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 September 30, 2002
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 04-2621506
-------- ----------
(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 [ ]
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, as of November 12, 2002 was 7,860,866 shares.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
Item 1. Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ending September 30,
2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ending September 30, 2002 and 2001
(unaudited) 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 23
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 24
Item 4. Controls and Procedures 24
Part II. Other Information
Item 5. Other Events 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
PART I - FINANCIAL INFORMATION
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 2002 December 31, 2001
(Unaudited) (Audited)
-------------------- -----------------
Assets
Current assets:
Cash $ 6,990,244 $ 5,252,058
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $2,755,223 at
September 30, 2002 and $2,816,449 at December 31, 2001 5,459,407 5,652,035
Inventories, net 7,086,342 11,083,143
Prepaid expenses and other current assets 974,174 999,662
---------- ----------
Total current assets 20,510,167 22,986,898
Property, plant and equipment, net 3,613,637 4,128,916
Net deferred tax assets - 2,012,844
Other assets - 56,666
---------- ----------
Total assets $ 24,123,804 $ 29,185,324
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 189,947 $ 139,201
Accounts payable 3,371,739 2,750,174
Accrued expenses 1,208,824 1,879,566
---------- ----------
Total current liabilities 4,770,510 4,768,941
Long-term debt 5,390,053 5,745,368
Other non-current liabilities - 255,287
---------- ----------
Total liabilities 10,160,563 10,769,596
---------- ----------
Stockholders' equity:
Common stock, $0.01 par value at September 30, 2002 and
no par value at December 31, 2001. Authorized 25,000,000
shares; issued and outstanding 7,860,866 shares at
September 30, 2002 and at December 31, 2001 78,609 28,245,215
Additional paid-in capital 28,166,606 -
Retained earnings (accumulated deficit) (14,241,223) (9,634,692)
Accumulated other comprehensive income (loss) (40,751) (194,795)
---------- ----------
Total stockholders' equity 13,963,241 18,415,728
---------- ----------
Total liabilities and stockholders' equity $ 24,123,804 $ 29,185,324
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ending Nine Months Ending
September 30, September 30,
----------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 10,878,334 $ 11,719,317 $29,059,126 $ 31,991,512
Costs of goods sold 7,707,513 8,889,253 22,115,801 26,855,076
------------ ------------ ------------ ------------
Gross profit 3,170,821 2,830,064 6,943,325 5,136,436
Operating expenses:
Selling 1,423,216 1,802,103 4,487,702 5,837,656
General and administrative 824,863 1,433,023 2,587,701 4,571,519
Research and development 878,901 1,334,617 2,810,385 4,155,051
------------ ------------ ------------ ------------
Total operating expenses 3,126,980 4,569,743 9,885,788 14,564,226
------------ ------------ ------------ ------------
Operating income (loss) 43,841 (1,739,679) (2,942,463) (9,427,790)
Other income (expense):
Interest income 23,091 46,386 88,603 166,725
Interest (expense) (73,502) (121,330) (232,568) (336,761)
Equity in losses of affiliate - - (56,666) (135,166)
Other, net 99,012 97,464 294,120 171,304
------------ ------------ ------------ ------------
Total other income (expense), net 48,601 22,520 93,489 (133,898)
------------ ------------ ------------ ------------
Income (loss) before income tax expense
and extraordinary item 92,442 (1,717,159) (2,848,974) (9,561,688)
Income tax expense (benefit) -- 3,800,000 2,012,844 3,800,000
------------ ------------ ------------ ------------
Income (loss) before extraordinary item 92,442 (5,517,159) (4,861,818) (13,361,688)
Extraordinary gain on elimination of
negative goodwill -- -- 255,287 --
------------ ------------ ------------ ------------
Net income (loss) $ 92,442 $ (5,517,159) $(4,606,531) $(13,361,688)
============ ============ ============ ============
Earnings (loss) per common share before
extraordinary item:
Basic $ 0.01 $ (.70) $ (.62) $ (1.70)
============ ============ ============ ============
Diluted $ 0.01 $ (.70) $ (.62) $ (1.70)
============ ============ ============ ============
Extraordinary gain on elimination of
negative goodwill -basic and diluted $ -- $ -- $ .03 $ --
============ ============ ============ ============
Earnings (loss) per common share:
Basic $ 0.01 $ (.70) $ (.59) $ (1.70)
============ ============ =========== ============
Diluted $ 0.01 $ (.70) $ (.59) $ (1.70)
============ ============ =========== ============
Weighted average common and common equivalent shares
Basic 7,860,866 7,860,866 7,860,866 7,860,866
============ ============ ============ ============
Diluted 7,862,235 7,860,866 7,860,866 7,860,866
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ending
September 30,
2002 2001
-----------------------------------
Cash flows from operating activities:
Net income (loss) $ (4,606,531) $(13,361,688)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary gain on elimination of negative
goodwill (255,287) -
Depreciation and amortization 653,544 1,613,269
Amortization of restricted stock - 74,880
Write-off of net deferred tax assets 2,012,844 3,800,000
Equity in losses of affiliate 56,666 135,165
Changes in operating assets and liabilities:
Accounts receivable, net 332,873 607,618
Inventories, net 3,996,801 9,039,742
Prepaid expenses and other assets 508,188 (308,076)
Accounts payable and accrued expenses (49,177) (3,934,570)
--------- ---------
Net cash provided by (used in) operating activities 2,649,921 (2,333,660)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of investment securities - 53
Investment in affiliate (482,700) (74,999)
Additions to property, plant and equipment (138,266) (547,319)
--------- ---------
Net cash provided by (used in) investing activities (620,966) (622,265)
--------- ---------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt - 6,000,000
Principal payments on long-term debt (304,569) (83,395)
--------- ---------
Net cash provided by (used in) financing activities (304,569) 5,916,605
--------- ---------
Effect of exchange rate changes on cash 13,800 (43,423)
--------- ---------
Net increase (decrease) in cash 1,738,186 2,917,257
Cash beginning of period 5,252,058 2,906,270
--------- ---------
Cash end of period $ 6,990,244 $ 5,823,527
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 235,937 $ 310,956
========= =========
Income taxes $ - $ -
========= =========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
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 ending December 31, 2001 included in the
Company's 2001 Annual Report on Form 10-K.
The consolidated balance sheet as of September 30, 2002, the consolidated
statements of operations for the three months and nine months ending September
30, 2002 and 2001, and the consolidated statements of cash flows for the nine
months ending September 30, 2002 and 2001 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 results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2002.
(2) Liquidity
On December 31, 2001, Zoom had cash of approximately $5.3 million. For the
nine months ending September 30, 2002, the Company's net cash provided by
operating activities was $2.5 million, and net cash used in investing and
financing activities was $.9 million. On September 30, 2002, Zoom had cash of
approximately $7.0 million. 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.
To conserve cash and manage its liquidity, the Company implemented expense
reductions throughout 2001 and in the first nine months of 2002. The employee
headcount was 329 at December 31, 2000, and 190 at September 30, 2002.
