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, 2005
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.)
|
|
|
207
South Street, Boston, Massachusetts
|
02111
|
______________________________________
|
___________________
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
Telephone Number, Including Area Code: (617)
423-1072
Securities
Registered Pursuant to Section 12 (b) of the Act: None
Securities
Registered Pursuant to Section 12 (g) of the Act:
Common
Stock, $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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated
Filer o Non-Accelerated
Filer 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 30, 2005 (computed by
reference to the closing price of such stock on The Nasdaq Capital Market
on
such date) was approximately $17,950,023.
The
number of shares outstanding of the registrant's common stock, $0.01 par value,
as of March 17, 2006 was 9,346,966 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's proxy statement for the registrant's 2006 annual meeting
of
shareholders to be filed with the SEC in April 2006 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
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;
|
·
|
production
schedules for our
products;
|
·
|
market
acceptance of new products and
services;
|
·
|
the
availability of debt and equity
financing;
|
·
|
general
economic conditions;
|
·
|
trends
relating to our results of
operations;
|
·
|
our
ability to service our debt obligations;
and
|
·
|
the
sufficiency of our capital
resources.
|
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.
ITEM
1 - BUSINESS
We
design, produce, market, sell, and support broadband and dial-up modems, Voice
over Internet Protocol or "VoIP" products and services, 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, but generally our
sales of dial-up modems have been declining and our sales of broadband modems
have been rising. 2005 was the first full year in which our DSL modem revenues
were higher than our dial-up modem revenues.
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. We also have a line of integrated services digital
network ("ISDN") products, which can transmit and receive data simultaneously
at
up to 128,000 bits per second.
In
response to increased demand for faster connection speeds, 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,
mostly external. 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, or 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., the U.K., and other countries include cable service
providers, original equipment manufacturers, and retailers.
We
are
currently shipping Voice over IP 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 volume shipments included a multi-function DSL gateway with
VoIP, and we also ship 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. Our VoIP products
can be purchased with or without 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.
We
have
designed a new generation of telephone dialers and related telephony products.
In the early 1980s Zoom introduced its first generation of dialers, including
the Demon Dialer® and Hotshot™. Dialers simplify the placing of a phone call by
dialing digits automatically. Zoom's new generation of dialers includes a model
designed for alternative long distance companies, and a second model designed
for use with prepaid phone cards.
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.
General
The
vast
majority of our products facilitate communication of data through the Internet.
Our dial-up modems and ISDN modems can also link computers, point-of-purchase
terminals, or other modem-equipped devices to each other through the traditional
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 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.
Dial-Up
Modems
We
have a
broad line of dial-up modems with top data speeds up to 56,000 bps, available
in
internal, external, and PCMCIA models. PC-oriented internal modems are designed
primarily for installation in the PCI or ISA slot of IBM PC-compatibles.
Embedded internal modems are designed to be embedded in non-PC equipment such
as
point-of-purchase terminals, kiosks, and set-top boxes. Many of our external
modems are designed to work with almost any terminal or computer, including
Windows computers, the Apple Macintosh, Linux computers, and other computers.
Our PCMCIA modems are designed for use with notebook and sub-notebook computers
equipped with standard PCMCIA 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 ISDN or 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 many 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®, Hayes® and
Global Village® 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
2003,
2004 and 2005, our dial-up modems and related products accounted for
approximately 73%, 52% 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. Zoom expects to continue to add
DSL
modems to its product line during 2006. One new model is planned to include
VoIP, wireless networking, a 4-port hub, router, and firewall.
The
maximum speed for the ADSL standard has been 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 believes that
it
has completed the ADSL 2/2+ hardware design for Ethernet, Ethernet/USB, 4-port
switch, and wireless models, and that Zoom should be able to ship these models
to appropriate customers when the firmware is ready for these
models.
In
2003,
2004 and 2005, our DSL modems and related products accounted for approximately
14%, 38%, and 53% 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 the first quarter of 2005
Zoom added a new Bluetooth USB adapter to its line, a low-cost class 2 adapter
to accompany the class 1 adapter we had been shipping. Zoom also continues
to
add features, and Zoom recently added enhanced support for transmission of
audio
and video to some of its Bluetooth products.
