtedness, grant liens, make
investments, pay dividends, or repurchase stock. This consent may not be
unreasonably withheld.
The Loan and Security Agreement contains events of default that include
among other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Silicon Valley
Bank is entitled to, among other things, accelerate all obligations of Zoom
Telephonics and sell its assets to satisfy obligations under the Loan and
Security Agreement.
We believe our current availability under the line is $2 million.
We believe we have sufficient resources to fund our planned operations over
the next 12 months. However, if we are unable to generate net income, 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. Moreover, as provided above, our liquidity could be significantly
impaired if we are not able either to refinance our mortgage or sell our
buildings on or before the maturity date of the mortgage in January 2006. See
"Risk Factors" for further information with respect to events and uncertainties
that could harm our business, operating results, and financial condition.
COMMITMENTS
The following table summarizes our contractual obligations and commitments
as of December 31, 2004.
Contractual Obligations Payments Due by Period
(as of December 31, 2004)
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
----- --------- --------- --------- -------
Long Term Debt (1) $ 5,382,430 $ 484,741 $ 4,897,689 - -
Operating Leases (2) 1,311,239 846,985 464,254 - -
------------ ------------ ----------- ----------- ---------
Total $ 6,693,669 $ 1,331,726 $ 5,361,943 - -
============ ============ =========== =========== =========
(1) Represents the mortgage on our corporate headquarters, including estimated
interest payments at 5%. In January 2001 we received $6.0 million in
financing by securing a mortgage on this property. Our mortgage is a
five-year balloon mortgage that is amortized on a 20-year basis.
(2) Represents minimum lease payments, excluding executory costs to be made
under leases for our manufacturing facility in Boston, MA, our office
facility in Camberley, U.K., and our technical support facility in Boca
Raton, FL.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently Issued or Proposed Accounting Pronouncements
In December 2004 the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values beginning with the first interim
or annual period after June 15, 2005, with early adoption encouraged. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. We are required to adopt SFAS
123R in the third quarter of 2005, beginning July 1, 2005. Under SFAS 123R, we
must determine the appropriate fair value model and related assumptions to be
used for valuing share-based payments, the amortization method for compensation
cost and the transition method to be used at date of adoption. The transition
methods include modified prospective and modified retrospective adoption
options. Under the modified retrospective option, prior periods may be restated
either as of the beginning of the year of adoption or for all periods presented.
The modified prospective method requires that compensation expense be recorded
for all unvested stock options at the beginning of the first quarter of adoption
of SFAS 123R, while the modified retrospective method would record compensation
expense for all unvested stock options beginning with the first period restated.
We are evaluating the requirements of SFAS 123R and expect that the adoption of
SFAS 123R will have a material impact on our consolidated results of operations
and earnings per share. We have not yet determined the method of adoption or the
effect of adopting SFAS 123R, and we have not determined whether the adoption
will result in amounts that are similar to the current pro forma disclosures
under SFAS 123.
In November 2004 the FASB issued SFAS No. 151, "Inventory Costs-An
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Among other provisions, the new rule requires that items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by us in the first quarter of 2006, beginning on January 1, 2006.
We are currently evaluating the effect, if any, that the adoption of SFAS 151
will have on our consolidated results of operations.
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.
WE MAY CONTINUE TO INCUR NET LOSSES IF WE ARE UNABLE TO INCREASE SALES OF OUR
BROADBAND MODEMS.
Our net sales have been declining primarily due to the decline in the
dial-up modem market, decreases in average selling prices of dial-up modems, and
the trend toward faster connection speeds and broadband access products. Despite
numerous cost reductions over the last few years, we have continued to incur
significant net losses primarily due to our continuous decline in net sales from
dial-up modems. We believe that the future of our business is largely dependent
on the success of our broadband modems and other products. Although we believe
that we have sufficient resources to fund our planned operations over the next
year, if we fail to increase our net sales of our broadband modems and other
products, our longer-term ability to stay in business and to achieve our
intended business objectives could be adversely effected. Our continuing losses
could also adversely affect our ability to fund the growth of our business
should our strategies prove successful.
OUR LIQUIDITY MAY BE SIGNIFICANTLY IMPAIRED IF WE ARE NOT ABLE EITHER TO
REFINANCE OUR MORTGAGE OR SELL OUR BUILDINGS PRIOR TO THE MATURITY OF OUR
MORTGAGE IN JANUARY 2006.
Our mortgage loan on the two buildings constituting our headquarters
facility, of which $5.1 million was outstanding on December 31, 2004, will be
due and payable on January 10, 2006. We cannot assure that we will be able to
refinance the mortgage or, in the alternative, sell our buildings on favorable
terms, if at all. If we were not able to obtain such financing or complete such
sale, our liquidity could be significantly impaired.
TO STAY IN BUSINESS WE MAY REQUIRE FUTURE ADDITIONAL FUNDING WHICH WE MAY BE
UNABLE TO OBTAIN ON FAVORABLE TERMS, IF AT ALL.
In addition to obtaining funds to refinance or repay our mortgage, 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. 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 net sales, 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 NET SALES 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. Due
to these factors and others, one of our significant retail customers has
notified us that they want to purchase on a consignment basis for their dial-up
modem category. That customer has also indicated that they plan to reduce the
number of brands of dial-up modems they sell, and that they cannot assure that
they will continue to sell our products. Less advantageous terms of sales,
decreasing average selling prices and reduced demand for our dial-up modems have
resulted and may in the future result in decreased net sales for dial-up modems.
If we fail to replace declining revenue from the sales of dial-up modems with
the sales of our other products, including our broadband modems, our business
and results of operation will be harmed.
OUR RELIANCE ON A LIMITED NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR
REVENUES COULD MATERIALLY HARM OUR BUSINESS AND PROSPECTS.
Relatively few customers have accounted for a substantial portion of our
net sales. In 2004, our net sales to each of three companies - Olusum (our
distributor in Turkey), the Dixons Group (Dixons, Currys, PC World, and PC
City), and Staples - constituted over 10% of our net sales; and together these
three customers accounted for 35% of our total net sales. Our customers
generally do not enter into long-term agreements obligating them to purchase our
products. We may not continue to receive significant revenues from any of these
or from other large customers. A reduction or delay in orders from any of our
significant customers, or a delay or default in payment by any significant
customer could materially harm our business and prospects.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS INHERENT IN
INTERNATIONAL ACTIVITIES.
Our sales outside of North America continue to represent an increasingly
significant portion of our sales. Sales outside of North America have increased
from 38% of net sales in 2001 to approximately 55% of our net sales in 2004,
including 27% in the UK and 16% in Turkey. Currently our operations are
significantly dependent on our international operations, particularly sales of
our DSL modems, and may be materially and adversely affected by many factors
including:
o international regulatory and communications requirements and policy
changes;
o favoritism toward local suppliers;
o delays in the rollout of broadband services by cable and DSL service
providers;
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 net sales. If foreign markets for our current and
future products develop more slowly than currently expected, our sales and our
future results of operations may be harmed.
CHANGES IN THE ACCOUNTING TREATMENT OF STOCK OPTIONS MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
In December 2004 the FASB issued SFAS 123R, which is a revision of SFAS
123. SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values and does not permit pro forma disclosure as an alternative to
financial statement recognition. SFAS 123R is scheduled to be effective
beginning in the third quarter of 2005. The adoption of the SFAS 123R fair value
method may have a significant adverse impact on our reported results of
operations because the stock-based compensation expense will be charged directly
against our reported earnings. The impact of our adoption of SFAS 123R cannot be
predicted at this time because that will depend on the future fair values and
number of share-based payments granted in the future. However, had we adopted
SFAS 123 in prior periods, the magnitude of the impact of that standard would
have approximated the impact of SFAS 123 assuming the application of the
Black-Scholes model as described in the disclosure of pro forma net loss and pro
forma loss per share in note 1(k) of our notes to consolidated financial
statements.
