UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 51-0448969
-------- ----------
(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
--------------
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 check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, as of May 11, 2005, was 9,080,091 shares.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
Item 1. Consolidated Balance Sheets as of March 31, 2005
and December 31, 2004 (unaudited) 3
Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-22
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 22
Item 4. Controls and Procedures 22-23
Part II. Other Information
Item 6. Exhibits 23
Signatures 24
Exhibit Index 25
PART I - FINANCIAL INFORMATION
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
March 31, 2005 December 31, 2004
-------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 7,607,957 $ 9,438,596
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $1,366,518 at
March 31, 2005 and $1,359,455 at December 31, 2004 2,674,323 3,349,781
Inventories 6,245,027 5,030,478
Prepaid expenses and other current assets 302,876 529,989
---------- ----------
Total current assets 16,830,183 18,348,844
Property, plant and equipment, net 2,640,329 2,703,208
---------- ----------
Total assets $ 19,470,512 $ 21,052,052
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 5,050,262 $ 229,555
Accounts payable 1,841,891 2,006,819
Accrued expenses 1,145,478 1,275,088
---------- ----------
Total current liabilities 8,037,631 3,511,462
Long-term debt, less current portion - 4,872,298
---------- ----------
Total liabilities 8,037,631 8,383,760
---------- ----------
Stockholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000 shares; issued 9,032,391
shares, outstanding 9,023,991 at March 31, 2005 and issued 8,935,516 shares,
outstanding 8,927,116 at December 31, 2004 90,324 89,355
Additional paid-in capital 30,676,495 30,572,727
Retained earnings (accumulated deficit) (19,814,732) (18,510,181)
Accumulated other comprehensive income (loss) 488,116 523,713
Treasury stock, at cost (7,322) (7,322)
---------- ----------
Total stockholders' equity 11,432,881 12,668,292
---------- ----------
Total liabilities and stockholders' equity $ 19,470,512 $ 21,052,052
========== ==========
See accompanying notes to unaudited consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2005 2004
---- ----
Net sales $ 6,436,543 $ 7,791,605
Costs of goods sold 4,904,354 5,479,549
------------ ------------
Gross profit 1,532,189 2,312,056
Operating expenses:
Selling 1,120,090 1,225,977
General and administrative 822,456 953,332
Research and development 749,298 678,219
------------ ------------
Total operating expenses 2,691,844 2,857,528
------------ ------------
Operating income (loss) (1,159,655) (545,472)
Other income (expense):
Interest income 46,981 24,182
Interest (expense) (65,783) (52,648)
Other, net (126,094) 16,376
------------ ------------
Total other income (expense), net (144,896) (12,090)
------------ ------------
Income (loss) before income tax
expense (1,304,551) (557,562)
Income tax expense (benefit) - -
------------ ------------
Net income (loss) $ (1,304,551) $ (557,562)
============ ============
Earnings (loss) per common share:
Basic $ (0.15) $ (0.07)
============ ============
Diluted $ (0.15) $ (0.07)
============ ============
Weighted average common and common equivalent shares
Basic 8,967,122 8,136,012
============ ============
Diluted 8,967,122 8,136,012
============ ============
See accompanying notes to unaudited consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2005 2004
-----------------------------------
Cash flows from operating activities:
Net income (loss) $ (1,304,551) $ (557,562)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 85,556 116,721
Changes in operating assets and liabilities:
Accounts receivable, net 635,475 (24,938)
Inventories (1,214,549) (796,786)
Prepaid expenses and other assets 227,113 (24,411)
Accounts payable and accrued expenses (294,538) (58,129)
---------- ----------
Net cash provided by (used in) operating activities (1,865,494) (1,345,105)
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (22,677) (26,176)
---------- ----------
Net cash provided by (used in) investing activities (22,677) (26,176)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt (51,591) (54,544)
Proceeds from exercise of stock options 104,737 570,204
---------- ----------
Net cash provided by (used in) financing activities 53,146 515,660
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Effect of exchange rate changes on cash 4,386 179
---------- ----------
Net increase (decrease) in cash (1,830,639) (855,442)
Cash beginning of period 9,438,596 9,904,384
---------- ---------
Cash end of period $ 7,607,957 $ 9,048,942
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 65,783 $ 52,648
========== =========
Income taxes $ - $ -
========== =========
See accompanying notes to unaudited consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Zoom Technologies, Inc. (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and footnote disclosures required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2004 included in the Company's
2004 Annual Report on Form 10-K.
The consolidated balance sheet as of March 31, 2005, the consolidated
statements of operations for the three months ended March 31, 2005 and 2004, and
the consolidated statements of cash flows for the three months ended March 31,
2005 and 2004 are unaudited, but, in the opinion of management, include all
adjustments (consisting of normal, recurring adjustments) necessary for a fair
presentation of results for these interim periods.
The consolidated financial statements include the accounts and operations
of the Company's wholly-owned subsidiary, Zoom Telephonics, Inc., a Delaware
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2005.
(b) Stock-Based Compensation
The Company accounts for its stock option plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and Related Interpretations." No
stock-based compensation expense is reflected in net income (loss) for these
plans, as all options granted under these plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock Based
Compensation", to stock based compensation:
Three Months
Ended March 31,
---------------------------
2005 2004
------------ ------------
Net income (loss), as reported......... $ (1,304,551) $ (557,562)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects............. (89,566) (173,868)
------------ ------------
Pro forma net income (loss)............ (1,394,117) $ (731,430)
============ ============
Income (loss) per share:
Basic and diluted - as reported........ $ (0.15) $ (0.07)
Basic and diluted - pro forma.......... $ (0.16) $ (0.09)
(c) Recently Issued or Proposed Accounting Pronouncements
In December 2004 the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." All share-based payments to employees, including
grants of employee stock options, must be recognized in the financial statements
based on their fair values beginning with the first annual period beginning
after June 15, 2005, with early adoption encouraged. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. The Company is required to adopt SFAS 123R in
the first quarter of 2006, beginning January 1, 2006. Under SFAS 123R, the
Company must determine the appropriate fair value model and related assumptions
to be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption. The
transition methods include modified prospective and modified retrospective
adoption options. Under the modified retrospective option, prior periods may be
restated either as of the beginning of the year of adoption or for all periods
presented. The modified prospective method requires that compensation expense
starts being recorded for all unvested stock options at the beginning of the
first quarter of adoption of SFAS 123R, while the modified retrospective method
would record compensation expense for all unvested stock options beginning with
the first period restated. Zoom is evaluating the requirements of SFAS 123R and
expects that the adoption of SFAS 123R will have a material impact on its
consolidated results of operations and earnings per share.
In November 2004 the FASB issued SFAS No. 151, "Inventory Costs-An
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Among other provisions, the new rule requires that items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of 2006, beginning on January
1, 2006. The Company is currently evaluating the effect, if any, that the
adoption of SFAS 151 will have on its consolidated results of operations.
(2) Liquidity; Revolving Line of Credit
On March 31, 2005 the Company had working capital of $8.8 million,
including $7.6 million in cash and cash equivalents.
On March 16, 2005 Zoom Telephonics, Inc., a wholly owned subsidiary of the
Company, entered into a Loan and Security Agreement with Silicon Valley Bank
that provides for a revolving line of credit of up to $2 million. The revolving
line of credit can be used to (i) borrow under revolving loans for working
capital and general corporate purposes, (ii) issue letters of credit, (iii)
enter into foreign exchange forward contracts, and (iv) support certain cash
management services. Revolving loans will bear interest at a floating rate of
interest equal to Silicon Valley Bank's prime rate plus 1%. The loan rate at
March 31, 2005 was 6.75%. This interest rate will be reduced to Silicon Valley
Bank's prime rate plus .5% if the Company records two consecutive quarters of
combined profitability. The revolving line of credit terminates, and all
outstanding obligations under the Loan and Security Agreement become, due on
March 15, 2006.
