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 ending March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-18672
ZOOM TECHNOLOGIES, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 51-0448969
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
--------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [ X ]
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, as of May 2, 2003 was 7,852,466 shares.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
Item 1. Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 (unaudited) 3
Consolidated Statements of Operations for the three
Months Ending March 31, 2003 and 2002
(unaudited) 4
Consolidated Statements of Cash Flows for the three
Months Ending March 31, 2003 and 2002
(unaudited) 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 5. Other Events 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23 - 24
Exhibit Index 25
PART I - FINANCIAL INFORMATION
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
March 31, 2003 December 31, 2002
-------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 7,690,027 $ 7,612,274
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances of $2,668,034 at
March 31, 2003 and $2,646,408 at December 31, 2002 3,215,394 3,714,202
Inventories, net 6,197,599 6,782,550
Prepaid expenses and other current assets 492,176 1,037,733
---------- ----------
Total current assets 17,595,196 19,146,759
Property, plant and equipment, net 3,341,171 3,485,911
---------- ----------
Total assets $ 20,936,367 $ 22,632,670
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 217,423 $ 191,550
Accounts payable 1,720,839 2,406,843
Accrued expenses 1,107,445 1,207,724
---------- ----------
Total current liabilities 3,045,707 3,806,117
Long-term debt 5,264,381 5,342,057
---------- ----------
Total liabilities 8,310,088 9,148,174
---------- ----------
Stockholders' equity:
Common stock, $0.01 par value. Authorized 25,000,000
shares; issued 7,860,866 shares, outstanding 7,852,466
and 7,858,266 shares at March 31,2003 and December 31,
2002, respectively 282,452 282,452
Additional paid-in capital 27,962,763 27,962,763
Retained earnings (accumulated deficit) (15,609,846) (14,770,278)
Accumulated other comprehensive income (loss) (1,768) 11,755
Treasury stock (7,322) (2,196)
---------- ----------
Total stockholders' equity 12,626,279 13,484,496
---------- ----------
Total liabilities and stockholders' equity $ 20,936,367 $ 22,632,670
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ending
March 31,
-----------------------------
2003 2002
---- ----
Net sales $ 7,538,513 $ 8,973,517
Costs of goods sold 5,393,719 7,183,327
------------ ------------
Gross profit 2,144,794 1,790,190
Operating expenses:
Selling 1,361,768 1,572,616
General and administrative 957,796 910,647
Research and development 752,204 1,075,934
------------ ------------
Total operating expenses 3,071,768 3,559,197
------------ ------------
Operating income (loss) (926,974) (1,769,007)
Other income (expense):
Interest income 21,311 31,529
Interest (expense) (54,812) (88,376)
Equity in losses of affiliate - (30,000)
Other, net 120,907 121,843
------------ ------------
Total other income (expense), net 87,406 34,996
------------ ------------
Income (loss) before income tax
expense and extraordinary item (839,568) (1,734,011)
Income tax expense (benefit) - 2,012,844
------------ ------------
Income (loss) before extraordinary
item (839,568) (3,746,855)
Extraordinary gain on elimination
of negative goodwill - 255,287
------------ ------------
Net income (loss) $ (839,568) $ (3,491,568)
============ ============
Earnings (loss) per common share before extraordinary item:
Basic $ (0.11) $ (0.47)
============ ============
Diluted $ (0.11) $ (0.47)
============ ============
Extraordinary gain on elimination of negative goodwill
Basic and diluted $ - $ 0.03
============ ============
Earnings (loss) per common share:
Basic $ (0.11) $ (0.44)
============ ============
Diluted $ (0.11) $ (0.44)
============ ============
Weighted average common and common equivalent shares
Basic 7,853,382 7,860,866
============ ============
Diluted 7,853,382 7,860,866
============ ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ending
March 31,
2003 2002
-----------------------------------
Cash flows from operating activities:
Net income (loss) $ (839,568) $ (3,491,568)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Non-operating gain on refund of deposit (40,237) -
Extraordinary gain on elimination of negative
goodwill (255,287)
Depreciation and amortization 145,334 233,527
Write-off of net deferred tax assets _ 2,012,844
Equity in losses of affiliate _ 30,000
Changes in operating assets and liabilities:
Accounts receivable, net 486,589 611,269
Inventories, net 584,951 3,074,336
Prepaid expenses and other assets 585,794 (66,534)
Accounts payable and accrued expenses (786,283) (169,410)
--------- ---------
Net cash provided by (used in) operating activities 136,580 1,979,177
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (594) (12,986)
--------- ---------
Net cash provided by (used in) investing activities (594) (12,986)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (51,803) (38,714)
Purchase of Treasury stock (5,126) -
--------- ---------
Net cash provided by (used in) financing activities (56,929) (38,714)
--------- ---------
Effect of exchange rate changes on cash (1,304) (40,303)
--------- ---------
Net increase (decrease) in cash 77,753 1,887,174
Cash beginning of period 7,612,274 5,252,058
--------- ---------
Cash end of period $ 7,690,027 $ 7,139,232
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 58,090 $ 88,376
========= =========
Income taxes $ - $ -
========= =========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Zoom Technologies, Inc. (the
"Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and footnote disclosures required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ending December 31, 2002 included in the
Company's 2002 Annual Report on Form 10-K.