In addition to expense reductions, the Company's liquidity in the remainder
of 2002 is expected to be enhanced by the utilization of $3.0 million "no
charge" components, as a result of supply agreements entered in 2001. Under
these arrangements, the Company received $3 million of components at "no charge"
in exchange for its commitment to purchase at least $8 million of components
over the 30-month period commencing January 1, 2002, provided that those
components are offered at competitive terms and prices. Purchases of
approximately $1.9 million have been made as of September 30, 2002 against the
$8 million commitment. The utilization of "no-charge" components is expected to
supplement the Company's cash flow in 2002 and 2003, as it will be able to avoid
the purchase and payment of an equivalent dollar amount of inventory. In the
first nine months of 2002, the Company had a favorable impact to its cash flow
from this arrangement of approximately $2.0 million. The favorable impact to the
Company's statement of operations will be recognized on a delayed basis as a
purchase discount over the total number of components acquired through the
supply agreement.
In 2000, the Company made a significant investment to build up its
broadband access products, particularly cable modems. However, the Company was
not able to penetrate the broadband modem and wireless local area network
markets to the extent it had expected. On December 31, 2001 the Company had $4.1
million net inventory in broadband and wireless products and components. This
inventory was primarily paid for in 2000 and 2001. Sales of products in 2002 and
2003 using any portion of this inventory are expected to enhance our liquidity
in those years, as we will be able to avoid the purchase and payment of an
equivalent dollar amount of new materials. We are currently selling cable modems
and wireless products that consume a portion of this inventory and we are
pursuing additional orders in markets worldwide. At September 30, 2002 our
balance of broadband and wireless net inventory was $2.0 million.
Additionally, during the past several years the Company has experienced a
declining demand for its dial-up modem products. Trends including the bundling
by PC manufacturers of dial-up modems into computers and the increased
popularity of broadband modems lower the total available market through the
Company's sales channels. Because of this, the Company's dial-up modem sales are
unlikely to grow unless the Company's market share grows, or the new V.92 and
V.44 modem standards grow sales through the Company's channels. If the Company's
dial-up modem sales do not grow, the Company's future success will depend in
large part on its ability to successfully penetrate the broadband modem,
networking, and dialer markets.
The Company's cash position on December 31, 2001 was $5.3 million and on
September 30, 2002 was $7.0 million. Management believes it has sufficient
resources to fund its planned operations over the next 12 months. These planned
operations anticipate modest declines to modest increases in the sales of
dial-up modems, as a result of V.92 deployment by some of the major Internet
Service Providers and/or continuing increases in market share, counteracting
decreases in average selling prices, and some growth in the sales of broadband
and wireless products. However, if the Company is unable to increase its
revenues, continue to reduce its expenses, or raise capital, the Company's
longer-term ability to continue as a going concern and achieve the Company's
intended business objectives could be adversely affected.
(3) Earnings Per Share
The reconciliation of the numerators and denominators of the basic and
diluted net income (loss) per share computations for the Company's reported net
income (loss) is as follows:
Three Months Ending Nine Months Ending
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Basic:
Net income (loss) $ 92,442 $(5,517,159) $(4,606,531) $(13,361,688)
Weighted average shares
outstanding 7,860,866 7,860,866 7,860,866 7,860,866
----------- ----------- ----------- ------------
Net income (loss) per share $ 0.01 $ (.70) $ (.59) $ (1.70)
=========== =========== =========== ============
Diluted:
Net income (loss) $ 92,442 $(5,517,159) $(4,606,531) $(13,361,688)
Weighted average shares
outstanding 7,860,866 7,860,866 7,860,866 7,860,866
Net effect of dilutive stock
options based on the
Treasury stock method using
average market price 1,369 -- -- --
Weighted average shares
outstanding 7,862,235 7,860,866 7,860,866 7,860,866
----------- ----------- ----------- -----------
Net income (loss) per share $ 0.01 $ (.70) $ (.59) $ (1.70)
=========== =========== =========== ===========
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are excluded from the
computation. Options to purchase 14,167 and 24,486 shares of common stock at
September 30, 2002 and 2001, respectively, were outstanding but not included in
the computation of diluted earnings per share for the nine months ended
September 30, 2002 and 2001, as their effect would be antidilutive. Options to
purchase 1,369 shares of common stock at September 30, 2001 were outstanding but
not included in the computation of diluted earnings per share for the three
months ended September 30, 2001, as their effect would be antidilutive.
(4) Inventories
Inventories consist of the following: September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials $ 2,603,018 $ 6,276,480
Work in process 1,777,767 462,389
Finished goods 2,705,557 4,344,274
---------- ----------
$ 7,086,342 $ 11,083,143
========== ==========
During the nine months ending September 30, 2002 the Company recorded lower
of cost or market write-downs of $812,596 related to broadband and wireless
inventory.
(5) Comprehensive Income
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 Ending Nine Months Ending
September 30, September 30,
---------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) $ 92,442 $ (5,517,159) $ (4,606,531) $(13,361,688)
Foreign currency translation
adjustment 62,751 132,536 154,044 (43,423)
Net unrealized holding gain
on investment securities -- -- -- 53
----------- ------------ ------------ ------------
Comprehensive income (loss) $ 155,193 $ (5,384,623) $ (4,452,487) $(13,405,058)
=========== ============ ============ ============
(6) Mortgage
On January 10, 2001 the Company obtained a mortgage for $6 million on its
real estate property located at 201 and 207 South Street, Boston, Massachusetts.
This is a 20-year direct reduction mortgage. 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 current rate of interest as of September 30, 2002 was 4.97% and
interest expense was $232,568 and $336,761 for the nine months ending September
30, 2002 and 2001, respectively.
(7) Commitments
During the three and nine months ending September 30, 2002, 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 fiscal year ending
December 31, 2001.
During 2001, the Company entered into an agreement to purchase the ground
lease for a manufacturing facility located at 27 Drydock Avenue in Boston,
Massachusetts (the "Drydock Building"). In connection with the proposed purchase
of the Drydock Building, the Company paid $513,500 which was held in escrow as a
deposit pending the closing of the transaction. Of this deposit, $25,000 was
nonrefundable. When the Company was unable to obtain acceptable financing the
seller (i.e., the then current leaseholder) retained the deposit pending
resolution of some disputed facts concerning the Company's withdrawal from the
transaction under the terms of the Purchase and Sale Agreement. While the
Company believed that it was entitled to a return of the $488,500 refundable
portion of the deposit plus interest, the seller directed the escrow agent to
hold the funds pending resolution of the dispute.
As an alternative to pursing legal remedies to obtain a return of the
deposit, the Company pursued an arrangement to acquire the Drydock Building in
partnership with the following individuals: Frank B. Manning, President and a
director of the Company; Peter R. Kramer, Executive Vice President and a
director of the Company; Bruce M. Kramer, Peter Kramer's brother; and a third
party. Under this arrangement, these individuals, either directly or through
entities controlled by them, joined together with the Company as of March 29,
2002 to form the Zoom Group LLC, a Massachusetts limited liability company
("Zoom Group") to purchase the Drydock Building. The Company and each of the
investors owns a 20% interest in the Zoom Group. The managers of the Zoom Group
are Peter Kramer and the third party. There are no special allocations among the
members of the Zoom Group, and each member is required to contribute his or its
proportionate amount of capital in return for its 20% interest.
Effective as of March 29, 2002, the Company entered into a Reinstatement
Agreement, Assignment Agreement and Second Amendment to Agreement of Purchase
and Sale with the Zoom Group and the owner of the Drydock ground lease. Under
this Reinstatement Agreement, the original purchase agreement for the Drydock
Building was amended and reinstated, and the Company assigned its rights under
the purchase agreement to the Zoom Group, together with rights to the $488,500
refundable portion of the deposit plus interest. In connection with this
transaction, under a separate letter agreement, the other members of the Zoom
Group paid to the Company $390,800 ($97,700 each), representing their
proportionate share of the deposit assigned to the Zoom Group. As a result, the
Company's remaining interest in the deposit is $97,700. As part of the
reinstatement of the purchase agreement, the members of the Zoom Group agreed
that an additional $25,000 of the $488,500 deposit would be nonrefundable,
$5,000 of which has been allocated to each investor.
