Unassociated Document
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 March 31, 2007
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 May 11, 2007, was 9,346,966 shares.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
| |
|
|
Page
|
|
Part
I.
|
Financial
Information
|
|
|
| |
|
|
|
|
Item
1.
|
Condensed
Consolidated Balance Sheets as of March 31, 2007 and December 31,
2006
(unaudited)
|
|
3
|
| |
|
|
|
| |
Condensed
Consolidated Statements of Operations for the three months ended
March 31,
2007 and 2006 (unaudited)
|
|
4
|
| |
|
|
|
| |
Condensed
Consolidated Statements of Cash Flows for the three months ended
March 31,
2007 and 2006 (unaudited)
|
|
5
|
| |
|
|
|
| |
Notes
to Condensed Consolidated Financial Statements
|
|
6-8
|
| |
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
8-13
|
| |
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
13
|
| |
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
13
|
| |
|
|
|
|
Part
II.
|
Other
Information
|
|
|
| |
|
|
|
|
Item
1A
|
Risk
Factors
|
|
14-20
|
| |
|
|
|
|
Item
6.
|
Exhibits
|
|
20
|
| |
|
|
|
| |
Signatures
|
|
21
|
| |
|
|
|
| |
Exhibit
Index
|
|
22
|
| |
|
|
|
| |
Exhibits
|
|
23-36
|
PART
I - FINANCIAL INFORMATION
ZOOM
TECHNOLOGIES, INC.
Condensed
Consolidated Balance Sheets
(unaudited)
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,240,543
|
|
$
|
7,833,046
|
|
|
Accounts
receivable, net of allowances of $1,109,679 at March 31, 2007 and
$915,969
at December 31, 2006
|
|
|
2,831,912
|
|
|
3,385,280
|
|
|
Inventories
|
|
|
4,922,308
|
|
|
4,511,814
|
|
|
Prepaid
expenses and other current assets
|
|
|
305,827
|
|
|
269,301
|
|
|
Total
current assets
|
|
|
14,300,590
|
|
|
15,999,441
|
|
| |
|
|
|
|
|
|
|
|
Equipment,
net
|
|
|
223,657
|
|
|
249,221
|
|
|
Total
assets
|
|
$
|
14,524,247
|
|
$
|
16,248,662
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,584,547
|
|
$
|
2,639,935
|
|
|
Accrued
expenses
|
|
|
666,016
|
|
|
562,349
|
|
|
Deferred
gain on sale of real estate
|
|
|
367,245
|
|
|
367,245
|
|
|
Total
current liabilities
|
|
|
2,617,808
|
|
|
3,569,529
|
|
| |
|
|
|
|
|
|
|
|
Deferred
gain on sale of real estate
|
|
|
261,447
|
|
|
357,373
|
|
|
Total
liabilities
|
|
|
2,879,255
|
|
|
3,926,902
|
|
| |
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized
- 25,000,000 shares; issued - 9,355,366 shares, including shares
held in
treasury
|
|
|
93,554
|
|
|
93,554
|
|
|
Additional
paid-in capital
|
|
|
31,344,628
|
|
|
31,275,169
|
|
|
Accumulated
deficit
|
|
|
(20,347,388
|
)
|
|
(19,597,296
|
)
|
|
Accumulated
other comprehensive income -currency translation
adjustment
|
|
|
561,520
|
|
|
557,655
|
|
|
Treasury
stock (8,400 shares), at cost
|
|
|
(7,322
|
)
|
|
(7,322
|
)
|
|
Total
stockholders' equity
|
|
|
11,644,992
|
|
|
12,321,760
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
14,524,247
|
|
$
|
16,248,662
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Operations
(Unaudited)
| |
|
Three
Months Ended
March
31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Net
sales
|
|
$
|
4,754,255
|
|
$
|
5,280,710
|
|
|
Cost
of goods sold
|
|
|
3,634,473
|
|
|
4,314,953
|
|
|
Gross
profit
|
|
|
1,119,782
|
|
|
965,757
|
|
| |
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
|
893,571
|
|
|
903,944
|
|
|
General
and administrative
|
|
|
638,917
|
|
|
848,908
|
|
|
Research
and development
|
|
|
491,340
|
|
|
631,760
|
|
| |
|
|
2,023,828
|
|
|
2,384,612
|
|
|
Operating
profit (loss) before gain on sale of real estate
|
|
|
(904,046
|
)
|
|
(1,418,855
|
)
|
| |
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
95,926
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(808,120
|
)
|
|
(1,418,855
|
)
|
| |
|
|
|
|
|
|
|
|
Other
:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
78,046
|
|
|
80,322
|
|
|
Interest
expense
|
|
|
-
|
|
|
(90,727
|
)
|
|
Other,
net
|
|
|
(20,018
|
)
|
|