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 modem markets, DSL and cable, and the VoIP market. These markets
have been challenging markets, with significant barriers to entry, that have
adversely affected our sales to these markets. Although some cable and DSL
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. These
approvals are 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 incumbent
cable equipment providers like Motorola and Scientific Atlanta.
Our sales of broadband products have been adversely affected by all of
these factors. Sales of our broadband products in European countries have
fluctuated and may continue to fluctuate due to approvals and delays in the
deployment by service providers of cable and DSL service in these countries. We
cannot assure that we will be able to successfully penetrate these markets.
OUR FAILURE TO MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY
STANDARDS WOULD ADVERSELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES.
The market for PC communications products and high-speed broadband access
products and services 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
and service developments and enhancements have taken longer than planned and
have delayed the availability of our products and services, 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 services, 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 and industry
standards 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
o meet changing industry standards.
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. Therefore, the resources we devote to product development,
sales and marketing may not generate material net sales for us. In addition,
short product cycles have 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 2004 and 2003, we
recorded a reduction of net sales of $.1 million and $.2 million, respectively,
for customer price protection.
WE HAVE BEEN SELLING OUR VOIP SERVICE FOR A LIMITED PERIOD AND THERE IS NO
GUARANTEE THAT THIS SERVICE WILL GAIN BROAD MARKET ACCEPTANCE.
We have only recently introduced our VoIP service. Given our limited
history with offering this service, there are many difficulties that we may
encounter, including technical hurdles, multiple and changing regulations and
industry standards, and other problems that we may not anticipate. To date, we
have not generated significant revenue from the sale of our VoIP products and
services, and there is no guarantee that we will be successful in generating
significant revenues.
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 too higher than normal returns.
OUR FAILURE TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS COULD MATERIALLY AND
ADVERSELY AFFECT OUR LIQUIDITY AND HARM OUR BUSINESS.
Due to rapid technological change and changing markets we are required to
manage our inventory levels carefully to both meet customer expectations
regarding delivery times and to limit our excess inventory exposure. 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 five 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 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, quality assurance and
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 most of our dial-up and broadband
modem chipsets from Conexant Systems and Agere Systems. Integrated circuit
product areas covered by one or both companies include dial-up modems, DSL
modems, cable modems, networking, routers, and gateways. 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. We
believe the market for chipsets is currently experiencing shortages and there
are increased lead times for some chipsets. 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.
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 DSL 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
evolving. 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. Industry analysts believe that the market for our
dial-up modems will continue to decline. If we are unable to increase demand for
and sales of our broadband modems, 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 signifcantly greater resources than we do. Intense competition, rapid
technological change and evolving industry standards could result in less
favorable selling terms to our customers, decrease demand for our products or
make our products obsolete.
OUR BUSINESS IS DEPENDENT ON THE INTERNET AND THE DEVELOPMENT OF THE INTERNET
INFRASTRUCTURE.
Our success 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.
CHANGES IN EXISTING REGULATIONS OR ADOPTION OF NEW REGULATIONS AFFECTING THE
INTERNET COULD INCREASE THE COST OF OUR PRODUCTS OR OTHERWISE AFFECT OUR ABILITY
TO OFFER OUR PRODUCTS AND SERVICES OVER THE INTERNET.
Congress has adopted legislation that regulates certain aspects of the
Internet, including online content, user privacy, taxation, liability for
third-party activities and jurisdiction. In addition, a number of initiatives
pending in Congress and state legislatures would prohibit or restrict
advertising or sale of certain products and services on the Internet, which may
have the effect of raising the cost of doing business on the Internet generally.
Federal, state, local and foreign governmental organizations are considering
other legislative and regulatory proposals that would regulate the Internet. We
cannot predict whether new taxes will be imposed on our services, and depending
on the type of taxes imposed, whether and how our services would be affected
thereafter. Increased regulation of the Internet may decrease its growth and
hinder technological development, which may negatively impact the cost of doing
business via the Internet or otherwise harm our business.
NEW REGULATIONS TO REDUCE THE USE OF HAZARDOUS MATERIALS IN PRODUCTS SCHEDULED
TO BE IMPLEMENTED IN 2006 COULD INCREASE OUR MANUFACTURING COSTS AND HARM OUR
BUSINESS.
The European Union and the US have announced plans to reduce the use of
hazardous materials, such as lead, in electronic equipment. The implementation
of these new requirements, currently scheduled to begin in 2006, would require
us and other electronics companies to change or discontinue many products. We
believe that our transition process to comply with these new requirements may be
difficult, and may negatively impact our product costs. In addition, we may
incur additional costs involved with the disposal of inventory or returned
products that do not meet the new requirements, which could further harm our
business.
CHANGES IN CURRENT OR FUTURE LAWS OR GOVERNMENTAL REGULATIONS AND INDUSTRY
STANDARDS THAT NEGATIVELY IMPACT OUR PRODUCTS, SERVICES 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 and services 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.
In addition to reliability and quality standards, the market acceptance of
our VoIP products and services is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. Standards are continuously being modified and replaced. As
standards evolve, we may be required to modify our existing products or develop
and support new versions of our products. The failure of our products to comply,
or delays in compliance, with various existing and evolving industry standards
could delay or interrupt volume production of our products, which could harm our
business.
FUTURE LEGISLATION OR REGULATION OF INTERNET TELEPHONY COULD RESTRICT OUR VOIP
BUSINESS, PREVENT US FROM OFFERING SERVICE OR INCREASE OUR COST OF DOING
BUSINESS.
Our ability to provide VoIP communications services on the terms we
currently provide arise in large part from the fact VoIP services are not
currently subject to the same regulation as traditional telephony. If the FCC or
any state determines to regulate VoIP, they may impose surcharges, taxes or
additional regulations upon providers of Internet telephony. These surcharges
could include access charges payable to local exchange carriers to carry and
terminate traffic, contributions to the Universal Service Fund (USF) or other
charges. Regulations requiring compliance with the Communications Assistance for
Law Enforcement Act (CALEA), or provision of the same type of 911 services as
required for traditional telecommunications providers could also place a
significant financial burden on us depending on the technical changes required
to accommodate the requirements. The imposition of any such additional fees,
charges, taxes and regulations on IP communications services could materially
increase our costs and may limit or eliminate our competitive pricing.
In many countries outside the U.S. in which we operate or our services are
sold, the status of the laws that may relate to our VoIP services is unclear. We
cannot be certain that we will be able to comply with existing or future
requirements, or that we will be able to continue to be in compliance with any
such requirements. Our failure to comply with these requirements could
materially adversely affect our ability to continue to offer our VoIP service in
these jurisdictions.
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, may reduce our foreign currency denominated sales when
expressed in dollars, 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. A weakness in the U.S. dollar relative to various Asian currencies
including the Chinese renminbi could increase our product costs.
OUR FUTURE SUCCESS WILL DEPEND ON THE CONTINUED SERVICES OF OUR EXECUTIVE
OFFICERS AND KEY PRODUCT DEVELOPMENT PERSONNEL.
The loss of any of our executive officers or key product 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 senior management team, a
key engineer or salesperson, 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 make strategic investments in or pursue acquisitions of related
businesses, technologies, product lines, or products. Our identification of
suitable strategic investments or acquisition candidates involves risk inherent
in assessing the values, strengths, weaknesses, risks and profitability of such
candidates, including the effects of the possible investment or 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.
