UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0448969
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
207 South Street, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 423-1072
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
The aggregate market value of the common stock, $0.01 par value, of the
registrant held by non-affiliates of the registrant as of June 28, 2002
(computed by reference to the closing price of such stock on The Nasdaq Market
on such date) was approximately $6,288,693.
The number of shares outstanding of the registrant's common stock, $0.01 par
value, as of March 20, 2003 was 7,858,266 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the registrant's 2003 annual
meeting of shareholders to be filed with the SEC in April 2003 are incorporated
by reference into Part III, Items 10-13 of this Form 10-K.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements involve known and
unknown risks, uncertainties and other factors which may cause our or our
industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to statements regarding:
o the timing of new product introductions;
o the success of our V.92 dial-up modems;
o ability to reach our goal of returning to profitability;
o the anticipated development and expansion of our markets and sales
channels;
o investment in resources for product design in foreign markets;
o the development of new competitive technologies and products;
o approvals, certifications and clearances for our products;
o production schedules for our products;
o market acceptance of new products;
o business strategies;
o dependence on significant suppliers;
o dependence on significant manufacturers, distributors and customers;
o the availability of debt and equity financing;
o general economic conditions;
o the realization of cash improvement from the sale of excess inventory;
o the realization of cash improvement from the utilization of no-charge
components;
o the impact of our cost-savings initiatives; and
o our financial condition or results of operations.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
report to reflect any change in our expectations or any change in events,
conditions or circumstances on which any of our forward-looking statements are
based. Factors that could cause or contribute to differences in our future
financial results include those discussed in the risk factors set forth in Item
7 below as well as those discussed elsewhere in this report. We qualify all of
our forward-looking statements by these cautionary statements.
PART I
ITEM 1 - BUSINESS
Overview
We design, produce and market dial-up and broadband modems, speed dialers, and
other communications products. Our primary objective is to build upon our
position as a leading supplier of Internet access devices and to take advantage
of a number of emerging trends in communications including enhanced Internet
access, higher data rates, and new voice and multimedia applications.
To date our revenues have come primarily from sales of our dial-up modems. Our
dial-up modems connect personal computers and other devices to the local
telephone line for transmission of data, fax, voice, and images. Our dial-up
modems enable personal computers and other devices to connect to other computers
and networks, including the Internet and local area networks, at top data speeds
up to 56,000 bits per second. Most of our modems connect to a single telephone
line, but we also make multi-line modems which can connect to up to sixteen
telephone lines. We also have a line of integrated services digital network
("ISDN") products, which can transmit and receive data simultaneously at up to
128,000 bits per second.
In response to increased demand for faster connection speeds and increased modem
functionality, we have invested resources to expand our product line to include
cable and ADSL modems and related broadband access products. Cable modems
provide a high-bandwidth connection to the Internet through a cable-TV cable
that connects to compatible equipment that is typically at or near the cable
service provider. We began shipping cable modems during 2000. Our cable modem
customers in the U.S., the U.K., and other countries now include cable service
providers, original equipment manufacturers, and retailers.
Our Asymmetric Digital Subscriber Line modems, known as ADSL modems, provide a
high-bandwidth connection to the Internet through a standard telephone line that
typically connects to compatible ADSL equipment in or near the central telephone
office. We are now shipping four ADSL modems: one internal PCI bus model and
three external models.
We have been designing a new generation of telephone dialers and related
telephony products. In the early 1980s Zoom introduced its first generation of
dialers, including Demon Dialertm and Hotshottm. Dialers simplify the placing of
a phone call by dialing digits automatically. Zoom's new generation of dialers
includes a model designed for alternative long distance companies, and a second
model designed for use with prepaid phone cards. Zoom plans to extend its
proprietary dialer technology into a wide range of telephony products.
Zoom also has a line of cameras designed to be used with personal computers.
Some "web camera" models only function when they are connected to a computer,
and allow storage or transmission of a still picture or moving video. Some new
models also work when they are not connected to the computer; so that pictures
or videos can be stored into the camera away from the computer, and later
downloaded into the computer.
We were incorporated in British Columbia under the name 1519 Holdings Ltd. on
July 7, 1986 and subsequently changed our name to Zoom Telephonics, Inc. on
October 1, 1987. On June 28, 1991, we changed our jurisdiction of incorporation
from British Columbia to Canada. In February 2002 we changed our jurisdiction
of incorporation from Canada to the State of Delaware and changed our corporate
name to Zoom Technologies, Inc. Our operations continue to be carried out by our
wholly owned subsidiary, Zoom Telephonics, Inc., a Delaware corporation. Our
principal executive offices are located at 207 South Street, Boston, MA 02111
and our telephone number is (617) 423-1072.
Products
General
The vast majority of our products facilitate communication of data through the
Internet. Our dial-up modems and integrated services digital network, or ISDN,
modems link PCs and portable information devices through the telephone network
and connected networks, including the Internet and local area networks.
Similarly, our cable modems use the cable-TV cable and our ADSL modems use the
local telephone line to provide a high-speed link to the Internet. Our dialers
can be used to route voice calls to a voice-over-IP network including the
Internet. Our PC cameras provide pictures that can be communicated over the
Internet.
Dial-Up Modems
We have a broad line of dial-up modems with top data speeds up to 56,000 bps,
available in internal, external and PCMCIA models. PC-oriented internal modems
are designed primarily for installation in the PCI or ISA slot of IBM
PC-compatibles. Embedded internal modems are designed to be embedded in non-PC
equipment such as point-of-purchase terminals, kiosks, and set-top boxes. Many
of our external modems are designed to work with almost any terminal or
computer, including IBM PC-compatibles, the Apple MacIntosh and other computers.
Our external models include desktop models and multi-line modems with up to
sixteen modems in an enclosure. Our PCMCIA modems are designed for use with
notebook and sub-notebook computers as well as PDAs (personal digital
assistants) equipped with standard PCMCIA slots. When sold as packaged retail
products, our modems are shipped complete with third-party software that
supports the hardware capabilities of the modem.
56K modems allow users connected to standard phone lines to download data at
speeds up to 56,000 bps when communicating with compatible central sites
connected to digital lines such as ISDN or T1 lines. Those central sites are
typically online services, Internet Service Providers, or remote LAN access
equipment. We began shipping pre-standard K56flextm 56K modems in the second
quarter of 1997. In February 1998, a committee of the International
Telecommunications Union ("ITU") agreed upon the V.90 standard for 56K. V.90 is
now widely deployed in equipment made by central site manufacturers, and most of
our dial-up modem sales include V.90. We are now also shipping V.92 modems,
which offer increased functionality and faster upstream data rates than other
dial-up modems. We expect V.92 modems to take an increasing and ultimately
larger share of the dial-up modem market because of these increased functions.
In March and April of 1999, we acquired substantially all of the modem assets of
Hayes Microcomputer Products, Inc., an early leader in the modem industry. In
July 2000, we acquired the trademark and product rights to Global Village
products. Global Village is a leading modem brand for Apple MacIntosh computers.
We now sell and market dial-up modems under the Zoom, Hayes and Global Village
names, as well as under various other private-label brands developed for some of
our large accounts.
In 2000, 2001, and 2002, our dial-up modems and related products comprised of
approximately 92%, 83%, and 84% of our sales respectively.
The following sets forth some of the key features incorporated in one or more of
our dial-up modems:
o ZoomGuardtm. ZoomGuard represents the protective circuitry added to our
modems to improve their ability to withstand the effects of lightning
striking a phone line to which the modem is connected. For most modem
manufacturers, lightning is a major cause of field failures.
o PC Card Guard tm. PC Card Guard represents the protective circuitry added
to our PCMCIA modems to protect against destruction caused by plugging the
modem into a digital PBX phone jack. We were one of the first companies to
develop this useful feature.
o Voice Mail. Voice mail capability allows a PC to serve as an answering
machine with message storage and local or remote message retrieval.
o Channel 2tm. Channel 2 is our trademark for a feature that works with the
optional Call Waiting feature available from some phone companies. Channel
2 permits the modem to recognize an incoming call when the modem is
on-line, so that the user can determine how to handle the call.
o Distinctive Ring. Distinctive Ring is a service offered by telephone
companies that assigns more than one phone number to a single phone line,
with each number ringing differently. This service along with appropriate
modem functionality allows someone to arrange for one phone number to be
answered as a phone line, a second number to be answered as a fax line, and
a third number to be answered as a data line. We have been issued a United
States patent related to our distinctive ring technology.
o Plug & Play. Microsoft's Windows software supports Plug & Play, a standard
that is intended to allow the installation of Plug & Play-compatible
peripherals like modems with limited hardware configuration by the
end-user.
International Modems.
Most foreign countries have their own telecommunications standards and
regulatory approval requirements for sales of communications products such as
those we offer. As a result, the introduction of new products into international
markets can be costly and time-consuming. In 1993, we introduced our first
dial-up modem approved for selected Western European countries. Since then we
have continued to expand our product offerings internationally. We have received
regulatory approvals for, and are currently selling dial-up modems in a number
of countries, including Australia, Austria, Belgium, Denmark, Finland, Germany,
Hungary, India, Ireland, Italy, Japan, the Netherlands, Poland, Portugal,
Russia, Slovenia, South Africa, Spain, Sweden, Switzerland, and the United
Kingdom. We intend to continue to expand and enhance our product line for our
existing markets and to seek approvals for the sale of our products in new
countries throughout the world.
Multi-line Modems.
In 1996 we began shipping a family of multi-line dial-up modems targeted for
local area network fax and data server applications, computer bulletin boards,
multi-line voice mail, and other applications. The Zoom/MultiLine products hold
up to eight voice dial-up faxmodems in one small external case that includes
status indicators for each dial-up modem. The Hayes Century product line
provides up to 16 dial-up modems in a single enclosure.
ISDN Products.
We have a family of modems for Integrated Service Digital Network, or ISDN,
communications. ISDN is a telephone service that allows existing phone lines to
be used to transmit data digitally. ISDN service permits much higher data
transmission rates than conventional analog telephone service. Basic ISDN
service provides two 64,000 bps channels and one 16,000 bps channel. The higher
rates of data transmission achievable with ISDN can be particularly attractive
for data-intensive applications such as the transmission of graphics and video
images, World Wide Web browsing, or video telephony.
In late 2000 we introduced the following ISDN products:
o a PCI model that plugs into the PCI slot of a Windows PC,
o a USB model that plugs into the USB port of a PC, and
o a serial port model that plugs into the serial port of a PC.
Cable Modems
Each cable service provider has its own approval process, in which the cable
service provider may require CableLabs(R) certification in addition to the cable
service provider's own company approval. We have obtained CableLabs(R)
certification for four types of DOCSIS-standard cable modems - PCI, USB,
Ethernet, and Ethernet/USB models. Some of these models have also received cable
service provider approvals; for instance, the Ethernet/USB model includes
approvals by AT&T, Adelphia, Charter, Comcast, Cox, and Mediacom. The approval
process has been and continues to be a significant barrier to entry, as are the
strong relationships with cable service providers enjoyed by incumbent cable
equipment providers like Motorola and Scientific Atlanta.
In 2002 Zoom was successful at gaining new cable service provider approvals, and
in upgrading firmware where appropriate for some customers. In 2003 we expect to
continue to sell cable modems to cable service providers and original equipment
manufacturers both inside and outside the US. We are already selling cable
modems through some high-volume retailers in the US, and we hope to expand sales
through that channel. So far sales through the retail channel have been
handicapped by a number of factors, including the approval process described
above and the fact that some cable service providers do not provide a financial
incentive to a customer who purchases his own modem rather than leasing it from
the cable service provider.
ADSL Modems.
Our ADSL modems incorporate the standards that are most popular with U.S.
telephone companies and Internet Service providers, including G.DMT and G.Lite.
In 2000, we designed and shipped our first ADSL modems, an external USB model
and an internal PCI model. In 2002 we introduced new USB and PCI models, and
also introduced an Ethernet model and a USB/Ethernet model with router features.
Wireless
In general we are de-emphasizing wireless network interface cards, and
concentrating our wireless network product plans on broadband modems with
built-in wireless networking capability.
Full-Color Video Cameras and Other Video Products.
In late 1997 we shipped the Zoom/Video Cam, a full-color PC video camera. Since
then we have introduced new PC camera models. We have limited hardware product
development in the video area. Typically we purchase another company's camera
hardware, and license appropriate packing and documentation to achieve a
finished product. We are continuing to expand our line of PC cameras to utilize
our sales channels and to benefit from the growing market for low-cost cameras.
Dialers and Related Telephony Products.
Our dialers simplify the placing of a phone call by dialing digits
automatically. We shipped our first telephone dialer, the Demon Dialer(R), in
1981, and in 1983 began shipping the Hotshot(TM) dialer. As the dialer market
diminished due to equal access, we focused on modems and other peripherals for
the personal computer market. In the second half of 2003, we expect to commence
shipping a new generation of dialers incorporating proprietary technology. Our
proprietary technology includes proprietary hardware, firmware, and software,
and is currently protected by one U.S. patent. These dialers are well suited to
easily route appropriate calls through money-saving long-distance service
providers. We expect to sell some of our dialer models to long-distance service
providers, and other models to high-volume retailers. In 2002, dialer products
represented under 1% of Zoom's sales.
Sales Channels
General
We sell our products primarily through high-volume retailers and distributors,
value-added resellers, PC system integrators, and OEMs. We support our major
accounts in their efforts to discern strategic directions in the market, to
maintain appropriate inventory levels, and to offer a balanced selection of
products. As we expand our product offerings, particularly in cable, ADSL and
other broadband modems, we are seeking to expand and strengthen our market
channels to include cable service providers, phone companies, and Internet
Service Providers. Expanding our market channels to include significant sales to
these customers has been challenging and we cannot assure that we will be
successful.
During 2002, our customers who accounted for more than 10% of our total sales
were Staples, Best Buy, and DSG Retail. Together, these 3 customers accounted
for 43% of our total sales. The loss of any of these customers, or a significant
reduction in sales to these customers, could have a material adverse effect on
our business.
High-volume Retailers.
In the United States, we reach the PC retail market primarily through
high-volume retailers. Our extensive United States retail distribution network
includes Best Buy, CDW, Fry's, Micro Electronics, PC Connection, Staples, and
many others.
Distributors.
We sell significant quantities of dial-up modems through distributors, who often
sell to corporate accounts, value-added resellers and other channels that are
generally not served by our high-volume retailers. Our North American
distributors include D&H Distributing, Gates-Arrow, Ingram Micro, and Tech Data.
System Integrators and Original Equipment Manufacturers.
Our OEM customers sell our products under their own name or incorporate our
products as a component of their systems. We seek to be responsive to the needs
of personal computer manufacturers by providing on-time delivery of
high-quality, reliable, cost-effective products with strong engineering and
sales support. We believe many of these customers also appreciate the
improvement in their products' image due to use of a Zoom or Hayes brand modem.
International Channels.
