UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18672
ZOOM TECHNOLOGIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0448969
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
The aggregate market value of the common stock, $0.01 par value, of the
registrant held by non-affiliates of the registrant as of June 30, 2003
(computed by reference to the closing price of such stock on The Nasdaq Small
Cap Market on such date) was approximately $7,046,944.
The number of shares outstanding of the registrant's common stock, $0.01 par
value, as of March 19, 2004 was 8,182,941 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the registrant's 2004 annual
meeting of shareholders to be filed with the SEC in April 2004 are incorporated
by reference into Part III, Items 10-14 of this Form 10-K.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements involve known and
unknown risks, uncertainties and other factors which may cause our or our
industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to statements regarding:
o the anticipated development and timing of new product introductions;
o the success of our V.92 dial-up modems;
o ability to reach our goal of returning to profitability;
o the anticipated development and expansion of our existing technologies,
markets and sales channels;
o investment in resources for product design in foreign markets;
o the development of new competitive technologies and products;
o approvals, certifications and clearances for our products;
o production schedules for our products;
o market acceptance of new products;
o business strategies;
o dependence on significant suppliers;
o dependence on significant manufacturers, distributors and customers;
o the availability of debt and equity financing;
o general economic conditions;
o the realization of cash improvement from the sale of excess inventory;
o the realization of cash improvement from the utilization of no-charge
components;
o the impact of our cost-savings initiatives; and
o our financial condition or results of operations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. Except as otherwise required by law, we expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained in this report to reflect any change in our
expectations or any change in events, conditions or circumstances on which any
of our forward-looking statements are based. Factors that could cause or
contribute to differences in our future financial results include those
discussed in the risk factors set forth in Item 7 below as well as those
discussed elsewhere in this report. We qualify all of our forward-looking
statements by these cautionary statements.
PART I
ITEM 1 - BUSINESS
OVERVIEW
We design, produce, market, sell, and support dial-up and broadband modems
as well as other communication-related products. Our primary objective is to
build upon our position as a leading producer of Internet access devices, and to
take advantage of a number of emerging trends in communications including
enhanced Internet access, higher data rates, and voice calls traveling over the
Internet.
Most of our revenues have come and continue to come from sales of our
dial-up modems, though broadband modems have been increasing their share of our
business. Our dial-up modems connect personal computers and other devices to the
local telephone line for transmission of data, fax, voice, and images. Our
dial-up modems enable personal computers and other devices to connect to other
computers and networks, including the Internet and local area networks, at top
data speeds up to 56,000 bits per second. Most of our modems connect to a single
telephone line, but we also make multi-line modems that can connect to up to
sixteen telephone lines. We also have a line of integrated services digital
network ("ISDN") products, which can transmit and receive data simultaneously at
up to 128,000 bits per second.
In response to increased demand for faster connection speeds and enhanced
modem functionality, we have invested resources to expand our product line to
include cable and ADSL modems and related broadband access products. Cable
modems provide a high-bandwidth connection to the Internet through a cable-TV
cable that connects to compatible equipment that is typically at or near the
cable service provider. We began shipping cable modems during 2000. Our cable
modem customers in the U.S., the U.K., and other countries now include cable
service providers, original equipment manufacturers, and retailers.
Our Asymmetric Digital Subscriber Line modems, known as ADSL modems,
provide a high-bandwidth connection to the Internet through a standard telephone
line that typically connects to compatible ADSL equipment in or near the central
telephone office. We are now shipping five basic ADSL modems, one internal PCI
bus model and four external models, with a number of variations of these based
on variations of the unit's power supply, included filters, firmware, packaging,
or other customer-specific requirements.
We are working on a line of "voice over IP" or "VoIP" products that
facilitate phone calls that may travel through the Internet, potentially
lowering the cost of the call and providing other benefits. We expect to build
VoIP capabilities into some ADSL modems and routers. In addition, it is likely
that some of our products will include a VoIP service with various features
including the ability to make free VoIP calls to some other Zoom products.
We have been designing a new generation of telephone dialers and related
telephony products. In the early 1980s Zoom introduced its first generation of
dialers, including the Demon Dialer(TM) and Hotshot(TM). Dialers simplify the
placing of a phone call by dialing digits automatically. Zoom's new generation
of dialers includes a model designed for alternative long distance companies,
and a second model designed for use with prepaid phone cards. Zoom plans to
extend its proprietary dialer technology into a range of telephony products.
Zoom also has a line of cameras designed to be used with personal
computers. Some "web camera" models only function when they are connected to a
computer, and allow storage or transmission of a still picture or moving video.
Some new models also work when they are not connected to the computer; so that
pictures or videos can be stored into the camera away from the computer, and
later downloaded into the computer.
We are incorporated in Delaware under the name Zoom Technologies, Inc. In
2002 we changed our jurisdiction of incorporation from Canada to Delaware and
our name from Zoom Telephonics, Inc. to Zoom Technologies, Inc. We conduct our
business through our operating subsidiary, Zoom Telephonics, Inc. and its
subsidiaries. Zoom Telephonics, Inc. was originally incorporated in New York in
1977 and changed its state of incorporation to Delaware in 1993. Our principal
executive offices are located at 207 South Street, Boston, MA 02111 and our
telephone number is (617) 423-1072.
AVAILABLE INFORMATION
Our Internet website address is http://www.zoom.com. Through our website,
we make available, free of charge, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. These SEC reports can be accessed
through the investor relations section of our website. The information found on
our website is not part of this or any other report we file with or furnish to
the SEC.
PRODUCTS
General
The vast majority of our products facilitate communication of data through
the Internet. Our dial-up modems and integrated services digital network, or
ISDN, modems can also link computers, point-of-purchase terminals, or other
modem-equipped devices to each other through the traditional network without
using the Internet. Our cable modems use the cable-TV cable and our ADSL modems
use the local telephone line to provide a high-speed link to the Internet. Our
dialers can be used to route voice calls to a VoIP network that may include the
Internet. Our PC cameras provide pictures that can be communicated over the
Internet.
Dial-Up Modems
We have a broad line of dial-up modems with top data speeds up to 56,000
bps, available in internal, external and PCMCIA models. PC-oriented internal
modems are designed primarily for installation in the PCI or ISA slot of IBM
PC-compatibles. Embedded internal modems are designed to be embedded in non-PC
equipment such as point-of-purchase terminals, kiosks, and set-top boxes. Many
of our external modems are designed to work with almost any terminal or
computer, including IBM PC-compatibles, the Apple MacIntosh, Linux computers,
and other computers. Our external models include desktop models and multi-line
modems with up to sixteen modems in an enclosure. Our PCMCIA modems are designed
for use with notebook and sub-notebook computers as well as PDAs (personal
digital assistants) equipped with standard PCMCIA slots. When sold as packaged
retail products, our dial-up modems are shipped complete with third-party
software that supports the hardware capabilities of the modem.
56K modems allow users connected to standard phone lines to download data
at speeds up to 56,000 bps when communicating with compatible central sites
connected to digital lines such as ISDN or T1 lines. Those central sites are
typically online services, Internet Service Providers, or remote LAN access
equipment. We began shipping pre-standard K56flex(TM) 56K modems in the second
quarter of 1997. In February 1998 a committee of the International
Telecommunications Union ("ITU") agreed upon the V.90 standard for 56K. V.90 is
now widely deployed in equipment made by central site manufacturers, and most of
our dial-up modem sales include V.90. We are now also shipping V.92 modems,
which offer increased functionality and faster upstream data rates than V.90
dial-up modems. We expect V.92 modems to take an increasing share of the dial-up
modem market because of these improvements.
In March and April of 1999, we acquired substantially all of the modem
assets of Hayes Microcomputer Products, Inc., an early leader in the modem
industry. In July 2000, we acquired the trademark and product rights to Global
Village products. Global Village is a modem brand for Apple MacIntosh computers.
We now sell and market dial-up modems under the Zoom, Hayes and Global Village
names, as well as under various other private-label brands developed for some of
our large accounts.
In 2001, 2002 and 2003, our dial-up modems and related products accounted
for approximately 90%, 84% and 73% of our net sales, respectively.
The following sets forth some of the key features incorporated in one or
more of our dial-up modems:
o ZoomGuard(TM). ZoomGuard represents the protective circuitry added to our
modems to improve their ability to withstand the effects of lightning
striking a phone line to which the modem is connected. In many countries,
lightning is a major cause of modem field failures.
o PC Card Guard(TM). PC Card Guard represents the protective circuitry added
to some of our PCMCIA modems to protect against destruction caused by
plugging the modem into a digital PBX phone jack. We were one of the first
companies to develop this useful feature.
o Voice Mail. Voice mail capability allows a PC to serve as an answering
machine with message storage and local or remote message retrieval.
o Distinctive Ring. Distinctive Ring is a service offered by telephone
companies that assigns more than one phone number to a single phone line,
with each number ringing differently. This service along with appropriate
modem functionality allows someone to arrange for one phone number to be
answered as a phone line, a second number to be answered as a fax line, and
a third number to be answered as a data line. We have been issued a United
States patent related to our distinctive ring technology.
International Modems.
Modems for countries outside the US often vary from a similar modem for the
US due to different regulatory requirements, country-specific phone jacks and AC
power, and language-related specifics. As a result, the introduction of new
products into international markets can be costly and time-consuming. In 1993,
we introduced our first dial-up modem approved for selected Western European
countries. Since then we have continued to expand our product offerings
internationally. We have received regulatory approvals for, and are currently
selling dial-up modems in a number of countries, including Australia, Austria,
Belgium, Denmark, Finland, Germany, Hungary, India, Ireland, Italy, Japan,
Mexico, the Netherlands, Peru, Poland, Portugal, Russia, Saudi Arabia, Slovenia,
South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and
Vietnam. We intend to continue to expand and enhance our product line for our
existing markets and to seek approvals for the sale of our products in new
countries throughout the world.
Multi-line Modems.
In 1996 we began shipping a family of multi-line dial-up modems targeted
for local area network fax and data server applications, computer bulletin
boards, multi-line voice mail, and other applications. The Zoom/MultiLine(TM)
products hold up to eight voice dial-up faxmodems in one small external case
that includes status indicators for each dial-up modem. Our Hayes Century(TM)
product line provides up to 16 dial-up modems in a single enclosure.
ISDN Products.
We have a family of modems for Integrated Service Digital Network, or ISDN,
communications. Basic ISDN is a telephone service that uses existing phone lines
to provide two 64,000 bps channels and one 16,000 bps channel. The higher rates
of data transmission achievable with ISDN can be particularly attractive for
data-intensive applications such as the transmission of graphics and video
images, Internet browsing, or video telephony. ISDN also provides much faster
response times to a source of data than those associated with dial-up modems.
In late 2000 we introduced the following ISDN products:
o a PCI model that plugs into the PCI slot of a Windows PC,
o a USB model that plugs into the USB port of a PC, and
o a serial port model that plugs into the serial port of a PC.
Cable Modems
Each cable service provider has its own approval process, in which the
cable service provider may require CableLabs(R) certification in addition to the
cable service provider's own company approval. We have obtained CableLabs(R)
certification for four types of DOCSIS-standard cable modems - PCI, USB,
Ethernet, and Ethernet/USB models. Some of these models have also received cable
service provider approvals; for instance, the Ethernet/USB model includes
approvals by AT&T, Adelphia, Charter, Comcast, Cox, and Mediacom. The approval
process has been and continues to be a significant barrier to entry, as are the
strong relationships with cable service providers enjoyed by incumbent cable
equipment providers like Motorola and Scientific Atlanta.
In 2003 we continued to sell cable modems to cable service providers and
original equipment manufacturers both inside and outside the US, and to computer
retailers in the US. So far sales through the retail channel have been
handicapped by a number of factors, including the approval process described
above and the fact that some cable service providers do not provide a financial
incentive to a customer who purchases his own modem rather than leasing it from
the cable service provider.
ADSL Modems.
Our ADSL modems incorporate the standards that are most popular with U.S.
telephone companies and Internet Service providers, including G.DMT and G.Lite.
In 2000, we designed and shipped our first ADSL modems, an external USB model
and an internal PCI model. In 2002 we introduced new USB and PCI models, and
also introduced an Ethernet model and a USB/Ethernet model with router features.
In 2003 we introduced an ADSL modem with a built-in router, a USB port, and four
switched Ethernet ports. In 2001, 2002 and 2003, our ADSL modems and related
products accounted for approximately 2%, 3% and 14% of our net sales. Zoom
expects to continue to add ADSL modems to our product line during 2004. At least
one new model is planned to include VoIP or "Voice over Internet Protocol"
capabilities as summarized below. Another new model is planned to include
wireless network capability incorporating the wireless standards 802.11b and
802.11g. Other new models are planned as new product designs packaged and
marketed under the Hayes brand.
Voice Over Internet Protocol
In 2004 we plan to begin introducing a line of products that support VoIP
or "Voice over Internet Protocol". Our VoIP implementations use the
standards-based SIP protocol, and are thus compatible with a wide range of VoIP
gateways and endpoints. The first two products will each have a phone port that
lets someone plug in a normal phone to place and receive free voice calls over
the Internet when the calls are between two of our VoIP products or compatible
products. These two products will also allow someone to communicate with a phone
that is not VoIP enabled, though this will typically trigger a long distance
service charge. We expect that some versions of the first two products will be
bundled with phone service, including a free VoIP phone service and an optional
paid service for communicating with phones that are not VoIP enabled. The first
product is also expected to include an ADSL modem, a router, a firewall, a
4-port switching hub, and other features. The second product will be the same as
the first, except instead of having a built-in ADSL modem, it will have an
Ethernet port for connecting to the Ethernet port of an external ADSL modem or
cable modem. We are devoting significant resources to the VoIP product area in
2004, and if our initial efforts are successful, we expect to expand the product
line by, for instance, increasing the number of voice ports built into some of
our products.
Wireless
In general we have been de-emphasizing wireless network interface cards,
and concentrating our wireless network product plans on broadband modems with
built-in wireless networking capability.
Full-Color Video Cameras and Other Video Products.
In late 1997 we shipped the Zoom/Video Cam, a full-color PC video camera.
Since then we have introduced new PC camera models. We have limited hardware
product development in the video area. Typically we purchase another company's
camera hardware, and license appropriate packing and documentation to achieve a
finished product.
Dialers and Related Telephony Products.
Our dialers simplify the placing of a phone call by dialing digits
automatically. We shipped our first telephone dialer, the Demon Dialer(R), in
1981, and in 1983 began shipping the Hotshot(TM) dialer. As the dialer market
diminished due to equal access, we focused on modems and other peripherals for
the personal computer market. We recently began shipping a new generation of
dialers incorporating proprietary technology. Our proprietary technology
includes proprietary hardware, firmware, and software, and is currently
protected by one U.S. patent. These dialers are well suited to easily route
appropriate calls through money-saving long-distance service providers,
including prepaid phone card service providers. We expect to sell some of our
dialer models to long-distance service providers, and other models to
high-volume retailers. In 2003, dialer products represented under 1% of our net
sales.
SALES CHANNELS
General
We sell our products primarily through high-volume retailers and
distributors, Internet service providers, value-added resellers, PC system
integrators, and original equipment manufacturers ("OEMs"). We support our major
accounts in their efforts to discern strategic directions in the market, to
maintain appropriate inventory levels, and to offer a balanced selection of
products.
During 2003 our customers who accounted for more than 10% of our total net
sales were Staples, Best Buy, and Dixons Group (Dixons, Currys, PC World, and PC
City). Together these 3 customers accounted for 37% of our total net sales.
High-volume Retailers.
In the United States, we reach the PC retail market primarily through
high-volume retailers. Our United States retail distribution network includes
Best Buy, CDW, Fry's, Micro Electronics, PC Connection, Staples, and many
others.
Distributors.
We sell significant quantities of dial-up and ADSL modems through
distributors, who often sell to corporate accounts, retailers, value-added
resellers and other customers. Our North American distributors include D&H
Distributing, Gates-Arrow, Ingram Micro, and Tech Data.
System Integrators and Original Equipment Manufacturers.
Our system integrator and OEM customers sell our products under their own
name or incorporate our products as a component of their systems. We seek to be
responsive to the needs of these customers by providing on-time delivery of
high-quality, reliable, cost-effective products with strong engineering and
sales support. We believe many of these customers also appreciate the
improvement in their products' image due to use of a Zoom or Hayes brand modem.
International Channels.
In international markets, we sell our products primarily through
independent distributors and retailers. Our international distributors include
Beijing Tide Hightech Co. Ltd, Computer 2000, Criterium, Informatics, Micro
Peripherals, Olusum, Pouliadis, Tan Thanh, UMD, and others. Our major European
high-volume retailers include Business Logic, Centromail, Dixons Group (Dixons,
Currys, PC World, and PC City), Time Computers, and others. Our international
net sales as a percentage of total net sales have grown from 8% in 1994 to 45%
in 2003. Our revenues from international sales were $15.7 million in 2001, $14.9
million in 2002, and $15.1 million in 2003. See note 17 to our accompanying
financial statements for further information regarding our geographic sales.
Approximately 61%, 75% and 69% of our international net sales in 2001, 2002 and
2003, respectively, were customers in the United Kingdom. We believe sales
growth outside of the United States will continue to require substantial
additional investments of resources for product design and testing, regulatory
approvals, and native-language instruction manuals, software, packaging, sales
support, and technical support. We have made this investment in the past for
many countries, and we expect to make this investment for many countries and
products in the future.