The consolidated balance sheet as of March 31, 2003, the consolidated
statements of operations for the three months ending March 31, 2003 and 2002,
and the consolidated statements of cash flows for the three months ending March
31, 2003 and 2002 are unaudited, but, in the opinion of management, include all
adjustments (consisting of normal, recurring adjustments) necessary for a fair
presentation of results for these interim periods.
The consolidated financial statements include the accounts and operations
of the Company's wholly-owned subsidiary, Zoom Telephonics, Inc., a Delaware
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2003.
(b) Stock-Based Compensation
The Company accounts for its stock option plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and Related Interpretations." No
stock-based compensation cost is reflected in net income (loss) for these plans,
as all options granted under these plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of Financial Accounting Standards
Board (FASB) Statement No. 123, "Accounting for Stock Based Compensation", to
stock based compensation (in thousands, except per share data):
FOR THE THREE MONTHS
ENDED MARCH 31,
(UNAUDITED)
----------------------------
2003 2002
------------- ------------
Net loss, as reported.................................. $ (839,568) $(3,491,568)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects............ (117,259) (270,945)
------------- ------------
Pro forma net loss..................................... $ (956,827) $(3,762,513)
============= ============
Loss per share:
Basic and diluted - as reported........................ $ (0.11) $ (0.44)
Basic and diluted - pro forma.......................... $ (0.12) $ (0.48)
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------------
2003 2002
------ -------
Risk-free interest rate.............. 2.26% 3.48%
Expected dividend yield.............. 0.00% 0.00%
Expected volatility.................. 136.59% 100.63%
Expected life (years)................ 2.47 2.04
Weighted-average fair value of
options granted during the period.... $ 0.52 $ 1.10
(c) Recent Accounting Pronouncements
In June 2002, the FASB issued Statement of Financial Accounting Standards
(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 than
at the date of a commitment to an exit or disposal plan. This statement is
effective for restructuring activities commencing after December 31, 2002. The
adoption of SFAS 146 did not have a material impact on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure" (SFAS 148). SFAS 148 amends SFAS No.
123 "Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. As the Company
did not make a voluntary change to the fair value based method of accounting for
stock-based employee compensation in 2002, the adoption of SFAS 148 did not have
a material impact on the Company's financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses the
consolidation of variable interest entities in which the equity investors lack
one or more of the essential characteristics of a controlling financial interest
or where the equity investment at risk is not sufficient for the entity to
finance its activities without subordinated financial support from other
parties. The Interpretation applies to VIEs created after January 31, 2003 and
to VIEs in which an interest is acquired after that date. Effective July 1,
2003, it also applies to VIEs in which an interest is acquired before February
1, 2003. The Company may apply the Interpretation prospectively, with a
cumulative effect adjustment as of July 1, 2003, or by restating previously
issued financial statements with a cumulative effect adjustment as of the
beginning of the first year restated. The Company is in the process of
evaluating the effects of applying Interpretation No. 46 in 2003. Based on its
preliminary analysis, the Company does not anticipate that adoption of
Interpretation No. 46 will have a material effect on the Company's consolidated
financial statements.
(2) Liquidity
On December 31, 2002, Zoom had cash of approximately $7.6 million. For the
three months ending March 31, 2003, the Company's net cash provided by operating
activities was $0.1 million, and net cash used in investing and financing
activities was $0.1 million. On March 31, 2003, Zoom had cash of approximately
$7.7 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 improvement in the Company's operating performance.