In international markets, we sell our products primarily through independent
distributors and retailers. Our international distributors include Beijing Tide
Hightech Co. Ltd, Computer 2000, Criterium, Informatics, Micro Peripherals,
Pouladis, UMD, and others. Our major European high-volume retailers include
Business Logic, Centromail, DSG Retail (Dixons, PC World, and PC City), Time
Computers, and others. Our international net sales as a percentage of total
sales have grown from 8% in 1994 to 40% in 2002. Our revenues from international
sales were $17.2 million in 2000, $15.7 million in 2001, and $14.9 million in
2002. See note 17 to our accompanying financial statement for further
information regarding our geographic sales. Approximately 56%, 61% and 70% of
our international sales in 2000, 2001 and 2002, respectively, were customers in
the United Kingdom. We believe sales growth outside of the United States will
continue to require substantial additional investments of resources for product
design and testing, regulatory approvals, and native-language instruction
manuals, software, packaging, sales support, and technical support. We have made
this investment in the past for many countries, and we expect to make this
investment for many countries and products in the future.
Sales, Marketing and Support
Our sales, support, and marketing are primarily managed from our headquarters in
Boston, Massachusetts and our technical support office in Boca Raton, Florida.
In North America we sell our Zoom, Hayes, Global Village, and private-label
dial-up modem products primarily through commissioned independent sales
representatives managed and supported by our own staff. Most major cable service
providers are serviced by our employees. North American technical support is
primarily handled from our Boston headquarters location and from our technical
support offices in Boca Raton, Florida. We also maintain a sales, support, and
logistics office in the United Kingdom. Warehousing, customs clearance, and
shipping for the United Kingdom and some other European countries are primarily
handled by contract with an unaffiliated specialist in these services located in
England. For countries outside North America and Europe, our in-house staff
typically works directly with country-specific distributors. Our worldwide OEM
sales are primarily handled by our staff in the United States and United
Kingdom, who are at times assisted by our sales staff or commissioned sales
representatives. See note 17 to our accompanying financial statements for
geographic information regarding our sales.
We believe that Zoom, Hayes, and Global Village are widely recognized brand
names. We build upon our brand equity in a variety of ways, including
cooperative advertising, product packaging, trade shows, and public relations.
We generally provide our high-volume retailers with funds to advertise our
products in conjunction with the customers' general advertising. We believe that
this type of advertising efficiently and effectively targets the end-user market
for our products.
We attempt to develop quality products that are user-friendly and require
minimal support. We typically support our claims of quality with product
warranties of one to seven years, depending upon the product. To address the
needs of those end-users of our products who require assistance, we have our own
staff of technical specialists who currently provide telephone support six days
per week. Our technical support specialists also maintain a significant World
Wide Web support facility that includes email, firmware and software downloads,
and the SmartFactstm Q&A search engine. In 2001 we expanded our European
technical support to enable users in other countries to access support in their
own language. This support is generally provided by our support staff in Boston,
Florida, and the United Kingdom.
Research and Development
Our research and development efforts are focused on developing new products for
PC communications markets, further enhancing the capabilities of existing
products, and reducing production costs. We have developed close collaborative
relationships with certain of our OEM customers and component suppliers, who
work with us to identify and respond to emerging technologies and market trends
by developing products that address these trends. In addition, we purchase modem
and other chipsets that incorporate sophisticated technology from third parties,
thereby eliminating the need for us to develop this technology in-house. As of
December 31, 2002 we had 22 employees engaged primarily in research and
development. Our research and development team performs electronics hardware
design and layout, mechanical design, prototype construction and testing,
component specification, firmware and software development, product testing,
foreign and domestic regulatory approval efforts, end-user and internal
documentation, and third-party software selection and testing.
During 2000, 2001 and 2002 we expended $6.2 million, $5.3 million, and $3.5
million, respectively, on research and development activities.
Manufacturing and Suppliers
Our products are currently designed for high-volume automated assembly,
primarily in China, Korea, Taiwan, and the United States to help assure reduced
costs, rapid market entry, short lead times, and reliability. For some products
we supply large kits of parts to one of several automated contract
manufacturers. For other products, particularly those manufactured in Asia, our
contract manufacturers obtain some of the material required to assemble the
products based upon a Zoom Telephonics Approved Vendor List and Parts List. The
contract manufacturers insert parts onto the printed circuit board, with most
parts automatically inserted by machine, solder the circuit board, and
in-circuit test the completed assemblies. Functional test and packaging are
sometimes performed by the contract manufacturer. For the United States and many
other markets, functional test and packaging are more commonly performed at our
manufacturing facilities in Boston, allowing us to tailor the packaging and its
contents for our customers immediately before shipping. We also perform circuit
design, circuit board layout, and strategic component sourcing in our Boston
manufacturing facility. Wherever the product is built, our quality systems are
used to help assure that the product meets our specifications.
We usually use one primary contract manufacturer for a given design. We
sometimes maintain back-up production tooling at a second assembler for our
highest-volume products. Our contract manufacturers are normally adequate to
meet reasonable and properly planned production needs; but a fire, natural
calamity, strike, or other significant event at an assembler's facility could
adversely affect our shipments and revenues. Currently, a substantial percentage
of our manufacturing is performed by SameTime Electronics ("SameTime"). The loss
of SameTime's services or a material adverse change in SameTime's business or in
our relationship with SameTime could materially and adversely harm our business.
To lessen the risk associated with using one manufacturer of a substantial
portion of our products, we are also using Vtech, Mac Systems, Taicom, Abocom,
Behaviour Tech, SIS (Southern Info. Systems) and Billion to manufacture various
of our products.
Our products include a large number of parts, most of which are available from
multiple sources with varying lead times. However, most of our products include
a sole-sourced chipset as the most critical component of the product. We
currently buy dial-up modem chipsets exclusively from the two highest-volume
dial-up modem chipset manufacturers, Conexant Systems, Inc. and Agere Systems
Inc. Conexant and Agere have significant resources for semiconductor design and
fabrication, analog and digital signal processing, and communications firmware
development. Integrated circuit product areas covered by one or both companies
include dial-up modems, ADSL modems, cable modems, wireless networking, home
phone line networking, routers, and gateways. We also buy chipsets for our ADSL
modems from Conexant. Some of our chipset suppliers provide us certain
concessions and incentives, such as reduced prices or free chipsets, if we
purchase or agree to purchase a certain dollar amount of products from these
suppliers. Our commitments to purchase products from these suppliers are
described in further detail in Item 7 of this report and in note 7(b) to our
accompanying financial statements.
We have experienced delays in receiving shipments of modem chipsets in the past,
and we may experience such delays in the future. Moreover, there can be no
assurance that a chipset supplier will, in the future, sell chipsets to us in
quantities sufficient to meet our needs or that we will purchase the specified
dollar amount of products necessary to receive concessions and incentives from a
chipset supplier. An interruption in a chipset supplier's ability to deliver
chipsets, a failure of our suppliers to produce chipset enhancements or new
chipsets on a timely basis and at competitive prices, a material increase in the
price of the chipsets, our failure to purchase a specified dollar amount of
products or any other adverse change in our relationship with modem component
suppliers could have a material adverse effect on our results of operations.
Competition
The PC communication products industry is intensely competitive and
characterized by aggressive pricing practices, continually changing customer
demand patterns and rapid technological advances and emerging industry
standards. These characteristics result in frequent introductions of new
products with added capabilities and features, and continuous improvements in
the relative functionality and price of modems and other PC communications
products. Our operating results and our ability to compete could be adversely
affected if we are unable to:
o successfully anticipate customer demand accurately;
o manage our product transitions, inventory levels, and manufacturing process
efficiently;
o distribute or introduce our products quickly in response to customer demand
and technological advances;
o differentiate our products from those of our competitors; or
o otherwise compete successfully in the markets for our products.
Our primary competitors by product group include the following:
o Dial-up modem competitors: Actiontec, Askey, Best Data, Creative Labs, GVC,
Intel, Sitecom, SONICblue, 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.
Many of our competitors and potential competitors have more extensive financial,
engineering, product development, manufacturing, and marketing resources than we
do.
The principal competitive factors in our industry include the following:
o product performance, features, and reliability;
o price;
o brand image;
o product availability and lead times;
o size and stability of operations;
o breadth of product line and shelf space;
o sales and distribution capability;
o technical support and service;
o product documentation and product warranties;
o relationships with providers of broadband access services; and
o compliance with industry standards.
We believe we are able to provide a competitive mix of the above factors for all
of our main product areas, particularly when our products are sold through
retailers or computer product distributors. We are less successful in selling
directly to providers of broadband access services.
Cable and ADSL modems transmit data at significantly faster speeds than dial-up
modems, which still account for the vast majority of our revenues. Cable and
ADSL modems, however, are generally more expensive than dial-up modems and
typically require a more expensive Internet access service. In addition, the use
of cable and ADSL modems is currently impeded by a number of technical and
infrastructure limitations. We began shipping both cable and ADSL modems in the
year 2000. In the year 2002, most of our competitors' cable and ADSL modem
products were sold through cable service operators, phone companies, and
Internet Service Providers. Only about 11% of new US cable modem placements in
2002 were sold at retail, and an even lower percentage were sold through
retailers in most other countries. ADSL had even less success at retail in the
US. Some European countries, however, significantly expanded their retailer sale
of ADSL modems in 2002, particularly in those countries that encouraged
competition with the incumbent telephone company. In the U.K., for instance,
this resulted in Zoom placing four ADSL modem models into DSG Retail.
Successfully penetrating the broadband modem market presents a number of
challenges, including:
o the current limited retail market for broadband modems;
o the relatively small number of cable, telecommunications and Internet
service providers that make up a substantial part of the market for
broadband modems;
o the significant bargaining power of these large volume purchasers;
o the time consuming, expensive and uncertain approval processes of the
various cable and ADSL service providers; and
o the strong relationships with service providers enjoyed by some incumbent
equipment providers, including Motorola and Scientific Atlanta for cable
modems.
Our initial sales of broadband products have been adversely affected by all of
these factors. It is likely that our success in selling broadband modems will
require success in the retail market. We continue to make efforts to improve our
share of the retail market and to expand the size of the retail market.
Intellectual Property Rights
We rely primarily on a combination of copyrights, trademarks, trade secrets and
patents to protect our proprietary rights. We have trademarks and copyrights for
our firmware (software on a chip), printed circuit board artwork, instructions,
packaging, and literature. We also have four patents and one pending patent
application in the United States. The patents which have been issued expire
between 2011 and 2015. There can be no assurance that any patent application
will be granted or that any patent obtained will provide protection or be of
commercial benefit to us, or that the validity of a patent will not be
challenged. Moreover, there can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop comparable or superior technologies.
We license certain technologies used in our products, typically bundled
software, on a non-exclusive basis. In addition we purchase chipsets that
incorporate sophisticated technology. We have received, and may receive in the
future, infringement claims from third parties relating to our products and
technologies. We investigate the validity of these claims and, if we believe the
claims have merit, we respond through licensing or other appropriate actions.
Certain of these past claims have related to technology included in modem
chipsets. We forwarded these claims to the appropriate vendor. If we or our
component manufacturers were unable to license necessary technology on a
cost-effective basis, we could be prohibited from marketing products containing
that technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action taken
against it.
Government Regulation
In addition to obtaining approvals and certifications of our broadband products
from CableLabs(R) and, in some cases, the actual cable, telephone or Internet
service provider, all of our products sold in the U.S are required to meet
United States government regulations, including regulations of the United States
Federal Communications Commission, known as the FCC, which regulate equipment,
such as modems, that connects to the public telephone network. The FCC also
regulates electromagnetic radiation emissions. For each of our products sold in
most foreign countries, specific regulatory approvals must be obtained for
matters such as electrical safety, manufacturing standards, country-specific
telecommunications equipment requirements, and electromagnetic radiation and
susceptibility requirements. We have received regulatory approvals for certain
modems in Australia, Austria, Belgium, Bulgaria, China, Cyprus, Denmark,
Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Israel,
Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, Russia,
Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland,
Turkey, and the United Kingdom. We expect to continue to seek and receive
approvals for new products in a large number of countries throughout the world.
The regulatory process can be time-consuming and can require the expenditure of
substantial resources. In many foreign countries, obtaining required regulatory
approvals may take significantly longer than in the United States. There can be
no assurance that the FCC or foreign regulatory agencies will grant the
requisite approvals for any of our products on a timely basis, if at all. United
States and foreign regulations regarding the manufacture and sale of
telecommunications devices are subject to future change. We cannot predict what
impact, if any, such changes may have upon its business.
Seasonality
We believe our sales are somewhat seasonal, with increased sales generally
occurring in mid-August through November. We expect that our quarterly results
will continue to fluctuate in the future as a result of seasonality and other
factors.
Backlog
Our backlog as of March 5, 2003 was $1.6 million, and on March 6, 2002 was $1.5
million. Many orders included in backlog may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of our net sales for any future period.
Employees
As of December 31, 2002 we had 185 full-time employees (including employees
hired on a temporary basis) versus 215 in 2001. Of the 2002 total, 22 were
engaged in research and development, 90 were involved in purchasing, assembly,
packaging, shipping and quality control, 47 were engaged in sales, marketing and
technical support, and the remaining 26 performed accounting, administrative,
management information systems, and executive functions. Our temporary employees
were comprised of 12 individuals at December 31, 2002. Most of these temporary
employees were employed in manufacturing. None of our employees is represented
by a labor union.
Our Executive Officers
The names and biographical information of our current executive officers, are
set forth below:
Name Age Position with Zoom
--------------------------------------------------------------------------------
Frank B. Manning 54 Chief Executive Officer, President and
Chairman of the Board
Peter R. Kramer 51 Executive Vice President and Director
Robert A. Crist 59 Vice President of Finance and Chief
Financial Officer
Terry J. Manning 51 Vice President of Sales and Marketing
Dean N. Panagopoulos 45 Vice President of Network Products
Deena Randall 49 Vice President of Operations
Frank B. Manning is a co-founder of our company. Mr. Manning has been our
president, chief executive officer, and a director since May 1977. He has served
as our chairman of the board since 1986. He earned his BS, MS and PhD degrees in
Electrical Engineering from the Massachusetts Institute of Technology, where he
was a National Science Foundation Fellow. Mr. Manning was a director of
MicroTouch Systems, a former NASDAQ-listed company involved in touchscreen
technology, from 1993 until their acquisition by 3M in early 2001. Since 1998
Mr. Frank Manning has also been a director of the Massachusetts Technology
Development Corporation, a public purpose venture capital firm that invests in
seed and early-stage technology companies in Massachusetts.
Peter R. Kramer is a co-founder of our company. Mr. Kramer has been our
executive vice president and a director since May 1977. He earned his BA degree
in 1973 from SUNY Stony Brook and his MFA degree from C.W. Post College in 1975.
Robert A. Crist joined us in July 1997 as vice president of finance and chief
financial officer. From April 1992 until joining us, Mr. Crist served in various
capacities at Wang Laboratories, Inc. (now Getronics), a computer software and
services company, including chief financial officer for the software business.
Prior to 1992 Mr. Crist served in various capacities at Unisys Corporation,
including assistant corporate controller, corporate director of business
planning and analysis, and corporate manufacturing and engineering controller.
Mr. Crist earned his BA degree from Pennsylvania State University and he earned
his MBA from the University of Rochester in 1971.
