Unassociated Document
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, 2007
or
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For
the transition period from ______to ______
Commission
File Number 0-18672
ZOOM
TECHNOLOGIES, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
|
51-0448969
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Identification
No.)
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|
|
|
207
South Street, Boston, Massachusetts
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02111
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
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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, $0.01 Par Value
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes o No
x
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
o
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.
Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer o Accelerated
Filer o
Non-Accelerated
Filer (do not check if a smaller reporting company)o Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o 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 29, 2007 (computed by
reference to the closing price of such stock on The Nasdaq Capital Market on
such date) was approximately $10,085,080.32.
The
number of shares outstanding of the registrant's common stock, $0.01 par value,
as of February 15, 2008 was 9,346,966 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's proxy statement for the registrant's 2008 annual meeting
of
shareholders to be filed with the SEC in April 2008 are incorporated by
reference into Part III, Items 10-14 of this Form 10-K.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
_______________________________________
Some
of the statements contained in this report are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the
Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties and other factors which may cause our or our industry's
actual results, performance or achievements to be materially different from
any
future results, performance or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to statements regarding:
·
|
the
sufficiency of our capital
resources;
|
·
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market
acceptance of our products and
services;
|
·
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the
delisting of our common stock on the Nasdaq Capital
Market
|
·
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the
anticipated development, timing and success of new product and service
introductions;
|
·
|
the
anticipated development and expansion of our existing technologies,
markets and sales
channels;
|
·
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the
decline of the dial-up modem
market;
|
·
|
investment
in resources for product design in foreign
markets;
|
·
|
the
development of new competitive technologies, products and
services;
|
·
|
approvals,
certifications and clearances for our products and
services;
|
·
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production
schedules for our
products;
|
·
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the
availability of debt and equity
financing;
|
·
|
general
economic conditions; and
|
·
|
trends
relating to our results of
operations.
|
In
some cases, you can identify forward-looking statements by terms such as "may,"
"will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. Except as otherwise required by law, we expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained in this report to reflect any change in
our
expectations or any change in events, conditions or circumstances on which
any
of our forward-looking statements are based. Factors that could cause or
contribute to differences in our future financial results include those
discussed in the risk factors set forth in Item 7 below as well as those
discussed elsewhere in this report. We qualify all of our
forward-looking statements by these cautionary
statements.
PART
I
ITEM
1 - BUSINESS
We
design, produce, market, sell, and support broadband and dial-up modems, Voice
over Internet Protocol or "VoIP" products and services, Bluetooth® wireless
products, and other communication-related products. Our primary objective is
to
build upon our position as a leading producer of Internet access devices, and
to
take advantage of a number of trends in communications including enhanced
Internet access, higher data rates, and voice calls traveling over the
Internet.
Dial-up
modems were Zoom's highest revenue category for many years. Generally our sales
of dial-up modems have been declining and other product categories have become
increasingly important.
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.
In
response to increased demand for faster connection speeds, we have expanded
our
product line to include DSL modems, cable modems, and related broadband access
products. Our Asymmetric Digital Subscriber Line modems, known as ADSL modems
or
DSL modems, provide a high-bandwidth connection to the Internet through a
telephone line that typically connects to compatible DSL equipment in or near
the central telephone office. Zoom® is shipping a broad line of DSL modems. Some
are fairly basic, designed to connect to the USB port of a Windows computer
or
the Ethernet port of a computer, router, or other device. Other Zoom DSL modems
are more complex, and may include a router, a four-port switch, a firewall,
a
wireless access point, and other enhanced features. For a given DSL hardware
platform, we often provide model variations with a different power supply,
filters, firmware, packaging, or other customer-specific items.
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., and other countries are primarily focused on
retail.
We
are
currently shipping VoIP products which enable broadband users to make phone
calls through the Internet, potentially lowering the cost of the call and
providing other benefits such as the ability to manage and track calls using
a
Web browser. 2005 shipments included a multi-function DSL gateway with VoIP,
and
we also shipped a router with VoIP for use with either a DSL modem or cable
modem. In February 2006 we began shipping the first products in a line of analog
telephone adapters (ATAs), which connect to a router and one or more phones,
and
provide VoIP capabilities to the connected phones. Some of our VoIP products
are
targeted for sale to service providers, and some others are targeted for sale
through our sales channels to end-users. Some of Zoom’s VoIP products benefit
from Zoom's Global Village™ VoIP service. Global Village's VoIP service enables
an end-user to make free VoIP phone calls to end-users of several VoIP service
providers, including Global Village, and also allows a user to pay to call
almost any phone in the world. Zoom also has a private-label VoIP
service called VoIP ASAP, which enables a service provider to offer VoIP service
using that service provider’s name and logo.
Zoom’s
product line includes wireless products, including wireless-G network products
and Bluetooth®
products. Generally Zoom’s revenues for wireless products have been growing.
We
are
incorporated in Delaware under the name Zoom Technologies, Inc. We conduct
our
business through our operating subsidiary, Zoom Telephonics, Inc. Zoom
Telephonics, Inc., was originally incorporated in New York in 1977 and changed
its state of incorporation to Delaware in 1993. Our principal executive offices
are located at 207 South Street, Boston, MA 02111 and our telephone number
is
(617) 423-1072.
Available
Information
Our
Internet website address is www.zoom.com. Through our website we make available,
free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. These SEC reports can be accessed through the investor
relations section of our website.
Products
General
The
vast
majority of our products facilitate communication of data through the Internet.
Our dial-up modems can also link computers, point-of-purchase terminals, or
other modem-equipped devices to each other through the traditional telephone
network without using the Internet. Our cable modems use the cable-TV cable
and
our DSL modems use the local telephone line to provide a high-speed link to
the
Internet. Our wireless-G network products typically communicate with a broadband
modem for access to the Internet. Some of our Bluetooth wireless products,
such
as our Bluetooth modem, are designed for Internet access. Our dialers can be
used to route voice calls to a VoIP network that may include the Internet.
Our
modems and dialers typically connect to a single phone line in a home, office,
or other location. We do have some products, however, that do not facilitate
communication of data through the Internet. The most important of these are
some
Bluetooth products, including our iHiFi®
line
of
Bluetooth audio products.
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 PC Card models. PC-oriented internal modems are designed
primarily for installation in the PCI slot of IBM PC-compatibles. Embedded
internal modems are designed to be embedded in PCs dedicated to a specific
application, 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 Windows computers, the Apple Macintosh, Linux computers,
and
other computers. Our PC Card modems are designed for use with notebook and
sub-notebook computers equipped with standard PC Card slots. When sold as
packaged retail products, our dial-up modems are typically 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 ("56K") when communicating with compatible central sites
connected to digital lines such as T1 lines. Those central sites are typically
online services, Internet Service Providers, or remote LAN access equipment.
Our
56K modems typically support the V.90 standard as well as lower-speed standards,
and most of our 56K modems also support the newer V.92 standard.
In
March
and April of 1999 we acquired substantially all of the modem product and
trademark 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 was a modem brand for Apple Macintosh
computers. We now sell and market dial-up modems under the Zoom® and Hayes®
names, as well as under various other private-label brands developed for some
of
our large accounts. In addition, we offer a VoIP service under the Global
Village name.
In
2006
and 2007 our dial-up modems and related products accounted for approximately
48%
and 40% of our net sales, respectively.
DSL
Modems
Our
DSL
modems incorporate the ADSL standards that are currently most popular worldwide,
including ADSL2/2+, G.dmt, G.Lite, and ANSI T1.413 issue 2. In 2000 we designed
and shipped our first DSL modems, an external USB model and an internal PCI
model. In 2002 we introduced new USB and PCI models, and also introduced an
Ethernet model and a USB/Ethernet model with router features. In 2003 we
introduced a DSL modem with a built-in router, a USB port, and four switched
Ethernet ports. In September 2004 Zoom began shipping its first DSL modem with
built-in VoIP, which also included a router, a 4-port switch, and a firewall.
During the fourth quarter of 2004 Zoom introduced new modem hardware designs
for
its USB, Ethernet, Ethernet/USB, and 4-port router models, shifting to newer
modem chipsets and lowering Zoom's cost of goods. In March 2005 Zoom introduced
a DSL modem with wireless networking using the 802.11b and 802.11g standards,
a
4-port switching hub, router, and firewall. In 2006 Zoom began shipping a
software Install Assistant with most of its DSL modems to simplify end-user
installation. In January 2007 Zoom began shipping user-friendly upstream (that
is, to the Internet) QOS Quality-of-Service capability with some of its DSL
modems, to provide a “fast lane” for bandwidth-sensitive applications such as
VoIP, gaming, and video. In 2008 Zoom expects to expand its user-friendly QOS
to
include downstream (that is, from the Internet) QOS, to add QOS to more of
Zoom’s DSL products, to add other features to some of its DSL products. Zoom
will also introduce a DSL modem with a built-in wireless-G router and
VoIP.
The
maximum speed for the ADSL standard is 8 megabits per second for short phone
lines, with lower speeds for longer phone lines. In 2005 Zoom began shipping
some models with hardware that supports the ADSL 2 and 2+ standards. These
modems work with central site equipment incorporating the ADSL standard, and
typically offer enhanced functionality for central site equipment incorporating
the ADSL 2 and ADSL 2+ standards. This enhanced functionality includes speeds
up
to 24 megabits per second for short phone lines, generally higher speeds for
most phone line lengths, the ability to transmit at high speeds for longer
phone
lines (extended "reach"), and other features including lower overall power
consumption and better diagnostics. Zoom now ships ADSL products with ADSL
2/2+
for Ethernet, Ethernet/USB, 4-port switch, and wireless models.
In
2006
and 2007 our DSL modems and related products accounted for approximately 44%
and
50% of our net sales.
Bluetooth®
Modems and Adapters
In
2003
we began shipping a Bluetooth modem, a Bluetooth USB adapter, and a Bluetooth
PC
Card adapter. Bluetooth is a wire-elimination technology that is increasingly
popular for mobile phone and computer products. In 2006 we introduced our
iHiFiTM
line of
Bluetooth products for transmission of music and other audio from one device
to
another – for instance, from an iPod or other sound source to a stereo or
powered speakers. In 2007 we introduced a number of new iHiFi products,
including Bluetooth headphones and a transmitter that works for any iPod that
has an iPod docking connector.
Cable
Modems
Each
cable service provider has its own approval process, in which the cable service
provider may require CableLabs® certification and may also require the service
provider’s own company test and approval. We have obtained CableLabs®
certification for our currently marketed cable modems. They have also received
a
number of cable service provider company approvals.
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 Cisco Systems.
Zoom
sells cable modems to cable service providers and original equipment
manufacturers, both inside and outside the US, and to computer retailers in
the
US. Sales through the retail channel have been handicapped by a number of
factors, including the fact that most cable service providers offer cable modems
with their service 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. However, Zoom has been expanding
the
number of U.S. retail outlets carrying Zoom’s cable modems, and we dramatically
increased our cable modem sales in 2007.
Zoom’s
cable modems currently support DOCSIS standards 1.0, 1.1, and 2.0, the popular
standards in the US and many other countries. The DOCSIS 3.0 standard supports
higher speeds and other features, and Comcast hopes to begin shipping some
DOCSIS 3.0 cable modems in 2008. Though DOCSIS 3.0 cable modems will represent
a
small percentage of the total cable modems shipped in 2008, they represent
an
important product area; and Zoom hopes to be shipping DOCSIS 3.0 cable modems
in
volume at some point this year or next.
Voice
over Internet Protocol
In
2004
we introduced a line of products that support VoIP or "Voice over Internet
Protocol". Our first VoIP products used the standards-based Session Initiation
Protocol, or SIP protocol, and are thus compatible with a wide range of other
SIP-compatible VoIP products and services. SIP allows devices to establish
and
manage voice calls on the Internet. Zoom’s VoIP product line includes the X5v,
the V3, and a line of Analog Telephone Adapters. The X5v includes a DSL modem,
a
router, a firewall, a 4-port switching hub, Zoom’s TelePort, and other features.
The V3 has the same features as the X5v, except instead of having a built-in
DSL
modem, the V3 has an Ethernet port for connecting to the Ethernet port of an
external DSL modem or cable modem. Zoom’s Analog Telephone Adapters connect to a
router’s Ethernet port and to one or more telephones to provide those phones
with VoIP capabilities. Zoom expects to introduce a DSL modem with a built-in
wireless-G router and VOIP in 2008. Some of Zoom’s Analog Telephone Adapters
include TelePort.
Zoom’s
Teleport™ phone port lets an end-user plug in a normal phone to place and
receive voice calls over the Internet, or to place and receive calls over the
familiar switched telephone network. Because the TelePort typically routes
emergency calls over the familiar switched telephone network, those calls are
handled correctly without relying on proper handling by a VoIP service provider.
In addition, the TelePort can be used to provide a “second phone line” and to
provide other advantages.
Some
versions of these VoIP products are bundled with Global Village phone service,
a
Zoom-developed SIP-based service that includes a free VoIP phone service and
an
optional paid service for communicating with phones that can be reached through
the switched phone network. Other versions of Zoom’s VoIP products do not come
with Global Village service, since they are designed to be used by service
providers offering some other VoIP service. Global Village has a wide array
of
features for routing calls, recording voice mail, conference calling, and
tracking customer usage and costs. Global Village phone service helps Zoom
to
address the specific needs of its end-user, retailer, and service provider
customers. For instance, Zoom makes Global Village available in a number of
different languages and with a number of payment options to address specific
market needs. Global Village can be offered to end-users, but it can also be
offered to service providers either under the Global Village brand or as a
private-label VoIP service.
Some
of
our Analog Telephone Adapters (ATAs) for end-users include a Web-based Chooser
that allows the end-user to shop for a suitable VoIP service, select it, and
then automatically configure the ATA for that service. This is consistent with
Zoom’s goal of providing freedom of choice to its VoIP customers.
Zoom
devoted significant resources to the VoIP product area in 2004 through 2007,
and
we continue to devote considerable resources to VoIP hardware, firmware, and
test, and to Zoom's Global Village phone service.
In
2007
Zoom improved and extended its VoIP product line by improving the performance
of
its existing SIP products, introducing new multiple-phone-port SIP products,
and
introducing its first SkypeTM
products. While SIP has been the most successful approach to VoIP for enterprise
use and for VoIP offerings by telephone companies, Skype has been most
successful for end-users using personal computers. We believe that Skype has
tens of millions of active users worldwide. In 2007 we introduced two Skype
products. One is an adapter that plugs into the USB port of a PC and allows
the
use of a normal corded or cordless phone, and one is a wireless PC headset
that
lets a user switch easily between phone calls and music.
Wireless
Local Area Networking
In
2005
Zoom began shipping DSL modems with Wireless-G local area network capability
and
introduced other Wireless-G products, including USB and PC Card clients, a
wireless access point, and a wireless gaming adapter. In late 2006 Zoom
introduced a Wireless-G router and a Wireless-G PCI client. Zoom is considering
extensions of its wireless local area network product line, including the ADSL
modem with wireless-G router and VoIP mentioned above, and also including
wireless products with extended range. Zoom also plans to ship products that
incorporate the extended range and higher data rate associated with the
multiple-input multiple-output wireless standard, 802.11n, which is expected
to
be finalized in late 2008.
Dialers
and Related Telephony Products
Zoom
manufactures dialers that simplify the placing of a phone call by dialing digits
automatically. We shipped our first telephone dialer, the Demon Dialer®, in
1981, and in 1983 began shipping the Hotshot™ dialer. As the dialer market
diminished due to equal access, we focused on modems and other peripherals
for
the personal computer market. In 1996 we began shipping a new generation of
dialers incorporating proprietary technology that is now covered by four issued
U.S. patents. Some of these dialers are well-suited for routing appropriate
calls through money-saving long-distance service providers, including prepaid
phone card service providers.
Products
for Markets outside North America
Products
for countries outside the US often differ from a similar product for the US
due
to different regulatory requirements, country-specific phone jacks and AC power
adapters, and language-related specifics. As a result, the introduction of
new
products into markets outside North America 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 into markets outside North America, including DSL modems
and
VoIP products and services. We have received regulatory approvals for, and
are
currently selling our products in a number of countries, including many European
Union, Caribbean, and South American countries, Canada, Mexico, Poland, Saudi
Arabia, Switzerland, Turkey, the USA, Hong Kong, and Vietnam. We intend to
continue to expand and enhance our product line for our existing markets and
to
seek approvals for the sale of our products in new countries throughout the
world.
ROHS
Restriction on Hazardous Substances
The
European Union’s Directive 2002/95/EC, Restriction on Use of Hazardous
Substances (RoHS), has strict rules regarding products put on the European
market after July 1, 2006. Those products have defined limits on their content
of lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls, and
polybrominated diphenyl ethers. Most electronics manufacturers including Zoom
consequently needed to change their manufacturing processes and component
choices to conform to RoHS. Zoom has completed the work required to affect
this
change for products where it is practical to make this change, including almost
all of Zoom’s high-volume products.
CEC
Appliance Efficiency Regulations
The
California Energy Commission (CEC) has rules that will affect many of our
products manufactured on or after July 1, 2007. These rules apply to our
products with power cubes, which typically plug into an AC outlet and provide
low-voltage AC or DC to a modem or other device. CEC rules will require that
the
power cubes used in our products be highly efficient, so that most of the input
energy is used by our device and not dissipated as heat. This typically requires
a power cube that costs about $1.50 more per unit than the power cubes we
currently use, resulting in a smaller, lower-weight power cube that will reduce
the customer’s energy usage for the power cube. Because California is the most
highly populated state in the US and because many of our customers have sales
outlets in California, Zoom now meets the CEC rules for all our significant
US
products.
Sales
Channels
General
We
sell
our products primarily through high-volume distributors and retailers, Internet
service providers, telephone service providers, value-added resellers, PC system
integrators, and original equipment manufacturers ("OEMs"). We support our
major
accounts in their efforts to discern strategic directions in the market, to
maintain appropriate inventory levels, and to offer a balanced selection of
attractive products.