54,414
|
|
|
Total
other income(expense), net
|
|
|
58,028
|
|
|
44,009
|
|
| |
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(750,092
|
)
|
|
(1,374,846
|
)
|
| |
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(750,092
|
)
|
$
|
(1,374,846
|
)
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share
|
|
$
|
(0.08
|
)
|
$
|
(0.15
|
)
|
| |
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
9,346,966
|
|
|
9,346,966
|
|
See
accompanying notes.
ZO
ZOOM TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
| |
|
Three
Months Ended
March
31,
|
|
| |
|
2007
|
|
2006
|
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(750,092
|
)
|
$
|
(1,374,846
|
)
|
| |
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
69,459
|
|
|
62,168
|
|
|
Depreciation
|
|
|
25,083
|
|
|
52,025
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
555,954
|
|
|
18,773
|
|
|
Inventories
|
|
|
(410,019
|
)
|
|
449,482
|
|
|
Prepaid
expenses and other assets
|
|
|
(36,252
|
)
|
|
35,577
|
|
|
Accounts
payable and accrued expenses
|
|
|
(1,047,213
|
)
|
|
(1,344,266
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
(1,593,080
|
)
|
|
(2,101,087
|
)
|
| |
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Additions
to equipment
|
|
|
572
|
|
|
(23,107
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
572
|
|
|
(23,107
|
)
|
| |
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
—
|
|
|
(1,363,478
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
—
|
|
|
(1,363,478
|
)
|
| |
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
5
|
|
|
895
|
|
| |
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(1,592,503
|
)
|
|
(3,486,777
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
7,833,046
|
|
|
9,081,122
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
6,240,543
|
|
$
|
5,594,345
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
$
|
90,727
|
|
|
Income
taxes
|
|
$
|
—
|
|
$
|
—
|
|
See
accompanying notes.
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, 2006 included in the Company's 2006
Annual Report on Form 10-K.
The
accompanying financial statements are unaudited. However, the condensed balance
sheet as of December 31, 2006 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 of the Company and its
wholly-owned subsidiary, Zoom Telephonics, Inc. All 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) Recently
Issued or Proposed Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, and disclosure.
Effective
January 1, 2007, the Company adopted FIN 48. As of that date the Company had
no
material unrecognized income tax benefits. Further, no significant changes
in
the unrecognized income tax benefits are expected to occur over the next twelve
months.
Historically
the Company has not accrued or paid significant interest and penalties for
underpayments of income taxes. Interest and penalties related to such
underpayments would be classified as a component of income tax expense. No
material amounts of interest or penalties for underpayments of income taxes
were
required to be accrued as of March 31, 2007.
The
Company files income tax returns in the United States and the United Kingdom.
Currently, open tax years in the US for federal and state income tax purposes
are 2003 through 2006. Open tax years in the UK are 2005 through
2006.
In
June
2006, the FASB issued Emerging Issues Tax Force No. 06-3, or EITF 06-3, “How
Sales Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That Is, Gross Versus Net
Presentation).” EITF 06-3 requires disclosure of accounting policy regarding the
gross or net presentation of point-of-sales taxes such as sales tax and
value-added tax. If taxes included in gross revenues are significant, the amount
of such taxes for each period for which an income statement is presented should
also be disclosed. The Company adopted EITF 06-3 effective January 1, 2007.