Terry J. Manning joined us in 1984 and served as corporate communications
director from 1984 until 1989 when he became the director of our sales and
marketing department. Terry Manning is Frank Manning's brother. Terry Manning
earned his BA degree from Washington University in St. Louis in 1974 and his
MPPA degree from the University of Missouri at St. Louis in 1977.
Dean N. Panagopoulos joined us in February 1995 as director of information
systems. In July 2000 Mr. Panagopoulos was promoted to the position of vice
president of network products. From 1993 to 1995, Mr. Panagopoulos worked as an
independent consultant. From 1991 to 1993, Mr. Panagopoulos served as director
of technical services for Ziff Information Services, a major outsourcer of
computing services. He attended the Massachusetts Institute of Technology from
1975 to 1978 and earned his BS degree in Information Systems from Northeastern
University in 1983.
Deena Randall joined us in 1977 as our first employee. Ms. Randall has served in
various senior positions within our organization and has directed our operations
since 1989. Ms. Randall earned her BA degree from Eastern Nazarene College in
1975.
ITEM 2 - PROPERTIES
Our corporate headquarters are located at 201 and 207 South Street, Boston,
Massachusetts. Approximately 16,000 square feet of this 56,000 square foot
facility is leased to third parties. We purchased these buildings in April 1993.
In January 2001, we received $6.0 million in financing by securing a mortgage on
this property. Our mortgage is a 5-year balloon mortgage that is amortized on a
20-year basis. The interest rate is fixed for one year, based on the one year
Federal Home Loan Bank rate plus 2.5% per annum. The rate is adjusted on January
10th of each calendar year. During fiscal 2002, the rate of interest was changed
to 4.97%. As of January 10, 2003, the rate of interest was reduced to 3.81%
In August 1996, we entered into a five-year lease for a 77,428 square foot
manufacturing and warehousing facility at 645 Summer Street, Boston, MA. On
February 28, 2001, we exercised our option to extend this lease for an
additional five years. We believe that this space provides us with enough
manufacturing space for our current operations and could support significant
growth.
In March 1999, we assumed an office lease from Hayes Microcomputer Products,
Inc. at 430 Frimley Business Park, Camberley, Surrey, U.K. We have an agreement
in principle to extend this lease term to 2006.
In September 2002, we entered into a five year lease, as a tenant, for
approximately 3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton,
Florida. We primarily use this facility as a technical support facility.
ITEM 3 - LEGAL PROCEEDINGS
No material litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered in this report.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In 2001 and 2002, our common stock was traded on the Nasdaq National Market
under the symbol "ZOOM." The following table sets forth, for the periods
indicated, the high and low sale prices per share of common stock, as reported
by the Nasdaq National Market. In January, 2003, our common stock was delisted
from the Nasdaq National Market and was listed, and is currently trading, on the
Nasdaq Small Cap Market under the symbol "ZOOM."
Fiscal Year Ending December 31, 2001 High Low
---- ---
First Quarter...................... $ 4.500 $ 2.188
Second Quarter..................... 3.320 2.250
Third Quarter...................... 3.100 1.050
Fourth Quarter..................... 1.800 1.100
Fiscal Year Ending December 31, 2002 High Low
---- ---
First Quarter...................... $ 2.130 $ 1.040
Second Quarter..................... 1.450 0.600
Third Quarter...................... 1.330 0.560
Fourth Quarter..................... 1.140 0.450
As of March 20, 2003, there were 7,858,266 shares of our common stock
outstanding and approximately 264 holders of record of our common stock.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the fourth quarter of 2002.
Dividend Policy
We have never declared or paid cash dividends on our capital stock and do not
plan to pay any cash dividends in the foreseeable future. Our current policy is
to retain all of our earnings to finance future growth.
ITEM 6 - SELECTED FINANCIAL DATA The following table contains our selected
consolidated financial data and is qualified in its entirety by the more
detailed consolidated financial statements and notes thereto included elsewhere
in this report. Our statement of operations data for the years ending December
31, 2000, 2001 and 2002 and our balance sheet data as of December 31, 2001 and
2002 have been derived from our consolidated financial statements, which have
been audited by KPMG LLP, independent certified public accountants, and are
included elsewhere in this report. Our statement of operations data for the
years ending December 31, 1998 and 1999 and our balance sheet data as of
December 31, 1998, 1999, and 2000 have been derived from our consolidated
financial statements, which have been audited by KPMG LLP and are not included
in this report. This data should be read in conjunction with the consolidated
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein.
Years Ending December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In thousands) except per share amounts
Statement of Operations Data:
Net sales............................. $ 59,846 $ 62,228 $ 57,708 $ 41,570 $ 37,274
Cost of goods sold.................... 45,181 40,550 39,404 35,193 27,937
------ ------ ------ ------ ------
Gross profit....................... 14,665 21,678 18,304 6,377 9,337
------ ------ ------ ------ ------
Operating expenses:
Selling............................ 9,753 11,711 10,672 7,480 5,848
General and administrative......... 4,976 6,276 6,228 7,938 3,405
Research and development........... 4,449 6,425 6,249 5,328 3,526
----- ----- ----- ----- -----
Total operating expenses 19,178 24,412 23,149 20,746 12,779
------ ------ ------ ------ ------
Operating income (loss)............ (4,513) (2,734) (4,845) (14,370) (3,442)
Other income (expense), net........... 1,074 737 469 (159) 66
----- ----- --- --- -----
Income (loss) before income taxes.. (3,439) (1,997) (4,376) (14,529) (3,376)
Income tax expense (benefit).......... (1,287) (588) (1,299) 3,800 2,015
----- ----- ----- ------ -----
Income (loss) before extraordinary
item (2,152) (1,409) (3,077) (18,239) (5,390)
Extraordinary gain on elimination
of negative goodwill.................. - - - - 255
------- ------- ----- ------- -----
Net income (loss).................. (2,152) (1,409) (3,077) (18,329) (5,136)
======= ======= ======= ======= =======
Earnings (loss) per common and
common equivalent share:
Loss before extraordinary item:
Basic and diluted.................. $ (.29) $ (.19) $ (.40) $ (2.33) $ (.68)
Extraordinary gain on elimination of
negative goodwill.................. $ - $ - $ - $ - $ .03
========= ========= ========= ========= =========
Net loss:
Basic and diluted.................. $ (.29) $ (.19) $ (.40) $ (2.33) $ (.65)
========= ========= ========= ========= =========
Weighted average common and
common equivalent shares:
Basic and diluted.................. 7,474 7,483 7,757 7,861 7,861
Years Ending December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $ 33,376 $ 29,573 $ 23,562 $ 18,218 $ 15,341
Total assets 43,560 43,072 46,960 29,185 22,633
Long-term obligations - 481 369 6,001 5,342
Total stockholders' equity 38,425 37,514 36,747 18,416 13,485
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the consolidated financial statements included
elsewhere in this report and the information described under the caption "Risk
Factors" below.
Overview
On February 28, 2002, we completed a change in our jurisdiction of incorporation
from Canada to the State of Delaware. In connection with the change in
jurisdiction, we changed our corporate name from Zoom Telephonics, Inc. to Zoom
Technologies, Inc. These changes were accomplished through a process called a
continuance under the laws of Canada and domestication under the laws of the
State of Delaware. The Company continues to trade on the Nasdaq Stock Market
under the symbol "ZOOM", and to operate through its wholly owned Delaware
subsidiary, Zoom Telephonics, Inc., which has not changed its name.
We were established in 1977, and initially produced and marketed speed dialers
and other specialty telephone accessories. We shipped our first dial-up modem in
1983 and our first dial-up faxmodem in 1990. In 2002, dial-up modems and related
products comprised approximately 84% of our net sales. We sell our dial-up
modems and related products both domestically and internationally through
high-volume retailers and distributors, and to PC manufacturers and other OEMs.
Starting in 2000, we made a significant investment in broadband modems, namely
cable modems and ADSL modems. Our hope is to increase our sales of these
products, in addition to other products including PC cameras and telephone
dialers.
We continually seek to improve our product designs and manufacturing approach in
order to reduce our costs. We pursue a strategy of outsourcing rather than
internally developing our dial-up modem chipsets, which are application-specific
integrated circuits that form the technology base for our modems. By outsourcing
the chipset technology, we are able to concentrate our research and development
resources on modem system design, leverage the extensive research and
development capabilities of our chipset suppliers, and reduce our development
time and associated costs and risks. As a result of this approach, we are able
to quickly develop new and innovative products while maintaining a relatively
low level of research and development expense as a percentage of sales. We also
outsource aspects of our manufacturing to contract manufacturers as a means of
reducing our fixed labor costs and capital expenditures, and to provide us with
greater flexibility in our production capacity.
In recent years, the market for after-market sales of dial-up modems has
declined, as personal computer (PC) manufacturers have incorporated a modem as a
built-in component in most consumer PCs. A new dial-up modem standard, known as
V.92, may provide an improvement in after-market dial-up modem sales, but this
improvement is dependent on the installation of compatible equipment by the
Internet Service Providers. The installation of V.92 equipment by the Internet
Service Providers has begun, but so far this has been deployed slowly.
In response to increased demand for faster connection speeds and increased modem
functionality, we have invested resources to expand our product line to include
cable and ADSL modems and other broadband access products. We are also planning
to begin volume shipment of a new generation of telephone dialers in the second
half of 2003 and expect to continue to expand our line of PC cameras.
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
financial statements. 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 (see
note 4 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 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, and for 2001 and 2002 were .2% and .1% of total revenue,
respectively.
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
2001 and 2002, we recorded charges against inventory of $4.6 million and $0.7
million, respectively, as a result of lower of cost or market valuation issues.
We have entered into supply arrangements with suppliers of some components that
include price and other concessions, including no-charge components, for meeting
certain purchase requirements or commitments. Under these arrangements, we are
committed to purchase approximately $8.0 million of components over a period of
approximately 30-months that commenced on January 1, 2002, provided that those
components were offered at competitive terms and prices. We believe that at
December 31, 2002, we are on track to meet the $8.0 million commitment. We are
also required to purchase either a minimum percentage, as measured by unit
purchases or dollar amount of components, from a supplier over a two-year period
commencing on January 1, 2002, and we are currently exceeding that percentage.
In connection with these arrangements, we became entitled to receive at least
$3.0 million of no-charge components, based upon the supplier's market price for
the components in late 2001 and early 2002, and other pricing concessions based
on our purchase volumes. We received $1.2 million of these no-charge components
in the fourth quarter of 2001. We received the remainder of the no-charge
components in the first quarter of 2002. Through December 31, 2002, we consumed
$1.8 million of these chips in our manufacturing process and they were shipped
in finished products to customers in 2002. In 2002, our purchases and payments
were approximately $2 million less than we would have expected without the
no-charge components. Of the original $3.0 million chip valuation, $.3 million
has been written down as a result of a decline in the market value of the free
chips. The favorable impact to our statement of operations is being recognized
on a delayed basis as a purchase discount over the total number of components
acquired through the 30 month supply agreement (see note 7(b) to the
consolidated financial statements). Since the start of these arrangements in
January 2002, the favorable impact to our statement operations was $.8 million.
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. We recorded goodwill for two
acquisitions, Tribe Computer Works, Inc. in 1996 and certain assets of Hayes
Microcomputer Products, Inc. in 1998. The goodwill values for Tribe and Hayes
were being amortized over 13 years and 5 years, respectively. In 2001, we
determined that based on our history of negative cash flows from operations, a
forecast of future positive cash flows could not be sufficiently relied upon to
justify retaining the remaining goodwill assets on the consolidated balance
sheet. Therefore, we recorded an impairment charge of $2.3 million in 2001. As
of December 31, 2001 and December 31, 2002, our net goodwill asset value on our
consolidated balance sheet was zero.
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.
Results of Operations
The following table sets forth certain financial data for the periods indicated
as a percentage of net sales:
Years Ending
December 31,
2000 2001 2002
---- ---- ----
Net sales............................... 100.0% 100.0% 100.0%
Cost of goods sold...................... 68.3 84.7 75.0
---- ---- ----
Gross profit.......................... 31.7 15.3 25.0
Operating expenses:
Selling............................... 18.5 18.0 15.7
General and administration............ 10.8 19.1 9.1
Research and development.............. 10.8 12.8 9.5
---- ---- ----
Total operating expenses.............. 40.1 49.9 34.3
---- ---- ----
Operating profit (loss)................. (8.4) (34.6) (9.3)
Other income (expense), net.......... .8 (.4) .2
--- ---- ----
Loss before income taxes.. ............ (7.6) (35.0) (9.1)
Income tax expense (benefit)......... (2.3) 9.1 5.4
Extraordinary Gain...................... - - .7
----- ----- ----
Net profit (loss) ...................... (5.3)% (44.1)% (13.8)%
===== ===== ======
Year Ending December 31, 2002 Compared to Year Ending December 31, 2001
Net Sales. Our net sales decreased 10.3% to $37.3 million in 2002 from $41.6
million in 2001. Our sales decline resulted primarily from an 8%, $3.1 million
year-over-year net sales decline in dial-up modem sales, a $2.1 million
year-over-year net sales decline from an OEM modem contract, and a decline in
camera sales, partially offset by increased sales in the broadband cable and
ADSL modem categories.
Although our unit sales of dial-up modems were up slightly in 2002 compared to
2001, reflecting our increased unit and dollar market share at retail in North
America and the U.K., our net sales of dial-up modems were down 8% in 2002
compared to 2001, primarily due to the lower average selling prices of our
dial-up modems and a shift in our unit sales mix to lower-priced modems. Our
dial-up modem sales in 2002 and 2001 were 84% and 83% of our total sales,
respectively. In 2002, our sales in the broadband cable and ADSL modem
categories represented 9% our of total sales compared to 3% of our total sales
in 2001, reflecting an initial acceptance of these products into our retail
sales channels.
Our net sales in the North America decreased by 12.4% to $22.2 million in 2002,
compared to our net sales in 2001. Our 2002 international sales decreased by
7.0% to $15.1 million, compared to our net sales in 2001. These decreases were
due primarily to the sales decline of dial-up modems and primarily resulting
from a shift in demand to lower priced modems.
Gross Profit. Our gross profit was $9.3 million in 2002 compared to $6.4 million
in 2001. Our gross profit as a percentage of net sales increased to 25.0% in
2002 from 15.3% in 2001. The primary reason for this improvement was a reduction
of inventory write-downs for lower of cost of market and inventory obsolescence
expenses totaling $4.0 million in 2001 compared to $.9 million in 2002.
Excluding the charges for inventory write-downs and obsolescence in 2002 and
2001, our gross profit as a percentage of net sales improved approximately 2.8
percentage points from 2001 to 2002, primarily due to supplier cost reductions,
and manufacturing expense reductions.
Selling Expenses. Selling expenses decreased by $1.6 million to $5.8 million in
2002, from $7.5 million in 2001. Selling expenses as a percentage of net sales
decreased to 15.7% in 2002 from 18.0% in 2001. The $1.6 million decrease was
primarily due to reduced personnel costs, marketing costs, freight delivery
costs, and sales commissions.
