Unassociated Document
zoo
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________
FORM
10-Q
______________
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the quarterly period ended June 30, 2006
or
o
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.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware
|
51-0448969
|
|
____________________________
|
____________________________
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer 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
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
The
number of shares outstanding of the registrant’s Common Stock, $.01 Par Value,
as of August 11, 2006 was 9,346,966 shares.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
|
Part
I.
|
Financial
Information
|
Page
|
| |
|
|
|
Item
1.
|
Condensed
Consolidated Balance Sheets as of June 30, 2006 and December 31,
2005
(unaudited)
|
3
|
| |
|
|
| |
Condensed
Consolidated Statements of Operations for the three and six months
ended
June 30, 2006 and 2005 (unaudited)
|
4
|
| |
|
|
| |
Condensed
Consolidated Statements of Cash Flows for the six months ended
June 30,
2006 and 2005 (unaudited)
|
5
|
| |
|
|
| |
Notes
to Condensed Consolidated Financial Statements
|
6-10
|
| |
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
10-17
|
| |
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
17
|
| |
|
|
|
Item
4.
|
Controls
and Procedures
|
17-18
|
| |
|
|
|
Part
II.
|
Other
Information
|
|
| |
|
|
|
Item
1A.
|
Risk
Factors
|
18-24
|
| |
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
| |
|
|
|
Item
6.
|
Exhibits
|
25
|
| |
|
|
| |
Signatures
|
26
|
| |
|
|
| |
Exhibit
Index
|
27
|
| |
|
|
| |
Exhibits
|
28-31
|
PART
I - FINANCIAL INFORMATION
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
(unaudited)
| |
|
June
30, 2006
|
|
December
31, 2005
|
|
|
Assets
|
|
|
|
|
|
| |
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,526,639
|
|
$
|
9,081,122
|
|
|
Accounts
receivable, net of reserves for doubtful accounts, returns, and allowances
of $1,324,721 at June 30, 2006 and $1,294,637 at December 31,
2005
|
|
|
2,253,422
|
|
|
2,630,859
|
|
|
Inventories
|
|
|
4,157,224
|
|
|
5,073,178
|
|
|
Prepaid
expenses and other current assets
|
|
|
124,965
|
|
|
301,265
|
|
|
Total
current assets
|
|
|
11,062,250
|
|
|
17,086,424
|
|
| |
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
2,524,635
|
|
|
2,600,660
|
|
|
Certificate of
deposit in debt
service reserve account
|
|
|
212,714
|
|
|
-
|
|
|
Total
assets
|
|
$
|
13,799,599
|
|
$
|
19,687,084
|
|
| |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
139,208
|
|
$
|
4,889,928
|
|
|
Accounts
payable
|
|
|
1,495,256
|
|
|
3,140,593
|
|
|
Accrued
expenses
|
|
|
833,393
|
|
|
788,427
|
|
|
Total
current liabilities
|
|
|
2,467,857
|
|
|
8,818,948
|
|
| |
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
3,507,406
|
|
|
-
|
|
|
Total
liabilities
|
|
|
5,975,263
|
|
|
8,818,948
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value. Authorized 25,000,000 shares; issued 9,355,366
shares at June 30, 2006 and issued
9,355,366 shares at December
31, 2005, including shares held in treasury
|
|
|
93,554
|
|
|
93,554
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
31,138,996
|
|
|
31,015,977
|
|
|
Retained
earnings (accumulated deficit)
|
|
|
(23,859,661
|
)
|
|
(20,627,318
|
)
|
|
Accumulated
other comprehensive income
- currency translation adjustment income
(loss)
|
|
|
458,769
|
|
|
393,245
|
|
|
Treasury
stock, at cost stock
(8,400 shares),
|
|
|
(7,322
|
)
|
|
(7,322
|
)
|
|
Total
stockholders’ equity
|
|
|
7,824,336
|
|
|
10,868,136
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
13,799,599
|
|
$
|
19,687,084
|
|
See
accompanying notes
to
unaudited consolidated financial statements.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
(Unaudited)
| |
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
4,518,233
|
|
$
|
6,524,374
|
|
$
|
9,798,943
|
|
$
|
12,960,916
|
|
|
Costs
of goods sold
|
|
|
4,295,669
|
|
|
5,142,880
|
|
|
8,610,622
|
|
|
10,047,233
|
|
|
Gross
profit
|
|
|
222,564
|
|
|
1,381,494
|
|
|
1,188,320
|
|
|
2,913,683
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
878,022
|
|
|
1,074,524
|
|
|
1,781,967
|
|
|
2,194,614
|
|
|
General
and administrative
|
|
|
697,780
|
|
|
1,731,049
|
|
|
1,546,688
|
|
|
2,553,506
|
|
|
Research
and development
|
|
|
557,112
|
|
|
695,408
|
|
|
1,188,873
|
|
|
1,444,706
|
|
|
Total
operating expenses
|
|
|
2,132,914
|
|
|
3,500,981
|
|
|
4,517,527
|
|
|
6,192,826
|
|
|
Operating
income (loss)
|
|
|
(1,910,350
|
)
|
|
(2,119,487
|
)
|
|
(3,329,206
|
)
|
|
(3,279,143
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
57,868
|
|
|
34,543
|
|
|
138,190
|
|
|
81,524
|
|
|
Interest
(expense)
|
|
|
(54,978
|
)
|
|
(61,132
|
)
|
|
(145,704
|
)
|
|
(126,915
|
)
|
|
Gain
on sale of investment in
InterMute, Inc.
|
|
|
|
|
|
3,495,516
|
|
|
|
|
|
3,495,516
|
|
|
Other,
net
|
|
|
49,964
|
|
|
71,973
|
|
|
104,378
|
|
|
(54,120
|
)
|
|
Total
other income (expense), net
|
|
|
52,854
|
|
|
3,540,900
|
|
|
96,864
|
|
|
3,396,005
|
|
|
Income
(loss) before income taxes
|
|
|
(1,857,496
|
)
|
|
1,421,413
|
|
|
(3,232,342
|
)
|
|
116,862
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,857,496
|
)
|
$
|
1,421,413
|
|
$
|
(3,232,342
|
)
|
$
|
116,862
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.20
|
)
|
$
|
0.16
|
|
$
|
(0.35
|
)
|
$
|
0.01
|
|
|
Diluted
|
|
$
|
(0.20
|
)
|
$
|
0.15
|
|
$
|
(0.35
|
)
|
$
|
0.01
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common
equivalent
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,346,966
|
|
|
9,163,847
|
|
|
9,346,966
|
|
|
9,066,028
|
|
|
Diluted
|
|
|
9,346,966
|
|
|
9,396,546
|
|
|
9,346,966
|
|
|
9,426,115
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
(Unaudited)
| |
|
Six
Months Ended June
30,
|
|
| |
|
2006
|
|
2005
|
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,232,342
|
)
|
$
|
116,862
|
|
| |
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
Gain
on Sale of Investment in InterMute, Inc.
|
|
|
0
|
|
|
(3,495,516
|
)
|
|
Depreciation
|
|
|
111,966
|
|
|
140,575
|
|
|
Stock
based compensation
|
|
|
123,018
|
|
|
0
|
|
|
Changes
in operating assets and liabilities:
Accounts
receivable, net
|
|
|
440,986
|
|
|
668,618
|
|
|
Inventories
|
|
|
915,954
|
|
|
(1,320,726
|
)
|
|
Prepaid
expenses and other assets
|
|
|
(36,414
|
)
|
|
333,569
|
|
|
Accounts
payable and accrued expenses
|
|
|
(1,600,372
|
)
|
|
(574,923
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
(3,277,204
|
)
|
|
(4,131,541
|
)
|
| |
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Sale of Investment in InterMute
|
|
|
0
|
|
|
3,495,516
|
|
|
Additions
to property, plant and equipment
|
|
|
(35,941
|
)
|
|
(17,354
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
(35,941
|
)
|
|
3,478,162
|
|
| |
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(1,243,313
|
)
|
|
(106,242
|
)
|
|
Proceeds
from exercise of stock options
|
|
|
0
|
|
|
418,637
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(1,243,313
|
)
|
|
312,395
|
|
| |
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,975
|
|
|
(3,250
|
)
|
| |
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(4,554,483
|
)
|
|
(344,234
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
9,081,122
|
|
|
9,438,596
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
4,526,639
|
|
$
|
9,094,362
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
54,978
|
|
$
|
61,132
|
|
|
Income
taxes
|
|
$
|
—
|
|
$
|
—
|
|
ZOOM
TECHNOLOGIES, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
| (1) |
Summary
of Significant Accounting
Policies
|
| (a) |
Basis
of Presentation and Principles of
Consolidation
|
The
condensed consolidated financial statements of Zoom Technologies, Inc. (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not
include all of the information and disclosures required by accounting principles
generally accepted in the United States of America. These statements should
be
read in conjunction with the audited consolidated financial statements and
notes
thereto for the year ended December 31, 2005 included in the Company's 2005
Annual Report on Form 10-K.