EITF
06-3 did not have a significant effect on the Company’s financial statements in
the first quarter of 2007.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115. Under
SFAS 159, a company may elect to use fair value to measure certain financial
assets and financial liabilities. The fair value election is irrevocable and
generally made on an instrument-by-instrument basis even if a company has
similar instruments that it elects not to measure at fair value. At the adoption
date, unrealized gains and losses on existing items for which the fair value
option had been elected are reported as a cumulative effect adjustment to
retained earnings. Subsequent to the adoption of SFAS 159, changes in fair
value
are recognized in operations. SFAS is effective for fiscal years beginning
after
November 15, 2007 and is required to be adopted by the Company on January 1,
2008. The Company Is
currently determining if fair value accounting is appropriate for any eligible
items and cannot currently estimate the effect, if any, that SFAS 159 will
have
on its financial statements.
(2)
Liquidity
On
March
31, 2007 the Company had working capital of $11.7 million, including $6.2
million in cash and
cash
equivalents.
To
conserve cash and manage liquidity, the Company has implemented cost cutting
initiatives including the reduction of employee headcount and overhead costs.
The employee headcount was 124 at March 31, 2006 and 68 at March 31, 2007.
Forty-three of this total reduction of 56 resulted from the closing of the
Company’s Boston manufacturing facility in August 2006. The Company’s production
activity was outsourced to a lower-cost maquiladora factory in Tijuana, Mexico.
The Company plans to continue to assess its cost structure as it relates to
revenues and cash position, and the Company may make further reductions if
the
actions are deemed necessary.
The
Company's total current assets at March 31, 2006 were $14.3 million and current
liabilities were $2.6 million. The Company did not have any long-term debt
at
March 31, 2007. Management believes it has sufficient resources to fund its
planned operations through at least March 31, 2008. However, if the Company
is
unable to increase its revenues, reduce its expense, or raise capital the
Company's longer-term ability to continue as a going concern and achieve its
intended business objectives could be adversely affected.
(3)
Earnings Per Share
Options
to purchase 1,380,250 shares of common stock at March 31, 2007 and 1,241,200
shares at March 31, 2006 were outstanding but not included in the computation
of
diluted earnings per share for the three months ended March 31, 2007 and 2006
because their effect would be antidilutive.
(4)
Inventories
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
Inventories
consist of :
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,722,263
|
|
$
|
2,969,375
|
|
|
Work
in process
|
|
|
470,410
|
|
|
522,307
|
|
|
Finished
goods
|
|
|
1,729,635
|
|
|
1,020,132
|
|
|
Total
Inventories
|
|
$
|
4,922,308
|
|
$
|
4,511,814
|
|
(5)
Comprehensive Income (Loss)
Comprehensive
income (loss) follows::
| |
|
Three
Months Ended March 31,
|
|
| |
|
2007
|
|
2006
|
|
|
Net
income (loss)
|
|
$
|
(750,092
|
)
|
$
|
(1,
374,846
|
)
|
|
Foreign
currency translation adjustment
|
|
|
3,865
|
|
|
5,
642
|
|
|
Comprehensive
income (loss)
|
|
$
|
(746,227
|
)
|
$
|
(1,
369,204
|
)
|
((6)
Contingencies
The
Company is party to various lawsuits and administrative proceedings arising
in
the ordinary course of business. The Company evaluates such lawsuits and
proceedings on a case-by-case basis, and its policy is to vigorously contest
any
such claims that it believes are without merit. The Company's management
believes that the ultimate resolution of such pending matters will not
materially and adversely affect the Company's business, financial position,
results of operations or cash flows.