To conserve cash and manage its liquidity, the Company implemented expense
reductions throughout 2002 and continued these reductions in the first three
months of 2003. The employee headcount was 215 at December 31, 2001, and 176 at
March 31, 2003. The Company will continue to assess its cost structure as it
relates to its revenues and cash position in 2003, and may make further
reductions if these actions are deemed necessary.
During the past several years the Company has experienced 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 promotions by the Internet
Service Providers of their V.92 and V.44 modem implementations and/or the
availability of new web acceleration techniques 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, and dialer markets.
Management believes it has sufficient resources to fund its planned
operations over the next 12 months. However, if the Company is unable to
increase its revenues, reduce its expenses, or raise capital, the Company's
longer-term ability to continue as a going concern and achieve its intended
business objectives could be adversely affected.
(3) Earnings Per Share
The reconciliation of the numerators and denominators of the basic and
diluted net earnings (loss) per share computations for the Company's reported
net income (loss) is as follows:
Three Months Ending
March 31,
------------------------------
2003 2002
------------ ------------
Basic:
Net income (loss) $ (839,568) $(3,491,568)
Weighted average shares
outstanding 7,853,382 7,860,866
----------- -----------
Net earnings (loss) per share $ (0.11) $ (0.44)
=========== ===========
Diluted:
Net income (loss) $ (839,568) $(3,491,568)
Weighted average shares
outstanding 7,853,382 7,860,866
Net effect of dilutive stock
options based on the Treasury
stock method using average
market price - -
Weighted average shares
outstanding 7,853,382 7,860,866
----------- -----------
Net earnings (loss) per share $ (0.11) $ (0.44)
=========== ============
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 2,147 and 2,008 shares of common stock at March
31, 2003 and 2002, respectively, were outstanding but not included in the
computation of diluted earnings per share for the three months ended March 31,
2003 and 2002, as their effect would be antidilutive.
(4) Inventories
Inventories consist of the following: March 31, 2003 December 31, 2002
------------------ -----------------
Raw materials $ 2,905,919 $ 2,808,421
Work in process 618,716 673,275
Finished goods 2,672,964 3,300,854
---------- ----------
$ 6,197,599 $ 6,782,550
========== ==========
During the three months ending March 31, 2003 and December 31, 2002 the
Company recorded lower of cost or market write-downs of $237,715 and $174,905
related to broadband and wireless inventory, respectively.
(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
March 31,
----------------------------
2003 2002
------------ ------------
Net income (loss) $ (839,568) $ (3,491,568)
Foreign currency translation
adjustment (13,523) (40,303)
----------- --------------
Comprehensive income (loss) $ (853,091) $ (3,531,871)
=========== ==============
6) Long-Term Debt
On January 10, 2001, the Company obtained a mortgage for $6 million on the
real estate property located at 201 and 207 South Street, Boston, Massachusetts.
This is a 20-year direct reduction mortgage with a five-year balloon due January
10, 2006. The interest rate is fixed for one year, based on the one year Federal
Home Loan Bank rate plus 2.5 % per annum. The rate is adjusted on January 10th
of each calendar year commencing on January 10, 2002. The rate was adjusted to
3.81% on January 10, 2003. On September 24, 2002 the Company paid an additional
principal payment of $178,761 in compliance with a mortgage covenant.
(7) Commitments
During the three months ending March 31, 2003, 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,
2002.
In March 2002, following the termination of discussions pursuant to which
Zoom proposed to purchase a ground lease for a manufacturing facility located at
27 Drydock Avenue, Boston, Massachusetts (the "Drydock Building"), Zoom pursued
an arrangement to purchase 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 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 owned a 20% interest in the Zoom
Group.
In August, 2002, the Zoom Group purchased the Drydock Building for a
purchase price of $6.1 million. The Zoom Group obtained a mortgage of $4.2
million, less closing costs and legal fees. Each member of the Zoom Group
contributed $482,577 for their share of the investment plus initial working
capital. These initial capital contributions include each member's share of the
deposit.
Under the Zoom Group Operating Agreement, the Company had both the right to
sell its interest in the Zoom Group to the other members of the Zoom Group by
January 5, 2003 for the Company's original purchase price, and the right to
purchase the other members' entire interests in the Zoom Group through December
31, 2005 in accordance with a predetermined formula. In December 2002, a special
committee of Zoom's board of directors, appointed to review the Drydock
transactions, determined that is was advisable and in the best interest of the
Company to exercise its right to sell its interest in the Zoom Group to the
remaining Zoom Group LLC members. Accordingly, effective January 5, 2003, the
Company exercised its right to sell and assign its interest in the Zoom Group to
the remaining members of the Zoom Group for approximately $482,000. In March
2003, Zoom received the proceeds from the sale of its interest from the
remaining members of the Zoom Group. This action was taken to improve the
Company's liquidity position and to reduce its exposure to the Boston real
estate market.