ITEM 7A.
We invest our cash in money market instruments and certificates of deposit.
These investments are generally denominated in U.S. dollars and U.K. pounds. Due
to the conservative nature of these instruments, we do not believe that we have
a material exposure to interest rate or market risk. The investment portfolio is
used to preserve our capital until it is required to fund operations or
acquisitions. None of these instruments are held for trading purposes. We do not
own derivative financial instruments.
We are exposed to interest rate risk in the ordinary course of business.
For our floating rate mortgage arrangement, interest rate changes generally do
not affect the fair market value, but do affect future earnings and cash flow.
Based on our borrowings of $5.1 million under our mortgage arrangement as of
December 31, 2004 a one-percentage point increase in interest rates would
decrease cash flow and earnings for a year by approximately $51,000.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Index to Consolidated Financial Statements 34
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2003 and 2004 36
Consolidated Statements of Operations for the years ended December 31, 37
2002, 2003 and 2004
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the Years Ended December 31, 2002, 2003 and 2004 38
Consolidated Statements of Cash Flows for the years ended December 31, 39
2002, 2003 and 2004
Notes to Consolidated Financial Statements 40-53
Schedule II: Valuation and Qualifying Accounts for the years ended
December 31, 2002, 2003 and 2004 58
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with our accountants on
accounting or financial disclosure during the period covered by this report.
ITEM 9A - CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of December 31, 2004 we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in enabling
us to record, process, summarize and report information required to be included
in our periodic SEC filings within the required time period.
There have been no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B - OTHER INFORMATION
None.
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", "Board of Directors" Meetings and Committees; Audit Committee",
"Code of Ethics" and " Section 16(a) Beneficial Ownership Compliance " in our
definitive proxy statement for our 2005 annual meeting of stockholders which
will be filed with the SEC within 120 days after the close of our fiscal year,
and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item appears under the captions "Executive
Compensation," and "Directors' Compensation", in our definitive proxy statement
for our 2005 annual meeting of stockholders which will be filed with the SEC
within 120 days after the close of our fiscal year, and is incorporated herein
by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
We maintain a number of equity compensation plans for employees, officers,
directors and others whose efforts contribute to our success. The table below
sets forth certain information as of our fiscal year ended December 31, 2004
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our stockholders, and (ii) were not
approved by our stockholders.
Equity Compensation Plan Information
Number Of Securities
Number Of Securities Remaining Available For
To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity
Exercise Of Price Of Outstanding Compensation Plans (excluding
Outstanding Options, Options, securities reflected in
Plan Category Warrants And Rights Warrants And Rights column (a))
------------- ------------------- ------------------------- -----------------------------
(a) (b) (c)
--- --- ---
Equity compensation plans 664,000 $1.7500 646,646
approved by security holders(1)
Equity compensation plans 390,575 $1.9132 422,075
not approved by security holders(2)
----------------------------------- ------------------- ------------------------- -----------------------------
Total 1,054,575 $1.8105 1,068,721
(1) Includes the following plans: 1990 Employee Stock Option Plan and 1991
Directors Stock Option Plan, each as amended. Please see note 11 to our
consolidated financial statements for a description of these plans.
(2) Includes the 1998 Employee Equity Incentive Plan, as amended. The purposes
of the 1998 Employee Equity Incentive Plan (the "1998 Plan"), adopted by
the Board of Directors in 1998, are to attract and retain employees and
provide an incentive for them to assist us in achieving our long-range
performance goals, and to enable such employees to participate in our
long-term growth. In general, under the 1998 Plan, all employees who are
not officers or directors are eligible to participate in the 1998 Plan. The
1998 Plan is currently administered by the Compensation Committee of the
Board of Directors. Participants in the 1998 Plan are eligible to receive
non-qualified stock options at an option price determined by the Stock
Option Committee. All stock options granted under the 1998 Plan have been
granted for at least the fair market value on the date of grant. A total of
1,200,000 shares of our common stock have been authorized for issuance
under the 1998 Plan.
The additional information required by this item is incorporated by
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management " in our definitive proxy statement for our 2005 annual
meeting of stockholders to be filed with the SEC within 120 days after the close
of our fiscal year.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Any information required by this item may appear under the caption "Certain
Relationships and Related Transactions" in our Definitive Proxy Statement for
our 2005 annual meeting of Stockholders to be filed with the SEC within 120 days
after the close of our fiscal year and is incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item appears under the caption "Principal
Accountant Fees and Services" in our Definitive Proxy Statement for our 2005
annual meeting of stockholders to be filed with the SEC within 120 days after
the close of our fiscal year and is incorporated herein by reference.
PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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.)
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, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, filed as Exhibit 99.1
to the Company's Registration Statement on Form S-8 (Reg. No. 333-
107923), filed with the Commission on August 13, 2003. *
10.3 1998 Employee Equity Incentive Plan, as amended, filed as Exhibit
99.1 to the Company's Registration Statement on Form S-8 (Reg. No.
333-97573), filed with the Commission on August 2, 2002. *
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996 (the "June 1996
Form 10-Q"). *
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Employment Agreement, filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997. *
10.7 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Company's 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 2001 Form 10-Q. *
10.9 Form of Non-Qualified Stock Option Agreement for Executive
Officers.
10.10 Summary of Directors' Compensation.
10.11 Loan and Security Agreement with Silicon Valley Bank, filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
March 22, 2005. *
21. Subsidiaries, filed as Exhibit 21 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000. *
23. Consent of KPMG LLP, independent registered public accounting
firm.
31.1 CEO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 CFO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 CEO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 CFO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(Continued)
* 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.
(b) Exhibits - See Item 15 (a) (3) above for a list of Exhibits
incorporated herein by reference or filed with this Report.
(c) Schedules - Schedule II: Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted since
they are either inapplicable or not required.
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 TECHNOLOGIES, INC.
(Registrant)
/s/ Frank B. Manning
----------------------------
Frank B. Manning, President
Date: March 30, 2005
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 Date
/s/ Frank B. Manning Principal Executive Officer March 30, 2005
-------------------- and Chairman of the Board
Frank B. Manning
/s/ Robert A. Crist Principal Financial and March 30, 2005
-------------------- Accounting Officer
Robert A. Crist
/s/ Peter R. Kramer Director March 30, 2005
--------------------
Peter R. Kramer
/s/ Bernard Furman Director March 30, 2005
--------------------
Bernard Furman
/s/ L. Lamont Gordon Director March 30, 2005
--------------------
L. Lamont Gordon
/s/ J. Ronald Woods Director March 30, 2005
--------------------
J. Ronald Woods
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2003 and 2004 36
Consolidated Statements of Operations for the years ended December 31, 37
2002, 2003 and 2004
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ended December 31, 2002, 2003 and 2004 38
Consolidated Statements of Cash Flows for the years ended December 31, 39
2002, 2003 and 2004
Notes to Consolidated Financial Statements 40-53
Schedule II: Valuation and Qualifying Accounts for the years ended
December 31, 2002, 2003 and 2004 58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2003 and 2004, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2003 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Boston, Massachusetts
February 10, 2005, except as to Note 3, which is as of March 30, 2005.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------------
ASSETS 2003 2004
------ ---- ----
Current assets:
Cash and cash equivalents.......................... $ 9,904,384 $ 9,438,596
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances $1,790,205 in
2003 and $1,359,455 in 2004 (note 13)........... 3,944,699 3,349,781
Inventories, net (note 5).......................... 4,771,216 5,030,478
Prepaid expenses and other current assets.......... 434,694 529,989
---------- ----------
Total current assets..................... 19,054,993 18,348,844
Property, plant and equipment, net (note 6)........... 2,918,985 2,703,208
---------- ----------
Total assets............................ $ 21,973,978 $ 21,052,052
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................. $ 2,172,028 $ 2,006,819
Accrued expenses.................................. 1,011,910 1,275,088
Current portion of long term debt (note 10)....... 223,833 229,555
---------- ----------
Total current liabilities................ 3,407,771 3,511,462
Long-term debt, less current portion (note 10)........ 5,095,986 4,872,298
---------- ----------
Total liabilities....................... 8,503,757 8,383,760
---------- ----------
Stockholders' equity (note 11): Common stock, $0.01 par value.