The revolving loans under the Loan and Security Agreement are secured by a
first priority lien on substantially all of the assets of the Company and Zoom
Telephonics, Inc., excluding intellectual property and real estate. The Company
guaranteed the obligations of Zoom Telephonics under the revolving line of
credit and pledged all of the stock of Zoom Telephonics in support of its
guarantee. The Loan and Security Agreement requires that the Company maintain a
minimum adjusted quick ratio and a minimum net worth. In addition, Zoom
Telephonics is required to obtain Silicon Valley Bank's prior written consent to
among other things, dispose of assets, make acquisitions, be acquired, incur
indebtedness, grant liens, make investments, pay dividends, or repurchase stock.
This consent may not be unreasonably withheld.
The Loan and Security Agreement contains events of default that include,
among other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control,
and material judgments. Upon occurrence of an event of default, Silicon Valley
Bank is entitled to, among other things, accelerate all of Zoom Telephonics'
obligations and sell its assets to satisfy obligations under the Loan and
Security Agreement. The Company's current availability under the line is $2
million. As of March 31, 2005 no amounts were outstanding under the revolving
line of credit and the Company was in compliance with all covenants.
To conserve cash and manage liquidity during the past few years, the
Company has implemented expense reductions, including the reduction of employee
headcount and overhead costs. The employee headcount was 185 at December 31,
2002 and 143 at March 31, 2005. The Company will continue to assess its cost
structure as it relates to its revenues and cash position in 2005, and the
Company may make further cost reductions if the actions are deemed necessary.
Management believes the Company has sufficient resources to fund its normal
operations through March 31, 2006. However, if the Company is unable to increase
its revenues, reduce or otherwise adequately control 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. Moreover,
the Company's liquidity could be significantly impaired if it is not able to
either refinance the mortgage or sell the buildings on or before the maturity
date of the mortgage in January 2006. See "Risk Factors" below, for further
information with respect to events and uncertainties that could harm the
Company's business, operating results, and financial condition.
(3) Earnings Per Share
The reconciliation of the numerators and denominators of the basic and
diluted net earnings (loss) per share computations for the Company's reported
net income (loss) is as follows:
Three Months Ended
March 31,
-----------------------------
2005 2004
----------- -----------
Basic:
Net income (loss) $(1,304,551) $ (557,562)
Weighted average shares
outstanding 8,967,122 8,136,012
----------- -----------
Net income (loss) per share $ (.15) $ (.07)
=========== ===========
Diluted:
Net income (loss) $(1,304,551) $ (557,562)
Weighted average shares
outstanding 8,967,122 8,136,012
Net effect of dilutive stock
options based on the
Treasury stock method using
average market price - -
----------- -----------
Weighted average shares
outstanding 8,967,122 8,136,012
----------- -----------
Net income (loss) per share $ (.15) $ (.07)
=========== ===========
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are excluded from the
computation for the three months ended March 31, 2005 and 2004. Options to
purchase 984,200 and 1,518,000 shares of common stock at March 31, 2005 and 2004
respectively, were outstanding but not included in the computation of diluted
earnings per share as their effect would be antidilutive.
(4) Inventories
Inventories consist of the following: March 31, 2005 December 31, 2004
-------------- -----------------
Raw materials $ 3,187,875 $ 2,595,730
Work in process 1,295,617 920,075
Finished goods 1,761,535 1,514,673
---------- ----------
Total Inventories $ 6,245,027 $ 5,030,478
========== ==========
(5) Comprehensive Income (Loss)
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" establishes rules for the reporting and display of
comprehensive income (loss) and its components; however, it has no impact on the
Company's net income (loss). SFAS No. 130 requires all changes in equity from
non-owner sources to be included in the determination of comprehensive income
(loss).
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended March 31,
------------------------------
2005 2004
----------- -----------
Net income (loss) $(1,304,551) $ (557,562)
Foreign currency translation
adjustment (35,597) 112,196
----------- -----------
Comprehensive income (loss) $(1,340,148) $ (445,366)
=========== ===========
At March 31, 2005 and December 31, 2004, Accumulated other comprehensive
income (loss) as reported on the Company's balance sheet is comprised solely of
foreign currency translation adjustments.
(6) Long-Term Debt
On January 10, 2001 the Company obtained a mortgage loan for $6 million
secured by 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. In 2004 the
interest rate was 3.99%. As of January 10, 2005 the rate of interest changed to
5.80%. Recently the Company renegotiated the rate to 5.0% effective February 10,
2005. As of March 31, 2005 $5.1 million was outstanding on this loan, which is
due and payable on January 10, 2006. Because the mortgage loan is due within
twelve months, the obligation has been reclassified from a long-term to a
current liability at March 31, 2005.
(7) Commitments
During the three month period ended March 31, 2005, other than the line of
credit discussed in Note 2 above, there were no material changes to the capital
commitments and contractual obligations of the Company from those disclosed in
the Form 10-K for the year ended December 31, 2004.
(8) Segment and Geographic Information
The Company's operations are classified into one reportable segment. The
Company's United States and international net sales for the three months ended
March 31, 2005 and 2004, respectively, were comprised as follows:
Three Months Three Months
Ended % of Ended % of
March 31, 2005 Total March 31, 2004 Total
North America $ 2,580,145 40% $ 3,779,156 49%
International-Turkey 1,521,737 24% 658,926 8%
International-UK 1,288,356 20% 2,477,000 32%
International-All Other 1,046,305 16% 876,523 11%
----------- ---- ----------- ----
Total $ 6,436,543 100% $ 7,791,605 100%
=========== ==== =========== ====
(9) Customer Concentrations
Relatively few customers have accounted for a substantial portion of the
Company's net sales. In the first quarter of 2005, the Company's net sales to
its top three customers accounted for 42% of its total net sales, with the
Company's sales to its Turkish distributor, Olusum, accounting for 24% of total
net sales. The remaining 18% was divided fairly equally between the other two
customers, both with less than a 10% share. In 2004, the Company's net sales to
each of three companies - Olusum (our distributor in Turkey), the Dixons Group
(Dixons, Currys, PC World, and PC City), and Staples - constituted over 10% of
its net sales; and together these three customers accounted for 35% of the
Company's total net sales. The Company's customers generally do not enter into
long-term agreements obligating them to purchase our products. The Company may
not continue to receive significant revenues from any of these or from other
large customers. A reduction or delay in orders from any of the Company's
significant customers, or a delay or default in payment by any significant
customer could materially harm the Company's business and prospects. Because of
the Company's significant customer concentration, its net sales and operating
income could fluctuate significantly due to changes in political or economic
conditions, or the loss, reduction of business, or less favorable terms for any
of our significant customers.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the safe harbor statement and the risk factors contained herein and set forth in
our Annual Report on Form 10-K for the year ended December 31, 2004. Readers
should also be cautioned that results of any reported period are often not
indicative of results for any future period.
OVERVIEW
We derive our net sales primarily from sales of Internet related hardware
products, principally modems, to retailers, distributors, Internet Service
Providers and Original Equipment Manufacturers. We sell our products through a
small direct sales force and third party sales agents. Our employees are
primarily located at our headquarters in Boston, Massachusetts, and we have a
sales and support office in the United Kingdom. We typically design our hardware
products, though we do sometimes use another company's design if it meets our
requirements. We obtain our hardware components from third party suppliers and
we outsource most of the product assembly work to contract manufacturers,
currently in Asia. We perform most of the packaging and distribution effort at
our production and warehouse facility in Boston, Massachusetts. We also utilize
a third party distribution facility in the United Kingdom.