General and Administrative Expenses. General and administrative expenses
decreased by $4.5 million to $3.4 million in 2002 from $7.9 million in 2001. The
year-over-year $4.5 million decrease included a $2.3 million decrease from the
fourth quarter 2001 write-off of all of our positive goodwill and a $.9 million
decrease from related amortization charges. Excluding the effect of the goodwill
write-offs and related amortization, general and administrative expenses
decreased $1.3 million, or 28%, primarily from reductions in personnel and
related expenses, bank fees, bad debt expense, and legal and audit expenses.
Research and Development Expenses. Research and development expenses decreased
by $1.8 million to $3.5 million in 2002 from $5.3 million in 2001. Research and
development expenses as a percentage of net sales decreased to 9.5% in 2002 from
12.8% in 2001. The $1.8 million decrease in research and development expenses
was primarily due to reduced personnel costs and related expenses, industry and
government approval costs associated with obtaining licenses, consulting,
recruiting, and outside services.
Other income (expense). Other income (expense), net improved from a loss of $.16
million in 2001 to income of $.07 million in 2002. Included in other income
(loss) are interest income (expense), other income and non-interest income,
equity losses of an affiliate, and rental income from leasing space at our
headquarters.
o Interest Income. Interest income decreased to $.10 million in 2002 from
$.20 million in 2001. The decrease was the result of our lower earned
interest rate partially offset by the interest earned on higher average
cash and cash equivalent balances during 2002 compared to 2001. The average
interest rate earned in 2002 was approximately two percentage points lower
in 2002 than in 2001.
o Interest expense. Interest expense decreased to $.29 million in 2002 from
$.5 million in 2001. The interest expense decrease is the result of the
interest rate decline from 7.76% in 2001 to 4.97% in 2002 on our variable
rate $6.0 million mortgage taken out in January 2001 on our headquarters
building, and lower mortgage debt balances. This interest is adjusted
annually in January of each year.
o Equity in losses of affiliate. Our affiliate equity losses were $.06
million in 2002 compared to $.15 million in 2001. Our investment balance in
the affiliate was reduced to zero at December 31, 2002.
o Other Income, Net. Other income and non-interest income increased from $.24
million in 2001 to $.31 million in 2002.
Income Tax Expense (Benefit). We did not record any net tax benefit to offset
our $3.4 million pre-tax loss in 2002. In addition, in 2002 we recorded a $2.0
million income tax charge to increase our valuation allowance against our net
deferred tax asset. This accounting treatment is also described in further
detail under the caption "Critical Accounting Policies" above and in footnote 12
to the consolidated financial statements. An additional $.002 million in tax
expense was recorded for income taxes incurred by our sales branch in the United
Kingdom.
Extraordinary gain. In 2002 we recorded an extraordinary gain of $.26 million
from the elimination of the remaining negative goodwill on our balance sheet
related to a previous acquisition.
Net Loss. Our net loss for 2002 was $5.1 million or $.65 per share, versus a net
loss of $18.3 million or $2.33 per share, for 2001.
Year Ending December 31, 2001 Compared to Year Ending December 31, 2000
Net Sales. Our net sales decreased 27.9% to $41.6 million in 2001 from $57.7
million in 2000. Our sales decline resulted primarily from our 22%
year-over-year net sales decline of dial-up modem units combined with a 10%
average sales price decline. Our sales mix shifted slightly away from dial-up
modems in 2001 compared to 2000. In 2000, 92% of our net sales were generated
from sales of dial-up modem products. In 2001, 83% of our net sales were
generated from sales of dial-up modem products. The change was due to an
increased mix of sales for cable modems, embedded modems, and ISDN modems.
Our net sales in North America decreased by 37.4% to $25.3 million in 2001,
compared to our net sales in 2000. Our 2001 international sales decreased by
6.2% to $16.2 million, compared to our net sales in 2000. The net sales decline
in 2001 compared to 2000 in North America resulted from the overall dial-up
modem U.S. market decline, the loss of Office Depot as a customer, and a decline
in the average selling price of dial-up modems.
Gross Profit. Our gross profit was $6.4 million in 2001 compared to $18.3
million in 2000. Our gross profit as a percentage of net sales decreased to 15.3
% in 2001 from 31.7% in 2000. The primary reason for this decline of 16.4
percentage points was $4.6 million of obsolescence and inventory revaluation
expenses in 2001 compared to $.3 million in similar types of expenses in 2000.
The major portion of the $4.6 million expense was for "lower of cost or market"
write-downs of broadband inventory. The inventories in question were purchased
in 2000. Excluding the $4.6 million and $.3 million of inventory obsolescence
and revaluation in 2001 and 2000, respectively, our gross profit as a percentage
of net sales in 2001 was 26.4% compared to 32.2% in 2000. This year-over-year
4.6 percentage points drop was primarily due to a production volume decrease,
which resulted in higher fixed manufacturing costs per unit shipped, and the 10%
average selling price decline for dial-up modems.
Selling Expenses. Selling expenses decreased by 29.9% to $7.5 million in 2001
from $10.7 million in 2000. Selling expenses as a percentage of net sales
decreased to 18.0% in 2001 from 18.5% in 2000. The $3.2 million decrease was the
result of significant reductions in both variable and fixed selling expenses,
including staff reductions, cooperative advertising, and sales commissions. The
staff reductions took place throughout the year.
General and Administrative Expenses. General and administrative expenses
increased by $1.7 million to $7.9 million in 2001 from $6.2 million in 2000. The
year-over-year increase resulted from a $2.3 million write-off of all of our
positive goodwill assets. Excluding the goodwill asset write-offs, general and
administrative expenses decreased $.5 million, or 10%, to $5.6 million in 2001
from $6.2 million in 2000, or to 13.0% from 10.3% as a percentage of net sales,
respectively. The $.5 million reduction of general and administrative expenses
resulted primarily from reductions in personnel and related expenses, partially
offset by increased legal expense and filing expenses associated with the recent
change of our jurisdiction of incorporation from Canada to the United States.
Staff reductions occurred throughout the year.
Research and Development Expenses. Research and development expenses decreased
by 14.7% to $5.3 million in 2001 from $6.2 million in 2000. Research and
development expenses as a percentage of net sales increased to 12.2% in 2001
from 10.5% in 2000. The dollar decrease in research and development expenses was
due to reduced personnel and related expenses and industry and government
approval costs, primarily associated with decreased engineering activity on
broadband and wireless product development. Staff reductions occurred throughout
the year.
Other income (expense). Other income (expense), net changed from income of $.47
million in 2000 to a loss of $.16 million in 2001. Included in other income
(loss) are interest income (expense), other income and non-interest income, and
equity losses of an affiliate and rent from the leasing of space at our
headquarters.
o Interest Income. Interest income decreased to $.20 million in 2001 from $.5
million in 2000. The decrease was the result of our lower earned interest
rate and lower average invested cash balance during 2001 compared to 2000.
The average interest rate earned in 2001 was approximately 250 basis points
lower in 2001 than in 2000.
o Interest expense. Interest expense increased to $.5 million in 2001 from $0
in 2000. The interest expense increase is due to the interest payments for
the $6.0 million mortgage taken out in January 2001 on our headquarters
building.
o Equity in losses of affiliate. Our affiliate equity losses were $.15
million in 2001 compared to $.22 million in 2000. Our investment balance in
the affiliate has been reduced to $.06 million at December 31, 2001.
o Other Income, Net. Other income and non-interest income remained constant
at $.24 million in 2001 and 2000. Activity in this account includes other
income of $.12 million for an unexpected recovery of funds in a dispute.
There was slightly lower rental income in 2001 compared to 2000.
Income Tax Expense (Benefit). We did not record any net tax benefit to offset
our $14.5 million pre-tax loss in 2001. In addition, we recorded a $3.8 million
income tax charge to increase our valuation allowance against our net deferred
tax asset due to our operating results, both recent and projected, and the lower
market value of our real estate. This accounting treatment is described in
further detail under the caption "Critical Accounting Policies" above and in
footnote 12 to the audited consolidated financial statements.
Net Loss. Our net loss for 2001 was $18.3 million or $2.33 per share versus a
net loss of $3.1 million or $.40 per share for 2000.
Liquidity and Capital Resources
On December 31, 2002, we had working capital of $15.3 million, including $7.6
million in cash and cash equivalents.
In 2002 operating activities generated $2.9 million in cash. Our net loss in
2002 was $5.1 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 $.9 million, and
depreciation and amortization of $.8 million. These non-cash charges were
partially offset by an extraordinary non-cash gain on the elimination of
negative goodwill of $.3 million. Sources of cash from operations included a
reduction of inventory, excluding the above-mentioned obsolescence and lower of
cost or market adjustments, of $3.4 million, and a decrease in accounts
receivable of $2.1 million. Uses of cash included a decrease of accounts payable
and accrued expenses of $1.0 million and a decrease of prepaid expenses and
other current assets of $.04 million.
Our $3.4 million year over year inventory reduction excluding the
above-mentioned obsolescence and lower of cost or market adjustments, was
primarily the result of reduced inventory purchases attributable to the delivery
of no-charge components from our key component vendors, reduced inventory to
support lower sales activity in 2002 compared to 2001, and improved inventory
turnover.
In 2002 our net cash used in investing activities was $.2 million, which was
used to purchase plant and equipment. The investment in an affiliate was our 20%
investment in the Zoom Group, LLC, a limited liability company formed by certain
affiliates of Zoom to purchase the building which we refer to as the Drydock
Building. In January 2003, we exercised our right to sell our interest in the
Zoom Group, LLC to the remaining members of the Zoom Group, LLC. In March 2003,
we received the proceeds from the sale of our interest from the remaining
members of the Zoom Group, LLC, in the amount of approximately $.48 million,
which represents our investment amount less the non-refundable deposit and a
negotiated portion of losses in the Zoom Group, LLC plus interest earned on our
original deposit. This action terminates our participation in the ownership of
the Drydock building. The Drydock transaction and other commitments are
discussed in further detail under the caption "Commitments" below. We do not
have any significant capital commitments, and we anticipate that we will
continue with modest investments in equipment and in improvement to our
facilities during the year.
In 2002 we used cash for financing activities of $.35 million consisting of $.17
million for monthly principal payments plus a one-time principal reduction
payment of $.18 million on our $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. Our mortgage is a 5-year balloon mortgage that is
amortized on a 20-year basis. The interest rate is adjusted annually in January
of each year based on the Federal Home Loan Bank rate plus 2.5 % per annum. In
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 operating performance
improvement. However, we believe we would be able to obtain funds, if and when
required, by factoring accounts receivable. We do not plan to put a factoring
arrangement in place until and unless it is necessary since there would be an
up-front cost to 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 185 at December 31, 2002. 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 of dial-up modems into computers and the increased
popularity of broadband modems lower the total available market through our
sales channels. Because of this, our dial-up modem sales are unlikely to grow
unless we continue to grow our market share, or the new V.92 and V.44 modem
standards grow sales through our channels. If our dial-up modem sales do not
grow, our future success will depend in large part on our ability to
successfully penetrate the broadband modem, networking and dialer markets. Sales
may also decline due to market trends.
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
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 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 owned 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. 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.
Under the Reinstatement Agreement, 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, we had both 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.
In December 2002, the special committee of our board of directors appointed
to review the Drydock transactions, after consideration of numerous factors,
determined that it was advisable and in the best interest of Zoom to exercise
its right to sell its interest in the Zoom Group to the other members of the
Zoom Group. Accordingly, effective January 5, 2003, we exercised our right to
sell our interest to the remaining members of the Zoom Group for approximately
$.48 million, which equals our investment less the non-refundable deposit and
our negotiated portion of the losses in the Zoom Group plus interest earned on
our original deposit. In March 2003, we received the proceeds from the sale of
our interest from the remaining members of the Zoom Group, LLC. By exercising
our option to sell our interest, we believe we have improved our liquidity
position and reduced our exposure to the current unfavorable conditions in the
Boston real estate market.
The following table summarizes our contractual obligations and commitments as of
December 31, 2002.
Contractual Obligations
Payments Due by Period
LESS THAN AFTER 5
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
----- --------- --------- --------- -------
Long Term Debt (1) $ 5,533,607 $ 191,550 $ 412,440 $ 4,929,617 -
Capital Lease
Obligations - - - - -
Operating Leases (2) 2,756,704 739,836 1,484,847 532,021 -
Unconditional
Purchase Orders - - - - -
Purchase
Commitments (3) 5,442,467 3,600,000 1,842,467 - -
Other Long Term
Obligations - - - - -
------------ ------------ ----------- ------------ ---------
Total $ 13,732,778 $ 4,531,386 $ 3,739,754 $ 5,461,638 -
============ ============ =========== ============ =========
(1) Represents the mortgage on our corporate headquarters. In January 2001, we
received $6.0 million in financing by securing a mortgage on this property.
Our mortgage is a 5-year balloon mortgage that is amortized on a 20-year
basis.
(2) Represents anticipated minimum lease payments, excluding executory costs to
be made under leases for our manufacturing facility in Boston, MA, our
office facility in Camberley, U.K., and our technical support facility in
Boca Raton, FL.
(3) See discussion of purchase commitments for chipsets under the section
entitled "Critical Accounting Policies" above.
Recently Issued Accounting Standards
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 results in a change in the manner in which we record
certain types of discounts and sales and marketing incentives that are provided
to its customers. Zoom has historically recorded certain types of these
incentives as marketing expenses. Under Issue No. 00-14, we will record 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. The requirements
of Issue No. 00-14 and 00-25 were implemented in the first fiscal quarter of
2002, at which time prior period reported amounts were reclassified to conform
to the new presentation. There is no current year or historical impact on our
consolidated balance sheets. 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.
Prior year reclassifications have been made to conform to current presentation
and are as follows:
Years ending December 31,
2000 2001
---- ----
Revenues:
As previously reported $ 59,750,187 $ 43,709,528
As reclassified 57,708,456 41,570,276
Sales and Marketing expenses:
As previously reported 12,713,756 9,619,549
As reclassified 10,672,025 7,480,297
In June 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 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. We do not believe that the impact of adopting SFAS 146 will
have a material impact on the 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
our 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 we 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 our 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. We 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. We are in the process of evaluating the effects of applying
Interpretation No. 46 in 2003. Based on our preliminary analysis, we do not
anticipate that adoption of Interpretation No. 46 will have a material effect on
our 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 $5.1 million in 2002 and net losses of
approximately $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. 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 2002, our
cash provided from operations was positive, at $2.9 million. As of December 31,
2002 we had net working capital of $15.3 million including cash of $7.6 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, 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. 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, we
recorded a reduction of revenue of $.7 million for customer price protection.
We may be subject to product returns resulting from defects, or from
overstocking of our products. Product returns could result in the failure to
attain market acceptance of our products, which would harm our business.
If our products contain undetected defects, errors, or failures, we could
face:
o delays in the development of our products;
o numerous product returns; and
o other losses to us or to our customers or end users.
Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, either of which would reduce our sales and
harm our business. We are also exposed to the risk of product returns from our
customers as a result of contractual stock rotation privileges and our practice
of assisting some of our customers in balancing their inventories. Overstocking
has in the past led and may in the future lead too higher than normal returns.