SALES, MARKETING AND SUPPORT
Our sales, marketing, and support are primarily managed from our
headquarters in Boston, Massachusetts. In North America we sell our Zoom, Hayes,
Global Village, and private-label dial-up modem products through our own
employees and through commissioned independent sales representatives managed and
supported by our own staff. Most Internet service providers are serviced by our
employees. North American technical support is primarily handled from our Boston
headquarters location and from our technical support offices in Boca Raton,
Florida. We also maintain a sales, support, and logistics office in the United
Kingdom. Warehousing, customs clearance, and shipping for the United Kingdom and
some other European countries are primarily handled by contract with an
unaffiliated specialist in these services located in England. For countries
outside North America and Europe, our in-house staff typically works directly
with country-specific distributors. Our worldwide OEM sales are primarily
handled by our staff in the United States and United Kingdom, who are at times
assisted by our sales staff or commissioned sales representatives. See note 17
to our accompanying financial statements for geographic information regarding
our sales.
We believe that Zoom, Hayes, and Global Village are widely recognized brand
names. We build upon our brand equity in a variety of ways, including
cooperative advertising, product packaging, trade shows, and public relations.
We generally provide our high-volume retailers with funds to advertise our
products in conjunction with the customers' general advertising. We believe that
this type of advertising efficiently and effectively targets the end-user market
for our products.
We attempt to develop quality products that are user-friendly and require
minimal support. We typically support our claims of quality with product
warranties of one to seven years, depending upon the product. To address the
needs of those end-users of our products who require assistance, we have our own
staff of technical specialists who currently provide telephone support six days
per week. Our technical support specialists also maintain a significant World
Wide Web support facility that includes email, firmware and software downloads,
and the SmartFacts(TM) Q&A search engine. In 2001 we expanded our European
technical support to enable users in other countries to access support in
languages other than English. This support is generally provided by our support
staff in Boston, Florida, and the United Kingdom.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on developing new
communications network access products, further enhancing the capabilities of
existing products, and reducing production costs. We have developed close
collaborative relationships with certain of our OEM customers and component
suppliers. We work with these partners and other sources to identify and respond
to emerging technologies and market trends by developing products that address
these trends. In addition, we purchase modem and other chipsets that incorporate
sophisticated technology from third parties, thereby eliminating the need for us
to develop this technology in-house. As of December 31, 2003 we had 20 employees
engaged primarily in research and development. Our research and development team
performs electronics hardware design and layout, mechanical design, prototype
construction and testing, component specification, firmware and software
development, product testing, foreign and domestic regulatory approval efforts,
end-user and internal documentation, and third-party software selection and
testing.
During 2001, 2002 and 2003 we expended $5.3 million, $3.5 million and $2.8
million, respectively, on research and development activities.
MANUFACTURING AND SUPPLIERS
Our products are currently designed for high-volume automated assembly to
help assure reduced costs, rapid market entry, short lead times, and
reliability. High-volume assembly typically occurs in China, Taiwan, or Korea.
For some products we supply large kits of parts to one of several automated
contract manufacturers. For other products, our contract manufacturers obtain
some or all of the material required to assemble the products based upon a Zoom
Telephonics Approved Vendor List and Parts List. Our manufacturers typically
insert parts onto the printed circuit board, with most parts automatically
inserted by machine, solder the circuit board, and in-circuit test the completed
assemblies. Functional test and packaging are sometimes performed by the
contract manufacturer. For the United States and many other markets, functional
test and packaging are more commonly performed at our manufacturing facilities
in Boston, allowing us to tailor the packaging and its contents for our
customers immediately before shipping. We also perform circuit design, circuit
board layout, and strategic component sourcing in our Boston manufacturing
facility. Wherever the product is built, our quality systems are used to help
assure that the product meets our specifications.
We usually use one primary contract manufacturer for a given design. We
sometimes maintain back-up production tooling at a second assembler for our
highest-volume products. Our contract manufacturers are normally adequate to
meet reasonable and properly planned production needs; but a fire, natural
calamity, strike, or other significant event at an assembler's facility could
adversely affect our shipments and revenues. Currently, a substantial percentage
of our manufacturing is performed by SameTime Electronics ("SameTime"). The loss
of SameTime's services or a material adverse change in SameTime's business or in
our relationship with SameTime could materially and adversely harm our business.
To lessen the risk associated with using one manufacturer of a substantial
portion of our products, we are also using Mac Systems, Lite-On, Vtech,
Billionton, Taicom, Abocom, Behaviour Tech, Well and Billion to manufacture
various of our products.
Our products include a large number of parts, most of which are available
from multiple sources with varying lead times. However, most of our products
include a sole-sourced chipset as the most critical component of the product. We
currently buy dial-up modem chipsets exclusively from the two highest-volume
dial-up modem chipset manufacturers, Conexant Systems, Inc. and Agere Systems
Inc. We also buy chipsets for our ADSL and cable modems from Conexant. Conexant
and Agere have significant resources for semiconductor design and production,
analog and digital signal processing, communications firmware development, and
application sales and support. Integrated circuit product areas covered by one
or both companies include dial-up modems, ADSL modems, cable modems, wireless
networking, home phone line networking, routers, and gateways. Some of our
chipset suppliers have provided us certain concessions and incentives, such as
reduced prices or free chipsets, if we purchased or agreed to purchase a certain
dollar amount of products from these suppliers.
We have experienced delays in receiving shipments of modem chipsets in the
past, and we may experience such delays in the future. Moreover, we cannot
assure that a chipset supplier will, in the future, sell chipsets to us in
quantities sufficient to meet our needs or that we will purchase the specified
dollar amount of products necessary to receive concessions and incentives from a
chipset supplier. An interruption in a chipset supplier's ability to deliver
chipsets, a failure of our suppliers to produce chipset enhancements or new
chipsets on a timely basis and at competitive prices, a material increase in the
price of the chipsets, our failure to purchase a specified dollar amount of
products or any other adverse change in our relationship with modem component
suppliers could have a material adverse effect on our results of operations.
We are also subject to price fluctuations in our cost of goods. Our costs
may increase if component shortages develop or lead-times stretch out. We are
experiencing this to some degree in early 2004, particularly for some memory
components.
COMPETITION
The communications network access industry is intensely competitive and
characterized by aggressive pricing practices, continually changing customer
demand patterns and rapid technological advances and emerging industry
standards. These characteristics result in frequent introductions of new
products with added capabilities and features, and continuous improvements in
the relative functionality and price of modems and other PC communications
products. Our operating results and our ability to compete could be adversely
affected if we are unable to:
o successfully and accurately anticipate customer demand;
o manage our product transitions, inventory levels, and manufacturing
processes efficiently;
o distribute or introduce our products quickly in response to customer demand
and technological advances;
o differentiate our products from those of our competitors; or
o otherwise compete successfully in the markets for our products.
Our primary competitors by product group include the following:
o Dial-up modem competitors: Actiontec, Askey, Best Data, Creative Labs,
Lite-On, Sitecom, and US Robotics.
o Cable modem competitors: Ambit, D-Link, Linksys, Motorola, Netgear,
Scientific Atlanta, SMC, Terayon, Thomson, and Toshiba.
o ADSL modem competitors: 3Com, Actiontec, Alcatel, Siemens (formerly
Efficient Networks), Thomson, US Robotics, Westell and Zyxcel.
Many of our competitors and potential competitors have more extensive
financial, engineering, product development, manufacturing, and marketing
resources than we do.
The principal competitive factors in our industry include the following:
o product performance, features, and reliability;
o price;
o brand image;
o product availability and lead times;
o size and stability of operations;
o breadth of product line and shelf space;
o sales and distribution capability;
o technical support and service;
o product documentation and product warranties;
o relationships with providers of broadband access services; and
o compliance with industry standards.
We believe we are able to provide a competitive mix of the above factors
for all of our main product areas, particularly when our products are sold
through retailers or computer product distributors. We are less successful in
selling directly to providers of broadband access services and to PC
Manufacturers.
Cable and ADSL modems transmit data at significantly faster speeds than dial-up
modems, which still account for the vast majority of our revenues. Cable and
ADSL modems, however, typically require a more expensive Internet access
service. In addition, the use of cable and ADSL modems is currently impeded by a
number of technical and infrastructure limitations. We began shipping both cable
and ADSL modems in the year 2000. In the year 2003, most of our cable and ADSL
modem products were sold through cable service operators, phone companies, and
Internet Service Providers. We have had some success in selling to smaller phone
companies and to Internet service providers, but we have not sold significant
quantities to large phone companies or to cable service providers. Only about
one out of eight new US cable modem placements in 2003 were sold at retail, and
an even lower percentage were sold through retailers in most other countries.
ADSL had even less success at retail in the US. Some European countries,
however, sell significant volumes of ADSL modems through retailers. In the U.K.,
for instance, this has resulted in Zoom placing five ADSL modem models into
retailer Dixons Group.
Successfully penetrating the broadband modem market presents a number of
challenges, including:
o the current limited retail market for broadband modems;
o the relatively small number of cable, telecommunications and Internet
service providers that make up the majority part of the market for
broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive and uncertain approval processes of the
various cable and ADSL service providers; and
o the strong relationships with service providers enjoyed by some incumbent
equipment providers, including Motorola and Scientific Atlanta for cable
modems.
Our initial sales of broadband products have been adversely affected by all
of these factors. Nevertheless, we experienced significant growth in ADSL modem
sales in 2003.
INTELLECTUAL PROPERTY RIGHTS
We rely primarily on a combination of copyrights, trademarks, trade secrets
and patents to protect our proprietary rights. We have trademarks and copyrights
for our firmware (software on a chip), printed circuit board artwork,
instructions, packaging, and literature. We also have four patents and one
pending patent application in the United States. The patents which have been
issued expire between 2011 and 2015. We cannot assure that any patent
application will be granted or that any patent obtained will provide protection
or be of commercial benefit to us, or that the validity of a patent will not be
challenged. Moreover, we cannot assure that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop comparable or superior technologies.
We license certain technologies used in our products, typically bundled
software, on a non-exclusive basis. In addition we purchase chipsets that
incorporate sophisticated technology. We have received, and may receive in the
future, infringement claims from third parties relating to our products and
technologies. We investigate the validity of these claims and, if we believe the
claims have merit, we respond through licensing or other appropriate actions.
Certain of these past claims have related to technology included in modem
chipsets. We forwarded these claims to the appropriate vendor. If we or our
component manufacturers were unable to license necessary technology on a
cost-effective basis, we could be prohibited from marketing products containing
that technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action taken
against it.
GOVERNMENT REGULATION
In addition to obtaining approvals and certifications of our broadband
products from CableLabs(R) and, in some cases, the actual cable, telephone or
Internet service provider, all of our products sold in the U.S are required to
meet United States government regulations, including regulations of the United
States Federal Communications Commission, known as the FCC, which regulates
equipment, such as modems, that connects to the public telephone network. The
FCC also regulates communication equipments electromagnetic radiation and
susceptibility. For each of our products sold in most foreign countries,
specific regulatory approvals must be obtained for matters such as electrical
safety, manufacturing standards, country-specific telecommunications equipment
requirements, and electromagnetic radiation and susceptibility requirements. We
have received regulatory approvals for certain modems in Australia, Austria,
Belgium, Bulgaria, China, Cyprus, Denmark, Finland, France, Germany, Greece,
Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Luxembourg, the
Netherlands, Norway, Poland, Portugal, Russia, Slovenia, South Africa, South
Korea, Spain, Sri Lanka, Sweden, Switzerland, Turkey, and the United Kingdom. We
expect to continue to seek and receive approvals for new products in a large
number of countries throughout the world. The regulatory process can be
time-consuming and can require the expenditure of substantial resources. In many
foreign countries, obtaining required regulatory approvals may take
significantly longer than in the United States. We cannot assure that the FCC or
foreign regulatory agencies will grant the requisite approvals for any of our
products on a timely basis, if at all. United States and foreign regulations
regarding the manufacture and sale of telecommunications devices are subject to
future change. We cannot predict what impact, if any, such changes may have upon
our business.
SEASONALITY
We believe our sales are somewhat seasonal, with increased sales typically
occurring in mid-August through November. We expect that our quarterly results
will continue to fluctuate in the future as a result of seasonality and other
factors.
BACKLOG
Our backlog as of March 3, 2004 was $1.8 million, and on March 5, 2003 was
$1.6 million. Many orders included in backlog may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of our net sales for any future period.
EMPLOYEES
As of December 31, 2003 we had 159 full-time employees (including employees
hired on a temporary basis) versus 185 in 2002. Of the 2003 total, 20 were
engaged in research and development, 76 were involved in purchasing, assembly,
packaging, shipping and quality control, 40 were engaged in sales, marketing and
technical support, and the remaining 23 performed accounting, administrative,
management information systems, and executive functions. Our temporary employees
were comprised of 11 individuals at December 31, 2003. Most of these temporary
employees were employed in manufacturing. None of our employees is represented
by a labor union.
OUR EXECUTIVE OFFICERS
The names and biographical information of our current executive officers
are set forth below:
Name Age Position with Zoom
--------------------------------------------------------------------------------
Frank B. Manning 55 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 52 Executive Vice President and Director
Robert A. Crist 60 Vice President of Finance and Chief
Financial Officer
Terry J. Manning 52 Vice President of Sales and Marketing
Dean N. Panagopoulos 46 Vice President of Network Products
Deena Randall 50 Vice President of Operations
FRANK B. MANNING is a co-founder of our company. Mr. Manning has been our
president, chief executive officer, and a director since May 1977. He has served
as our chairman of the board since 1986. He earned his BS, MS and PhD degrees in
Electrical Engineering from the Massachusetts Institute of Technology, where he
was a National Science Foundation Fellow. Since 1998 Mr. Frank Manning has also
been a director of the Massachusetts Technology Development Corporation, a
public purpose venture capital firm that invests in seed and early-stage
technology companies in Massachusetts.
PETER R. KRAMER is a co-founder of our company. Mr. Kramer has been our
executive vice president and a director since May 1977. He earned his BA degree
in 1973 from SUNY Stony Brook and his MFA degree from C.W. Post College in 1975.
ROBERT A. CRIST joined us in July 1997 as vice president of finance and
chief financial officer. From April 1992 until joining us, Mr. Crist served in
various capacities at Wang Laboratories, Inc. (now Getronics), a computer
software and services company, including chief financial officer for the
software business. Prior to 1992 Mr. Crist served in various capacities at
Unisys Corporation, including assistant corporate controller, corporate director
of business planning and analysis, and corporate manufacturing and engineering
controller. Mr. Crist earned his BA degree from Pennsylvania State University
and he earned his MBA from the University of Rochester in 1971.
TERRY J. MANNING joined us in 1984 and served as corporate communications
director from 1984 until 1989, when he became the director of our sales and
marketing department. Terry Manning is Frank Manning's brother. Terry Manning
earned his BA degree from Washington University in St. Louis in 1974 and his
MPPA degree from the University of Missouri at St. Louis in 1977.
DEAN N. PANAGOPOULOS joined us in February 1995 as director of information
systems. In July 2000 Mr. Panagopoulos was promoted to the position of vice
president of network products. From 1993 to 1995, Mr. Panagopoulos worked as an
independent consultant. From 1991 to 1993, Mr. Panagopoulos served as director
of technical services for Ziff Information Services, a major outsourcer of
computing services. He attended the Massachusetts Institute of Technology from
1975 to 1978 and earned his BS degree in Information Systems from Northeastern
University in 1983.
DEENA RANDALL joined us in 1977 as our first employee. Ms. Randall has
served in various senior positions within our organization and has directed our
operations since 1989. Ms. Randall earned her BA degree from Eastern Nazarene
College in 1975.
ITEM 2 - PROPERTIES
Our corporate headquarters are located at 201 and 207 South Street, Boston,
Massachusetts. Approximately 16,000 square feet of this 56,000 square foot
facility is leased to third parties. We purchased these buildings in April 1993.
In January 2001, we received $6.0 million in financing by securing a mortgage on
this property. Our mortgage is a five-year balloon mortgage that is amortized on
a 20-year basis. The interest rate is fixed for one year, based on the one year
Federal Home Loan Bank rate plus 2.5% per annum. The rate is adjusted on January
10th of each calendar year. As of January 10, 2004, the rate of interest was
changed from 3.81% to 3.99%.
In August 1996, we entered into a five-year lease for a 77,428 square foot
manufacturing and warehousing facility at 645 Summer Street, Boston, MA. On
February 28, 2001, we exercised our option to extend this lease for an
additional five years. We believe that this space provides us with enough
manufacturing space for our current operations and could support significant
growth.
In March 1999, we assumed an office lease from Hayes Microcomputer
Products, Inc. at 430 Frimley Business Park, Camberley, Surrey, U.K. We have an
agreement in principle to extend this lease term to 2005.
In September 2002, we entered into a five year lease, as a tenant, for
approximately 3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton,
Florida. We primarily use this facility as a technical support facility.
ITEM 3 - LEGAL PROCEEDINGS
No material litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered in this report.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Since January 2003, our common stock has been trading on the Nasdaq Small
Cap Market under the symbol "ZOOM". Prior to that time our common stock had been
trading on the Nasdaq National Market under the same symbol. The following table
sets forth, for the periods indicated, the high and low sale prices per share of
common stock, as reported by the Nasdaq Small Cap or Nasdaq National Market, as
applicable.
Fiscal Year Ending December 31, 2002 High Low
---- ---
First Quarter...................... $ 2.130 $ 1.040
Second Quarter..................... 1.450 0.600
Third Quarter...................... 1.330 0.560
Fourth Quarter..................... 1.140 0.450
Fiscal Year Ending December 31, 2003 High Low
---- ---
First Quarter...................... $ 0.870 $ 0.650
Second Quarter..................... 1.310 0.640
Third Quarter...................... 3.750 1.040
Fourth Quarter..................... 4.450 1.790
As of March 19, 2004, there were 8,182,941 shares of our common stock
outstanding and approximately 253 holders of record of our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
We did not sell any unregistered securities during the fourth quarter of
2003.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock and do
not plan to pay any cash dividends in the foreseeable future. Our current policy
is to retain all of our earnings to finance future growth.