Historically we derived a majority of our net sales from the retail
after-market sale of dial-up modems to customers seeking to add or upgrade a
modem in their personal computers. In recent years the size of this market and
our sales to this market have declined, as personal computer manufacturers have
incorporated a modem as a built-in component in most consumer personal computers
and as increasing numbers of consumers world-wide have switched to broadband
Internet access. The general consensus of communications industry analysts is
that after-market sales of dial-up modems will continue to decline. There is
also consensus among industry analysts that the market for broadband Internet
connection devices, such as cable modems and DSL modems, will grow rapidly
during the decade. In response to increased and forecasted demand for faster
connection speeds and increased modem functionality, we have invested and
continue to invest resources to advance our product line of broadband modems,
especially DSL modems, and we have experienced increased sales of these modems
that have partially offset our declining sales of dial-up modems. The last
quarter of 2004 and the first quarter of 2005 were the first quarters in which
our broadband modem revenues were higher than our dial-up modem revenues.
We continually seek to improve our product designs and manufacturing
approach in order to reduce our costs. We pursue a strategy of outsourcing
rather than internally developing our modem chipsets, which are
application-specific integrated circuits that form the technology base for our
modems. By outsourcing the chipset technology, we are able to concentrate our
research and development resources on modem system design, leverage the
extensive research and development capabilities of our chipset suppliers, and
reduce our development time and associated costs and risks. As a result of this
approach, we are able to quickly develop new and innovative products while
maintaining a relatively low level of research and development expense as a
percentage of net sales. We also outsource aspects of our manufacturing to
contract manufacturers as a means of reducing our costs of production, and to
provide us with greater flexibility in our production capacity.
In recent years we have realized the benefit of reduced unit costs for our
dial-up modems. A portion of the cost reduction realized in our financial
statements has been derived from purchase discount programs with our chipset
suppliers. From the first quarter of 2002 through the fourth quarter of 2004, we
realized significant benefits as a result of our volume purchases under these
programs. These initial programs and their financial benefits expired during
2004, and in late 2004 we negotiated the award of free chipsets relating to the
purchase of some types of modem chipsets for 2005 if we achieve certain purchase
targets.
Over the past several years our net sales have declined. In response to the
declining sales volume, we have engaged in cost-cutting initiatives which have
included reducing staffing and overhead costs. On December 31, 2001, our total
headcount of full-time employees, including temporary workers, was 215, which
was reduced to 185, 159, and 154 at year-end 2002, 2003, and 2004, respectively.
As of March 31, 2005, our employee headcount was 143.
During 2003 and 2004 the downward pressure on retail pricing for dial-up
modems moderated. However, the competition for broadband modem sales continues
to be intense, characterized by continuing price pressures. As a result, we
generally are able to realize higher margins on our dial-up modems than with our
broadband modems.
In the first quarter of 2005 and the fourth quarter of 2004, respectively,
our net sales for the quarter were down 17.4% and 8.4% over the same quarter in
the prior year. The main reason for this decrease was the decline in dial-up
modem sales which more than offset our growth in DSL modem sales. While we
remain optimistic about continued growth of the DSL modem market, our DSL sales
are currently concentrated with a small number of customers, and this reduces
the predictability of our results. We are continuing our efforts to expand our
DSL customer base and to use our strength in DSL to expand our DSL product line
and enter new markets. One new product introduced in September of 2004
incorporates VoIP capability into a DSL modem. We also introduced our own VoIP
service called Global Village(TM) to offer free IP-to-IP service and low-cost
calling to virtually anyone worldwide.
Our cash and cash equivalents balance at March 31, 2005 was $7.6 million,
down from $9.4 million at December 31, 2004. Most of this change resulted from
our $1.3 million operating loss and a $1.2 million increase in inventory due to
the re-scheduling of customer orders into the second quarter of 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following is a discussion of what we view as our more significant
accounting policies and estimates. As described below, management judgments and
estimates must be made and used in connection with the preparation of our
consolidated financial statements. Where noted, material differences could
result in the amount and timing of our net sales, costs, and expenses for any
period if we made different judgments or used different estimates.
REVENUE (NET SALES) RECOGNITION. We primarily sell hardware products to our
customers. The hardware products include dial-up modems, DSL modems, cable
modems, embedded modems, ISDN modems, telephone dialers, and wireless and wired
networking equipment. We earn a small amount of royalty that is included in our
net sales, primarily from internet service providers. We generally do not sell
software. We began selling services in 2004. We introduced our Global Village
VoIP service in late 2004, but sales of those services to date have not been
material.
We derive our net sales primarily from the sales of hardware products to
three types of customers:
o computer peripherals retailers,
o computer product distributors, and
o original equipment manufacturers (OEMs).
We recognize hardware net sales for all three types of customers at the
point when the customers take legal ownership of the delivered products. Legal
ownership passes from Zoom to the customer based on the contractual FOB point
specified in signed contracts and purchase orders, which are both used
extensively. Many of our customer contracts or purchase orders specify FOB
destination. We verify the delivery date on all significant FOB destination
shipments made during the last 10 business days of each quarter.
Our net sales of hardware are reduced by certain events which are
characteristic of the sales of hardware to retailers of computer peripherals.
These events are product returns, certain sales and marketing incentives, price
protection refunds, and consumer and in-store mail-in rebates. Each of these is
accounted for as a reduction of net sales based on detailed management
estimates, which are reconciled to actual customer or end-consumer credits on a
monthly or quarterly basis.
Our VoIP service revenues to date were recorded as the end-user-customer
consumed billable VoIP services. The end-user-customer became a service customer
by electing to sign up for the Global Village billable service on the Internet.
Zoom recorded revenue either as billable services were consumed or as a monthly
flat-fee service was billed.
Product Returns. Products are returned by retail stores and distributors
for inventory balancing, contractual stock rotation privileges, and warranty
repair or replacements. We estimate the sales and cost value of expected future
product returns of previously sold products. Our estimates for product returns
are based on recent historical trends plus estimates for returns prompted by,
among other things, new product introductions, announced stock rotations and
announced customer store closings, etc. Management reviews historical returns,
current economic trends, and changes in customer demand and acceptance of our
products when estimating sales return allowances. The estimate for future
returns is recorded as a reserve against accounts receivable, a reduction of net
sales, and the corresponding change to inventory and cost of sales. The
relationship of quarterly physical product returns to quarterly product sales
remained relatively stable for many years, but has been declining from a high of
10.6% to a low of 5.4% in the past two years as retail sales as a percent of
total sales have declined.
Price Protection Refunds. We have a policy of offering price protection to
certain of our retailer and distributor customers for some or all their
inventory. Under the price protection policies, when we reduce our prices for a
product, the customer receives a credit for the difference between the original
purchase price and our reduced price for their unsold inventory of that product.
Our estimates for price protection refunds are based on a detailed understanding
and tracking by customer and by sales program. Estimated price protection
refunds are recorded in the same period as the announcement of a pricing change.
Information from customer inventory-on-hand reports or from direct
communications with the customers is used to estimate the refund, which is
recorded as a reduction of net sales and a reserve against accounts receivable.
Reductions in our net sales due to price protection were $.7 million in 2002,
$.2 million in 2003, and $.1 million in 2004. In the quarter ended March 31,
2005, Zoom's recorded price protection was $.05 million.
Sales and Marketing Incentives. Many of our retailer customers require
sales and marketing support funding, usually set as a percentage of our sales in
their stores. The incentives were primarily reported as reductions in our net
sales and were $1.7 million in 2002, $1.5 million in 2003, and $1.3 million in
2004. In the quarter ended March 31, 2005, Zoom's net sales were reduced by $.3
million due to sales and marketing support funding. The declining trend was
primarily due to lower retailer sales.
Consumer Mail-In and In-Store Rebates and Store Rebates. Our estimates for
consumer mail-in rebates are based on a detailed understanding and tracking by
customer and sales program, supported by actual rebate claims processed by the
rebate redemption centers plus an accrual for an estimated lag in processing at
the redemption centers. Our estimates for store rebates are comprised of actual
credit requests from the eligible customers. The estimate for mail-in and store
rebates is recorded as a reserve against accounts receivable and a reduction of
net sales in the same period that the rebate obligation was triggered.