Our failure to effectively manage our inventory levels could materially and
adversely affect our liquidity and harm our business.
During fiscal 2000, in anticipation of future sales of our broadband access
products, particularly cable modems, we significantly increased our inventory
for these products. We also built up this inventory in response to shortages of
components for these products earlier in that year. We have also had difficulty
in generating significant orders for some of our products, particularly
broadband products, and as a result, we experienced a significant increase in
our inventory, to $21.7 million on December 31, 2000 from $14.3 million on
December 31, 1999. During fiscal 2001, we were able to reduce our inventory
levels to $11.1 million as a result of sales, raw material returns to suppliers,
and the write-down of value of some of our inventory. At December 31, 2002, our
inventory level is $6.8 million, a reduction of $4.3 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, 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 only provided by one of these
companies. The loss of the services of any of our significant third party
manufacturers or a material adverse change in the business of or our
relationships with any of these manufacturers could harm our business. Since
third parties manufacture our products and we expect this to continue in the
future, our success will depend, in part, on the ability of third parties to
manufacture our products cost effectively and in sufficient quantities to meet
our customer demand.
We are subject to the following risks because of our reliance on third party
manufacturers:
o reduced management and control of component purchases;
o reduced control over, delivery schedules;
o reduced control over quality assurance;
o reduced control over manufacturing yields;
o lack of adequate capacity during periods of excess demand;
o limited warranties on products supplied to us;
o potential increases in prices;
o interruption of supplies from assemblers as a result of a fire, natural
calamity, strike or other significant event; and
o misappropriation of our intellectual property.
We may be unable to produce sufficient quantities of our products because we
obtain key components from, and depend on, sole or limited source suppliers.
We obtain certain key parts, components, and equipment from sole or limited
sources of supply. For example, we purchase dial-up and broadband modem chipsets
from Conexant Systems and Agere Systems. Integrated circuit product areas
covered by one or both companies include dial-up modems, ADSL modems, cable
modems, networking, routers, and gateways. In the past, we have experienced
delays in receiving shipments of modem chipsets from our sole source suppliers.
We may experience similar delays in the future. In addition, some products may
have other components that are available from only one source. 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,
Intel, Sitecom, SONICblue, 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 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 30% in fiscal 2000 and
38% in fiscal 2001. In 2002 our international sales accounted for
approximately 40% 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 7A.
We invest our cash in money market instruments and certificates of deposit.
These investments are generally denominated in U.S. dollars and U.K. pounds. Due
to the conservative nature of these instruments, we do not believe that we have
a material exposure to interest rate or market risk. The investment portfolio is
used to preserve our capital until it is required to fund operations or
acquisitions. None of these instruments are held for trading purposes. We do not
own derivative financial instruments.
We are exposed to interest rate risk in the ordinary course of business.
For our floating rate mortgage arrangement, interest rate changes generally do
not affect the fair market value, but do affect future earnings and cash flow.
Based on our borrowings of $5.3 million under our mortgage arrangement as of
December 31, 2002, a one-percentage point increase in interest rates would
decrease cash flow and earnings by approximately $55,000.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Index to Consolidated Financial Statements 32
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 2001 and 2002 34
Consolidated Statements of Operations for the years ending December 31, 35
2000, 2001 and 2002
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 2000, 2001 and 2002 36
Consolidated Statements of Cash Flows for the years ending December 31, 37
2000, 2001 and 2002
Notes to Consolidated Financial Statements 38-53
Schedule II: Valuation and Qualifying Accounts for the years ending
December 31, 2000, 2001 and 2002 56
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with our accountants on accounting or
financial disclosure during the period covered by this report.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item appears under the caption "Our Executive
Officers " in Part 1, Item 1 -- Business, and under the captions "Election of
Directors" and "Compliance With Section 16(a) of the Securities Exchange Act" in
our definitive proxy statement for our 2003 annual meeting of shareholders which
will be filed with the SEC within 120 days after the close of our fiscal year,
and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item appears under the captions "Executive
Compensation," "Directors' Compensation", in our definitive proxy statement for
our 2003 annual meeting of shareholders which will be filed with the SEC within
120 days after the close of our fiscal year, and is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We maintain a number of equity compensation plans for employees, officers,
directors and others whose efforts contribute to our success. The table below
sets forth certain information as of our fiscal year ended December 31, 2002
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our stockholders, and (ii) were not
approved by our stockholders.
Equity Compensation Plan Information
Number Of Securities
Number Of Securities Remaining Available For
To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity
Exercise Of Price Of Outstanding Compensation Plans (excluding
Outstanding Options, Options, securities reflected in
Plan Category Warrants And Rights Warrants And Rights column (a))
------------- ------------------- ------------------- -----------
(a) (b) (c)
--- --- ---
Equity compensation plans 1,320,000 $3.4671 472,646
approved by security holders(1)
Equity compensation plans 780,500 3.1648 372,800
not approved by security holders(2)
Total 2,100,500 $3.3547 845,446
(1) Includes the following plans: 1990 Employee Stock Option Plan and 1991
Directors Stock Option Plan, each as amended. Please see note 11 to our
consolidated financial statements for a description of these plans.
(2) Includes the 1998 Employee Equity Incentive Plan, as amended. The purposes
of the 1998 Employee Equity Incentive Plan (the "1998 Plan"), adopted by
the Board of Directors in 1998, are to attract and retain employees and
provide an incentive for them to assist us in achieving our long-range
performance goals, and to enable such employees to participate in our
long-term growth. In general, under the 1998 Plan, all employees who are
not officers or directors are eligible to participate in the 1998 Plan. The
1998 Plan is currently administered by the Stock Option Committee of the
Board of Directors. In 1999, the Board of Directors authorized our Chief
Executive Officer to grant stock options to purchase up to 100,000 shares
in any fiscal quarter, not to exceed stock options to purchase 350,000
shares in any fiscal year to eligible employees under the 1998 Plan.
Participants in the 1998 Plan are eligible to receive non-qualified stock
options at an option price determined by the Stock Option Committee. All
stock options granted under the 1998 Plan have been granted for at least
the fair market value on the date of grant. A total of 1,200,000 shares of
our common stock have been authorized for issuance under the 1998 Plan.
The additional information required by this item is incorporated by reference to
the section entitled "Share Ownership of Directors, Officers and Certain
Beneficial Owners" in our Definitive Proxy Statement for our 2003 annual meeting
of shareholders to be filed with the SEC within 120 days after the close of the
fiscal year.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item may appear under the caption "Certain
Transactions" in our Definitive Proxy Statement for our 2003 annual meeting of
Shareholders to be filed with the SEC within 120 days after the close of the
fiscal year and is incorporated herein by reference.
ITEM 14 - 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 our disclosure
controls and procedures, which have been designed to permit us to effectively
identify and timely disclose important information. They concluded that the
disclosure controls and procedures were effective. Since the date of the
evaluation, we have made no significant changes in our internal controls or in
other factors that could significantly affect our internal controls.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits:
(1), (2) The consolidated financial statements and required schedules are
indexed on page F-1.
(3) Exhibits required by the Exhibit Table of Item 601 of SEC
Regulation S-K. (Exhibit numbers refer to numbers in the Exhibit
Table of Item 601.)
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 (the "June 1996 Form
10-Q") and as further amended on June 14, 2001, filed as Exhibit
10.2 to the Annual Report on Form 10-K for the fiscal year ending
December 31, 2001. *
10.3 1998 Employee Equity Incentive Plan, as amended, files as exhibit
99.1 to Registration Statement on Form S-8 (Reg. No.333-47188).*
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the June 1996 Form 10-Q. *
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Letter Agreement between Zoom and an executive officer, filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal
quarter ending September 30, 2000. *
**10.7 Employment Agreement, filed as Exhibit 10.9 to the Form 10-K for
the fiscal year ended December 31, 2002. *
10.8 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001 (the "March 2001 Form 10-Q"). *
10.9 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2001 Form 10-Q. *
10.10 Operating Agreement, Zoom Group LLC dated as of March 29, 2002,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the fiscal quarter ended March 2002. *
10.11 Agreement between Zoom Telephonics, Inc and Members if the Zoom
Group dated as of March 22, 2002, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
10.12 Reinstatement Agreement, Assignment Agreement and Second
amendment of Purchase and Sale dated as of March 29, 2002, filed
as Exhibit 10.3 to the March 2002 Form 10-Q. *
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
21. Subsidiaries. *
23. Consent of KPMG LLP.
99.1 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
99.2 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
(b) Reports on Form 8-K.
No current reports on Form 8-K have been filed during the last
quarter for the period covered by this report.
(c) Exhibits - See Item 15(a)(3) above for a list of Exhibits
incorporated herein by reference or filed with this Report.
(d) Schedules - Schedule II: Valuation and Qualifying Accounts.
Schedules other than those listed above have been omitted since
they are either inapplicable or not required.
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ZOOM TECHNOLOGIES, INC.
(Registrant)
By: /s/ Frank B. Manning
----------------------------
Frank B. Manning, President
Date: March 25, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title Date
/s/ Frank B. Manning Principal Executive Officer March 25, 2003
-------------------- and Chairman of the Board
Frank B. Manning
/s/ Robert A. Crist Principal Financial and March 25, 2003
-------------------- Accounting Officer
Robert A. Crist
/s/ Peter R. Kramer Director March 25, 2003
--------------------
Peter R. Kramer
/s/ Bernard Furman Director March 25, 2003
--------------------
Bernard Furman
/s/ L. Lamont Gordon Director March 27, 2003
--------------------
L. Lamont Gordon
/s/ J. Ronald Woods Director March 27, 2003
--------------------
J. Ronald Woods
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 2001 and 2002 34
Consolidated Statements of Operations for the years ending December 31, 35
2000, 2001 and 2002
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ending December 31, 2000, 2001 and 2002 36
Consolidated Statements of Cash Flows for the years ending December 31, 37
2000, 2001 and 2002
Notes to Consolidated Financial Statements 38-53
Schedule II: Valuation and Qualifying Accounts for the years ending
December 31, 2000, 2001 and 2002 56
Independent Auditors' Report
The Board of Directors and Stockholders
Zoom Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Zoom
Technologies, Inc. and subsidiary as of December 31, 2001 and 2002, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zoom Technologies,
Inc. and subsidiary as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
February 11, 2003, except as to notes 3
and 7(c) which are as of March 28, 2003.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
Assets 2001 2002
------ ---- ----
Current assets:
Cash and cash equivalents $ 5,252,058 $ 7,612,274
Accounts receivable, net of reserves for doubtful
accounts, returns, and allowances $2,816,449 in
2001 and $2,646,408 in 2002 (note 13) 5,652,035 3,714,202
Inventories, net (note 5) 11,083,143 6,782,550
Prepaid expenses and other current assets 999,662 1,037,733
---------- ----------
Total current assets 22,986,898 19,146,759
Property, plant and equipment, net (note 6) 4,128,916 3,485,911
Net deferred tax assets (note 12) 2,012,844 -
Other assets 56,666 -
---------- ----------
Total assets $ 29,185,324 $ 22,632,670
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,750,174 $ 2,406,843
Accrued expenses 1,879,566 1,207,724
Current portion of long term debt (note 10) 139,201 191,550
---------- ----------
Total current liabilities 4,768,941 3,806,117
Long-term debt, less current portion (note 10) 5,745,368 5,342,057
Other non-current liabilities (note 8) 255,287 -
---------- ----------
Total liabilities 10,769,596 9,148,174
---------- ----------
Stockholders' equity (note 11):
Common stock, no par value at December 31, 2001
and $0.01 par value at December 31, 2002.