REPURCHASES BY THE COMPANY
During the fourth quarter of 2003, we did not repurchase any shares of our
common stock on our own behalf or for any affiliated purchaser.
ITEM 6 - SELECTED FINANCIAL DATA
The following table contains our selected consolidated financial data and
is qualified in its entirety by the more detailed consolidated financial
statements and notes thereto included elsewhere in this report. Our statement of
operations data for the years ending December 31, 2001, 2002 and 2003 and our
balance sheet data as of December 31, 2002 and 2003 have been derived from our
consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants, and are included elsewhere in this
report. Our statement of operations data for the years ending December 31, 1999
and 2000 and our balance sheet data as of December 31, 1999, 2000, and 2001 have
been derived from our consolidated financial statements, which have been audited
by KPMG LLP and are not included in this report. This data should be read in
conjunction with the consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
Years Ending December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(In thousands) except per share amounts
Statement of Operations Data:
Net sales............................. $ 62,228 $ 57,708 $ 41,570 $ 37,274 $ 33,335
Cost of goods sold.................... 40,550 39,404 35,193 27,937 23,120
------ ------ ------ ------ ------
Gross profit....................... 21,678 18,304 6,377 9,337 10,215
------ ------ ------ ------ ------
Operating expenses:
Selling............................ 11,711 10,672 7,480 5,848 5,271
General and administrative......... 6,276 6,228 7,938 3,405 3,118
Research and development........... 6,425 6,249 5,328 3,527 2,767
------ ------ ------ ------ ------
Total operating expenses........... 24,412 23,149 20,746 12,780 11,156
------ ------ ------ ------ ------
Operating income (loss)............ (2,734) (4,845) (14,370) (3,443) (941)
Other income (expense), net........... 737 469 (159) 67 273
------ ------ ------ ------ -----
Income (loss) before income taxes.. (1,997) (4,376) (14,529) (3,376) (668)
Income tax expense (benefit).......... (588) (1,299) 3,800 2,015 -
------ ------ ------ ------ -----
Income (loss) before extraordinary
item............................... (1,409) (3,077) (18,239) (5,391) (668)
Extraordinary gain on elimination
of negative goodwill.................. - - - 255 -
------ ------ ------ ------- ------
Net income (loss).................. (1,409) (3,077) (18,329) (5,136) (668)
====== ====== ====== ====== ======
Earnings (loss) per common and common equivalent share: Loss before
extraordinary item:
Basic and diluted.................. $ (.19) $ (.40) $ (2.33) $ (.68) $ (.08)
Extraordinary gain on elimination of
negative goodwill.................. $ - $ - $ - $ .03 $ -
========= ========= ========= ========= =========
Net loss:
Basic and diluted.................. $ (.19) $ (.40) $ (2.33) $ (.65) $ (.08)
========= ========= ========= ========= =========
Weighted average common and common equivalent shares:
Basic and diluted.................. 7,483 7,757 7,861 7,861 7,883
Years Ending December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital....................... $ 29,573 $ 23,562 $ 18,218 $ 15,341 $ 15,647
Total assets.......................... 43,072 46,960 29,185 22,633 21,974
Long-term obligations................. 481 369 6,001 5,342 5,096
Total stockholders' equity............ 37,514 36,747 18,416 13,485 13,470
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Financial Data" and the consolidated financial statements included
elsewhere in this report and the information described under the caption "Risk
Factors" below.
OVERVIEW
We derive our net sales primarily from sales of Internet related hardware
products, principally modems, to retailers, distributors, Internet Service
Providers and Original Equipment Manufacturers. We sell our products through a
small direct sales force and third party sales agents. Our employees are
primarily located in our headquarters in Boston, Massachusetts and we have a
sales office in the United Kingdom. We obtain our hardware components from third
party suppliers and we outsource most of the product assembly work to contract
manufacturers, currently in Asia. We perform most of the packaging and
distribution effort at our production and warehouse facility in Boston,
Massachusetts. We also utilize a third party distribution facility in the United
Kingdom.
Historically we have derived a majority of our net sales from the retail
after-market sale of dial-up modems to customers seeking to add or upgrade a
modem in their personal computers. In recent years, the size of this market,
along with our sales to this market has declined, as personal computer
manufacturers have incorporated a modem as a built-in component in most consumer
personal computers and as increasing numbers of consumers world-wide have
switched to broadband Internet access. The general consensus of communications
industry analysts is that after-market sales of dial-up modems will continue to
decline. There is also consensus among industry analysts that the market for
broadband Internet connection devices, such as cable modems and ADSL modems,
will grow rapidly during the decade. In response to increased and forecasted
demand for faster connection speeds and increased modem functionality, we have
invested and continue to invest resources to advance our product line of
broadband modems, especially ADSL 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 dial-up modem chipsets, which are
application-specific integrated circuits that form the technology base for our
modems. By outsourcing the chipset technology, we are able to concentrate our
research and development resources on modem system design, leverage the
extensive research and development capabilities of our chipset suppliers, and
reduce our development time and associated costs and risks. As a result of this
approach, we are able to quickly develop new and innovative products while
maintaining a relatively low level of research and development expense as a
percentage of net sales. We also outsource aspects of our manufacturing to
contract manufacturers as a means of reducing our costs of production, and to
provide us with greater flexibility in our production capacity.
In recent years, we have realized the benefit of reduced unit costs for our
dial-up modems. A portion of the cost reduction realized in our financial
statements is derived from purchase discount programs with our chipset
suppliers. From the first quarter of 2002 through the fourth quarter of 2003, we
realized significant benefits as a result of our adherence to supplier purchase
agreements with volume purchase commitments. The programs and the financial
benefits of existing agreements expire during 2004. One of our objectives in
2004 is to negotiate and implement new purchase discount programs. It may be
more difficult for us to do so in 2004 as the market is currently experiencing
shortages and increased lead times for some chipsets, particularly for some
memory components. To maintain our dial-up gross profit percentage, we believe
we will require cost reductions in 2004. Fortunately, the downward pressure on
retail pricing for dial-up modems appears to be moderating, likely because fewer
suppliers remain active in the market.
Over the past three years, our net sales have declined an average of 16%
per year. In response to the declining sales volume, we reduced staffing and
overhead costs. In December 31, 2000, our total headcount of full-time
employees, including temporary workers, was 329, which was reduced to 215, 185,
and 159 at year-end 2001, 2002, and 2003, respectively. As a result of our staff
reductions and the reduction of other discretionary spending, our operating and
manufacturing expenses over the past three years have been reduced an average of
18%.
In our most recent quarter, the fourth quarter of 2003, our net sales for
the quarter were up 11.5% over the fourth quarter of 2002. Fourth quarter 2003
sales were flat compared to our sales for the third quarter of 2003. We were
profitable in the third and fourth quarters of 2003. Our growing broadband sales
are currently concentrated with a small number of customers so there is no
predictable uniformity for 2004 broadband quarterly sales.
We previously announced that we expected our first quarter of 2004 sales
through February 18, 2004 to be about 18% below sales during the comparable
period for the first quarter of 2003. Updating this information, our first
quarter of 2004 sales through March 29, 2004 are expected to be slightly greater
than sales during the comparable period for the first quarter of 2003. This
improvement primarily reflects the volatility of our sales due to our dependence
on sales to a few significant customers, and the strong contribution, compared
to one year ago, of our increasing ADSL sales. We continue to expect that we
will experience decreasing dial-up modem sales in 2004, reflecting the
continuing decline of this market.
Our cash and cash equivalents balance at December 31, 2003 was $9.9
million, up from $7.6 million at December 31, 2002. Most of the cash improvement
resulted from our reduction of inventories, as we improved our inventory
turnover, primarily in our broadband products. It is unlikely that we can
further reduce inventories significantly and we expect to utilize cash if we are
successful in growing our sales volume.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following is a discussion of what we view as our more significant
accounting policies and estimates. These policies and estimates are also
described in the notes to our consolidated financial statements. As described
below, management judgments and estimates must be made and used in connection
with the preparation of our consolidated financial statements. Where noted,
material differences could result in the amount and timing of our net sales,
costs, and expenses for any period if we made different judgments or used
different estimates.
REVENUE (NET SALES) RECOGNITION. We sell hardware products to our
customers. The products include dial-up modems, embedded modems, cable modems,
PC cameras, ISDN and ADSL modems, telephone dialers, and wireless and wired
networking equipment. We generally do not sell software or services. We earn a
small amount of royalty net sales. We derive our net sales primarily from the
sales of hardware products to three types of customers:
o computer peripherals retailers,
o computer product distributors, and
o original equipment manufacturers (OEMs).
We recognize net sales for all three types of customers at the point when
the customers take legal ownership of the delivered products. Legal ownership
passes from Zoom to the customer based on the contractual FOB point specified in
signed contracts and purchase orders, which are both used extensively. Many of
our customer contracts or purchase orders specify FOB destination. We verify the
delivery date on all significant FOB destination shipments made during the last
10 business days of each quarter.
Our net sales are reduced by certain events which are characteristic of the
sales of hardware to computer peripherals retailers. These events are product
returns, certain sales and marketing incentives, price protection refunds,
consumer and in-store mail-in rebates. Each of these is accounted for as a
reduction of net sales based on detailed management estimates, which are
reconciled to actual customer or end-consumer credits on a monthly or quarterly
basis.
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
has remained relatively stable for many years.
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 $.9 million in 2001,
$.7 million in 2002 and $.2 million in 2003.
Sales and Marketing Incentives. Many of our retail customers require sales
and marketing support funding, usually set as a percentage of our sales in their
stores. Reductions in our net sales due to sales and marketing incentives were
$2.1 million in 2001, $1.7 million in 2002 and $1.5 million in 2003.
Consumer Mail-In and In-Store Rebates and Store Rebates. Our estimates for
consumer mail-in rebates are based on a detailed understanding and tracking by
customer and by sales program, supported by actual rebate claims processed by
the rebate redemption centers plus an accrual for an estimated lag in processing
at the redemption centers. Our estimates for store rebates are comprised of
actual credit requests from the eligible customers. The estimate for mail-in and
store rebates is recorded as a reserve against accounts receivable and a
reduction of net sales in the same period that the rebate obligation was
triggered. Reductions in our net sales due to the consumer rebates were $1.3 in
2001, $1.6 million in 2002 and $2.1 million in 2003.
To ensure that the sales, discounts, and marketing incentives are recorded
in the proper period, we perform extensive tracking and documenting by customer,
by period, and by type of marketing event. This tracking includes reconciliation
to the accounts receivable records for deductions taken by our customers for
these discounts and incentives.
ACCOUNTS RECEIVABLE VALUATION. We establish accounts receivable reserves
equal to the above-discussed net sales adjustments for estimates of product
returns, price protection refunds, and consumer and store rebates. These
reserves are drawn down as actual credits are issued to the customer's accounts.
Our bad-debt write-offs have not been significant during 2001, 2002 and
2003.
INVENTORY VALUATION AND COST OF GOODS SOLD. Inventory is valued on a
standard cost basis where the material standards are periodically updated for
current material pricing. Reserves for obsolete inventory are established by
management based on usability reviews performed each quarter. Our reserves
against the inventory of a particular product range from 0% to 100%, based on
management's estimate of the probability that the material will not be consumed.
In the second half of 2000, when industry expectations were very high for
expansion of the broadband and wireless markets, we purchased parts to support
our aggressive forecast for a ramp-up of sales of cable modems, ADSL modems, and
wireless networking products. The subsequent slow down in the industry resulted
in a significant excess inventory position of materials. During 2001, the market
selling prices for the broadband and wireless products declined significantly
because of an industry-wide oversupply. Starting in 2001 and to a lesser extent
in 2002 and 2003, the sales prices for some of the products dropped below our
cost and, accordingly, we then valued our inventory on a "lower of cost or
market" basis. Our valuation process is to compare our cost to the selling
prices each quarter, and if the selling price of a product is less than the "if
completed" cost of our inventory, we write-down the inventory on a "lower of
cost or market" basis. In 2001, 2002 and 2003, we recorded charges against
inventory of $4.6 million, $.7 million and $.3 million, respectively, as a
result of lower of cost or market valuation issues.
We have entered into supply arrangements with suppliers of some components
that include price and other concessions, including no-charge components, for
meeting certain purchase requirements or commitments. Under these arrangements,
we are committed to purchase approximately $8.0 million of components over a
period of approximately 30-months that commenced on January 1, 2002, provided
that those components were offered at competitive terms and prices. We believe
that at December 31, 2003, we are on track to meet the $8.0 million commitment.
We are also required to purchase either a minimum percentage, as measured by
unit purchases or dollar amount of components, from a supplier over a two-year
period commencing on January 1, 2002, and we are currently exceeding that
percentage. In connection with these arrangements, we became entitled to receive
at least $3.0 million of no-charge components, based upon the supplier's market
price for the components in late 2001 and early 2002, and other pricing
concessions based on our purchase volumes. We received $1.2 million of these
no-charge components in the fourth quarter of 2001. We received the remainder of
the no-charge components in the first quarter of 2002. The favorable impact to
our statement of operations is being calculated as a purchase discount over the
estimated total number of components acquired through the 30 month supply
agreement and recognized on a delayed basis as the products employing the
acquired components involved in the supply arrangement are sold. This method of
accounting has been consistent each year.
VALUATION AND IMPAIRMENT OF DEFERRED TAX ASSETS. As part of the process of
preparing our consolidated financial statements we are required to estimate our
income tax expense and deferred income tax position. This process involves the
estimation of our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision
for income taxes and any valuation allowance recorded against our net deferred
tax assets. In 2001, we recorded a $3.8 million income tax charge to reflect an
additional increase in our deferred tax asset valuation allowance. Management's
decision to record the valuation allowance was based on the uncertain
recoverability of our deferred tax asset balance. In our first quarter ending
March 31, 2002, we recorded an additional $2.0 income tax charge and valuation
reserve, which reduced our net deferred tax asset balance to zero. This
additional reserve reflected our decision to discontinue our specific tax
planning strategy to sell our headquarters building in Boston in light of the
less favorable market conditions for the sale of such building. At December 31,
2003, 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, 2003, the Company had federal net operating loss
carryforwards of approximately $22,531,000. These federal net operating losses
are available to offset future taxable income, and are due to expire beginning
2019. The Company had Massachusetts net operating loss carryforwards of
approximately $20,240,000. These federal net operating losses are available to
offset future taxable income, and are due to expire beginning 2004.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of net sales:
Years Ending December 31,
2001 2002 2003
---- ---- ----
Net sales............................... 100.0% 100.0% 100.0%
Cost of goods sold...................... 84.7 75.0 69.4
---- ---- ----
Gross profit.......................... 15.3 25.0 30.6
Operating expenses:
Selling............................... 18.0 15.7 15.8
General and administration............ 19.1 9.1 9.3
Research and development.............. 12.8 9.5 8.3
---- ---- ----
Total operating expenses.............. 49.9 34.3 33.4
---- ---- ----
Operating income (loss)................. (34.6) (9.3) (2.8)
Other income (expense), net.......... (.4) .2 .8
--- ---- ----
Loss before income taxes.. ............ (35.0) (9.1) (2.0)
Income tax expense (benefit)......... 9.1 5.4 -
Extraordinary Gain...................... - .7 -
----- ----- ------
Net income (loss) ...................... (44.1)% (13.8)% (2.0)%
===== ===== ======
YEAR ENDING DECEMBER 31, 2003 COMPARED TO YEAR ENDING DECEMBER 31, 2002
Following is a discussion of the major categories of our consolidated
statement of operations, comparing the financial results for the year ending
December 31, 2003 with the year ending December, 31, 2002. The major categories
discussed are: Net Sales, Cost of Goods Sold and Gross Profit, Operating
Expenses, Operating Profit (Loss), Other Income (Expense), Income Tax Expense
(Benefit), Extraordinary Gain, and Net Income (Loss).
NET SALES. Our total net sales declined year-over-year. We primarily
generate our sales by selling dial-up modems to the electronics after-market via
distributors and retailers. As noted in the overview, this part of the dial-up
modem market continues to decline. Our efforts to increase share in this market
have only moderated our year-over-year sales decline, which was comprised of
declines of both unit sales volume and average selling prices. Our growing sales
category, broadband modems, did not grow sufficiently in 2003 to offset the
decline in our dial-up modem sales, as our total net sales decreased 10.6% to
$33.3 million in 2003 from $37.3 million in 2002.
As shown in the table below, our net sales for dial-up modems declined $7.2
million, or 23.0%, from $31.4 million in 2002 to $24.2 million in 2003. This
decline was primarily attributable to both lower unit sales and lower prices,
reflecting the declining retail market for these modems. Our broadband net sales
increased $3.3 million, or 99%, from $3.3 million in 2002 to $6.6 million in
2003. This increase was primarily attributable to increased unit sales of ADSL
modems. Net sales in our other product sales categories, which include ISDN
modems, cameras, wireless networking equipment, telephone dialers, etc.,
declined 1.0%, from $2.5 million to $2.5 million. Our total net sales decreased
$3.9 million, or 10.6%, from 2002 to 2003.
$000 Total Year Total Year $ %
Net Sales 2002 2003 Change Change
-------------- ---------- ---------- --------- --------
Dial-up $ 31,407 $ 24,198 $( 7,208) ( 23.0)%
Broadband $ 3,340 $ 6,629 $ 3,289 98.5 %
Other Products $ 2,528 $ 2,508 $( 20) ( 0.8)%
========= ========= ========= ========
Total Net Sales $ 37,274 $ 33,335 $( 3,939) ( 10.6)%
Our net sales in North America decreased by 18.5% to $18.2 million in 2003,
compared to our net sales in 2002. Our 2003 international net sales increased by
1.3% to $15.1 million, compared to our net sales in 2002. These changes reflect
our declining sales of dial-up modems worldwide, our stronger broadband sales in
the International markets, and the positive currency translation impact, for
converting British Pounds and Euros to dollars, of a significant portion of our
International sales.