The
accompanying financial statements are unaudited. However, the condensed balance
sheet as of December 31, 2005 was derived from audited financial statements.
In
the opinion of management, the accompanying financial statements include all
adjustments (consisting of normal, recurring adjustments) necessary for a fair
presentation of results for these interim periods.
The
accompanying financial statements include the accounts and operations of the
Company and include the accounts of its wholly-owned subsidiary, Zoom
Telephonics, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the entire year.
| (b) |
Stock-Based
Compensation
|
Effective
January 1, 2006, the Company adopted SFAS No. 123 (R), “Accounting for Stock
Based Compensation” using the modified-prospective method. Under this method,
compensation cost is recognized for all share-based payments granted, modified
or settled after January 1, 2006, as well as for any unvested awards that were
granted prior thereto. Compensation cost for unvested awards granted prior
to
January 1, 2006 is recognized using the same estimate of the grant-date fair
value and the same attribution method used to determine the pro forma
disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation.”
Compensation cost for awards granted after January 1, 2006 is based on the
estimated fair value of the awards on their grant date and is generally
recognized over the required service period. Prior to January 1, 2006, the
Company accounted for its stock option plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and Related Interpretations.” No
stock-based compensation expense was recognized in operations for these plans,
since all options granted under them had an exercise price equal to the market
value of the underlying common stock on the date of grant. The effect of
adopting SFAS No. 123 (R) was to increase compensation cost and the reported
net
loss for the quarter ended June 30, 2006 by $61 thousand, or $0.01 per basic
and
diluted share and for the six months ended June 30, 2006 by $123 thousand,
or
$0.01 per basic and diluted share.
The
unrecognized stock-based compensation cost related to non-vested stock awards
as
of June 30, 2006 was $99,331. Such amount will be recognized in operations
over
a weighted average remaining period of 4 quarters.
The
fair
value of each option granted was estimated on the date of grant using the
Black-Scholes option-pricing model. There were no stock options granted in
the
second quarter of 2006. The fair value of options granted during the three
and
six months ended June 30, 2005 and the three months ended March 31, 2006 were
estimated using the following assumptions:
| |
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Weighted-average
expected stock-price volatility
|
|
|
n.a.
|
|
|
91.0
|
%
|
|
66.2
|
%
|
|
92.8
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
expected option life
|
|
|
n.a.
|
|
|
2.5
years
|
|
|
2
years
|
|
|
2.47
years
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
risk-free interest rate
|
|
|
n.a.
|
|
|
3.62
|
%
|
|
4.29
|
%
|
|
3.59
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
dividend yield
|
|
|
n.a.
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Pro-forma
information required under SFAS No. 123, Accounting
for Stock-Based Compensation
before
the adoption of SFAS No.123(R) for the three and six months ended June 30,
2005
follows:
| |
|
Three
Months Ended
June
30, 2005
|
|
|
Six
Months Ended
June
30, 2005
|
|
Net
income (loss), as reported
|
|
|
$
|
1,421,413
|
|
|
|
|
|
|
$ |
116,862
|
|
|
Stock-based
employee compensation expense determined under fair value
method
|
|
|
|
(169,175
|
)
|
|
|
|
|
|
|
(258,741
|
)
|
|
Pro
forma net income (loss)
|
|
|
$
|
1,252,238
|
|
|
|
|
|
|
$
|
(141,879
|
)
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
|
$
|
0.16
|
|
|
|
|
|
|
$
|
0.01
|
|
|
Diluted
- as reported
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
0.01
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- pro forma
|
|
|
$
|
0.14
|
|
|
|
|
|
|
$
|
(0.02
|
)
|
|
Diluted
- pro forma
|
|
|
$
|
0.13
|
|
|
|
|
|
|
$ |
(0.02
|
)
|
| (c) |
Recently
Issued or Proposed Accounting
Pronouncements
|
Share-Based
Payments
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 123(R), “Share Based Payment: an amendment of FASB Statements No.
123 and 95” (“SFAS No. 123(R)”). FASB Statement 123(R) requires companies to
recognize in the income statement, effective for annual periods beginning after
June 15, 2005, the grant-date fair value of stock options and other equity-based
compensation issued to employees, but expresses no preference for a type of
valuation model. Effective January 1, 2006 the Company adopted SFAS 123(R)
using
the modified prospective application.
(2)
Liquidity
On
June
30, 2006 the Company had working capital of $8.6 million, including $4.5 million
in cash and
cash
equivalents.
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.
The
loan was scheduled to be paid in full on January 10, 2006 and the final payment
was deferred during negotiations for a new mortgage. On March 30, 2006 the
Company paid the lender $1.2 million to reduce the then balance of $4.9 million,
and refinanced the remaining $3.7 million with a new mortgage. Payments on
the
new mortgage are based on a 15 year amortization period with initial interest
at
7.75%, adjusted along with the federal prime rate. The rate of interest at
June
30, 2006 was 8.25%. The
mortgage matures April 10, 2007 but may be extended at Zoom’s option to April
10, 2008 if Zoom makes the election to extend the loan and pays the lender
an
extension fee of $36,750 by March 10, 2007 and prior to and following such
election Zoom is not in default under the loan. As required by the lender the
Company has deposited six months of principal and interest ($212,714 as of
June
30, 2006) in a Certificate of Deposit held by the lender as a debt service
reserve account The new mortgage contains certain customary financial and
non-financial covenants including requirements to maintain tangible net worth
of
$7.0 million and to maintain cash and cash equivalents, free from any and all
encumbrances, of not less than $1.0 million. The Company was in compliance
with
these covenants as of June 30, 2006. The Company’s tangible net worth at June
30, 2006 was $7.8 million. The Company believes it should be able to sell its
owned buildings on favorable terms for any required additional liquidity. If
the
Company were to sell the portion of its owned buildings that include the
principal headquarters, it would expect to be able to lease back a portion
of
the sold property or otherwise find suitable space for its principal
headquarters on satisfactory terms.
On
March
16, 2005 the Company entered into a one year 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 terminated, as scheduled, on March 15,
2006. There were no borrowings under the line for the entire one year contract.
The Company is currently discussing a new one year line with Silicon Valley
Bank. There can be no assurance as to the outcome of these
negotiations.
To
conserve cash and manage liquidity during the past few years, the Company has
implemented expense reductions, including the reduction of employee headcount
and overhead costs. The employee headcount was 130 at June 30, 2005 and 116
at
June 30, 2006. The Company continues to implement cost cutting initiatives
including the reduction of employee headcount and overhead costs, and most
recently, the planned move of most of its manufacturing operations to a
dedicated facility in Tijuana, Mexico starting on approximately September 1,
2006. In connection therewith on June 30, 2006 the Company notified 40 employees
currently working at Zoom in Boston that they would be terminated on
approximately August 31, 2006. One-time severance benefits approximating
$108,000 have been accrued for this termination and charged to operations as
of
June 30, 2006. For a further discussion of this transaction and potential cost
savings, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” under Part I and “Risk Factors” in Item 1A under Part II
below. The Company plans to continue to assess its cost structure as it relates
to the Company’s revenues and cash position in 2006, and may make further
changes if the actions are deemed necessary.