ISDN
Products
We
have a
family of modems for ISDN communications. Basic ISDN is a telephone service
that
uses existing phone lines to provide two 64,000 bps channels and one 16,000
bps
channel. ISDN has higher data rates than dial-up modems, and this can be
particularly attractive for data-intensive applications such as the transmission
of graphics and video images, Internet browsing, or video telephony. ISDN also
provides much faster response times to a source of data than those associated
with dial-up modems. However, generally our ISDN sales are declining due to
competition from DSL and cable modem products and services, which provide higher
speeds than ISDN.
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 four types of DOCSIS-standard cable modems - PCI, USB,
Ethernet, and Ethernet/USB models. Some of these models 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.
In
2005
we continued to sell cable modems to cable service providers and original
equipment manufacturers, both inside and outside the US, and to computer
retailers in the US. So far sales through the retail channel have been
handicapped by a number of factors, including the approval process described
above, 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.
Voice
over Internet Protocol
In
2004
we introduced a line of products that support VoIP or "Voice over Internet
Protocol". Our first VoIP products use 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 Zoom’s new 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 Ethenet port and to one or more telephones to provide
those phones with VoIP capabilities. 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.
Zoom
devoted significant resources to the VoIP product area in 2004 in 2005, and
we
continue to devote considerable resources to VoIP hardware, firmware, and test,
and to Zoom's Global Village phone service.
In
2006
Zoom expects to extend its VoIP product line by adding new hardware products
and
by enhancing the functionality of Global Village. Zoom expects that some of
its
products will be targeted toward businesses that want to add VoIP to their
existing phone system to save money on long distance calls.
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.
Dialers
and Related Telephony Products
Our
dialers simplify the placing of a phone call by dialing digits automatically.
We
shipped our first telephone dialer, the Demon Dialer®, 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 and South American countries, Canada, Mexico, Poland, Saudi Arabia,
Switzerland, Turkey, the USA, 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 need to change their manufacturing processes and component choices
to conform to RoHS. Zoom has completed most of 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. Zoom is already shipping a small number of
products that conform to RoHS, and Zoom will be shipping many products that
conform to RoHS prior to July 1, 2006. Generally conformance to RoHS is slightly
increasing Zoom’s cost of goods, and in some cases this will slightly reduce
Zoom’s gross margin. Zoom believes that RoHS will moderately reduce the number
of products available for purchase in Europe from Zoom’s competitors, especially
for dial-up modems, and that this may help Zoom to increase its market share.
A
number of states in the U.S. plan to adopt laws similar to RoHS during 2007,
and
we believe that Zoom is well-prepared for this transition. However, careful
management is required to minimize inventory risk for products that do not
conform to RoHS, since those products will have reduced
marketability.
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
2005 our customers who accounted for approximately 10% or more of our total
net
sales were Olusum (Turkey) and Staples. Together these two customers accounted
for 33% 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 distributors outside North America
include Altec, CPCDI, Enta Technologies, Micro Peripherals, Olusum, Tan Thanh,
and UMD. Our major European high-volume retailers include Business Logic,
Centromail, Dixons Group (Dixons, Currys, PC World, and PC City), El Corte
Ingles and MediaMark. Our net sales outside of North America as a percentage
of
total net sales have grown from 40% in 2002 to 55% in 2005. Our revenues from
sales outside North America were $15.1 million in 2003, $17.4 million in 2004,
and $14.0 million in 2005. Approximately 69%, 47%, and 37% of our net sales
outside North America in 2003, 2004 and 2005, respectively, were customers
in
the United Kingdom. Sales to Turkey accounted for 3%, 28%, and 40% of our net
sales outside North America in 2003, 2004 and 2005, respectively. We believe
sales growth outside North America will continue to require substantial
additional investments of resources for product design and testing, regulatory
approvals, and native-language instruction manuals, software, packaging, sales
support, and technical support. We have made this investment in the past for
many countries, and we expect to make this investment for many countries and
products in the future. Areas of focus include Western Europe, Eastern Europe,
the Middle East, and Latin America.