(7)
Segment and Geographic Information
The
Company’s operations are classified as one reportable segment. The Company’s net
sales follow:
| |
|
Three
Months
|
|
|
|
Three
Months
|
|
|
|
| |
|
Ended
|
|
%
of
|
|
Ended
|
|
%
of
|
|
| |
|
March
31, 2007
|
|
Total
|
|
March
31, 2006
|
|
Total
|
|
|
North
America
|
|
$
|
3,485,661
|
|
|
73
|
%
|
|
|
|
$
|
2,
952, 123
|
|
|
56
|
%
|
|
Turkey
|
|
|
(38,714
|
)
|
|
(1
|
)%
|
|
|
|
|
661,222
|
|
|
13
|
%
|
|
UK
|
|
|
662,956
|
|
|
14
|
%
|
|
|
|
|
906,
366
|
|
|
17
|
%
|
|
All
Other
|
|
|
642,352
|
|
|
14
|
%
|
|
|
|
|
760,999
|
|
|
14
|
%
|
|
Total
|
|
$
|
4,754,255
|
|
|
100
|
%
|
|
|
|
$
|
5,280,710
|
|
|
100
|
%
|
(8)
Customer Concentrations
Relatively
few customers account for a substantial portion of the Company's net sales.
In
the first quarter of 2007 the Company's net sales to its top three customers
accounted for 41% of its total net sales. In the first quarter of 2006 the
Company's net sales to its top three customers accounted for 34% of its total
net sales. The Company's customers generally do not enter into long-term
agreements obligating them to purchase the Company’s products. The Company may
not continue to receive significant revenues from any of these or from other
large customers. A reduction or delay in orders from any of the Company's
significant customers, or a delay or default in payment by any significant
customer could materially harm the Company's business and prospects. Because
of
the Company's significant customer concentration, its 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.
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 set forth in our Annual Report on Form 10-K for
the year ended December 31, 2006 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 communication products,
principally broadband and dial-up modems and other communication 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 or
Taiwan.
For
many
years we performed most of the final assembly, test, packaging, warehousing
and
distribution at a production and warehouse facility on Summer Street in Boston,
Massachusetts, which has also engaged in firmware programming for some products.
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 have implemented that plan. Our lease for our Summer
Street facility expired in August 2006, and we completely vacated the facility
on September 30, 2006.
Since
1983 our headquarters has been near South Station in downtown Boston. Zoom
has
owned two adjacent buildings which connect on most floors, and which house
our
entire Boston staff. In December 2006 we sold our headquarters buildings to
a
third party, with a two-year lease-back of approximately 25,000 square feet
of
the 62,000 square foot facility. Our net sale proceeds were approximately $7.7
million, of which approximately $3.6 million was repaid to our mortgage holder,
eliminating the mortgage debt from our balance sheet.
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 consensus of communications industry analysts is that sales of
dial-up modems will probably 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. 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, both DSL modems and cable
modems.
We
continually seek to improve our product designs and manufacturing approach
in
order to improve product performance and 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 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. Our
total headcount of full-time employees, including temporary workers, went from
124 on March 31, 2006 to 68 on March 31, 2007. Of the decline of 56 employees,
43 were related to the outsourcing of our final assembly manufacturing operation
to Mexico. The manufacturing personnel in Mexico are not included in our 2007
headcount. Of the 68 employees on December 31, 2006, 14 were engaged in research
and development, 20 were involved in purchasing, assembly, packaging, shipping
and quality control, 22 were engaged in sales, marketing and technical support,
and the remaining 12 performed accounting, administrative, management
information systems, and executive functions.
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,
marketing, 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 master distributor for each country
who handles the support and marketing costs within the country. Gross margin
for
sales to these master distributors tends to be low, since lower pricing to
these
distributors helps them to cover the support and marketing costs for their
country. 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 broadband market than in the dial-up
market.