$000 Total Year Total Year $ %
Net Sales 2002 2003 Change Change
--------------- ---------- ---------- -------- --------
North America $ 22,343 $ 18,212 $(4,131) ( 18.5)%
International $ 14,931 $ 15,123 $ 192 1.3 %
========= ========= ======== ========
Total Net Sales $ 37,274 $ 33,335 $(3,939) ( 10.6)%
GROSS PROFIT. Our gross profit was $10.2 million in 2003 compared to $9.3
million in 2002. Our gross profit as a percentage of net sales increased to
30.6% in 2003 from 25.0% in 2002. The primary reason for this improvement was a
marked improvement in the gross profit percentage of net sales of both dial-up
modems and broadband modems. The improved gross profit percentage for dial-up
modems resulted from cost reductions which exceeded market price reductions. The
improved gross profit percentage for broadband modems resulted from product cost
savings, which exceeded the negative impact of market price reductions.
OPERATING EXPENSE. Total operating expense decreased by $1.6 million to
$11.2 million in 2003 from $12.8 million in 2002. Total operating expense as a
percentage of net sales improved to 33.5% in 2003 from 34.3% in 2002. The table
below shows total operating expenses and its three major categories: selling
expense, general and administrative expense, and research and development
expense.
$000 Total Year % Net Total Year % Net $000 %
Operating Expenses 2002 Sales 2003 Sales Change Change
-------------------------- ---------- ----- ---------- ----- -------- -------
Selling Expense $ 5,848 15.7% $ 5,271 15.8% $( 577) ( 9.9)%
General and Administrative
Expense $ 3,405 9.1% $ 3,117 9.4% $( 288) ( 8.5)%
Research and Development
Expense $ 3,527 9.5% $ 2,767 8.3% $( 760) (21.5)%
Total Operating Expense $12,780 34.3% $11,155 33.5% $(1,625) (12.7)%
Selling Expense. Selling expense decreased by $.6 million to $5.3 million
in 2003, from $5.8 million in 2002. Selling expense as a percentage of net sales
were 15.8% in 2003 and 15.7% in 2002. The $.6 million decrease in selling
expenses was primarily due to reduced personnel costs, marketing costs, and
sales commissions, which were partially offset by higher freight delivery costs.
General and Administrative Expense. General and administrative expense
decreased by $.3 million to $3.1 million in 2003 from $3.4 million in 2002.
General and administrative expenses as a percentage of net sales were 9.4% in
2003 and 9.1% in 2002. The $.3 million decrease in general and administrative
expense was primarily due to reduced personnel costs, depreciation and
amortization, insurance costs, and legal and audit costs.
Research and Development Expense. Research and development expense
decreased by $.8 million to $2.8 million in 2003 from $3.5 million in 2002.
Research and development expenses as a percentage of net sales decreased to 8.3%
in 2003 from 9.5% in 2002. The $.8 million decrease in research and development
expenses was primarily due to reduced personnel costs and related expenses.
OTHER INCOME (EXPENSE). Other income, net improved to $.27 million in 2003
from $.07 million in 2002. The improvement was primarily the result of higher
rental income from leased excess space at our headquarters facility and reduced
interest payments on our variable-rate mortgage note for our headquarters
facility.
INCOME TAX EXPENSE (BENEFIT). We did not record any net tax expense in
2003. In 2002, we recorded a $2.0 million income tax expense to increase our
valuation allowance against our then remaining net deferred tax asset, which has
remained at a net zero value since that time. This accounting treatment is
described in further detail under the caption "Critical Accounting Policies and
Estimates" above and in footnote 12 to the consolidated financial statements.
EXTRAORDINARY GAIN. In 2003 we did not record any extraordinary gain or
(loss). In 2002 we recorded an extraordinary gain of $.26 million from the
elimination of the remaining negative goodwill on our balance sheet related to a
previous acquisition.
YEAR ENDING DECEMBER 31, 2002 COMPARED TO YEAR ENDING DECEMBER 31, 2001
NET SALES. Our net sales decreased 10.3% to $37.3 million in 2002 from
$41.6 million in 2001. Our sales decline resulted primarily from a
year-over-year net sales decline in retail and distributor dial-up modem sales,
a year-over-year net sales decline from an OEM modem contract, and a decline in
camera sales, partially offset by increased sales in the broadband cable and
ADSL modem categories.
Although our unit sales of dial-up modems were up slightly in 2002 compared
to 2001, reflecting our increased unit and dollar market share at retail in
North America and the U.K., our net sales of dial-up modems were down in 2002
compared to 2001, primarily due to the lower average selling prices of our
dial-up modems and a shift in our unit sales mix to lower-priced modems.
Our net sales in the North America decreased by 12.4% to $22.2 million in
2002, compared to our net sales in 2001. Our 2002 international sales decreased
by 7.0% to $15.1 million, compared to our net sales in 2001. These decreases
were due primarily to the sales decline of dial-up modems and primarily
resulting from a shift in demand to lower priced modems.
GROSS PROFIT. Our gross profit was $9.3 million in 2002 compared to $6.4
million in 2001. Our gross profit as a percentage of net sales increased to
25.0% in 2002 from 15.3% in 2001. The primary reason for this improvement was a
reduction of inventory write-downs for lower of cost of market and inventory
obsolescence expenses totaling $4.0 million in 2001 compared to $.9 million in
2002. Our gross profit percentage also improved in 2002 as a result of supplier
cost reductions, and manufacturing expense reductions that were partially offset
by decreases in modem prices.
SELLING EXPENSE. Selling expense decreased by $1.6 million to $5.8 million
in 2002, from $7.5 million in 2001. Selling expenses as a percentage of net
sales decreased to 15.7% in 2002 from 18.0% in 2001. The $1.6 million decrease
was primarily due to reduced personnel costs, marketing costs, freight delivery
costs, and sales commissions.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased by $4.5 million to $3.4 million in 2002 from $7.9 million in 2001. The
year-over-year $4.5 million decrease included a $2.3 million decrease from the
fourth quarter 2001 write-off of all of our positive goodwill and a $.9 million
decrease from related amortization charges. Other general and administrative
expense reductions were primarily attributable to decreases in personnel and
related expenses, bank fees, bad-debt expense, and legal and audit expenses.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
decreased by $1.8 million to $3.5 million in 2002 from $5.3 million in 2001.
Research and development expense as a percentage of net sales decreased to 9.5%
in 2002 from 12.8% in 2001. The $1.8 million decrease in research and
development expense was primarily due to reduced personnel costs and related
expenses, industry and government approval costs associated with obtaining
licenses, consulting, recruiting, and outside services.
OTHER INCOME (EXPENSE). Other income (expense), net improved from a loss of
$.16 million in 2001 to income of $.07 million in 2002. Included in other income
(expense) are interest income (expense), other income and non-interest income,
equity losses of an affiliate, and rental income from leasing space at our
headquarters.
INCOME TAX EXPENSE (BENEFIT). We did not record any net tax benefit to
offset our $3.4 million pre-tax loss in 2002. In addition, in 2002 we recorded a
$2.0 million income tax charge to increase our valuation allowance against our
net deferred tax asset.
EXTRAORDINARY GAIN. In 2002 we recorded an extraordinary gain of $.26
million from the elimination of the remaining negative goodwill on our balance
sheet related to a previous acquisition.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2003, we had working capital of $15.6 million, including
$9.9 million in cash and cash equivalents.
In 2003 operating activities generated $2.2 million in cash. Our net loss
in 2003 was $.7 million which included non-cash depreciation and amortization
expense of $.6 million. Sources of cash from operations included a reduction of
inventory of $2.0 million, a decrease of prepaid expenses and other current
assets of $.6 million, and a decrease in accounts receivable of $.1 million.
Uses of cash included a decrease of accounts payable and accrued expenses of $.4
million.
Our $2.0 million year-over-year inventory reduction was primarily the
result of reduced inventory levels for our broadband products, reflecting
improved inventory turnover. Our inventory turnover of dial-up modems remained
constant as our inventory level decreased in proportion to our decrease in
dial-up sales activity. We believe that it is unlikely that we can further
reduce inventory significantly, and we expect to utilize cash if we are
successful in growing our sales volume.
In 2003 our net cash used in investing activities was $.1 million, which
was used to purchase plant and equipment.
In 2003 cash was provided by financing activities of $.1 million consisting
of employee funding from the exercise of employee stock options of $.3 million,
partially offset by $.2 million for monthly principal payments on our $6.0
million mortgage on our headquarters facility. Our mortgage is a 5-year balloon
mortgage, payable in full in January, 2006, that is amortized on a 20-year
basis. The interest rate is adjusted annually in January of each year based on
the Federal Home Loan Bank rate plus 2.5 % per annum. In 2003, the interest rate
was 3.81%. As of January 10, 2004, the rate of interest was changed to 3.99%.
Currently we do not have a debt facility from which we can borrow, and to
obtain one on acceptable terms unless there is operating performance
improvement. However, we believe we would be able to obtain funds, if and when
required, by factoring accounts receivable. We do not plan to put a factoring
arrangement in place until and unless it is necessary since there would be an
up-front cost to negotiate and document the arrangement.
To conserve cash and manage our liquidity, we implemented expense
reductions throughout 2003. Our employee headcount was 185 at December 31, 2002,
which has been reduced to 159 at December 31, 2003. We will continue to assess
our cost structure as it relates to our net sales and cash position in 2004, and
we may make further reductions if the actions are deemed necessary.
Management believes it has sufficient resources to fund its planned
operations over the next 12 months. However, if we are unable to generate net
income, reduce our expenses, or raise capital, our longer-term ability to
continue as a going concern and achieve our intended business objectives could
be adversely affected. See "Risk Factors" below, for further information with
respect to events and uncertainties that could harm our business, operating
results, and financial condition.
COMMITMENTS
The following table summarizes our contractual obligations and commitments
as of December 31, 2003.
Contractual Obligations
Payments Due by Period
LESS THAN AFTER 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
----- --------- --------- --------- -------
Long Term Debt (1) $ 5,319,819 $ 223,833 $ 5,095,986 - -
Capital Lease Obligations - - - - -
Operating Leases (2) 1,796,441 832,055 964,386 - -
Purchase Commitments (3) 1,942,503 1,942,503 - - -
------------ ------------ ----------- ----------- ---------
Total $ 9,058,763 $ 2,998,391 $ 6,060,372 - -
============ ============ =========== =========== =========
(1) Represents the mortgage on our corporate headquarters. In January 2001, we
received $6.0 million in financing by securing a mortgage on this property.
Our mortgage is a five-year balloon mortgage that is amortized on a 20-year
basis.
(2) Represents anticipated minimum lease payments, excluding executory costs to
be made under leases for our manufacturing facility in Boston, MA, our
office facility in Camberley, U.K., and our technical support facility in
Boca Raton, FL.
(3) See discussion of purchase commitments for chipsets under the section
entitled "Critical Accounting Policies" above.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51",
and, in October 2003, the FASB issued FASB Staff Position (FSP) No. FIN 46-6,
"Effective Date of FASB Interpretation 46." This staff position deferred the
effective date for applying FIN 46 to an interest held in a VIE or potential VIE
that was created before February 1, 2003 until the end of the first interim or
annual period ending after December 15, 2003, except if the company had already
issued statements reflecting a VIE in accordance with FIN 46. In December 2003,
the FASB issued Interpretation No. 46R (FIN 46R), "Consolidation of Variable
Interest Entities -- An Interpretation of ARB No. 51." FIN 46R replaces FIN 46
and addresses consolidation by business enterprises of variable interest
entities that possess certain characteristics. A variable interest entity
("VIE") is defined as (a) an ownership, contractual or monetary interest in an
entity where the ability to influence financial decisions is not proportional to
the investment interest, or (b) an entity lacking the invested capital
sufficient to fund future activities without the support of a third party. FIN
46R establishes standards for determining under what circumstances VIEs should
be consolidated with their primary beneficiary, including those to which the
usual condition for consolidation does not apply. Adoption of the required
sections of FIN 46, as modified and interpreted, including the provisions of FIN
46R, did not have any effect on the Company's consolidated financial statements
or disclosures. The Company intends to adopt the remaining sections of this
guidance when required in 2004. The Company does not expect adoption of FIN 46,
as modified and interpreted, including the provisions of FIN 46R, to have a
significant impact on the Company's financial statements or disclosures.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104), which supersedes
SAB 101, "Revenue Recognition in Financial Statements". The primary purpose of
SAB 104 is to rescind accounting guidance contained in SAB 101 related to
multiple element revenue arrangements, which was superseded as a result of the
issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables". While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a
material impact on the Company's financial statements.
RISK FACTORS
This report contains forward-looking statements that involve risks and
uncertainties, such as statements of our objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applicable to all forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this report.
WE MAY CONTINUE TO INCUR NET LOSSES IF WE ARE UNABLE TO INCREASE SALES OF OUR
BROADBAND MODEMS.
Our net sales continue to decline primarily due to the decline in the
dial-up modem market, decreases in average selling prices of dial-up modems, and
the trend toward faster connection speeds and broadband access products. Despite
numerous cost reductions over the last few years, we have continued to incur
significant net losses primarily due to our continuous decline in net sales from
dial-up modems. We believe that the future of our business is largely dependent
on the success of our broadband modems and other products. Although we believe
that we have sufficient resources to fund our planned operations over the next
year, if we fail to increase our net sales of our broadband modems and other
products, our longer-term ability to stay in business and to achieve our
intended business objectives could be adversely effected. Our continuing losses
could also adversely affect our ability to fund the growth of our business
should our strategies prove successful.
TO STAY IN BUSINESS WE MAY REQUIRE FUTURE ADDITIONAL FUNDING WHICH WE MAY BE
UNABLE TO OBTAIN ON FAVORABLE TERMS, IF AT ALL.
Over the next twelve months, we may require additional financing for our
operations either to fund losses beyond those we anticipate or to fund growth in
our inventory and accounts receivable should growth occur. We currently do not
have a debt facility from which we can borrow and we do not expect to obtain one
on acceptable terms unless our operating performance improves. Additional
financing may not be available to us on a timely basis if at all, or on terms
acceptable to us. If we fail to obtain acceptable additional financing when
needed, we may be required to further reduce planned expenditures or forego
business opportunities, which could reduce our net sales, increase our losses,
and harm our business. Moreover, additional equity financing could dilute the
per share value of our common stock held by current shareholders, while
additional debt financing could restrict our ability to make capital
expenditures or incur additional indebtedness, all of which would impede our
ability to succeed.
OUR NET SALES AND OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BECAUSE OF A
DECLINE IN AVERAGE SELLING PRICES FOR OUR DIAL-UP MODEMS AND BECAUSE OF THE
DECLINE IN THE RETAIL MARKET FOR DIAL-UP MODEMS.
The dial-up modem industry has been characterized by declining average
selling prices and a declining retail market. The decline in average selling
prices is due to a number of factors, including technological change, lower
component costs, and competition. The decline in the size of the retail market
for dial-up modems is primarily due to the inclusion of dial-up modems as a
standard feature contained in new PCs, and the advent of broadband products.
Less advantageous terms of sales, decreasing average selling prices and reduced
demand for our dial-up modems have resulted and may in the future result in
decreased net sales for dial-up modems, which has been our primary source of net
sales. If we fail to replace declining revenue from the sales of dial-up modems
with the sales of our other products, including our broadband modems, our
business and results of operation will be harmed.
WE BELIEVE THAT OUR FUTURE SUCCESS WILL DEPEND IN LARGE PART ON OUR ABILITY TO
MORE SUCCESSFULLY PENETRATE THE BROADBAND MODEM MARKETS, WHICH HAVE BEEN
CHALLENGING MARKETS, WITH SIGNIFICANT BARRIERS TO ENTRY.
With the shrinking of the dial-up modem market, we believe that our future
success will depend in large part on our ability to more successfully penetrate
the broadband, cable and ADSL, modem markets. These markets have been
challenging markets, with significant barriers to entry, that have adversely
affected our sales to these markets. Although some cable and ADSL modems are
sold at retail, the high volume purchasers of these modems are concentrated in a
relatively few large cable, telecommunications, and Internet service providers
which offer broadband modem services to their customers. These customers,
particularly cable services providers, also have extensive and varied approval
processes for modems to be approved for use on their network. These approvals
are expensive, time consuming, and continue to evolve. Successfully penetrating
the broadband modem market therefore presents a number of challenges including:
o the current limited retail market for broadband modems;
o the relatively small number of cable, telecommunications and Internet
service provider customers that make up a substantial part of the market
for broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive, uncertain and varied approval process of the
various cable service providers; and
o the strong relationships with cable service providers enjoyed by incumbent
cable equipment providers like Motorola and Scientific Atlanta.
Our sales of broadband products have been adversely affected by all of
these factors. Sales of our broadband products in European countries have
fluctuated and may continue to fluctuate due to approvals and delays in the
deployment by service providers of cable and ADSL service in these countries. We
cannot assure that we will be able to successfully penetrate these markets.
OUR EXISTING INDEBTEDNESS COULD PREVENT US FROM OBTAINING ADDITIONAL FINANCING
AND HARM OUR LIQUIDITY.
In January 2001, we obtained a $6 million, 20 year direct reduction
mortgage from a bank, secured by our owned real estate in Boston, Massachusetts.