During
2007 three customers each accounted for 10% or more of our total net sales.
Together these three customers accounted for 44% of our total net
sales.
Distributors
and Retailers outside North America
In
markets outside North America we sell and ship our products primarily to
independent distributors and retailers. Our European high-volume retailers
include Dixons Store Group, a major customer, and many others. Our revenues
from
sales outside North America were $14.0 million in 2005, $8.0 million in 2006,
and $6.7 million in 2007. Approximately 46% and 61% of our net sales outside
North America in 2006 and 2007, respectively, were to customers in the United
Kingdom. Sales to Turkey accounted for 17% and 1% of our net sales outside
North
America in 2006 and 2007, respectively. We believe sales growth outside North
America will continue to require substantial additional investments of resources
for product design and testing, regulatory approvals, native-language
instruction manuals and 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.
Areas of focus include Western Europe, the Middle East, and Latin
America.
North
American High-volume Retailers and Distributors
In
North
America we reach the modem retail market primarily through high-volume
retailers. Our North American retailers include Best Buy, Fry’s, Micro Center,
Staples, and many others. Our revenues from sales in North America were $10.3
million in 2006 and $11.8 million in 2007. Retailers typically carry an
assortment of our dial-up modems, cable modems, and DSL modems; and some also
carry an assortment of our wireless products.
We
sell
significant quantities of our products through distributors, who often sell
to
corporate accounts, retailers, service providers, value-added resellers,
equipment manufacturers, and other customers. Our North American distributors
include our major customers Tech Data, Ingram Micro, D&H Distributing, and
others.
Internet
and Telephone Service Providers
In
recent
years a growing portion of our business has been the sale of DSL modems to
DSL
service providers in the U.S. and in some other countries. We plan to continue
to devote significant efforts toward selling and supporting these customers.
In
addition, we will continue to offer some of our VoIP products and services
to
telephone service providers.
System
Integrators and Original Equipment Manufacturers
Our
system integrator and OEM customers sell our products under their own name
or
incorporate our products as a component of their systems. We seek to be
responsive to the needs of these customers by providing on-time delivery of
high-quality, reliable, cost-effective products with strong engineering and
sales support. We believe that some of these customers also appreciate the
improvement in their products' image due to use of a Zoom or Hayes brand
modem.
Sales,
Marketing and Support
Our
sales, marketing, and support are primarily managed from our headquarters in
Boston, Massachusetts. In North America we sell our Zoom, Hayes, Global Village,
and private-label dial-up modem products through Zoom's sales force and through
commissioned independent sales representatives managed and supported by our
own
staff. Most service providers are serviced by Zoom's sales force. North American
technical support is primarily handled from our Boston headquarters. We also
maintain a sales and logistics office in the United Kingdom for the UK and
a
number of other European countries.
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, Web advertising, trade shows, and public
relations.
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 Internet support
facility that includes email, firmware and software downloads, and the
SmartFacts™ Q&A search engine. In 2001 we expanded our European technical
support to enable users in other countries to access support in languages other
than English. This support is generally provided by our support staff in
Boston.
Research
and Development
Our
research and development efforts are focused on developing new communications
products and VoIP services, further enhancing the capabilities of existing
products, and reducing production costs. We have developed close collaborative
relationships with certain of our ODM suppliers and component suppliers. We
work
with these partners and other sources to identify and respond to emerging
technologies and market trends by developing products that address these trends.
In addition, we purchase modems 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, 2007 we had 14 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, VoIP service development, product testing, foreign and domestic
regulatory approval efforts, end-user and internal documentation, and
third-party software selection and testing.
During
2006 and 2007 we expended $2.2 million and $1.8 million respectively on research
and development activities.
Manufacturing
and Suppliers
Our
products are currently designed for high-volume automated assembly to help
assure reduced costs, rapid market entry, short lead times, and reliability.
High-volume assembly typically occurs in China, Taiwan, or Korea. Our contract
manufacturers and original design manufacturers typically obtain some or all
of
the material required to assemble the products based upon a Zoom Technologies
Approved Vendor List and Parts List. Our manufacturers typically insert parts
onto the printed circuit board, with most parts automatically inserted by
machine, solder the circuit board, and in-circuit test the completed assemblies.
Functional test and packaging are sometimes performed by the contract
manufacturer. For the United States and many other markets, functional test
and
packaging are more commonly performed at our manufacturing facilities in North
America, 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 at our North American facility.
Wherever the product is built, our quality systems are used to help assure
that
the product meets our specifications.
In
late
2006 we moved our North American manufacturing facility from Boston,
Massachusetts to Tijuana, Mexico. This was a highly challenging move, since
it
dramatically changed our personnel, facilities, infrastructure, and logistics.
The reason we made the move was to reduce our personnel cost, facilities cost,
and the costs associated with shipping from Asia to North America. While we
continue to experience challenges associated with the Tijuana facility,
including challenges relating to bringing products across the border between
the
U.S. and Mexico, the Tijuana facility is running fairly smoothly now. We believe
that this facility assists us in cost-effectively providing rapid response
to
the needs of our U.S. customers.
We
usually use one primary manufacturer for a given design. We sometimes maintain
back-up production tooling at a second manufacturer for our highest-volume
products. Our manufacturers are normally adequate to meet reasonable and
properly planned production needs; but a fire, natural calamity, strike,
financial problem, 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 Xavi Technologies Corporation (“Xavi”). The
loss of these services or a material adverse change in Xavi’s business or in our
relationship could materially and adversely harm our business.
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 use dial-up modem chipsets exclusively from two high-volume dial-up
modem chipset manufacturers, Conexant Systems, Inc. and Agere Systems Inc.
The
majority of our DSL and cable modems use Conexant chipsets. We also purchase
DSL
chipsets from Ikanos, a company that purchased the DSL business of Analog
Devices. We believe Conexant, Agere, and Ikanos have significant resources
for
semiconductor design and production, analog and digital signal processing,
communications firmware development, and application sales and support.
Integrated circuit product areas covered by these companies together include
dial-up modems, DSL modems, cable modems, wireless networking, home phone line
networking, routers, and gateways
We
have
experienced delays in receiving shipments of modem chipsets in the past, and
we
may experience such delays in the future. Moreover, we cannot assure that a
chipset supplier will, in the future, sell chipsets to us in quantities
sufficient to meet our needs or that we will purchase the specified dollar
amount of products necessary to receive concessions and incentives from a
chipset supplier. An interruption in a chipset supplier's ability to deliver
chipsets, a failure of our suppliers to produce chipset enhancements or new
chipsets on a timely basis and at competitive prices, a material increase in
the
price of the chipsets, our failure to purchase a specified dollar amount of
products or any other adverse change in our relationship with modem component
suppliers could have a material adverse effect on our results of
operations.
We
are
also subject to price fluctuations in our cost of goods. Our costs may increase
if component shortages develop, lead-times stretch out, or fuel costs continue
to rise.
We
are
also subject to the RoHS and CEC rules discussed above, which affect component
sourcing, product manufacturing, sales, and marketing.
Competition
The
communications network access industry is intensely competitive and
characterized by aggressive pricing practices, continually changing customer
demand patterns and rapid technological advances and emerging industry
standards. These characteristics result in frequent introductions of new
products with added capabilities and features, and continuous improvements
in
the relative functionality and price of modems and other PC communications
products. Our operating results and our ability to compete could be adversely
affected if we are unable to:
·
|
successfully
and accurately anticipate customer
demand;
|
·
|
manage
our product transitions, inventory levels, and manufacturing processes
efficiently;
|
·
|
distribute
or introduce our products quickly in response to customer demand
and
technological advances;
|
·
|
differentiate
our products from those of our competitors;
or
|
·
|
otherwise
compete successfully in the markets for our
products.
|
Some
of
our primary competitors by product group include the following:
·
|
DSL
modem competitors:
2Wire, 3Com, Actiontec, Airties, Asus, Aztech, Cisco Systems (Linksys
division), D-Link, Netgear, Netopia, Sagem, Siemens (formerly Efficient
Networks), Thomson, US Robotics, Westell, Xavi, and ZyXEL
Communications.
|
·
|
Dial-up
modem competitors:
Best Data, Creative Labs, Lite-On, Sitecom, and US
Robotics.
|
·
|
Cable
modem competitors: Arris
Systems, Cisco Systems (Linksys and Scientific Atlanta divisions),
D-Link,
Hon Hai Network Systems (formerly Ambit Microsystems), Motorola,
Netgear,
SMC Networks, Terrayon, and Thomson
|
·
|
VoIP
hardware competitors:
AudioCodes, Cisco Systems (Linksys division), Digium, D-Link, Draytek,
Grandstream, Mediatrix, Micro-ATA, MultiTech, Patton, Snom, Zyxel,
and
8x8.
|
·
|
Bluetooth
competitors:
Anycom, Belkin, D-Link, IOGear, Jabra, Kensington, Linksys, Logitech,
Sitecom, SMC, Targus, Trendnet, and
Trust.
|
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:
·
|
product
performance, features, reliability and quality of
service;
|
·
|
product
availability and lead times;
|
·
|
size
and stability of operations;
|
·
|
breadth
of product line and shelf space;
|
·
|
sales
and distribution capability;
|
·
|
technical
support and service;
|
·
|
product
documentation and product
warranties;
|
·
|
relationships
with providers of broadband access services;
and
|
·
|
compliance
with industry standards.
|
We
believe we are able to provide a competitive mix of the above factors for our
products, particularly when they are sold through retailers, computer product
distributors, and small to medium sized Internet service providers, and system
integrators. We are less successful in selling directly to large telephone
companies and other large providers of broadband access services.
DSL
and
cable modems transmit data at significantly faster speeds than dial-up modems.
DSL and cable, however, typically require a more expensive Internet access
service. In addition, the use of DSL and cable modems is currently impeded
by a
number of technical and infrastructure limitations. We began shipping both
cable
and DSL modems in the year 2000. We have had some success in selling to smaller
phone companies and to Internet service providers, but we have not sold
significant quantities to large phone companies or to large cable service
providers. We believe a small fraction of new US cable modem placements in
2006
were sold at retail, and that a low percentage were sold through retailers
in
most other countries. DSL had even less success at retail in the U.S. Some
European countries, however, sell significant volumes of DSL modems through
retailers. In the U.K., for instance, this has resulted in Zoom placing DSL
modem models into retailer Dixons Store Group.
Successfully
penetrating the broadband modem market presents a number of challenges,
including:
·
|
The
current limited retail market for broadband
modems;
|
·
|
The
relatively small number of cable, telecommunications and Internet
service
providers that make up the majority of the market for broadband
modems;
|
·
|
The
significant bargaining power of these large volume
purchasers;
|
·
|
The
time-consuming, expensive and uncertain approval processes of the
various
cable and DSL service providers;
and
|
·
|
The
strong relationships with service providers enjoyed by some incumbent
equipment providers, including Motorola and Cisco Systems for cable
modems.
|
The
use
of the Internet to provide voice communications services is a relatively recent
market development. A substantial number of companies have emerged to provide
VoIP products and services, and many of these companies have more extensive
financial, engineering, product development, and marketing resources than we
do.
The principal competitive factors in the VoIP market include: price, brand
recognition, service and support, features, distribution, and reliability.
Competitors for our current VoIP hardware products are listed above. Competitors
for our Skype VoIP products include a large number of companies worldwide,
including Actiontec, Cisco Systems (Linksys division), D-Link, Motorola,
Sennheiser, TeleVoIP, and U.S. Robotics.
Competitors
for our VoIP service include AT&T, iConnectHere, Net2Phone, Voicepulse,
Vonage and 8x8, as well as incumbent telephone carriers and other providers
of
traditional telephone service. Many of our competitors have greater name
recognition and resources than we have and may be better positioned to more
aggressively develop, promote and sell their products, including by offering
more attractive pricing policies and bundled service arrangements. In addition,
if telecommunications rates continue to decrease, any competitive pricing
advantage of our services may be diminished or eliminated. We cannot assure
that
we will be able to compete effectively.
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 nine patents. The patents that have
been
issued expire between 2011 and 2015. We cannot assure that any patent
application will be granted or that any patent obtained will provide protection
or be of commercial benefit to us, or that the validity of a patent will not
be
challenged. Moreover, we cannot assure that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop comparable or superior technologies.
We
license certain technologies used in our products, typically rights to 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. Where possible we attempt to receive patent indemnification from
chipset suppliers and other appropriate suppliers, but the extent of this
coverage varies and enforcement of this indemnification may be difficult and
costly.
Government
Regulation
Regulatory
Approvals, Certifications and Other Industry Standards
Our
modems and related products sold in the U.S are required to meet United States
government regulations, including regulations of the United States Federal
Communications Commission, known as the FCC, which regulates equipment, such
as
modems, that connects to the public telephone network. The FCC also regulates
the electromagnetic radiation and susceptibility of communications equipment.
In
addition, in order for our broadband products to be qualified for use with
a
particular broadband Internet service, we are often required to obtain approvals
and certifications from the actual cable, telephone or Internet service provider
and from CableLabs® for cable modems. In addition to U.S. regulations, many of
our products sold abroad require us to obtain specific regulatory approvals
from
foreign regulatory agencies for matters such as electrical safety,
country-specific telecommunications equipment requirements, and electromagnetic
radiation and susceptibility requirements. We submit products to accredited
testing laboratories and, when required, to specific foreign regulatory
agencies, to receive approvals for our products based on the test standards
appropriate to the target markets for a given product. We expect to continue
to
seek and receive approvals for new products to allow us to reach a large number
of countries throughout the world, including countries in the Americas, Europe,
Asia, and Africa. The regulatory process can be time-consuming and can require
the expenditure of substantial resources. We cannot assure that the FCC or
foreign regulatory agencies will grant the requisite approvals for any of our
products on a timely basis, if at all.
United
States and foreign regulations regarding the manufacture and sale of electronics
devices are subject to change. On July 1, 2006 changes were implemented by
the
European Union to reduce the use of hazardous materials, such as lead, in
electronic equipment. As discussed above, the implementation of these
requirements caused Zoom and other electronics companies to change or
discontinue many of its European products. As discussed above, the California
Energy Commission’s Appliance Efficiency Regulations will affect the power cube
supplied with some of Zoom’s US products.
In
addition to reliability, quality and content standards, the market acceptance
of
our products and services is dependent upon the adoption of industry standards
so that products from multiple manufacturers are able to communicate with each
other. Our products and services, particularly our VoIP products and services,
rely heavily on a variety of communication, network and voice compression
standards to interoperate with other vendors' equipment. There is currently
a
lack of agreement among industry leaders about which standard should be used
for
a particular VoIP application, and about the definition of the standards
themselves. There is significant and growing consensus to use SIP for VoIP
telephony, but there are important exceptions. One exception is Skype, which
uses a proprietary protocol. Another exception is Packet Cable, which is popular
with cable service providers. Another complication is that some VoIP services
continue to evolve. The failure of our products and services to comply with
various existing and evolving standards could delay or interrupt volume
production of our VoIP telephony or other new products and services, expose
us
to fines or other imposed penalties, or adversely affect the perception and
adoption rates of our products and services, any of which could harm our
business.
Internet
Telephony Services
The
use
of the Internet and private IP networks to provide VoIP services is a relatively
recent development. Although providing such services is currently permitted
and
largely unregulated within the U.S., several foreign governments have adopted
laws and regulations that could restrict or prohibit the providing of VoIP
services. More aggressive domestic or international regulation of the Internet
in general, and Internet telephony providers and services specifically, may
adversely affect our ability to introduce and market our VoIP services and
products successfully.
Our
ability to provide VoIP communications services on the terms we currently
provide arise in large part from the fact VoIP services are not currently
subject to the same regulation as traditional telephony. Because these services
are not currently regulated to the same extent as traditional telephony, VoIP
providers can currently avoid paying charges that traditional telephone
companies must pay. Local exchange carriers are lobbying the FCC and the states
to regulate VoIP on the same basis as traditional telephone services. The FCC
and several states are examining this issue. If the FCC or any state determines
to regulate VoIP, they may impose surcharges, taxes or additional regulations
upon providers of Internet telephony. These surcharges could include access
charges payable to local exchange carriers to carry and terminate traffic,
contributions to the Universal Service Fund (USF) or other charges. Regulations
requiring compliance with the Communications Assistance for Law Enforcement
Act
(CALEA), or provision of the same type of 911 services as required for
traditional telecommunications providers could also place a significant
financial burden on us depending on the technical changes required to
accommodate the requirements. The imposition of any such additional fees,
charges, taxes and regulations on IP communications services could materially
increase our costs, require us to modify our service, delay our products, or
impair our ability to offer competitive pricing.
In
many
countries outside the U.S. in which we operate or our services are sold, the
status of the laws that may relate to our VoIP services is unclear. We cannot
be
certain that we will be able to comply with existing or future requirements,
or
that we will be able to continue to be in compliance with any such requirements.
Our failure to comply with these requirements could have a material adverse
affect on our ability to continue to offer our VoIP service in these
jurisdictions.
Regulation
of the Internet
In
addition to regulations addressing our modems and related products and our
Internet telephony services, other regulatory issues relating to the Internet
in
general could affect our ability to provide our services. Congress has adopted
legislation that regulates certain aspects of the Internet, including online
content, user privacy, taxation, liability for third-party activities and
jurisdiction. In addition, a number of initiatives pending in Congress and
state
legislatures would prohibit or restrict advertising or sale of certain products
and services on the Internet, which may have the effect of raising the cost
of
doing business on the Internet generally.
Federal,
state, local and foreign governmental organizations are considering other
legislative and regulatory proposals that would regulate the Internet. We cannot
predict whether new taxes will be imposed on our services, and depending on
the
type of taxes imposed, whether and how our services would be affected
thereafter. Increased regulation of the Internet may decrease its growth and
hinder technological development, which may negatively impact the cost of doing
business via the Internet or otherwise harm our business.