Under the Reinstatement Agreement, the Zoom Group agreed to purchase the
Drydock Building, subject to financing and other contingencies, for a purchase
price of $6.1 million, subject to adjustment. Effective August 29, 2002, the
parties closed on the purchase and sale of the Drydock Building. Each member of
the Zoom Group contributed $483,000 to fund the cash portion of the purchase
price plus initial working capital. These initial capital contributions include
each member's share of the deposit.
Under the Zoom Group Operating Agreement, the Company has the right to sell
its interest in the Zoom Group to the other members of the Zoom Group, and the
right to purchase the other members' entire interests in the Zoom Group. The
Company's right of sale expires on January 5, 2003. Should the Company exercise
its sale right, it would be entitled to recover the full amount of all
refundable investments (the $92,700 refundable portion of the $97,700 deposit
and any additional investment made in the Zoom Group.) Under the Company's right
to purchase, it has the option to purchase all the interests of the other
members of the Zoom Group for a purchase price determined in accordance with a
prearranged formula based upon the initial purchase price of the Drydock
Building plus 20% a year, prorated after the first year. The Company has no
obligation to exercise either its purchase or sale right, and no member of the
Zoom Group has any right to require the Company to do so. Any decision to
exercise any of these rights will be made by the independent directors of the
Company.
(8) Income Taxes
At December 31, 2001, the Company's net deferred tax asset of $2.013
million was the result of the Company's specific tax planning strategy to sell
its headquarters building in Boston. In the first quarter ending March 31, 2002,
the Company recorded an income tax charge and valuation reserve of $2.013
million, which reduced its net deferred tax asset balance to zero. This
additional reserve reflects the Company's decision to discontinue its specific
tax planning strategy to sell its headquarters building in Boston in light of
the less favorable market conditions for the sale of that building.
(9) Segment and Geographic Information
The Company's operations are classified into one reportable segment. The
Company's domestic and international net sales for the three months and nine
months ending September 30, 2002 and 2001, respectively, were comprised as
follows:
Three Months Three Months Nine Months Nine Months
Ending % of Ending % of Ending % of Ending % of
Sept 30, 2002 Total Sept 30, 2001 Total Sept 30, 2002 Total Sept 30, 2001 Total
------------- ----- ------------- ----- ------------- ----- ------------- -----
North America $ 6,907,233 63% $ 7,675,217 65% $17,775,036 61% $20,411,112 64%
International 3,971,101 37% 4,044,101 35% 11,284,090 39% 11,580,400 36%
----------- --- ----------- --- ----------- --- ----------- ---
Total 10,878,334 100% $11,719,318 100% $29,059,126 100% $31,991,512 100%
=========== === =========== === =========== === =========== ===
(10) Extraordinary Gain
On January 1, 2002, the Company recorded an extraordinary gain of $255,287,
upon the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS
142). The gain resulted from the elimination of the remaining negative goodwill
on the Company's consolidated balance sheet related to a previous acquisition,
and was recorded in accordance with the provisions of SFAS 142.
(11) New Accounting Pronouncements
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather that at the date of a commitment to an exit or disposal
plan. This statement is effective for fiscal years beginning after December 31,
2002. The Company does not believe that the impact of adopting SFAS 146 will
have a material impact on its consolidated financial statements.
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain
Sales Incentives" addresses the recognition, measurement, and income statement
classification for certain types of sales incentives. The application of the
guidance in Issue No. 00-14 resulted in a change in the manner in which the
Company records certain types of discounts and sales and marketing incentives
that are provided to its customers. The Company has historically recorded
certain types of these incentives as marketing expenses. Under Issue No. 00-14,
beginning on January 1, 2002, the Company records these discounts and incentives
as reductions of revenue. In April 2001, the FASB Emerging Issues Task Force
reached a consensus on Issue No. 00-25 "Accounting for Consideration from a
Vendor to a Retailer in Connection with the Purchase or Promotion of the
Vendor's Products". Issue No. 00-25 addresses whether certain consideration
offered by a vendor to a distributor, including slotting fees, cooperative
advertising arrangements and "buy-down" programs, should be characterized as
operating expenses or reductions of revenue. Issue No. 00-14 and 00-25 were
implemented in the first quarter of 2002 and prior period reported amounts have
reclassified to conform to the new presentation. Third quarter 2001 results have
been reclassified as follows:
Three Months Ending Nine Months Ending
September 30, September 30,
--------------------------- --------------------------
2001 2001
---- ----
Revenues:
As previously reported $ 12,317,900 $ 33,408,216
As reclassified 11,719,317 31,991,512
Selling expenses:
As previously reported $ 2,400,686 $ 7,254,360
As reclassified 1,802,103 5,837,656
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 fiscal year ending December 31, 2001.
Readers should also be cautioned that results of any reported period are often
not indicative of results for any future period.
Critical Accounting Policies
The following is a discussion of what we view as our more significant
accounting policies. These policies are also described in the notes to our
audited consolidated financial statements included in our Annual Report on Form
10-K for the fiscal year ending December 31, 2001. As described below,
management judgments and estimates must be made and used in connection with the
preparation of our consolidated financial statements. Material differences could
result in the amount and timing of our revenue and expenses for any period if we
made different judgments or used different estimates.
Revenue 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
revenue. We derive our revenue 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 sell a very small amount of our hardware products to direct consumers
and to customers via the Internet. We recognize revenue for all three types of
our customers at the point when the customers take legal ownership of the
delivered products. Legal ownership passes from Zoom to the customer based on
the point specified in signed contracts and purchase orders, which are both used
extensively. Many of our customer contracts or purchase orders specify that
ownership passes to the customer at the destination of delivery. Since it would
be impractical to verify ownership change for each individual delivery to the
destination point, we estimate the day the customer receives delivery based on
our ship date and the carrier's published delivery schedule specific to the
freight class and location.
Our revenues are reduced by certain events which are characteristic of
hardware sales to computer peripherals retailers. These events are product
returns, price protection refunds, 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 events such as new product introductions, announced stock rotations,
and announced customer store closings. We analyze historical returns, current
economic trends, and changes in customer demand and acceptance of our products
when evaluating the adequacy of sales return allowances. Our estimates for price
protection refunds require 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 reserve against accounts
receivable and a reduction of current period revenue. Our 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. Our
estimates for store rebates are comprised of actual credit requests from the
eligible customers.
On January 1, 2002, we adopted FASB Emerging Issues Task Force Issue No.
00-14 "Accounting for Certain Sales Incentives" and Issue No. 00-25 "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." The application of the guidance in Issue
No. 00-14 and No. 00-25 resulted in a change in the manner in which we record
certain types of discounts and sales and marketing incentives that are provided
to our customers. We had historically recorded these incentives as selling
expenses. Under Issue No. 00-14 and No. 00-25, we are now recording these
incentives as reductions of revenue for the current and prior periods. This
change reduced revenues, which, in turn, reduced gross margins. The offset was
an equal reduction of selling expenses. There was no change in net income (loss)
for either the historical periods restated or the quarter ending September 30,
2002 (see note 11 to the consolidated financial statements). To ensure that the
discounts and sales 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
for product returns, store rebates, consumer mail-in rebates, price protection
refunds, and bad debts. These reserves are drawn down as actual credits are
issued to the customer's accounts. Our total year bad-debt write-offs for 2000
and 2001 were .3% and .2% of total revenue, respectively. During the first nine
months of 2002, our bad debt write-offs were .08% of total revenue.