Authorized 25,000,000 shares; issued
7,860,866 shares and outstanding 7,860,866 and
7,858,266 shares at December 31, 2001 and
December 31, 2002, respectively. 28,245,215 282,452
Additional paid-in capital - 27,962,763
Retained earnings (accumulated deficit) (9,634,692) (14,770,278)
Accumulated other comprehensive income (loss) (194,795) 11,755
Treasury stock, at cost - (2,196)
---------- ----------
Total stockholders' equity 18,415,728 13,484,496
---------- ----------
Total liabilities and stockholders'
equity $ 29,185,324 $ 22,632,670
========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 2000, 2001 and 2002
2000 2001 2002
------------ ------------ ------------
Net sales (notes 4, 13 and 17) .............. $ 57,708,456 $ 41,570,276 $ 37,274,287
Cost of goods sold (note 5) ................. 39,404,320 35,193,449 27,937,544
----------- ----------- -----------
Gross profit ........... 18,304,136 6,376,827 9,336,743
----------- ----------- -----------
Operating expenses:
Selling ............................. 10,672,025 7,480,297 5,848,137
General and administrative (note 8).. 6,228,317 7,938,175 3,405,043
Research and development ............ 6,249,092 5,327,968 3,526,350
----------- ----------- -----------
Total operating expenses 23,149,434 20,746,440 12,779,530
----------- ----------- -----------
Operating loss ......... (4,845,298) (14,369,613) (3,442,787)
----------- ----------- -----------
Other income (expense):
Interest income ..................... 447,148 198,805 102,604
Interest expense..................... - (454,708) (293,104)
Equity in losses of affiliate (note 14) (215,834) (145,165) (56,666)
Other, net .......................... 237,820 241,759 313,619
----------- ----------- -----------
Total other income (expense), net 469,134 (159,309) 66,453
----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item (4,376,164) (14,528,922) (3,376,334)
Income tax expense (benefit)(note 12) ....... (1,298,916) 3,800,000 2,014,539
----------- ----------- -----------
Income (loss) before extraordinary
item (3,077,248) (18,328,922) (5,390,873)
Extraordinary gain on elimination
of negative goodwill - - 255,287
----------- ----------- -----------
Net Income (loss) ...... $ (3,077,248) $(18,328,922) $ (5,135,586)
=========== =========== ===========
Basic and diluted earnings (loss) per share (note 2):
Loss before extraordinary item:
Basic and diluted....... $ (.40) $ (2.33) $ (.68)
=========== =========== ===========
Extraordinary gain on elimination of negative goodwill $ - $ - $ .03
=========== =========== ===========
Net loss:
Basic and diluted....... $ (.40) $ (2.33) $ (.65)
=========== =========== ===========
Weighted average common and common equivalent
shares:
Basic and diluted....... 7,756,815 7,860,866 7,860,650
=========== =========== ===========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
Retained Accumulated
Additional Earnings Other Total
Common Stock Paid In (accumulated Comprehensive Treasury Stock Stockholders'
Shares Amount Capital deficit) Income(Loss) Shares Amount Equity
--------- ---------- ---------- ---------- ----------- ------ ------ ------------
Balance at December 31, 1999 .... 7,560,296 25,780,231 - 11,771,478 (37,626) - - 37,514,083
Net profit (loss) ............... - - - (3,077,248) - - - (3,077,248)
Foreign currency translation
adjustment ...................... - - - - (80,788) - - (80,788)
Unrealized holding gain on
investments ..................... - - - - 26,255 - - 26,255
Comprehensive loss ............ - - - - - - - (3,131,781)
Exercise of stock options (note
11) ............................. 300,570 1,822,722 - - - - - 1,822,722
Compensation expense related to
issuance of restricted stock ... - 52,577 - - - - - 52,577
Tax effect of exercises of non-
qualified stock options (notes
11 and 12) .................... - 489,845 - - - - - 489,845
---------- ------------ ---------- ----------- ---------- ------ ------ ------------
Balance at December 31, 2000 .. 7,860,866 $28,145,375 - $ 8,694,230 $ (92,159) - - $36,747,446
Net profit (loss) ............. - - - (18,328,922) - - - (18,328,922)
Foreign currency translation
adjustment .................... - - - - (102,689) - - (102,689)
Unrealized holding gain on
investments ................... - - - - 53 - - 53
Comprehensive loss . ......... - - - - - - - (18,431,558)
Compensation expense related to
issuance of restricted stock .. - 99,840 - - - - - 99,840
---------- ------------ ---------- ----------- ---------- ------ ------ ------------
Balance at December 31, 2001 .. 7,860,866 $28,245,215 - $(9,634,692) $ (194,795) - - $18,415,728
Net profit (loss) ............. - - - (5,135,586) - - - (5,135,586)
Foreign currency translation
adjustment .................... - - - - 206,550 - - 206,550
Comprehensive loss ........... - - - - - - - (4,929,036)
Incorporation to Delaware
corporation .................. - (27,962,763) 27,962,763 - - - - -
Purchase of treasury stock .... - - - - - 2,600 (2,196) (2,196)
---------- ----------- ---------- ------------ ---------- ------- ------- ------------
Balance at December 31, 2002 .. 7,860,866 $ 282,452 27,962,763 $(14,770,278) $ 11,755 2,600 (2,196) $ 13,484,496
========== =========== ========== ============ ========== ====== ======= ============
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 2000, 2001 and 2002
2000 2001 2002
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (3,077,248) $(18,328,922) $ (5,135,586)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary gain on negative goodwill - - (255,287)
Depreciation and amortization 1,613,276 1,769,608 837,968
Impairment of goodwill - 2,294,881 -
Amortization of unearned compensation
expense 52,577 99,840 -
Equity in losses of affiliate 215,834 145,165 56,666
Net deferred income taxes (1,843,874) 3,800,000 2,012,844
Tax benefit from exercise of
nonqualified stock options 489,845 - -
Changes in operating assets and liabilities,
net of acquisitions
Accounts receivable (2,514,401) 2,271,932 2,139,336
Inventories (7,593,276) 10,813,740 4,300,593
Prepaid expenses and other
current assets (106,651) (296,655) (38,071)
Accounts payable and accrued
expenses 4,766,116 (5,214,009) (1,015,173)
---------- ---------- ----------
Net cash provided by (used in)
operating activities (7,997,802) (2,644,420) 2,903,290
---------- ---------- ----------
Cash flows from investing activities:
Sales of investment securities, net 3,215,329 53 -
Investment in affiliates - (141,665) -
Purchases of property, plant and equipment (1,324,268) (650,060) (194,963)
---------- ---------- ----------
Net cash provided by (used in)
investing activities 1,891,061 (791,672) (194,963)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt - 6,000,000 -
Repayment of long-term debt - (115,431) (350,962)
Exercise of nonqualified stock options 1,875,299 - -
Payments to acquire treasury stock - - (2,196)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 1,875,299 5,884,569 (353,158)
---------- ---------- ----------
Effect of exchange rate changes on cash (80,788) (102,689) 5,047
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (4,312,230) 2,345,788 2,360,216
---------- ---------- ----------
Cash and cash equivalents at beginning of year 7,218,500 2,906,270 5,252,058
---------- ---------- ----------
Cash and cash equivalents at end of year $ 2,906,270 $ 5,252,058 $ 7,612,274
========== ========== ==========
See accompanying notes to consolidated financial statements.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ending December 31, 2000, 2001 and 2002
(1) Incorporation and Nature of Operations
Zoom Telephonics, Inc. (the "Company") was incorporated under the federal
laws of Canada (Canada Business Corporations Act). Its principal
business activity, the design, production, and marketing of faxmodems
and other communication peripherals, is conducted through its
wholly-owned subsidiary, Zoom Telephonics, Inc. ("Zoom US"), a
Delaware corporation based in Boston, Massachusetts.
In February 2002, the Company completed a transaction in which it changed
its jurisdiction of incorporation from Canada to the State of Delaware
effective March 1, 2002. In connection with the change in
jurisdiction, the Company changed its name to Zoom Technologies, Inc.
These changes were accomplished through a process called a continuance
under the laws of Canada and a domestication under the laws of the
State of Delaware, and were approved by the Company's shareholders at
a stockholders' meeting on February 15, 2002.
As part of the continuation, each share of Zoom Telephonics, Inc. was
automatically converted into one share of Zoom Technologies, Inc.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation and Use of Estimates
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America and are stated in US dollars.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may differ
from those estimates. Significant estimates made by the Company
include the useful lives of property, plant and equipment and
goodwill, the recoverability of long-lived assets, the collectibility
of accounts receivable, the valuation allowance for deferred tax
assets, the valuation of sales returns and allowances, the reserves
for obsolete and slow moving inventory, and the write-downs of
inventory valuation for the lower cost of market.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Zoom US, and all of its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all investments with original maturities of less
than 90 days to be cash equivalents. Included in cash and cash
equivalents at December 31, 2002 and 2001 was a deposit for
approximately $241,000 and $218,000, respectively, in a duty deferment
account approved by H.M. Customs and Excise in the United Kingdom for
the deferment of value added taxes for imports.
(d) Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
(e) Property, plant and equipment
Property, plant and equipment is stated and recorded at cost. Depreciation
of property, plant and equipment is provided by using the
straight-line method at rates sufficient to amortize the costs of the
fixed assets over their estimated useful lives.
(f) Accounting for Impairment of Long-Lived Assets
The Company uses the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." This statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost
to sell.
(g) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(h) Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
period. Diluted loss per share is computed by dividing net income by
the weighted average number of common shares and dilutive potential
common shares outstanding during the period. Under the treasury stock
method, the unexercised options are assumed to be exercised at the
beginning of the period or at issuance, if later. The assumed proceeds
are then used to purchase common shares at the average market price
during the period.
2000 2001 2002
---- ---- ----
Basic weighted
average shares outstanding 7,756,815 7,860,866 7,860,650
Net effect of dilutive potential
common shares outstanding, based
on the treasury stock method - - -
--------- --------- ---------
Diluted weighted
average shares outstanding 7,756,815 7,860,866 7,860,650
========= ========= =========
Potential common shares for which inclusion would have the effect of
increasing diluted earnings per share (i.e., antidilutive) are
excluded from the computation. The dilutive effect of options to
purchase 419,039, 13,870 and 3,814 shares of common stock at December
31, 2000, 2001, and 2002, respectively, were outstanding, but not
included in the computation of diluted earnings per share as their
effect would be antidilutive.
(i) Revenue Recognition
The Company sells hardware products to its customers. The products are
dial-up modems, embedded modems, cable modems, PC cameras, ISDN and
ADSL modems, telephone dialers, and wireless and wired networking
equipment. The Company generally does not sell software or services.
The Company earns a small amount of royalty revenue. The Company
derives its revenue primarily from the sales of hardware products to
three types of customers (1) computer peripherals retailers, (2)
computer product distributors, and (3) original equipment
manufacturers (OEMs). The Company sells a very small amount of its
hardware products to direct consumers or to any customers via the
Internet. As described below, management judgments and estimates must
be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and
timing of the Company's revenue for any period if its management makes
different judgments or utilizes different estimates.
Revenue is recognized by the Company for all three types of customers at
the point when the customers take legal ownership of the delivered
products. Legal ownership passes from the Company to the customer
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
based on the contractual FOB point specified in signed contracts and
purchase orders, which are both used extensively. Many of the
Company's customer contracts or purchase orders specify FOB
destination. Since it would be impractical to verify ownership change
for each individual delivery to the FOB destination point, the Company
estimates the day of delivery receipt by the customer based on its
ship date and the carrier's published delivery schedule specific to
the freight class and location.
The Company's 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 the Company's products when evaluating the adequacy of sales return
allowances. The Company's estimates for price protection refunds
require a detailed understanding and tracking by customer, by sales
program. Estimated price protection refunds are recorded in the same
period as the announcement of a pricing change. Information from
customer inventory-on-hand reports or from direct communications with
the customers is used to estimate the refund, which is recorded as a
reserve against accounts receivable and a reduction of current period
revenue. The Company's estimates for consumer mail-in rebates are
comprised of actual rebate claims processed by the rebate redemption
centers plus an accrual for an estimated lag in processing. The
Company's estimates for store rebates are comprised of actual credit
requests from the eligible customers.
(j) Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, and
borrowings. Due to the short term nature of these instruments of
conversion to cash or the corresponding variable interest rate
attached to the debt, the carrying amount of these financial
instruments approximates fair value.
(k) Stock-Based Compensation
The Company accounts for stock based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). As permitted by
SFAS 123, the Company measures compensation cost in accordance with
Accounting Principles Board Opinion (APB) No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and FASB interpretation No. 44 (FIN
44). Accordingly, no accounting recognition is given to stock options
granted at fair market value until they are exercised. Upon exercise,
net proceeds, including tax benefits realized, if any, are credited to
equity.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of FASB 123 to stock based compensation.
YEAR ENDED DECEMBER 31,
2000 2001 2002
---------- ------------ -----------
Net income (loss), as reported.................... $(3,077,248) $(18,328,922) $(5,135,586)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects........ (837,541) (683,521) (225,230)
--------- ---------- ---------
Proforma net income (loss)........................ $(3,914,789) $(19,012,443) $(5,360,816)
========= ========== =========
Earnings (loss) per share:
Basic -- as reported.............................. $ (0.40) $ (2.33) $ (0.65)
Basic -- proforma................................. $ (0.50) $ (2.42) $ (0.68)
========= ========= =========
Diluted -- as reported............................ $ (0.40) $ (2.33) $ (0.65)
Diluted -- proforma............................... $ (0.50) $ (2.42) $ (0.68)
========= ========= =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(l) Advertising Costs
Advertising costs are expensed as incurred and reported in selling,
general, and administrative expenses in the accompanying consolidated
statements of operations and include costs of advertising, production,
trade shows, and other activities designed to enhance demand for the
Company's products. There are no deferred advertising costs in the
accompanying consolidated balance sheets.
(m) Investments in Affiliates
Investments in which the Company has no significant influence over the
investee are accounted for under the cost method of accounting.
Investments in which the Company exercises significant influence but
which the Company does not control are accounted for under the equity
method of accounting. Under the equity method, investments are stated
at cost and are adjusted for the Company's share of earnings and
losses, contributions and distributions.
(n) Foreign Currencies
The Company generates a portion of its revenues in international markets
and denominated in foreign currencies, which subjects its operations
to exposure to foreign currency fluctuations. The impact of currency
fluctuations can be positive or negative in any given period. During
the years ending December 31, 2000, 2001, and 2002 foreign currency
transaction activity, gains, and losses were not material. At December
31, 2002, the Company's foreign currency-denominated net assets were
not material. The Company has no involvement with derivative financial
instruments.
The Company considers the local currency to be the functional currency for
its international subsidiary. Assets and liabilities denominated in
foreign currencies are translated using the exchange rate of the
balance sheet date. Revenues and expenses are translated at average
exchange rates prevailing during the year. Translation adjustments
resulting from this process are charged or credited to accumulated
other comprehensive loss.
(o) Warranty Costs
The Company provides currently for the estimated costs that may be
incurred under its standard warranty obligations.
(3) Liquidity
In 2002, the Company's net cash provided by operating activities was $2.9
million and net cash used in investing activities was $.2 million. In
2001, the Company obtained a mortgage on its corporate headquarters,
which provided financing of $6 million. On December 31, 2002 Zoom had
cash and cash equivalents of approximately $7.6 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 the Company's liquidity, the Company has
implemented expense reductions throughout 2001 and 2002. The employee
headcount was 313 at December 31, 2000, which has been reduced to 185
at December 31, 2002. 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.
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 our sales channels. Because of this,
our 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 at December 31, 2002 was $7.6 million.
Management believes it has sufficient resources to fund its planned
operations over the next 12 months. However, if the Company is unable
to increase its revenues, reduce its expenses, or raise capital, the
Company's longer- term ability to continue as a going concern and
achieve its intended business objectives could be adversely affected.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(4) New Accounting Pronouncements
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 results 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, the Company will record
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. The
requirements of Issue No. 00-14 and 00-25 were implemented in the
first fiscal quarter of 2002, at which time prior period reported
amounts were reclassified to conform to the new presentation. There is
no current year or historical impact on our consolidated balance
sheets. 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. Prior
year reclassifications have been made to conform to current
presentation and are as follows:
Years ending December 31,
2000 2001
--------------------------
Revenues:
As previously reported $ 59,750,187 $ 43,709,528
As reclassified 57,708,456 41,570,276
Sales and Marketing expenses:
As previously reported 12,713,756 9,619,549
As reclassified 10,672,025 7,480,297
In June 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 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
Company does not believe that the impact of adopting SFAS 146 will
have a material impact on its 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
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
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.
(5) Inventories
Inventories consist of the following at December 31:
2001 2002
---- ----
Raw materials $ 6,276,480 $ 2,808,421
Work in process 462,389 673,275
Finished goods 4,344,274 3,300,854
---------- -----------
Net Inventory $ 11,083,143 $ 6,782,550
========== ==========
During 2001 and 2002 the Company recorded lower of cost or market
write-downs of $4.6 million and $0.7 million, respectively, related to
broadband and wireless inventory.
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
Estimated
2001 2002 useful lives
---- ---- ------------
Land $ 309,637 $ 309,637 -
Buildings and improvements 2,695,346 2,761,616 31.5 years
Leasehold improvements 473,723 483,039 5 years
Computer hardware and software 3,509,445 3,550,749 3 years
Machinery and equipment 1,699,564 1,735,057 5 years
Molds, tools and dies 1,489,484 1,532,064 5 years
Office furniture and fixtures 275,516 275,516 5 years
---------- -----------
10,452,715 10,647,678
Less accumulated depreciation
and amortization (6,323,799) (7,161,767)
--------- ---------
$ 4,128,916 $ 3,485,911
========= =========
(7) Commitments and Contingencies
(a) Lease Obligations
The Company leases a manufacturing and warehousing facility in Boston,
Massachusetts, an office facility in Camberley, United Kingdom, and a
technical support facility in Boca Raton, Florida. The Boston,
Massachusetts lease expires in August 2006. In September 2002, we
entered into a 5 year lease, as a tenant, for approximately 3,500
square feet at 950 Broken Sound Parkway NW, Boca Raton, Florida. In
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
March 1999, the Company assumed an office lease from Hayes
Microcomputer Products, Inc. at 430 Frimley Business Park, Camberley
Surrey, U.K. We have an agreement in principle to extend this lease
term to 2006. Total rent expense, under non-cancelable operating
leases, was $463,693, $546,034 and $782,000 for the years ending
December 31, 2000, 2001 and 2002, respectively.