North
American High-volume Retailers and Distributors
In
North
America we reach the PC retail market primarily through high-volume retailers.
Our North American retailers include CDW, CompUSA, Fry's, Micro Electronics,
PC
Connection, Staples, and many others. Although we offer a number of our products
through high-volume retailers in North America, including DSL modems and cable
modems, most of our sales in North America to high-volume retailers have
historically been sales of our dial-up modems. However, our broadband modems
have been increasing their share of our sales through high-volume
retailers.
We
sell
significant quantities of our products through distributors, who often sell
to
corporate accounts, retailers, service providers, value-added resellers and
other customers. Our North American distributors include Border State Electric
Supply, D&H Distributing, Ingram Micro, and Tech Data.
Internet
Service Providers and Voice Service Providers
A
rapidly
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 expect 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 many 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 and from
our
technical support offices in Boca Raton, Florida. We also maintain a sales,
support, 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, 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
and Florida.
Research
and Development
Our
research and development efforts are focused on developing new communications
network access 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 OEM customers 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 modem and other chipsets that incorporate
sophisticated technology from third parties, thereby eliminating the need for
us
to develop this technology in-house. As of December 31, 2005 we had 18 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
2003, 2004, and 2005 we expended $2.8 million, $2.9 million and $2.7 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 Boston,
Massachusetts 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 Boston facility. Wherever
the product is built, our quality systems are used to help assure that the
product meets our specifications.
We
usually use one primary 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 SameTime Electronics ("SameTime"). The
loss
of these services or a material adverse change in SameTime’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 buy dial-up modem chipsets exclusively from two high-volume dial-up
modem chipset manufacturers, Conexant Systems, Inc. and Agere Systems Inc.
We
also buy the majority of our DSL and cable modem chipsets from Conexant. We
also
purchase DSL chipsets from Ikanos, a company that recently 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. Some of our chipset suppliers
have provided us certain concessions and incentives, such as reduced prices
or
free chipsets, if we purchased or agreed to purchase a certain dollar amount
of
products from these suppliers.
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 or lead-times stretch out.
We
are
also subject to the new RoHS rules discussed above, which may have a major
impact on 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, D-Link, Linksys,
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, D-Link, Hon Hai Network Systems (formerly Ambit Microsystems),
Linksys, Motorola, Netgear, Scientific Atlanta, SMC Networks,
Terrayon,
and Thomson
|
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;
|
·
|
price;
|
·
|
brand
image;
|
·
|
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
dial-up modems, particularly when they are sold through retailers or
computer
product distributors. We are less successful in selling directly to providers
of
broadband access services and to PC Manufacturers.
DSL
and
cable modems transmit data at significantly faster speeds than dial-up
modems,
which still account for a significant portion of our revenues. 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 cable service providers. A
small
fraction of new US cable modem placements in 2004 were sold at retail,
and an
even lower 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 five DSL modem models into
retailer
Dixons Group. Similarly Zoom, through its distributor Olusum in Turkey,
has been
successful in placing most of its DSL modem models into Turkey for sale
by a
large number of retailers.
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 Scientific Atlanta
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 VoIP products include Cisco (Linksys & Sipura brands),
D-Link, Grandstream, Mediatrix, Zyxel, and 8x8.
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
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
telecommunications devices are subject to change. Recent changes have been
announced by the European Union and the U.S. to reduce the use of hazardous
materials, such as lead, in electronic equipment. The implementation of these
new requirements, currently scheduled for July 1, 2006 for the European Union,
would require Zoom and other electronics companies to change or discontinue
many
products. We believe that the transition process to comply with these new
requirements is difficult, and in some cases has a slight negative impact on
our
product costs. In addition, we may incur additional costs involved with the
disposal of inventory or returned products that do not meet the new
requirements. We cannot predict what impact, if any, any other regulatory
changes may have upon our business.