Authorized 25,000,000 shares; issued 8,084,616 shares;
outstanding 8,076,216 and issued 8,935,516;
outstanding 8,927,116 shares at December
31, 2003 and December 31, 2004, respectively...... 80,846 89,355
Additional paid-in capital.......................... 28,500,421 30,572,727
Retained earnings (accumulated deficit)............. (15,438,333) (18,510,181)
Accumulated other comprehensive income (loss)....... 334,609 523,713
Treasury stock, at cost............................. (7,322) (7,322)
---------- ----------
Total stockholders' equity............... 13,470,221 12,668,292
---------- ----------
Total liabilities and stockholders'
equity................................. $ 21,973,978 $ 21,052,052
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2003 and 2004
2002 2003 2004
------------ ------------ ------------
Net sales (notes 13 and 17)........................... $ 37,274,287 $ 33,335,209 $ 31,411,781
Cost of goods sold (note 5)........................... 27,937,544 23,120,573 23,345,918
----------- ----------- -----------
Gross profit .................... 9,336,743 10,214,636 8,065,863
----------- ----------- -----------
Operating expenses:
Selling ...................................... 5,848,137 5,270,585 4,800,165
General and administrative (note 8)........... 3,405,043 3,117,764 3,619,480
Research and development...................... 3,526,350 2,766,967 2,927,225
----------- ----------- -----------
Total operating expenses......... 12,779,530 11,155,316 11,346,870
----------- ----------- -----------
Operating loss................... (3,442,787) (940,680) (3,281,007)
----------- ----------- -----------
Other income (expense):
Interest income .............................. 102,604 87,427 149,381
Interest expense.............................. (293,104) (211,165) (211,213)
Equity in losses of affiliate (note 14)....... (56,666) - -
Other, net.................................... 313,619 396,363 270,991
----------- ----------- -----------
Total other income (expense), net 66,453 272,625 209,159
----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item......... (3,376,334) (668,055) (3,071,848)
Income tax expense (benefit)(note 12)................. 2,014,539 - -
----------- ----------- -----------
Income (loss) before extraordinary
item........................... (5,390,873) (668,055) (3,071,848)
Extraordinary gain on elimination
of negative goodwill........... 255,287 - -
----------- ----------- -----------
Net Income (loss)................ $ (5,135,586) $ (668,055) $ (3,071,848)
=========== =========== ===========
Basic and diluted earnings (loss) per share (note 2):
Loss before extraordinary item:
Basic and diluted................ $ (.68) $ (.08) $ (.36)
=========== =========== ===========
Extraordinary gain on elimination of negative goodwill $ .03 $ - $ -
=========== =========== ===========
Net loss:
Basic and diluted................ $ (.65) $ (.08) $ (.36)
=========== =========== ===========
Weighted average common and common equivalent shares:
Basic and diluted................ 7,860,650 7,883,400 8,590,092
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Retained Accumulated
Additional Earnings Other Total
Common Stock Paid In (accumulated Comprehensive Treasury Stock Stockholders'
Shares Amount Capital deficit) Income(Loss) Shares Amount Equity
--------- ----------- ----------- ------------ ------------ ------ ------- -------------
Balance at December 31, 2001 .. 7,860,866 $28,245,215 - $(9,634,692) $ (194,795) - - $18,415,728
Net profit (loss) ............. - - - (5,135,586) - - - (5,135,586)
Foreign currency translation
adjustment .................... - - - - 206,550 - - 206,550
Comprehensive loss ........... - - - - - - - (4,929,036)
Incorporation to Delaware
corporation .................. - (28,166,607) 28,166,607 - - - - -
Purchase of treasury stock .... - - - - - 2,600 (2,196) (2,196)
---------- ----------- ----------- ------------- ------------ ----- -------- ------------
Balance at December 31, 2002 .. 7,860,866 $ 78,608 $28,166,607 $(14,770,278) $ 11,755 2,600 $(2,196) $13,484,496
Net profit (loss) ............. - - - (668,055) - - - (668,055)
Foreign currency translation
adjustment .................... - - - - 322,854 - - 322,854
Comprehensive loss ........... - - - - - - - (345,201)
Exercise of stock options (note
11) ........................... 223,750 2,238 333,814 - - - - 336,052
Purchase of treasury stock .... - - - - - 5,800 (5,126) (5,126)
---------- ----------- ----------- ------------- ------------ ------ -------- ------------
Balance at December 31, 2003 .. 8,084,616 $ 80,846 $28,500,421 $(15,438,333) $ 334,609 8,400 $(7,322) $13,470,221
Net profit (loss) ............. - - - (3,071,848) - - - (3,071,848)
Foreign currency translation
adjustment .................... - - - - 189,104 - - 189,104
Comprehensive loss ........... - - - - - - - (2,882,744)
Exercise of stock options (note
11) ........................... 850,900 8,509 2,072,306 - - - - 2,080,815
---------- ----------- ----------- ------------- ------------ ------ -------- ------------
Balance at December 31, 2004 .. 8,935,516 $ 89,355 $30,572,727 $(18,510,181) $ 523,713 8,400 $(7,322) $12,668,292
========== =========== =========== ============= ============ ====== ======== ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2003 and 2004
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income (loss)................................. $ (5,135,586) $ (668,055) $ (3,071,848)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Non-operating gain on refund of deposit..... - (40,237) -
Extraordinary gain on negative goodwill..... (255,287) - -
Depreciation and amortization............... 837,968 617,781 405,158
Equity in losses of affiliate............... 56,666 - -
Net deferred income taxes................... 2,012,844 - -
Changes in operating assets and liabilities:
Accounts receivable....................... 2,139,336 106,881 771,767
Inventories............................... 4,300,593 2,011,334 (259,262)
Prepaid expenses and other current assets. (38,071) 643,276 (95,295)
Accounts payable and accrued expenses (1,015,173) (430,629) 97,969
---------- ---------- ----------
Net cash provided by (used in)
operating activities.............. 2,903,290 2,240,351 (2,151,511)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment........ (194,963) (50,855) (189,381)
---------- ---------- ----------
Net cash provided by (used in)
investing activities.............. (194,963) (50,855) (189,381)
---------- ---------- ----------
Cash flows from financing activities:
Repayment of long-term debt....................... (350,962) (213,788) (217,966)
Exercise of nonqualified stock options............ - 336,052 2,080,815
Payments to acquire treasury stock................ (2,196) (5,126) -
---------- ---------- ----------
Net cash provided by (used in)
financing activities............. (353,158) 117,138 1,862,849
---------- ---------- ----------
Effect of exchange rate changes on cash.................. 5,047 (14,524) 12,255
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents..... 2,360,216 2,292,110 (465,788)
---------- ---------- ----------
Cash and cash equivalents at beginning of year........... 5,252,058 7,612,274 9,904,384
---------- ---------- ----------
Cash and cash equivalents at end of year................. $ 7,612,274 $ 9,904,384 $ 9,438,596
========== ========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2003 and 2004
(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 broadband
and dial-up modems and other communication-related products, 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.