As of December 31, 2003, our outstanding indebtedness was $5.3 million. This
mortgage has a balloon payment due in January 2006. Our outstanding indebtedness
could adversely affect our ability to obtain additional financing for working
capital, acquisitions, or other purposes. Our existing indebtedness could also
make us more vulnerable to economic downturns and competitive pressures, make it
more difficult to obtain additional debt financing, and adversely affect our
liquidity. In the event of a cash shortfall, we could be forced to reduce other
expenditures to meet our requirements with respect to our outstanding debt. Our
ability to meet our obligations will be dependent upon our future performance,
which will be subject to financial, business and other factors affecting our
operations. Many of these factors are beyond our control. If we are unable to
generate sufficient cash flow from operations in the future to service our debt,
we may be required to refinance all or a portion of these obligations or obtain
additional financing in order to stay in business.
OUR FAILURE TO MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY
STANDARDS WOULD ADVERSELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS.
The market for PC communications products and high-speed broadband access
products is characterized by aggressive pricing practices, continually changing
customer demand patterns, rapid technological advances, emerging industry
standards and short product life cycles. Some of our product developments and
enhancements have taken longer than planned and have delayed the availability of
our products, which adversely affected our sales and profitability in the past.
Any significant delays in the future may adversely impact our ability to sell
our products, and our results of operations and financial condition may be
adversely affected. Our future success will depend in large part upon our
ability to:
o identify and respond to emerging technological trends in the market;
o develop and maintain competitive products that meet changing customer
demands;
o enhance our products by adding innovative features that differentiate our
products from those of our competitors;
o bring products to market on a timely basis;
o introduce products that have competitive prices;
o manage our product transitions, inventory levels and manufacturing
processes efficiently; and
o respond effectively to new technological changes or new product
announcements by others.
Our product cycles tend to be short, and we may incur significant non-
recoverable expenses or devote significant resources to sales that do not occur
when anticipated. Therefore, the resources we devote to product development,
sales and marketing may not generate material net sales for us. In addition,
short product cycles have resulted in and may in the future result in excess and
obsolete inventory, which has had and may in the future have an adverse affect
on our results of operations. In an effort to develop innovative products and
technology, we have incurred and may in the future incur substantial
development, sales, marketing, and inventory costs. If we are unable to recover
these costs, our financial condition and operating results could be adversely
affected. In addition, if we sell our products at reduced prices in anticipation
of cost reductions and we still have higher cost products in inventory, our
business would be harmed and our results of operations and financial condition
would be adversely affected.
OUR OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BECAUSE OF PRICE PROTECTION
PROGRAMS.
Our operating results have been adversely affected by reductions in average
selling prices because we gave credits to some of our customers as a result of
contractual price protection guarantees. Specifically, when we reduce the price
for a product, the customer receives a credit for the difference between the
customer's most recent purchase price and our reduced price for the product, for
all unsold product at the time of the price reduction. For fiscal 2003 and 2002,
we recorded a reduction of net sales of $.2 million and $.7 million,
respectively, for customer price protection.
WE MAY BE SUBJECT TO PRODUCT RETURNS RESULTING FROM DEFECTS, OR FROM
OVERSTOCKING OF OUR PRODUCTS. PRODUCT RETURNS COULD RESULT IN THE FAILURE TO
ATTAIN MARKET ACCEPTANCE OF OUR PRODUCTS, WHICH WOULD HARM OUR BUSINESS.
If our products contain undetected defects, errors, or failures, we could
face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, either of which would reduce our sales and
harm our business. We are also exposed to the risk of product returns from our
customers as a result of contractual stock rotation privileges and our practice
of assisting some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead too higher than normal returns.
OUR FAILURE TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS COULD MATERIALLY AND
ADVERSELY AFFECT OUR LIQUIDITY AND HARM OUR BUSINESS.
During fiscal 2000, in anticipation of future sales of our broadband access
products, particularly cable modems, we significantly increased our inventory
for these products. We also built up this inventory in response to shortages of
components for these products earlier in that year. We have also had difficulty
in generating significant orders for some of our products, particularly
broadband products, and as a result, we experienced a significant increase in
our inventory, to $21.7 million on December 31, 2000 from $14.3 million on
December 31, 1999. During fiscal 2001, we were able to reduce our inventory
levels to $11.1 million as a result of sales, raw material returns to suppliers,
and the write-down of value of some of our inventory. At December 31, 2003, our
inventory level is $4.8 million, a reduction of $2.0 million from December 31,
2002 primarily attributable to lower inventory levels to support the reduced
sales activity in 2003, improved inventory turnover, and sales of excess
broadband and wireless inventory. Our failure to effectively manage our
inventory may adversely affect our liquidity and increases the risk of inventory
obsolescence, a decline in market value of the inventory, or losses from theft,
fire, or other casualty.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
DEPEND ON THIRD PARTY MANUFACTURERS. IF THESE THIRD PARTY MANUFACTURERS FAIL TO
PRODUCE QUALITY PRODUCTS IN A TIMELY MANNER, OUR ABILITY TO FULFILL OUR CUSTOMER
ORDERS WOULD BE ADVERSELY IMPACTED.
We use contract manufacturers to partially manufacture our products. We use
these third party manufacturers to help ensure low costs, rapid market entry,
and reliability. Any manufacturing disruption could impair our ability to
fulfill orders, and failure to fulfill orders would adversely affect our sales.
Although we currently use four contract manufacturers for the bulk of our
purchases, in some cases a given product is only provided by one of these
companies. The loss of the services of any of our significant third party
manufacturers or a material adverse change in the business of or our
relationships with any of these manufacturers could harm our business. Since
third parties manufacture our products and we expect this to continue in the
future, our success will depend, in part, on the ability of third parties to
manufacture our products cost effectively and in sufficient quantities to meet
our customer demand.
We are subject to the following risks because of our reliance on third
party manufacturers:
o reduced management and control of component purchases;
o reduced control over, delivery schedules;
o reduced control over quality assurance;
o reduced control over manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices;
o interruption of supplies from assemblers as a result of a fire, natural
calamity, strike or other significant event; and
o misappropriation of our intellectual property.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
OBTAIN KEY COMPONENTS FROM, AND DEPEND ON, SOLE OR LIMITED SOURCE SUPPLIERS.
We obtain certain key parts, components, and equipment from sole or limited
sources of supply. For example, we purchase dial-up and broadband modem chipsets
from Conexant Systems and Agere Systems. Integrated circuit product areas
covered by one or both companies include dial-up modems, ADSL modems, cable
modems, networking, routers, and gateways. In the past, we have experienced
delays in receiving shipments of modem chipsets from our sole source suppliers.
We may experience similar delays in the future. In addition, some products may
have other components that are available from only one source. We believe the
market for chipsets is currently experiencing shortages and there are increased
lead times for some chipsets. If we are unable to obtain a sufficient supply of
components from our current sources, we could experience difficulties in
obtaining alternative sources or in altering product designs to use alternative
components. Resulting delays or reductions in product shipments could damage
relationships with our customers and our customers could decide to purchase
products from our competitors. Inability to meet our customers' demand or a
decision by one or more of our customers to purchase products from our
competitors could harm our operating results.
OUR FAILURE TO SATISFY MINIMUM PURCHASE REQUIREMENTS OR COMMITMENTS WE HAVE WITH
OUR SOLE SOURCE SUPPLIERS COULD HAVE AN ADVERSE AFFECT ON OUR RESULTS OF
OPERATIONS.
We have entered into supply arrangements with suppliers of some components
that include price and other concessions, including no-charge components, for
meeting minimum purchase requirements or commitments. Our business and results
of operations could be harmed if we fail to satisfy the minimum purchase
requirements or commitments contained in our supply arrangements.
OUR FAILURE TO OBTAIN NEW CHIPSET PURCHASE PROGRAMS WITH CHIPSET SUPPLIERS COULD
HAVE AN ADVERSE AFFECT ON OUR RESULTS OF OPERATIONS.
Our current chipset purchase agreements, which include price and other
concessions for meeting minimum purchase requirements or commitments, are due to
expire in 2004. If we are unable to obtain new or otherwise negotiate favorable
chipset purchase discount programs, our expenses could increase significantly
and our results of operations could be adversely affected.
THE MARKET FOR HIGH-SPEED COMMUNICATIONS PRODUCTS AND SERVICES HAS MANY
COMPETING TECHNOLOGIES AND, AS A RESULT, THE DEMAND FOR OUR PRODUCTS AND
SERVICES IS UNCERTAIN.
The market for high-speed communications products and services has a number
of competing technologies. For instance, Internet access can be achieved by:
o using a standard telephone line and appropriate service for dial-up modems,
ISDN modems, or ADSL modems, possibly in combination;
o using a cable modem with a cable TV line and cable modem service;
o using a router and some type of modem to service the computers connected to
a local area network; or
o other approaches, including wireless links to the Internet.
Although we currently sell products that include these technologies, the
market for high-speed communication products and services is fragmented and
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.
OUR BUSINESS IS DEPENDENT ON THE INTERNET AND THE DEVELOPMENT OF THE INTERNET
INFRASTRUCTURE.
Our success will depend on the continued growth of the use of the Internet
by businesses, particularly for applications that utilize multimedia content and
that require high bandwidth. The recent growth in the use of the Internet has
caused frequent periods of performance degradation. This has required the
upgrade of routers, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet.
CHANGES IN CURRENT OR FUTURE LAWS OR GOVERNMENTAL REGULATIONS THAT NEGATIVELY
IMPACT OUR PRODUCTS AND TECHNOLOGIES COULD HARM OUR BUSINESS.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire United States communications industry including our
customers and their products and services that incorporate our products. Our
products are also required to meet the regulatory requirements of other
countries throughout the world where our products are sold. Obtaining government
regulatory approvals is time-consuming and very costly. In the past, we have
encountered delays in the introduction of our products, such as our cable
modems, as a result of government certifications. We may face further delays if
we are unable to comply with governmental regulations. Delays caused by the time
it takes to comply with regulatory requirements may result in cancellations or
postponements of product orders or purchases by our customers, which would harm
our business.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS INHERENT IN
INTERNATIONAL ACTIVITIES.
Our international sales continue to represent an increasingly significant
portion of our sales. International sales have increased from 38% of net sales
in 2001 to approximately 45 % of our net sales in 2003. Currently our operations
are significantly dependent on our international operations, particularly sales
of our ADSL modems, and may be materially and adversely affected by many factors
including:
o international regulatory and communications requirements and policy
changes;
o favoritism toward local suppliers;
o delays in the rollout of broadband services by cable and ADSL service
providers;
o local language and technical support requirements;
o difficulties in inventory management, accounts receivable collection and
the management of distributors or representatives;
o difficulties in staffing and managing foreign operations;
o political and economic changes and disruptions;
o governmental currency controls;
o shipping costs;
o currency exchange rate fluctuations; and
o tariff regulations.
We anticipate that our international sales will continue to account for a
significant percentage of our net sales. If foreign markets for our current and
future products develop more slowly than currently expected, our sales and our
future results of operations may be harmed.
FLUCTUATIONS IN THE FOREIGN CURRENCY EXCHANGE RATES IN RELATION TO THE U.S.
DOLLAR COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.
Changes in currency exchange rates that increase the relative value of the
U.S. dollar may make it more difficult for us to compete with foreign
manufacturers on price, or may otherwise have a material adverse effect on our
sales and operating results. A significant increase in our foreign currency
denominated sales would increase our risk associated with foreign currency
fluctuations.
OUR FUTURE SUCCESS WILL DEPEND ON THE CONTINUED SERVICES OF OUR EXECUTIVE
OFFICERS AND KEY RESEARCH AND DEVELOPMENT PERSONNEL WITH EXPERTISE IN HARDWARE
AND SOFTWARE DEVELOPMENT.
The loss of any of our executive officers or key research and development
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring skilled personnel could harm our business. Competition for
skilled personnel is significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition, the loss
of Frank B. Manning, our president and chief executive officer, or Peter Kramer,
our executive vice president, some other member of the management team, a key
engineer, or other key contributors, could harm our relations with our
customers, our ability to respond to technological change, and our business.
OUR BUSINESS MAY BE HARMED BY ACQUISITIONS WE MAY COMPLETE IN THE FUTURE.
We may pursue acquisitions of related businesses, technologies, product
lines, or products. Our identification of suitable acquisition candidates
involves risk inherent in assessing the values, strengths, weaknesses, risks and
profitability of acquisition candidates, including the effects of the possible
acquisition on our business, diversion of our management's attention, risk of
increased leverage, shareholder dilution, risk associated with unanticipated
problems, and risks associated with liabilities we assume.
WE MAY HAVE DIFFICULTY PROTECTING OUR INTELLECTUAL PROPERTY.
Our ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements to
protect our intellectual property. The steps we take to protect our technology
may be inadequate. Existing trade secret, trademark and copyright laws offer
only limited protection. Our patents could be invalidated or circumvented. We
have more intellectual property assets in some countries than we do in others.
In addition, the laws of some foreign countries in which our products are or may
be developed, manufactured or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. This may
make the possibility of piracy of our technology and products more likely We
cannot assure that the steps that we have taken to protect our intellectual
property will be adequate to prevent misappropriation of our technology.
WE COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Particular aspects of our technology could be found to infringe on the
intellectual property rights or patents of others. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. We cannot predict the extent to which we
may be required to seek licenses. We cannot assure that the terms of any
licenses we may be required to seek will be reasonable. We are often indemnified
by our suppliers relative to certain intellectual property rights; but these
indemnifications do not cover all possible suits, and there is no guarantee that
a relevant indemnification will be honored by the indemnifying company.
ITEM 7A.
We invest our cash in money market instruments and certificates of deposit.
These investments are generally denominated in U.S. dollars and U.K. pounds. Due
to the conservative nature of these instruments, we do not believe that we have
a material exposure to interest rate or market risk. The investment portfolio is
used to preserve our capital until it is required to fund operations or
acquisitions. None of these instruments are held for trading purposes. We do not
own derivative financial instruments.
We are exposed to interest rate risk in the ordinary course of business.
For our floating rate mortgage arrangement, interest rate changes generally do
not affect the fair market value, but do affect future earnings and cash flow.
Based on our borrowings of $5.3 million under our mortgage arrangement as of
December 31, 2003, a one-percentage point increase in interest rates would
decrease cash flow and earnings for a year by approximately $53,000.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Index to Consolidated Financial Statements 32
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 2002 and 2003 34
Consolidated Statements of Operations for the years ending December 31, 35
2001, 2002 and 2003
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 2001, 2002 and 2003 36
Consolidated Statements of Cash Flows for the years ending December 31, 37
2001, 2002 and 2003
Notes to Consolidated Financial Statements 38-51
Schedule II: Valuation and Qualifying Accounts for the years ending
December 31, 2001, 2002 and 2003 56
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with our accountants on
accounting or financial disclosure during the period covered by this report.
ITEM 9A - CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management 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 December 31, 2003, 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 III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item appears under the caption "Our Executive
Officers " in Part 1, Item 1 -- Business, and under the captions "Election of
Directors", "Audit Committee Financial Expert", "Code of Ethics" and "Compliance
With Section 16(a) of the Securities Exchange Act" in our definitive proxy
statement for our 2004 annual meeting of stockholders which will be filed with
the SEC within 120 days after the close of our fiscal year, and is incorporated
herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item appears under the captions "Executive
Compensation," "Directors' Compensation", in our definitive proxy statement for
our 2004 annual meeting of stockholders which will be filed with the SEC within
120 days after the close of our fiscal year, and is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
We maintain a number of equity compensation plans for employees, officers,
directors and others whose efforts contribute to our success. The table below
sets forth certain information as of our fiscal year ended December 31, 2003
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our stockholders, and (ii) were not
approved by our stockholders.
Equity Compensation Plan Information
Number Of Securities
Number Of Securities Remaining Available For
To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity
Exercise Of Price Of Outstanding Compensation Plans (excluding
Outstanding Options, Options, securities reflected in
Plan Category Warrants And Rights Warrants And Rights column (a))
------------- ------------------- ------------------------- -----------------------------
(a) (b) (c)
--- --- ---
Equity compensation plans 1,253,000 $2.0743 718,646
approved by security holders(1)
Equity compensation plans 582,050 $1.7567 420,500
not approved by security holders(2)
----------------------------------- ------------------- ------------------------- -----------------------------
Total 1,835,050 $1.9736 1,139,146
(1) Includes the following plans: 1990 Employee Stock Option Plan and 1991
Directors Stock Option Plan, each as amended. Please see note 11 to our
consolidated financial statements for a description of these plans.
(2) Includes the 1998 Employee Equity Incentive Plan, as amended. The purposes
of the 1998 Employee Equity Incentive Plan (the "1998 Plan"), adopted by
the Board of Directors in 1998, are to attract and retain employees and
provide an incentive for them to assist us in achieving our long-range
performance goals, and to enable such employees to participate in our
long-term growth. In general, under the 1998 Plan, all employees who are
not officers or directors are eligible to participate in the 1998 Plan. The
1998 Plan is currently administered by the Stock Option Committee of the
Board of Directors. In 1999, the Board of Directors authorized our Chief
Executive Officer to grant stock options to purchase up to 100,000 shares
in any fiscal quarter, not to exceed stock options to purchase 350,000
shares in any fiscal year to eligible employees under the 1998 Plan.
Participants in the 1998 Plan are eligible to receive non-qualified stock
options at an option price determined by the Stock Option Committee. All
stock options granted under the 1998 Plan have been granted for at least
the fair market value on the date of grant. A total of 1,200,000 shares of
our common stock have been authorized for issuance under the 1998 Plan.