Reductions in our net sales due to the consumer rebates were $1.6 million in
2002, $2.1 million in 2003, and $1.4 million in 2004. In the quarter ended March
31, 2005, Zoom's recorded consumer and store rebates were $.3 million. The
declining trend was primarily due to lower retailer sales.
To ensure that the sales, discounts, and marketing incentives are recorded
in the proper period, we perform extensive tracking and documenting by customer,
by period, and by type of marketing event. This tracking includes reconciliation
to the accounts receivable records for deductions taken by our customers for
these discounts and incentives.
ACCOUNTS RECEIVABLE VALUATION. We establish accounts receivable reserves
equal to the above-discussed net sales adjustments for estimates of product
returns, price protection refunds, and consumer and store rebates. These
reserves are drawn down as actual credits are issued to the customer's accounts.
Over the past several years, our bad-debt write-offs have not been significant.
INVENTORY VALUATION AND COST OF GOODS SOLD. Inventory is valued on a
standard cost basis where the material standards are periodically updated for
current material pricing. Reserves for obsolete inventory are established by
management based on usability reviews performed each quarter. Our reserves
against the inventory of a particular product range from 0% to 100%, based on
management's estimate of the probability that the material will not be consumed
or that it will be sold below cost. Our valuation process is to compare our cost
to the selling prices each quarter, and if the selling price of a product is
less than the "if completed" cost of our inventory, we write-down the inventory
on a "lower of cost or market" basis. In 2002 and 2003, we recorded charges
against inventory of $.7 million and $.3 million respectively as a result of
lower of cost or market valuation issues. No charges against inventory were
recorded in 2004 or the quarter ended March 31, 2005.
During the last three years we benefited from various component supply
arrangements that provided us with free products based on the amount of goods we
purchased from the supplier. The favorable impact to our statement of operations
was recognized as the products employing the acquired components were sold. A
new supply arrangement for 2005, with free products to be earned on purchases,
received similar accounting treatment in the quarter ended March 31, 2005.
VALUATION AND IMPAIRMENT OF DEFERRED TAX ASSETS. As part of the process of
preparing our consolidated financial statements we are required to estimate our
income tax expense and deferred income tax position. This process involves the
estimation of our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision
for income taxes and any valuation allowance recorded against our net deferred
tax assets. We have recorded a 100% valuation allowance against our deferred tax
assets. It is management's estimate that, after considering all the available
objective evidence, historical and prospective, with greater weight given to
historical evidence, it is more likely than not that these assets will not be
realized. If we establish a record of continuing profitability, at some point we
will be required to reverse the valuation allowance and restore the deferred
asset value to the balance sheet, recording an equal income tax benefit which
will increase net income in that period(s).
VALUATION OF INVESTMENT IN AFFILIATES. We have a minority interest in a
privately held software company, InterMute, Inc., which we have been accounting
for under the equity method of accounting. Under the equity method of
accounting, our investment is increased or decreased, not below zero, based upon
our proportionate share of the net earnings or losses of InterMute. We made our
original investment in 1999, at the time of the company's formation, and have
subsequently made additional investments. As a result of the losses incurred by
InterMute subsequent to our investments, our investment balance was reduced to
zero during 2002. We discontinued applying the equity method when the investment
was reduced to zero and did not provide for additional losses, as we have not
guaranteed obligations of the investee and are not committed to provide further
financial support. On May 10, 2005, Trend Micro Inc. announced it has entered
into an agreement to acquire InterMute, subject to completion of due diligence.
If this transaction is completed, the Company expects that it would recognize a
gain on the transaction based upon the consideration received by Zoom as a
stockholder of InterMute.
Results of Operations
SUMMARY. Net sales were $6.4 million for our first quarter ended March 31,
2005, down 17.4% from $7.8 million in the first quarter of 2004. We had a net
loss of $1.3 million for the first quarter of 2005, compared to a net loss of
$0.6 million in the first quarter of 2004. Loss per diluted share was $0.15 for
the first quarter of 2005 compared to a loss per diluted share of $.07 for the
first quarter of 2004.
NET SALES. Our net sales for the first quarter of 2005 decreased 17.4% from
the first quarter of 2004, primarily due to a 44% decrease in dial-up modem
sales, partially offset by a 51% increase in DSL modem sales. Dial-up modem net
sales declined to $2.6 million in the first quarter of 2005 compared to $4.7
million in the first quarter of 2004, primarily due to a decrease of both
dial-up modem unit sales and, to a lesser extent, lower dial-up modem average
selling prices, primarily resulting from the continued decline of the dial-up
modem after-market. DSL modem net sales increased to $3.4 million in the first
quarter of 2005 compared to $2.2 million in the first quarter of 2004, primarily
due to increased unit net sales of DSL modems in Turkey and other countries. The
first quarter of 2005 and the fourth quarter of 2004 were the first quarters in
which our DSL modem net sales exceeded our dial-up modem net sales. However, net
sales of DSL modems in the first quarter of 2005 compared to the fourth quarter
of 2004 declined by $.7 million. Net sales in our other product sales
categories, which include cable modems, cameras, ISDN modems, telephone dialers,
and wireless networking equipment declined $.5 million, or 52% from $.9 million
from the first quarter of 2004 to $.4 million in the first quarter of 2005,
primarily due to decreased sales emphasis on these products.
Our net sales in North America were $2.6 million in the first quarter of
2005, a decline from $3.8 million in the first quarter of 2004. Our
international net sales in Turkey were $1.5 million in the first quarter of
2005, an increase from $0.7 million in the first quarter of 2004. Our
international net sales in the U.K. were $1.3 million in the first quarter of
2005, a decline from $2.5 million in the first quarter of 2004. Our
international net sales other than Turkey and the U.K. were $1.0 million in the
first quarter of 2005, an increase from $0.9 million in the first quarter of
2004. These changes reflect our declining sales of dial-up modems in North
America and the U.K. and our stronger DSL sales in Turkey and other
international markets.
In the first quarter ended March 31, 2005 the Company's largest customer,
accounting for 24% of total net sales, was Olusum, its distributor in Turkey.
Because of our significant customer concentration, our net sales and operating
income could fluctuate significantly due to changes in political or economic
conditions or the loss, reduction of business, or less favorable terms for any
of our significant customers.
GROSS PROFIT. Our total gross profit was $1.5 million in the first quarter
of 2005, a decline from $2.3 million in the first quarter of 2004. Our gross
margin percent of net sales decreased to 23.8% in the first quarter of 2005 from
29.7% in the first quarter of 2004. Gross margins were lower primarily because
of the continuing product sales shift away from dial-up modems, our highest
margin product category, and because of lower absorption of manufacturing
overhead due to lower sales.
OPERATING EXPENSE. Our operating expense decreased by $0.2 million to $2.7
million or 41.8% of net sales in the first quarter of 2005 from $2.9 million or
36.7% of net sales in the first quarter of 2004. The decrease of $0.2 million
was primarily due to lower personnel costs in selling and general and
administrative expenses, slightly offset by higher personnel costs in research
and development.
Selling Expense. Selling expense decreased $.1 million to $1.1 million or
17.4% of net sales in the first quarter of 2005 from $1.2 million or 15.7% of
net sales in the first quarter of 2004. Selling expense was lower primarily
because of lower personnel and related costs resulting from employee headcount
reductions, partially offset by higher distribution and outbound product
delivery expenses.
General and Administrative Expense. General and administrative expense
decreased $.1 million to $.8 million, or 12.8% of net sales in the first quarter
of 2005 from $1.0 million, or 12.2% of net sales, in the first quarter of 2004.
General and administrative expense decreases included lower personnel costs,
professional fees, and depreciation expense.