(8) 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 ending March
31, 2003 and 2002, respectively, were comprised as follows:
Three Months Three Months
Ending % of Ending % of
Mar 31, 2003 Total Mar 31, 2002 Total
------------- ----- ------------- -----
United States $ 4,579,123 61% $ 5,509,321 61%
International 2,959,390 39% 3,464,196 39%
----------- --- ----------- ---
Total $ 7,538,513 100% $ 8,973,517 100%
=========== === =========== ===
(9) Extraordinary Gain
In the quarter ending March 31, 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.
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, 2002.
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
consolidated audited financial statements included in our annual report on Form
10-K for the year ending December 31, 2002. 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 recognize revenue for all three types of customers at the point when the
customers take legal ownership of the delivered products. Legal ownership passes
from Zoom to the customer based on the contractual FOB point specified in signed
contracts and purchase orders, which are both used extensively. Many of our
customer contracts or purchase orders specify FOB destination. Since it would be
impractical to verify ownership change for each individual delivery to the FOB
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 new product introductions, announced stock rotations, announced
customer store closings, etc. Management analyzes historical returns, current
economic trends, and changes in customer demand and acceptance of 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.
In the quarter ending March 31, 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 marketing 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, which in turn, reduced gross margins. The offset was an equal
reduction of selling expenses. EITF Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)," subsequently codified the guidance in Issue No. 00-14 and
00-25. There was no change in net income (loss) for either of the historical
periods restated.
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 debt. These reserves are drawn down as actual credits are
issued to the customer's accounts. Our bad-debt write-offs have not been
significant in recent years.
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 material will not be consumed. In the second half of
2000, when industry expectations were very high for expansion of the broadband
and wireless markets, we purchased parts to support our aggressive forecast for
a ramp-up of sales of cable modems, ADSL modems, and wireless networking
products. The subsequent slow down in the industry resulted in a significant
excess inventory position of materials. During 2001, the market selling prices
for the broadband and wireless products declined significantly because of an
industry-wide oversupply. Starting in 2001 and to a lesser extent in 2002, the
sales prices for some of the products dropped below our cost and, accordingly,
we then valued our inventory on a "lower of cost or market" basis. Our valuation
process is to compare our cost to the selling prices each quarter, and if the
selling price of a product is less than the "if completed" cost of our
inventory, we write-down the inventory on a "lower of cost or market" basis. In
each of Q1 2002 and Q1 2003, we recorded charges against inventory of $0.2
million as a result of lower of cost of market valuation.
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 have agreed to purchase approximately $8.0 million of components over a
period of approximately 30-months that commenced on January 1, 2002, provided
that those components were offered at competitive terms and prices. We are
required to purchase either a minimum percentage, as measured by unit purchases
or dollar amount of components, from a supplier over a two-year period
commencing on January 1, 2002, and we are currently exceeding that percentage.
In connection with these arrangements, we became entitled to receive at least
$3.0 million of no-charge components, based upon the supplier's market price for
the components in late 2001 and early 2002, and other pricing concessions based
on our purchase volumes. We received $1.2 million of these no-charge components
in the fourth quarter of 2001. We received the remainder of the no-charge
components in the first quarter of 2002. The favorable impact of the free
components is being recognized on a delayed basis as a purchase discount over
the total number of components acquired through the 30 month supply agreement.
Valuation and Impairment of Intangible Assets. We assess the impairment of
our goodwill assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. In the quarter ending March 31, 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.
Valuation and Impairment of Deferred Tax Assets. As part of the process of
preparing our consolidated financial statements we are required to estimate our
income taxes. This process involves the estimation of our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision
for income taxes and any valuation allowance recorded against our net deferred
tax assets. In 2001, we recorded a $3.8 million income tax charge to reflect an
additional increase in our deferred tax asset valuation allowance. Management's
decision to record the valuation allowance was based on the uncertain
recoverability of our deferred tax asset balance. 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 $2.0 million
deferred tax asset that remained on our balance sheet as of December 31, 2001.