In
the
first quarter of 2007 our net sales were down 10.0% compared to the first
quarter of 2006. The main reason for the sales decrease was the significant
decline in DSL modem sales to Turkey due to actions by Turkish Telecom to
dramatically increase their bundling of DSL modems with their service. We are
seeing growth in some areas, including DSL sales to U.S. Internet Service
Providers and U.S. retailers, and we are continuing our efforts to expand our
DSL customer base and product line. Because of our significant customer
concentration, however, our net sales and operating results have fluctuated
and
in the future could continue to 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.
Our
cash
and cash equivalents balance at March 31, 2007 was $6.2 million, down from
$7.8
million at December 31, 2006. This reduction was due primarily to a reduction
in
accounts payable and accrued expenses, our operating loss for the quarter,
and
an increase in inventory, partially offset by a decrease in accounts
receivable.
Critical
Accounting Policies and Estimates
The
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. Where noted, material differences could result in the
amount and timing of our net sales, costs, and expenses for any period if we
made different judgments or used different estimates.
Revenue
(Net Sales) Recognition. We
primarily sell hardware products to our customers. The hardware products include
dial-up modems, DSL modems, cable modems, voice over IP products, embedded
modems, ISDN modems, telephone dialers, 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
2007
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, etc. Management reviews historical returns, current economic
trends, and changes in customer demand and acceptance of our products when
estimating sales return allowances. The estimate for future returns is recorded
as a reserve against accounts receivable, a reduction of net sales, and the
corresponding change to inventory and cost of sales. The relationship of
quarterly physical product returns to quarterly product sales remained
relatively stable for many years, but has been declining from a high of 10.6%
to
a low of 5.4% in the past two years as retail sales as a percent of total sales
have declined. Product returns as a percentage of total net sales were 9.4%
in
the first quarter of 2007.
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 2005, and $0.1 million in 2006. In the first quarter of 2007
the
reduction in our net sales due to price protection was $0.04 million.
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 $1.1 million in 2005 and $1.1 million
in
2006. In the first quarter of 2007, the reduction in our net sales due to sales
and marketing incentives was $0.3 million compared to $0.2 million in the first
quarter of 2006.
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 $0.8 million
in 2005 and 2006. In the first quarter of 2007 the reduction in our net sales
due to consumer rebates was $0.2 million compared to $0.3 million in the first
quarter of 2006.
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, and consumer rebates. These allowances are reduced as actual credits
are issued to the customer's accounts. Our bad-debt write-offs were not
significant in either the first quarter of 2006 or 2007.
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. Our valuation
process is to compare our cost to the selling prices each quarter, and if the
selling price of a product is less than the "if completed" cost of our
inventory, we write-down the inventory on a "lower of cost or market" basis.
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, 2006 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, 2006 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 2007 to 2010.
Results
of Operations
Summary.
Net
sales were $4.8 million for our first quarter ended March 31, 2007, down 10.0%
from $5.3 million in the first quarter of 2006. We had a net loss of $0.75
million for the first quarter of 2007, compared to a net loss of $1.4 million
in
the first quarter of 2006. Loss per diluted share improved from $0.15 for the
first quarter of 2006 to $0.08 for the first quarter of 2007.
Net
Sales.
Our
total net sales for the first quarter of 2007 decreased 10.0% from the first
quarter of 2006, primarily due to a 16% decrease in DSL modem sales and a 15%
decrease in dial-up modem sales. DSL modem net sales decreased from $2.7 million
in the first quarter of 2006 to $2.2 million in the first quarter of 2007 as
a
result of decreased sales to our Turkish distributor. The main reason for the
DSL modem sales decrease to Turkey was the action by Turkish Telecom to
dramatically increase their bundling of DSL modems with their service. Dial-up
modem net sales declined to $2.0 million in the first quarter of 2007 compared
to $2.3 million in the first quarter of 2006, primarily due to the continued
decline of the dial-up modem after-market. Cable modem sales increased from
$0.03 million in the first quarter of 2006 to $0.5 million in the first quarter
of 2007 as a result of recent cable modem placements in high volume retailers
in
the United States.