The Company's estimated future minimum rental payments, excluding
executory costs, under these operating leases are set forth in the
table below.
Year Total
2003 $ 739,836
2004 741,561
2005 743,286
2006 490,632
2007 41,389
(b) Purchase Commitments
The Company has entered into supply arrangements with suppliers of some
components that include price and other concessions, including
no-charge components, for meeting certain purchase requirements or
commitments. Under these arrangements the Company is committed to
purchase approximately $8.0 million of components over a period of
approximately 30-months that commenced on January 1, 2002, provided
that those components were offered at competitive terms and prices.
The Company believes that at December 31, 2002, it is on track to meet
the $8.0 million commitment. The Company is also required to purchase
either a minimum percentage, as measured by unit purchases or dollar
amount of components, from a supplier over a two-year period
commencing on January 1, 2002, and the Company is currently exceeding
that percentage. In connection with these arrangement, the Company was
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. The Company received $1.2 million of these no-charge
components in the fourth quarter of 2001. The Company received the
remainder of the no-charge components in the first quarter of 2002.
Through December 31, 2002, the Company consumed $1.8 million of these
chips in its manufacturing process and they were shipped in finished
products to customers in 2002. In 2002, the Company purchased and paid
approximately $2 million less than would have expected without the
no-charge components. Of the original $3.0 million chip valuation, $.3
million has been written down as a result of a decline in the market
value of the free chips. The favorable impact to the statement of
operations is being recognized on a delayed basis as a purchase
discount over the total number of components acquired through the 30
month supply agreement. The Company expects that the remaining $0.8
million total market value of "no charge" components will be consumed
in its manufacturing process and shipped in finished products to
customers in 2003.
(c) Contingencies
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 Zoom was
unable to obtain acceptable financing the Seller (the 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 Zoom 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.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
As an alternative to pursing legal remedies to obtain a return of the
deposit, Zoom 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 owned 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. 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.
Under the Reinstatement Agreement, 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 our liquidity
position and to reduce our exposure to the Boston real estate market.
Additionally, the Company is party to various lawsuits and administrative
proceedings arising in the ordinary course of business. The Company
evaluates such lawsuits and proceedings on a case-by-case basis, and
its policy is to vigorously contest any such claims which it believes
are without merit. The Company's management believes that the ultimate
resolution of such pending matters will not materially and adversely
affect the Company's business, financial position, results of
operations or cash flows. The Company had no Letters of Credit
outstanding at December 31, 2002.
(d) Concentrations
The Company participates in the PC peripherals industry, which is
characterized by aggressive pricing practices, continually changing
customer demand patterns and rapid technological developments. The
Company's operating results could be adversely affected should the
Company be unable to successfully anticipate customer demand
accurately; manage its product transitions, inventory levels and
manufacturing process efficiently; distribute its product quickly in
response to customer demand; differentiate its products from those of
its competitors or compete successfully in the markets for its new
products.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The Company depends on many third-party suppliers for key components
contained in its product offerings. For some of these components, the
Company may only use a single source supplier, in part due to the lack
of alternative sources of supply. If the supply of a key material
component is delayed or curtailed, the Company's ability to ship the
related product or solution in desired quantities and in a timely
manner could be adversely affected, possibly resulting in reductions
in net sales. In cases where alternative sources of supply are
available, qualification of the sources and establishment of reliable
supplies could result in delays and possible reduction in net sales.
In the event that the financial condition of the Company's third-party
suppliers for key components was to erode, the delay or curtailment of
deliveries of key material components could occur. Additionally, the
Company's reliance on third-party suppliers of key material components
exposes the Company to potential product quality issues that could
affect the reliability and performance of its products and solutions.
Any lesser ability to ship its products in desired quantities and in a
timely manner due to a delay or curtailment of the supply of material
components, or product quality issues arising from faulty components
manufactured by third-party suppliers, could adversely affect the
market for the Company's products and lead to a reduction in the
Company's net sales.
(8) Impairment
In March 1999, the Company entered into a series of independent
agreements to acquire most of the modem assets of Hayes Microcomputer
Products, Inc. for $5.0 million in cash. The purchase included the
Hayes, Practical Peripherals, Accura, Optima, Century 2, and Cardinal
brands and product rights for the USA, Canada, South & Central
America, Europe, and the Middle East. In July 1999 the Company
finalized the purchase of Hayes Asia Pacific for $1.1 million in cash.
The acquisitions were accounted for as purchases. The excess of cost
over fair value of net assets acquired was being amortized on a
straight-line method over five years.
The Company also recorded negative goodwill that resulted from the
purchase of the Hayes U.K., business, where the value of the net
assets acquired exceeded the cost. This transaction was independent of
other Hayes purchases.
The Company recorded goodwill for two acquisitions, Tribe Computer Works,
Inc. in 1996 and certain assets of Hayes Microcomputer Products, Inc.
in 1998. The goodwill values for Tribe and Hayes were being amortized
over 13 years and 5 years, respectively. In 2001, the Company
determined that based on its history of negative cash flows from
operations, a forecast of future positive cash flows could not be
sufficiently relied upon to support retaining the remaining goodwill
assets on the consolidated balance sheet. Therefore, the Company
recorded an impairment charge of $2.3 million in 2001 and on January
1, 2002, the Company recorded an extraordinary gain of $0.3 million
upon the adoption of SFAS No. 142. The gain resulted from the
elimination of the remaining negative goodwill on the Company's
consolidated balance sheet. As of December 31, 2002, the Company's net
goodwill and negative goodwill balances on its consolidated balance
sheet are zero.
Net loss before goodwill amortization, net of tax and related per
share amounts for the years ended December 31, 2000, 2001, 2002 is as
follows (in thousands, except per share amounts):
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Year ended December 31,
2000 2001 2002
---- ---- ----
Net loss as reported $ (3,077) $ (18,329) $ (5,136)
Add back: Goodwill amortization
expense net of tax effect 569 781 -
----- ------ -----
Adjusted net loss $ (2,508) $ (17,548) $ (5,136)
Basic and diluted loss per share,
as reported $ (0.39) $ (2.33) $ (0.65)
Add back: Goodwill amortization
expense net of tax effect 0.07 0.10 -
----- ------ -----
Proforma basic and diluted loss
per share $ (0.32) $ (2.23) $ (0.65)
(9) Comprehensive Income (loss)
The components of comprehensive income (loss), net of tax, are as follows:
2000 2001 2002
---- ---- ----
Net income (loss) $(3,077,248) $(18,328,922) $(5,135,586)
Foreign currency translation
adjustment (80,788) (102,689) 206,550
Net unrealized holding gain
on investment securities 26,255 53 -
--------- ---------- ---------
Comprehensive income (loss) $(3,131,781) $(18,431,558) $(4,929,036)
========= ========== =========
(10) Long-Term Debt
On January 10, 2001, the Company obtained a mortgage for $6 million on
the real estate property located at 201 and 207 South Street, Boston,
Massachusetts. This is a 20-year direct reduction mortgage with a
five-year balloon due January 10, 2006. The interest rate is fixed for
one year, based on the one year Federal Home Loan Bank rate plus 2.5 %
per annum. The rate is adjusted on January 10th of each calendar year
commencing on January 10, 2002. The rate was adjusted to 3.81% on
January 10, 2003. On September 24, 2002 the Company paid an additional
principal payment of $178,761 in compliance with a mortgage covenant.
Future minimum principal payments are due as follows at December 31,
2002.
Year Total
2003 $ 191,550
2004 200,664
2005 211,776
2006 4,929,617
---------
Total $ 5,533,607
=========
(11) Stock Option Plans
At December 31, 2002, the Company had three stock option plans, which are
described below:
Employee Stock Option Plan
The Employee Stock Option Plan (the "Employee Stock Option Plan") is for
officers and certain full-time and part-time employees of the Company.
Non-employee directors of the Company are not entitled to participate
under this plan. The Employee Stock Option Plan provides for the
availability of 2,800,000 shares of common stock for issuance upon the
exercise of stock options granted under the plan. Shares of common
stock were registered for issuance under this plan in accordance with
the Securities Act of 1933. Under this plan, stock options are granted
at the discretion of the Stock Option Committee of the Board of
Directors at an option price not less than the fair market value of
the stock on the date of grant. The options are exercisable in
accordance with terms specified by the Stock Option Committee not to
exceed ten years from the date of grant. Options outstanding under
this plan are as follows:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Weighted average
Number of shares exercise price
Balance at December 31, 1999 1,031,467 $ 7.21
Granted 377,000 7.43
Exercised (196,181) 7.09
Expired (254,675) 10.67
------- -----
Balance at December 31, 2000 957,611 $ 6.40
Granted 631,000 2.77
Exercised - -
Expired (550,611) 5.85
-------- ----
Balance at December 31, 2001 1,038,000 $ 4.48
Granted 325,000 1.00
Exercised - -
Expired (115,000) 4.84
-------- ----
Balance at December 31, 2002 1,248,000 $ 3.54
========= ====
The following table summarizes information about fixed stock options under
the Employee Stock Option Plan outstanding on December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.00 to $ 1.75 325,000 2.40 $ 1.00 - $ 0.00
1.75 to 3.50 350,000 1.60 2.20 175,000 2.20
3.50 to 5.25 251,000 1.00 3.63 125,500 3.63
5.25 to 7.00 100,000 .50 6.36 100,000 6.36
7.00 to 8.75 222,000 .10 8.00 222,000 8.00
---------------- ------- ---- ---- ------- ----
$ 1.00 to $ 8.75 1,248,000 1.30 years $ 3.54 622,500 $ 5.22
================ ========= ========== ====== ======= ======
The Company recognized a tax benefit of $489,845 in 2000 upon the exercise
of nonqualified stock options under the Employee Stock Option Plan.
This benefit has been recorded as an increase to the value of common
stock.
1991 Director Stock Option Plan
In 1991, the Company established the Director Stock Option Plan (the
"Directors Plan"). Shares of common stock were registered for issuance
under this plan in accordance with the Securities Act of 1933. The
Directors Plan was established for all directors of the Company except
for any director who is a full-time employee or full-time officer of
the Company. Under the Directors Plan, each eligible director is
automatically granted an option to purchase 6,000 shares of common
stock on July 10 and January 10 of each year, beginning July 10, 1991.
The option price is the fair market value of the common stock on the
date the option is granted. There are 198,000 shares authorized for
issuance. Each option expires two years from the grant date. Options
outstanding under this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 1999 72,000 $ 5.93
Granted 36,000 7.69
Exercised (42,000) 5.99
Expired (6,000) 7.75
-------- ----
Balance at December 31, 2000 60,000 $ 6.76
Granted 36,000 3.26
Exercised - -
Expired (24,000) 5.37
-------- ----
Balance at December 31, 2001 72,000 $ 5.48
Granted 36,000 1.17
Exercised - -
Expired (36,000) 7.69
-------- ----
Balance at December 31, 2002 72,000 $ 2.21
====== ====
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about fixed stock options under
the Directors Plan on December 31, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 0.65 to $ 1.75 36,000 1.300 $ 1.17 18,000 $ 1.68
1.75 to $ 3.50 18,000 0.500 2.40 18,000 2.40
3.50 to 5.25 18,000 0.000 4.13 18,000 4.13
---------------- ------- --------- ------ ------ ------
$ 0.65 to $ 5.25 72,000 .8 years $ 2.21 54,000 $ 2.74
================ ======= ========= ====== ====== ======
1998 Employee Equity Incentive Stock Option Plan
The 1998 Employee Equity Incentive Stock Option Plan (the "1998 Plan") was
adopted by the Board of Directors to attract and retain employees and
provide an incentive for them to assist the Company to achieve
long-range performance goals, and to enable them to participate in the
long-term growth of the Company. Non-employee directors of the Company
and certain officers of the Company are not entitled to participate
under this plan. The authorized number of shares available for
issuance under the 1998 Plan is 1,200,000 shares of common stock.
Shares of common stock were registered for issuance under the 1998
Plan in accordance with the Securities Act of 1933. Under this plan,
stock options may be granted at the discretion of the Stock Option
Committee of the Board of Directors at an option price determined by
the Stock Option Committee. In addition, in 1999, the Board of
Directors authorized the Chief Executive Officer of the Company to
grant up to an aggregate of 100,000 stock options to employees who are
not executive officers or directors of the Company and in 2000, the
Board of Directors authorized the Chief Executive Officer to grant to
such persons stock options to purchase up to 100,000 shares in any
fiscal quarter, not to exceed an aggregate of 350,000 stock options in
any fiscal year. All options under this grant have been at fair market
value on the date of the grant. The options are exercisable in
accordance with terms specified by the Stock Option Committee or, in
certain cases, the Chief Executive Officer. Options outstanding under
this plan are as follows:
Weighted average
Number of shares exercise price
Balance at December 31, 1999 328,050 $ 4.25
Granted 514,650 6.36
Exercised (42,050) 4.27
Expired (150,275) 5.01
------- ----
Balance at December 31, 2000 650,375 $ 5.74
Granted 248,825 2.45
Exercised - -
Expired (199,300) 5.82
------- ----
Balance at December 31, 2001 699,900 $ 4.55
Granted 363,600 1.00
Exercised - -
Expired (283,000) 3.55
------- ----
Balance at December 31, 2002 780,500 $ 3.16
======= ====
The following table summarizes information about fixed stock options under
the 1998 Plan outstanding on December 31, 2002:
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 1.00 to $ 1.75 336,900 2.40 $ 1.01 4,000 $ 1.22
1.75 to 3.50 196,350 1.30 2.68 122,512 2.81
3.50 to 5.25 12,000 1.00 3.63 6,000 3.63
5.25 to 7.00 168,250 0.50 5.86 168,250 5.86
7.00 to 8.75 47,000 0.20 7.98 47,000 7.98
8.75 to 10.50 20,000 0.30 10.00 20,000 10.00
---------------- ------- --------- ----- ------ -----
$ 1.00 to $10.50 780,500 1.5 years $ 3.16 367,762 $ 5.25
================ ======= ========= ====== ======= ======
On December 31, 2002 there were 845,446 additional shares available for
issuance under all three stock option plans. The per share
weighted-average fair value of stock options granted during 2000,
2001, and 2002 was $6.84, $2.70 and $0.93, respectively, on the date
of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 2000 - expected dividend yield
0.0%, risk-free interest rate of 5.90%, volatility 110% and an
expected life of 3.0 years; 2001 - expected dividend yield 0.0%,
risk-free interest rate of 4.63%, volatility 101% and an expected life
of 1.7 years; 2002 - expected dividend yield 0.00%, risk-free interest
rate of 3.53%, volatility 140% and an expected life of 1.4 years;
(12) Income Taxes
Income tax expense (benefit) consists of the following:
Current Deferred Total
Year ending December 31, 2000:
US federal $ 48,160 $ (1,539,591) $ (1,491,431)
State and local - 192,515 192,515
Foreign - - -
------- ----------- -----------
$ 48,160 $ (1,347,076) $ (1,298,916)
====== =========== ===========
Year ending December 31, 2001:
US federal $ - $ 3,337,900 $ 3,337,900
State and local - 462,100 462,100
Foreign - - -
------ ----------- -----------
$ - $ 3,800,000 $ 3,800,000
====== =========== ===========
Year ending December 31, 2002:
US federal $ - $ 1,612,634 $ 1,612,634
State and local - 400,210 400,210
Foreign 1,695 - 1,695
------- ----------- -----------
$ 1,695 $ 2,012,844 $ 2,014,539
======= =========== ===========
Income tax expense (benefit) was ($1,298,916), $3,800,000 and $2,014,539
for the years ending December 31, 2000, 2001 and 2002, respectively, and
differed from the amounts as computed by applying the US statutory tax rate of
34% to pretax loss as a result of the following:
2000 2001 2002
---- ---- ----
Computed "expected" US tax benefit $ (1,487,896) $ (4,939,834) $(1,147,954) -
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal
income tax benefit 127,061 304,986 264,139
Increase (reduction) in federal valuation allowance - 8,427,351 2,885,398
Other, net 61,919 7,497 12,956
----------- ----------- ---------
Income tax expense (benefit) $ (1,298,916) $ 3,800,000 $ 2,014,539
=========== =========== =========
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Total income tax expense (benefit) was allocated as follows:
2000 2001 2002
---- ---- ----
Loss from operations $ (1,298,916) $ 3,800,000 $ 2,014,539
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes (489,845) - -
----------- --------- -----------
$ (1,788,761) $ 3,800,000 $ 2,014,539
=========== ========= ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000, 2001, and 2002 are presented below:
2000 2001 2002
---- ---- ----
Deferred tax assets:
Inventories, primarily non-deductible reserves $ 1,830,940 $ 2,862,364 $ 2,688,239
Accounts receivable,
primarily returns and allowances 534,204 497,510 340,213
Accrued expenses, principally provisions
not currently deductible 392,011 345,249 228,992
Net operating loss carryforwards and
credits 3,697,196 8,307,793 9,768,697
Other 525,493 1,224,952 1,544,889
------- --------- ---------
Total gross deferred tax assets 6,979,844 13,237,868 14,571,030
Less valuation allowance (1,167,000) (11,225,024) (14,571,030)
--------- ---------- ----------
Net deferred tax assets $ 5,812,844 $ 2,012,844 $ -
========= ========== ==========
On December 31, 2002, the Company had federal and state net operating
loss carryforwards of approximately $20,841,000 and $20,597,000,
respectively. These federal and state net operating losses are
available to offset future taxable income, and are due to expire
beginning 2018 and 2003, respectively. The Company recorded a deferred
tax asset valuation allowance against a portion of the deferred tax
assets that management believes may expire unused. The valuation
allowance reduces deferred tax assets to reflect the estimated amount
of deferred tax assets, which will more likely not be realized.