Backlog
Our
backlog as of March 5, 2008 was $0.6 million, and on March 7, 2007 was $0.7
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
On
December 31, 2007 we had 64 full-time employees compared to 69 as of December
31, 2006. Of the 2007 total, 14 were engaged in research and development, 18
were involved in purchasing, assembly, packaging, shipping and quality control,
21 were engaged in sales, marketing and technical support, and the remaining
11
performed accounting, administrative, management information systems, and
executive functions. 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
|
|
59
|
|
Chief
Executive Officer, President and Chairman of the Board
|
Peter
R. Kramer
|
|
56
|
|
Executive
Vice President and Director
|
Robert
A. Crist
|
|
64
|
|
Vice
President of Finance and Chief Financial Officer
|
Terry
J. Manning
|
|
56
|
|
Vice
President of Sales and Marketing
|
Dean
N. Panagopoulos
|
|
50
|
|
Vice
President of Network Products
|
Deena
Randall
|
|
54
|
|
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. From 1998 through late 2006 Mr. Manning was also 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. Mr. Manning is the brother of Terry Manning, our vice
president of sales and marketing. From 1999 to 2005 Mr. Manning was a Director
of Intermute, a company that Zoom co-founded and that was sold to Trend Micro
Inc., a subsidiary of Trend Micro Japan. Mr. Manning has been a Director of
Unity Business Networks, a hosted VoIP service provider, since Zoom’s investment
in July 2007.
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 and director of
mergers and acquisitions. Prior to 1992 Mr. Crist served in various capacities
at Unisys Corporation, including corporate controller, corporate director of
business planning and analysis, corporate manufacturing and engineering
controller, and CFO for several business units. Mr. Crist earned his BS 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
1A. - RISK FACTORS
The
disclosure under the heading “Risk Factors” contained in Item 7 of this Annual
Report on Form 10-K is incorporated by reference in this Item 1A.
ITEM
1B. - UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2 – PROPERTIES
Our
corporate headquarters are located at 201 and 207 South Street, Boston,
Massachusetts. In December 2006 we sold our headquarters buildings to a third
party, with a two-year lease-back of approximately 25,000 square feet of the
62,000 square foot facility. Our net sale proceeds were approximately $7.7
million of which approximately $3.6 million was repaid to our mortgage holder,
eliminating the mortgage debt on our balance sheet ended December 31, 2006.
Our
lease expires in December 2008. A renewal of our current lease may require
an
increase in our monthly rent. We would likely move our headquarters to a new
location in the same general area of Boston to avoid a material increase in
our
monthly rent. In the event this lease is not further extended, we believe we
will be able to find alternative space that is suitable and adequate for our
headquarters operation.
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.
The
term of this lease expired in August 2006 and we began the planned move of
our
manufacturing and warehousing facility to Tijuana, Mexico. In August 2006 we
signed a lease for a 35,575 square foot manufacturing and warehousing facility
in Tijuana, Mexico with an initial lease term from October 2006 to May 2007,
with five two-year options thereafter. In February, 2007 we renegotiated the
first renewal term and signed a one-year extension starting in May 2007, with
five two-year options thereafter. We received verbal approval from the landlord
and expect to sign another one-year extension starting in May 2008. In the
event
this lease is not further extended, we believe we will be able to find
alternative space that is suitable and adequate for our manufacturing and
warehousing operations.
In
September 2005 we entered into a two year office lease consisting of 2,400
square feet at 2 Kings Road, Fleet, Hants, U.K for our U.K. sales office. In
September 2007 the lease was continued on a month-to-month basis with a 3 month
cancellation notice required by Zoom or the landlord. In the event this lease
is
not further extended, we believe we will be able to find alternative space
that
is suitable and adequate for our U.K. sales office.
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. In September
2007 the term of the lease expired and we moved our Florida-based customer
service organization to our headquarters location in Boston,
Massachusetts.
ITEM
3 - LEGAL PROCEEDINGS
No
material litigation.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matter
was submitted to a vote of security holders during the fourth quarter of the
fiscal year covered in this report.
PART
II
ITEM
5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock trades on the Nasdaq Capital 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 Capital
Market.
Fiscal
Year Ended December 31, 2007
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.80
|
|
$
|
1.08
|
|
Second
Quarter
|
|
$
|
1.89
|
|
$
|
1.15
|
|
Third
Quarter
|
|
$
|
1.30
|
|
$
|
.72
|
|
Fourth
Quarter
|
|
$
|
1.30
|
|
$
|
.53
|
|
Fiscal
Year Ended December 31, 2006
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.75
|
|
$
|
1.28
|
|
Second
Quarter
|
|
$
|
1.51
|
|
$
|
1.05
|
|
Third
Quarter
|
|
$
|
1.14
|
|
$
|
.91
|
|
Fourth
Quarter
|
|
$
|
2.80
|
|
$
|
1.00
|
|
As
of
February 15, 2008, there were 9,346,966 shares of our common stock outstanding
and 209 holders of record of our common stock.
Recent
Sales of Unregistered Securities
We
did
not sell any unregistered securities during the fourth quarter of
2007.
Dividend
Policy
We
have
never declared or paid cash dividends on our capital stock and do not plan
to
pay any cash dividends in the foreseeable future. Our current policy is to
retain all of our earnings to finance future growth.
Repurchases
by the Company
During
2007 we did not repurchase any shares of our common stock on our own behalf
or
for any affiliated purchaser.
Equity
Compensation Plan Information
The
information required by this Item 5 regarding securities authorized for issuance
under our equity compensation plans is set forth in Part III, Item 12 of this
report.
ITEM
6 - SELECTED FINANCIAL DATA
Not
required.
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.
Readers should also be cautioned that results of any reported period are often
not indicative of results for any future period.
Overview
We
derive
our net sales primarily from sales of Internet-related communication products,
principally broadband and dial-up modems and other communication products,
to
retailers, distributors, Internet Service Providers and Original Equipment
Manufacturers. We sell our products through a direct sales force and through
independent sales agents. Our employees are primarily located at our
headquarters in Boston, Massachusetts and our sales office in the United
Kingdom. We typically design our hardware products, though we do sometimes
use
another company’s design if it meets our requirements. Electronic assembly and
testing of the Company’s products in accordance with our specifications is
typically done in China.
For
many
years we performed most of the final assembly, test, packaging, warehousing
and
distribution at a production and warehouse facility on Summer Street in Boston,
Massachusetts, which has also engaged in firmware programming for some products.
On June 30, 2006 we announced our plans to move most of our Summer Street
operations to a dedicated facility in Tijuana, Mexico commencing approximately
September 1, 2006, and we have implemented that plan. Our lease for our Summer
Street facility expired in August 2006, and we completely vacated the facility
on September 30, 2006. Our Mexican maquiladora manufacturing operation is
managed by a maquiladora management company.
Since
1983 our headquarters has been near South Station in downtown Boston. Zoom
has
owned two adjacent buildings which connect on most floors, and which house
our
entire Boston staff. In December 2006 we sold our headquarters buildings to
a
third party, with a two-year lease-back of approximately 25,000 square feet
of
the 62,000 square foot facility. Our net sale proceeds were approximately $7.7
million of which approximately $3.6 million was repaid to our mortgage holder,
eliminating the mortgage debt from our balance sheet. Our lease expires in
December 2008. A renewal of our current lease may require an increase in our
monthly rent. We would likely move our headquarters to a new location in the
same general area of Boston to avoid a material increase in our monthly rent.
In
the event this lease is not further extended, we believe we will be able to
find
alternative space that is suitable and adequate for our headquarters
operation.
For
many
years we derived a majority of our net sales from the retail after-market sale
of dial-up modems to customers seeking to add or upgrade a modem for their
personal computers. In recent years the size of this market and our sales to
this market have declined, as personal computer manufacturers have incorporated
a modem as a built-in component in most consumer personal computers and as
increasing numbers of consumers world-wide have switched to broadband Internet
access. The consensus of communications industry analysts is that after-market
sales of dial-up modems will probably continue to decline. There is also
consensus among industry analysts that the installed base for broadband Internet
connection devices, such as cable modems and DSL modems, will grow rapidly
during the decade. In response to increased and forecasted worldwide demand
for
faster connection speeds and increased modem functionality, we have invested
and
continue to invest resources to advance our product line of broadband modems,
both DSL modems and cable modems.
We
continually seek to improve our product designs and manufacturing approach
in
order to improve product performance and reduce our costs. We pursue a strategy
of outsourcing rather than internally developing our modem chipsets, which
are
application-specific integrated circuits that form the technology base for
our
modems. By outsourcing the chipset technology, we are able to concentrate our
research and development resources on modem system design, leverage the
extensive research and development capabilities of our chipset suppliers, and
reduce our development time and associated costs and risks. As a result of
this
approach, we are able to quickly develop new products while maintaining a
relatively low level of research and development expense as a percentage of
net
sales. We also outsource aspects of our manufacturing to contract manufacturers
as a means of reducing our costs of production, and to provide us with greater
flexibility in our production capacity.
Over
the
past several years our net sales have declined. In response to declining sales
volume, we have cut costs by reducing staffing and some overhead costs. Our
total headcount of full-time employees, including temporary workers, went from
127 on December 31, 2005 to 64 on December 31, 2007. Of the decline of 63
employees, 47 were related to the outsourcing of our final assembly
manufacturing operation to Mexico. Our dedicated manufacturing personnel in
Mexico are employees of our Mexican manufacturing service provider and not
included in our 2007 headcount. Of the 64 employees on December 31, 2007, 14
were engaged in research and development, 18 were involved in manufacturing
oversight, purchasing, assembly, packaging, shipping and quality control, 21
were engaged in sales, marketing and technical support, and the remaining 11
performed accounting, administrative, management information systems, and
executive functions.
Generally
our gross margin for a given product depends on a number of factors including
the type of customer to whom we are selling. The gross margin for retailers
tends to be higher than for some of our other customers; but the sales, support,
returns, and overhead costs associated with retailers also tend to be higher.
Zoom’s sales to certain countries, including Turkey, Vietnam, and Saudi Arabia,
are currently handled by a single master distributor for each country who
handles the support and marketing costs within the country. Gross margin for
sales to these master distributors tends to be low, since lower pricing to
these
distributors helps them to cover the support and marketing costs for their
country.
In
2007
our net sales were up 0.8% compared to 2006. The sales increase was mainly
the
result of strong increases in DSL and Cable modem sales which were substantially
offset by declines in dial-up modem and wireless product sales. In 2007 we
made
new placements of DSL modems in large retailers in the U.S. and the U.K. and
new
placements of Cable modems in large retailers in the U.S. Sales of DSL modems
to
a previously large customer in Turkey essentially stopped in 2007. We attribute
this decline to a number of factors including increased competition and actions
by Turkish Telecom to dramatically increase their bundling of DSL modems with
their service. Because of our significant customer concentration our net sales
and operating results have fluctuated and in the future could continue to
fluctuate significantly due to changes in political or economic conditions
or
the loss, reduction of business, or less favorable terms for any of our
significant customers.
Since
1999 we had a minority interest in a privately held software company, Intermute,
Inc. In June 2005 Intermute was acquired by Trend Micro Inc., a U.S. subsidiary
of Trend Micro Japan. In connection with the acquisition, in June 2005 we
received a payment of approximately $3.5 million which we recorded as a
non-operating gain in our second quarter of 2005. We realized in cash an
additional contingent gain of $869,750 during the quarter ended September 30,
2006, representing our portion of an earn out payment paid by the buyer as
a
result of the achievement of a performance milestone. On November 11, 2006
we
received a second and final performance milestone payment, also of $869,750.
In
December 2006 we received a return of our escrow deposit of approximately
$365,933. There will be no further payments from the sale of Intermute. Total
net proceeds from the sale of our minority interest in Intermute were $5.6
million, received over 2005 and 2006.
Our
cash
and cash equivalents balance at December 31, 2007 was $3.6 million, down from
$7.8 million at December 31, 2006. This reduction was due primarily to our
$3.5
million loss for the 2007 year and our June 2007 $1.2 million investment
transaction with Unity Business Networks, LLC.
Critical
Accounting Policies and Estimates
Following
is a discussion of what we view as our more significant accounting policies
and
estimates. As described below, management judgments and estimates must be made
and used in connection with the preparation of our consolidated financial
statements. We have identified areas where material differences could result
in
the amount and timing of our net sales, costs, and expenses for any period
if we
had made different judgments or used different estimates.
Revenue
(Net Sales) Recognition. We
primarily sell hardware products to our customers. The hardware products include
dial-up modems, DSL modems, cable modems, voice over IP products, and wireless
and wired networking equipment. We earn a small amount of royalty revenue that
is included in our net sales, primarily from internet service providers. We
generally do not sell software. We began selling services in 2004. We introduced
our Global Village VoIP service in late 2004, but sales of those services to
date have not been material.
We
derive
our net sales primarily from the sales of hardware products to four types of
customers:
·
|
computer
peripherals retailers,
|
·
|
computer
product distributors,
|
·
|
Internet
service providers, and
|
·
|
original
equipment manufacturers (OEMs)
|
We
recognize hardware net sales for our customers at the point when the customers
take legal ownership of the delivered products. Legal ownership passes from
Zoom
to the customer based on the contractual FOB point specified in signed contracts
and purchase orders, which are both used extensively. Many of our customer
contracts or purchase orders specify FOB destination. We verify the delivery
date on all significant FOB destination shipments made during the last 10
business days of each quarter.
Our
net
sales of hardware include reductions resulting from certain events which are
characteristic of the sales of hardware to retailers of computer peripherals.
These events are product returns, certain sales and marketing incentives, price
protection refunds, and consumer mail-in and in-store rebates. Each of these
is
accounted for as a reduction of net sales based on detailed management
estimates, which are reconciled to actual customer or end-consumer credits
on a
monthly or quarterly basis.
Our
2007
VoIP service revenues were recorded as the end-user-customer consumed billable
VoIP services. The end-user-customer became a service customer by electing
to
sign up for the Global Village billable service on the Internet. Zoom recorded
revenue either when billable services were consumed or when a monthly flat-fee
service was billed.
Product
Returns.
Products are returned by retail stores and distributors for inventory balancing,
contractual stock rotation privileges, and warranty repair or replacements.
We
estimate the sales and cost value of expected future product returns of
previously sold products. Our estimates for product returns are based on recent
historical trends plus estimates for returns prompted by, among other things,
announced stock rotations and announced customer store closings. Management
reviews historical returns, current economic trends, and changes in customer
demand and acceptance of our products when estimating sales return allowances.
The estimate for future returns is recorded as a reserve against accounts
receivable, a reduction in our net sales, and the corresponding change to
inventory reserves and cost of sales. Product returns as a percentage of total
shipments were 11.7% and 8.9%, respectively, for 2007 and 2006. The 2006 figure
does not include the impact of the start of the consignment arrangement in
2006
at a major retailer customer.
Price
Protection Refunds.
We have
a policy of offering price protection to certain of our retailer and distributor
customers for some or all their inventory. Under the price protection policies,
when we reduce our prices for a product, the customer receives a credit for
the
difference between the original purchase price and our reduced price for their
unsold inventory of that product. Our estimates for price protection refunds
are
based on a detailed understanding and tracking by customer and by sales program.
Estimated price protection refunds are recorded in the same period as the
announcement of a pricing change. Information from customer inventory-on-hand
reports or from direct communications with the customers is used to estimate
the
refund, which is recorded as a reduction of net sales and a reserve against
accounts receivable. Reductions in our net sales due to price protection were
$0.1 million in 2006 and $0.1 million in 2007.
Sales
and Marketing Incentives.
Many of
our retailer customers require sales and marketing support funding, usually
set
as a percentage of our sales in their stores. The incentives were reported
as
reductions in our net sales and were $0.8 million in 2006 and $1.2 million
in
2007.
Consumer
Mail-In and In-Store Rebates.
Our
estimates for consumer mail-in and in-store rebates are based on a detailed
understanding and tracking by customer and sales program, supported by actual
rebate claims processed by the rebate redemption centers plus an accrual for
an
estimated lag in processing at the redemption centers. The estimate for mail-in
and in-store rebates is recorded as a reserve against accounts receivable and
a
reduction of net sales in the same period that the rebate obligation was
triggered. Reductions in our net sales due to the consumer rebates were $0.7
million in 2006 and $0.3 million in 2007.
To
ensure
that the sales, discounts, and marketing incentives are recorded in the proper
period, we perform extensive tracking and documenting by customer, by period,
and by type of marketing event. This tracking includes reconciliation to the
accounts receivable records for deductions taken by our customers for these
discounts and incentives.
Accounts
Receivable Valuation.
We
establish accounts receivable valuation allowances equal to the above-discussed
net sales adjustments for estimates of product returns, price protection
refunds, consumer rebates, and general bad debt reserves. These allowances
are
reduced as actual credits are issued to the customer's accounts. Our bad-debt
write-offs were less than $0.1 million for 2007 and nominal for
2006.
Inventory
Valuation and Cost of Goods Sold.
Inventory is valued at the lower of cost, determined by the first-in, first-out
method, or market. We review inventories for obsolete slow moving products
each
quarter and make provisions based on our estimate of the probability that the
material will not be consumed or that it will be sold below cost. We did not
have significant charges to costs and expenses for obsolete or slow-moving
products in 2007. In 2006 we recorded an additional charge of $0.6 million
for
inventory reserves related to obsolete and slow-moving products.
Valuation
and Impairment of Deferred Tax Assets.
As part
of the process of preparing our consolidated financial statements we estimate
our income tax expense and deferred income tax position. This process involves
the estimation of our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. We then
assess the likelihood that our deferred tax assets will be recovered from future
taxable income. To the extent we believe that recovery is not likely, we
establish a valuation allowance. Changes in the valuation allowance are
reflected in the statement of operations.