Our
total
net sales for the first quarter of 2007 decreased $0.5 million from the first
quarter of 2006, Our net sales in North America increased by $0.5 million from
$3.0 million in the first quarter of 2006 to $3.5 million in the first quarter
of 2007. Our net sales in Turkey were $0.0 million in the first quarter of
2007,
a decrease from $0.7 million in the first quarter of 2006. The main reason
for
the significant drop in sales to Turkey was the action by Turkish Telecom to
dramatically increase their bundling of DSL modems with their service. Our
net
sales in the U.K. were $0.7 million in the first quarter of 2007, a decline
from
$0.9 million in the first quarter of 2006. Our net sales outside North America
other than Turkey and the U.K. were $0.6 million in the first quarter of 2007,
a
decrease from $0.8 million in the first quarter of 2006.
In
the
first quarter ended March 31, 2007 three customers accounted for 41% of 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 $1.1 million in the first quarter of 2007, an improvement
from
$1.0 million in the first quarter of 2006. Our gross margin percent of net
sales
increased to 23.6% in the first quarter of 2007 from 18.3% in the first quarter
of 2006. Gross margins were higher in the first quarter of 2007 primarily due
to
the move of Zoom’s Boston final assembly operation to Tijuana, Mexico, which
lowered manufacturing personnel, space, and occupancy costs compared to the
first quarter of 2006. Reduced product obsolescence expense also contributed
to
the improvement in gross margins. Higher freight costs due to fuel surcharges
and unplanned air premiums in the first quarter of 2007 compared to 2006 offset
a large portion of these savings.
Selling
Expense.
Selling
expense was $0.9 million or 18.8% of net sales in the first quarter of 2007
compared to $0.9 million or 17.1% of net sales in the first quarter of 2006.
Selling expense reductions from a decline in sales personnel were offset by
increases in product delivery costs to customers.
General
and Administrative Expense.
General
and administrative expense was $0.6 million or 13.4% of net sales in the first
quarter of 2007 and $0.8 million or 16.1% of net sales in the first quarter
of
2006. General and administrative expense decreases included legal, audit, and
personnel costs.
Research
and Development Expense.
Research
and development expense decreased $0.1 million to $0.5 million or 10.3% of
net
sales in the first quarter of 2007 from $0.6 million or 12.0% of net sales
in
the first quarter of 2006. Research and development costs decreased primarily
as
a result of lower personnel costs and product evaluation fees. Development
and
support continues on all of our major product lines with particular emphasis
on
VoIP products and service, DSL products, and wireless products.
Gain
on sale of real estate. A
gain on
sale of real estate of $0.096 million was recorded in the first quarter of
2007.
In December 2006 Zoom sold its headquarters building in Boston and agreed to
lease-back some of the office space. This lease-back arrangement resulted in
an
accounting deferral of $0.725 million of the gain. This deferred gain will
be
recorded over the subsequent 8 quarters at $0.096 per quarter for 7 quarters
and
$0.053 million in the 8th
quarter,
Q4 2008.
Other
Income (Expense). Other
income (expense) was net income of $0.06 million in the first quarter of 2007,
primarily from interest income, partially offset by foreign exchange loss.
In
the first quarter of 2006 other income (expense) was net income of $.04 million
primarily due to interest and rental income, partially offset by mortgage
interest.
Income
Tax Expense (Benefit). We
did
not record any tax expense in the first quarter of 2007 or the first quarter
of
2006. The net deferred tax asset balance at March 31, 2007 was zero. This
accounting treatment is described in further detail under the caption
Critical
Accounting Policies and Estimates
above.
Liquidity
and Capital Resources
On
March
31, 2007 we had working capital of $11.7 million, including $6.2 million in
cash
and cash equivalents. We had a $1.6 million reduction in cash in the first
three
months of 2007. Operating activities used $1.6 million in cash, as follows:
a
net loss of $0.8 million, a decrease of accounts payable and accrued expense
of
$1.1 million, and an increase of inventory of $0.4 million Sources of cash
from
operations included a decrease of accounts receivable of $0.6 million.