The
Company believes that its current level of working capital combined with the
anticipated proceeds from the planned sale of the Company’s headquarters
building will provide it with sufficient resources to fund its normal operations
through June 30, 2007. The Company also believes that it may obtain additional
liquidity from additional consideration it may receive from its prior sale
of
interest in InterMute. However, the Company cannot assure that it can sell
its
building on favorable terms and on a timely basis, if at all, nor can it assure
that it will receive any additional proceeds from the sale of its interest
in
InterMute. The Company’s $3.7 million mortgage loan contains financial covenants
including the requirement that the Company maintain a tangible net worth of
at
least $7.0 million. As of June 30, 2006 the Company’s tangible net worth was
$7.8 million. If the Company continues to incur operating losses that are not
otherwise offset by proceeds from the timely sale of the Company’s headquarters
facility or any additional consideration the Company may receive from its prior
sale of its interest in InterMute, the Company could be in default of this
covenant before the loan matures in April 2007. In such event, the lender would
have the right to demand payment in full of the loan and the Company
would have
no
right to exercise its option to extend the loan. The Company is also under
continuing pressures from its customers to reduce prices and provide more
advantageous terms of sale, and one of its significant retailer customers has
notified the Company that they would like to purchase modems from the Company
on
a consignment basis. Such a change, if implemented, could require the Company
to
repurchase the customer’s inventory of modems that the Company had previously
sold to that customer, which the Company estimates to be approximately $1.3
million as of June 30, 2006. If the Company is not able to sell its building
on
a timely basis or obtain significant additional proceeds from the sale of its
interest in InterMute, the Company’s liquidity could be significantly impaired
and the Company may not have sufficient resources to fund its normal operations
over the next twelve months. Longer-term, if the Company is unable to increase
its revenues, reduce or otherwise adequately control its expenses, or raise
capital, the Company’s ability to continue as a going concern and achieve its
intended business objectives would be adversely affected..
(3) Earnings
(loss) per share
The
reconciliation of the numerators and denominators of the basic and diluted
net
earnings (loss) per share computations for the Company’s reported net income
(loss) is as follows:
| |
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,857,496
|
)
|
$
|
1,421,413
|
|
$
|
(3,232,342
|
)
|
$
|
116,862
|
|
|
Weighted
average shares outstanding
|
|
|
9,346,966
|
|
|
9,163,847
|
|
|
9,346,966
|
|
|
9,066,028
|
|
|
Earnings
(loss) per share
|
|
$
|
(.20
|
)
|
$
|
0.16
|
|
$
|
(.35
|
)
|
$
|
0.01
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,857,496
|
)
|
$
|
1,421,413
|
|
$
|
(3,232,342
|
)
|
$
|
116,862
|
|
|
Weighted
average shares outstanding
|
|
|
9,346,966
|
|
|
9,163,847
|
|
|
9,346,966
|
|
|
9,066,028
|
|
|
Net
effect of dilutive stock options based on the Treasury stock method
using
average market price
|
|
|
-
|
|
|
232,699
|
|
|
-
|
|
|
360,087
|
|
|
Weighted
average shares outstanding
|
|
|
9,346,966
|
|
|
9,396,546
|
|
|
9,346,966
|
|
|
9,426,115
|
|
|
Earnings
(loss) per share
|
|
$
|
(.20
|
)
|
$
|
0.15
|
|
$
|
(.35
|
)
|
$
|
0.01
|
|
Potential
common shares for which inclusion would have the effect of increasing diluted
earnings per share (i.e., antidilutive) are excluded from the computation for
the three and six months ended June 30, 2006. Options to purchase 1,226,200
shares of common stock at June 30, 2006, were outstanding but not included
in
the computation of diluted earnings per share for the three and six months
ended
June 30, 2006 as their effect would be antidilutive.
(4)
Inventories
|
Inventories
consist of the following:
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
Raw
materials
|
|
$
|
1,910,976
|
|
$
|
2,333,949
|
|
|
Work
in process
|
|
|
501,925
|
|
|
648,034
|
|
|
Finished
goods
|
|
|
1,744,323
|
|
|
2,091,195
|
|
|
Total
|
|
$
|
4,157,224
|
|
$
|
5,073,178
|
|
(5)
Comprehensive Income (Loss)
| |
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Net
income (loss)
|
|
$
|
(1,857,496
|
)
|
$
|
1,421,413
|
|
$
|
(3,232,342
|
)
|
$
|
116,862
|
|
|
Foreign
currency translation adjustment
|
|
|
59,882
|
|
|
(61,240
|
)
|
|
65,524
|
|
|
(96,837
|
)
|
|
Comprehensive
income (loss)
|
|
$
|
(1,797,614
|
)
|
$
|
1,
360,173
|
|
$
|
(3,166,818
|
)
|
$
|
20,025
|
|
(6)
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.
The
loan was scheduled to be paid in full on January 10, 2006 and the final payment
was deferred during negotiations for a new mortgage. On March 30, 2006 the
Company paid the lender $1.2 million to reduce the then balance of $4.9 million,
and refinanced the remaining $3.7 million with a new mortgage. Payments on
the
new mortgage are based on a 15 year amortization period with the initial
interest at 7.75%, adjusted along with the federal prime rate. The rate of
interest at June 30, 2006 was 8.25%. The mortgage matures April 10, 2007 but
may
be extended at Zoom’s option to April 10, 2008 if Zoom makes the election to
extend the loan and pays the lender an extension fee of $36,750 by March 10,
2007 and prior to and following such election Zoom is not in default under
the
loan. Zoom has classified the scheduled principal payments due after June 30,
2007 as long-term debt because the Company intends to extend the maturity date
to April 10, 2008 unless other more financially advantageous arrangements are
obtained. As required by the lender the Company has deposited six months of
principal and interest ($212,714 as of June 30, 2006) in a Certificate of
Deposit held by the lender as a debt service reserve account The new mortgage
contains certain customary financial and non-financial covenants including
requirements to maintain tangible net worth of $7.0 million and to maintain
cash
and cash equivalents, free from any and all encumbrances, of not less than
$1.0
million. The Company was in compliance with these covenants as of June 30,
2006.
(7)
Commitments
During
the six month period ended June 30, 2006, other than the renewal of the mortgage
on the Company’s headquarters buildings discussed in Note 2 and Note 6 above
there were no material changes to the Company’s commitments and contractual
obligations compared to those disclosed in the Form 10-K for the year ended
December 31, 2005
(8)
Segment and Geographic Information
The
Company’s operations are classified as one reportable segment. The Company’s net
sales for the three and six months ended June 30, 2006 and 2005, respectively,
for North America and those outside North America were comprised as
follows:
| |
|
Three
Months
Ended
|
|
%
of
|
|
Three
Months Ended
|
|
%
of
|
|
Six
Months Ended
|
|
%
of
|
|
Six
Months Ended
|
|
%
of
|
|
| |
|
June
30, 2006
|
|
Total
|
|
June
30, 2005
|
|
Total
|
|
June
30, 2006
|
|
Total
|
|
June
30, 2005
|
|
Total
|
|
|
North
America
|
|
$
|
2,478,515
|
|
55%
|
|
$
|
3,191,152
|
|
49%
|
|
$
|
5,430,638
|
|
55%
|
|
$
|
5,771,297
|
|
45%
|
|
|
Turkey
|
|
|
391,042
|
|
9%
|
|
|
615,474
|
|
9%
|
|
|
1,052,264
|
|
11%
|
|
|
2,137,211
|
|
16%
|
|
|
UK
|
|
|
888,340
|
|
20%
|
|
|
1,660,733
|
|
26%
|
|
|
1,794,706
|
|
18%
|
|
|
2,949,089
|
|
23%
|
|
|
All
Other
|
|
|
760,336
|
|
16%
|
|
|
1,057,015
|
|
16%
|
|
|
1,521,335
|
|
16%
|
|
|
2,103,319
|
|
16%
|
|
|
Total
|
|
$
|
4,518,233
|
|
100%
|
|
$
|
6,524,374
|
|
100%
|
|
$
|
9,798,943
|
|
100%
|
|
$
|
12,960,916
|
|
100%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
Customer Concentrations
Relatively
few customers have accounted for a substantial portion of the Company's net
sales. In the second quarter of 2006 the Company's net sales to its top three
customers accounted for 35% of its total net sales, with the Company's net
sales
to a North American retailer accounting for 19% of total net sales. The
remaining 16% was split between two other customers, a Turkish distributor
and a
United Kingdom retailer, at 9% and 7% respectively. For the first six months
of
2006 the Company’s net sales to its top three customers accounted for 34% of the
Company’s net sales, with the Company’s net sales to a North American retailer
accounting for 13% of total net sales. The remaining 20% was split between
two
other customers, a Turkish distributor and a North American distributor, at
11%
and 10% respectively.