In our first quarter ending March 31, 2002, we recorded an additional $2.0
income tax charge and valuation reserve, which reduced our net deferred tax
asset balance to zero. This additional reserve reflected our decision to
discontinue our specific tax planning strategy to sell our headquarters building
in Boston in light of the less favorable market conditions for the sale of such
building. As of March 31, 2003 our deferred tax asset balance was zero.
Results of Operations
We recorded net sales of $7.5 million for our first quarter ending March
31, 2003, down 16.0% from $9.0 million in the first quarter of 2002. We reported
an operating loss of $0.9 million for the first quarter of 2003, compared to an
operating loss of $1.8 million in the first quarter of 2002. We reported a net
loss of $0.8 million for our first quarter ending March 31, 2003 compared to a
net loss of $3.5 million for the first quarter ending March 31, 2002. Earnings
per share improved as we reported a loss of $0.11 per diluted share for the
first quarter of 2003 compared to a loss of $0.44 per diluted share for the
first quarter of 2002.
Our total net sales decrease of 16% from Q1 2002 was primarily due to
decreased dial-up modem sales. Dial-up modem sales declined primarily due to a
decrease of 8% in dial-up modem unit sales and a 6% decline in dial-up modem
average selling prices. In Q1 2003 net sales in our broadband categories more
than doubled compared to Q1 2002, with our strongest quarter sales to date of
ADSL modems.
Our gross profit increased to $2.1 million in Q1 2003 from $1.8 million in
Q1 2002. Our gross profit percentage of net sales improved from 19.9% in Q1 2002
to 28.5% of net sales in Q1 2003. The improvement resulted primarily from our
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 operating expenses decreased by $0.5 million to $3.1 million in Q1 2003
from $3.6 million in Q1 2002. The decrease of $0.5 million was comprised of
lower selling expenses of $0.2 million and lower research and development
expenses of $0.3 million, partially offset by increased general and
administrative expenses of $0.05 million. We have reduced our worldwide staff
from 198 employees on March 31, 2002 to 176 employees on March 31, 2003. We also
continue to maintain a temporary wage freeze and tight controls on discretionary
spending.
Selling expenses in Q1 2003 decreased to $1.4 million or 18.1% of net sales
from $1.6 million or 17.5% of net sales in Q1 2002. Selling expenses were lower
primarily because of reduced personnel costs, commissions, rent, and freight and
distribution costs relating primarily from lower sales. These lower selling
expenses were slightly offset by higher marketing costs.
General and administrative expenses were $1.0 million or 12.7% of net sales
in Q1 2003 compared to $0.9 million or 10.1% of net sales in Q1 2002. General
and administrative expenses changed primarily due to increased bad debt expense
resulting from a recovery of a previously written-off balance in Q1 2002 versus
a small charge to bad debt expense in Q1 2003, partially offset by lower
depreciation and amortization, taxes, and other general support expenses.
Research and development expenses were $0.8 million or 10.0% of net sales
in Q1 2003 compared to $1.1 million or 12.0% of net sales in Q1 2002. Research
and development costs decreased primarily as a result of reduced personnel
costs, facility occupancy costs, and equipment rental expenses, partially offset
by increased purchased services. Development and support continues on all of our
major product lines.
Other income (expense) net improved from income of $0.03 million in Q1 2002
to income of $0.09 million in Q1 2003. Included in other income (expense) are
interest income, interest expense, and other, net.
o Interest income. Interest income decreased to $0.02 million in Q1 2003 from
$0.03 million in Q1 2002. 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 Q1 2003 compared to Q1 2002. The average
interest rate earned was approximately 34 basis points lower in Q1 2003
than in Q1 2002.
o Interest expense. Interest expense decreased to $0.05 million in Q1 2003
from $0.09 million in Q1 2002. The interest expense decrease is due to
lower interest expense on our $6.0 million mortgage taken out in January
2001 on our headquarters building. The interest rate and the outstanding
balance were both lower in Q1 2003 compared to Q1 2002. The mortgage
interest rate is adjusted annually in January of each year.
o Equity in losses of affiliate. Our losses in affiliates decreased to $0.0
million in Q1 2003 from $0.03 million in Q1 2002. Our affiliate investments
are fully written down to zero at March 31, 2003.
o Other, net. The total was $0.12 million in Q1 2002 and Q1 2003.
We did not record any net tax benefit to offset our $0.8 million pre-tax
loss in Q1 2003. In Q1 2002, we recorded a $2.0 million income tax charge to
increase our valuation allowance against our net deferred tax asset. The
accounting treatment with respect to our net deferred tax asset is described in
further detail under the caption "Critical Accounting Policies" above.