Significant
management judgment is required in determining our provision for income taxes
and any valuation allowances. We have recorded a 100% valuation allowance
against our deferred income tax assets. It is management's estimate that, after
considering all the available objective evidence, historical and prospective,
with greater weight given to historical evidence, it is more likely than not
that these assets will not be realized. If we establish a record of continuing
profitability, at some point we will be required to reduce the valuation
allowance and recognize an equal income tax benefit which will increase net
income in that period(s).
As
of
December 31, 2007 we had federal net operating loss carry forwards of
approximately $36,777,000. These federal net operating losses are available
to
offset future taxable income, and are due to expire in years ranging from
2018 to 2027. We also had state net operating loss carry forwards of
approximately $11,447,000. These state net operating losses are available to
offset future taxable income, and are primarily due to expire in years ranging
from 2008 to 2012.
Valuation
of Investment in Affiliates.
Since
1999 the Company had a minority interest in a privately held software company,
Intermute, Inc., which the Company had been accounting for under the equity
method of accounting. The Company made its original investment in 1999, at
the
time of Intermute’s formation, and subsequently made additional investments.
Under the equity method of accounting, the Company's investment was increased
or
decreased, not below zero, based upon the Company's proportionate share of
the
net earnings or losses of Intermute. As a result of the losses incurred by
Intermute subsequent to the Company's investments, the Company's investment
balance was reduced to zero during 2002. The Company discontinued applying
the
equity method when the investment was reduced to zero and did not provide for
additional losses, as the Company did not guarantee obligations of the investee
and was not committed to provide further financial support.
In
June
2005 Intermute was acquired by Trend Micro Inc., a U.S. subsidiary of Trend
Micro Japan. In connection with the acquisition, in June 2005 the Company
received a payment of approximately $3.5 million which was recorded as a
non-operating gain in the Company’s second quarter of 2005. The Company realized
in cash an additional contingent gain of $0.9 million during the quarter ended
September 30, 2006, representing its portion of an earnout payment paid by
the
buyer as a result of the achievement of a performance milestone. On November
11,
2006 the Company received a second and final performance milestone payment,
also
of $0.9 million. In December 2006 the Company received a return of its escrow
deposit of approximately $0.4 million. All of the payments were recorded as
non-operating gains, a total of approximately $2.1 million in 2006. There will
be no further payments from the sale of Intermute. Total
net
proceeds from the sale of our minority interest in Intermute were $5.6 million,
received over 2005 and 2006.
During
the quarter ended September 30, 2007 the Company purchased all the Series A
Preferred Shares (the Series A Shares) of Unity Business Networks, LLC (Unity)
for cash of $1.2 million, including transaction costs. The Series A Shares
are
convertible at any time at the Company’s option into 15% of Unity’s common stock
on a fully-diluted basis. The Series A Shares convert automatically if Unity
consummates a public offering with gross proceeds in excess of $25 million
or 30
days after Unity delivers its 2009 audited financial statements to the Company.
In addition, the Company has an option to purchase all the outstanding common
stock of Unity based on a specified multiple of Unity’s revenues, as defined,
for 2008. The option is exercisable for 30 days following the receipt of Unity’s
2008 audited financial statements. The Company’s CEO is a member of Unity’s five
member board of directors. Further, the Company is entitled to vote Series
A
Shares on an as-converted basis with Unity’s common stock. The Company is unable
to exercise significant influence over Unity’s policies or operations. The
Company accounts for its investment in Unity at cost. The investment will be
reviewed periodically for potential impairment.
On
January 22, 2008, Zoom Technologies, Inc. (the “Company”) and RedMoon, Inc., a
provider of wireless networks headquartered in Plano, Texas (“RedMoon”), entered
into a Convertible Note Purchase Agreement pursuant to which the Company made
an
initial investment of $300,000 in 6% convertible notes (the “Notes”) and agreed
to purchase an additional $50,000 per month of 6% convertible notes beginning
on
May 1, 2008 and continuing until the earlier of (i) the Company’s election to
exercise the option to purchase all outstanding stock of RedMoon contained
in
the Option Agreement described below or (ii) the Company’s election to terminate
such Option Agreement, up to a maximum total investment of $500,000. The Notes
are senior to all long term liabilities of RedMoon and all current liabilities
of RedMoon in excess of $11,000 and are secured by certain equipment of RedMoon.
The Notes have a term of three years, and, at the Company’s election, may be
converted into shares of Series A Preferred Stock of RedMoon. If the Company
purchases Notes with a total principal amount of $500,000, such Notes will
be
convertible into shares of Series A Preferred Stock representing 20% of the
fully diluted capitalization of RedMoon. If the Company purchases Notes with
a
total principal amount of less than $500,000, the number of shares of Series
A
Preferred Stock issued upon conversion of the Notes will be pro-rated according
to the amount of the actual investment.
On
the
same date, the Company, RedMoon and the holders of RedMoon’s outstanding capital
stock entered into an Option Agreement pursuant to which the Company has the
right to buy the balance of RedMoon any time prior to the close of business
on
August 31, 2008, unless the Company elects to terminate the Option Agreement
prior to that date, at a price equal to 1,000,000 shares of the Company’s common
stock plus up to 4,000,000 additional shares of the Company’s common stock, or
cash or a combination of cash and stock of equivalent value, with any issuance
of some or all of the 4,000,000 additional shares or share equivalents based
on
RedMoon’s performance during the five calendar quarters beginning with the
quarter ending June 30, 2008.
Finally,
on the same date the Company and RedMoon entered into a Security Agreement
granting the Company a security interest in certain equipment of RedMoon, and
the Company, RedMoon, and certain of RedMoon’s stockholders entered into a
Voting Agreement whereby the Company and certain stockholders of RedMoon agreed
to elect Frank Manning, Chief Executive Officer of the Company, and Bryan
Thompson, Chief Executive Officer of RedMoon, to the Board of Directors of
RedMoon.
Results
of Operations
The
following table sets forth certain financial data as a percentage of net sales
for the periods indicated:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
85.8
|
|
|
79.8
|
|
Gross
profit
|
|
|
14.2
|
|
|
20.2
|
|
Operating
expense:
|
|
|
|
|
|
|
|
Selling
|
|
|
19.8
|
|
|
19.3
|
|
General
and administration
|
|
|
15.5
|
|
|
13.1
|
|
Research
and development
|
|
|
11.8
|
|
|
9.9
|
|
|
|
|
47.1
|
|
|
42.3
|
|
Operating
profit (loss) before sale of real estate
|
|
|
(32.9
|
)
|
|
(22.1
|
)
|
Gain
on sale of real estate
|
|
|
25.9
|
|
|
2.1
|
|
Operating
profit (loss)
|
|
|
(
7.0
|
)
|
|
(
20.0
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
Gain
on sale of investment in Intermute, Inc.
|
|
|
11.5
|
|
|
-
|
|
Other,
net
|
|
|
0.8
|
|
|
1.0
|
|
Total
other income (expense)
|
|
|
12.3
|
|
|
1.0
|
|
Loss
before income taxes
|
|
|
5.3
|
|
|
(19.0
|
)
|
Income
taxes (benefit)
|
|
|
(
0.3
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
5.6
|
%
|
|
(19.0)
|
%
|
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
The
following is a discussion of the major categories of our consolidated statement
of operations, comparing the financial results for the year ended December
31,
2007 with the year ended December 31, 2006.
Net
Sales.
Our
total net sales increased year-over-year by $0.2 million or 0.8%. In 2007 we
primarily generated our sales by selling dial-up and broadband modems via
retailers, distributors, and Internet Service Providers. The dial-up modem
market has continued to decline, and Zoom sales of dial-up modems declined
$1.5
million due primarily to the decline of the dial-up modem market. Our DSL
broadband modem category increased $1.2 million primarily as a result of
increased placements at large electronic retailers the U.S. and the U.K.,
partially offset by a $1.3 million decline of DSL sales to our Turkish
distributor due to actions by Turkish Telecom which dramatically increased
their
bundling of DSL modems with their service offerings. Net sales in our other
product sales category, which included primarily cable modems, increased 33.3%
from $1.5 million in 2006 to $2.0 million in 2007. The following table
illustrates this change in net sales.
|
|
Year
2006
Sales
$000
|
|
Year
2007
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
Dial-up
|
|
$
|
8,851
|
|
$
|
7,337
|
|
$ |
(1,514
|
)
|
|
(17.1
|
)%
|
DSL
|
|
|
7,981
|
|
|
9,154
|
|
|
1,173
|
|
|
14.7
|
%
|
Cable
and Other Products
|
|
|
1,490
|
|
|
1,987
|
|
|
497
|
|
|
33.3
|
%
|
Total
Net Sales
|
|
$
|
18,322
|
|
$
|
18,478
|
|
$
|
156
|
|
|
0.9
|
%
|
As
shown
in the table below our net sales in North America increased $1.5 million or
14.6% from $10.3 million in 2006 to $11.8 million in 2007. Our net sales in
Turkey were negligible in 2007 compared to $1.4 million in 2006, a 96.4%
decrease. The dramatic decline of our sales in Turkey resulted from decreased
DSL sales to our Turkish distributor due to actions by Turkish Telecom which
dramatically increased their bundling of DSL modems with their service
offerings. This action significantly reduced the retail market for DSL modems
in
Turkey. Our net sales in the UK were $4.1 million in 2007 compared to $3.7
million in 2006, a 9.4% increase. The sales increase in North America and the
UK
primarily reflect our increased sales of broadband modems in our retailer
channel, which offset the continued decline of dial-up modem sales in all
channels. Our net sales in all other countries were $2.6 million in 2007
compared to $3.0 million in 2006, a 12.8% decline. The sales decline in all
other countries was primarily due to declining sales of dial-up modems and
DSL
modems.
|
|
Year
2006
Sales
$000
|
|
Year
2007
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
10,279
|
|
$
|
11,776
|
|
$
|
1,498
|
|
|
14.6
|
%
|
Turkey
|
|
|
1,359
|
|
|
49
|
|
|
(1,310
|
)
|
|
(96.4
|
)%
|
UK
|
|
|
3,717
|
|
|
4,065
|
|
|
348
|
|
|
9.4
|
%
|
All
Other
|
|
|
2,967
|
|
|
2,588
|
|
|
(379
|
)
|
|
(12.8
|
)%
|
Total
Net Sales
|
|
$
|
18,322
|
|
$
|
18,478
|
|
|
156
|
|
|
0.8
|
%
|
During
2007 three customers each accounted for 10% or more of our total net sales.
Together these three customers accounted for 44% of our total net sales. During
2006, a single customer accounted for more than 10% of our total net
sales.
Because
of our customer concentration, our net sales and operating income could
fluctuate significantly due to changes in political or economic conditions
or
the loss, reduction of business, or less favorable terms for any of our
significant customers.
Gross
Profit.
Our
gross profit was $3.7 million in 2007 compared to $2.6 million in 2006. Our
gross profit percentage of net sales increased to 20.2% in 2007 from 14.2%
in
2006. The primary reason for this increase was lower obsolescence expense and
lower manufacturing expense. Both our fixed and variable manufacturing
costs were lower in 2007 compared to 2006 as a result of the third quarter
2006
transition of production to Mexico.
Operating
Expense.
Total
operating expense excluding the gain on sale of real estate decreased by $0.8
million from $8.6 million in 2006 to $7.8 million in 2007. Total operating
expense excluding the gain on sale of real estate as a percentage of net sales
decreased from 47.1% in 2006 to 42.3% in 2007. The table below illustrates
the
change in operating expense.
Operating
Expense
|
|
Year
2006
Sales
$000
|
|
%
Net
Sales
|
|
Year
2007
Sales
$000
|
|
%
Net
Sales
|
|
Change
$000
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expense
|
|
$
|
3,631
|
|
|
19.8
|
%
|
$
|
3,558
|
|
|
19.3
|
%
|
$
|
(73
|
)
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expense
|
|
|
2,847
|
|
|
15.5
|
%
|
|
2,424
|
|
|
13.1
|
%
|
|
(423
|
)
|
|
(14.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and Development Expense
|
|
|
2,158
|
|
|
11.8
|
%
|
|
1,825
|
|
|
9.9
|
%
|
|
(333
|
)
|
|
(15.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expense excluding the gain on sale of real
estate
|
|
|
8,636
|
|
|
47.1
|
%
|
|
7,807
|
|
|
42.3
|
%
|
|
(829
|
)
|
|
(9.5
|
)%
|
Selling
Expense.
Selling
expense decreased from $3.6 million in 2006 to $3.56 million in 2007. Selling
expense as a percentage of net sales was 19.8% in 2006 and 19.3% in 2007. The
$0.1 million reduction in selling expense was primarily due to reduced personnel
costs due to lower employee headcount.
General
and Administrative Expense.
General
and administrative expense was $2.8 million in 2006 and $2.4 million in 2007.
General and administrative expense as a percentage of net sales was 15.5% in
2006 and 13.1% in 2007. In 2006 compared to 2007, general and administrative
expense decreased $0.4 million primarily due to a reduction in personnel costs
($0.4 million) and legal, audit and consulting fees ($0.2 million), partially
offset by the increase in facility expenses as a result of the sale and
leaseback of our headquarters facility in late 2006 ($0.1 million).
Research
and Development Expense.
Research
and development expense decreased from $2.2 million in 2006 to $1.8 million
in
2007. Research and development expense as a percentage of net sales decreased
from 11.8% in 2006 to 9.9% in 2007. The $0.3 million decrease in research and
development expense was primarily due to reduced personnel costs ($0.3
million).
Gain
on Sale of Real Estate. In
2006
we recognized a gain in operations on the sale of real estate of $4.8 million.
The gain as a percentage of net sales was 32.9% in 2006. In December 2006,
we
sold the real estate housing our corporate headquarters and concurrently entered
into a leaseback arrangement for a portion of the property. The leaseback
arrangement is for two years. A gain of $5.5 million was realized on the sale.
However, a portion of the gain ($0.7 million) was deferred and is being
recognized in operations over the term of the lease ($0.37 million in 2007
and
$0.36 million in 2008). The gain initially deferred is the estimated present
value of the minimum lease payments under the leaseback arrangement.
Other
Income (Expense).
Other
income, net decreased to $0.2 million in 2007 from $2.3 million in 2006. The
$2.3 million other income in 2006 included $2.1 million gain under an earn-out
provision from the sale of our investment in Intermute in a prior year. We
will
not receive any additional similar payments.
Income
Tax Expense (Benefit).
We
recorded a favorable $0.05 million net income tax benefit in 2006 resulting
solely from changes in prior years’ estimates. We have not recognized any income
tax benefits on our operating losses in 2007 and 2006 because we are in a net
operating loss carry forward position and realization of such benefits is
unlikely.
Liquidity
and Capital Resources
On
December 31, 2007 we had working capital of $7.7 million including $3.6 million
in cash and cash equivalents. On December 31, 2006 we had working capital of
$12.4 million including $7.8 million in cash and cash equivalents. Our current
ratio at December 31, 2007 was 3.7 compared to 4.5 at December 31, 2006. A
significant portion in the reduction of the current ratio was due to our 2007
net loss of $3.5 million and the cash expenditure of $1.2 million for our June
2007 investment in Unity Business Networks, LLC.
In
2007
operating activities used $3.0 million in cash. Our net loss in 2007 was $3.5
million. Sources of cash from operations included a decrease in accounts
receivable of $1.3 million, non-cash stock-based compensation of $0.2 million,
non-cash depreciation and amortization expense of $0.1 million, and a decrease
in inventories of $0.1 million. Uses of cash from operations included a decrease
in accounts payable and accrued expense of $0.7 million and a non-cash gain
on
sale of real estate of $0.4 million.
In
2007
our net cash used by investing activities was $1.2 million, which included
our
investment in Unity Business Networks, LLC of $1.2 million
In
2007
there was no significant cash provided by or used in financing activities.
To
conserve cash and manage our liquidity, we have implemented cost-cutting
initiatives including the reduction of employee headcount and overhead costs.
As
of December 31, 2007 we had 64 full-time employees compared to 69 as of December
31, 2006. We plan to continue to assess our cost structure as it relates to
our
revenues and cash position, and we may make further reductions if the actions
are deemed necessary.
Management
believes we have sufficient resources to fund our normal operations over the
next 12 months, through at least December 31, 2008. However, if we are unable
to
increase our revenues, reduce or otherwise adequately control our expenses,
or
raise capital, our longer-term ability to continue as a going concern and
achieve our intended business objectives could be adversely affected. See “Risk
Factors” below, for further information with respect to events and uncertainties
that could harm our business, operating results, and financial
condition.
ITEM
1A. 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 are 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.
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. Our revolving credit facility expired on March 15, 2006
and
we currently have no line of credit from which we can borrow. 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 not have sufficient resources to fund our normal operations
and
we may be required to further reduce planned expenditures or forego business
opportunities. These factors could reduce our net sales, increase our losses,
and harm our business. Moreover, additional equity financing could dilute the
per share value of our common stock held by current shareholders, while
additional debt financing could restrict our ability to make capital
expenditures or incur additional indebtedness, all of which would impede our
ability to succeed.
The
market for high-speed communications products and services has many competing
technologies and, as a result, the demand for certain of our products and
services is declining.
Industry
analysts believe that the market for our dial-up modems will continue to
decline. If we are unable to increase demand for and sales of our broadband
modems, we may be unable to sustain or grow our business. The market for
high-speed communications products and services has a number of competing
technologies. For instance, Internet access can be achieved
by:
·
|
using
a standard telephone line and appropriate service for dial-up modems;
|
·
|
using
a cable modem with a cable TV line and cable modem service;
|
·
|
using
a router and some type of modem to service the computers connected
to a
local area network; or
|
·
|
other
approaches, including wireless links to the
Internet.
|
Although
we currently sell products that include these technologies, our most successful
products have historically been our dial-up modems. The introduction of new
products by competitors, market acceptance of competing products based on new
or
alternative technologies, or the emergence of new industry standards have in
the
past rendered and could continue to render our products less competitive or
even
obsolete. For example, these factors have caused the market for our dial-up
modems to shrink dramatically. If we are unable to increase demand for our
broadband modems, we may be unable to sustain or grow our
business.