In
the
second quarter of 2005 the Company’s net sales to its top three customers
accounted for 39% of its total net sales, with the Company’s sales to a large
U.S. retailer accounting for 21% of the total net sales. The remaining 18%
was
divided fairly equally between the other two customers, both with less than
a
10% share. In the first six months of 2005 the Company's net sales to its top
three customers accounted for 40% of its total net sales.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with the safe
harbor statement and the risk factors contained in Item IA of Part II of this
Quarterly Report on Form 10-Q as well those set forth in our Annual Report
on
Form 10-K for the year ended December 31, 2005 and our other filings with the
SEC. Readers should also be cautioned that results of any reported period are
often not indicative of results for any future period.
Overview
We
derive
our net sales primarily from sales of Internet related hardware products,
principally broadband and dial-up modems and related products, to retailers,
distributors, Internet Service Providers and Original Equipment Manufacturers.
We sell our products through a direct sales force and through independent sales
agents. Our employees are primarily located at our headquarters in Boston,
Massachusetts, our support office in Boca Raton, Florida, and our sales office
in the United Kingdom. We typically design our hardware products, though we
do
sometimes use another company’s design if it meets our requirements. Electronic
assembly and testing of the Company’s products in accordance with our
specifications is typically done in China.
We
have
traditionally performed most of the packaging and distribution effort at our
production and warehouse facility on Summer Street in Boston, Massachusetts,
which has also engaged in firmware programming and in testing. Our headquarters
is about a mile away, on South Street in Boston. Our lease for our Summer Street
facility is scheduled to expire in August 2006. On June 30, 2006 we announced
our plans to move most of our Summer Street operations to a dedicated facility
in Tijuana, Mexico commencing approximately September 1, 2006, and we do not
plan to renew our Summer Street lease.
For
many
years 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 for their
personal computers. In recent years the size of this market and our sales to
this market have 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 installed base for broadband Internet
connection devices, such as cable modems and DSL modems, will grow rapidly
during the decade. In response to increased and forecasted worldwide 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.
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.
Over
the
past several years our net sales have declined. In response to declining sales
volume, we have cut costs by reducing staffing and some overhead costs. On
March
31, 2005 our total headcount of full-time employees, including temporary
workers, was 143 which was reduced to 116 at June 30, 2006. As described above,
in connection with the move of our Summer Street manufacturing operations to
Tijuana, Mexico, we did not renew our Summer Street lease and on June 30, 2006
we communicated termination notices to 40 Summer Street employees.
Generally
our gross margin for a given product depends on a number of factors including
the type of customer to whom we are selling. The gross margin for retailers
tends to be higher than for some of our other customers; but the sales, support,
and overhead costs associated with retailers also tend to be higher. Zoom’s
sales to certain countries, including Turkey, Vietnam, and Saudi Arabia, are
currently handled by a single distributor for each country who handles the
support and marketing costs within the country. Gross margin for sales to these
distributors tends to be low, since lower pricing to these distributors helps
them to cover the support and marketing costs that they cover. Our gross margin
for broadband modems tends to be lower than for dial-up modems for a number
of
reasons, including that retailers are currently a more significant channel
for
our dial-up modems than for our broadband modems, that a higher percentage
of
our DSL sales come from low-margin countries, and that there is stronger
competition in the DSL market than in the dial-up market.
In
the
second quarter of 2006 our net sales were down 31.0% compared to the second
quarter of 2005. In the first six months of 2006 our net sales were down 24%
compared to the first six months of 205. The main reason for the sales decreases
was the decline in dial-up modem and DSL modem sales. While we have generally
experienced growth in our DSL modem sales, a significant portion of these sales
is currently concentrated with a small number of customers, and this reduces
the
predictability of our results. In Turkey Zoom has had a relatively high share
of
the small but growing DSL market, but our sales in 2006 have been declining.
We
attribute this decline to a number of factors including increased competition
and the lack of a significant DSL promotion by Turkish Telecom in 2006. We
are
working hard to reverse this trend, but plans by Turkish Telecom to dramatically
increase their bundling of DSL modems with their service are likely to
significantly reduce our sales to Turkey. We are also continuing our efforts
to
expand our DSL customer base and product line, and to enter new markets. Because
of our significant customer concentration, however, our net sales and operating
results have fluctuated and in the future could fluctuate significantly due
to
changes in political or economic conditions or the loss, reduction of business,
or less favorable terms for any of our significant customers.
Since
1999 we had a minority interest in a privately held software company, InterMute,
Inc. In June 2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary
of Trend Micro Japan. In connection with the acquisition, in June 2005 we
received a payment of approximately $3.5 million in exchange for our investment.
We recorded a non-operating gain of $3.5 million in our second quarter of 2005
in connection with this sale. We may also receive up to $3.0 million in
additional payments in 2006 if certain conditions and performance targets are
met. We will not record gains from these additional payments, if any, until
and
unless they are fully earned.
Our
cash
and cash equivalents balance at June 30, 2006 was $4.5 million compared to
$9.1
million at December 31, 2005. This reduction of $4.6 million was due primarily
to funding our $3.2 million net loss for the first six months of 2006, and
to a
$1.4 million cash reduction from the refinancing of our mortgage loan which
included a principal pay-down of $1.2 million and the deposit of $0.2 million
in
a debt service reserve account.
Critical
Accounting Policies and Estimates
Following
is a discussion of what we view as our more significant accounting policies
and
estimates. As described below, management judgments and estimates must be made
and used in connection with the preparation of our consolidated financial
statements. We have identified areas where material differences could result
in
the amount and timing of our net sales, costs, and expenses for any period
if we
had 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, voice over IP products, and wireless
and wired networking equipment. We earn a small amount of royalty revenue 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 to
date have not been material.
We
derive our net sales primarily from the sales of hardware products to four
types
of customers:
| · |
computer
peripherals retailers,
|
| · |
computer
product distributors,
|
| · |
internet
service providers, and
|
| · |
original
equipment manufacturers (OEMs)
|
We
recognize hardware net sales for our 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 include reductions resulting from 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 mail-in and in-store 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
2006
VoIP service revenues were recorded as the end-user-customer consumed billable
VoIP services. 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. 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 reserves and cost of sales. Product returns
as
a percentage of total net sales were 9.7% and 8.3 %, respectively, for the
three
and six months ended June 30, 2006 compared to 7.7 % and 7.0%, respectively,
for
the three and six months ended June 30, 2005.
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
$0.2 million in 2003, $0.1 million in 2004, and $0.2 million in 2005. In the
three and six months ended June 30, 2006, the reduction in our net sales due
to
price protection was $0.02 million and $0.04 million, respectively compared
to
$0.11 million and $0.15 million, respectively, for the three and six months
ended June 30, 2005.
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 $1.5 million in 2003, $1.3 million in
2004,
and $1.1 million in 2005. In the three and six months ended June 30, 2006,
the
reduction in our net sales due to sales and marketing incentives was $0.3
million and $0.6 million, respectively compared to $0.4 million and $0.7
million, respectively, for the three and six months ended June 30, 2005.
Consumer
Mail-In and In-Store Rebates.