To
conserve cash and manage our liquidity, we continue to implement cost cutting
initiatives including the reduction of employee headcount and overhead costs.
The employee headcount was 124 at March 31, 2006 and was reduced to 68 at March
31, 2007. Of the decline of 56 employees, 43 were related to the outsourcing
of
our final assembly manufacturing operation to Mexico. The manufacturing
personnel in Mexico are not Zoom employees. We plan to continue to assess our
cost structure as it relates to our revenues and cash position in 2007, and
we
may make further reductions if the actions are deemed necessary.
Management
believes it has sufficient resources to fund its planned operations through
at
least March 31, 2008. However, if we are unable to increase our revenues, reduce
or otherwise adequately control our expenses, or raise capital, our longer-term
ability to continue as a going concern and achieve our intended business
objectives could be adversely affected. See the safe harbor statement contained
herein and the "Risk Factors" under Item IA of 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, 2006 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 three months ended March 31, 2007, 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, 2006.
"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; 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
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
March 31, 2007 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 are 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.
To
stay in business we may require future additional funding which we may be
unable
to obtain on favorable terms, if at all.
Over
the
next twelve months we may require additional financing for our operations
either
to fund losses beyond those we anticipate or to fund growth in our inventory
and
accounts receivable. Our revolving credit facility expired on March 15, 2006
and
we currently have no line of credit from which we can borrow. 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 not have sufficient resources to fund our normal operations
and
we may be required to further reduce planned expenditures or forego business
opportunities. These factors 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.
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. 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, our most successful
products have historically been our dial-up modems. The introduction of new
products by competitors, market acceptance of products based on new or
alternative technologies, or the emergence of new industry standards have
in the
past rendered and could continue to render our products less competitive
or even
obsolete. For example, these factors have caused the market for our dial-up
modems to shrink dramatically. If we are unable to increase demand for our
broadband modems, we may be unable to sustain or grow our business.
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 quarter of 2007 the Company's net sales to its top three customers
accounted for 41% of its total net sales. In the first quarter of 2006 the
Company's net sales to its top three customers accounted for 34% of its 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 of, reduction of business with, or less favorable terms for any
of our
significant customers. A reduction or delay in orders from any of our
significant customers, or a delay or default in payment by any significant
customer could materially harm our business, results of operation and
liquidity.
Delays,
unanticipated costs, interruptions in production or other problems in connection
with the transfer of our manufacturing operations to Mexico or the continuing
operation of that facility could harm our business.
In
September 2006 we transferred most of our manufacturing operations from Boston,
Massachusetts to Tijuana, Mexico. As a result of moving our manufacturing
options to Mexico, we experienced delays and interruptions in production
and may
experience additional delays and interruptions as well as unanticipated costs
and other problems. We incurred approximately $280,000 in costs in connection
with the move of our manufacturing operations to Mexico. Delays, interruptions
in production or other problems related to 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.
Capacity
constraints in our Mexican operations could reduce our sales and revenues
and
hurt customer relationships.
We
now
rely on our Mexican operations to finish and ship most of the products we
sell.
Since moving our manufacturing operations to our Mexican facility we have
experienced and may continue to experience constraints on our manufacturing
capacity as we address challenges related to operating our new facility,
such as
hiring and training workers, creating the facility’s infrastructure, developing
new supplier relationships, complying with customs and border regulations,
and
resolving shipping and logistical issues. Our sales and revenues may be reduced
and our customer relationships may be impaired if we continue to experience
constraints on our manufacturing capacity. We are working to minimize capacity
constraints in a cost-effective manner, but there can be no assurance that
we
will be able to adequately minimize capacity constraints.
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
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 our operations in 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.
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
are
likely to continue to 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.