We
may not be able to maintain our listing on the Nasdaq Capital Market if we
are
unable to satisfy the minimum bid price requirements.
Our
stock
is currently trading below $1.00 per share, which is below the Nasdaq $1.00
minimum bid price requirement. Because our stock traded below $1.00 per share
for 30 consecutive business days, on November 16, 2007 the Nasdaq Stock Market
notified us that we are no longer in compliance with Marketplace Rule
4310(c)(4). We were provided until May 14, 2008 to regain compliance. In order
to regain compliance, the bid price of our common stock must meet or exceed
$1.00 per share for a minimum of ten consecutive business days before that
date.
If we cannot demonstrate compliance with Rule 4310(c)(4) by May 14, 2008, the
Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial
listing criteria set forth in Nasdaq Marketplace Rule 4310(c), except for the
bid price requirement. If the Nasdaq determines that we meet the initial listing
criteria, the Nasdaq staff will grant us an additional 180 calendar day
compliance period. If we are not eligible for an additional compliance period,
the Nasdaq staff will provide written notice that our securities will be
delisted. At that time, we may appeal the determination to delist our securities
to a Listing Qualifications Panel. A delisting of our shares could have a
negative effect on the market price for our shares.
Our
reliance on a limited number of customers for a large portion of our revenues
could materially harm our business and prospects.
Relatively
few customers have accounted for a substantial portion of our net sales. In
2007, our net sales to three companies constituted 44% of our total net sales.
Our customers generally do not enter into long-term agreements obligating them
to purchase our products. We may not continue to receive significant revenues
from any of these or from other large customers. Because of our significant
customer concentration, our net sales and operating income could fluctuate
significantly due to changes in political or economic conditions or the loss
of,
reduction of business with, or less favorable terms for any of our significant
customers. For example, in 2006, DSL sales to our Turkish distributor, one
of
our large customers, declined significantly from $5.6 million in 2005 to $1.3
million in 2006. We attribute this decline due to a number of factors including
increased competition and plans by Turkish Telecom to dramatically increase
their bundling of DSL modems with their service. We cannot guarantee that we
will increase our sales to our Turkish distributor. A reduction or delay in
orders from any of our significant customers, or a delay or default in payment
by any significant customer could materially harm our business, results of
operation and liquidity.
Our
reliance on a single manufacturer for a substantial percentage of our products
could have an adverse effect on our business.
We
currently rely on a single manufacturer to manufacture a substantial portion
of
our products. The loss of the services of this manufacturer or an adverse change
in the manufacturer’s business or our relationship could have a material adverse
effect on our ability to manufacture our products and on our
business.
Capacity
constraints in our Mexican operations could reduce our sales and revenues and
hurt customer relationships.
We
now
rely on our Mexican operations to finish and ship most of the products we sell.
Since moving our manufacturing operations to our Mexican facility we have
experienced and may continue to experience constraints on our manufacturing
capacity as we address challenges related to operating our new facility, such
as
hiring and training workers, creating the facility’s infrastructure, developing
new supplier relationships, complying with customs and border regulations,
and
resolving shipping and logistical issues. Our sales and revenues may be reduced
and our customer relationships may be impaired if we continue to experience
constraints on our manufacturing capacity. We are working to minimize capacity
constraints in a cost-effective manner, but there can be no assurance that
we
will be able to adequately minimize capacity constraints.
Our
reliance on a business processing outsourcing partner to conduct our operations
in Mexico could materially harm our business and
prospects.
In
connection with the move of most of our North American manufacturing operations
to Mexico, we rely on a business processing outsourcing partner to hire, subject
to our oversight, the production team for our manufacturing operation, provide
the selected facility described above, and coordinate many of the ongoing
manufacturing logistics relating to our operations in Mexico. Our outsourcing
partner’s related functions include acquiring the necessary Mexican permits,
providing the appropriate Mexican operating entity, assisting in customs
clearances, and providing other general assistance and administrative services
in connection with the ongoing operation of the Mexican facility. Our
outsourcing partner’s performance of these obligations efficiently and
effectively is critical to the success of our operations in Mexico. Failure
of
our outsourcing partner to perform its obligations efficiently and effectively
could result in delays, unanticipated costs or interruptions in production,
delays in deliveries to our customers or other harm to our business, results
of
operation, and liquidity. Moreover, if our outsourcing arrangement is not
successful, we cannot assure our ability to find an alternative production
facility or outsourcing partner to assist in our operations in Mexico or our
ability to operate successfully in Mexico without outsourcing or similar
assistance.
Our
net sales, operating results and liquidity have been and may in the future
be
adversely affected 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. Decreasing average
selling prices and reduced demand for our dial-up modems have resulted and
are
likely to continue to result in decreased net sales for dial-up modems. If
we
fail to replace declining revenue from the sales of dial-up modems with the
sales of our other products, including our broadband modems, our business,
results of operation and liquidity will be harmed.
Less
advantageous terms of sale of our products could harm our
business.
We
entered into a consignment arrangement with a significant retailer customer
in
October 2006. In connection with this arrangement ownership of all unsold
products previously purchased from Zoom reverted to us in November 2006. Under
the consignment arrangement we do not recognize revenue from the sale of a
product until the retailer actually sells such product to its customer. The
consignment arrangement also results in a delay in the dating of invoices,
the
recognition of accounts receivable, and the due dates for payment by the
retailer for goods sold. If additional significant customers adopt similar
arrangements or otherwise change the terms of sale, our business, results of
operation and liquidity will be harmed.
We
believe that our future success will depend in large part on our ability to
more
successfully penetrate the broadband modem markets, which have been challenging
markets, with significant barriers to entry.
With
the
shrinking of the dial-up modem market, we believe that our future success will
depend in large part on our ability to more successfully penetrate the broadband
modem markets, DSL and cable, and the VoIP market. These markets have
significant barriers to entry that have adversely affected our sales to these
markets. Although some cable and DSL modems are sold at retail, the high volume
purchasers of these modems are concentrated in a relatively few large cable,
telecommunications, and Internet service providers which offer broadband modem
services to their customers. These customers, particularly cable services
providers, also have extensive and varied approval processes for modems to
be
approved for use on their network. These approvals are expensive, time
consuming, and continue to evolve. Successfully penetrating the broadband modem
market therefore presents a number of challenges including:
·
|
the
current limited retail market for broadband modems;
|
·
|
the
relatively small number of cable, telecommunications and Internet
service
provider customers that make up the bulk of the market for broadband
modems in certain countries, including the United States;
|
·
|
the
significant bargaining power of these large volume purchasers;
|
·
|
the
time consuming, expensive, uncertain and varied approval process
of the
various cable service providers; and
|
·
|
the
strong relationships with cable service providers enjoyed by incumbent
cable equipment providers like Motorola and
Cisco.
|
Our
sales
of broadband products have been adversely affected by all of these factors.
Sales of our broadband products in European countries have fluctuated and may
continue to fluctuate due to approvals and delays in the deployment by service
providers of cable and DSL service in these countries. We cannot assure that
we
will be able to successfully penetrate these markets.
Our
failure to meet changing customer requirements and emerging industry standards
would adversely impact our ability to sell our products and
services.
The
market for PC communications products and high-speed broadband access products
and services is characterized by aggressive pricing practices, continually
changing customer demand patterns, rapid technological advances, emerging
industry standards and short product life cycles. Some of our product and
service developments and enhancements have taken longer than planned and have
delayed the availability of our products and services, which adversely affected
our sales and profitability in the past. Any significant delays in the future
may adversely impact our ability to sell our products and services, and our
results of operations and financial condition may be adversely affected. Our
future success will depend in large part upon our ability to:
·
|
identify
and respond to emerging technological trends and industry standards
in the
market;
|
·
|
develop
and maintain competitive products that meet changing customer demands;
|
·
|
enhance
our products by adding innovative features that differentiate our
products
from those of our competitors;
|
·
|
bring
products to market on a timely basis;
|
·
|
introduce
products that have competitive prices;
|
·
|
manage
our product transitions, inventory levels and manufacturing processes
efficiently;
|
·
|
respond
effectively to new technological changes or new product announcements
by
others; and
|
·
|
meet
changing industry standards.
|
Our
product cycles tend to be short, and we may incur significant non-recoverable
expenses or devote significant resources to sales that do not occur when
anticipated. Therefore, the resources we devote to product development, sales
and marketing may not generate material net sales for us. In addition, short
product cycles have resulted in and may in the future result in excess and
obsolete inventory, which has had and may in the future have an adverse affect
on our results of operations. In an effort to develop innovative products and
technology, we have incurred and may in the future incur substantial
development, sales, marketing, and inventory costs. If we are unable to recover
these costs, our financial condition and operating results could be adversely
affected. In addition, if we sell our products at reduced prices in anticipation
of cost reductions and we still have higher cost products in inventory, our
business would be harmed and our results of operations and financial condition
would be adversely affected.
Our
international operations are subject to a number of risks that could harm our
business.
Currently
our business is significantly dependent on our operations outside the United
States, particularly sales of our products and the production of most of our
products. All of our manufacturing operations except our rework operations
are
now located outside of the United States. In 2006, sales outside North America
were 44% of our net sales. In 2007, sales outside North America were 60% of
our
net sales. The inherent risks of international operations could harm our
business, results of operation, and liquidity. Specifically, our manufacturing
operations in Mexico are subject to the challenges and risks associated with
international operations, including those related to integration of operations
across different cultures and languages, currency risk, and economic, legal,
political and regulatory risks. The types of risks faced in connection with
international operations and sales include, among others:
· |
regulatory
and communications requirements and policy changes;
|
· |
favoritism
toward local suppliers;
|
· |
delays
in the rollout of broadband services by cable and DSL service providers
outside of the United States;
|
· |
local
language and technical support requirements;
|
· |
difficulties
in inventory management, accounts receivable collection and the management
of distributors or
representatives;
|
·
|
reduced
control over staff and other difficulties in staffing and managing
foreign
operations;
|
·
|
reduced
protection for intellectual property rights in some
countries;
|
·
|
political
and economic changes and disruptions;
|
·
|
governmental
currency controls;
|
·
|
currency
exchange rate fluctuations, including, as a result of the move of
our
manufacturing operations to Mexico, changes in value of the Mexican
Peso
relative to the US dollar; and import, export, and tariff
regulations.
|
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:
·
|
delays
in the development of our products;
|
·
|
numerous
product returns; and
|
·
|
other
losses to us or to our customers or end
users.
|
Any
of
these occurrences could also result in the loss of or delay in market acceptance
of our products, either of which would reduce our sales and harm our business.
We are also exposed to the risk of product returns from our customers as a
result of contractual stock rotation privileges and our practice of assisting
some of our customers in balancing their inventories. Overstocking has in the
past led and may in the future lead to higher than normal returns.
Our
failure to effectively manage our inventory levels could materially and
adversely affect our liquidity and harm our business.
Due
to
rapid technological change and changing markets we are required to manage our
inventory levels carefully to both meet customer expectations regarding delivery
times and to limit our excess inventory exposure. In the event we fail to
effectively manage our inventory our liquidity may be adversely affected and
we
may face increased risk of inventory obsolescence, a decline in market value
of
the inventory, or losses from theft, fire, or other casualty. We did not incur
a
significant inventory obsolescence charge in 2007 for inventory reserves related
to obsolete and slow-moving products.
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 and original design manufacturers for electronics
manufacturing of most of our products. We use these third party manufacturers
to
help ensure low costs, rapid market entry, and reliability. Any manufacturing
disruption could impair our ability to fulfill orders, and failure to fulfill
orders would adversely affect our sales. Although we currently use four
electronics 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:
·
|
reduced
management and control of component purchases;
|
·
|
reduced
control over delivery schedules, quality assurance and manufacturing
yields;
|
·
|
lack
of adequate capacity during periods of excess demand;
|
·
|
limited
warranties on products supplied to us;
|
·
|
potential
increases in prices;
|
·
|
interruption
of supplies from assemblers as a result of a fire, natural calamity,
strike or other significant event; and
|
·
|
misappropriation
of our intellectual property.
|
We
may be unable to produce sufficient quantities of our products because we obtain
key components from, and depend on, sole or limited source
suppliers.
We
obtain
certain key parts, components, and equipment from sole or limited sources of
supply. For example, we purchase most of our dial-up and broadband modem
chipsets from Conexant Systems, Agere Systems, and Ikanos Communications.
Integrated circuit product areas covered by at least one of these companies
include dial-up modems, DSL modems, cable modems, networking, routers, and
gateways. In the past we have experienced delays in receiving shipments of
modem
chipsets from our sole source suppliers. We may experience similar delays in
the
future. In addition, some products may have other components that are available
from only one source. If we are unable to obtain a sufficient supply of
components from our current sources, we would 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.
We
face significant competition, which could result in decreased demand for our
products or services.
We
may be
unable to compete successfully. A number of companies have developed, or are
expected to develop, products that compete or will compete with our products.
Furthermore, many of our current and potential competitors have significantly
greater resources than we do. Intense competition, rapid technological change
and evolving industry standards could result in less favorable selling terms
to
our customers, decrease demand for our products or make our products
obsolete.
New
environmental regulations may increase our manufacturing costs and harm our
business.
The
State
of
California and other states have
implemented regulations requiring the use of highly efficient power cubes.
These
new requirements will affect
many of
our products and will
typically
result
in an increase of
$0.20
to $0.70 in our cost to produce those products that use U.S. power cubes. This
is expected to reduce our gross margin for those products.
Changes
in current or future laws or governmental regulations and industry standards
that negatively impact our products, services and technologies could harm our
business.
The
jurisdiction of the Federal Communications Commission, or the FCC, extends
to
the entire United States communications industry including our customers and
their products and services that incorporate our products. Our products are
also
required to meet the regulatory requirements of other countries throughout
the
world where our products and services are sold. Obtaining government regulatory
approvals is time-consuming and very costly. In the past, we have encountered
delays in the introduction of our products, such as our cable modems, as a
result of government certifications. We may face further delays if we are unable
to comply with governmental regulations. Delays caused by the time it takes
to
comply with regulatory requirements may result in cancellations or postponements
of product orders or purchases by our customers, which would harm our
business.
In
addition to reliability and quality standards, the market acceptance of our
VoIP
products and services is dependent upon the adoption of industry standards
so
that products from multiple manufacturers are able to communicate with each
other. Standards are continuously being modified and replaced. As standards
evolve, we may be required to modify our existing products or develop and
support new versions of our products. The failure of our products to comply,
or
delays in compliance, with various existing and evolving industry standards
could delay or interrupt volume production of our products, which could harm
our
business.
Regulation
of VoIP services is developing and is therefore uncertain. Future regulation
of
VoIP services could increase our costs and restrict the growth of our VoIP
business.
VoIP
services currently have different regulations from traditional telephony in
most
countries including the US. The US, various states and other countries may
impose surcharges, taxes or new regulations upon providers of VoIP services.
The
imposition of any such surcharges, taxes and regulations on VoIP services could
materially increase our costs, may limit or eliminate our competitive pricing
and may require us to restructure the VoIP services we currently offer. For
example, regulations requiring compliance with the Communications Assistance
for
Law Enforcement Act (CALEA) or provision of the same type of 911 services as
required for traditional telecommunications providers could place a significant
financial burden on us depending on the technical changes required to
accommodate the requirements.
In
many
countries outside the US in which we operate or our services are sold, we cannot
be certain that we will be able to comply with existing or future requirements,
or that we will be able to continue to be in compliance with any such
requirements. Our failure to comply with these requirements could materially
adversely affect our ability to continue to offer our VoIP services in these
jurisdictions.
Fluctuations
in the foreign currency exchange rates in relation to the U.S. Dollar could
have
a material adverse effect on our operating results.
Changes
in currency exchange rates that increase the relative value of the U.S. dollar
may make it more difficult for us to compete with foreign manufacturers on
price, may reduce our foreign currency denominated sales when expressed in
dollars, or may otherwise have a material adverse effect on our sales and
operating results. A significant increase in our foreign currency denominated
sales would increase our risk associated with foreign currency fluctuations.
A
weakness in the U.S. dollar relative to the Mexican Peso and various Asian
currencies including the Chinese renminbi could increase our product
costs
Our
future success will depend on the continued services of our executive officers
and key product development personnel.
The
loss
of any of our executive officers or key product development personnel, the
inability to attract or retain qualified personnel in the future, or delays
in
hiring skilled personnel could harm our business. Competition for skilled
personnel is significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition, the loss
of Frank B. Manning, our president and chief executive officer, or some other
member of the senior management team, a key engineer or salesperson, or other
key contributors, could harm our relations with our customers, our ability
to
respond to technological change, and our business.
We
may have difficulty protecting our intellectual property.
Our
ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements to
protect our intellectual property. The steps we take to protect our technology
may be inadequate. Existing trade secret, trademark and copyright laws offer
only limited protection. Our patents could be invalidated or circumvented.
We
have more intellectual property assets in some countries than we do in others.
In addition, the laws of some foreign countries in which our products are or
may
be developed, manufactured or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. This
may
make the possibility of piracy of our technology and products more likely.
We
cannot ensure 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 party.
ZOOM
TECHNOLOGIES, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
Page
|
|
|
Index
to Consolidated Financial Statements
|
35
|
Report
of Independent Registered Public Accounting Firm
|
36
|
Consolidated
Balance Sheets as of December 31, 2006 and 2007
|
37
|
Consolidated
Statements of Operations for the years ended December 31, 2006 and
2007
|
38
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss)
for the
years ended December 31, 2006, and 2007
|
39
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006 and
2007
|
40
|
Notes
to Consolidated Financial Statements
|
41-51
|
Schedule
II: Valuation and Qualifying Accounts for the years ended December
31,
2006 and 2007
|
52
|
ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM
9A - CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
of
December 31, 2007 we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer
and
Chief Financial Officer, of the effectiveness of the design and operation of
our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934. Based upon that evaluation, our
Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in enabling us to record, process,
summarize and report information required to be included in our periodic SEC
filings within the required time period.