Our
estimates for consumer mail-in and in-store 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. The estimate for mail-in
and in-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 $2.1
million in 2003, $1.4 million in 2004, and $0.8 million in 2005. In the three
and six months ended June 30, 2006, the reduction in our net sales due to
consumer rebates was $0.2 million and $0.5 million, respectively compared to
$0.4 million and $0.6 million, respectively, for the three and six months ended
June 30, 2005.
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 valuation allowances equal to the above-discussed
net sales adjustments for estimates of product returns, price protection
refunds, consumer rebates, and general bad debt reserves. These allowances
are
reduced as actual credits are issued to the customer's accounts. Our bad-debt
write-offs were less than $0.03 million for the three and six months ended
June
30, 2006.
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. Allowances for obsolete
inventory are established by management based on usability reviews performed
each quarter. Our allowances 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. In the second
quarter of 2006 we recorded an additional $0.2 million charge for inventory
reserves related to some slow-moving VoIP products. On July 1, 2006 Europe
began
a program for “RoHS” or Restriction on Hazardous Substances, which seeks to
minimize lead and other hazardous substances. In the second quarter of 2006
we
established a $0.1 million inventory obsolescence reserve for some non-RoHS
components that were purchased for use in European countries that now require
RoHS.
Valuation
and Impairment of Deferred Tax Assets. As
part
of the process of preparing our consolidated financial statements we 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 then
assess the likelihood that our deferred tax assets will be recovered from future
taxable income. To the extent we believe that recovery is not likely, we
establish a valuation allowance. Changes in the valuation allowance are
reflected 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, 2005 we had federal net operating loss carryforwards of
approximately $31,854,000. These federal net operating losses are available
to
offset future taxable income, and are due to expire in years ranging from
2018 to 2025. On December 31, 2005 we had state net operating loss carryforwards
of approximately $22,253,000. These state net operating losses are available
to
offset future taxable income, and are primarily due to expire in years ranging
from 2006 to 2010.
Results
of Operations
Summary.
Net
sales were $4.5 million for our second quarter ended June 30, 2006, down 30.7%
from $6.5 million in the second quarter of 2005. We had a net loss of $1.9
million for the second quarter of 2006, compared to net income of $1.4 million
in the second quarter of 2005. Our operating loss for the second quarter of
2006
was $1.9 million, a small improvement over the operating loss of $2.1 million
for the second quarter of 2005. The net income of $1.4 million for the second
quarter of 2005 was comprised of other income of $3.5 million, due to the gain
from the sale of our interest in InterMute, offset by the operating loss of
$2.1
million. Loss per diluted share was $0.20 for the second quarter of 2006
compared to a gain per diluted share of $0.15 for the second quarter of
2005.
Net
sales
were $9.8 million for the six months ended June 30, 2006, down 24.4% from $13.0
million in the first six months of 2005. We had a net loss of $3.2 million
for
the first six months of 2006, compared to a net gain of $0.1 million in the
first six months of 2005. Our operating loss for the first six months of both
2006 and 2005 was $3.3 million. Other income for the first six months of 2006
was $0.1 million compared to $3.4 million for the first six months of 2005,
due
primarily to the gain from the sale of our interest in InterMute. Loss per
diluted share was $0.35 for the first six months of 2006 compared to income
per
diluted share of $0.01 for the first six months of 2005.
Net
Sales.
Our net
sales for the first quarter of 2006 decreased 30.7% from the first quarter
of
2005, primarily due to a 33% decrease in dial-up modem sales and a 37% decrease
in DSL modem sales Dial-up modem net sales declined to $2.1 million in the
second quarter of 2006 compared to $3.2 million in the second quarter of 2005,
primarily due to the continued decline of the dial-up modem after-market. DSL
modem net sales decreased from $3.2 million in the second quarter of 2005 to
$1.8 million in the second quarter of 2006 primarily as a result of decreased
DSL sales to our Turkish distributor as discussed above, reduced DSL sales
at
retail in the U.K. due to the decision of a large U.K retailer to discontinue
carrying most of our DSL product line, and the loss of Granville Technologies,
a
former large DSL and dial-up modem customer in the United Kingdom that went
out
of business in mid-2005.
Our
net
sales for the first six months of 2006 decreased 24.4% from the first six months
of 2005, primarily due to a 29% decrease in dial-up modem sales and a 29%
decrease in DSL modem sales. Dial-up modem net sales declined to $4.2 million
in
the first six months of 2006 compared to $5.9 million in the first six months
of
2005, primarily due to a decrease of both dial-up modem unit sales, primarily
resulting from the continued decline of the dial-up modem after-market, and
to
lower dial-up modem average selling prices. DSL modem net sales decreased to
$4.4 million in the first six months of 2006 compared to $6.3 million in the
first six months of 2005, primarily as a result of decreased DSL sales to our
Turkish distributor as discussed above, reduced DSL sales at retail in the
U.K.
due to the decision of a large U.K retailer to discontinue carrying most of
our
DSL product line, and the loss of Granville Technologies, a former large DSL
and
dial-up modem customer in the United Kingdom that went out of business in
mid-2005. Net sales in our other product sales categories, which include cable
modems, VoIP, and wireless networking equipment, increased $0.3 million or
39%
from $0.8 million for the first six months of 2005 to $1.2 million in the first
six months of 2006, primarily due to increased wireless product
sales.
Our
net
sales in North America were $2.5 million in the second quarter of 2006, a
decrease from $3.2 million in the second quarter of 2005. Our net sales in
Turkey were $0.4 million in the second quarter of 2006, a decrease from $0.6
million in the second quarter of 2005. Our net sales in the U.K. were $0.9
million in the second quarter of 2006, a decline from $1.7 million in the second
quarter of 2005. The decline in net sales in the U.K and Turkey as discussed
above. Our net sales other than North America, Turkey and the U.K. were $0.8
million in the second quarter of 2006, a decrease from $1.1million in the second
quarter of 2005. Our net sales in North America were $5.4 million in the first
six months of 2006, a decline from $5.8 million in the first six months of
2005.
Our net sales in Turkey were $1.1 million in the first six months of 2006 and
$2.1 million in the first six months of 2005. Our net sales in the U.K. were
$1.8 million in the first six months of 2006, a decline from $2.9 million in
the
first six months of 2005. Our net sales in countries other than North America,
Turkey and the U.K. were $1.5 million for the first six months of 2006 and
$2.1
million for the first six months of 2005.
In
the
second quarter of 2006 our net sales to our top three customers accounted for
35% of our total net sales, with our net sales to a North American retailer
accounting for 19% of total net sales. The remaining 16% was split between
two
other customers our Turkish distributor and a United Kingdom retailer, at 9%
and
7%, respectively. For the first six months of 2006, our net sales to our top
three customer accounted for 34% of our net sales, with our net sales to a
North
American retailer accounting for 13% of total net sales. The remaining 20%
was
split between two other customers, our Turkish distributor and a North American
distributor, at 11% and 10%, respectively.
In
the
second quarter of 2005 our net sales to our top three customers accounted for
39% of our total net sales, with our sales to a large U.S. retailer accounting
for 21% of the total net sales. The remaining 18% was divided fairly equally
between the other two customers, both with less than a 10% share. In the first
six months of 2005 our net sales to our top three customers accounted for 40%
of
our total net sales. Because of our significant customer concentration, our
net
sales and operating income has fluctuated and could in the future fluctuate
significantly due to changes in political or economic conditions or the loss,
reduction of business, or less favorable terms for any of our significant
customers.
Gross
Profit. Our
total
gross profit was $0.2 million in the second quarter of 2006, a decline from
$1.4
million in the second quarter of 2005. Our gross margin percent of net sales
decreased to 4.9% in the second quarter of 2006 from 21.2% in the second quarter
of 2005. Gross margins were lower primarily because of the negative effect
of
fixed manufacturing overhead spread over the lower sales, increased charges
for
inventory obsolescence due to VoIP and RoHS as discussed above, lower product
margins at standard cost due to pricing, cost, and sales mix changes, and a
$0.1
million severance charge for our planned third quarter of 2006 closing of our
Boston production facility, which was announced and communicated to all affected
employees on June 30, 2006.