As part of the continuation, each share of Zoom Telephonics, Inc. was
automatically converted into one share of 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.
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, 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 cost of 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, 2004 and 2003 was a deposit for
approximately $19,000 and $267,000, respectively, in a duty deferment
account approved by H.M. Customs and Excise in the United Kingdom for
the deferment of value added taxes for imports.
(d) Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
(e) 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.
(f) Accounting for Impairment of Long-Lived Assets
The Company uses the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." This statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost
to sell.
(g) 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.
(h) 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.
2002 2003 2004
---- ---- ----
Basic weighted
average shares outstanding ....... 7,860,650 7,883,400 8,590,092
Net effect of dilutive potential
common shares outstanding, based
on the treasury stock method...... - - -
--------- --------- ---------
Diluted weighted
average shares outstanding........ 7,860,650 7,883,400 8,590,092
========= ========= =========
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 3,814, 206,414 and 769,790 shares of common stock at December
31, 2002, 2003, and 2004, respectively, were outstanding, but not
included in the computation of diluted earnings per share as their
effect would be antidilutive.
(i) Revenue Recognition
The Company primarily sells hardware products to its customers. The
hardware products include dial-up modems, DSL modems, cable modems,
embedded modems, ISDN modems, telephone dialers, and wireless and
wired networking equipment. The Company earns a small amount of
royalty that is included in its net sales, primarily from internet
service providers. The Company generally does not sell software. The
Company began selling services in 2004. The Company introduced its
Global Village VoIP service in late 2004, but sales of those services
in 2004 were not material.
The Company derives its net sales primarily from the sales of hardware
products to computer peripherals retailers, computer product
distributors, and 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.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The Company recognizes hardware net sales 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 its customer
contracts or purchase orders specify FOB destination. The Company
verifies the delivery date on all significant FOB destination
shipments made during the last 10 business days of each quarter.
The Company's net sales of hardware are reduced by certain events which
are characteristic of the sales of hardware to retailers of computer
peripherals. These events are product returns, certain sales and
marketing incentives, price protection refunds, and consumer and
in-store mail-in rebates. Each of these is accounted for as a
reduction of net sales based on careful management estimates, which
are reconciled to actual customer or end-consumer 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.
The Company's 2004 VoIP service revenues were recorded as the
end-user-customer consumed billable VoIP services. No sales of VoIP
services were made to resellers in 2004. The end-user-customer became
a services customer by electing to sign up for the Global Village
billable service on the internet. The Company recorded revenue either
as billable services were consumed or as a monthly flat-fee service
was billed.
(j) Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
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.
(k) Stock-Based Compensation
The Company accounts for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). As permitted by
SFAS 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 proceeds, including tax benefits realized, if any, are credited to
equity.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of FASB 123 to stock-based compensation.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
YEAR ENDED DECEMBER 31,
2002 2003 2004
------------ ------------ -------------
Net income (loss), as reported......................... $(5,135,586) $ (668,055) $ (3,071,848)
Deduct: Total stock-based employee compensation expense
determined under fair value based method fpr all awards
net of related tax effects............................. (1,109,003) (372,009) (591,459)
------------ ------------ -------------
Proforma net income (loss)............................. $(6,244,589) $(1,040,064) $ (3,663,307)
============ ============ =============
Earnings (loss) per share:
Basic -- as reported................................... $ (0.65) $ (.08) $ (.36)
Basic -- proforma...................................... $ (0.79) $ (.13) $ (.43)
============ ============ =============
Diluted -- as reported................................. $ (0.65) $ (.08) $ (.36)
Diluted -- proforma.................................... $ (0.79) $ (.13) $ (.43)
Weighted-average assumptions: 2002-expected dividend yield 0.00%, risk-free
interest rate of 2.65%, volatility 106% and an expected life of 2.5
years; 2003-expected dividend yield 0.00%, risk-free interest rate of
1.82%, volatility 124% and an expected life of 2.0 years;
2004-expected dividend yield 0.0%, risk-free interest rate of 2.32%,
volatility 110% and an expected life of 2.0 years.
(l) 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.
(m) 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.
(n) 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. 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 income (loss).
(o) Warranty Costs
The Company provides currently for the estimated costs that may be
incurred under its standard warranty obligations.
(3) LIQUIDITY
In 2004 the Company's net cash used in operating activities was $2.2
million, net cash used in investing activities was $.2 million, and
net cash provided by financing activities was $1.9 million. On
December 31, 2003 and 2004 Zoom had cash and cash equivalents of
approximately $9.9 million and $9.4 million, respectively.
On March 16, 2005 Zoom Telephonics, a wholly owned subsidiary of the
Company, entered into a Loan and Security Agreement with Silicon
Valley Bank that provides for a revolving line of credit of up to $2
million. The revolving line of credit can be used to (i) borrow
revolving loans for working capital and general corporate purposes,
(ii) issue letters of credit, (iii) enter into foreign
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
exchange forward contracts, and (iv) support certain cash management
services. Revolving loans will bear interest at a floating rate of
interest equal to Silicon Valley Bank's prime rate plus 1%. This
interest rate will be reduced to Silicon Valley Bank's prime rate plus
.5% if the Company records two consecutive quarters of combined
profitability.
On March 15, 2006 Silicon Valley Bank's commitment to extend revolving
loans under the Loan and Security Agreement terminates and all
outstanding obligations under the agreement become due.
The revolving loans under the Loan and Security Agreement are secured by a
first priority lien on substantially all of the assets of the Company,
excluding intellectual property and real estate. The Company
guaranteed the obligations of Zoom Telephonics under the revolving
line of credit and pledged all of the stock of Zoom Telephonics in
support of the Company's guarantee. The Loan and Security Agreement
requires that Zoom Telephonics maintain a minimum adjusted quick ratio
and a minimum net worth. In addition, Zoom Telephonics is required to
obtain Silicon Valley Bank's prior written consent to among other
things, dispose of assets, make acquisitions, be acquired, incur
indebtedness, grant liens, make investments, pay dividends, or
repurchase stock. This consent may not be unreasonably withheld.
The Loan and Security Agreement contains events of default that include
among other things, non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and warranties,
cross default to certain other indebtedness, bankruptcy and insolvency
events, change of control and material judgments. Upon occurrence of
an event of default, Silicon Valley Bank is entitled to, among other
things, accelerate all obligations of Zoom Telephonics and sell its
assets to satisfy the obligations under the Loan and Security
Agreement.
The Company believes its current availability under the line is $2
million.
To conserve cash and manage the Company's liquidity, the Company has
implemented expense reductions throughout 2002, 2003, and 2004. The
employee headcount was 329 at December 31, 2000, which was reduced to
185 at December 31, 2002, 159 at December 31, 2003, and to 154 at
December 31, 2004. The Company will continue to assess its cost
structure as it relates to its revenues and cash position in 2005, and
may make further reductions if these actions are deemed necessary.
In recent years, the Company's sales have declined as its major product
market, the dial-up modem retail after-market, has declined. This
trend continues, as personal computer manufacturers incorporate a
dial-up modem as a built-in component in most consumer personal
computers and increasing numbers of consumers world-wide are switching
to broadband Internet access. The Company's sales of products for the
broadband Internet market have been growing, and in 2004 represented
40% of total net sales. The Company's future success will depend in
large part on the ability to improve its penetration of the growing
broadband modem markets.
The Company's mortgage loan on the two buildings constituting our
headquarters facility, of which $5.1 million was outstanding on
December 31, 2004 will be due and payable on January 10, 2006. Based
upon recent indications of interest from potential lenders, the
Company believes it will be able to refinance the mortgage or, in the
alternative, sell our buildings for a purchase price significantly in
excess of the outstanding amounts under the loan.