Our
management is responsible for establishing and maintaining adequate internal
controls over financial reporting, as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Act of 1934. Under the supervision and with
the participation of our management, including our Chief Executive Officer
and
Chief Financial Officer, we conducted an evaluation of the effectiveness of
our
internal control over financial reporting. In making its assessment of internal
control over financial reporting, management used criteria issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on our evaluation under such
framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2007
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting pursuant to temporary rules of the Securities and Exchange Commission
that permit us to provide only management's report in this annual
report.
There
have been no changes in our internal control over financial reporting during
the
most recent quarter that have materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
PART
III
ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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",
"Board of Directors”, "Code of Ethics" and "Section 16(a) Beneficial Ownership
Compliance " in our definitive proxy statement for our 2008 annual meeting
of
stockholders which will be filed with the SEC within 120 days after the close
of
our fiscal year, and is incorporated herein by reference.
ITEM
11 - EXECUTIVE COMPENSATION
Information
required by this item appears under the captions "Executive Compensation,"
and
"Directors' Compensation", in our definitive proxy statement for our 2008 annual
meeting of stockholders which will be filed with the SEC within 120 days after
the close of our fiscal year, and is incorporated herein by
reference.
ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
We
maintain a number of equity compensation plans for employees, officers,
directors and others whose efforts contribute to our success. The table below
sets forth certain information as of our fiscal year ended December 31, 2007
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 To Be Issued Upon Exercise Of Outstanding Options
|
|
Weighted-Average Exercise Price Of Outstanding Options
|
|
Number Of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
|
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security
holders(1)
|
|
|
874,000
|
|
$
|
1.72
|
|
|
2,145,646
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security
holders(2)
|
|
|
510,750
|
|
$
|
1.90
|
|
|
1,673,050
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
1,384,750
|
|
$
|
1.79
|
|
|
3,818,696
|
|
(1)
|
Includes
the following plans: 1990 Employee Stock Option Plan and 1991 Directors
Stock Option Plan, each as amended. Please see note 9 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 Compensation Committee
of
the Board of Directors. 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 2,700,000 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 "Security Ownership of Certain Beneficial Owners and Management
" in our definitive proxy statement for our 2008 annual meeting of stockholders
to be filed with the SEC within 120 days after the close of our fiscal
year.
ITEM
13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Any
information required by this item may appear under the caption "Certain
Relationships and Related Transactions" and “Board of Directors” in our
Definitive Proxy Statement for our 2008 annual meeting of Stockholders to be
filed with the SEC within 120 days after the close of our fiscal year and is
incorporated herein by reference.
ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
required by this item appears under the caption “Principal Accountant Fees and
Services” in our Definitive Proxy Statement for our 2008 annual meeting of
stockholders to be filed with the SEC within 120 days after the close of our
fiscal year and is incorporated herein by reference.
ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
required by this item appears under the caption “Principal Accountant Fees and
Services” in our Definitive Proxy Statement for our 2007 annual meeting of
stockholders to be filed with the SEC within 120 days after the close of our
fiscal year and is incorporated herein by reference.
PART
IV
ITEM
15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES *
(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
|
|
|
|
|
**10.2
|
1991
Director Stock Option Plan, as amended, filed as Exhibit 99.1 to
the
Company's Registration Statement on Form S-8 (Reg. No. 333-107923),
filed
with the Commission on August 13, 2003. *
|
|
|
|
|
10.3
|
1998
Employee Equity Incentive Plan, as amended
|
|
|
|
|
10.4
|
Form
of Indemnification Agreement, filed as Exhibit 10.6 to the June 1996
Form
10-Q. *
|
|
|
|
|
**10.5
|
Form
of Non-Qualified Stock Option Agreement for Executive Officers, filed
as
Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2004..*
|
|
|
|
|
**10.6
|
Summary
of Directors' Compensation, filed as Exhibit 10.10 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2004.*
|
|
|
|
|
10.7
|
Letter
agreement dated August 4, 2006, filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006.*
|
|
|
|
|
10.8
|
Purchase
and Sale Agreement dated August 31, 2006, filed as Exhibit 10.1 to
the
Company’s Current Report on Form 8-K on September 20,
2006.*
|
|
|
|
|
**10.9
|
Form
of Non-Qualified Stock Option Agreement for Named Executive Officers,
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on
December 12, 2006.*
|
|
|
|
|
10.10
|
Standard
lease by and between 201-207 South Street LLC and Zoom Technologies,
Inc.
on December 22, 2006 to lease space for 24 months for headquarters
offices.
|
|
|
|
|
**10.11
|
Change
of Control and Severance Agreement between the Company and Frank
B.
Manning dated as of 12/28/06, filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.*
|
|
|
|
|
**10.12
|
Change
of Control and Severance Agreement between the Company and Peter
R. Kramer
dated as of 12/28/06, filed as Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
2007.*
|
|
|
|
|
**10.13
|
Change
of Control and Severance Agreement between the Company and Robert
A. Crist
dated as of 4/27/07, filed as Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
2007.*
|
|
**10.14
|
Change
of Control and Severance Agreement between the Company and Deena
Randall
dated as of 4/27/07, filed as Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
2007.*
|
|
|
|
|
**10.15
|
Change
of Control and Severance Agreement between the Company and Terry
Manning
dated as of 4/27/07, filed as Exhibit 10.5 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31,
2007.*
|
|
|
|
|
10.16
|
Series
A Preferred Share Purchase Agreement, dated July 25, 2007, by and
between
Unity Business Networks, L.L.C. and Zoom Technologies, Inc., filed
as
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007.*
|
|
|
|
|
10.17
|
Option
Agreement, dated July 25, 2007, by and among Unity Business Networks,
L.L.C., Zoom Technologies, Inc., and each of the members of Unity
listed
on the signature page thereto., filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.*
|
|
|
|
|
10.18
|
Investor
Rights Agreement, dated July 25, 2007, by and among Unity Business
Networks, L.L.C., Zoom Technologies, Inc., and each of the holders
of
Unity’s Common Interests listed on the signature page thereto, filed as
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007.*
|
|
|
|
|
10.19
|
Second
Amended and Restated Operating Agreement of Unity Business Networks,
L.L.C., dated July 25, 2007, filed as Exhibit 10.4 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2007.*
|
|
|
|
|
10.20
|
Convertible
Note Purchase Agreement, dated as of January 22, 2008, by and between
Zoom
Technologies, Inc. and RedMoon, Inc., filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K on January 29, 2008.*
|
|
|
|
|
10.21
|
Form
of 6% Convertible Note, filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K on January 29, 2008.*
|
|
|
|
|
10.22
|
Option
Agreement, dated as of January 22, 2008, by and among Zoom Technologies,
Inc., RedMoon, Inc. and certain stockholders of RedMoon, Inc., filed
as
Exhibit 10.3 to the Company’s Current Report on Form 8-K on January 29,
2008.*
|
|
|
|
|
10.23
|
Security
Agreement, dated as of January 22, 2008, by and between Zoom Technologies,
Inc. and RedMoon, Inc. , filed as Exhibit 10.4 to the Company’s Current
Report on Form 8-K on January 29, 2008.*
|
|
|
|
|
10.24
|
Voting
Agreement, dated as of January 22, 2008, by and among Zoom Technologies,
Inc., RedMoon, Inc. and certain stockholders of RedMoon, Inc. , filed
as
Exhibit 10.5 to the Company’s Current Report on Form 8-K on January 29,
2008.*
|
|
|
|
|
21.
|
Subsidiaries,
filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
the
fiscal year ended December 31, 2000. *
|
|
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
31.1
|
CEO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
31.2
|
CFO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
32.1
|
CEO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
32.2
|
CFO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
*
|
In
accordance with Rule 12b-32 under the Securities Exchange Act of
1934, as
amended, reference is made to the documents previously filed with
the
Securities and Exchange Commission, which documents are hereby
incorporated by reference.
|
|
|
|
|
**
|
Compensation
Plan or Arrangement.
|
|
|
|
(b)
|
|
Exhibits
- See Item 15 (a) (3) above for a list of Exhibits incorporated herein
by
reference or filed with this
Report.
|
(c)
|
|
Schedules
- Schedule II: Valuation and Qualifying Accounts. Schedules other
than
those listed above have been omitted since they are either inapplicable
or
not required.
|
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)
|
|
|
|
Date:
March 26, 2008
|
By:
|
/s/
Frank B. Manning
|
|
Frank
B. Manning, President
|
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 and on the dates indicated.
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/
Frank B. Manning
|
|
Principal
Executive Officer and Chairman of the Board
|
March
26, 2008
|
Frank
B. Manning
|
|
|
|
|
|
|
|
/s/
Robert A. Crist
|
|
Principal
Financial and Accounting Officer
|
March
26, 2008
|
Robert
A. Crist
|
|
|
|
|
|
|
|
/s/
Peter R. Kramer
|
|
Director
|
March
26, 2008
|
Peter
R. Kramer
|
|
|
|
|
|
|
|
/s/
Bernard Furman
|
|
Director
|
March
26, 2008
|
Bernard
Furman
|
|
|
|
|
|
|
|
/s/
J. Ronald Woods
|
|
Director
|
March
26, 2008
|
J.
Ronald Woods
|
|
|
|
|
|
|
|
/s/
Joseph Donovan
|
|
Director
|
March
26, 2008
|
Joseph
Donovan
|
|
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
36
|
Consolidated
Balance Sheets as of December 31, 2006 and 2007
|
|
37
|
Consolidated
Statements of Operations for the years ended December 31 2006, and
2007
|
|
38
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss)
for the
years ended December 31, 2006 and 2007
|
|
39
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006 and
2007
|
|
40
|
Notes
to Consolidated Financial Statements
|
|
41-51
|
Schedule
II: Valuation and Qualifying Accounts for the years ended December
31,
2006 and 2007
|
|
52
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss),
and cash flows for the years then ended. Our audits also included the financial
statement schedule. The Company's management is responsible for these
consolidated financial statements and schedule. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on
our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of the Company’s internal control
over financial reporting. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, 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, 2007 and 2006, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 2 , effective January 1, 2007, the Company adopted FIN 48,
“Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement No. 109.”
/s/
UHY LLP
|
|
Boston,
Massachusetts
March
26, 2008
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,833,046
|
|
$
|
3,647,654
|
|
Accounts
receivable, net of allowances of $915,969 in 2006 and
$1,400,803 in 2007
|
|
|
3,385,280
|
|
|
2,128,888
|
|
Inventories
|
|
|
4,511,814
|
|
|
4,452,503
|
|
Prepaid
expense and other current assets
|
|
|
269,301
|
|
|
336,424
|
|
Total
current assets
|
|
|
15,999,441
|
|
|
10,565,469
|
|
|
|
|
|
|
|
|
|
Equipment
and leasehold improvements, net
|
|
|
249,221
|
|
|
172,070
|
|
Investment
in Unity Business Networks, LLC.
|
|
|
-
|
|
|
1,178,709
|
|
Total
assets
|
|
$
|
16,248,662
|
|
$
|
11,916,248
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,639,935
|
|
$
|
2,079,325
|
|
Accrued
expense
|
|
|
562,349
|
|
|
415,468
|
|
Deferred
gain on sale of real estate
|
|
|
367,245
|
|
|
340,913
|
|
Total
current liabilities
|
|
|
3,569,529
|
|
|
2,835,706
|
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of real estate
|
|
|
357,373
|
|
|
-
|
|
Total
liabilities
|
|
|
3,926,902
|
|
|
2,835,706
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value:
|
|
|
|
|
|
|
|
Authorized
- 25,000,000 shares; issued – 9,355,366 shares, including shares held
in treasury
|
|
|
93,554
|
|
|
93,554
|
|
Additional
paid-in capital
|
|
|
31,275,169
|
|
|
31,507,393
|
|
Accumulated
deficit
|
|
|
(19,597,296
|
)
|
|
(23,100,390
|
)
|
Accumulated
other comprehensive income –currency translation
adjustment
|
|
|
557,655
|
|
|
587,307
|
|
Treasury
stock (8,400 shares), at cost
|
|
|
(7,322
|
)
|
|
(7,322
|
)
|
Total
stockholders' equity
|
|
|
12,321,760
|
|
|
9,080,542
|
|
Total
liabilities and stockholders' equity
|
|
$
|
16,248,662
|
|
$
|
11,916,248
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2006 and 2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
18,322,301
|
|
$
|
18,477,532
|
|
Cost
of goods sold
|
|
|
15,720,574
|
|
|
14,746,978
|
|
Gross
profit
|
|
|
2,601,727
|
|
|
3,730,554
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
|
|
|
3,631,340
|
|
|
3,557,928
|
|
General
and administrative
|
|
|
2,846,862
|
|
|
2,423,829
|
|
Research
and development
|
|
|
2,157,529
|
|
|
1,825,018
|
|
|
|
|
8,635,731
|
|
|
7,806,776
|
|
Operating
profit (loss) before gain on sale of real estate
|
|
|
(6,034,004
|
)
|
|
(4,076,221
|
)
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
4,752,625
|
|
|
383,404
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(1,281,379
|
)
|
|
(3,692,817
|
)
|
|
|
|
|
|
|
|
|
Other
:
|
|
|
|
|
|
|
|
Interest
income
|
|
|
226,015
|
|
|
229,523
|
|
Interest
expense
|
|
|
(306,867
|
)
|
|
-
|
|
Gain
on sale of investment in Intermute, Inc.
|
|
|
2,105,433
|
|
|
-
|
|
Other,
net
|
|
|
233,515
|
|
|
(39,800
|
)
|
Total
other income, net
|
|
|
2,258,096
|
|
|
189,723
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
976,717
|
|
|
(3,503,094
|
)
|
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
|
(53,405
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,030,122
|
|
$
|
(3,503,094
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share
|
|
$
|
0.11
|
|
$ |
(0.37
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares:
|
|
|
|
|
|
|
|
Basic
|
|
|
9,346,966
|
|
|
9,346,966
|
|
Diluted
|
|
|
9,349,381
|
|
|
9,346,966
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME (LOSS)
|
|
Common Stock
|
|
Additional Paid In
Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income (A)
|
|
Treasury Stock
|
|
Total Stockholders'
Equity
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
9,355,366
|
|
$
|
93,554
|
|
$
|
31,015,977
|
|
$ |
(20,627,318
|
)
|
$
|
393,245
|
|
|
8,400
|
|
$ |
(7,322
|
)
|
$
|
10,868,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,030,022
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,030,022
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
164,410
|
|
|
-
|
|
|
-
|
|
|
164,410
|
|
Comprehensive
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,194,432
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
259,192
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
259,192
|
|
Balance
at December 31, 2006
|
|
|
9,355,366
|
|
|
93,554
|
|
|
31,275,169
|
|
|
(19,597,296
|
)
|
|
557,655
|
|
|
8,400
|
|
|
(7,322
|
)
|
|
12,321,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,503,094
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,503,094
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
29,652
|
|
|
-
|
|
|
-
|
|
|
29,652
|
|
Comprehensive
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,473,442
|
)
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
232,224
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
232,224
|
|
Balance
at December 31, 2007
|
|
|
9,355,366
|
|
$
|
93,554
|
|
$
|
31,507,393
|
|
$ |
(23,100,390
|
)
|
$
|
587,307
|
|
|
8,400
|
|
$ |
(7,322
|
)
|
$
|
9,080,542
|
|
(A)
Consists exclusively of foreign currency translation adjustments.
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2006 and 2007
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,030,023
|
|
$ |
(3,503,094
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
Gain
on sale of investment in Intermute, Inc.
|
|
|
(2,105,433
|
)
|
|
-
|
|
Gain
on sale of real estate
|
|
|
(4,752,625
|
)
|
|
(383,704
|
)
|
Depreciation
and amortization
|
|
|
140,540
|
|
|
85,432
|
|
Stock
based compensation
|
|
|
259,192
|
|
|
232,224
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(629,677
|
)
|
|
1,278,407
|
|
Inventories
|
|
|
573,902
|
|
|
62,913
|
|
Prepaid
expense and other current assets
|
|
|
37,084
|
|
|
(65,789
|
)
|
Accounts
payable and accrued expense
|
|
|
(702,546
|
)
|
|
(705,522
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(6,149,540
|
)
|
|
(2,999,133
|
)
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of investment in Intermute, Inc.
|
|
|
2,105,433
|
|
|
-
|
|
Proceeds
from sale of real estate
|
|
|
7,733,970
|
|
|
-
|
|
Investment
in Unity Business Networks, LLC
|
|
|
-
|
|
|
(1,178,709
|
)
|
Purchases
of property, plant and equipment
|
|
|
(43,643
|
)
|
|
(7,927
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
9,795,760
|
|
|
(1,186,636
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
(4,889,929
|
)
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(4,889,929
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(4,367
|
)
|
|
377
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(1,248,076
|
)
|
|
(4,185,392
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
9,081,122
|
|
|
7,833,046
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
7,833,046
|
|
$
|
3,647,654
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2006 and 2007
(1) NATURE
OF OPERATIONS
Zoom
Technologies, Inc. and subsidiary (collectively, the "Company") design, produce,
and market broadband and dial-up modems and other communication-related
products
(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 (US
GAAP).
The
preparation of financial statements in conformity with US GAAP 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
expense during the reporting period. Actual results may differ from those
estimates. Significant estimates made by the Company include: 1) asset valuation
allowances for accounts receivable (collectibility and sales returns) and
deferred income tax assets; 2) write-downs of inventory for slow-moving and
obsolete items, and market valuations; 3) stock based compensation; 4) the
useful lives of property, plant and equipment; and 5) the recoverability of
long-lived assets.