Research and development expense increased $.1 million to $0.8 million or
11.6% of net sales in the first quarter of 2005 from $0.7 million or 8.7% of net
sales in the first quarter of 2004. Research and development costs increased
primarily as a result of higher personnel costs and product testing fees.
Development and support continues on all of our major product lines with
particular emphasis on VoIP hardware, the Global Village phone services, and DSL
modems.
OTHER INCOME (EXPENSE). Other income (expense), net was a net expense of
$.1 million in the first quarter of 2005, compared to a net expense of $.01
million in the first quarter of 2004 primarily due to higher realized foreign
exchange losses.
INCOME TAX EXPENSE (BENEFIT). We did not record any tax expense in the
first quarter of 2005 or the first quarter of 2004. The net deferred tax asset
balance at March 31, 2005 is zero. This accounting treatment is described in
further detail under the caption CRITICAL ACCOUNTING POLICIES AND ESTIMATES
above.
Liquidity and Capital Resources
On March 31, 2005 we had working capital of $8.8 million, including $7.6
million in cash and cash equivalents. In the first three months of 2005,
operating activities used $1.9 million in cash. Our net loss in the first three
months of 2005 was $1.3 million. Uses of cash from operations included an
increase of inventory of $1.2 million and a reduction of accounts payable and
accrued expenses of $.3 million. The primary reason for the inventory increase
was the rescheduling of some customers' orders to the second quarter of 2005 and
the increase of work-in-process for our new Wireless-G DSL modem. Sources of
cash from operations included a decrease of accounts receivable, consistent with
the sales decline, of $.6 million and a decrease of prepaid expenses of $.2
million.
In the first three months of 2005 financing activities provided $.05
million of cash, due primarily to the receipt of $.1 million cash from the
exercise of employee stock options, partially offset by $.05 million in cash for
monthly principal payments of our $6.0 million mortgage. Our mortgage is a
5-year balloon mortgage, payable in full in January, 2006, that is amortized on
a 20-year basis. The interest rate is adjusted annually in January of each year
based on the Federal Home Loan Bank rate plus 2.5% per annum. In 2004 the
interest rate was 3.99%. As of January 10, 2005 the rate of interest changed to
5.80%. Recently we renegotiated the rate to 5.0% effective February 10, 2005. As
of March 31, 2005, $5.1 million was outstanding on this loan, which will be due
and payable on January 10, 2006. Because the mortgage is due within twelve
months, the mortgage loan has been re-characterized from a long-term to a
current liability. Our working capital as of March 31, 2005 has been reduced by
$4.9 million due to the re-characterization of the mortgage loan. Based upon
recent indications of interest from potential lenders, we believe we will be
able to refinance the mortgage or, in the alternative, sell our buildings for a
purchase price significantly in excess of the outstanding amounts under the
loan.
On March 16, 2005 we entered into a Loan and Security Agreement with
Silicon Valley Bank that provides for a revolving line of credit of up to $2
million. The revolving line of credit can be used to (i) borrow under revolving
loans for working capital and general corporate purposes, (ii) issue letters of
credit, (iii) enter into foreign exchange forward contracts, and (iv) support
certain cash management services. Revolving loans will bear interest at a
floating rate of interest equal to Silicon Valley Bank's prime rate plus 1%. The
rate at March 31, 2005 was 6.75%. This interest rate will be reduced to Silicon
Valley Bank's prime rate plus .5% if we record two consecutive quarters of
combined profitability. The revolving line of credit terminates and all
outstanding obligations under the Loan and Security agreement become due on
March 15, 2006.
The revolving loans under the Loan and Security Agreement are secured by a
first priority lien on substantially all of our assets, excluding intellectual
property and real estate. We guaranteed the obligations of Zoom Telephonics
under the revolving line of credit and pledged all of the stock of Zoom
Telephonics in support of our guarantee. The Loan and Security Agreement
requires that we maintain a minimum adjusted quick ratio and a minimum net
worth. In addition, we are required to obtain Silicon Valley Bank's prior
written consent to among other things, dispose of assets, make acquisitions, be
acquired, incur indebtedness, grant liens, make investments, pay dividends, or
repurchase stock. This consent may not be unreasonably withheld.
The Loan and Security Agreement contains events of default that include
among other things, non-payment of principal, interest or fees, violation of
covenants, inaccuracy of representations and warranties, cross default to
certain other indebtedness, bankruptcy and insolvency events, change of control
and material judgments. Upon occurrence of an event of default, Silicon Valley
Bank is entitled to, among other things, accelerate all of our obligations under
the Loan and Security Agreement and sell our assets to satisfy our obligations
under the Loan and Security Agreement. As of March 31, 2005, our availability
under the revolving line of credit was $2 million. We have no outstanding
borrowings and are in compliance with the covenants under the revolving line of
credit as of March 31, 2005.
On May 10, 2005, Trend Micro Inc. announced it has entered into an
agreement to acquire InterMute, subject to completion of due diligence. Zoom is
a stockholder of InterMute and expects that, if this transaction is completed,
it would receive approximately $3 million as an initial cash payment, subject to
closing adjustments, representing Zoom's pro rata share of the initial
acquisition consideration. Zoom may also receive additional payments of up to
approximately $3 million over approximately 18 months following the completion
of the transaction if certain conditions and performance targets are met.
To conserve cash and manage our liquidity, we continue to implement cost
cutting initiatives including the reduction of employee headcount and overhead
costs. The employee headcount was 185 at December 31, 2004 and has been reduced
to 143 at March 31, 2005. We plan to continue to assess our cost structure as it
relates to our revenues and cash position in 2005, and we may make further
reductions if the actions are deemed necessary.
Management believes we have sufficient resources to fund our normal
operations over the next 12 months, through March 31, 2006. However, if we are
unable to increase our revenues, reduce or otherwise adequately control our
expenses, or raise capital, our longer-term ability to continue as a going
concern and achieve our intended business objectives could be adversely
affected. Moreover, our liquidity could be significantly impaired if we are not
able either to refinance the mortgage or sell the buildings on or before the
maturity date of the mortgage in January 2006. See "Risk Factors" below, for
further information with respect to events and uncertainties that could harm our
business, operating results, and financial condition.
Commitments
During the three months ended March 31, 2005, there were no material
changes to our capital commitments and contractual obligations from those
disclosed in the Form 10-K for the year ended December 31, 2004.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995.
Some of the statements contained in this report are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties and other factors which may cause our or
our industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to statements regarding: Zoom's plans, expectations and
intentions, including statements relating to Zoom's prospects and plans relating
to sales of our dial-up, cable and DSL modems and VoIP products; the anticipated
development and timing of new product introductions; the decline of the dial-up
modem market; the level of demand for Zoom's products; Zoom's ability to obtain
debt or equity financing; the anticipated impact of changes in the accounting
treatment of stock options; and Zoom's financial condition or results of
operations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties you should not place undue
reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking statements are
based. Factors that could cause or contribute to differences in our future
financial results include those discussed in the risk factors set forth below as
well as those discussed elsewhere in this report and in our filings with the
Securities and Exchange Commission. We qualify all of our forward-looking
statements by these cautionary statements.
RISK FACTORS
This report contains forward-looking statements that involve risks and
uncertainties, such as statements of our objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applicable to all forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this report.
WE MAY CONTINUE TO INCUR NET LOSSES IF WE ARE UNABLE TO INCREASE SALES OF OUR
BROADBAND MODEMS.
Our net sales have been declining primarily due to the decline in the
dial-up modem market, decreases in average selling prices of dial-up modems, and
the trend toward faster connection speeds and broadband access products. Despite
numerous cost reductions over the last few years, we have continued to incur
significant net losses primarily due to our continuous decline in net sales from
dial-up modems. We believe that the future of our business is largely dependent
on the success of our broadband modems and other products. Although we believe
that we have sufficient resources to fund our planned operations over the next
year, if we fail to increase our net sales of our broadband modems and other
products, our longer-term ability to stay in business and to achieve our
intended business objectives could be adversely effected. Our continuing losses
could also adversely affect our ability to fund the growth of our business
should our strategies prove successful.