The Company's total current assets at December 31, 2004 were $18.3 million
and current liabilities were $3.5 million and long-term debt was $4.9
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.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(4) NEW ACCOUNTING PRONOUNCEMENTS
Recently Issued or Proposed Accounting Pronouncements
In December 2004 the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," ("SFAS123") and supercedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first interim
or annual period after June 15, 2005 with early adoption encouraged.
The pro forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement recognition. The
Company is required to adopt SFAS 123R in the third quarter of fiscal
2005, beginning July 1, 2005. Under SFAS 123R, the Company must
determine the appropriate fair value model and related assumptions to
be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of
adoption. The transition methods include prospective and retroactive
adoption options. Under the retroactive option, prior periods may be
restated either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options at the beginning of
the first quarter of adoption of SFAS 123R, while the retroactive
method would record compensation expense for all unvested stock
options beginning with the first period restated. The Company is
evaluating the requirements of SFAS 123R and expects that the adoption
of SFAS 123R will have a material impact on our consolidated results
of operations and earnings per share. The Company has not yet
determined the method of adoption or the effect of adopting SFAS 123R,
and has not determined whether the adoption will result in amounts
that are similar to the current pro forma disclosures under SFAS 123.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Among other
provisions, the new rule requires that items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs be
recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal" as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by the
Company in the first quarter of fiscal 2006, beginning on January 1,
2006. The Company is currently evaluating the effect, if any, that the
adoption of SFAS 151 will have on its consolidated results of
operations.
(5) INVENTORIES
Inventories consist of the following at December 31:
2003 2004
---- ----
Raw materials............. $ 1,754,850 $ 2,595,730
Work in process........... 639,425 920,075
Finished goods............ 2,376,941 1,514,673
----------- -----------
Net Inventory $ 4,771,216 $ 5,030,478
=========== ===========
During 2003 the Company recorded lower of cost or market write-downs of
$0.3 million related to broadband and wireless inventory.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
Estimated
2003 2004 useful lives
---- ---- ------------
Land........................... $ 309,637 $ 309,637 -
Buildings and improvements..... 2,774,281 2,767,517 31.5 years
Leasehold improvements......... 483,039 483,039 5 years
Computer hardware and software. 3,565,595 3,624,027 3 years
Machinery and equipment........ 1,753,001 1,837,064 5 years
Molds, tools and dies.......... 1,537,464 1,591,114 5 years
Office furniture and fixtures.. 275,516 275,516 5 years
----------- -----------
$10,698,533 $10,887,914
Less accumulated depreciation
and amortization (7,779,548) (8,184,706)
----------- -----------
$ 2,918,985 $ 2,703,208
=========== ===========
(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 March 2006. In September 2002 we
entered into a five year lease, as a tenant, for approximately 3,500
square feet at 951 Broken Sound Parkway, Boca Raton, Florida, which
expires in August 2007. In March 1999 the Company assumed an office
lease from Hayes Microcomputer Products, Inc. at 430 Frimley Business
Park, Camberley Surrey, U.K. The Company has agreed to extend this
lease term to March 2006. Total rent expense, under non-cancelable
operating leases, was $782,000, $757,821 and $795,102 for the years
ended December 31, 2002, 2003 and 2004, respectively.
The Company's estimated future minimum rental payments, excluding
executory costs, under these operating leases are set forth in the
table below.
Year Total
---- -------
2005 846,985
2006 386,916
2007 77,338
(b) Contingencies
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, 2004.
(c) 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.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
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.
(8) EXTRAORDINARY GAIN
In March 2002 the Company recorded negative goodwill that resulted from the
purchase of the Hayes Microcomputer Products U.K., business, where the
value of the net assets acquired exceeded the cost.
On January 1, 2002 the Company recorded an extraordinary gain of $0.3
million upon the adoption of SFAS No. 142. The gain resulted from the
elimination of the remaining negative goodwill on the Company's
consolidated balance sheet.
(9) Comprehensive Income (loss)
The components of comprehensive income (loss), net of tax, are as follows:
2002 2003 2004
---- ---- ----
Net income (loss)................ $(5,135,586) $ (668,055) $(3,071,848)
Foreign currency translation
adjustment...................... 206,550 322,854 189,104
------------ ----------- -----------
Comprehensive income (loss)...... $(4,929,036) $ (345,201) $(2,882,744)
============ =========== ===========
Foreign currency translation adjustment represented the entire balance
within accumulated other comprehensive income (loss) at December 31,
2002, 2003 and 2004.
(10) LONG-TERM DEBT
On January 10, 2001 the Company obtained a mortgage for $6 million on the
real estate property located at 201 and 207 South Street, Boston,
Massachusetts. This is a 20-year direct reduction mortgage with a
five-year balloon due January 10, 2006. 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 5.8% on
January 10, 2005. On September 24, 2002 the Company paid an additional
principal payment of $178,761 in compliance with a mortgage covenant.
Future minimum principal payments are due as follows at December 31,
2004.
Year Total
---- -----
2005 229,555
2006 4,872,298
---------
Total $ 5,101,853
(11) STOCK OPTION PLANS
At December 31, 2004 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 Compensation Committee of the Board of
Directors at an option price not less than the fair market value of
the stock on the date of grant. The options are exercisable in
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
accordance with terms specified by the Compensation Committee not to
exceed ten years from the date of grant. Options outstanding under
this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 2001 1,038,000 $ 4.48
Granted................... 325,000 1.00
Exercised................. - -
Expired................... (115,000) 4.84
--------- ----
Balance at December 31, 2002 1,248,000 $ 3.54
Granted................... 310,000 1.95
Exercised................. (37,000) 1.65
Expired................... (322,000) 7.49
--------- ----
Balance at December 31, 2003 1,199,000 $ 2.13
Granted................... - -
Exercised................. (631,000) 2.67
Expired................... - -
---------- ----
Balance at December 31, 2004 568,000 $ 1.52
========== ====
The following table summarizes information about fixed stock options under
the Employee Stock Option Plan outstanding on December 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.00 258,000 0.40 $ 1.00 258,000 $ 1.00
1.95 310,000 1.80 1.95 155,000 1.95
---------------- ------- ---- ---- ------- ----
$ 1.00 to $1.95 568,000 1.20 years $ 1.52 413,000 $ 1.36
================ ======= ========== ====== ======= ======
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. In 2003, the Directors Plan was amended to provide that,
each eligible director is automatically granted an option to purchase
12,000 shares of common stock on July 10 and January 10 of each year,
beginning July 10, 2003. Prior to the amendment to the Directors Plan,
eligible directors were automatically granted an option to purchase
6,000 shares of common stock on July 10 and January 10 of each year,
beginning on July 10, 1991. The option price is the fair market value
of the common stock on the date the option is granted. There are
450,000 shares authorized for issuance under the Directors Plan. 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, 2001 72,000 $ 5.48
Granted................... 36,000 1.17
Exercised................. - -
Expired................... (36,000) 7.69
-------- ----
Balance at December 31, 2002 72,000 $ 2.21
Granted................... 54,000 0.95
Exercised................. (36,000) 1.18
Expired................... (36,000) 3.26
-------- ----
Balance at December 31, 2003 54,000 $ 0.94
Granted................... 72,000 3.81
Exercised................. (30,000) 0.85
Expired................... - -
-------- ----
Balance at December 31, 2004 96,000 $ 3.12
======== ====
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about fixed stock options under
the Directors Plan on December 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.05 24,000 0.5 $ 1.05 24,000 $ 1.05
$ 3.07 36,000 1.5 $ 3.07 - $ -