(b)
Principles of Consolidation
The
consolidated financial statements include the accounts of Zoom Technologies,
Inc. and its wholly owned subsidiary, Zoom Telephonics, Inc. All intercompany
balances and transactions have been eliminated in consolidation.
(c)
Cash and Cash Equivalents
All
highly liquid investments with original maturities of less than 90 days from
the
date of purchase are classified as cash equivalents. Cash equivalents consist
exclusively of money market funds. The Company has deposits at a limited number
of financial institutions with federally insured limits. Balances of cash and
cash equivalents at these institutions are normally in excess of the insured
limits. However, the Company believes that the institutions are financially
sound and there is only nominal risk of loss.
(d)
Inventories
Inventories
are stated at the lower of cost, determined using the first-in, first-out
method, or market.
(e)
Equipment and Leasehold Improvements
Equipment
and leasehold improvements are stated at cost, less accumulated depreciation
and
amortization. Depreciation of equipment is provided using the straight-line
method over the estimated useful lives of the assets. Amortization of leasehold
improvements is provided using the straight-line method over the estimated
useful lives of the improvement or lease term whichever is shorter.
(f)
Impairment of Long-Lived Assets
Long-lived
assets are reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset or asset group to undiscounted future net cash flows expected to
be
generated by the asset or asset group. 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 their fair value. Assets to be disposed
of
are reported at the lower of the carrying amount or fair value less cost to
sell.
(g)
Income Taxes
Deferred
income taxes are provided on the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and on net operating loss and tax credit carry forwards. Deferred income
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 income tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is provided for that
portion of deferred income tax assets not expected to be realized.
Effective
January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement No. 109.” As of that
date and as of December 31, 2007 the Company had no material unrecognized income
tax benefits. Further, no significant changes in the unrecognized income tax
benefits are expected to occur over the next year.
Historically
the Company has not accrued or paid significant interest and penalties for
underpayments of income taxes. Interest and penalties related to such
underpayments would be classified as a component of income tax expense. No
material amounts of interest or penalties for underpayments of income taxes
were
required to be accrued as of December 31, 2007.
The
Company files income tax returns in the United States and the United Kingdom.
Years subsequent to 2002 are open for U.S. Federal and state income tax
reporting and years subsequent to 2004 are open in the United
Kingdom.
(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. A summary of the denominators used to compute basic
and
diluted earnings (loss) per share follow:
|
|
2006
|
|
2007
|
|
Weighted
average shares outstanding – used to compute basic earnings (loss)
per share
|
|
|
9,346,966
|
|
|
9,346,966
|
|
Net
effect of dilutive potential common shares outstanding,
based on the treasury stock method
|
|
|
2,415
|
|
|
-
|
|
Weighted
average shares outstanding – used to compute diluted earnings (loss)
per share
|
|
|
9,349,381
|
|
|
9,346,966
|
|
Potential
common shares for which inclusion would have the effect of increasing diluted
earnings per share (i.e., anti-dilutive) are excluded from the computation.
The
dilutive effect of options to purchase 1,384,750 shares of common stock at
December 31, 2007 were outstanding, but not included in the computation of
diluted earnings per share as their effect would be anti-dilutive.
(i)
Revenue Recognition
The
Company primarily sells hardware products to its customers. The hardware
products include dial-up modems, DSL modems, cable modems, embedded modems,
ISDN
modems, telephone dialers, and wireless and wired networking equipment. The
Company generally does not sell software.
The
Company derives its net sales primarily from the sales of hardware products
to
computer peripherals retailers, computer product distributors, and 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.
The
Company recognizes hardware net sales for all four types of customers at the
point when the customers take legal ownership of the delivered products. Legal
ownership passes to the customer based on the contractual FOB point specified
in
signed contracts and purchase orders, which are both used extensively. Many
customer contracts or purchase orders specify FOB destination. The Company
verifies the delivery date on all significant FOB destination shipments made
during the last 10 business days of each quarter.
The
Company's net sales of hardware are reduced by certain events which are
characteristic of the sales of hardware to retailers of computer peripherals.
These events are product returns, certain sales and marketing incentives, price
protection refunds, and consumer and in-store mail-in rebates. Each of these
is
accounted for as a reduction of net sales based on careful management estimates,
which are reconciled to actual customer or end-consumer credits on a monthly
or
quarterly basis.
The
estimates for product returns are based on recent historical trends plus
estimates for returns prompted by 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.
The
Company accounts for point-of-sale taxes on a net basis.
(j)
Financial Instruments
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses. Due to the short term nature payment terms
associated with these instruments, their carrying amounts approximate fair
value. It is not practicable to estimate the fair value of the Company’s
investment in Unity Business Networks, LLC.
(k)
Stock-Based Compensation
Compensation
cost for awards granted after January 1, 2006 is generally recognized over
the
required service period based on the estimated fair value of the awards on
their
grant date. Fair value is determined using the Black Scholes option-pricing
model. Compensation cost for unvested awards granted prior to January 1, 2006
is
recognized using the modified-prospective method. Under this method, the same
estimate of the grant date fair value and the same attribution method used
to
determine the pro forma disclosures under SFAS No. 123 (R) , “Accounting for
Stock Based Compensation” are used to recognize compensation cost.
(l)
Advertising Costs
Advertising
costs are expensed as incurred and reported in selling expense 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)
Foreign Currencies
The
Company generates a portion of its revenues in markets outside North America
principally in transactions denominated in foreign currencies, which exposes
the
Company to risks of foreign currency fluctuations. Foreign currency transaction
gains and losses are reflected in operations and were not material for any
period presented. The Company does not use derivative financial
instruments.
The
Company considers the local currency to be the functional currency for its
U.K.
branch. Assets and liabilities denominated in foreign currencies are translated
using the exchange rates as of the balance sheet date. Revenues and expenses
are
translated at average exchange rates prevailing during the year. Translation
adjustments resulting from this process are charged or credited to “accumulated
other comprehensive income.”
(n)
Warranty Costs
The
Company provides currently for the estimated costs that may be incurred under
its standard warranty obligations.
(o)
Shipping and Freight Costs
The
Company records the expense associated with customer-delivery shipping and
freight costs in selling expense.
(3)
LIQUIDITY
|
|
As
of December 31, 2007 the Company had working capital of $7.7 million
including $3.6 million in cash equivalents. On December 31, 2006
the
Company had working capital of $12.4 million including $7.8 million
in
cash and cash equivalents. The Company’s current ratio at December 31,
2007 was 3.7 compared to 4.5 at December 31, 2006. A significant
portion
in the reduction of working capital and the corresponding current
ratio
was due to our 2007 net loss of $3.5 million and the cash expenditure
of
$1.2 million for our June 2007 investment in Unity Business Networks,
LLC.
|
In
2007
the Company’s operating activities used $3.0 million in cash. Its net loss in
2007 was $3.5 million. Sources of cash from operations included a decrease
in
accounts receivable of $1.3 million, non-cash stock-based compensation of $0.2
million, non-cash depreciation and amortization expense of $0.1 million, and
a
decrease in inventories of $0.1 million. Uses of cash from operations included
a
decrease in accounts payable and accrued expense of $0.7 million and a non-cash
gain on sale of real estate of $0.4 million.
|
|
In
2007 the Company’s net cash used by investing activities was $1.2 million,
which included the cost of its investment in Unity Business Networks,
LLC.
of $1.2 million
|
In
2007
there was no significant cash provided by or used in the Company’s financing
activities.
To
conserve cash and manage liquidity, the Company has implemented cost cutting
initiatives including the reduction of employee headcount and overhead costs.
The Company’s total headcount of full-time employees, including temporary
workers, went from 127 on December 31, 2005 to 64 on December 31, 2007. Of
the
decline of 63 employees, 47 were related to the outsourcing of our final
assembly manufacturing operation to Mexico. The dedicated manufacturing
personnel in Mexico are employees of the Company’s Mexican manufacturing service
provider and not included in its 2007 headcount. Of the 64 employees on December
31, 2007, 14 were engaged in research and development, 18 were involved in
manufacturing oversight, purchasing, assembly, packaging, shipping and quality
control, 21 were engaged in sales, marketing and technical support, and the
remaining 11 performed accounting, administrative, management information
systems, and executive functions. The Company plans to continue to assess its
cost structure as it relates to revenues and cash position, and the Company
may
make further reductions if the actions are deemed necessary.
The
Company's total current assets at December 31, 2007 were $10.6 million and
current liabilities were $2.8 million. The Company did not have any long-term
debt at December 31, 2007. Management believes it has sufficient resources
to
fund its planned operations through at least December 31, 2008. However, if
the
Company is unable to increase its revenues, reduce its expense, or raise capital
the Company's longer-term ability to continue as a going concern and achieve
its
intended business objectives could be adversely affected.
(4)
NEW ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 157, Fair Value Measurements ("SFAS 157") which defines fair
value, establishes a framework and gives guidance regarding the method used
for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 requires companies to disclose the fair value of their financial
instruments according to a fair value hierarchy, as defined, and may require
companies to provide additional disclosures based on that hierarchy.
SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently assessing the effect that SFAS 157 may have
on its consolidated financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for
Financial Assets and Liabilities—Including an amendment of FASB Statement
No. 115 ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which requires assets or
liabilities to be carried at fair value. The objective of SFAS 159 is to
improve financial reporting by providing companies with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS 159, a company may elect to use fair value to
measure eligible items at specified election dates and report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. Eligible items include, but are limited
to,
accounts receivable, accounts payable, and issued debt. If elected,
SFAS 159 is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the effect of adopting SFAS 159
on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS 141(R)"). SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired.
SFAS 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination.
SFAS 141(R) is effective for fiscal years beginning after December 15,
2008. The Company will adopt SFAS 141(R) in the first quarter of 2009 and
apply its provisions to any acquisition after the adoption date.
(5)
INVENTORIES
Inventories
consist of the following at December 31:
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Materials
|
|
$
|
2,969,375
|
|
$
|
2,913,556
|
|
Work
in process
|
|
|
522,307
|
|
|
189,295
|
|
Finished
goods (including $563,000 held by a customer at December 31, 2006)
|
|
|
1,020,132
|
|
|
1,349,652
|
|
Total
|
|
$
|
4,511,814
|
|
$
|
4,452,503
|
|
(6)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment
and leasehold improvements consist of the following at December 31:
|
|
2006
|
|
2007
|
|
Estimated
Useful
lives in years
|
|
Leasehold
improvements
|
|
$
|
6,100
|
|
$
|
6,216
|
|
|
5
|
|
Computer
hardware and software
|
|
|
3,706,110
|
|
|
3,716,257
|
|
|
3
|
|
Machinery
and equipment
|
|
|
1,905,434
|
|
|
1,906,949
|
|
|
5
|
|
Molds,
tools and dies
|
|
|
1,607,669
|
|
|
1,624,899
|
|
|
5
|
|
Office
furniture and fixtures
|
|
|
277,337
|
|
|
277,337
|
|
|
5
|
|
|
|
$
|
7,502,650
|
|
$
|
7,531,658
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
|
(7,253,429
|
)
|
|
(7,359,588
|
)
|
|
|
|
Equipment
and leasehold improvements, net
|
|
$
|
249,221
|
|
$
|
172,070
|
|
|
|
|
(7) COMMITMENTS
AND CONTINGENCIES
(a)
Lease Obligations
The
Company leases its headquarters’ offices in Boston, Massachusetts, a
manufacturing facility in Tijuana, Mexico, and a sales office facility in Fleet,
United Kingdom. In December 2006, the Company sold its owned headquarters
buildings in Boston, Massachusetts and leased back 25,000 square feet for two
years expiring December 2008 (see Note 8). In September 2006 the Company moved
out of its leased manufacturing facility in Boston, Massachusetts and moved
into
a leased manufacturing facility in Tijuana, Mexico. In August 2006 the Company
signed a lease for a 35,575 square foot manufacturing and warehousing facility
in Tijuana, Mexico with an initial lease term from October 2006 to May 2007,
with five two-year options thereafter. In February 2007 the Company renegotiated
the first renewal term and signed a one-year extension starting in May 2007,
with five two-year options thereafter. The Company received verbal approval
from
the landlord and expects to sign another one-year extension starting in May
2008. In the event this lease is not further extended, the Company believes
it
will be able to find alternative space that is suitable and adequate for our
manufacturing and warehousing operations.
In
September 2005 the Company entered into a two year office lease consisting
of
2,400 square feet at 2 Kings Road, Fleet, Hants, U.K for its U.K. sales office.
In September 2007 the lease was continued on a month-to-month basis with a
3
month cancellation notice required by the Company or the landlord. In the event
this lease is not further extended, the Company believes it will be able to
find
alternative space that is suitable and adequate for its U.K. sales
office.
In
September 2002 the Company entered into a five-year lease, as a tenant, for
approximately 3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton,
Florida, primarily for use as a technical support facility. In September 2007
the term of the lease expired and the Company moved its Florida-based customer
service organization to its headquarters location in Boston,
Massachusetts.
Rent
expense for all of the Company's leases was $711,637 in 2007 and $628,221 in
2006.
As
of
December 31, 2007, the Company's estimated future minimum committed rental
payments, excluding executory
costs, under the operating leases described above to their expiration are
$608,530 for 2008 and $75,575
for 2009.
(b)
Contingencies
The
Company is party to various lawsuits and administrative proceedings arising
in
the ordinary course of business. The Company evaluates such lawsuits and
proceedings on a case-by-case basis, and its policy is to vigorously contest
any
such claims which it believes are without merit. The Company's management
believes that the ultimate resolution of such matters will not materially and
adversely affect the Company's business, financial position, results of
operations or cash flows.
(c)
Concentrations
The
Company participates in the PC peripherals industry, which is characterized
by
aggressive pricing practices, continually changing customer demand patterns
and
rapid technological developments. The Company's operating results could be
adversely affected should the Company be unable to successfully anticipate
customer demand accurately; manage its product transitions, inventory levels
and
manufacturing process efficiently; distribute its product quickly in response
to
customer demand; differentiate its products from those of its competitors or
compete successfully in the markets for its new products.
The
Company depends on many third-party suppliers for key components contained
in
its product offerings. For some of these components, the Company may only use
a
single source supplier, in part due to the lack of alternative sources of
supply. If the supply of a key material component is delayed or curtailed,
the
Company's ability to ship the related product or solution in desired quantities
and in a timely manner could be adversely affected, possibly resulting in
reductions in net sales. In cases where alternative sources of supply are
available, qualification of the sources and establishment of reliable supplies
could result in delays and possible reduction in net sales.
In
the
event that the financial condition of the Company's third-party suppliers for
key components was to erode, the delay or curtailment of deliveries of key
material components could occur. Additionally, the Company's reliance on
third-party suppliers of key material components exposes the Company to
potential product quality issues that could affect the reliability and
performance of its products and solutions. Any lesser ability to ship its
products in desired quantities and in a timely manner due to a delay or
curtailment of the supply of material components, or product quality issues
arising from faulty components manufactured by third-party suppliers, could
adversely affect the market for the Company's products and lead to a reduction
in the Company's net sales.
(8) SALE/LEASEBACK
AND MORTGAGE DEBT
In
December 2006, the Company sold real estate housing its corporate headquarters
and concurrently entered into a leaseback arrangement for a portion of the
property. The leaseback arrangement is for two years. Net proceeds from
the sale were $7,733,970 of which a portion was used to retire related
outstanding mortgage debt. A gain of $5,477,243 was realized on the sale.
However, a portion of the gain ($724,618) has been deferred and is being
recognized in operations over the term of the lease (2007 - $383,704 and 2008
-
$340,914). The gain initially deferred is the estimated present value of
the minimum lease payments under the leaseback arrangement. The gain
recognized in operations in 2006 and 2007 was $4,752,625 and $383,404,
respectively. The Company’s lease expires in December 2008. A renewal of the
Company’s current lease may require an increase in the rent. The Company
would likely move its headquarters to a new location in the same general
area of Boston to avoid a material increase in the rent. In the event this
lease is not further extended, the Company believes it will be able to find
alternative space that is suitable and adequate for its headquarters
operation.
(9) STOCK
OPTION PLANS
At
December 31, 2007 the Company had three stock option plans as described
below.
1990
Employee Stock Option Plan
The
1990
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 4,800,000 shares of common stock for
issuance upon the exercise of stock options granted under the plan. Shares
of
common stock were registered for issuance under this plan in accordance with
the
Securities Act of 1933. Under this plan, stock options are granted at the
discretion of the Compensation Committee of the Board of Directors at an option
price not less than the fair market value of the stock on the date of grant.
The
options are exercisable in accordance with terms specified by the Compensation
Committee not to exceed ten years from the date of grant. Option activity under
this plan follows:
|
|
Number of shares
|
|
Weighted average
exercise
price
|
|
Balance
at December 31, 2005
|
|
|
636,000
|
|
$
|
2.21
|
|
Granted
|
|
|
335,000
|
|
$
|
1.03
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(301,000
|
)
|
$
|
1.95
|
|
Balance
at December 31, 2006
|
|
|
670,000
|
|
$
|
1.74
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2007
|
|
|
670,000
|
|
$
|
1.74
|
|
|
|
The
weighted average grant date fair value of options granted was $1.03
in
2006.
|
|
|
The
following table summarizes information about fixed stock options
under the
Employee Stock Option Plan outstanding on December 31,
2007:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
Prices
|
|
Number Outstanding
|
|
Weighted Average Remaining
Contractual Life
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.03
|
|
|
335,000
|
|
|
1.9
|
|
$
|
1.03
|
|
|
167,500
|
|
$
|
1.03
|
|
$2.45
|
|
|
335,000
|
|
|
0.3
|
|
$
|
2.45
|
|
|
335,000
|
|
$
|
2.45
|
|
$1.03
to $2.45
|
|
|
670,000
|
|
|
1.1
|
|
$
|
1.74
|
|
|
502,500
|
|
$
|
1.97
|
|
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. In 2003, the Directors Plan was
amended to provide that, each eligible director is automatically granted an
option to purchase 12,000 shares of common stock on July 10 and January 10
of
each year, beginning July 10, 2003. The option price is the fair market value
of
the common stock on the date the option is granted. There are 450,000 shares
authorized for issuance under the Directors Plan. Each option expires two years
from the grant date. Option activity under this plan follows:
|
|
Number of shares
|
|
Weighted average exercise price
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
108,000
|
|
$
|
3.20
|
|
Granted
|
|
|
72,000
|
|
$
|
1.27
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(48,00
|
)
|
$
|
3.81
|
|
Balance
at December 31, 2006
|
|
|
132,000
|
|
$
|
1.93
|
|
Granted
|
|
|
72,000
|
|
$
|
1.21
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2007
|
|
|
204,000
|
|
$
|
1.67
|
|
The
weighted average grant date fair value of options granted was $1.27 in 2006
and
$1.21 in 2007.