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 this inventory range from 0% to 100%, based on management's estimate of
the probability that the materials 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. This resulted in a significant inventory position of materials. During
2001, the market selling prices for the broadband and wireless products declined
significantly because of an industry-wide oversupply. During 2001, and to a
lesser extent in the first nine months of 2002 (see note 2 to the consolidated
financial statements), 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 involves comparing 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 permanently write-down the inventory on a
"lower of cost or market" basis.
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 at least $8.0 million of components over the 30-
month period commencing on January 1, 2002, provided that those components are
offered at competitive terms and prices. Purchases of approximately $1.9 million
have been made as of September 30, 2002 against the $8 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. In connection with these arrangements, we were
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 upon 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 $3.0 million of no-charge components in the first quarter
of 2002. At September 30, 2002, the gross inventory value of the no-charge
components has been reduced to $1.5 million, offset by a $2.4 million reserve in
inventory, yielding a net inventory value of ($.9) million for inventory
acquired under these arrangements. We expect that the remaining $1.5 million
gross value of "no charge" components will be consumed in our manufacturing
process and shipped in finished products to customers in the ensuing 12 months.
If this occurs, our cash provided by (used in) operating activities in 2002 and
2003 is expected to be improved by $3.0 million, as we expect to avoid the
purchase and payment of an equivalent dollar amount. In the first nine months of
2002, our purchases and payments of the components in question were
approximately $2.0 million less than we would have expected without the
no-charge components. Our statement of operations will reflect the $3.0 million
of favorability as we ship products containing the components acquired under
these supply arrangements. At the end of the third quarter ending September 30,
2002, the cumulative favorable impact of this arrangement to our statement of
operations was $.6 million, with the favorable impact of $.1 million, $.2
million, and $.3 million in the first, second, and third quarters, respectively.
Valuation and Impairment of Deferred Tax Assets. As part of the process of
preparing our consolidated financial statements we are required to estimate the
recoverability of our deferred tax assets. 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 accordance with the provisions of the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In 2001, we
recorded a $3.8 million income tax charge to reflect an additional increase in
our deferred tax asset valuation allowance. This is equal to 100% of the tax
benefits derived from our 2001 pre-tax losses and certain of our pre-tax losses
incurred prior to 2001. Management's decision to record the valuation allowance
was based on the uncertain recoverability of the deferred tax asset balance. At
December 31, 2001, a portion of our net deferred tax asset was supported by our
specific tax planning strategy to sell our appreciated headquarters building in
Boston. The amount of the projected tax benefit from this sale was used to
support the $2.013 million deferred tax asset remaining on our balance sheet as
of December 31, 2001. In our first quarter ending March 31, 2002, we recorded an
additional income tax charge and valuation reserve, which reduced our net
deferred tax asset balance to zero. This additional reserve reflects 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.
Results of Operations
We recorded net sales of $10.9 million for our third quarter ending
September 30, 2002, down 7.2% from $11.7 million in the third quarter of 2001.
We reported an operating income of $0.04 million for the third quarter of 2002,
compared to an operating loss of $1.7 million in the third quarter of 2001. We
reported a net income of $0.1 million for our third quarter ending September 30,
2002 compared to a net loss of $5.5 million for the third quarter ending
September 30, 2001. Earnings per share improved as we reported earnings of $0.01
per share for the third quarter of 2002 compared to a loss of $0.70 per share
for the third quarter of 2001. Our net sales were $29.1 million and our
operating loss was $2.9 million for the nine months ending September 30, 2002
compared to net sales of $32.0 million and an operating loss of $9.4 million for
the nine months ending September 30, 2001. The net loss was $4.6 million, or
$0.59 per share for the nine months ending on September 30, 2002 versus a net
loss of $13.4 million, or $1.70 per share for the nine months ending September
30, 2001.
Our total net sales in Q3 2002 decreased 7.2% from Q3 2001. This decline
was primarily due to a large drop in OEM sales to one of our OEM customers. In
Q3 2002 we did not generate any sales to this OEM customer as compared to sales
of approximately $.6 million to this customer in Q3 2001. We are currently in
discussions with this customer about renewed sales in 2003. Although our unit
sales of dial-up modems were stronger,achieving our highest quarterly unit sales
of dial-up modems in three years and reflecting our increased unit and dollar
market share at retail in the U.S. and the U.K, our net sales of dial-up modems
were down 5% in Q3 2002 as compared to Q3 2001 primarily because lower-priced
modems had a higher share of our dial-up modem sales mix. In Q3 2002 net sales
in our broadband and wireless categories increased compared to Q3 2001, with our
strongest quarter sales to date of ADSL modems.
Our gross profit increased to $3.2 million in Q3 2002 from $2.8 million in
Q3 2001. Our gross profit percentage of net sales improved from 24.1% in Q3 2001
to 29.1% of net sales in Q3 2002. The improvement resulted primarily from our
material and overhead cost reductions, which outpaced the continuing
market-driven reduction in average selling prices, and lower inventory charges
for obsolescence and lower of cost or market valuations. Our nine month
year-to-date gross profit in 2002 increased to $6.9 million, or 23.9% of net
sales, from $5.1 million, or 16.1% of net sales for the first nine months of
fiscal 2001. The major reason for the low 16.1% gross profit percentage of net
sales in the first nine months of 2001 was the recording of significant
inventory write-downs and obsolescence reserves during that period, primarily
relating to broadband modems and wireless networking products. Excluding the
inventory charges for obsolescence and lower of cost or market write-downs in
both years, our nine-month year-to-date gross profit percentage of net sales in
2002 was more comparable to the first nine months of fiscal 2001.
Our operating expenses decreased by $1.4 million to $3.1 million in Q3 2002
from $4.6 million in Q3 2001. The decrease of $1.4 million was comprised of
lower selling expenses of $.4 million, lower general and administrative expenses
of $.6 million, and lower research and development expenses of $.5 million. We
have reduced our worldwide staff from 243 employees on September 30, 2001 to 190
employees on September 30, 2002. We also continue to maintain a temporary wage
freeze and tight controls on discretionary spending.
Our operating expenses for the first nine months ending September 30, 2002
decreased by $4.7 million to $9.9 million compared to $14.6 million in the first
nine months ending September 30, 2001. The decrease of $4.7 million was
comprised of lower selling expenses of $1.4 million, lower general and
administrative expenses of $2.0 million, and lower research and development
expenses of $1.3 million. Our operating expenses for the nine months ending
September 30, 2002 were 34.0% of net sales, compared to 45.5% for the first nine
months of 2001.
Selling expenses in Q3 2002 decreased to $1.4 million or 13.1% of net sales
from $1.8 million or 15.4% of net sales in Q3 2001. Selling expenses were lower
primarily because of reduced personnel costs, marketing costs, freight costs,
commissions, and other selling expenses.