The additional information required by this item is incorporated by
reference to the section entitled "Share Ownership of Directors, Officers and
Certain Beneficial Owners" in our Definitive Proxy Statement for our 2004 annual
meeting of stockholders to be filed with the SEC within 120 days after the close
of the fiscal year.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item may appear under the caption "Certain
Transactions" in our Definitive Proxy Statement for our 2004 annual meeting of
Stockholders to be filed with the SEC within 120 days after the close of the
fiscal year and is incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item may appear under the caption "Principal
Accountant Fees and Services" in our Definitive Proxy Statement for our 2004
annual meeting of stockholders to be filed with the SEC within 120 days after
the close of the fiscal year and is incorporated herein by reference.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits:
(1), (2) The consolidated financial statements and required schedules are
indexed on page F-1.
(3) Exhibits required by the Exhibit Table of Item 601 of SEC
Regulation S-K. (Exhibit numbers refer to numbers in the Exhibit
Table of Item 601.)
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, filed as Exhibit 99.1
to the Company's Registration Statement on Form S-8 (Reg. No. 333-
107923), filed with the Commission on August 13, 2003. *
10.3 1998 Employee Equity Incentive Plan, as amended, filed as Exhibit
99.1 to the Company's Registration Statement on Form S-8 (Reg. No.
333-97573), filed with the Commission on August 2, 2002. *
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996 (the "June 1996
Form 10-Q"). *
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Employment Agreement, filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997. *
10.7 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2001 (the "March 2001 Form 10-Q"). *
10.8 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2001 Form 10-Q. *
10.9 Operating Agreement, Zoom Group LLC dated as of March 29, 2002,
filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 2002. *
10.10 Agreement between Zoom Telephonics, Inc and Members of the Zoom
Group dated as of March 22, 2002, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
10.11 Reinstatement Agreement, Assignment Agreement and Second amendment
of Purchase and Sale dated as of March 29, 2002, filed as Exhibit
10.3 to the March 2002 Form 10-Q. *
21. Subsidiaries, filed as Exhibit 21 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000. *
23. Consent of KPMG LLP.
31.1 CEO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 CFO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 CEO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 CFO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
(b) Reports on Form 8-K.
No current reports on Form 8-K have been filed during the last
quarter for the period covered by this report.
(c) Exhibits - See Item 15 (a) (3) above for a list of Exhibits
incorporated herein by reference or filed with this Report.
(d) Schedules - Schedule II: Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted since
they are either inapplicable or not required.
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ZOOM TECHNOLOGIES, INC.
(Registrant)
By: /s/ Frank B. Manning
----------------------------
Frank B. Manning, President
Date: March 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title Date
/s/ Frank B. Manning Principal Executive Officer March 29, 2004
-------------------- and Chairman of the Board
Frank B. Manning
/s/ Robert A. Crist Principal Financial and March 29, 2004
-------------------- Accounting Officer
Robert A. Crist
/s/ Peter R. Kramer Director March 29, 2004
--------------------
Peter R. Kramer
/s/ Bernard Furman Director March 29, 2004
--------------------
Bernard Furman
/s/ L. Lamont Gordon Director March 29, 2004
--------------------
L. Lamont Gordon
/s/ J. Ronald Woods Director March 29, 2004
--------------------
J. Ronald Woods
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 2002 and 2003 34
Consolidated Statements of Operations for the years ending December 31, 35
2001, 2002 and 2003
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 2001, 2002 and 2003 36
Consolidated Statements of Cash Flows for the years ending December 31, 37
2001, 2002 and 2003
Notes to Consolidated Financial Statements 38-51
Schedule II: Valuation and Qualifying Accounts for the years ending
December 31, 2001, 2002 and 2003 56
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Zoom Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Zoom
Technologies, Inc. and subsidiary as of December 31, 2002 and 2003, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zoom Technologies,
Inc. and subsidiary as of December 31, 2002 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
February 11, 2004.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------------
ASSETS 2002 2003
------ ---- ----
Current assets:
Cash and cash equivalents.......................... $ 7,612,274 $ 9,904,384
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances $2,646,408 in
2002 and $1,790,205 in 2003 (note 13)........... 3,714,202 3,944,699
Inventories, net (note 5).......................... 6,782,550 4,771,216
Prepaid expenses and other current assets.......... 1,037,733 434,694
---------- ----------
Total current assets..................... 19,146,759 19,054,993
Property, plant and equipment, net (note 6)........... 3,485,911 2,918,985
---------- ----------
Total assets............................ $ 22,632,670 $ 21,973,978
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................. $ 2,406,843 $ 2,172,028
Accrued expenses.................................. 1,207,724 1,011,910
Current portion of long term debt (note 10)....... 191,550 223,833
---------- ----------
Total current liabilities................ 3,806,117 3,407,771
Long-term debt, less current portion (note 10)........ 5,342,057 5,095,986
---------- ----------
Total liabilities....................... 9,148,174 8,503,757
---------- ----------
Stockholders' equity (note 11): Common stock, $0.01 par value.
Authorized 25,000,000 shares; issued 8,084,616 shares;
outstanding 7,858,266 and 8,076,216 shares at December
31, 2002 and December 31, 2003, respectively...... 78,608 80,846
Additional paid-in capital.......................... 28,166,607 28,500,421
Retained earnings (accumulated deficit)............. (14,770,278) (15,438,333)
Accumulated other comprehensive income (loss)....... 11,755 334,609
Treasury stock, at cost............................. (2,196) (7,322)
---------- ----------
Total stockholders' equity............... 13,484,496 13,470,221
---------- ----------
Total liabilities and stockholders'
equity................................. $ 22,632,670 $ 21,973,978
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 2001, 2002 and 2003
2001 2002 2003
------------ ------------ ------------
Net sales (notes 13 and 17)........................... $ 41,570,276 $ 37,274,287 $ 33,335,209
Cost of goods sold (note 5)........................... 35,193,449 27,937,544 23,120,573
----------- ----------- -----------
Gross profit .................... 6,376,827 9,336,743 10,214,636
----------- ----------- -----------
Operating expenses:
Selling ...................................... 7,480,297 5,848,137 5,270,585
General and administrative (note 8)........... 7,938,175 3,405,043 3,117,764
Research and development...................... 5,327,968 3,526,350 2,766,967
----------- ----------- -----------
Total operating expenses......... 20,746,440 12,779,530 11,155,316
----------- ----------- -----------
Operating loss................... (14,369,613) (3,442,787) (940,680)
----------- ----------- -----------
Other income (expense):
Interest income .............................. 198,805 102,604 87,427
Interest expense.............................. (454,708) (293,104) (211,165)
Equity in losses of affiliate (note 14)....... (145,165) (56,666) -
Other, net.................................... 241,759 313,619 396,363
----------- ----------- -----------
Total other income (expense), net (159,309) 66,453 272,625
----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item......... (14,528,922) (3,376,334) (668,055)
Income tax expense (benefit)(note 12)................. 3,800,000 2,014,539 -
----------- ----------- -----------
Income (loss) before extraordinary
item........................... (18,328,922) (5,390,873) (668,055)
Extraordinary gain on elimination
of negative goodwill........... - 255,287 -
----------- ----------- -----------
Net Income (loss)................ $(18,328,922) $ (5,135,586) $ (668,055)
=========== =========== ===========
Basic and diluted earnings (loss) per share (note 2):
Loss before extraordinary item:
Basic and diluted................ $ (2.33) $ (.68) $ (.08)
=========== =========== ===========
Extraordinary gain on elimination of negative goodwill $ - $ .03 $ -
=========== =========== ===========
Net loss:
Basic and diluted................ $ (2.33) $ (.65) $ (.08)
=========== =========== ===========
Weighted average common and common equivalent shares:
Basic and diluted................ 7,860,866 7,860,650 7,883,400
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Retained Accumulated
Additional Earnings Other Total
Common Stock Paid In (accumulated Comprehensive Treasury Stock Stockholders'
Shares Amount Capital deficit) Income(Loss) Shares Amount Equity
--------- ----------- ----------- ------------ ------------ ------ ------- -------------
Balance at December 31, 2000 .. 7,860,866 $28,145,375 - $ 8,694,230 $ (92,159) - - $36,747,446
Net profit (loss) ............. - - - (18,328,922) - - - (18,328,922)
Foreign currency translation
adjustment .................... - - - - (102,689) - - (102,689)
Unrealized holding gain on
investments ................... - - - - 53 - - 53
Comprehensive loss . ......... - - - - - - - (18,431,558)
Compensation expense related to
issuance of restricted stock .. - 99,840 - - - - - 99,840
---------- ----------- ----------- ------------- ------------ ----- ------- -----------
Balance at December 31, 2001 .. 7,860,866 $28,245,215 - $(9,634,692) $ (194,795) - - $18,415,728
Net profit (loss) ............. - - - (5,135,586) - - - (5,135,586)
Foreign currency translation
adjustment .................... - - - - 206,550 - - 206,550
Comprehensive loss ........... - - - - - - - (4,929,036)
Incorporation to Delaware
corporation .................. - (28,166,607) 28,166,607 - - - - -
Purchase of treasury stock .... - - - - - 2,600 (2,196) (2,196)
---------- ----------- ----------- ------------- ------------ ----- -------- ------------
Balance at December 31, 2002 .. 7,860,866 $ 78,608 $28,166,607 $(14,770,278) $ 11,755 2,600 $(2,196) $13,484,496
Net profit (loss) ............. - - - (668,055) - - - (668,055)
Foreign currency translation
adjustment .................... - - - - 322,854 - - 322,854
Comprehensive loss ........... - - - - - - - (345,201)
Exercise of stock options (note
11) ........................... 223,750 2,238 333,814 - - - - 336,052
Purchase of treasury stock .... - - - - - 5,800 (5,126) (5,126)
---------- ----------- ----------- ------------- ------------ ------ -------- ------------
Balance at December 31, 2003 .. 8,084,616 $ 80,846 $28,500,421 $(15,438,333) $ 334,609 8,400 $(7,322) $13,470,221
========== =========== =========== ============= ============ ====== ======== ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 2001, 2002 and 2003
2001 2002 2003
---- ---- ----
Cash flows from operating activities:
Net income (loss)................................. $(18,328,922) $ (5,135,586) $ (668,055)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Non-operating gain on refund of deposit..... - - (40,237)
Extraordinary gain on negative goodwill..... - (255,287) -
Depreciation and amortization............... 1,769,608 837,968 617,781
Impairment of goodwill...................... 2,294,881 - -
Amortization of unearned compensation
expense................................... 99,840 - -
Equity in losses of affiliate............... 145,165 56,666 -
Net deferred income taxes................... 3,800,000 2,012,844 -
Changes in operating assets and liabilities,
net of acquisitions.....................
Accounts receivable....................... 2,271,932 2,139,336 106,881
Inventories............................... 10,813,740 4,300,593 2,011,334
Prepaid expenses and other current assets. (296,655) (38,071) 643,276
Accounts payable and accrued expenses (5,214,009) (1,015,173) (430,629)
---------- ---------- ----------
Net cash provided by (used in)
operating activities.............. (2,644,420) 2,903,290 2,240,351
---------- ---------- ----------
Cash flows from investing activities:
Sales of investment securities, net............... 53 - -
Investment in affiliates.......................... (141,665) - -
Purchases of property, plant and equipment........ (650,060) (194,963) (50,855)
---------- ---------- ----------
Net cash provided by (used in)
investing activities.............. (791,672) (194,963) (50,855)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt...... 6,000,000 - -
Repayment of long-term debt....................... (115,431) (350,962) (213,788)
Exercise of nonqualified stock options............ - - 336,052
Payments to acquire treasury stock................ - (2,196) (5,126)
---------- ---------- ----------
Net cash provided by (used in)
financing activities............. 5,884,569 (353,158) 117,138
---------- ---------- ----------
Effect of exchange rate changes on cash.................. (102,689) 5,047 (14,524)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents..... 2,345,788 2,360,216 2,292,110
---------- ---------- ----------
Cash and cash equivalents at beginning of year........... 2,906,270 5,252,058 7,612,274
---------- ---------- ----------
Cash and cash equivalents at end of year................. $ 5,252,058 $ 7,612,274 $ 9,904,384
========== ========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ending December 31, 2001, 2002 and 2003
(1) INCORPORATION AND NATURE OF OPERATIONS
Zoom Telephonics, Inc. (the "Company") was incorporated under the federal
laws of Canada (Canada Business Corporations Act). Its principal
business activity, the design, production, and marketing of faxmodems
and other communication peripherals, is conducted through its
wholly-owned subsidiary, Zoom Telephonics, Inc. ("Zoom US"), a
Delaware corporation based in Boston, Massachusetts.
In February 2002, the Company completed a transaction in which it changed
its jurisdiction of incorporation from Canada to the State of Delaware
effective March 1, 2002. In connection with the change in
jurisdiction, the Company changed its name to Zoom Technologies, Inc.
These changes were accomplished through a process called a continuance
under the laws of Canada and a domestication under the laws of the
State of Delaware, and were approved by the Company's shareholders at
a stockholders' meeting on February 15, 2002.
As part of the continuation, each share of Zoom Telephonics, Inc. was
automatically converted into one share of Zoom Technologies, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Use of Estimates
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America and are stated in US dollars.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may differ
from those estimates. Significant estimates made by the Company
include the useful lives of property, plant and equipment and
goodwill, the recoverability of long-lived assets, the collectibility
of accounts receivable, the valuation allowance for deferred tax
assets, the valuation of sales returns and allowances, the reserves
for obsolete and slow moving inventory, and the write-downs of
inventory valuation for the lower cost of market.
Certain amounts from prior periods have been reclassified to conform to
current period presentation.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Zoom US, and all of its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all investments with original maturities of less
than 90 days to be cash equivalents. Included in cash and cash
equivalents at December 31, 2003 and 2002 was a deposit for
approximately $267,000 and $241,000, respectively, in a duty deferment
account approved by H.M. Customs and Excise in the United Kingdom for
the deferment of value added taxes for imports.
(d) Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
(e) Property, plant and equipment
Property, plant and equipment is stated and recorded at cost. Depreciation
of property, plant and equipment is provided by using the
straight-line method at rates sufficient to amortize the costs of the
fixed assets over their estimated useful lives.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(f) Accounting for Impairment of Long-Lived Assets
The Company uses the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." This statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost
to sell.
(g) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(h) Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. Diluted loss per share is computed by dividing net income by
the weighted average number of common shares and dilutive potential
common shares outstanding during the period. Under the treasury stock
method, the unexercised options are assumed to be exercised at the
beginning of the period or at issuance, if later. The assumed proceeds
are then used to purchase common shares at the average market price
during the period.
2001 2002 2003
---- ---- ----
Basic weighted
average shares outstanding ....... 7,860,866 7,860,650 7,883,400
Net effect of dilutive potential
common shares outstanding, based
on the treasury stock method...... - - -
--------- --------- ---------
Diluted weighted
average shares outstanding........ 7,860,866 7,860,650 7,883,400
========= ========= =========
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are
excluded from the computation. The dilutive effect of options to
purchase 13,870, 3,814 and 206,414 shares of common stock at December
31, 2001, 2002, and 2003, respectively, were outstanding, but not
included in the computation of diluted earnings per share as their
effect would be antidilutive.
(i) Revenue Recognition
The Company sells hardware products to its customers. The products are
dial-up modems, embedded modems, cable modems, PC cameras, ISDN and
ADSL modems, telephone dialers, and wireless and wired networking
equipment. The Company generally does not sell software or services.
The Company earns a small amount of royalty revenue. The Company
derives its net sales primarily from the sales of hardware products to
three types of customers (1) computer peripherals retailers, (2)
computer product distributors, and (3) original equipment
manufacturers (OEMs). The Company sells a very small amount of its
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
hardware products to direct consumers or to any customers via the
Internet. As described below, management judgments and estimates must
be made and used in connection with the net sales recognized in any
accounting period. Material differences may result in the amount and
timing of the Company's net sales for any period if its management
makes different judgments or utilizes different estimates.
Net Sales is recognized by the Company for all three types of customers at
the point when the customers take legal ownership of the delivered
products. Legal ownership passes from the Company to the customer
based on the contractual FOB point specified in signed contracts and
purchase orders, which are both used extensively. Many of the
Company's customer contracts or purchase orders specify FOB
destination. The Company verifies the delivery date on all significant
FOB destination shipments made during the last 10 business days of
each quarter.
The Company's net sales are reduced by certain events which are
characteristic of hardware sales to computer peripherals retailers.
These events are product returns, price protection refunds, certain
marketing development fund agreements, store rebates, and consumer
mail-in rebates. Each of these is accounted for as a reduction of
revenue based on careful management estimates, which are reconciled to
actual customer or end-consumer refunds and credits on a monthly or
quarterly basis. The estimates for product returns are based on recent
historical trends plus estimates for returns prompted by new product
introductions, announced stock rotations, announced customer store
closings, etc. Management analyzes historical returns, current
economic trends, and changes in customer demand and acceptance of the
Company's products when evaluating the adequacy of sales return
allowances. The Company's estimates for price protection refunds
require a detailed understanding and tracking by customer, by sales
program. Estimated price protection refunds are recorded in the same
period as the announcement of a pricing change. Information from
customer inventory-on-hand reports or from direct communications with
the customers is used to estimate the refund, which is recorded as a
reserve against accounts receivable and a reduction of current period
revenue. The Company's estimates for consumer mail-in rebates are
comprised of actual rebate claims processed by the rebate redemption
centers plus an accrual for an estimated lag in processing. The
Company's estimates for store rebates are comprised of actual credit
requests from the eligible customers.
(j) Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, and
borrowings. Due to the short term nature of these instruments of
conversion to cash or the corresponding variable interest rate
attached to the debt, the carrying amount of these financial
instruments approximates fair value.