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. Moreover, these standards continue to evolve. The failure of our
products and services to comply, or delays in compliance, 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 service, 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 and
may
limit or eliminate our competitive pricing.
In
many
countries outside the U.S. in which we operate or our services are sold, the
status of the laws that may relate to our VoIP services is unclear. We cannot
be
certain that we will be able to comply with existing or future requirements,
or
that we will be able to continue to be in compliance with any such requirements.
Our failure to comply with these requirements could 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 8, 2006 was $0.7 million, and on March 9, 2005 was $1.5
million. Many orders included in backlog may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of our net sales for any future
period.
Employees
As
of
December 31, 2005 we had 127 full-time employees compared to 154 as of December
31, 2004. Of the 2005 total, 18 were engaged in research and development, 66
were involved in purchasing, assembly, packaging, shipping and quality control,
29 were engaged in sales, marketing and technical support, and the remaining
14
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
|
|
57
|
|
Chief
Executive Officer, President and Chairman of the Board
|
Peter
R. Kramer
|
|
54
|
|
Executive
Vice President and Director
|
Robert
A. Crist
|
|
62
|
|
Vice
President of Finance and Chief Financial Officer
|
Terry
J. Manning
|
|
54
|
|
Vice
President of Sales and Marketing
|
Dean
N. Panagopoulos
|
|
48
|
|
Vice
President of Network Products
|
Deena
Randall
|
|
52
|
|
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. Since 1998 Mr. Frank Manning has also been a director of
the
Massachusetts Technology Development Corporation, a public purpose venture
capital firm that invests in seed and early-stage technology companies in
Massachusetts. Mr. Manning is the brother of Terry Manning, our vice president
of sales and marketing.
Peter
R. Kramer
is a
co-founder of our company. Mr. Kramer has been our executive vice president
and
a director since May 1977. He earned his BA degree in 1973 from SUNY Stony
Brook
and his MFA degree from C.W. Post College in 1975.
Robert
A. Crist
joined
us in July 1997 as vice president of finance and chief financial officer. From
April 1992 until joining us, Mr. Crist served in various capacities at Wang
Laboratories, Inc., (now Getronics), a computer software and services company,
including chief financial officer for the software business. Prior to 1992
Mr.
Crist served in various capacities at Unisys Corporation, including 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
None.
ITEM
2 - PROPERTIES
Our
corporate headquarters are located at 201 and 207 South Street, Boston,
Massachusetts. Approximately 11,000 square feet of this 62,000 square foot
facility is leased to third parties. We purchased these buildings in April
1993.
In January 2001 we received $6.0 million in financing by securing a mortgage
on
this property. On March 30, 2006 we paid the lender $1.166 million to pay down
the remaining balance of $4.841 million, and refinanced the balance of $3.675
million with a new mortgage with a 15 year amortization for one year and a
Maturity Date of April 10, 2007. At Zoom’s option, the mortgage may be extended
for an additional year to April 10, 2008.
In
August
1996 we entered into a five-year lease for a 77,428 square foot manufacturing
and warehousing facility at 645 Summer Street, Boston, MA. On February 28,
2001
we exercised our option to extend this lease for an additional five years.
We
believe that this space provides us with more manufacturing space than we
require for our current operations. The term of this lease is due to expire
in
August 2006. 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 2002 we entered into a five-year lease, as a tenant, for approximately
3,500 square feet at 950 Broken Sound Parkway NW, Boca Raton, Florida. We
primarily use this facility as a technical support facility.
ITEM
3 - LEGAL PROCEEDINGS
No
material litigation.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matter
was submitted to a vote of security holders during the fourth quarter of the
fiscal year covered in this report.