Selling expenses for the nine months ending September 30, 2002 decreased in
dollars to $4.5 million or 15.4% of net sales from $5.8 million or 18.2% of net
sales in the nine months ending September 30, 2001. The dollar decrease was
mainly due to reduced personnel costs, marketing costs, freight costs, and other
selling expenses.
General and administrative expenses were $0.8 million or 7.6% of net sales
in Q3 2002 compared to $1.4 million or 12.2% of net sales in Q3 2001. General
and administrative expenses were lower primarily due to lower depreciation and
amortization, personnel costs, insurance costs, and bad debt expense, partially
offset by increases in legal and audit expenses and printing. Our general and
administrative expenses in Q3 2001 included goodwill amortization of $.5
million, compared to no amortization in Q3 2002, as a result of the write-off of
our goodwill assets in Q4 2001.
General and administrative expenses for the nine months ending September
30, 2002 decreased to $2.6 million or 8.9% of net sales from $4.6 million or
14.3% of net sales in the nine months ending September 30, 2001. The decrease
was primarily due to lower depreciation and amortization, personnel costs, bad
debt expense, bank fees, real estate taxes, facility maintenance costs, business
insurance costs, and legal expenses, partially offset by increases in outside
services, postage, and filing fees.
Research and development expenses decreased to $0.9 million or 8.1% of net
sales in Q3 2002 from $1.3 million or 11.4% of net sales in Q3 2001. Research
and development costs decreased primarily as a result of reduced personnel costs
and fees for consulting and outside services, and reduced fees associated with
obtaining licenses and third-party approvals. Development and support continues
on all of our product lines.
Research and development expenses for the nine months ending September 30,
2002 decreased to $2.8 million or 9.7% of net sales from $4.2 million or 13.0%
of net sales in the nine months ending September 30, 2001. The decrease was
primarily due to reduced personnel costs and fees for consulting and outside
services, reduced fees associated with obtaining licenses and third-party
approvals, and other research and development expenses.
Other income (expense) net improved from income of $0.02 million in Q3 2001
to income of $.05 million in Q3 2002. Included in other income (expense) are
interest income, interest expense, and other income, net.
o Interest income. Interest income decreased to $.02 million in Q3 2002 from
$.05 million in Q3 2001. The decrease was the result of our lower earned
interest rate partially offset by the interest earned on a higher average
invested cash balance during Q3 2002 compared to Q3 2001. The average
interest rate earned in 2002 was approximately 165 basis points lower in Q3
2002 than in Q3 2001.
o Interest expense. Interest expense decreased to $.07 million in Q3 2002
from $.12 million in Q3 2001. The interest expense decrease is due to a
lower interest rate for the $6.0 million mortgage taken out in January 2001
on our headquarters building. This interest is adjusted annually in January
of each year.
o Other income, net. Other income and non-interest income remained relatively
unchanged at $.10 million, comparing Q3 2002 to Q3 2001.
Other income (expense) net improved from expense of $.13 million in the
first nine months of 2001 to income of $.09 million in first nine months of
2002. Included in other income (expense) are interest income, interest expense,
equity in losses of an affiliate, and other income, net.
o Interest income. Interest income decreased to $.09 million in the first
nine months of 2002 from $.17 million in the first nine months of 2001. The
decrease was the result of our lower earned interest rate which was
partially offset by a higher average invested cash balance during the first
nine months of 2002 compared to 2001. The average interest rate earned in
the first nine months of 2002 was approximately 260 basis points lower than
in the first nine months of 2001.
o Interest expense. Interest expense decreased to $.23 million in the first
nine months of 2002 from $.34 million in the first nine months of 2001. The
interest expense decrease is due to a lower interest rate for the $6.0
million mortgage taken out in January 2001 on our headquarters building.
This interest rate is adjusted annually in January of each year.
o Equity in losses of affiliate. Our equity losses in an affiliate were $.06
million in the first nine months of 2002 compared to $.14 million in the
first nine months of 2001. Our investment balance in the affiliate is zero
as of September 30, 2002.
o Other income, net. Other income and non-interest income increased to $.29
million in first nine months of 2002 from $0.17 million in the first nine
months of 2001. The main reason for the increase was the reversal of a
reserve for $0.1 million relating to a dispute involving a deposit that was
resolved in March 2002. Other activity in this account includes foreign
exchange transaction losses which were $.05 million in the first nine
months of 2002 compared to $0.07 million for the first nine months of 2001
and an increase in rental income to $0.25 million for the first nine months
of 2002 compared to $0.19 million for the first nine months of 2001.
Income tax expense was zero for the three months ending September 30, 2002
and $3.8 million for the three months ending September 30, 2001. Income tax
expense was $2.0 million for the nine months ending September 30, 2002 and $3.8
million for the nine months ending September 30, 2001. In Q3 2001, we recorded a
$3.8 million income tax charge to reflect an additional increase in our deferred
tax asset valuation allowance. This was equal to 100% of the tax benefits
derived from our 2001 pre-tax losses and certain of our pre-tax losses incurred
prior to 2001. Management's decision to record the valuation allowance was based
on the uncertain recoverability of the deferred tax asset balance. Based on our
specific tax planning strategy to sell our appreciated headquarters building in
Boston, a $2.013 million deferred tax asset remained on our balance sheet until
the first quarter ending March 31, 2002, when we recorded an additional income
tax charge and valuation reserve, which reduced our net deferred tax asset
balance to zero. This additional reserve reflects our decision to discontinue
our specific tax planning strategy to sell our headquarters building in Boston.
This reserve is also discussed under the caption "Critical Accounting Policies"
set forth herein.
Liquidity and Capital Resources
We ended the third quarter of 2002 with cash of $7.0 million and working
capital of $15.7 million.
Operating activities generated $2.5 million in cash during the first nine
months of 2002. Our net loss during the first nine months of 2002 was $4.6
million, which included significant non-cash charges for a write-off of net
deferred tax assets of $2.0 million, a cost of sales charge for obsolescence and
lower of cost or market write-downs of $.8 million, and depreciation and
amortization of $.7 million. These non-cash charges were partially offset by an
extraordinary non-cash gain on the elimination of negative goodwill of $.3
million. The net loss during the first nine months of 2002 excluding these major
non-cash charges and gain was $1.4 million. Sources of cash from operations
included reduction of inventory, excluding the above-mentioned obsolescence and
lower of cost or market adjustments, of $3.2 million, a reduction of prepaid
expenses of $.5 million, and a reduction of accounts receivable of $.2 million.
The reduction of inventory was primarily due to reduced inventory purchases as a
result of the receipt of no-charge components from key component vendors. Uses
of cash from operations were the net loss and a decrease in accounts payable and
accrued expenses of $.1 million.
Investing activities used $.5 million in cash for an investment in an
affiliate and $.1 million for capital expenditures during the first nine months
of 2002. The investment in an affiliate was our 20% investment in Zoom Group,
LLC, formed to purchase the Drydock building and discussed in further detail in
the Commitments section of this document. We do not have any significant capital
commitments, and we anticipate that we will continue with modest investments in
equipment and in improvements to our facilities during the year.
During the first nine months of 2002, we used cash for financing activities
of $.3 million consisting of $.12 million for nine monthly principal payments
plus a one-time principal reduction payment of $.18 million on the $6.0 million
mortgage on our headquarters facility. The one-time principal reduction payment
was requested by the mortgage holder in September 2002, following an appraisal
of our headquarters building of $9.3 million, in order to maintain the 60%
maximum loan-to-value ratio specified in the mortgage agreement. Principal on
the loan is amortized on a 20-year basis. The interest rate is adjusted annually
in January of each year based on the one-year Federal Home Loan Bank rate plus
2.5 % per annum. The interest rate for the current year is 4.97%.