(k) Stock-Based Compensation
The Company accounts for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). As permitted by
SFAS 123, the Company measures compensation cost in accordance with
Accounting Principles Board Opinion (APB) No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and FASB interpretation No. 44 (FIN
44). Accordingly, no accounting recognition is given to stock options
granted at fair market value until they are exercised. Upon exercise,
net proceeds, including tax benefits realized, if any, are credited to
equity.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of FASB 123 to stock-based compensation.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
YEAR ENDED DECEMBER 31,
2001 2002 2003
----------- ------------ -----------
Net income (loss), as reported.................... $(18,328,922) $(5,135,586) $ (668,055)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects........ (1,834,280) (1,109,003) (372,009)
---------- ---------- ----------
Proforma net income (loss)........................ $(20,163,202) $(6,244,589) $(1,040,064)
========== ========== ==========
Earnings (loss) per share:
Basic -- as reported.............................. $ (2.33) $ (0.65) $ (.08)
Basic -- proforma................................. $ (2.57) $ (0.79) $ (.13)
========= ========= =========
Diluted -- as reported............................ $ (2.33) $ (0.65) $ (.08)
Diluted -- proforma............................... $ (2.57) $ (0.79) $ (.13)
Weighted-average assumptions: 2001-expected dividend yield 0.0%, risk-free
interest rate of 3.83%, volatility 102% and an expected life of 2.0
years; 2002-expected dividend yield 0.00%, risk-free interest rate of
2.65%, volatility 106% and an expected life of 2.5 years;
2003-expected dividend yield 0.00%, risk-free interest rate of 1.82%,
volatility 124% and an expected life of 2.0 years.
(l) Advertising Costs
Advertising costs are expensed as incurred and reported in selling,
general, and administrative expenses in the accompanying consolidated
statements of operations and include costs of advertising, production,
trade shows, and other activities designed to enhance demand for the
Company's products. There are no deferred advertising costs in the
accompanying consolidated balance sheets.
(m) Investments in Affiliates
Investments in which the Company has no significant influence over the
investee are accounted for under the cost method of accounting.
Investments in which the Company exercises significant influence but
which the Company does not control are accounted for under the equity
method of accounting. Under the equity method, investments are stated
at cost and are adjusted for the Company's share of earnings and
losses, contributions and distributions.
(n) Foreign Currencies
The Company generates a portion of its revenues in international markets
and denominated in foreign currencies, which subjects its operations
to exposure to foreign currency fluctuations. The impact of currency
fluctuations can be positive or negative in any given period. During
the years ending December 31, 2001, 2002, and 2003 foreign currency
transaction activity, gains, and losses were not material. At December
31, 2003, the Company's foreign currency-denominated net assets were
not material. The Company has no involvement with derivative financial
instruments.
The Company considers the local currency to be the functional currency for
its international subsidiary. Assets and liabilities denominated in
foreign currencies are translated using the exchange rate of the
balance sheet date. Revenues and expenses are translated at average
exchange rates prevailing during the year. Translation adjustments
resulting from this process are charged or credited to accumulated
other comprehensive income (loss).
(o) Warranty Costs
The Company provides currently for the estimated costs that may be
incurred under its standard warranty obligations.
(3) LIQUIDITY
In 2003, the Company's net cash provided by operating activities was $2.2
million, net cash used in investing activities was $.1 million, and
net cash provided by financing activities was $.1 million. On December
31, 2002 and 2003 Zoom had cash and cash equivalents of approximately
$7.6 million and $9.9 million, respectively. Currently the Company
does not have a debt facility from which it can borrow, and it does
not expect to obtain one on acceptable terms unless there is operating
performance improvement.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
To conserve cash and manage the Company's liquidity, the Company has
implemented expense reductions throughout 2001, 2002, and 2003. The
employee headcount was 329 at December 31, 2000, which was reduced to
215 at December 31, 2001, 185 at December 31, 2002, and to 159 at
December 31 2003. The Company will continue to assess its cost
structure as it relates to its revenues and cash position in 2003, and
may make further reductions if these actions are deemed necessary.
In recent years, the Company's sales have declined as its major product
market, the dial-up modem retail after-market, has declined. This
trend continues, as personal computer manufacturers incorporate a
dial-up modem as a built-in component in most consumer personal
computers and increasing numbers of consumers world-wide are switching
to broadband Internet access. The company's sales of products for the
broadband Internet market have been growing, but in 2003 represented
only 20% of total net sales. The Company's future success will depend
in large part on the ability to improve its penetration of the growing
broadband modem markets.
The Company's total current assets at December 31, 2003 were $19.1 million
and current liabilities were $3.4 million and long-term debt was $5.3
million. Management believes it has sufficient resources to fund its
planned operations over the next 12 months. However, if the Company is
unable to increase its revenues, reduce its expenses, or raise
capital, the Company's longer-term ability to continue as a going
concern and achieve its intended business objectives could be
adversely affected.
(4) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities - an Interpretation of
ARB No. 51", and, in October 2003, the FASB issued FASB Staff Position
(FSP) No. FIN 46-6, "Effective Date of FASB Interpretation 46." This
staff position deferred the effective date for applying FIN 46 to an
interest held in a VIE or potential VIE that was created before
February 1, 2003 until the end of the first interim or annual period
ending after December 15, 2003, except if the company had already
issued statements reflecting a VIE in accordance with FIN 46. In
December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities -- An Interpretation of
ARB No. 51." FIN 46R replaces FIN 46 and addresses consolidation by
business enterprises of variable interest entities that possess
certain characteristics. A variable interest entity ("VIE") is defined
as (a) an ownership, contractual or monetary interest in an entity
where the ability to influence financial decisions is not proportional
to the investment interest, or (b) an entity lacking the invested
capital sufficient to fund future activities without the support of a
third party. FIN 46R establishes standards for determining under what
circumstances VIEs should be consolidated with their primary
beneficiary, including those to which the usual condition for
consolidation does not apply. Adoption of the required sections of FIN
46, as modified and interpreted, including the provisions of FIN 46R,
did not have any effect on the Company's consolidated financial
statements or disclosures. The Company intends to adopt the remaining
sections of this guidance when required in 2004. The Company does not
expect adoption of FIN 46, as modified and interpreted, including the
provisions of FIN 46R, to have a significant impact on the Company's
financial statements or disclosures.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104), which
supersedes SAB 101, "Revenue Recognition in Financial Statements". The
primary purpose of SAB 104 is to rescind accounting guidance contained
in SAB 101 related to multiple element revenue arrangements, which was
superseded as a result of the issuance of EITF 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables". While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. The adoption of SAB 104 did not have a material
impact on the Company's financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(5) INVENTORIES
Inventories consist of the following at December 31:
2002 2003
---- ----
Raw materials............. $ 2,808,421 $ 1,754,850
Work in process........... 673,275 639,425
Finished goods............ 3,300,854 2,376,941
--------- -----------
Net Inventory $ 6,782,550 $ 4,771,216
=========== ===========
During 2002 and 2003 the Company recorded lower of cost or market
write-downs of $0.7 million and $0.3 million, respectively, related to
broadband and wireless inventory.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
Estimated
2002 2003 useful lives
---- ---- ------------
Land........................... $ 309,637 $ 309,637 -
Buildings and improvements..... 2,761,616 2,774,281 31.5 years
Leasehold improvements......... 483,039 483,039 5 years
Computer hardware and software. 3,550,749 3,565,595 3 years
Machinery and equipment........ 1,735,057 1,753,001 5 years
Molds, tools and dies.......... 1,532,064 1,537,464 5 years
Office furniture and fixtures.. 275,516 275,516 5 years
----------- -----------
$10,647,678 $10,698,533
Less accumulated depreciation
and amortization (7,161,767) (7,779,548)
----------- -----------
$ 3,485,911 $ 2,918,985
=========== ===========
(7) COMMITMENTS AND CONTINGENCIES
(a) Lease Obligations
The Company leases a manufacturing and warehousing facility in Boston,
Massachusetts, an office facility in Camberley, United Kingdom, and a
technical support facility in Boca Raton, Florida. The Boston,
Massachusetts lease expires in March 2006. In September 2002, we
entered into a five year lease, as a tenant, for approximately 3,500
square feet at 951 Broken Sound Parkway, Boca Raton, Florida. In March
1999, the Company assumed an office lease from Hayes Microcomputer
Products, Inc. at 430 Frimley Business Park, Camberley Surrey, U.K. We
have agreed to extend this lease term to March 2005. Total rent
expense, under non-cancelable operating leases, was $546,034, $782,000
and $757,821 for the years ending December 31, 2001, 2002 and 2003,
respectively.
The Company's estimated future minimum rental payments, excluding
executory costs, under these operating leases are set forth in the
table below.
Year Total
---- -------
2004 832,055
2005 714,852
2006 215,140
2007 34,394
(b) Purchase Commitments
The Company entered into arrangements with suppliers of some components
that include price and other concessions, including no-charge
components, for meeting certain purchase requirements or commitments.
Under these arrangements, the Company is committed to purchase
approximately $8.0 million of components over a period of
approximately 30-months that commenced on January 1, 2002, provided
that those components were offered at competitive terms and prices.
The Company believes that at December 31, 2003, it is on track to meet
the $8.0 million commitment by December 31, 2004. In connection with
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
this arrangement, the Company became entitled to receive at least $3.0
million of no-charge components, based upon the supplier's market
price for the components in late 2001 and early 2002, and other
pricing concessions based on our purchase volumes. At December 31,
2003, the remaining purchase commitment is for $1.9 million worth of
components.
(c) Contingencies
The Company is party to various lawsuits and administrative proceedings
arising in the ordinary course of business. The Company evaluates such
lawsuits and proceedings on a case-by-case basis, and its policy is to
vigorously contest any such claims which it believes are without
merit. The Company's management believes that the ultimate resolution
of such pending matters will not materially and adversely affect the
Company's business, financial position, results of operations or cash
flows. The Company had no Letters of Credit outstanding at December
31, 2003.
(d) Concentrations
The Company participates in the PC peripherals industry, which is
characterized by aggressive pricing practices, continually changing
customer demand patterns and rapid technological developments. The
Company's operating results could be adversely affected should the
Company be unable to successfully anticipate customer demand
accurately; manage its product transitions, inventory levels and
manufacturing process efficiently; distribute its product quickly in
response to customer demand; differentiate its products from those of
its competitors or compete successfully in the markets for its new
products.
The Company depends on many third-party suppliers for key components
contained in its product offerings. For some of these components, the
Company may only use a single source supplier, in part due to the lack
of alternative sources of supply. If the supply of a key material
component is delayed or curtailed, the Company's ability to ship the
related product or solution in desired quantities and in a timely
manner could be adversely affected, possibly resulting in reductions
in net sales. In cases where alternative sources of supply are
available, qualification of the sources and establishment of reliable
supplies could result in delays and possible reduction in net sales.
In the event that the financial condition of the Company's third-party
suppliers for key components was to erode, the delay or curtailment of
deliveries of key material components could occur. Additionally, the
Company's reliance on third-party suppliers of key material components
exposes the Company to potential product quality issues that could
affect the reliability and performance of its products and solutions.
Any lesser ability to ship its products in desired quantities and in a
timely manner due to a delay or curtailment of the supply of material
components, or product quality issues arising from faulty components
manufactured by third-party suppliers, could adversely affect the
market for the Company's products and lead to a reduction in the
Company's net sales.
(8) IMPAIRMENT
In March 1999, the Company entered into a series of independent
agreements to acquire most of the modem assets of Hayes Microcomputer
Products, Inc. for $5.0 million in cash. The purchase included the
Hayes, Practical Peripherals, Accura, Optima, Century 2, and Cardinal
brands and product rights for the USA, Canada, South & Central
America, Europe, and the Middle East. In July 1999 the Company
finalized the purchase of Hayes Asia Pacific for $1.1 million in cash.
The acquisitions were accounted for as purchases. The excess of cost
over fair value of net assets acquired was being amortized on a
straight-line method over five years.
The Company also recorded negative goodwill that resulted from the
purchase of the Hayes U.K., business, where the value of the net
assets acquired exceeded the cost. This transaction was independent of
other Hayes purchases.
The Company recorded goodwill for two acquisitions, Tribe Computer Works,
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Inc. in 1996 and certain assets of Hayes Microcomputer Products, Inc.
in 1998. The goodwill values for Tribe and Hayes were being amortized
over 13 years and 5 years, respectively. In 2001, the Company
determined that based on its history of negative cash flows from
operations, a forecast of future positive cash flows could not be
sufficiently relied upon to support retaining the remaining goodwill
assets on the consolidated balance sheet. Therefore, the Company
recorded an impairment charge of $2.3 million in 2001 and on January
1, 2002, the Company recorded an extraordinary gain of $0.3 million
upon the adoption of SFAS No. 142. The gain resulted from the
elimination of the remaining negative goodwill on the Company's
consolidated balance sheet. As of December 31, 2003, the Company's net
goodwill and negative goodwill balances on its consolidated balance
sheet are zero.
Net loss before goodwill amortization, net of tax and related per share
amounts for the years ended December 31, 2001, 2002, 2003 is as
follows (in thousands, except per share amounts):
Year ended December 31,
2001 2002 2003
---- ---- ----
Net loss as reported............... $(18,329) $ (5,136) $ (668)
Add back: Goodwill amortization
expense net of tax effect......... 781 - -
------ ------ ------
Adjusted net loss.................. $(17,548) $ (5,136) $ (668)
Basic and diluted loss per share,
as reported....................... $ (2.33) $ (0.65) $ (0.08)
Add back: Goodwill amortization
expense net of tax effect......... 0.10 - -
------ ------ ------
Proforma basic and diluted loss
per share......................... $ (2.23) $ (0.65) $ (0.08)
(9) Comprehensive Income (loss)
The components of comprehensive income (loss), net of tax, are as follows:
2001 2002 2003
---- ---- ----
Net income (loss)................ $(18,328,922) $(5,135,586) $ (668,055)
Foreign currency translation
adjustment...................... (102,689) 206,550 322,854
Net unrealized holding gain
on investment securities........ 53 - -
------------ ----------- -----------
Comprehensive income (loss)...... $(18,431,558) $(4,929,036) $ (345,201)
============ =========== ===========
Foreign currency translation adjustment represented the entire balance
within accumulated other comprehensive income (loss) at December 31,
2002 and 2003.
(10) LONG-TERM DEBT
On January 10, 2001, the Company obtained a mortgage for $6 million on
the real estate property located at 201 and 207 South Street, Boston,
Massachusetts. This is a 20-year direct reduction mortgage with a
five-year balloon due January 10, 2006. The interest rate is fixed for
one year, based on the one year Federal Home Loan Bank rate plus 2.5 %
per annum. The rate is adjusted on January 10th of each calendar year
commencing on January 10, 2002. The rate was adjusted to 3.99% on
January 10, 2004. On September 24, 2002 the Company paid an additional
principal payment of $178,761 in compliance with a mortgage covenant.
Future minimum principal payments are due as follows at December 31,
2003.
Year Total
---- -----
2004 $ 223,833
2005 233,210
2006 4,862,776
---------
Total $ 5,319,819
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(11) STOCK OPTION PLANS
At December 31, 2003, the Company had three stock option plans, which are
described below:
Employee Stock Option Plan
The Employee Stock Option Plan (the "Employee Stock Option Plan") is for
officers and certain full-time and part-time employees of the Company.
Non-employee directors of the Company are not entitled to participate
under this plan. The Employee Stock Option Plan provides for the
availability of 2,800,000 shares of common stock for issuance upon the
exercise of stock options granted under the plan. Shares of common
stock were registered for issuance under this plan in accordance with
the Securities Act of 1933. Under this plan, stock options are granted
at the discretion of the Compensation Committee of the Board of
Directors at an option price not less than the fair market value of
the stock on the date of grant. The options are exercisable in
accordance with terms specified by the Compensation Committee not to
exceed ten years from the date of grant. Options outstanding under
this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 2000 957,611 $ 6.40
Granted................... 631,000 2.77
Exercised................. - -
Expired................... (550,611) 5.85
---------- ----
Balance at December 31, 2001 1,038,000 $ 4.48
Granted................... 325,000 1.00
Exercised................. - -
Expired................... (115,000) 4.84
--------- ----
Balance at December 31, 2002 1,248,000 $ 3.54
Granted................... 310,000 1.95
Exercised................. (37,000) 1.65
Expired................... (322,000) 7.49
--------- ----
Balance at December 31, 2003 1,199,000 $ 2.13
========= ====
The following table summarizes information about fixed stock options under
the Employee Stock Option Plan outstanding on December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 0.00 to $ 1.75 308,000 1.40 $ 1.00 145,500 $ 1.00
1.75 to 3.50 640,000 1.70 2.08 330,000 2.20
3.50 to 5.25 251,000 0.30 3.63 251,000 3.63
---------------- ------- ---- ---- ------- ----
$ 1.00 to $ 5.25 1,199,000 1.30 years $ 2.13 726,500 $ 2.45
================ ========= ========== ====== ======= ======
In 1991, the Company established the Director Stock Option Plan (the
"Directors Plan"). Shares of common stock were registered for issuance
under this plan in accordance with the Securities Act of 1933. The
Directors Plan was established for all directors of the Company except
for any director who is a full-time employee or full-time officer of
the Company. In 2003, the Directors Plan was amended to provide that,
each eligible director is automatically granted an option to purchase
12,000 shares of common stock on July 10 and January 10 of each year,
beginning July 10, 2003. Prior to the amendment to the Directors Plan,
eligible directors were automatically granted an option to purchase
6,000 shares on common stock on July 10 and January 10 of each year,
beginning on July 10, 1991. The option price is the fair market value
of the common stock on the date the option is granted. There are
450,000 shares authorized for issuance under the Directors Plan. Each
option expires two years from the grant date. Options outstanding
under this plan are as follows:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Weighted average
Number of shares exercise price
Balance at December 31, 2000 60,000 $ 6.76
Granted................... 36,000 3.26
Exercised................. - -
Expired................... (24,000) 5.37
-------- ----
Balance at December 31, 2001 72,000 $ 5.48
Granted................... 36,000 1.17
Exercised................. - -
Expired................... (36,000) 7.69
-------- ----
Balance at December 31, 2002 72,000 $ 2.21
Granted................... 54,000 0.95
Exercised................. (36,000) 1.18
Expired................... (36,000) 3.26
-------- ----
Balance at December 31, 2003 54,000 $ 0.94
======== ====
The following table summarizes information about fixed stock options under
the Directors Plan on December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 0.65 to $ 1.75 54,000 1.3 $ 0.94 18,000 $ 0.72
---------------- ------- --------- ------ ------ ------
$ 0.65 to $ 1.75 54,000 1.3 years $ 0.94 18,000 $ 0.72
================ ======= ========= ====== ====== ======
1998 Employee Equity Incentive Stock Option Plan
The 1998 Employee Equity Incentive Stock Option Plan (the "1998 Plan") was
adopted by the Board of Directors to attract and retain employees and
provide an incentive for them to assist the Company to achieve
long-range performance goals, and to enable them to participate in the
long-term growth of the Company. Non-employee directors of the Company
and certain officers of the Company are not entitled to participate
under this plan. The authorized number of shares available for
issuance under the 1998 Plan is 1,200,000 shares of common stock.