Our
total
gross profit was $1.2 million in the first six months of 2006, a decline from
$2.9 million in the first six months of 2005. Our gross margin percent of net
sales decreased to 12.1% in the first six months of 2006 from 22.5% in the
first
six months of 2005. Gross margins were lower primarily because of lower
absorption of fixed manufacturing overhead due to lower sales in the first
six
months of 2006 compared to the first six months of 2005, lower product margins
at standard cost due to pricing, cost, and sales mix changes, increased
obsolescence charges, and the $0.1 million severance charge.
Selling
Expense. Selling
expense decreased $0.2 million to $0.9 million or 19.4% of net sales in the
second quarter of 2006 from $1.1 million or 16.5% of net sales in the second
quarter of 2005. Selling expense was lower primarily because of lower personnel
and related costs resulting from employee headcount reductions, lower sales,
and
lower product delivery expense.
Selling
expense decreased $0.4 million to $1.8 million or 18.2% of net sales in the
first six months of 2006 from $2.2 million or 16.9% of net sales in the first
six months of 2005. Selling expense was lower primarily because of lower
personnel and related costs resulting from employee headcount reductions, lower
sales, and lower product delivery expense.
General
and Administrative Expense.
General
and administrative expense was $0.7 million or 15.4% of net sales in the second
quarter of 2006 compared to $1.7 million or 26.5% of net sales in the second
quarter of 2005. General and administrative expense in the second quarter of
2005 included $1.1 million of bad debt expense for the business failure of
Granville Technologies. Excluding the $1.1 million bad debt expense, the second
quarter year-over-year expense was relatively constant.
General
and administrative expense decreased $1.0 million to $1.5 million, or 15.8%
of
net sales in the first six months of 2006 from $2.6 million or 19.7% of net
sales in the first six months of 2005. The decrease of $1.0 million was
primarily due to the $1.1 million bad debt charge to general and administrative
expense for Granville Technologies in 2005.
Research
and Development Expense.
Research
and development expense decreased $0.1 million to $0.6 million or 12.3% of
net
sales in the second quarter of 2006 from $0.7 million or 10.7% of net sales
in
the second quarter of 2005. Research and development costs decreased primarily
as a result of lower personnel costs due to headcount reductions and lower
product license and approval fees. Development and support continues on all
of
our major product lines with particular emphasis on VoIP products and service,
DSL products, wireless products, and the new iHIFi product line.
Research
and development expense decreased $.2 million to $1.2 million or 11.1% of net
sales in the first six months of 2006 from $1.4 million or 11.1% of net sales
in
the first six months of 2005. Research and development costs increased primarily
in salary expense, depreciation, outside services and product evaluation
materials.
Other
Income (Expense), Net. Other
income (expense), net was net income of $0.05 million in the second quarter
of
2006, primarily from interest and rental income, compared to net income of
$3.5
million in the second quarter of 2005. The $3.5 million income gain resulted
primarily from the sale of our interest in InterMute to Trend Micro in
2005.
Other
income net was $3.2 million in the first six months of 2006, compared to $0.1
million in the first six months of 2005. The reason for the $3.3 million
increase in net income was primarily from the $3.5 million gain from the sale
of
our interest in the InterMute transaction.
Liquidity
and Capital Resources
On
June
30, 2006 we had working capital of $8.6 million, including $4.5 million in
cash
and cash equivalents. In the first six months of 2006, operating activities
used
$3.3 million in cash. Our net loss in the first six months of 2006 was $3.2
million. Uses of cash from operations included a decrease of accounts payable
and accrued expenses of $1.6 million. Sources of cash from operations included
a
decrease of accounts receivable of $0.4 million and inventory of $0.9 million.
In
the
first six months of 2006 net cash used in financing activities was $1.2 million,
due primarily to the refinancing of the mortgage on our headquarters buildings.
Our original mortgage was a 5-year balloon mortgage that was scheduled to be
due
and payable on January 10, 2006. The balloon payment was deferred until March
30, 2006 when a mortgage amendment was agreed and signed. On that date, we
paid
the lender $1.2 million to reduce the then outstanding balance of $4.9 million,
and refinanced the remaining $3.7 million with a new mortgage. Payments on
the
new mortgage are based on a 15 year amortization period with initial interest
at
7.75%, adjusted along with the federal prime rate. The rate of interest as
of
June 30, 2006 was 8.25%. The mortgage matures April 10, 2007 but may be extended
at Zoom’s option to April 10,2008 if Zoom makes the election to extend and pays
the lender an extension fee of $36,750 by March 10, 2007 and prior to and
following such election Zoom is not in default under the loan. As required
by
the lender we deposited six months of principal and interest ($212,714 as of
June 30, 2006) in a Certificate of Deposit held by the lender as a debt service
reserve account. The new mortgage contains certain customary financial and
non-financial covenants, including the requirement to maintain a tangible net
worth of $7.0 million and an amount of cash and cash equivalents, free from
any
and all encumbrances, in an amount of not less than $1.0 million. We were in
compliance with those covenants as of June 30, 2006. We believe we should be
able to sell our owned buildings on favorable terms if we require any additional
liquidity. If we were to sell the portion of our owned buildings that include
the principal headquarters, we expect we will be able to lease back a portion
of
the sold property or otherwise find suitable space for our principal
headquarters on satisfactory terms.
On
March
15, 2006 our one year revolving line of credit with Silicon Valley Bank
terminated. There were no borrowings under the line for the entire one year
contract. Accordingly, we do not currently have a line of credit from which
we
can borrow. We are in discussions with Silicon Valley Bank for a new one year
line of credit. There can be no assurance as to the outcome of these
discussions.
In
June
2005 InterMute, Inc., a software company in which we have a minority interest,
was acquired by Trend Micro Inc., a U.S. subsidiary of Trend Micro Japan. In
connection with the acquisition, in June 2005, we received a payment of
approximately $3.5 million in exchange for our investment. We recorded a
non-operating gain of $3.5 million in our second quarter of 2005 in connection
with this sale. We may also receive up to $3.0 million in additional payments
in
2006 if certain conditions and performance targets are met.
To
conserve cash and manage our liquidity, we continue to implement cost cutting
initiatives including the reduction of employee headcount and overhead costs,
and most recently, the move of most of our manufacturing operations to a
dedicated facility in Tijuana, Mexico starting on approximately September 1,
2006. In connection therewith on June 30, 2006 we notified 40 employees
currently working at Zoom in Boston that they would be terminated on
approximately August 31, 2006. One-time severance benefits approximating
$108,000 have been accrued for this termination and charged to operations as
of
June 30, 2006. We expect to incur approximately $250,000 of costs, including
the
aforementioned severance benefits, in connection with the move. We estimate
that
the move of our manufacturing facility should save approximately $2 million
over
our year 2005 production costs at year 2005’s production volumes. We anticipate
that our initial savings will be less than $2 million per year as our production
volumes are currently lower than 2005 levels and as a result of the initial
expenses we will incur to effect the move. Savings are expected to come
primarily from savings in costs for personnel, facilities, and shipping. We
cannot assure that we will be able to achieve these estimated cost savings.
See
“Risk Factors” in Item 1A under Part II below. We plan to continue to assess our
cost structure as it relates to our revenues and cash position in 2006, and
we
may make further changes if the actions are deemed necessary.
We
believe that the anticipated proceeds from the planned sale of our headquarters
building will provide us with sufficient resources to fund our normal operations
over the next 12 months, through June 30, 2007. We also believe that we may
obtain additional liquidity from additional consideration we may receive from
our prior sale of our interest in InterMute. However, we cannot assure that
we
can sell our building on favorable terms and on a timely basis, if at all,
nor
can we assure that we will receive any additional proceeds from the sale of
our
interest in InterMute. Our $3.7 million mortgage loan contains financial
covenants including the requirement that we maintain a tangible net worth of
at
least $7.0 million. As of June 30, 2006 our tangible net worth was $7.8 million.