Currently we do not have a debt facility from which we can borrow, and we
do not expect to obtain one on acceptable terms unless there is operating
performance improvement. However, we believe we would be able to obtain
additional funds, if and when required, by factoring accounts receivable. We
have engaged in preliminary negotiations with a financial organization, but we
do not plan to put anything in place until and unless it is necessary since
there would be an up-front cost to finalize the arrangement.
To conserve cash and manage our liquidity, we have reduced our worldwide
staff from 243 employees on September 30, 2001 to 190 employees on September 30,
2002. We continue to maintain our temporary wage freeze and our controls on
discretionary spending. We will continue to assess our cost structure as it
relates to our revenues and cash position in the remainder 2002, and we may make
further reductions if the actions are deemed necessary.
In addition to expense reductions, our liquidity in 2002 is expected to be
enhanced by the utilization of a portion of approximately $3.0 million of "no
charge" components as a result of supply agreements entered in 2001. Under these
arrangements, we are committed to purchase at least $8.0 million of components
over the 30-month period commencing January 1, 2002, provided that those
components are offered at competitive terms and prices. The utilization of
"no-charge" components is expected to supplement our cash flow in 2002 and 2003,
as we will be able to avoid the purchase and payment of an equivalent dollar
amount of inventory. We believe that we have had a favorable impact to our cash
flow in the first nine months of 2002 resulting from this arrangement of
approximately $2.0 million.
On December 31, 2001 we had $4.1 million net inventory in broadband and
wireless products and components. This inventory was primarily paid for in 2000
and 2001. Sales of products in 2002 and 2003 using any portion of this inventory
are expected to enhance our liquidity in those years, as we will be able to
avoid the purchase and payment of an equivalent dollar amount of new materials.
We are currently selling cable modems and wireless products that consume a
portion of this inventory and we are aggressively pursuing additional orders in
markets worldwide. At September 30, 2002 our balance of broadband and wireless
net inventory was $2.0 million.
Our cash position on December 31, 2001 was $5.3 million, which improved to
$7.0 million at September 30, 2002. We believe we have sufficient resources to
fund our planned operations over the next 12 months. These planned operations
anticipate steady to modest increases in the sales of dial-up modems, as a
result of V.92 deployment by some of the major Internet Service Providers and/or
continuing increases in market share, and steady growth in the sales of
broadband and wireless products. However, if we are unable to increase our
revenues, 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
During the nine month period ending September 30, 2002, 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 fiscal year ending
December 31, 2001.
During 2001, we entered into an agreement to purchase the ground lease for
a manufacturing facility located at 27 Drydock Avenue in Boston, Massachusetts
(the "Drydock Building"). In connection with the proposed purchase of the
Drydock Building, we paid $513,500 which was held in escrow as a deposit pending
the closing of the transaction. Of this deposit, $25,000 was nonrefundable. When
Zoom was unable to obtain acceptable financing the seller (the then current
leaseholder) retained the deposit pending resolution of some disputed facts
concerning Zoom's withdrawal from the transaction under the terms of the
Purchase and Sale Agreement. While we believed that we were entitled to a return
of the $488,500 refundable portion of the deposit plus interest, the seller
directed the escrow agent to hold the funds pending resolution of the dispute.
As an alternative to pursing legal remedies to obtain a return of the
deposit, we pursued an arrangement to acquire the Drydock Building in
partnership with the following individuals: Frank B. Manning, President and a
director of Zoom; Peter R. Kramer, Executive Vice President and a director of
Zoom; Bruce M. Kramer, Peter Kramer's brother; and a third party. Under this
arrangement, these individuals, either directly or through entities controlled
by them, joined together with us as of March 29, 2002 to form the Zoom Group
LLC, a Massachusetts limited liability company ("Zoom Group") to purchase the
Drydock Building. Zoom and each of the investors owns a 20% interest in the Zoom
Group. The managers of the Zoom Group are Peter Kramer and the third party.
There are no special allocations among the members of the Zoom Group, and each
member is required to contribute his or its proportionate amount of capital in
return for its 20% interest.
Effective as of March 29, 2002, we entered into a Reinstatement Agreement,
Assignment Agreement and Second Amendment to Agreement of Purchase and Sale with
the Zoom Group and the owner of the Drydock ground lease. Under this
Reinstatement Agreement, the original purchase agreement for the Drydock
Building was amended and reinstated, and we assigned our rights under the
purchase agreement to the Zoom Group, together with rights to the $488,500
refundable portion of the deposit plus interest. In connection with this
transaction, under a separate letter agreement, the other members of the Zoom
Group paid us $390,800 ($97,700 each), representing their proportionate share of
the deposit assigned to the Zoom Group. As a result, our remaining interest in
the deposit is $97,700. As part of the reinstatement of the purchase agreement,
the members of the Zoom Group agreed that an additional $25,000 of the $488,500
deposit would be nonrefundable, $5,000 of which has been allocated to each
investor.
Under the Reinstatement Agreement, the Zoom Group agreed to purchase the
Drydock Building, subject to financing and other contingencies, for a purchase
price of $6.1 million, subject to adjustment. Effective August 29, 2002, the
parties closed on the purchase and sale of the Drydock Building. Each member of
the Zoom Group contributed $483,000 to fund the cash portion of the purchase
price plus initial working capital. These initial capital contributions include
each member's share of the deposit.
Under the Zoom Group Operating Agreement we have the right to sell our
interest in the Zoom Group to the other members of the Zoom Group, and the right
to purchase the other members' entire interests in the Zoom Group. Our right of
sale expires on January 5, 2003. Should we exercise our sale right, we would be
entitled to recover the full amount of all refundable investments (the $92,700
refundable portion of the $97,700 deposit and any additional investment made in
the Zoom Group.) If we exercise this right, the other members will be jointly
and severally liable to pay this amount within ninety (90) days. Our right to
purchase the interests of the other members of the Zoom Group expires on
December 31, 2005. Under our right to purchase, we have the option to purchase
all the interests of the other members of the Zoom Group for a purchase price
determined in accordance with a prearranged formula based upon the initial
purchase price of the Drydock Building plus 20% a year, prorated after the first
year. We have no obligation to exercise either our purchase or sale right, and
no member of the Zoom Group has any right to require us to do so. Any decision
to exercise any of these rights will be made by the independent directors of
Zoom.
Recently Issued Accounting Standards
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather that at the date of a commitment to an exit or disposal
plan. This statement is effective for fiscal years beginning after December 31,
2002. We do not believe that the impact of adopting SFAS 146 will have a
material impact on our consolidated financial statements.
FASB Emerging Issues Task Force Issue No. 00-14 "Accounting for Certain
Sales Incentives" addresses the recognition, measurement, and income statement
classification for certain types of sales incentives. The application of the
guidance in Issue No. 00-14 resulted in a change in the manner in which we
record certain types of discounts and sales and marketing incentives that are
provided to our customers. We have historically recorded these incentives as
selling expenses. Under Issue No. 00-14, beginning on January 1, 2002, we began
recording The Company has historically recorded these incentives as selling
expenses. Under Issue No. 00-14, beginning on January 1, 2002, the Company
records these discounts and incentives as reductions of revenue. In April 2001,
the FASB Emerging Issues Task Force reached a consensus on Issue No. 00-25
"Accounting for Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products". Issue No. 00-25 addresses
whether certain consideration offered by a vendor to a distributor, including
slotting fees, cooperative advertising arrangements and "buy-down" programs,
should be characterized as operating expenses or reductions of revenue. Issue
No. 00-14 and 00-25 were implemented in the first fiscal quarter of 2002 and
prior period reported amounts have reclassified to conform to the new
presentation (see note 11 to the consolidated 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.