Liquidity and Capital Resources
On March 31, 2003, we had working capital of $14.5 million, including $7.7
million in cash and cash equivalents.
In Q1 2003 operating activities generated $0.1 million in cash. Our net
loss in Q1 2003 was $0.8 million. Sources of cash from operations included a
reduction of inventory of $0.6 million, a decrease in accounts receivable of
$0.5 million, and a reduction of prepaid expenses of $0.6 million. The decrease
in inventory and accounts receivable was primarily the result of reduced
consecutive quarter to quarter sales and improved inventory turnover and
improved collection of accounts receivable. The reduction of prepaid expenses
resulted primarily from the receipt of a payment of $0.48 million for the sale
of our interest in the Zoom Group to the other members of the Zoom Group in
connection with the termination of our participation in the ownership of the
Drydock building. The Drydock transaction is discussed in further detail under
the caption "Commitments and Related Party Transaction" below. Uses of cash from
operations included a decrease of accounts payable of $0.8 million.
In Q1 2003 our net cash used in investing activities was $0.001 million. We
anticipate that we will continue with modest investments in equipment and in
improvements to our facilities during the year.
In Q1 2003 we used cash for financing activities of $0.06 million
consisting primarily of $0.05 million for monthly principal payments on the
mortgage on our headquarters facility. Our mortgage is a 5-year balloon mortgage
that is amortized on a 20-year basis and matures on January 10, 2006. The
interest rate is adjusted annually in January of each year based on the Federal
Home Loan Bank rate plus 2.5 % per annum. In 2002, the interest rate was 4.97%.
As of January 10, 2003, the rate of interest was changed to 3.81%.
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 an improvement
in our operating performance. However, we believe we would be able to obtain
funds, if and when required, by factoring accounts receivable. We do not plan to
put a factoring arrangement in place until and unless it is necessary since
there would be an up-front cost to finalize the arrangement.
To conserve cash and manage our liquidity, we implemented expense
reductions throughout 2002 and in the first quarter of 2003. Our employee
headcount was 215 at December 31, 2001, which has been reduced to 176 at March
31, 2003. We will continue to assess our cost structure as it relates to our
revenues and cash position in 2003, and we may make further reductions if the
actions are deemed necessary.
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 promotions by the Internet Service Providers of their V.92 and
V.44 modem implementations and/or the availability of new web acceleration
techniques 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 and dialer markets.
Management believes it has sufficient resources to fund its planned
operations over the next 12 months. 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 and Related Party Transaction
During the three months ending March 31, 2003, there were no material
changes to the capital commitments and contractual obligations of the Company
from those disclosed in the Form 10-K for the year ending December 31, 2002.
In March 2002, following the termination of discussions pursuant to which
Zoom proposed to purchase a ground lease for a manufacturing facility located at
27 Drydock Avenue, Boston, Massachusetts (the "Drydock Building"), Zoom pursued
an arrangement to purchase 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 owned a 20% interest in the Zoom Group.
The managers of the Zoom Group are Peter Kramer and the third party.
In August, 2002, the Zoom Group purchased the Drydock Building for a
purchase price of $6.1 million. The Zoom Group obtained a mortgage of $4.2
million, less closing costs and legal fees. Each member of the Zoom Group
contributed $482,577 for their share of the investment plus initial working
capital. These initial capital contributions include each member's share of the
deposit.
Under the Zoom Group Operating Agreement, the Company had both the right to
sell its interest in the Zoom Group to the other members of the Zoom Group by
January 5, 2003 for the Company's original purchase price, and the right to
purchase the other members' entire interests in the Zoom Group through December
31, 2005 in accordance with a predetermined formula. Effective January 5, 2003,
we exercised our right to sell our interest in the Zoom Group to the other
members of the Zoom Group. In March 2003, we received the proceeds from the sale
of our interest from the remaining members of the Zoom Group, LLC to the value
of $.48 million, which represents the Company's investment amount less the
non-refundable deposit and the negotiated share of losses in the Zoom Group,
plus interest earned on the Company's original deposit. This action was taken to
improve the Company's liquidity position and to reduce its exposure to the
Boston real estate market.