Realization of deferred tax assets is dependent upon the generation of
future taxable income or gains from the sale or certain real estate.
The Company has recorded a valuation allowance against its deferred
tax assets because management believes that, after considering all the
available objective evidence, historical and prospective, with greater
weight given to historical evidence, it is more likely than not that
these assets will not be realized.
(13) Significant Customers
Two customers accounted for approximately 15% and 11% of net sales for the
year ending December 31, 2000. Four customers each comprised over 10%
of net sales for the year ending December 31, 2001. Three customers
each comprised over 10% of net sales for the year ending December 31,
2002. On December 31, 2001, two customers comprised approximately 40%
of net accounts receivable. On December 31, 2002, three customers
comprised approximately 79% of net accounts receivable.
(14) Investment in Affiliates
In September 1999, the Company made an investment in a limited liability
company ("LLC"). The Company granted the LLC the rights to a software
license in exchange for 300,000 Class A shares of the LLC, which were
valued by the Company at $300,000. The value at which the outside
investors paid cash for shares received as part of the same equity
infusion was used by the Company to value their shares received. In
May 2000, the LLC converted to a "C" corporation. In March 2001, and
December 2001, the Company made additional investments in the
affiliate for a total of $141,665, maintaining the same percent of
ownership. As a result of the recognition of the Company's share of
equity in losses of the affiliate, the investment balance as of
December 31, 2002 has been reduced to zero.
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(15) Supplemental Disclosure of Cash Flow Information
2000 2001 2002
---- ---- ----
Cash paid during year for interest $ - $ 426,803 $ 306,237
====== ========= =========
Cash paid during year for income taxes $ - $ - $ 66,624
====== ========= =========
The tax benefit of the exercise of stock options resulted in increases to common
stock of $489,845 in 2000. No options were exercised in 2001 or 2002.
(16) Dependence on Key Suppliers and Contract Manufacturers
The Company produces its products using components or subassemblies
purchased from third-party suppliers. An important factor in the
Company's liquidity is the receipt and use of "no-charge components".
The Company has entered into supply arrangements with suppliers of
some components that include price and other concessions, including
no-charge components, for meeting certain purchase requirements or
commitments. Under these arrangements, the Company is committed to
purchase approximately $8.0 million of components over a period of
approximately 30-months that commenced on January 1, 2002, provided
that those components are were offered at competitive terms and
prices. The Company believes that at December 31, 2002, that it's on
track to meet the $8.0 million commitment. The Company is also
required to purchase either a minimum percentage, as measured by unit
purchases or dollar amount of components, from a supplier over a
two-year period commencing on January 1, 2002, and the Company is
currently exceeding that percentage. In connection with these
arrangements, the Company became entitled to receive at least $3.0
million of no-charge components, based upon the supplier's market
price for the components in late 2001 and early 2002, and other
pricing concessions based on our purchase volumes. The Company
received $1.2 million of these no-charge components in the fourth
quarter of 2001. The Company received the remainder of the no-charge
components in the first quarter of 2002. Through December 31, 2002,
the Company consumed $1.8 million of these chips in our manufacturing
process and they were shipped in finished products to customers in
2002. In 2002, the Company's purchases and payments were approximately
$2 million less than expected without the no-charge components. Of the
original $3.0 million chip valuation, $.3 million has been written
down as a result of a decline in the market value of the free chips.
The favorable impact to the Company's statement of operations is being
recognized on a delayed basis as a purchase discount over the total
number of components acquired through the 30 month supply agreement.
Since the start of these arrangements in January 2002, the favorable
impact to the Company's statement operations was $.8 million.
A substantial percentage of the Company's manufacturing in 2002 was
performed by a contract manufacturer, SameTime Electronics, Inc.
("SameTime"); the loss of SameTime's services or a material adverse
change in SameTime's business or in the Company's relationship with
SameTime could materially and adversely harm the Company's business.
(17) Segment and Geographic Information
The Company's operations are classified into one reportable segment.
Substantially all of the Company's operations and long-lived assets
reside primarily in the United States. The Company's net sales to
North America and net sales to international locations for 2000, 2001,
and 2002 were comprised as follows:
2000 % of Total 2001 % of Total 2002 % of Total
---- ---------- ---- ---------- ---- ----------
North America $ 40,524,456 70% $ 25,828,176 62% $ 22,375,552 60%
International 17,184,000 30% 15,742,100 38% 14,898,735 40%
---------- --- ---------- --- ---------- ---
Total $ 57,708,456 100% $ 41,570,276 100% $ 37,274,287 100%
========== ==== ========== ==== ========== ====
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(18) Retirement Plan
The Company established a 401(k) retirement savings plan for employees in
January 1996. Under the provisions of the plan, the Company matches
25% of an employee's contribution, up to a maximum of $350 per
employee per year. Total Company contributions in 2000, 2001 and 2002
were $55,314, $46,749 and $34,531, respectively.
(19) Selected Quarterly Financial Information (in thousands, except per share
data, unaudited)
The following table sets forth selected quarterly financial for the years
ended December 31, 2001 and 2002. The operating results for any given
quarter are not necessarily indicative of results for any future
period.
2001 Quarter Ending 2002 Quarter Ending
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept.30 Dec. 31
------- ------- -------- ------- ------- ------- ------- -------
Net sales 10,027 $10,246 $11,719 $ 9,578 $ 8,973 $ 9,207 $10,879 $ 8,215
Costs of goods sold 9,875 8,091 8,889 8,338 7,183 7,225 7,708 5,822
------ ------ ------ ------ ------ ------ ------ ------
Gross profit (loss) 152 2,155 2,830 1,240 1,790 1,982 3,171 2,393
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling 2,224 1,813 1,802 1,642 1,572 1,492 1,423 1,361
General and administrative 1,635 1,503 1,433 3,367 911 852 825 817
Research and development 1,479 1,341 1,334 1,174 1,076 856 879 716
------ ----- ----- ----- ----- ----- ----- -----
Total operating expenses 5,338 4,657 4,569 6,183 3,559 3,200 3,127 2,894
------ ----- ----- ----- ----- ----- ----- -----
Operating profit (loss) (5,186) (2,502) (1,739) (4,943) (1,769) (1,218) 44 (501)
Other income (expense), net (29) (128) 22 (24) 35 11 48 (25)
--- --- -- -- -- -- -- --
Income (loss) before income
taxes and extraordinary item (5,215) (2,630) (1,717) (4,967) (1,734) (1,207) 92 (526)
Income tax expense (benefit) - 3,800 - - 2,013 - - 2
------ ----- ------ ----- ------ ----- ----- -----
Income (loss) before
extraordinary item - - - - (3,747) (1,207) 92 (528)
Extraordinary gain on
elimination of goodwill - - - - 255 - - -
------ ----- ------ ----- ------ ----- ----- -----
Net income (loss) $(5,215) $(2,630) $(5,517) $(4,967) $(3,492) $(1,207) $ 92 $ (528)
===== ===== ===== ===== ===== ===== ===== =====
Net loss per common share:
Basic and diluted $ (0.66) $ (0.33) $ (0.70) $ (0.63) $ (0.44) $ (0.15) $ 0.01 $ (0.07)
Weighted average common
and common equivalent
Shares:
Basic and diluted 7,861 7,861 7,861 7,861 7,861 7,861 7,861 7,861
EXHIBIT INDEX
3.1 Certificate of Incorporation, filed as Exhibit 3.1 to Zoom
Technologies, Inc. Current Report on Form 8-K dated February 28,
2002, filed with the Commission on March 4, 2002 (the "March 2002
Form 8-K). *
3.2 By-Laws of Zoom Technologies, Inc., filed as Exhibit 3.2 to the
March 2002 Form 8-K. *
**10.1 1990 Stock Option Plan, as amended, of Zoom Telephonics, Inc.,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1998. *
**10.2 1991 Director Stock Option Plan, as amended, of Zoom Telephonics,
Inc., filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 (the "June 1996 Form
10-Q") and as further amended on June 14, 2001, filed as Exhibit
10.2 to the Annual Report on Form 10-K for the fiscal year ending
December 31, 2001. *
10.3 1998 Employee Equity Incentive Plan, as amended filed as Exhibit
99.1 to Registration Statement on Form S-8 (Reg. No. 333-47188).*
10.4 Lease between Zoom Telephonics, Inc. and "E" Street Associates,
filed as Exhibit 10.5 to the June 1996 Form 10-Q.*
10.5 Form of Indemnification Agreement, filed as Exhibit 10.6 to the
June 1996 Form 10-Q. *
**10.6 Letter Agreement between Zoom and an executive officer, filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal
quarter ending September 30, 2000. *
**10.7 Employment Agreement, filed as Exhibit 10.9 to the Form 10-K for
the fiscal year ended December 31, 2002. *
10.8 Mortgage, Security Agreement and Assignment between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2001 (the "March 2001 Form 10-Q"). *
10.9 Commercial Real Estate Promissory Note, between Zoom and
Wainwright Bank & Trust Company, filed as Exhibit 10.2 to the
March 2001 Form 10-Q. *
10.10 Operating Agreement, Zoom Group LLC dated as of March 29, 2002,
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the fiscal quarter ended March 2002. *
10.11 Agreement between Zoom Telephonics, Inc and Members if the Zoom
Group dated as of March 22, 2002, filed as Exhibit 10.2 to the
March 2002 Form 10-Q. *
10.12 Reinstatement Agreement, Assignment Agreement and Second
amendment of Purchase and Sale dated as of March 29, 2002, filed
as Exhibit 10.3 to the March 2002 Form 10-Q. *
21. Subsidiaries. *
23. Consent of KPMG LLP.
99.1 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
99.2 Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
* In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
** Compensation Plan or Arrangement.
REPORT ON FINANCIAL STATEMENT SCHEDULE AND
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors;
Zoom Technologies, Inc.
The audits referred to in our report dated February 11, 2003, except as to notes
3 and 7(c), which are as of March 28, 2003, included the related financial
statement schedule for each of the years in the three-year period ended December
31, 2002 included in the annual report on Form 10-K. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to incorporation by reference in the registration statements (No.
33-42834, No.33-90930, No.333-60565, No.333-75575, No.33-90191, No.333-47188 and
No.333-97573) on Form S-8 of Zoom Technologies, Inc., of our report dated
February 11, 2003, except as to notes 3 and 7(c), which are as of March 28,
2003, relating to the consolidated balance sheets of Zoom Technologies, Inc. and
subsidiary as of December 31, 2001 and 2002, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss and cash
flows and related schedule for each of the years in the three-year period ended
December 31, 2002, which report appears in the December 31, 2002 annual report
on Form 10-K of Zoom Technologies, Inc.
/s/ KPMG LLP
Boston, Massachusetts
March 28, 2002
Schedule II
ZOOM TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
Years ending December 31, 2000, 2001 and 2002
Balance at Charged Balance
Beginning (Credited) to Amount at end
Description of year Expense written off of year
-------- ------- ----------- -------
Reserve for doubtful accounts $ 958,663 $ (43,608) $ 560,849 $ 354,206
Reserve for price protection 649,686 235,651 686,588 198,749
Reserve for sales returns 2,934,019 7,532,526 9,401,130 1,065,415
COOP advertising and other
allowances 2,228,223 6,566,840 7,285,978 1,509,085
--------- --------- ---------- ---------
Year ending December 31, 2000 $ 6,770,591 $14,291,409 $17,934,545 $ 3,127,455
========= ========== ========== =========
Reserve for doubtful accounts $ 354,206 $ 162,416 $ 284,351 $ 232,271
Reserve for price protection 198,749 943,820 403,456 739,113
Reserve for sales returns 1,065,415 5,628,163 6,013,536 680,042
COOP advertising and other
allowances 1,509,085 4,332,751 4,676,813 1,165,023
--------- --------- ---------- ---------
Year ending December 31, 2001 $ 3,127,455 $11,067,150 $11,378,156 $ 2,816,449
========= ========== ========== =========
Reserve for doubtful accounts $ 232,271 $ 36,944 $ 209,809 $ 59,406
Reserve for price protection 739,113 699,482 774,263 664,332
Reserve for sales returns 680,042 756,012 522,040 914,014
COOP advertising and other
allowances 1,165,023 3,960,531 4,116,898 1,008,656
--------- --------- ---------- ---------
Year ending December 31, 2002 $ 2,816,449 $ 5,452,969 $ 5,623,010 $ 2,646,408
========= ========== ========== =========