Our revenues have declined and we have incurred significant losses and used
significant cash in operations over the last three years.
We incurred a net loss of $4.6 million in the first nine months of fiscal
2002 and net losses of approximately $18.3 million in fiscal 2001, $3.1 million
in fiscal 2000, and $1.4 million in fiscal 1999. During 1999 through 2001, our
revenue declined from $62.2 million in 1999 to $57.7 million in 2000 and $41.6
million in 2001. In the nine months ending on September 30,2002, our revenue was
$29.1 million, a 9.2% decline from the prior year's first nine months. The cash
used in operations during 1999 through 2001 was $2.6 million in 2001, $8.0
million in 2000, and $2.7 million in 1999. In the first nine months of 2002, our
cash provided from operations was positive, at $2.5 million. As of September 30,
2002 we had net working capital of $15.7 million including cash of $7.0 million.
We attribute the decline of our business primarily to a decline in the
retail dial-up modem market and delays in the roll-out of the V.92 modem
standard. We anticipate that we will continue to incur significant expenses for
the foreseeable future as we:
o continue to develop and seek appropriate approvals for our dial-up modem,
broadband access, wireless local area network, Internet gateway, and dialer
products; and
o continue to make efforts to expand our sales channels internationally, and
into new channels appropriate to our new product areas.
Although we have reduced our operating expense levels significantly, our
revenues must increase or we will continue to incur operating losses. We cannot
guarantee that our expenditure reductions will continue or that we will be able
to halt the decline in our revenues. Although we believe that we have sufficient
resources to fund our planned operations over the next year, if we fail to
increase our revenues, our longer-term ability to stay in business and to
achieve our intended business objectives could be adversely effected. Our
continuing losses and use of cash 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 improved. 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 revenues, 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 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.
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 revenues 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. As
the market for cable and ADSL modems matures and competition between cable and
ADSL service providers intensifies, it is likely that there will be increased
retail distribution of cable and ADSL modems. While increased retail sale of
broadband modems could increase our sales of these products, it could further
reduce demand for our dial-up modems. Decreasing average selling prices and
reduced demand for our dial-up modems would result in decreased revenue for
dial-up modems, which has been our primary source of revenue.
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 incumbents
cable equipment providers like Motorola and Scientific Atlanta.
Our initial sales of broadband products have been adversely affected by all
of these factors. We cannot assure that we will be able to successfully
penetrate these markets.
Continued fluctuations in our operating results could cause the market
price of our common stock to fall.
Our operating results have fluctuated in the past and are likely to
fluctuate in the future. It is possible that our revenues and operating results
will be below the expectations of investors in future quarters. If we fail to
meet or surpass the expectations of investors, the market price of our common
stock will most likely fall. Factors that have affected and may in the future
affect our operating results include:
o the overall demand for dial-up, cable and ADSL modems, wireless local area
network products, Internet gateway products, dialers, and other
communications products;
o the timing of new product announcements and releases by us and our
competitors;
o successful testing, qualification and approval of our products, such as
Cablelabs(R) qualification of cable modems, telephone company qualification
of ADSL modems, approval by service providers for use on their networks,
and governmental approvals;
o variations in the number and mix of products we sell;
o the timing of customer orders and adjustments of delivery schedules to
accommodate our customers' programs;
o the availability of components, materials and labor necessary to produce
our products;
o the timing and level of expenditures in anticipation of future sales;
o pricing and other competitive conditions; and
o seasonality.
Our customer base is concentrated and the loss of one or more of our
customers could harm our business.
Relatively few customers have accounted for a significant portion of our
net sales. In fiscal 2001, approximately 53% of our net sales were attributable
to four customers, each of whom accounted for more than 10% of our net sales. In
the first nine months of 2002, approximately 45% of our net sales were
attributable to three customers, each of whom accounted for 10% or more of our
net sales. Because our customer base is concentrated, a loss of one or more of
these significant customers or a reduction or delay in orders or a default in
payment from any of our top customers could significantly reduce our sales which
would materially harm our business, results of operations, and financial
condition.
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. In the rapidly changing technology environment in which
we operate, product cycles tend to be short. Therefore, the resources we devote
to product development, sales and marketing may not generate material revenues
for us. In addition, short product cycles has 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 2001, we
recorded a reduction of revenue of $.9 million for customer price protection. In
the first nine months of 2002, we recorded a reduction of revenue of $.3 million
for 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 recently
introduced 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. Since that time, most of these component shortages have been
alleviated. 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 September 30, 2002, our inventory level is $7.1 million, a
reduction of $4.0 million from December 31, 2001 primarily attributable to
reduced inventory purchases attributable to the delivery of no-charge components
from our key component vendors 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 six 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. We purchase chipsets for our wireless
network interface cards from Intersil Corporation. In the past, we have
experienced delays in receiving shipments of modem chipsets from our sole source
suppliers. We may experience similar delays in the future. In addition, some
products may have other components that are available from only one source. If
we are unable to obtain a sufficient supply of components from our current
sources, we 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.
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 still in
its development stage. 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. In addition, if any of one or more of
the alternative technologies gain market share at the expense of another
technology, demand for our products may be reduced, and 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 decrease demand for
our products or make our products obsolete. Our competitors by product group
include the following:
o Dial-up modem competitors: Actiontec, Askey, Best Data, Creative Labs, GVC,
SONICblue, and US Robotics.
o Cable modem competitors: D-Link, Linksys, Motorola, Samsung, Scientific
Atlanta, Thomson, and Toshiba.
o ADSL modem competitors: Alcatel, Siemens (formerly Efficient Networks),
U.S.Robotics, and Westell.
o Wireless Local Area Network competitors: 3Com, Buffalo Technologies, Cisco
Systems, D-Link, Intel, Linksys, Proxim, and SMC.
The principal competitive factors in our industry include the following:
o product performance, features and reliability;
o price;
o product availability and lead times;
o size and stability of operations;
o breadth of product line;
o sales and distribution capability;
o tailoring of product to local market needs, sometimes including packaging,
documentation, software, and support in the local language;
o ease of use and technical support and service;
o relationships with providers of broadband access services; and o compliance
with industry standards.
Our business is dependent on the Internet and the development of the
Internet infrastructure.
Our success will depend in large part on increased use of the Internet to
increase the demand for high-speed communications products. Critical issues
concerning the commercial use of the Internet remain largely unresolved and are
likely to affect the development of the market for our products. These issues
include security, reliability, cost, ease of access, and quality of service.
Our success also 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.
Any perceived degradation in the performance of the Internet as a whole
could undermine the benefits of our products. Potentially increased performance
provided by our products and the products of others ultimately is limited by and
reliant upon the speed and reliability of the Internet backbone itself.
Consequently, the emergence and growth of the market for our products will
depend on improvements being made to the entire Internet infrastructure to
alleviate overloading.