On April 25, 2003, we agreed to purchase substantially all of modem assets
of SONICblue Incorporated, including the trade names Diamond and Supra, for
approximately $495,000, subject to adjustment, and certain end-user obligations,
including customer support and firmware upgrades. SONICblue, a consumer
electronics manufacturer, is currently involved in voluntary bankruptcy
proceedings filed under Chapter 11 of the Bankruptcy Code. Our obligation to
purchase the assets is still subject to approval of the bankruptcy court,
overbids in the bankruptcy court, and customary closing conditions.
Recently Issued Accounting Standards
In June 2002, the FASB issued Statement of Financial Accounting Standards
(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 than
at the date of a commitment to an exit or disposal plan. This statement is
effective for restructuring activities commencing after December 31, 2002. The
adoption of SFAS 146 did not have a material impact on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure" (SFAS 148). SFAS 148 amends SFAS No.
123 "Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. As the Company
did not make a voluntary change to the fair value based method of accounting for
stock-based employee compensation in 2002, the adoption of SFAS 148 did not have
a material impact on the Company's financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIEs"). This Interpretation addresses the
consolidation of variable interest entities in which the equity investors lack
one or more of the essential characteristics of a controlling financial interest
or where the equity investment at risk is not sufficient for the entity to
finance its activities without subordinated financial support from other
parties. The Interpretation applies to VIEs created after January 31, 2003 and
to VIEs in which an interest is acquired after that date. Effective July 1,
2003, it also applies to VIEs in which an interest is acquired before February
1, 2003. The Company may apply the Interpretation prospectively, with a
cumulative effect adjustment as of July 1, 2003, or by restating previously
issued financial statements with a cumulative effect adjustment as of the
beginning of the first year restated. The Company is in the process of
evaluating the effects of applying Interpretation No. 46 in 2003. Based on our
preliminary analysis, the Company does not anticipate that adoption of
Interpretation No. 46 will have a material effect on the Company's consolidated
financial statements.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Some of the statements contained in this report are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties and other factors which may cause our or
our industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to statements regarding: Zoom's plans, expectations and
intentions, including statements relating to Zoom's prospects and plans relating
to sales of our dial-up, cable and ADSL modems, the anticipated benefits Zoom
will receive as a result of V.92 rollout and the consolidation in the dial-up
modem markets, the anticipated development of Zoom's markets and sales channels,
the level of demand for Zoom's products, the anticipated effect that the "no
charge" components will have on Zoom's liquidity, the anticipated impact of
Zoom's cost-cutting initiatives, and Zoom's financial condition or results of
operations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking statements are
based. Factors that could cause or contribute to differences in our future
financial results include those discussed in the risk factors set forth below as
well as those discussed elsewhere in this report and in our filings with the
Securities and Exchange Commission. We qualify all of our forward-looking
statements by these cautionary statements.
RISK FACTORS
This report contains forward-looking statements that involve risks and
uncertainties, such as statements of our objectives, expectations and
intentions. The cautionary statements made in this report should be read as
applicable to all forward-looking statements wherever they appear in this
report. Our actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this report.
Our revenues have declined and we have incurred significant losses over the last
three years.
We incurred a net loss of $0.8 million in Q1 2003, $5.1 million in 2002,
$18.3 million in 2001, and $3.1 million in 2000. Our revenue has declined from
$57.7 million in 2000, to $41.6 million in 2001 and to $37.3 million in 2002.
Our revenue was $7.5 million for the three months ending March 31, 2003.
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, 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 probably 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 improves. Additional
financing may not be available to us on a timely basis if at all, or on terms
acceptable to us. If we fail to obtain acceptable additional financing when
needed, we may be required to further reduce planned expenditures or forego
business opportunities, which could reduce our 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.
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
2002, 43% of our net sales were attributable to three customers, each of whom
accounted for 10% or more of our net sales. In Q1 2003, approximately 54% of our
net sales were attributable to four customers, each of whom accounted for more
than 10% of 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. Therefore, the resources we devote to product
development, sales and marketing may not generate material revenues for us. In
addition, short product cycles have resulted in and may in the future result in
excess and obsolete inventory, which has had and may in the future have an
adverse affect on our results of operations. In an effort to develop innovative
products and technology, we have incurred and may in the future incur
substantial development, sales, marketing, and inventory costs. If we are unable
to recover these costs, our financial condition and operating results could be
adversely affected. In addition, if we sell our products at reduced prices in
anticipation of cost reductions and we still have higher cost products in
inventory, our business would be harmed and our results of operations and
financial condition would be adversely affected.
Our operating results have been adversely affected because of price protection
programs.