The
Company entered into a consignment arrangement with a significant retailer
customer in October 2006. In connection with this arrangement ownership of
all
unsold products previously purchased from the Company reverted to the Company
in
November 2006. The new arrangement resulted in an accounting adjustment that
reduced the Company’s net sales and net profit for 2006. Under the consignment
arrangement we are not able to recognize revenue from the sale of a product
until the retailer actually sells such product to its customer. The consignment
arrangement also results in a delay in the dating of invoices, the recognition
of accounts receivable, and the due dates for payment by the retailer for
goods
sold. If additional significant customers adopt similar arrangements or
otherwise change the terms of sale, 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
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.
Our
international operations are subject to a number of risks that could harm
our
business.
Currently
our business is significantly dependent on our operations outside the United
States, particularly sales of our products and the production of most of
our
products. All of our manufacturing operations except our rework operations
are
now located outside of the United States. In 2005 sales outside of North
America
were 55% of our net sales. In 2006 sales outside North America were 44% of
our
net sales. In the first quarter of 2007 sales outside North America were
27% of
our total 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
outside of the United States;
|
| · |
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.
|
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 2006 for inventory reserves related
to
some slow-moving VoIP products.
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. 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.
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
environmental regulations recently implemented or scheduled to be implemented
in
2007 may increase our manufacturing costs and harm our
business.
The
Federal government has 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 2007, may require us and other
electronics companies to change or discontinue many products. We believe
compliance with these new requirements will be difficult, and will typically
increase our product costs by up 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 addition the State of California has implemented
regulations requiring the use of highly efficient power cubes. These new
requirements will effect many of our products and may result in an increase
in
our product costs.
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.
Regulation
of VoIP services is developing and is therefore uncertain. Future regulation
of
VoIP services could increase our costs and restrict the grown of our VoIP
business.
VoIP
services currently have different regulations from traditional telephony
in most
countries including the US. The US, various states and other countries may
impose surcharges, taxes or new regulations upon providers of VoIP services.
The
imposition of any such surcharges, taxes and regulations on VoIP services
could
materially increase our costs, may limit or eliminate our competitive pricing
and may require us to restructure the VoIP services we currently offer. For
example, 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 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 . 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 party.
ITEM
6. EXHIBITS
|
Exhibit
No.
|
|
Exhibit
Description
|
|
10.1
|
|
Change
of Control and Severance Agreement between the Company and Frank
B.
Manning dated as of 12/28/06
|
| |
|
|
|
10.2
|
|
Change
of Control and Severance Agreement between the Company and Peter
R. Kramer
dated as of 12/28/06
|
| |
|
|
|
10.3
|
|
Change
of Control and Severance Agreement between the Company and Robert
A. Crist
dated as of 4/27/07
|
| |
|
|
|
10.4
|
|
Change
of Control and Severance Agreement between the Company and Deena
Randall
dated as of 4/27/07
|
| |
|
|
|
10.5
|
|
Change
of Control and Severance Agreement between the Company and Terry
Manning
dated as of 4/27/07
|
| |
|
|
|
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.
|
|
|
* |
Compensatory
plan or arrangement
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
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:
May 14, 2007
|
By:
/s/ Frank B. Manning
|
| |
Frank
B. Manning, President
|
| |
|
| |
|
|
Date:
May 14, 2007
|
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
|
|
10.1
|
|
Change
of Control and Severance Agreement between the Company and Frank
B.
Manning dated as of 12/28/06
|
| |
|
|
|
10.2
|
|
Change
of Control and Severance Agreement between the Company and Peter
R. Kramer
dated as of 12/28/06
|
| |
|
|
|
10.3
|
|
Change
of Control and Severance Agreement between the Company and Robert
A. Crist
dated as of 4/27/07
|
| |
|
|
|
10.4
|
|
Change
of Control and Severance Agreement between the Company and Deena
Randall
dated as of 4/27/07
|
| |
|
|
|
10.5
|
|
Change
of Control and Severance Agreement between the Company and Terry
Manning
dated as of 4/27/07
|
| |
|
|
|
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.
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32.1
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CEO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
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32.2
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CFO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
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* |
Compensatory
plan or arrangement
|