Shares of common stock were registered for issuance under the 1998
Plan in accordance with the Securities Act of 1933. Under this plan,
stock options may be granted at the discretion of the Compensation
Committee of the Board of Directors at an option price determined by
the Compensation Committee. All options under this plan have been at
fair market value on the date of the grant. The options are
exercisable in accordance with terms specified by the Compensation
Committee. Options outstanding under this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 2000 650,375 $ 5.74
Granted................... 248,825 2.45
Exercised................. - -
Expired................... (199,300) 5.82
------- ----
Balance at December 31, 2001 699,900 $ 4.55
Granted................... 363,600 1.00
Exercised................. - -
Expired................... (283,000) 3.55
------- ----
Balance at December 31, 2002 780,500 $ 3.16
Granted................... 240,000 1.85
Exercised................. (150,750) 1.54
Expired................... (287,700) 5.77
------- ----
Balance at December 31, 2003 582,050 $ 1.76
======= ====
The following table summarizes information about fixed stock options under
the 1998 Plan outstanding on December 31, 2003:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 0.00 to $ 1.75 202,100 1.4 $ 1.01 57,450 $ 1.02
1.75 to 3.50 367,950 2.0 2.11 127,950 2.59
3.50 to 5.25 12,000 0.3 3.63 12,000 3.63
---------------- ------- --------- ----- ------ -----
$ 1.00 to $ 5.25 582,050 1.8 years $ 1.76 197,400 $ 2.20
================ ======= ========= ===== ======= =====
On December 31, 2003 there were 1,139,146 additional shares available for
issuance under all three stock option plans. The per share weighted
-average fair value of stock options granted during 2001, 2002, and
2003 was $1.47, $0.54 and $1.14, respectively, on the date of grant
using the Black Scholes option-pricing model.
(12) INCOME TAXES
Income tax expense (benefit) consists of the following:
Current Deferred Total
------- -------- -----
Year ending December 31, 2001:
US federal.................. $ - $ 3,337,900 $ 3,337,900
State and local............. - 462,100 462,100
Foreign..................... - - -
------ ----------- -----------
$ - $ 3,800,000 $ 3,800,000
====== =========== ===========
Year ending December 31, 2002:
US federal.................. $ - $ 1,612,634 $ 1,612,634
State and local............. - 400,210 400,210
Foreign..................... 1,695 - 1,695
------ ----------- -----------
$ 1,695 $ 2,012,844 $ 2,014,539
====== =========== ===========
Year ending December 31, 2003:
US federal.................. $ - $ - $ -
State and local............. - - -
Foreign..................... - - -
------- ----------- -----------
$ - $ - $ -
======= =========== ===========
Income tax expense (benefit) was $3,800,000, $2,014,539 and zero dollars
for the years ending December 31, 2001, 2002 and 2003, respectively,
and differed from the amounts as computed by applying the US statutory
tax rate of 34% to pretax loss as a result of the following:
2001 2002 2003
---- ---- ----
Computed "expected" US tax expense (benefit).......... $(4,939,834) $(1,147,954) $ (227,139)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit................................ 304,986 264,139 -
Increase (reduction) in federal valuation allowance. 8,427,351 2,885,398 219,215
Other, net.......................................... 7,497 12,956 7,924
----------- ----------- ---------
Income tax expense (benefit) $ 3,800,000 $ 2,014,539 $ -
=========== =========== =========
Total income tax expense (benefit) was allocated as follows:
2001 2002 2003
---- ---- ----
Loss from operations.................................. $ 3,800,000 $ 2,014,539 $ -
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes......... - - -
----------- ---------- ----------
$ 3,800,000 $ 2,014,539 $ -
=========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001, 2002, and 2003 are presented below:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
2001 2002 2003
---- ---- ----
Deferred tax assets:
Inventories, primarily non-deductible reserves........ $ 2,862,364 $ 2,688,239 $ 2,409,923
Accounts receivable,
primarily returns and allowances.................... 497,510 340,213 483,057
Accrued expenses, principally provisions
not currently deductible............................ 345,249 228,992 141,157
Net operating loss carryforwards and credits.......... 8,307,793 9,768,697 9,132,219
Depreciation and amortization......................... 1,126,117 1,455,958 1,340,233
Other................................................. 98,835 88,933 102,594
---------- --------- ---------
Total gross deferred tax assets 13,237,868 14,571,030 13,609,183
Less valuation allowance (11,225,024) (14,571,030) (13,609,183)
---------- ---------- ----------
Net deferred tax assets $ 2,012,844 $ - $ -
========== ========== ==========
On December 31, 2003, the Company had federal net operating loss
carryforwards of approximately $22,531,000. These federal net
operating losses are available to offset future taxable income, and
are due to expire beginning 2018. The Company had state net operating
loss carryforwards in various states of approximately $20,259,000.
These federal net operating losses are available to offset future
taxable income, and are due to expire in years ranging from 2004
through 2023. The Company recorded a deferred tax asset valuation
allowance against the portion of the deferred tax assets that
management believes may expire unused. The valuation allowance reduces
deferred tax assets to reflect the estimated amount of deferred tax
assets, which will more likely not be realized. The Company has
recorded a valuation allowance against its deferred tax assets because
management believes that, after considering all the available
objective evidence, historical and prospective, with greater weight
given to historical evidence, it is more likely than not that these
assets will not be realized.
The income tax benefits derived from the exercise of non-qualified
employee stock options amounting to $109,872, $0, and $0 in the years
ended December 31, 2003, 2002 and 2001, respectively, were not
included in the statements of operations. These tax benefits have been
fully reserved with a variation allowance.
(13) SIGNIFICANT CUSTOMERS
Three customers each comprised over 10% of net sales for the years ending
December 31, 2003 and 2002. Four customers each comprised over 10% of
net sales for the year ending December 31, 2001. On December 31, 2003,
three customers comprised approximately 49% of net accounts
receivable. On December 31, 2002, three customers comprised
approximately 79% of net accounts receivable.
(14) INVESTMENT IN AFFILIATES
In September 1999, the Company made an investment in a limited liability
Company ("LLC"). The Company granted the LLC the rights to a software
license in exchange for 300,000 Class A shares of the LLC, which were
valued by the Company at $300,000. The value at which the outside
investors paid cash for shares received as part of the same equity
infusion was used by the Company to value their shares received. In
May 2000, the LLC converted to a "C" corporation. In March 2001, and
December 2001, the Company made additional investments in the
affiliate for a total of $141,665, maintaining the same percent of
ownership. As a result of the recognition of the Company's share of
equity in losses of the affiliate, the investment balance as of
December 31, 2002 has been reduced to zero.
(15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2001 2002 2003
---- ---- ----
Cash paid during year for interest $ 426,803 $ 306,237 $ 215,571
====== ========= =========
Cash paid during year for income taxes $ - $ 66,624 $ -
====== ========= =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The tax benefit of the exercise of stock options resulted in no increases
to common stock in 2003, since the Company believes that it is more
likely than not that these deferred tax assets will not be realized.
No options were exercised in 2001 or 2002.
(16) DEPENDENCE ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS
The Company produces its products using components or subassemblies
purchased from third-party suppliers. An important factor in the
Company's liquidity has been the receipt and use of "no-charge
components". The Company entered into supply arrangements with
suppliers of some components that include price and other concessions,
including no-charge components, for meeting certain purchase
requirements or commitments. Under these arrangements, the Company is
committed to purchase approximately $8.0 million of components over a
period of approximately 30-months that commenced on January 1, 2002,
provided that those components were offered at competitive terms and
prices. The Company believes that at December 31, 2003, it is on track
to meet the $8.0 million commitment. The Company is also required to
purchase either a minimum percentage, as measured by unit purchases or
dollar amount of components over a two-year period commencing on
January 1, 2002, and the Company is currently exceeding that
percentage. In connection with these arrangements, the Company became
entitled to receive at least $3.0 million of no-charge components,
based upon the supplier's market price for the components in late 2001
and early 2002, and other pricing concessions based on purchase
volumes. The Company received $1.2 million of these no-charge
components in the fourth quarter of 2001. The Company received the
remainder of the no-charge components in the first quarter of 2002.
The favorable impact to the statement of operations is being
calculated as a purchase discount over the estimated total number of
components acquired through the 30 month supply agreement and
recognized on a delayed basis as the products employing the acquired
components involved in the supply arrangement are sold.
Currently, a substantial percentage of the Company's manufacturing is
performed by SameTime Electronics ("SameTime"). The loss of SameTime's
services or a material adverse change in SameTime's business or in the
Company's relationship with SameTime could materially and adversely
harm the Company's business. To lessen the risk associated with using
one manufacturer of a substantial portion of the Company's products,
the Company is also using Mac Systems, Lite-On, Vtech, Billionton,
Taicom, Abocom, Behaviour Tech, Well and Billion to manufacture
various of our products.
(17) SEGMENT AND GEOGRAPHIC INFORMATION
The Company's operations are classified into one reportable segment.
Substantially all of the Company's operations and long-lived assets
reside primarily in the United States. The Company's net sales to
North America and net sales to international locations for 2001, 2002,
and 2003 were comprised as follows:
2001 % of Total 2002 % of Total 2003 % of Total
---- ---------- ---- ---------- ---- ----------
North America $ 25,828,176 62% $ 22,342,890 60% $ 18,212,110 55%
International 15,742,100 38% 14,931,397 40% 15,123,099 45%
---------- ---- ---------- ---- ---------- ----
Total $ 41,570,276 100% $ 37,274,287 100% $ 33,335,209 100%
========== ==== ========== ==== ========== ====
(18) RETIREMENT PLAN
The Company established a 401(k) retirement savings plan for employees in
January 1996. Under the provisions of the plan, the Company matches
25% of an employee's contribution, up to a maximum of $350 per
employee per year. Total Company contributions in 2001, 2002 and 2003
were $46,749, $34,531 and $29,587 respectively.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(19) SELECTED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE
DATA, UNAUDITED)
The following table sets forth selected quarterly financial for the years
ended December 31, 2002 and 2003. The operating results for any given
quarter are not necessarily indicative of results for any future
period.
2002 Quarter Ending 2003 Quarter Ending
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept.30 Dec. 31
------- ------- -------- ------- ------- ------- ------- -------
Net sales......................... $ 8,973 $ 9,207 $10,879 $ 8,215 $ 7,538 $ 7,537 $ 9,104 $ 9,156
Costs of goods sold............... 7,183 7,225 7,708 5,822 5,393 5,777 6,146 5,804
------ ------ ------ ------ ------ ------ ------ ------
Gross profit (loss)............. 1,790 1,982 3,171 2,393 2,145 1,760 2,958 3,352
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling......................... 1,572 1,492 1,423 1,361 1,362 1,227 1,376 1,306
General and administrative...... 911 852 825 817 958 843 612 705
Research and development........ 1,076 856 879 716 752 743 660 612
------ ----- ----- ----- ----- ----- ----- -----
Total operating expenses....... 3,559 3,200 3,127 2,894 3,072 2,813 2,648 2,623
------ ----- ----- ----- ----- ----- ----- -----
Operating profit (loss)........ (1,769) (1,218) 44 (501) (927) (1,053) 310 729
Other income (expense), net....... 35 11 48 (25) 87 62 96 27
--- --- -- -- -- -- -- --
Income (loss) before income
taxes and extraordinary item.. (1,734) (1,207) 92 (526) (840) (991) 406 756
Income tax expense (benefit)...... 2,013 - - 2 - - - -
------ ------ ------ ----- ----- ----- ----- -----
Income (loss) before
extraordinary item............ (3,747) (1,207) 92 (528) (840) (991) 406 756
Extraordinary gain on
elimination of goodwill....... 255 - - - - - - -
------ ------ ------ ----- ----- ----- ----- -----
Net income (loss).............. $(3,492) $(1,207) $ 92 $ (528) $ (840) $ (991) $ 406 $ 756
===== ===== ===== ===== ===== ===== ===== =====
Net loss per common share:
Basic.......................... $ (0.44) $ (0.15) $ 0.01 $ (0.07) $ (0.11) $ (0.13) $ 0.05 $ 0.09
Diluted........................ $ (0.44) $ (0.15) $ 0.01 $ (0.07) $ (0.11) $ (0.13) $ 0.05 $ 0.09
Weighted average common and common equivalent Shares:
Basic.......................... 7,861 7,861 7,861 7,861 7,853 7,852 7,857 7,970
Diluted........................ 7,861 7,861 7,861 7,861 7,853 7,852 8,081 8,593
EXHIBIT INDEX
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, filed as Exhibit 99.1
to the Company's Registration Statement on Form S-8 (Reg. No. 333-
107923), filed with the Commission on August 13, 2003. *
10.3 1998 Employee Equity Incentive Plan, as amended, filed as Exhibit
99.1 to the Company's Registration Statement on Form S-8 (Reg. No.
333-97573), filed with the Commission on August 2, 2002. *
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996 (the "June 1996
Form 10-Q"). *
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Employment Agreement, filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997. *
10.7 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2001 (the "March 2001 Form 10-Q"). *
10.8 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2001 Form 10-Q. *
10.9 Operating Agreement, Zoom Group LLC dated as of March 29, 2002,
filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 2002. *
10.10 Agreement between Zoom Telephonics, Inc and Members of the Zoom
Group dated as of March 22, 2002, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
10.11 Reinstatement Agreement, Assignment Agreement and Second amendment
of Purchase and Sale dated as of March 29, 2002, filed as Exhibit
10.3 to the March 2002 Form 10-Q. *
21. Subsidiaries, filed as Exhibit 21 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000. *
23. Consent of KPMG LLP.
31.1 CEO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 CFO Certification, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 CEO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 CFO Certification, Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
EXHIBIT INDEX (CONTINUED)
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
EXHIBIT 23.
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Zoom Technologies, Inc.:
We consent to the incorporation by reference in the registration statements No.
33-42834, No. 33-90930, No. 333-60565, No. 333-75575, No. 33-90191, No.
333-47188, No. 333-97573 and No. 333-107923 on Form S-8 of Zoom Technologies,
Inc. of our reports dated February 11, 2004, with respect to the consolidated
balance sheets of Zoom Technologies, Inc. and subsidiary as of December 31, 2002
and 2003, and the related consolidated statements of operations, stockholders'
equity and comprehensive loss, and cash flows for each of the years in the
three-year period ended December 31, 2003, and the related consolidated
financial statement schedule, which reports appear in the December 31, 2003
annual report on Form 10-K of Zoom Technologies, Inc.
/s/ KPMG LLP
Boston, Massachusetts
March 29, 2004
INDEPENDENT AUDITORS'
REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Zoom Technologies, Inc.:
Under date of February 11, 2004, we reported on the consolidated balance sheets
of Zoom Technologies, Inc. and subsidiary as of December 31, 2002 and 2003, and
the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2003, which are included in the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Boston, Massachusetts
February 11, 2004
SCHEDULE II
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 2001, 2002 and 2003
Balance at Charged Amount Balance
Beginning (Credited) to written off at end
Description of year Expense (Recoveries) of year
-------- ------- ------------ --------
Reserve for doubtful accounts.. $ 354,206 $ 162,416 $ 284,351 $ 232,271
Reserve for price protection... 198,749 943,820 403,456 739,113
Reserve for sales returns...... 1,065,415 5,628,163 6,013,536 680,042
COOP advertising and other
allowances..................... 1,509,085 4,332,751 4,676,813 1,165,023
--------- --------- ---------- ---------
Year ending December 31, 2001 $ 3,127,455 $11,067,150 $11,378,156 $ 2,816,449
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Reserve for doubtful accounts.. $ 232,271 $ 36,944 $ 209,809 $ 59,406
Reserve for price protection... 739,113 699,482 774,263 664,332
Reserve for sales returns...... 680,042 756,012 522,040 914,014
COOP advertising and other
allowances..................... 1,165,023 3,960,531 4,116,898 1,008,656
--------- --------- ---------- ---------
Year ending December 31, 2002 $ 2,816,449 $ 5,452,969 $ 5,623,010 $ 2,646,408
========= ========== ========== =========
Reserve for doubtful accounts.. $ 59,406 $ (42,713) $ ( 105,221) $ 121,914
Reserve for price protection... 664,332 168,095 722,866 109,561
Reserve for sales returns...... 914,014 3,260,578 3,404,030 770,562
COOP advertising and other
allowances..................... 1,008,656 2,648,885 2,869,373 788,168
--------- --------- ---------- ---------
Year ending December 31, 2003 $ 2,646,408 $ 6,034,845 $ 6,891,048 $ 1,790,205
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