The
following table summarizes information about fixed stock options under the
Directors Plan on December 31, 2007:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
Prices
|
|
Number Outstanding
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise
Price
|
|
Number Exercisable
|
|
Weighted Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00-$1.75
|
|
|
144,000
|
|
|
0.8
|
|
$
|
1.245
|
|
|
108,000
|
|
$
|
1.24
|
|
$1.75-$3.50
|
|
|
60,000
|
|
|
0.0
|
|
$
|
2.71
|
|
|
60,000
|
|
$
|
2.71
|
|
$1.24271
|
|
|
204,000
|
|
|
0.5
|
|
$
|
1.67
|
|
|
168,000
|
|
$
|
1.77
|
|
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 2,700,000 shares of common stock. Under this
plan, stock options may be granted at the discretion of the Compensation
Committee of the Board of Directors at an option price determined by the
Compensation Committee. All options under this plan have been issued at fair
market value on the date of the grant. The options are exercisable in accordance
with terms specified by the Compensation Committee. Option activity under this
plan follows:
|
|
Number of shares
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
493,700
|
|
$
|
2.36
|
|
Granted
|
|
|
273,000
|
|
$
|
1.03
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(215,700
|
)
|
$
|
1.97
|
|
Balance
at December 31, 2006
|
|
|
551,000
|
|
$
|
1.85
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(40,250
|
)
|
$
|
1.28
|
|
Balance
at December 31, 2007
|
|
|
510,750
|
|
$
|
1.90
|
|
The
weighted average grant date fair value of options granted was $1.03 in 2006.
The
following table summarizes information about fixed stock options under the
1998
Plan outstanding on December 31, 2007:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Prices
|
|
Number Outstanding
|
|
Weighted Average Remaining
Contractual Life
|
|
Weighted Average Exercise Price
|
|
Number Exercisable
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00-$1.75
|
|
|
240,000
|
|
|
1.9
|
|
$
|
1.03
|
|
|
120,000
|
|
$
|
1.03
|
|
$1.75-$3.50
|
|
|
218,750
|
|
|
0.3
|
|
$
|
2.42
|
|
|
218,750
|
|
$
|
2.43
|
|
$3.50-$5.25
|
|
|
52,000
|
|
|
0.0
|
|
$
|
3.70
|
|
|
52,000
|
|
$
|
3.70
|
|
$1.03-$4.83
|
|
|
510,750
|
|
|
1.0
|
|
$
|
1.90
|
|
|
390,750
|
|
$
|
2.16
|
|
As
of
December 31, 2007 both the fair value of options outstanding and the fair value
of options exercisable were less than the exercise price.
As
of
December 31, 2007 there were 3,818,696 additional shares available for issuance
under all three stock option plans. The per share weighted-average fair value
of
stock options granted during 2006 and 2007 was $0.3928 and $0.42065,
respectively.
The
unrecognized stock-based compensation cost related to non-vested stock awards
was less than $50,000 as of December 31, 2007. Such amount will be recognized
in
operations ratably through 2009.
(10) INCOME
TAXES
Income
tax expense (benefit) consists of:
|
|
Current
|
|
Deferred
|
|
Total
|
|
Year
Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
US
federal
|
|
$
|
47,483
|
|
$
|
-
|
|
$
|
47,483
|
|
State
and local
|
|
|
(100,006
|
)
|
|
-
|
|
|
(100,006
|
)
|
Foreign
|
|
|
882
|
)
|
|
-
|
|
|
(882
|
)
|
|
|
$
|
(53,405
|
)
|
$
|
-
|
|
$
|
(53,405
|
)
|
Year
Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
US
federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
State
and local
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
- |
|
$
|
-
|
|
$
|
-
|
|
A
reconciliation of the expected income tax expense or benefit to actual
follows:
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Computed
"expected" US tax (benefit)
|
|
$
|
333,455
|
|
$
|
(1,191,052
|
)
|
Change
resulting from:
|
|
|
|
|
|
|
|
State
and local income taxes, net of federal income tax benefit
|
|
|
(66,004
|
)
|
|
-
|
|
Federal
valuation allowance
|
|
|
406,594
|
|
|
1,175,308
|
|
Non-deductible
items
|
|
|
38,251
|
|
|
5,031
|
|
Change
in estimate for prior years’ provisions
|
|
|
46,601
|
|
|
10,713
|
|
Other,
net
|
|
|
887
|
|
|
-
|
|
Income
tax expense (benefit)
|
|
$
|
(53,405
|
)
|
$
|
-
|
|
Temporary
differences at December 31 follow:
|
|
2006
|
|
2007
|
|
Deferred
income tax assets:
|
|
|
|
|
|
Inventories
|
|
$
|
1,511,389
|
|
$
|
1,344,792
|
|
Accounts
receivable
|
|
|
242,647
|
|
|
378,714
|
|
Accrued
expenses
|
|
|
97,565
|
|
|
68,866
|
|
Net
operating loss and tax credit carry forwards
|
|
|
12,410,482
|
|
|
14,482,300
|
|
Plant
and equipment
|
|
|
656,327
|
|
|
669,929
|
|
Stock
compensation
|
|
|
-
|
|
|
183,246
|
|
Other
|
|
|
2,056
|
|
|
-
|
|
Total
deferred income tax assets
|
|
|
14,920,466
|
|
|
17,127,847
|
|
Valuation
allowance
|
|
|
(14,920,466
|
)
|
|
(17,127,847
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
|
|
As
of December 31, 2007 the Company had federal net operating loss carry
forwards of approximately $36,777,000 which are available to offset
future
taxable income. They are due to expire in varying amounts
from 2018 to 2027. The Company had state net operating loss carry
forwards of approximately $11,447,000 which are available to offset
future
taxable income. They are due to expire in varying amounts from 2008
through 2012.
|
Subsequently
recognized tax benefits relating to valuation allowances for deferred income
tax
assets, if any, will be allocated as follows: $16,348,000 to continuing
operations and $765,000 to additional paid-in capital which is attributable
to
the exercise of employee stock options.
(11) SIGNIFICANT
CUSTOMERS
The
Company sells its products primarily through high-volume distributors and
retailers, Internet service providers, telephone service providers, value-added
resellers, PC system integrators, and original equipment manufacturers ("OEMs").
The Company supports its major accounts in their efforts to discern strategic
directions in the market, to maintain appropriate inventory levels, and to
offer
a balanced selection of attractive products.
Relatively
few customers have accounted for a substantial portion of the Company’s net
sales. During 2007 three customers each accounted for 10% or more of our total
net sales. Together these three customers accounted for 44% of our total net
sales and 74% of our net accounts receivable. During 2006 three customers
accounted for 10% or more of its total net sales. Together these three customers
accounted for 30% of the Company’s total net sales and 56% of net accounts
receivable.
The
Company’s customers generally do not enter into long-term agreements obligating
them to purchase products. The Company may not continue to receive significant
revenues from any of these or from other large customers. A reduction or delay
in orders from any of the Company’s significant customers, or a delay or default
in payment by any significant customer could materially harm the Company’s
business and prospects. Because of the Company’s significant customer
concentration, its net sales and operating income could fluctuate significantly
due to changes in political or economic conditions, or the loss, reduction
of
business, or less favorable terms for any of the Company's significant
customers.
(12) GAIN
ON SALE OF INVESTMENT IN INTERMUTE
Since
1999 the Company had a minority interest in a privately held software company,
Intermute, Inc., which the Company had been accounting for under the equity
method of accounting. The Company made its original investment in 1999, at
the
time of the company’s formation, and subsequently made additional investments.
Under the equity method of accounting, the Company's investment was increased
or
decreased, not below zero, based upon the Company's proportionate share of
the
net earnings or losses of Intermute. As a result of the losses incurred by
Intermute subsequent to the Company's investments, the Company's investment
balance was reduced to zero during 2002. The Company discontinued applying
the
equity method when the investment was reduced to zero and did not provide for
additional losses, as the Company did not guarantee obligations of the investee
and was not committed to provide further financial support.
In
June
2005 Intermute was acquired by Trend Micro Inc., a U.S. subsidiary of Trend
Micro Japan. In connection with the acquisition of Intermute in June 2005,
the
Company received a payment in exchange for its investment of approximately
$3.5
million, also in June 2005. The Company realized in cash an additional gain
of
$2.1 million during 2006, representing its portion of an earnout paid by the
buyer as a result of the achievement of a performance milestone. Total net
proceeds from the sale of the Company’s minority interest in Intermute were $5.6
million, received over 2005 and 2006. There will be no further payments from
the
sale of Intermute.
(13) SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Cash
paid during year for interest
|
|
$
|
306,867
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Cash
paid during year for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
(14) DEPENDENCE
ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS
The
Company produces its products using components or subassemblies purchased from
third-party suppliers.
Currently
a substantial percentage of our manufacturing is performed by Xavi Technologies
Corp.. The loss of their services or a material adverse change in their business
or in our relationship could materially and adversely harm our business. To
lessen the risk associated with this company being the primary manufacturer
of a
substantial portion of our products and for a number of other reasons including
cost and availability, we are also using six other vendors to manufacture
various products.
(15) SEGMENT
AND GEOGRAPHIC INFORMATION
The
Company's operations are classified as one reportable segment. Substantially
all
of the Company's operations and long-lived assets reside primarily in the United
States. Net sales information follows:
|
|
2006
|
|
Percent
|
|
2007
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
10,278,545
|
|
|
56
|
%
|
$
|
11,776,442
|
|
|
65
|
%
|
Outside North America
|
|
|
8,043,756
|
|
|
44
|
%
|
|
6,701,090
|
|
|
36
|
%
|
Total
|
|
$
|
18,322,301
|
|
|
100
|
%
|
$
|
18,477,532
|
|
|
100
|
%
|
(16) RETIREMENT
PLAN
The
Company has a 401(k) retirement savings plan for employees. Under the plan,
the
Company matches 25% of an employee's contribution, up to a maximum of $350
per
employee per year. Company matching contributions charged to expense in 2006
and
2007 were $16,750 and $12,635, respectively.
(17) INVESTMENT
IN UNITY BUSINESS NETWORKS, LLC
During
2007 the Company purchased all the Series A Preferred Shares (the Series A
Shares) of Unity Business Networks, LLC (Unity) for cash of $1.2 million,
including transaction costs. The Series A Shares are convertible at any time
at
the Company’s option into 15% of Unity’s common stock on a fully-diluted basis.
The Series A Shares convert automatically if Unity consummates a public offering
with gross proceeds in excess of $25 million or 30 days after Unity delivers
its
2009 audited financial statements to the Company. In addition, the Company
has
an option to purchase all the outstanding common stock of Unity based on a
specified multiple of Unity’s revenues, as defined, for 2008. The option is
exercisable for 30 days following the receipt of Unity’s 2008 audited financial
statements. The Company’s CEO is a member of Unity’s five member board of
directors. Further, the Company is entitled to vote Series A Shares on an as-if
converted basis with Unity’s common stock. The Company is unable to exercise
significant influence over Unity’s policies or operations. The Company accounts
for its investment in Unity at cost. The investment is reviewed periodically
for
potential impairment.
(18)
|
SELECTED
UNAUDITED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER
SHARE
DATA)
|
The
following table depicts selected quarterly financial information. Operating
results for any given quarter are not necessarily indicative of results for
any
future period.
|
|
2006
Quarter Ended (1,2)
|
|
2007
Quarter Ended
|
|
|
|
Mar.
31
|
|
Jun.
30
|
|
Sept.
30
|
|
Dec.
31
|
|
Mar.
31
|
|
Jun.
30
|
|
Sept.
30
|
|
Dec.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,281
|
|
$
|
4,518
|
|
$
|
3,579
|
|
$
|
4,944
|
|
$
|
4,754
|
|
$
|
4,342
|
|
$
|
5,580
|
|
$
|
3,801
|
|
Costs
of goods sold
|
|
|
4,315
|
|
|
4,295
|
|
|
3,338
|
|
|
3,772
|
|
|
3,634
|
|
|
3,871
|
|
|
4,287
|
|
|
2,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
966
|
|
|
223
|
|
|
241
|
|
|
1,172
|
|
|
1,120
|
|
|
471
|
|
|
1,293
|
|
|
847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
904
|
|
|
878
|
|
|
782
|
|
|
1,067
|
|
|
894
|
|
|
878
|
|
|
979
|
|
|
807
|
|
General
and administrative
|
|
|
849
|
|
|
698
|
|
|
689
|
|
|
610
|
|
|
639
|
|
|
607
|
|
|
617
|
|
|
561
|
|
Research
and development
|
|
|
632
|
|
|
557
|
|
|
521
|
|
|
448
|
|
|
491
|
|
|
491
|
|
|
434
|
|
|
409
|
|
|
|
|
2,385
|
|
|
2,133
|
|
|
1,992
|
|
|
2,125
|
|
|
2,024
|
|
|
1,976
|
|
|
2,030
|
|
|
1,777
|
|
Operating
loss before gain of sale of
real estate
|
|
|
(
1,419
|
)
|
|
(1,910
|
)
|
|
(1,751
|
)
|
|
(953
|
)
|
|
(
904
|
)
|
|
(1,505
|
)
|
|
(737
|
)
|
|
(930
|
)
|
Gain
on sale of real estate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,752
|
|
|
96
|
|
|
96
|
|
|
96
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(1,419
|
)
|
|
(1,910
|
)
|
|
(1,751
|
)
|
|
3,799
|
|
|
(808
|
)
|
|
(1,409
|
)
|
|
(641
|
)
|
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net (1)
|
|
|
44
|
|
|
53
|
|
|
919
|
|
|
1,243
|
|
|
58
|
|
|
70
|
|
|
28
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(
1,375
|
)
|
|
(
1,857
|
)
|
|
(832
|
)
|
|
5,042
|
|
|
(
750
|
)
|
|
(
1,339
|
)
|
|
(613
|
)
|
|
(801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(
53
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(1,375
|
)
|
$ |
(1,857
|
)
|
$ |
(832
|
)
|
$
|
5,095
|
|
$ |
(750
|
)
|
$ |
(1,339
|
)
|
$ |
(613
|
)
|
$ |
(801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.15
|
)
|
$ |
(0.20
|
)
|
$ |
(0.09
|
)
|
$
|
0.55
|
|
$ |
(0.08
|
)
|
$ |
(0.14
|
)
|
$ |
(0.07
|
)
|
$ |
(0.09
|
)
|
Diluted
|
|
$ |
(0.15
|
)
|
$ |
(0.20
|
)
|
$ |
(0.09
|
)
|
$
|
0.54
|
|
$ |
(0.08
|
)
|
$ |
(0.14
|
)
|
$ |
(0.07
|
)
|
$ |
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
Diluted
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,357
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
(1)
Includes gain on sale of investment in Intermute, Inc. of $870 thousand and
$1,236 thousand during the quarters ended September 30, 2006 and December 31,
2006, respectively.
Schedule
II
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended December 31, 2006 and 2007
Description
|
|
Balance at
Beginning
of year
|
|
Charged
to
Expense
|
|
Deductions
|
|
Balance
at end
of year
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
229,854
|
|
$
|
(49,828
|
)
|
$
|
(2,794
|
)
|
$
|
182,819
|
|
Allowance
for price protection
|
|
|
23,076
|
|
|
63,909
|
|
|
83,571
|
|
|
3,415
|
|
Allowance
for sales returns
|
|
|
607,183
|
|
|
2,871,120
|
|
|
3,090,989
|
|
|
387,314
|
|
COOP
advertising and other allowances
|
|
|
434,524
|
|
|
1,826,128
|
|
|
1,918,231
|
|
|
342,421
|
|
Year
ended December 31, 2006
|
|
$
|
1,294,637
|
|
$
|
4,711,329
|
|
$
|
5,089,996
|
|
$
|
915,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
182,819
|
|
$
|
71,265
|
|
$
|
81,633
|
|
$
|
172,451
|
|
Allowance
for price protection
|
|
|
3,415
|
|
|
91,468
|
|
|
90,989
|
|
|
3,894
|
|
Allowance
for sales returns
|
|
|
387,314
|
|
|
2,421,901
|
|
|
1,981,163
|
|
|
828,052
|
|
COOP
advertising and other allowances
|
|
|
342,421
|
|
|
1,793,741
|
|
|
1,739,756
|
|
|
396,406
|
|
Year
ended December 31, 2007
|
|
$
|
915,969
|
|
$
|
4,378,375
|
|
$
|
3,893,541
|
|
$
|
1,400,803
|
|
EXHIBIT
INDEX
(a)
|
|
Financial
Statements, Schedules and Exhibits:
|
|
|
|
|
(1),(2)
|
The
consolidated financial statements and required schedules are indexed
on
page F-1.
|
|
|
|
**
|
10.1
|
1990
Stock Option Plan, as amended.
|
|
|
|
**
|
10.3
|
1998
Employee Equity Incentive Plan, as amended.
|
|
|
|
|
21.
|
Subsidiaries,
filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
the
fiscal year ended December 31, 2000. *
|
|
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
31.1
|
CEO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|