OUR LIQUIDITY MAY BE SIGNIFICANTLY IMPAIRED IF WE ARE NOT ABLE EITHER TO
REFINANCE OUR MORTGAGE OR SELL OUR BUILDINGS PRIOR TO THE MATURITY OF OUR
MORTGAGE IN JANUARY 2006.
Our mortgage loan on the two buildings constituting our headquarters
facility, of which $5.1 million was outstanding on March 31, 2005, will be due
and payable on January 10, 2006. We cannot assure that we will be able to
refinance the mortgage or, in the alternative, sell our buildings on favorable
terms, if at all. If we were not able to obtain such financing or complete such
sale, our liquidity could be significantly impaired.
TO STAY IN BUSINESS WE MAY REQUIRE FUTURE ADDITIONAL FUNDING WHICH WE MAY BE
UNABLE TO OBTAIN ON FAVORABLE TERMS, IF AT ALL.
In addition to obtaining funds to refinance or repay our mortgage, over the
next twelve months, we may require additional financing for our operations
either to fund losses beyond those we anticipate or to fund growth in our
inventory and accounts receivable. Additional financing may not be available to
us on a timely basis if at all, or on terms acceptable to us. If we fail to
obtain acceptable additional financing when needed, we may be required to
further reduce planned expenditures or forego business opportunities, which
could reduce our net sales, increase our losses, and harm our business.
Moreover, additional equity financing could dilute the per share value of our
common stock held by current shareholders, while additional debt financing could
restrict our ability to make capital expenditures or incur additional
indebtedness, all of which would impede our ability to succeed.
OUR NET SALES AND OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BECAUSE OF A
DECLINE IN AVERAGE SELLING PRICES FOR OUR DIAL-UP MODEMS AND BECAUSE OF THE
DECLINE IN THE RETAIL MARKET FOR DIAL-UP MODEMS.
The dial-up modem industry has been characterized by declining average
selling prices and a declining retail market. The decline in average selling
prices is due to a number of factors, including technological change, lower
component costs, and competition. The decline in the size of the retail market
for dial-up modems is primarily due to the inclusion of dial-up modems as a
standard feature contained in new PCs, and the advent of broadband products. Due
to these factors and others, one of our significant retail customers has
notified us that they want to purchase on a consignment basis for their dial-up
modem category. That customer has also indicated that they plan to reduce the
number of brands of dial-up modems they sell, and that they cannot assure that
they will continue to sell our products. Less advantageous terms of sales,
decreasing average selling prices and reduced demand for our dial-up modems have
resulted and may in the future result in decreased net sales for dial-up modems.
If we fail to replace declining revenue from the sales of dial-up modems with
the sales of our other products, including our broadband modems, our business
and results of operation will be harmed.
OUR RELIANCE ON A LIMITED NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR
REVENUES COULD MATERIALLY HARM OUR BUSINESS AND PROSPECTS.
Relatively few customers have accounted for a substantial portion of our
net sales. In 2004, our net sales to each of three companies - Olusum (our
distributor in Turkey), the Dixons Group (Dixons, Currys, PC World, and PC
City), and Staples - constituted over 10% of our net sales; and together these
three customers accounted for 35% of our total net sales. In the first quarter
of 2005, our net sales to our top three customers accounted for 42% of our total
net sales, with our sales to our Turkish distributor accounting for 24% of our
total net sales. Our customers generally do not enter into long-term agreements
obligating them to purchase our products. We may not continue to receive
significant revenues from any of these or from other large customers. A
reduction or delay in orders from any of our significant customers, or a delay
or default in payment by any significant customer could materially harm our
business and prospects.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER OF RISKS INHERENT IN
INTERNATIONAL ACTIVITIES.
Our sales outside of North America continue to represent an increasingly
significant portion of our sales. Sales outside of North America have increased
from 38% of net sales in 2001 to approximately 55% of our net sales in 2004,
including 27% in the UK and 16% in Turkey. In the first quarter of 2005, our
sales outside of North America accounted for 60% of our total net sales,
including 24% in Turkey and 20% in the U.K. Currently our operations are
significantly dependent on our international operations, particularly sales of
our DSL modems, and may be materially and adversely affected by many factors
including:
o international regulatory and communications requirements and policy
changes;
o favoritism toward local suppliers;
o delays in the rollout of broadband services by cable and DSL service
providers;
o local language and technical support requirements;
o difficulties in inventory management, accounts receivable collection and
the management of distributors or representatives;
o difficulties in staffing and managing foreign operations;
o political and economic changes and disruptions;
o governmental currency controls;
o shipping costs;
o currency exchange rate fluctuations; and
o tariff regulations.
We anticipate that our international sales will continue to account for a
significant percentage of our net sales. If foreign markets for our current and
future products develop more slowly than currently expected, our sales and our
future results of operations may be harmed.
CHANGES IN THE ACCOUNTING TREATMENT OF STOCK OPTIONS MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
In December 2004 the FASB issued SFAS 123R, which is a revision of SFAS
123. SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values and does not permit pro forma disclosure as an alternative to
financial statement recognition. SFAS 123R will be effective for us beginning in
the first quarter of 2006. The adoption of the SFAS 123R fair value method may
have a significant adverse impact on our reported results of operations because
the stock-based compensation expense will be charged directly against our
reported earnings. The impact of our adoption of SFAS 123R cannot be predicted
at this time because that will depend on the future fair values and number of
share-based payments granted in the future. However, had we adopted SFAS 123 in
prior periods, the magnitude of the impact of that standard would have
approximated the impact of SFAS 123 assuming the application of the
Black-Scholes model as described in the disclosure of pro forma net loss and pro
forma loss per share in note 1(b) of our notes to consolidated financial
statements.
WE BELIEVE THAT OUR FUTURE SUCCESS WILL DEPEND IN LARGE PART ON OUR ABILITY TO
MORE SUCCESSFULLY PENETRATE THE BROADBAND MODEM MARKETS, WHICH HAVE BEEN
CHALLENGING MARKETS, WITH SIGNIFICANT BARRIERS TO ENTRY.
With the shrinking of the dial-up modem market, we believe that our future
success will depend in large part on our ability to more successfully penetrate
the broadband modem markets, DSL and cable, and the VoIP market. These markets
have been challenging markets, with significant barriers to entry that have
adversely affected our sales to these markets. Although some cable and DSL
modems are sold at retail, the high volume purchasers of these modems are
concentrated in a relatively few large cable, telecommunications, and Internet
service providers which offer broadband modem services to their customers. These
customers, particularly cable services providers, also have extensive and varied
approval processes for modems to be approved for use on their network. These
approvals are expensive, time consuming, and continue to evolve. Successfully
penetrating the broadband modem market therefore presents a number of challenges
including:
o the current limited retail market for broadband modems;
o the relatively small number of cable, telecommunications and Internet
service provider customers that make up a substantial part of the market
for broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive, uncertain and varied approval process of the
various cable service providers; and o the strong relationships with cable
service providers enjoyed by incumbent cable equipment providers like
Motorola and Scientific Atlanta.
Our sales of broadband products have been adversely affected by all of
these factors. Sales of our broadband products in European countries have
fluctuated and may continue to fluctuate due to approvals and delays in the
deployment by service providers of cable and DSL service in these countries. We
cannot assure that we will be able to successfully penetrate these markets.
OUR FAILURE TO MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY
STANDARDS WOULD ADVERSELY IMPACT OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES.