If we continue to incur operating losses that are not otherwise offset by
proceeds from the timely sale of our headquarters facility or any additional
consideration we may receive from our prior sale of our interest in InterMute,
we could be in default of this covenant before the loan matures in April 2007.
In such event, the lender would have the right to demand payment in full of
the
loan and we would have
no
right to exercise our option to extend the loan. We are also under continuing
pressures from our customers to reduce prices and provide more advantageous
terms of sale, and one of our significant retailer customers has notified us
that they would like to purchase our modems on a consignment basis. Such a
change, if implemented, could require us to repurchase the customer’s inventory
of our modems that we had previously sold to that customer, which we estimate
to
be approximately $1.3 million as of June 30, 2006. If we are not able sell
our
building on a timely basis or obtain significant additional proceeds from the
sale of our interest in InterMute, our liquidity could be significantly impaired
and we may not have sufficient resources to fund our normal operations over
the
next twelve months. Longer-term, if we are unable to increase our revenues,
reduce or otherwise adequately control our expenses, or raise capital, our
ability to continue as a going concern and achieve our intended business
objectives would be adversely affected. See the safe harbor statement contained
herein and the "Risk Factors" in Item IA under Part II of this Quarterly Report
on Form 10-Q below, Zoom’s Annual Report on Form 10-K for the year ended
December 31, 2005 and Zoom’s other filings with the SEC, for further information
with respect to events and uncertainties that could harm our business, operating
results, and financial condition.
Commitments
During
the six months ended June 30, 2006, there were no material changes to our
capital commitments and contractual obligations from those disclosed in the
Form
10-K for the year ended December 31, 2005 except that, as described above,
in
March 2006 we paid our mortgage lender $1.2 million to reduce the then balance
of $4.8 million, and refinanced the remaining balance of our mortgage loan
with
a new $3.7 million mortgage with a 15 year amortization for one year and a
Maturity Date of April 10, 2007 and as announced in June 2006, commencing
approximately September 1, 2006, we plan to move most of our manufacturing
operations to a dedicated facility in Tijuana, Mexico.
"Safe
Harbor" Statement under the Private Securities Litigation Reform Act of
1995.
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: Zoom's plans, expectations and intentions,
including statements relating to Zoom's prospects and plans relating to sales
of
and markets for its products;
Zoom’s
expected benefits and cost savings resulting from the move of its manufacturing
facilities to Mexico; Zoom's ability to sell its owned buildings or receive
additional proceeds from the sale of its interest in InterMute for additional
liquidity; Zoom’s sufficiency of capital resources; and Zoom's financial
condition or results of operations.
In
some cases, you can identify forward-looking statements by terms such as "may,"
"will, " "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties you should not place
undue
reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking statements
are
based. Factors that could cause or contribute to differences in our future
financial results include those discussed in the risk factors set forth in
Item
1A of Part II below as well as those discussed elsewhere in this report and
in
our filings with the Securities and Exchange Commission. We qualify all of
our
forward-looking statements by these cautionary statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
own
financial instruments that are sensitive to market risks as part of our
investment portfolio. The investment portfolio is used to preserve our capital
until it is required to fund operations, including our research and development
activities. None of these market-risk sensitive instruments are held for trading
purposes. We do not own derivative financial instruments in our investment
portfolio. The investment portfolio contains instruments that are subject to
the
risk of a decline in interest rates. Investment Rate Risk - Our investment
portfolio consists entirely of money market funds, which are subject to interest
rate risk. Due to the short duration and conservative nature of these
instruments, we do not believe that it has a material exposure to interest
rate
risk. The 15-year amortization mortgage of our headquarters building is a
variable rate loan with the interest rate adjusted annually. A 1% point change
in the interest rate would result in a decrease or increase of approximately
$37,000 of interest expense per year. Our market risks have not changed
substantially since December 31, 2005.
ITEM
4. 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 recognized 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
June 30, 2006 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.
PART
II OTHER
INFORMATION
ITEM
1A. RISK
FACTORS
This
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our objectives, expectations and intentions. The
cautionary statements made in this report should be read as applicable to all
forward-looking statements wherever they appear in this report. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this report.
Our
liquidity may be significantly impaired if we are not able to sell our
headquarters facility.
We
are
currently seeking to sell our headquarters facility. The facility is subject
to
a $3.7 million mortgage. The mortgage matures April 10, 2007 but may be extended
at our option to April 10, 2008 if we make the election to extend the loan
and
pay the lender an extension fee of $36,750 by March 10, 2007 and if prior to
and
following such election we are not in default under the loan. The mortgage
contains financial and non-financial covenants, including the requirement to
maintain a minimum tangible net worth of $7.0 million and to maintain cash
and
cash equivalents, free from any and all encumbrances, of not less than $1.0
million. As of June 30, 2006 our tangible net worth was $7.8 million. If we
continue to incur losses that are not otherwise offset by proceeds from the
timely sale of our headquarters facility, we could be in default of this
covenant before the loan matures in March 2007. In such event, the lender would
have the right to demand payment in full of the loan and we would have
no
right to exercise our option to extend the loan. If we are not able to sell
our
building on a timely basis, our liquidity could be significantly impaired and
we
may not have sufficient resources to fund our normal operations over the next
twelve months. Moreover, if we do sell our headquarters facility, we believe
that we will be able to lease back a portion of the sold property or otherwise
find suitable space for our principal headquarters on satisfactory terms. If
we
fail to lease back a portion of the sold property or to find suitable space
for
our principal headquarters, our business would be harmed.
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. Our revolving credit facility expired on March 15, 2006
and
we currently have no line of credit from which we can borrow. We are currently
in discussions for a new one-year line of credit. 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.
Effective
on approximately September 1, 2006 we plan to transfer most of our manufacturing
operations from Boston, Massachusetts to Tijuana, Mexico. We may experience
delays, unanticipated costs or interruptions in production, or other problems
in
moving our manufacturing operations to Mexico. We currently anticipate to incur
approximately $250,000 in costs in connection with the move of our manufacturing
operations to Mexico. Delays, interruptions in production or other problems
in
effecting the move could lead to increased or unexpected costs, reduced margins,
delays in product deliveries, order cancellations, and lost revenue, all of
which could harm our business,
results of operation, and liquidity.
Our
conduct of business in Mexico is
subject to the additional challenges and risks associated with international
operations, including those related to integration of operations across
different cultures and languages, currency risk, and economic, legal, political
and regulatory risks.
Our
reliance on a business processing outsourcing partner to conduct our operations
in Mexico could materially harm our business and
prospects.
In
connection with the move of most of our manufacturing operations to Mexico,
we
will rely on a business processing outsourcing partner to hire, subject to
our
oversight, the production team for our manufacturing operation, provide the
selected facility described above, and coordinate some of the start-up and
ongoing manufacturing logistics relating to Mexico. Our outsourcing partner’s
related functions include acquiring the necessary Mexican permits, providing
the
appropriate Mexican operating entity, assisting in customs clearances, and
providing other general assistance and administrative services in connection
with the start-up and ongoing operation of the Mexican facility. Our
outsourcing partner’s performance of these obligations efficiently and
effectively will be critical to the success of our operations in Mexico. Failure
of our outsourcing partner to perform its obligations efficiently and
effectively could result in delays, unanticipated costs or interruptions in
production, delays in deliveries to our customers or other harm to our business,
results of operation, and liquidity. Moreover, if our outsourcing arrangement
is
not successful, we cannot assure our ability to find an alternative production
facility or outsourcing partner to assist in our operations in Mexico or our
ability to operate successfully in Mexico without outsourcing or similar
assistance.
Our
international operations are subject to a number of risks that could harm our
business.