$ 4.55 36,000 1.0 $ 4.55 36,000 $ 4.55
---------------- ------- --------- ------ ------ ------
$ 1.05 - $ 4.55 96,000 1.1 years $ 3.12 60,000 $ 3.15
================ ======= ========= ====== ====== ======
1998 Employee Equity Incentive Stock Option Plan
The 1998 Employee Equity Incentive Stock Option Plan (the "1998 Plan") was
adopted by the Board of Directors 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. The authorized number of shares available for
issuance under the 1998 Plan is 1,200,000 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 Compensation
Committee of the Board of Directors at an option price determined by
the Compensation Committee. All options under this plan have been at
fair market value on the date of the grant. The options are
exercisable in accordance with terms specified by the Compensation
Committee. Options outstanding under this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 2001 699,900 $ 4.55
Granted................... 363,600 1.00
Exercised................. - -
Expired................... (283,000) 3.55
------- ----
Balance at December 31, 2002 780,500 $ 3.16
Granted................... 240,000 1.85
Exercised................. (150,750) 1.54
Expired................... (287,700) 5.77
------- ----
Balance at December 31, 2003 582,050 $ 1.76
Granted................... 68,500 3.64
Exercised................. (189,900) 1.95
Expired................... ( 70,075) 2.19
------- ----
Balance at December 31, 2004 390,575 $ 1.91
======= ====
The following table summarizes information about fixed stock options under
the 1998 Plan outstanding on December 31, 2004:
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
$ 1.00 110,350 0.5 $ 1.00 110,350 $ 1.00
1.85 213,225 1.8 1.85 104,725 1.85
2.77 5,000 2.7 2.77 - -
3.56 to 3.59 57,000 2.9 3.59 - -
4.83 5,000 2.1 4.83 - -
---------------- ------- --------- ----- ------ -------
$ 1.00 to $ 4.83 390,575 1.6 years $ 1.91 215,075 $ 1.41
================ ======= ========= ===== ======= =======
On December 31, 2004 there were 1,068,721 additional shares available for
issuance under all three stock option plans. The per share
weighted-average fair value of stock options granted during 2002,
2003, and 2004 was $0.54, $1.14 and $2.18, respectively, on the date
of grant using the Black Scholes option-pricing model (see note 2).
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(12) INCOME TAXES
Income tax expense (benefit) consists of the following:
Current Deferred Total
------- -------- -----
Year ended December 31, 2002:
US federal.................. $ - $ 1,612,634 $ 1,612,634
State and local............. - 400,210 400,210
Foreign..................... 1,695 - 1,695
------ ----------- -----------
$ 1,695 $ 2,012,844 $ 2,014,539
====== =========== ===========
Year ended December 31, 2003:
US federal.................. $ - $ - $ -
State and local............. - - -
Foreign..................... - - -
------- ----------- -----------
$ - $ - $ -
======= =========== ===========
Year ended December 31, 2004:
US federal.................. $ - $ - $ -
State and local............. - - -
Foreign..................... - - -
------- ----------- -----------
$ - $ - $ -
======= =========== ===========
Income tax expense (benefit) was $2,014,539 dollars for the year ended
December 31, 2002 and zero dollars for the years ended December 31,
2003 and 2004, 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:
2002 2003 2004
---- ---- ----
Computed "expected" US tax expense (benefit).......... $(1,147,954) $ (227,139) $(1,044,428)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit................................ 264,139 - -
Increase (reduction) in federal valuation allowance. 2,885,398 219,215 1,023,535
Other, net.......................................... 12,956 7,924 20,893
----------- ----------- -----------
Income tax expense (benefit) $ 2,014,539 $ - $ -
=========== =========== ===========
Total income tax expense (benefit) was allocated as follows:
2002 2003 2004
---- ---- ----
Loss from operations.................................. $ 2,014,539 $ - $ -
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes......... - - -
----------- ---------- ----------
$ 2,014,539 $ - $ -
=========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002, 2003, and 2004 are presented below:
2002 2003 2004
---- ---- ----
Deferred tax assets:
Inventories, primarily non-deductible reserves........ $ 2,688,239 $ 2,409,923 $ 1,861,978
Accounts receivable,
primarily returns and allowances.................... 340,213 483,057 270,041
Accrued expenses, principally provisions
not currently deductible............................ 228,992 141,157 166,487
Net operating loss carryforwards and credits.......... 9,768,697 9,132,219 11,325,988
Depreciation and amortization......................... 1,455,958 1,340,233 1,616,459
Other................................................. 88,933 102,594 118,526
---------- --------- ---------
Total gross deferred tax assets 14,571,030 13,609,183 15,359,479
Less valuation allowance (14,571,030) (13,609,183) (15,359,479)
---------- ---------- ----------
Net deferred tax assets $ - $ - $ -
========== ========== ==========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
On December 31, 2004 the Company had federal net operating loss
carryforwards of approximately $28,638,000. These federal net
operating losses are available to offset future taxable income, and
are due to expire beginning 2019. The Company had state net operating
loss carryforwards in various states of approximately $26,824,000.
These federal and state net operating losses are available to offset
future taxable income, and are primarily due to expire in years
ranging from 2005 through 2009. The Company recorded a deferred tax
asset valuation allowance against the 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. 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.
Subsequently recognized tax benefits relating to valuation allowances for
deferred tax assets, if any, will be allocated as follows: $14,756,000
to continuing operations and $600,000 to additional paid-in capital
which is attributable to the exercise of employee stock options.
(13) SIGNIFICANT CUSTOMERS
Three customers each comprised of approximately 10% or more of net sales
for the years ended December 31, 2002, 2003 and 2004. On December 31,
2004 three customers comprised approximately 38% of net accounts
receivable. On December 31, 2003, three customers comprised
approximately 49% of net accounts receivable.
One of the Company's significant customers has notified the Company that
they want to purchase on a consignment basis for their dial-up modem
category. That customer has also indicated that they plan to reduce
the number of brands of dial-up modems that they sell, and that they
cannot assure that they will continue to sell the Company's products.
(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. 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, 2002 has
been reduced to zero.
(15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2002 2003 2004
---- ---- ----
Cash paid during year for interest $ 306,237 $ 215,571 $ 210,941
====== ========= =========
Cash paid during year for income taxes $ 66,624 $ - $ -
====== ========= =========
The tax benefit of the exercise of stock options resulted in no increases
to additional paid-in capital in 2004 or 2003, since the Company
believes that it is more likely than not that these deferred tax
assets will not be realized. No options were exercised in 2002.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(16) DEPENDENCE ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS
The Company produces its products using components or subassemblies
purchased from third-party suppliers.
Beginning in 2002 the Company entered into supply arrangements with
suppliers of some components that included price and other
concessions, including no-charge components, for meeting certain
purchase requirements or commitments. Under these arrangements, the
Company was committed to certain purchase requirements over a period
of approximately 30-months that commenced on January 1, 2002, provided
that those components were offered at competitive terms and prices. At
December 31, 2004, those commitments had been met. In connection with
these arrangements, the Company became entitled to receive at least
$3.0 million of no-charge components, based upon the supplier's market
price for the components in late 2001 and early 2002, and other
pricing concessions based on our purchase volumes. The Company
received $1.2 million of these no-charge components in the fourth
quarter of 2001. The Company received the remainder of the no-charge
components in the first quarter of 2002. The favorable impact to the
Company's statement of operations was calculated as a purchase
discount over the estimated total number of components acquired
through the 30 month supply agreement and recognized on a delayed
basis as the products employing the acquired components involved in
the supply arrangement were sold. This method of accounting was
consistent each year, covering 2002 through 2004.