The market for PC communications products and high-speed broadband access
products and services is characterized by aggressive pricing practices,
continually changing customer demand patterns, rapid technological advances,
emerging industry standards and short product life cycles. Some of our product
and service developments and enhancements have taken longer than planned and
have delayed the availability of our products and services, which adversely
affected our sales and profitability in the past. Any significant delays in the
future may adversely impact our ability to sell our products and services, and
our results of operations and financial condition may be adversely affected. Our
future success will depend in large part upon our ability to:
o identify and respond to emerging technological trends and industry
standards in the market;
o develop and maintain competitive products that meet changing customer
demands;
o enhance our products by adding innovative features that differentiate our
products from those of our competitors;
o bring products to market on a timely basis;
o introduce products that have competitive prices;
o manage our product transitions, inventory levels and manufacturing
processes efficiently;
o respond effectively to new technological changes or new product
announcements by others; and
o meet changing industry standards.
Our product cycles tend to be short, and we may incur significant
non-recoverable expenses or devote significant resources to sales that do not
occur when anticipated. Therefore, the resources we devote to product
development, sales and marketing may not generate material net sales for us. In
addition, short product cycles have resulted in and may in the future result in
excess and obsolete inventory, which has had and may in the future have an
adverse affect on our results of operations. In an effort to develop innovative
products and technology, we have incurred and may in the future incur
substantial development, sales, marketing, and inventory costs. If we are unable
to recover these costs, our financial condition and operating results could be
adversely affected. In addition, if we sell our products at reduced prices in
anticipation of cost reductions and we still have higher cost products in
inventory, our business would be harmed and our results of operations and
financial condition would be adversely affected.
WE HAVE BEEN SELLING OUR VOIP SERVICE FOR A LIMITED PERIOD AND THERE IS NO
GUARANTEE THAT THIS SERVICE WILL GAIN BROAD MARKET ACCEPTANCE.
We have only recently introduced our VoIP service. Given our limited
history with offering this service, there are many difficulties that we may
encounter, including technical hurdles, multiple and changing regulations and
industry standards, and other problems that we may not anticipate. To date, we
have not generated significant revenue from the sale of our VoIP products and
services, and there is no guarantee that we will be successful in generating
significant revenues.
WE MAY BE SUBJECT TO PRODUCT RETURNS RESULTING FROM DEFECTS, OR FROM
OVERSTOCKING OF OUR PRODUCTS. PRODUCT RETURNS COULD RESULT IN THE FAILURE TO
ATTAIN MARKET ACCEPTANCE OF OUR PRODUCTS, WHICH WOULD HARM OUR BUSINESS.
If our products contain undetected defects, errors, or failures, we could
face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, either of which would reduce our sales and
harm our business. We are also exposed to the risk of product returns from our
customers as a result of contractual stock rotation privileges and our practice
of assisting some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead to higher than normal returns.
OUR FAILURE TO EFFECTIVELY MANAGE OUR INVENTORY LEVELS COULD MATERIALLY AND
ADVERSELY AFFECT OUR LIQUIDITY AND HARM OUR BUSINESS.
Due to rapid technological change and changing markets we are required to
manage our inventory levels carefully to both meet customer expectations
regarding delivery times and to limit our excess inventory exposure. In the
first quarter of 2005 our inventory levels increased due to the rescheduling of
customer orders into the second quarter of 2005 and resulting decreased sales.
In the event this trend continues or we otherwise fail to effectively manage our
inventory our liquidity may be adversely affected and we may face increased risk
of inventory obsolescence, a decline in market value of the inventory, or losses
from theft, fire, or other casualty.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
DEPEND ON THIRD PARTY MANUFACTURERS. IF THESE THIRD PARTY MANUFACTURERS FAIL TO
PRODUCE QUALITY PRODUCTS IN A TIMELY MANNER, OUR ABILITY TO FULFILL OUR CUSTOMER
ORDERS WOULD BE ADVERSELY IMPACTED.
We use contract manufacturers to partially manufacture our products. We use
these third party manufacturers to help ensure low costs, rapid market entry,
and reliability. Any manufacturing disruption could impair our ability to
fulfill orders, and failure to fulfill orders would adversely affect our sales.
Although we currently use five contract manufacturers for the bulk of our
purchases, in some cases a given product is only provided by one of these
companies. The loss of the services of any of our significant third party
manufacturers or a material adverse change in the business of or our
relationships with any of these manufacturers could harm our business. Since
third parties manufacture our products and we expect this to continue in the
future, our success will depend, in part, on the ability of third parties to
manufacture our products cost effectively and in sufficient quantities to meet
our customer demand.
We are subject to the following risks because of our reliance on third
party manufacturers:
o reduced management and control of component purchases;
o reduced control over delivery schedules, quality assurance and
manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices; or
o interruption of supplies from assemblers as a result of a fire, natural
calamity, strike or other significant event; and misappropriation of our
intellectual property.
WE MAY BE UNABLE TO PRODUCE SUFFICIENT QUANTITIES OF OUR PRODUCTS BECAUSE WE
OBTAIN KEY COMPONENTS FROM, AND DEPEND ON, SOLE OR LIMITED SOURCE SUPPLIERS.
We obtain certain key parts, components, and equipment from sole or limited
sources of supply. For example, we purchase most of our dial-up and broadband
modem chipsets from Conexant Systems, Agere Systems, and Analog Devices.
Integrated circuit product areas covered by one of these companies include
dial-up modems, DSL modems, cable modems, networking, routers, and gateways. In
the past, we have experienced delays in receiving shipments of modem chipsets
from our sole source suppliers. We may experience similar delays in the future.
In addition, some products may have other components that are available from
only one source. We believe the market for chipsets is currently experiencing
shortages and there are increased lead times for some chipsets. If we are unable
to obtain a sufficient supply of components from our current sources, we could
experience difficulties in obtaining alternative sources or in altering product
designs to use alternative components. Resulting delays or reductions in product
shipments could damage relationships with our customers and our customers could
decide to purchase products from our competitors. Inability to meet our
customers' demand or a decision by one or more of our customers to purchase
products from our competitors could harm our operating results.
THE MARKET FOR HIGH-SPEED COMMUNICATIONS PRODUCTS AND SERVICES HAS MANY
COMPETING TECHNOLOGIES AND, AS A RESULT, THE DEMAND FOR OUR PRODUCTS AND
SERVICES IS UNCERTAIN.
The market for high-speed communications products and services has a number
of competing technologies. For instance, Internet access can be achieved by:
o using a standard telephone line and appropriate service for dial-up modems,
o ISDN modems, or DSL modems, possibly in combination;
o using a cable modem with a cable TV line and cable modem service;
o using a router and some type of modem to service the computers connected to
a local area network; or
o other approaches, including wireless links to the Internet.
Although we currently sell products that include these technologies, the
market for high-speed communication products and services is fragmented and
evolving. The introduction of new products by competitors, market acceptance of
products based on new or alternative technologies, or the emergence of new
industry standards could render and have in the past rendered our products less
competitive or obsolete. If any of these events occur, we may be unable to
sustain or grow our business. Industry analysts believe that the market for our
dial-up modems will continue to decline. If we are unable to increase demand for
and sales of our broadband modems, we may be unable to sustain or grow our
business.
WE FACE SIGNIFICANT COMPETITION, WHICH COULD RESULT IN DECREASED DEMAND FOR OUR
PRODUCTS OR SERVICES.
We may be unable to compete successfully. A number of companies have
developed, or are expected to develop, products that compete or will compete
with our products. Furthermore, many of our current and potential competitors
have 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 EXISTING REGULATIONS OR ADOPTION OF NEW REGULATIONS AFFECTING THE
INTERNET COULD INCREASE THE COST OF OUR PRODUCTS OR OTHERWISE AFFECT OUR ABILITY
TO OFFER OUR PRODUCTS AND SERVICES OVER THE INTERNET.