PART
II
ITEM
5 - MARKET FOR REGISTRANT'S COMMON EQUITY, 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, 2005
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
3.55
|
|
$
|
2.67
|
|
Second
Quarter
|
|
|
3.00
|
|
|
2.07
|
|
Third
Quarter
|
|
|
3.08
|
|
|
1.98
|
|
Fourth
Quarter
|
|
|
2.10
|
|
|
1.40
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2004
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
6.40
|
|
$
|
3.62
|
|
Second
Quarter
|
|
|
5.68
|
|
|
3.51
|
|
Third
Quarter
|
|
|
5.01
|
|
|
2.02
|
|
Fourth
Quarter
|
|
|
4.45
|
|
|
3.19
|
|
As
of
March 17, 2006, there were 9,346,966 shares of our common stock outstanding
and
approximately 234 holders of record of our common stock.
Recent
Sales of Unregistered Securities
We
did
not sell any unregistered securities during the fourth quarter of
2005.
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
2005 we did not repurchase any shares of our common stock on our own behalf
or
for any affiliated purchaser.
ITEM
6 - SELECTED FINANCIAL DATA
The
following table contains our selected consolidated financial data and is
qualified in its entirety by the more detailed consolidated financial statements
and notes thereto included elsewhere in this report. Our statement of operations
data for the years ended December 31, 2003, 2004, and 2005 and our balance
sheet
data as of December 31, 2004 and 2005 have been derived from our consolidated
financial statements, which have been audited by KPMG LLP, an independent
registered public accounting firm, and are included elsewhere in this report.
Our statement of operations data for the years ended December 31, 2001 and
2002
and our balance sheet data as of December 31, 2001, 2002, and 2003 have been
derived from our consolidated financial statements, which have been audited
by
KPMG LLP and are not included in this report. This data should be read in
conjunction with the consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of
Operations" appearing elsewhere herein.
|
|
Years
Ended December 31,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
(In
thousands except per share amounts)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
41,570
|
|
$
|
37,274
|
|
$
|
33,335
|
|
$
|
31,412
|
|
$
|
25,551
|
|
Cost
of goods sold
|
|
|
35,193
|
|
|
27,937
|
|
|
23,120
|
|
|
23,346
|
|
|
20,885
|
|
Gross
profit
|
|
|
6,377
|
|
|
9,337
|
|
|
10,215
|
|
|
8,066
|
|
|
4,666
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
7,481
|
|
|
5,848
|
|
|
5,271
|
|
|
4,800
|
|
|
4,059
|
|
General
and administrative
|
|
|
7,938
|
|
|
3,405
|
|
|
3,118
|
|
|
3,620
|
|
|
3,553
|
|
Research
and development
|
|
|
5,328
|
|
|
3,527
|
|
|
2,767
|
|
|
2,927
|
|
|
2,699
|
|
Total
operating expense
|
|
|
20,747
|
|
|
12,780
|
|
|
11,156
|
|
|
11,347
|
|
|
10,311
|
|
Operating
income (loss)
|
|
|
(14,370
|
)
|
|
(3,443
|
)
|
|
(941
|
)
|
|
(3,281
|
)
|
|
(5,645
|
)
|
Other
income (expense), net
|
|
|
(159
|
)
|
|
67
|
|
|
273
|
|
|
209
|
|
|
3,537
|
|
Income
(loss) before income taxes
|
|
|
(14,529
|
)
|
|
(3,376
|
)
|
|
(668
|
)
|
|
(3,072
|
)
|
|
(2,108
|
)
|
Income
tax expense (benefit)
|
|
|
3,800
|
|
|
2,015
|
|
|
-
|
|
|
-
|
|
|
9
|
|
Income
(loss) before extraordinary item
|
|
|
(18,329
|
)
|
|
(5,391
|
)
|
|
(668
|
)
|
|
(3,072
|
)
|
|
(2,117
|
)
|
Extraordinary
gain on elimination of Negative
goodwill
|
|
|
-
|
|
|
255
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
$
|
(18,329
|
)
|
$
|
(5,136
|
)
|
$
|
(668
|
)
|
$
|
(3,072
|
)
|
$
|
(2,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common and common
equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before extraordinary item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(2.33
|
)
|
$ |
(0.68
|
)
|
$ |
(0.08
|
)
|
$ |
(0.36
|
)
|
$ |
(0.23
|
)
|
Extraordinary
gain on elimination of negative
goodwill
|
|
|
- |
|
|
0.03
|
|
|
-
|
|
|
- |
|
|
- |
|
Net
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(2.33
|
)
|
$ |
(0.65
|
)
|
$ |
(0.08
|
)
|
$ |
(0.36
|
)
|
$ |
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,861
|
|
|
7,861
|
|
|
7,883
|
|
|
8,590
|
|
|
9,206
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
(In
thousands)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital…………
|
|
$
|
18,218
|
|
$
|
15,341
|
|
$
|
15,647
|
|
$
|
14,837
|
|
$
|
8,267
|
|
Total
assets……………
|
|
|
29,185
|
|
|
22,633
|
|
|
21,974
|
|
|
21,052
|
|
|
19,687
|
|
Long-term
obligations excluding current portion………
|
|
|
6,001
|
|
|
5,342
|
|
|
5,096
|
|
|
4,872
|
|
|
-
|
|
Total
stockholders' equity……………….