Currently
our operations are significantly dependent on our operations outside the United
States, particularly sales of our products and the production of most of our
products. In the first six months of 2005, sales outside of North America were
approximately 55% of our net sales in 2005. In the first six months of 2006,
sales outside North America were 45% of our net sales. The inherent risks of
international operations could harm our business, results of operation, and
liquidity. The types of risks faced in connection with international operations
and sales include, among others:
| · |
regulatory
and communications requirements and policy changes;
|
| · |
favoritism
toward local suppliers;
|
| · |
delays
in the rollout of broadband services by cable and DSL service providers;
|
| · |
local
language and technical support requirements;
|
| · |
difficulties
in inventory management, accounts receivable collection and the management
of distributors or representatives;
|
| · |
reduced
control over staff and other difficulties in staffing and managing
foreign
operations;
|
| · |
reduced
protection for intellectual property rights in some
countries;
|
| · |
political
and economic changes and disruptions;
|
| · |
governmental
currency controls;
|
| · |
currency
exchange rate fluctuations, including, as a result of the move of
our
manufacturing operations to Mexico, changes in value of the Mexican
Peso
relative to the US dollar; and
|
| · |
import,
export, and tariff regulations.
|
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
the
first six months of 2006, our net sales to three companies constituted 34%
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.
Because of our significant customer concentration, our net sales and operating
income could fluctuate significantly due to changes in political or economic
conditions or the loss, reduction of business, or less favorable terms for
any
of our significant customers. For example, in the first half of 2006, DSL sales
to our Turkish distributor, one of our top three customers, have declined
significantly from $2.2 million in the first six months in 2005 to $1.1 million
in the first six months in 2006. We attribute this decline due to increased
competition and the lack of a DSL promotion by Turkish Telecom in 2006. We
are
working hard to reverse this trend, but plans by Turkish Telecom to increase
their bundling of DSL modems with their service may significantly reduce our
sales to Turkey. We cannot guarantee that we will increase our sales to our
Turkish distributor. 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,
results of operation and liquidity.
Our
net sales, operating results and liquidity have been and may in the future
be
adversely affected 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. 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, results of
operation and liquidity will be harmed.
Less
advantageous terms of sale of our products could harm our
business.
One
of
our significant retail customers has notified us that they want to purchase
our
modems on a consignment basis. Such a change, if implemented could require
us to
repurchase the customer’s inventory of our modems that we had previously sold to
that customer, which we estimate to be approximately $1.3 million as of June
30,
2006. The customer has also indicated that they plan to reduce the number of
brands of modems they sell, and that they cannot assure that they will continue
to sell our products. If we obtain less advantageous terms of sale or experience
other reductions in purchases of our products from significant customers, our
business, results of operation and liquidity will be harmed.
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:
| · |
the
current limited retail market for broadband modems;
|
| · |
the
relatively small number of cable, telecommunications and Internet
service
provider customers that make up a substantial part of the market
for
broadband modems;
|
| · |
the
significant bargaining power of these large volume purchasers;
|
| · |
the
time consuming, expensive, uncertain and varied approval process
of the
various cable service providers; and
|
| · |
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:
| · |
identify
and respond to emerging technological trends and industry standards
in the
market;
|
| · |
develop
and maintain competitive products that meet changing customer demands;
|
| · |
enhance
our products by adding innovative features that differentiate our
products
from those of our competitors;
|
| · |
bring
products to market on a timely basis;
|
| · |
introduce
products that have competitive prices;
|
| · |
manage
our product transitions, inventory levels and manufacturing processes
efficiently;
|
| · |
respond
effectively to new technological changes or new product announcements
by
others; and
|
| · |
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.
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:
| · |
delays
in the development of our products;
|
| · |
numerous
product returns; and
|
| · |
other
losses to us or to our customers or end
users.
|
Any
of
these occurrences could also result in the loss of or delay in market acceptance
of our products, either of which would reduce our sales and harm our business.
We are also exposed to the risk of product returns from our customers as a
result of contractual stock rotation privileges and our practice of assisting
some of our customers in balancing their inventories. Overstocking has in the
past led and may in the future lead to higher than normal returns.
Our
failure to effectively manage our inventory levels could materially and
adversely affect our liquidity and harm our business.
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. In the event we fail to
effectively manage our inventory our liquidity may be adversely affected and
we
may face increased risk of inventory obsolescence, a decline in market value
of
the inventory, or losses from theft, fire, or other casualty. We incurred a
$0.3
million inventory obsolescence charge in the three months ended June 30,2006
for
slow-moving VoIP products and products that did not conform to the R0HS
standards.
We
may be unable to produce sufficient quantities of our products because we depend
on third party manufacturers. If these third party manufacturers fail to produce
quality products in a timely manner, our ability to fulfill our customer orders
would be adversely impacted.
We
use
contract manufacturers to partially manufacture our products. We use these
third
party manufacturers to help ensure low costs, rapid market entry, and
reliability. Any manufacturing disruption could impair our ability to fulfill
orders, and failure to fulfill orders would adversely affect our sales. Although
we currently use four contract manufacturers for the bulk of our purchases,
in
some cases a given product is only provided by one of these companies. The
loss
of the services of 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:
| · |
reduced
management and control of component purchases;
|
| · |
reduced
control over delivery schedules, quality assurance and manufacturing
yields;
|
| · |
lack
of adequate capacity during periods of excess demand;
|
| · |
limited
warranties on products supplied to us;
|
| · |
potential
increases in prices;
|
| · |
interruption
of supplies from assemblers as a result of a fire, natural calamity,
strike or other significant event; and
|
| · |
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, Agere Systems, and Ikanos Communications.
Integrated circuit product areas covered by at least one of these 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 would 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:
| · |
using
a standard telephone line and appropriate service for dial-up modems;
|
| · |
ISDN
modems, or DSL modems, possibly in combination;
|
| · |
using
a cable modem with a cable TV line and cable modem service;
|
| · |
using
a router and some type of modem to service the computers connected
to a
local area network; or
|
| · |
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 significantly
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.
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 Europe in 2006 and the US in 2007, 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 is difficult,
and will typically increase our product costs by from zero to $.50 per unit,
depending on the product. In addition, we may incur additional costs involved
with the disposal of inventory or with returned products that do not meet the
new requirements, which could further harm our business. In the first six months
of 2006, we incurred an additional $0.1 million in costs due to establishment
of
obsolescence reserves for the eventual disposal of some of our modem components
as a result of these new requirements.
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.
VoIP
services currently have different regulations from traditional telephony in
most
countries including the US. Regulatory bodies including the FCC and regulators
in various states and countries may impose surcharges, taxes or new 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. 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. 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. In May 2005 the
FCC
issued an order requiring interconnected VoIP providers to deliver 911 calls
to
the customer’s local emergency operator as a standard feature of the service. We
believe our VoIP products are capable of meeting the FCC requirements. In the
event our VoIP products do not meet the FCC requirements, we may need to modify
our products, which could increase our costs.
In
many
countries outside the US in which we operate or our services are sold, 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 services 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 the Mexican Peso and 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.
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.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company held its Annual Meeting of Stockholders on June 23, 2006. At the Annual
Meeting, the stockholders elected five directors to serve for the ensuring
year
and until their successors are duly elected. The voting results with respect
to
the election of directors were as follows:
Proposal
1 - In the election of directors, each nominee was elected by a vote of the
stockholders as follows:
|
Nominee
|
For
|
Withheld
|
|
Frank
B. Manning
|
8,659,944
|
105,606
|
|
Peter
R. Kramer
|
8,675,405
|
90,145
|
|
Bernard
Furman
|
8,675,775
|
89,775
|
|
J.
Ronald Woods
|
8,675,575
|
89,975
|
|
Joseph
Donovan
|
8,675,375
|
90,175
|
ITEM
6. EXHIBITS
Exhibit
No. Exhibit
Description
|
|
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.**
|
**Filed
herewith
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Company
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ZOOM
TECHNOLOGIES, INC.
(Registrant)
|
Date:
August 14, 2006
|
By:
/s/ Frank B. Manning
|
| |
Frank
B. Manning, President
|
| |
|
|
Date:
August 14, 2006
|
By:
/s/ Robert Crist
|
| |
Robert
Crist, Vice President of Finance and Chief Financial Officer (Principal
Financial and Accounting
Officer)
|
EXHIBIT
INDEX
Exhibit
No. Exhibit
Description
|
|
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.**
|
**Filed
herewith