Currently a substantial percentage of our manufacturing is performed by
SameTime Electronics ("SameTime") and Vtech. The loss of these
services or a material adverse change in their business or in our
relationship could materially and adversely harm our business. To
lessen the risk associated with these companies being the primary
manufacturers of a substantial portion of our products and for a
number of other reasons including cost and availability, we are also
using Billion, Billionton, Lite-On, Taicom and Well to manufacture
various products.
(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 2002, 2003,
and 2004 were comprised as follows:
2002 % of Total 2003 % of Total 2004 % of Total
---- ---------- ---- ---------- ---- ----------
North America $ 22,342,890 60% $ 18,212,110 55% $ 14,026,601 45%
International 14,931,397 40% 15,123,099 45% 17,385,180 55%
---------- ---- ---------- ---- ---------- ----
Total $ 37,274,287 100% $ 33,335,209 100% $ 31,411,781 100%
========== ==== ========== ==== ========== ====
(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 and expense in 2002,
2003 and 2004 were $34,531, $29,587 and $23,654 respectively.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(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, 2003 and 2004. The operating results for any given
quarter are not necessarily indicative of results for any future
period.
2003 Quarter Ended 2004 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept.30 Dec. 31
------- ------- -------- ------- ------- ------- ------- -------
Net sales......................... $ 7,538 $ 7,537 $ 9,104 $ 9,156 $ 7,792 $ 8,091 $ 7,143 $ 8,386
Costs of goods sold............... 5,393 5,777 6,146 5,804 5,480 5,841 5,646 6,379
------ ------ ------ ------ ------ ------ ------ ------
Gross profit (loss)............. 2,145 1,760 2,958 3,352 2,312 2,250 1,497 2,007
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling......................... 1,362 1,227 1,376 1,306 1,226 1,171 1,115 1,288
General and administrative...... 958 843 612 705 954 1,064 780 822
Research and development........ 752 743 660 612 678 665 722 862
------ ----- ----- ----- ----- ----- ----- -----
Total operating expenses....... 3,072 2,813 2,648 2,623 2,858 2,900 2,617 2,972
------ ----- ----- ----- ----- ----- ----- -----
Operating profit (loss)........ (927) (1,053) 310 729 (546) (650) (1,120) (965)
Other income (expense), net....... 87 62 96 27 (12) 70 92 59
--- --- -- -- -- -- -- --
Income (loss) before income
taxes and extraordinary item.. (840) (991) 406 756 (558) (580) (1,028) (906)
Income tax expense (benefit)...... - - - - - - - -
------ ------ ------ ----- ----- ----- ----- -----
Income (loss) before
extraordinary item............ (840) (991) 406 756 (558) (580) (1,028) (906)
------ ------ ------ ----- ----- ----- ----- -----
Net income (loss).............. $ (840) $ (991) $ 406 $ 756 $ (558) $ (580) $(1,028) $ (906)
===== ===== ===== ===== ===== ===== ===== =====
Net loss per common share:
Basic.......................... $ (0.11) $ (0.13) $ 0.05 $ 0.09 $(0.07) $ (0.07) $ (0.12) $ (0.10)
Diluted........................ $ (0.11) $ (0.13) $ 0.05 $ 0.09 $(0.07) $ (0.07) $ (0.12) $ (0.10)
Weighted average common and common equivalent Shares:
Basic.......................... 7,853 7,852 7,857 7,970 8,136 8,466 8,791 8,900
Diluted........................ 7,853 7,852 8,081 8,593 8,136 8,466 8,791 8,900
EXHIBIT INDEX
(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.)
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, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, filed as Exhibit 99.1
to the Company's Registration Statement on Form S-8 (Reg. No. 333-
107923), filed with the Commission on August 13, 2003. *
10.3 1998 Employee Equity Incentive Plan, as amended, filed as Exhibit
99.1 to the Company's Registration Statement on Form S-8 (Reg. No.
333-97573), filed with the Commission on August 2, 2002. *
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996 (the "June 1996
Form 10-Q"). *
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Employment Agreement, filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997. *
10.7 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Company's 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 2001 Form 10-Q. *
10.9 Form of Non-Qualified Stock Option Agreement for Executive
Officers.
10.10 Summary of Directors' Compensation.
10.11 Loan and Security Agreement with Silicon Valley Bank, filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
March 22, 2005. *
21. Subsidiaries, filed as Exhibit 21 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000. *
23. Consent of KPMG LLP, independent registered public accounting
firm.
31.1 CEO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 CFO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 CEO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 CFO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
EXHIBIT INDEX (CONTINUED)
* 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 23.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Zoom Technologies, Inc.:
We consent to the incorporation by reference in the registration statements (No.
33-42834, No. 33-90930, No. 333-60565, No. 333-75575, No. 33-90191, No.
333-47188, No. 333-97573 and No. 333-107923) on Form S-8 of Zoom Technologies,
Inc. of our reports dated February 10, 2005, except as to Note 3, which is as of
March 30, 2005, with respect to the consolidated balance sheets of Zoom
Technologies, Inc. and subsidiary as of December 31, 2003 and 2004, 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, 2004, and the related consolidated financial statement
schedule, which reports appear in the December 31, 2004 annual report on Form
10-K of Zoom Technologies, Inc.
/s/ KPMG LLP
Boston, Massachusetts
March 30, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Zoom Technologies, Inc.:
Under date of February 10, 2005 except as to Note 3, which is as of March 30,
2005, we reported on the consolidated balance sheets of Zoom Technologies, Inc.
and subsidiary as of December 31, 2003 and 2004, 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, 2004,
which are included in the Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this 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.
/s/ KPMG LLP
Boston, Massachusetts
February 10, 2005 except as to Note 3, which is as of March 30, 2005.
SCHEDULE II
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2003 and 2004
Balance at Charged Amount Balance
Beginning (Credited) to written off at end
Description of year Expense (Recoveries) of year
-------- ------- ------------ --------
Reserve for doubtful accounts.. $ 232,271 $ 146,712 $ 319,577 $ 59,406
Reserve for price protection... 739,113 380,048 454,829 664,332
Reserve for sales returns...... 680,042 4,196,684 3,962,712 914,014
COOP advertising and other
allowances..................... 1,165,023 2,947,460 3,103,826 1,008,657
--------- --------- ---------- ---------
Year ended December 31, 2002 $ 2,816,449 $ 7,670,904 $ 7,840,944 $ 2,646,409
========= ========== ========== =========
Reserve for doubtful accounts.. $ 59,406 $ (42,713) $ ( 105,221) $ 121,914
Reserve for price protection... 664,332 168,095 722,866 109,561
Reserve for sales returns...... 914,014 3,260,578 3,404,030 770,562
COOP advertising and other
allowances..................... 1,008,656 2,648,885 2,869,373 788,168
--------- --------- ---------- ---------
Year ended December 31, 2003 $ 2,646,408 $ 6,034,845 $ 6,891,048 $ 1,790,205
========= ========== ========== =========
Reserve for doubtful accounts.. $ 121,914 $ (37,184) $ (33,462) $ 118,192
Reserve for price protection... 109,561 145,697 236,529 18,729
Reserve for sales returns...... 770,562 2,658,411 2,822,674 606,299
COOP advertising and other
allowances..................... 788,168 1,156,371 1,328,304 616,235
--------- --------- ---------- ---------
Year ended December 31, 2004 $ 1,790,205 $ 3,923,295 $ 4,354,045 $ 1,359,455
========= ========== ========== =========