|
|
$
|
18,416
|
|
$
|
13,485
|
|
$
|
13,470
|
|
$
|
12,668
|
|
$
|
10,868
|
|
ITEM
7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the consolidated financial statements included
elsewhere in this report and the information described under the caption "Risk
Factors" below
Overview
We
derive
our net sales primarily from sales of Internet related hardware products,
principally broadband and dial-up modems and related 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, our support office in Boca Raton, Florida, 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 our products in accordance with our specifications
is
typically done in China. We perform most of the packaging and distribution
effort at our production and warehouse facility in Boston, Massachusetts, which
also engages in firmware programming and in testing.
Historically
we derived a majority of our net sales from the retail after-market sale of
dial-up modems to customers seeking to add or upgrade a modem 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 general
consensus of communications industry analysts is that after-market sales of
dial-up modems will continue to decline. There is also consensus among industry
analysts that the 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 demand for faster connection speeds and increased
modem functionality, we have invested and continue to invest resources to
advance our product line of broadband modems, especially DSL modems, and we
have
experienced increased sales of these modems that have partially offset our
declining sales of dial-up modems.
We
continually seek to improve our product designs and manufacturing approach
in
order to reduce our costs. We pursue a strategy of outsourcing rather than
internally developing our modem chipsets, which are application-specific
integrated circuits that form the technology base for our modems. By outsourcing
the chipset technology, we are able to concentrate our research and development
resources on modem system design, leverage the extensive research and
development capabilities of our chipset suppliers, and reduce our development
time and associated costs and risks. As a result of this approach, we are able
to quickly develop new and innovative products while maintaining a relatively
low level of research and development expense as a percentage of net sales.
We
also outsource aspects of our manufacturing to contract manufacturers as a
means
of reducing our costs of production, and to provide us with greater flexibility
in our production capacity.
Over
the
past several years our net sales have declined. In response to the declining
sales volume, we have cut costs by reducing staffing and some overhead costs.
On
December 31, 2002, our total headcount of full-time employees, including
temporary workers, was 185, which was reduced to 127 at year-end
2005.
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,
and overhead costs associated with retailers also tend to be higher. All of
Zoom’s sales to certain countries, including Turkey, Vietnam, and Saudi Arabia,
are currently handled by a single distributor who handles the support and
marketing costs within the country. Gross margin for sales to these distributors
tends to be low, since lower pricing to these distributors helps them to cover
the support and marketing costs that they cover. Our gross margin for broadband
modems tends to be lower than for dial-up modems for a number of reasons,
including the fact that retailers are currently a more significant channel
for
our dial-up modems than for our broadband modems; the fact that a higher
percentage of our DSL sales come from low-margin countries; and the fact that
there is stronger competition in the DSL market than in the dial-up
market.