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 accounted for approximately 29% in fiscal 2000 and
38% in fiscal 2001. In Q3 2002 our international sales accounted for
approximately 37% of our revenues. Currently our operations are significantly
dependent on our international operations, and may be materially and adversely
affected by many factors including:
o international regulatory and communications requirements and policy
changes;
o favoritism towards local suppliers;
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 revenues. If foreign markets for our current and
future products develop more slowly than currently expected, 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.
Our executive officers and directors may control certain matters to be
voted on by the shareholders. These officers and directors may vote in a manner
that is not in your best interests.
Based upon information provided to us, our executive officers and directors
beneficially own, in the aggregate as of September 30, 2002, approximately 23.9%
of our outstanding common stock. As a result, these shareholders could
significantly influence certain matters to be voted on by the shareholders.
These matters include the election of directors, amendments to our certificate
of incorporation and approval of significant corporate transactions. These
executive officers and directors may vote as shareholders in a manner that is
not in your best interests.
The volatility of our stock price could adversely affect an investment in
our common stock.
The market price of our common stock has been and may continue to be highly
volatile. We believe that a variety of factors have caused and could in the
future cause the stock price of our common stock to fluctuate, including:
o announcements of developments related to our business, including
announcements of certification by the FCC or other regulatory authorities
of our products or our competitors products;
o quarterly fluctuations in our actual or anticipated operating results,
assets, liabilities, and order levels;
o general conditions in the US and worldwide economies;
o announcements of technological innovations;
o new products or product enhancements introduced by us or our competitors;
o developments in patents or other intellectual property rights and
litigation; and
o developments in our relationships with our customers and suppliers.
In addition, in recent years the stock market in general and the markets
for shares of small capitalization and "high-tech" companies in particular, have
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Any fluctuations in the future
could adversely affect the market price of our common stock and the market price
of our common stock may decline.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company owns financial instruments that are sensitive to market risks
as part of its investment portfolio. The investment portfolio is used to
preserve the Company's capital until it is required to fund operations,
including the Company's research and development activities. None of these
market-risk sensitive instruments are held for trading purposes. The Company
does not own derivative financial instruments in its investment portfolio. The
investment portfolio contains instruments that are subject to the risk of a
decline in interest rates.
Investment Rate Risk - The Company's 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, the Company does 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 $60,000 of interest expense per year.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This report contains forward-looking information relating to Zoom's plans,
expectations and intentions, including statements relating to Zoom's dial-up
modem, cable modem, ADSL modem, wireless networking, and dialer sales and
development activities, the anticipated growth of sales resulting from the V92
service rollout, the anticipated development of Zoom's markets and sales
channels, the anticipated level of demand for Zoom's products, the anticipated
effect of the "no charge" components will have on Zoom's liquidity, the
anticipated impact of Zoom's cost-cutting initiatives, Zoom's ability to
continue listing on the Nasdaq National Market or, if necessary, obtain listing
on the Nasdaq Small Cap market, and Zoom's financial condition or results of
operations. Actual results may be materially different than those expectations
as a result of known and unknown risks, including: Zoom's continuing losses;
Zoom's ability to obtain additional financing for working capital and other
purposes; Zoom's ability to effectively manage its inventory; uncertainty of new
product development and introduction, including budget overruns, project delays
and the risk that newly introduced products may contain undetected errors or
defects or otherwise not perform as anticipated, and other delays in shipments
of products; the early stage of development of the cable and ADSL data
communications markets, the uncertainty of market growth of those markets, and
Zoom's ability to more successfully penetrate those markets, which have been
challenging markets with significant barriers to entry; Zoom's dependence on one
or a limited number of suppliers for certain key components; rapid technological
change; competition; the risk that Zoom's common stock will be delisted from the
Nasdaq National Market or be unable to qualify for listing on the Nasdaq Small
Cap Market; and other risks set forth in herein and in Zoom's other filings with
the Securities and Exchange Commission. Zoom cautions readers not to place undue
reliance upon any such forward-looking statements, which speak only as of the
date made. Zoom expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statements to reflect any change
in the Zoom's expectations or any change in events, conditions or circumstance
on which any such statement is based.
Item 4. Controls and Procedures.
Within the 90-day period prior to the date of this report, our Chief
Executive Officer and Chief Financial Officer performed an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in SEC Rule
13a-14), which have been designed to ensure that material information related to
the company is timely disclosed. Based upon that evaluation, they concluded that
the disclosure controls and procedures were effective.
Since the last evaluation of our internal controls and procedures for
financial reporting, Zoom has made no significant changes in those internal
controls and procedures or in other factors that could significantly affect our
internal controls and procedures for financial reporting.
PART II - OTHER INFORMATION
Item 5. Other Events and Information
NASDAQ Hearing
We received a letter from the Nasdaq Stock Market stating that Zoom had not
regained compliance with the $1.00 minimum bid requirement for the Nasdaq
National Market and that our common stock would be delisted on October 30, 2002.
We have requested a hearing regarding the delisting, which has been scheduled
for December 12, 2002. Pending the outcome of the hearing, our common stock will
continue to be listed on the Nasdaq National Market. If the outcome of our
hearing is not successful, Zoom intends to apply for listing on the Nasdaq Small
Cap Market. Zoom believes it currently meets the requirements to transfer to the
Nasdaq Small Cap Market.
SFAS No. 142 Disclosure
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, which addresses financial accounting and reporting for
acquired goodwill and other intangible assets. On January 1, 2002, we did not
report any goodwill or other intangible assets on our consolidated balance
sheet. On January 1, 2002, the Company recorded an extraordinary gain of
$255,287 upon the adoption of SFAS No. 142, which resulted from the elimination
of the remaining negative goodwill on the Company's consolidated balance sheet
related to a previous acquisition.
We believe that all audited financial statements incorporated by reference
into our open registration statements are fairly presented, in all material
respects, without transitional disclosure. Accordingly, we present in this
quarterly report, net loss before goodwill amortization, net of tax and related
per share amounts for the years ended December 31, 1999, 2000 and 2001 as
follows (in thousands, except per share amounts):
Year ended
December 31, December 31, December 31,
1999 2000 2001
Net loss as reported $ (1,409) $ (3,077) $ (18,329)
Add back: Goodwill amortization
expense, net of tax effect 421 569 781
------ ----- -----
Adjusted net loss $ (988) $ (2,508) $ (17,548)
Basic and diluted loss per
share, as reported $ (0.19) $ (0.39) $ (2.33)
Add back: Goodwill amortization
expense, net of tax effect 0.06 0.07 0.10
----- ----- -----
Pro-forma basic and diluted
loss per share $ (0.13) $ (0.32) $ (2.23)
ITEM 6 - Exhibits and reports on Form 8-K
(a) Exhibits
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) No reports on Form 8-K were filed by the Company during the quarter ending
September 30, 2002.
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: November 13 , 2002 By: /s/ Frank B. Manning
------------------------------------------
Frank B. Manning, President
Date: November 13, 2002 By: /s/ Robert Crist
-------------------------------------------
Robert Crist, Vice President of Finance
and Chief Financial Officer (Principal
Financial and Accounting Officer)
CERTIFICATION
I, Frank B. Manning, Chief Executive Officer of Zoom Technologies, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Zoom Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
-----------------------
/s/ Frank B. Manning,
Chief Executive Officer
CERTIFICATION
I, Robert Crist, Chief Financial Officer of Zoom Technologies, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Zoom Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
-----------------------
/s/ Robert Crist,
Chief Financial Officer