Our operating results have been adversely affected by reductions in average
selling prices because we gave credits to some of our customers as a result of
contractual price protection guarantees. Specifically, when we reduce the price
for a product, the customer receives a credit for the difference between the
customer's most recent purchase price and our reduced price for the product, for
all unsold product at the time of the price reduction. For fiscal 2002 and Q1
2003, we recorded a reduction of revenue of $0.7 million and $0.05 million,
respectively, for customer price protection.
We may be subject to product returns resulting from defects, or from
overstocking of our products. Product returns could result in the failure to
attain market acceptance of our products, which would harm our business.
If our products contain undetected defects, errors, or failures, we could
face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, either of which would reduce our sales and
harm our business. We are also exposed to the risk of product returns from our
customers as a result of contractual stock rotation privileges and our practice
of assisting some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead to higher than normal returns.
Our failure to effectively manage our inventory levels could materially and
adversely affect our liquidity and harm our business.
During fiscal 2000, in anticipation of future sales of our broadband access
products, particularly cable modems, we significantly increased our inventory
for these products. We also built up this inventory in response to shortages of
components for these products earlier in that year. We have also had difficulty
in generating significant orders for some of our products, particularly
broadband products, and as a result, we experienced a significant increase in
our inventory, to $21.7 million on December 31, 2000. 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 March 31, 2003, our inventory level was $6.2 million, a reduction
of $4.9 million from December 31, 2001 primarily attributable to reduced
inventory purchases attributable to the delivery of no-charge components from
our key component vendors, lower inventory levels to support the reduced sales
activity in 2002 and the first quarter of 2003, improved inventory turnover,
inventory write-downs for lower of cost or market adjustments and obsolescence,
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 provided by only one of these
companies. The loss of the services of any of our significant third party
manufacturers or a material adverse change in the business of or our
relationships with any of these manufacturers could harm our business. Since
third parties manufacture our products and we expect this to continue in the
future, our success will depend, in part, on the ability of third parties to
manufacture our products cost effectively and in sufficient quantities to meet
our customer demand.
We are subject to the following risks because of our reliance on third party
manufacturers:
o reduced management and control of component purchases;
o reduced control over delivery schedules;
o reduced control over quality assurance;
o reduced control over manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices;
o interruption of supplies from assemblers as a result of a fire, natural
calamity, strike or other significant event; and
o misappropriation of our intellectual property.
We may be unable to produce sufficient quantities of our products because we
obtain key components from, and depend on, sole or limited source suppliers.
We obtain certain key parts, components, and equipment from sole or limited
sources of supply. For example, we purchase dial-up and broadband modem chipsets
from Conexant Systems and Agere Systems. Integrated circuit product areas
covered by one or both companies include dial-up modems, ADSL modems, cable
modems, networking, routers, and gateways. In the past, we have experienced
delays in receiving shipments of modem chipsets from our sole source suppliers.
We may experience similar delays in the future. In addition, some products may
have other components that are available from only one source. 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, and in the cases of cable and ADSL modems, the
market is dominated by large cable and telephone service providers. 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,
Intel, Sitecom, and US Robotics.
o Cable modem competitors: Com21, D-Link, Linksys, Motorola, Netgear,
Scientific Atlanta, SMC, Terayon, Thomson, and Toshiba.
o ADSL modem competitors: 3Com, Alcatel, Siemens (formerly Efficient
Networks), Thomson, US Robotics, and Westell.
Our business is dependent on the Internet and the development of the Internet
infrastructure.
Our success will depend on the continued growth of the use of the Internet
by businesses, particularly for applications that utilize multimedia content and
that require high bandwidth. The 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 30% in fiscal 2000 and
38% in fiscal 2001. In 2002 our international sales accounted for approximately
40% of our revenues. In Q1 2003 our international sales accounted for
approximately 39% 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 toward 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.
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 $58,000 of interest expense per year.
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). These controls and procedures have been designed to ensure that
material information related to our 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
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.13 Agreement between Zoom and the members of the Zoom Group LLC.
99.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 CFO Certification 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
March 31, 2003.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZOOM TECHNOLOGIES, INC.
Date: May 8, 2003 By: /s/ Frank B. Manning
------------------------------------------
Frank B. Manning, President
Date: May 8, 2003 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: May 8, 2003
/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: May 8, 2003
/s/ Robert Crist,
-----------------------
Chief Financial Officer
Exhibit List
Exhibit No. Description
10.13 Agreement between Zoom and the members of the Zoom
Group LLC.
99.1 CEO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002