Congress has adopted legislation that regulates certain aspects of the
Internet, including online content, user privacy, taxation, liability for
third-party activities and jurisdiction. In addition, a number of initiatives
pending in Congress and state legislatures would prohibit or restrict
advertising or sale of certain products and services on the Internet, which may
have the effect of raising the cost of doing business on the Internet generally.
Federal, state, local and foreign governmental organizations are considering
other legislative and regulatory proposals that would regulate the Internet. We
cannot predict whether new taxes will be imposed on our services, and depending
on the type of taxes imposed, whether and how our services would be affected
thereafter. Increased regulation of the Internet may decrease its growth and
hinder technological development, which may negatively impact the cost of doing
business via the Internet or otherwise harm our business.
NEW REGULATIONS TO REDUCE THE USE OF HAZARDOUS MATERIALS IN PRODUCTS SCHEDULED
TO BE IMPLEMENTED IN 2006 COULD INCREASE OUR MANUFACTURING COSTS AND HARM OUR
BUSINESS.
The European Union and the US have announced plans to reduce the use of
hazardous materials, such as lead, in electronic equipment. The implementation
of these new requirements, currently scheduled to begin in 2006, would require
us and other electronics companies to change or discontinue many products. We
believe that our transition process to comply with these new requirements may be
difficult, and may negatively impact our product costs. In addition, we may
incur additional costs involved with the disposal of inventory or returned
products that do not meet the new requirements, which could further harm our
business.
CHANGES IN CURRENT OR FUTURE LAWS OR GOVERNMENTAL REGULATIONS AND INDUSTRY
STANDARDS THAT NEGATIVELY IMPACT OUR PRODUCTS, SERVICES AND TECHNOLOGIES COULD
HARM OUR BUSINESS.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire United States communications industry including our
customers and their products and services that incorporate our products. Our
products are also required to meet the regulatory requirements of other
countries throughout the world where our products and services are sold.
Obtaining government regulatory approvals is time-consuming and very costly. In
the past, we have encountered delays in the introduction of our products, such
as our cable modems, as a result of government certifications. We may face
further delays if we are unable to comply with governmental regulations. Delays
caused by the time it takes to comply with regulatory requirements may result in
cancellations or postponements of product orders or purchases by our customers,
which would harm our business.
In addition to reliability and quality standards, the market acceptance of
our VoIP products and services is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. Standards are continuously being modified and replaced. As
standards evolve, we may be required to modify our existing products or develop
and support new versions of our products. The failure of our products to comply,
or delays in compliance, with various existing and evolving industry standards
could delay or interrupt volume production of our products, which could harm our
business.
FUTURE LEGISLATION OR REGULATION OF INTERNET TELEPHONY COULD RESTRICT OUR VOIP
BUSINESS, PREVENT US FROM OFFERING SERVICE OR INCREASE OUR COST OF DOING
BUSINESS.
Our ability to provide VoIP communications services on the terms we
currently provide arise in large part from the fact VoIP services are not
currently subject to the same regulation as traditional telephony. If the FCC or
any state determines to regulate VoIP, they may impose surcharges, taxes or
additional regulations upon providers of Internet telephony. These surcharges
could include access charges payable to local exchange carriers to carry and
terminate traffic, contributions to the Universal Service Fund (USF) or other
charges. Regulations requiring compliance with the Communications Assistance for
Law Enforcement Act (CALEA), or provision of the same type of 911 services as
required for traditional telecommunications providers could also place a
significant financial burden on us depending on the technical changes required
to accommodate the requirements. The imposition of any such additional fees,
charges, taxes and regulations on IP communications services could materially
increase our costs and may limit or eliminate our competitive pricing.
In many countries outside the U.S. in which we operate or our services are
sold, the status of the laws that may relate to our VoIP services is unclear. We
cannot be certain that we will be able to comply with existing or future
requirements, or that we will be able to continue to be in compliance with any
such requirements. Our failure to comply with these requirements could
materially adversely affect our ability to continue to offer our VoIP service in
these jurisdictions.
FLUCTUATIONS IN THE FOREIGN CURRENCY EXCHANGE RATES IN RELATION TO THE U.S.
DOLLAR COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.
Changes in currency exchange rates that increase the relative value of the
U.S. dollar may make it more difficult for us to compete with foreign
manufacturers on price, may reduce our foreign currency denominated sales when
expressed in dollars, or may otherwise have a material adverse effect on our
sales and operating results. A significant increase in our foreign currency
denominated sales would increase our risk associated with foreign currency
fluctuations. A weakness in the U.S. dollar relative to various Asian currencies
including the Chinese renminbi could increase our product costs.
OUR FUTURE SUCCESS WILL DEPEND ON THE CONTINUED SERVICES OF OUR EXECUTIVE
OFFICERS AND KEY PRODUCT DEVELOPMENT PERSONNEL.
The loss of any of our executive officers or key product development
personnel, the inability to attract or retain qualified personnel in the future,
or delays in hiring skilled personnel could harm our business. Competition for
skilled personnel is significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition, the loss
of Frank B. Manning, our president and chief executive officer, or Peter Kramer,
our executive vice president, some other member of the senior management team, a
key engineer or salesperson, or other key contributors, could harm our relations
with our customers, our ability to respond to technological change, and our
business.
WE MAY HAVE DIFFICULTY PROTECTING OUR INTELLECTUAL PROPERTY.
Our ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements to
protect our intellectual property. The steps we take to protect our technology
may be inadequate. Existing trade secret, trademark and copyright laws offer
only limited protection. Our patents could be invalidated or circumvented. We
have more intellectual property assets in some countries than we do in others.
In addition, the laws of some foreign countries in which our products are or may
be developed, manufactured or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. This may
make the possibility of piracy of our technology and products more likely. We
cannot assure that the steps that we have taken to protect our intellectual
property will be adequate to prevent misappropriation of our technology.
WE COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Particular aspects of our technology could be found to infringe on the
intellectual property rights or patents of others. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology necessary to our business. We cannot predict the extent to which we
may be required to seek licenses. We cannot assure that the terms of any
licenses we may be required to seek will be reasonable. We are often indemnified
by our suppliers relative to certain intellectual property rights; but these
indemnifications do not cover all possible suits, and there is no guarantee that
a relevant indemnification will be honored by the indemnifying .
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We own financial instruments that are sensitive to market risks as part of
our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are held
for trading purposes. We do not own derivative financial instruments in our
investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates.
Investment Rate Risk - Our investment portfolio consists entirely of money
market funds, which are subject to interest rate risk. Due to the short duration
and conservative nature of these instruments, we do not believe that it has a
material exposure to interest rate risk. The 20 year mortgage of our
headquarters building is a variable rate loan with the interest rate adjusted
annually. A 1% change in the interest rate would result in a decrease or
increase of approximately $53,000 of interest expense per year.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of March 31, 2005 we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in enabling
us to record, process, summarize and report information required to be included
in our periodic SEC filings within the required time period.
There have been no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
10.1 First Amendment to Commercial Real Estate Promissory Note filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 31, 2005.*
10.2 Loan and Security Agreement dated March 16, 2005, by and between Zoom
Telephonics, Inc. and Silicon Valley Bank, filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 22, 2005.*
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.**
* 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.
** Filed herewith
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TECHNOLOGIES, INC.
Date: May 16, 2005 By: /s/ Frank B. Manning
------------------------------------------
Frank B. Manning, President
Date: May 16, 2005 By: /s/ Robert Crist
-------------------------------------------
Robert Crist, Vice President of Finance and
Chief Financial Officer (Principal Financial
and Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description
10.1 First Amendment to Commercial Real Estate Promissory Note filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 31, 2005.*
10.2 Loan and Security Agreement dated March 16, 2005, by and between Zoom
Telephonics, Inc. and Silicon Valley Bank, filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 22, 2005.*
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.**
* 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.
** Filed herewith