In
2005
our net sales were down 18.7% compared to 2004. The main reason for the decrease
was the decline in dial-up modem sales, more than offsetting a growth in DSL
modem sales. While we have generally experienced growth in our DSL modem sales,
these sales are currently concentrated with a small number of customers, and
this reduces the predictability of our results. In Turkey Zoom has had a
relatively high share of the small DSL market that is one of the fastest growing
in the world in percentage terms; and in the future we will compete to try
to
maintain or grow our share in what is expected to be a high-growth market.
We
are also continuing our efforts to expand our DSL customer base and product
line, and to enter new markets. Because of our significant customer
concentration, however, our net sales and operating results 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.
Zoom’s
fourth largest customer in the second quarter of 2005 and sixth largest customer
in the first nine months of 2005 was Granville Technologies, Ltd., which was
reported in late July 2005 to have gone into “administration,” a U.K. form of
receivership. No sales to Granville were recorded in the third or fourth quarter
of 2005. The administrators decided to discontinue the company as a going
concern and sell the business assets to help satisfy creditors. As a result,
Zoom recorded a bad debt expense in 2005 of $0.6 million for its uncollected
accounts receivable balance with Granville.
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 in exchange for our investment.
We recorded a non-operating gain of $3.5 million in our second quarter of 2005
in connection with this sale. We may also receive up to $3.0 million in
additional payments in 2006 if certain conditions and performance targets are
met. We will not record gains from these additional payments, if any, until
and
unless they are fully earned.
Our
cash
and cash equivalents balance at December 31, 2005 was $9.1 million, down from
$9.4 million at December 31, 2004. This was due primarily to our operating
loss
for the year, partially offset by the receipt of $3.5 million from the sale
of
the Company's investment in InterMute, the reduction of accounts receivable
and
prepaid expense, and the increase of accounts payable and accrued
expense.
Critical
Accounting Policies and Estimates
The
following is a discussion of what we view as our more significant accounting
policies and estimates. As described below, management judgments and estimates
must be made and used in connection with the preparation of our consolidated
financial statements. Where noted, material differences could result in the
amount and timing of our net sales, costs, and expenses for any period if we
made different judgments or used different estimates.
Revenue
(Net Sales) Recognition.
We
primarily sell hardware products to our customers. The hardware products include
dial-up modems, DSL modems, cable modems, voice over IP products, embedded
modems, ISDN modems, telephone dialers, 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 were not
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 and in-store mail-in rebates. Each of these
is
accounted for as a reduction of net sales based on detailed management
estimates, which are reconciled to actual customer or end-consumer credits
on a
monthly or quarterly basis.
Our
2005
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 as billable services were consumed or as a monthly flat-fee
service was billed.
Product
Returns.
Products are returned by retail stores and distributors for inventory balancing,
contractual stock rotation privileges, and warranty repair or replacements.
We
estimate the sales and cost value of expected future product returns of
previously sold products. Our estimates for product returns are based on recent
historical trends plus estimates for returns prompted by, among other things,
new product introductions, announced stock rotations and announced customer
store closings, etc. Management reviews historical returns, current economic
trends, and changes in customer demand and acceptance of our products when
estimating sales return allowances. The estimate for future returns is recorded
as a reserve against accounts receivable, a reduction of net sales, and the
corresponding change to inventory and cost of sales. The relationship of
quarterly physical product returns to quarterly product sales remained
relatively stable for many years, but has been declining from a high of 10.6%
to
a low of 5.4% in the past two years as retail sales as a percent of total sales
have declined. Product returns as a percentage of total net sales were 5.5%
and
6.9% in the fourth quarter and full year of 2005, respectively.
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
$0.2 million in 2003, $0.1 million in 2004, and $0.2 million in
2005.
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 $1.5 million in 2003, $1.3 million in
2004,
and $1.1 million in 2005. The decline in 2005 was primarily due to lower
retailer sales.
Consumer
Mail-In and In-Store Rebates and Store Rebates.
Our
estimates for consumer mail-in rebates are based on a detailed understanding
and
tracking by customer and sales program, supported by actual rebate claims
processed by the rebate redemption centers plus an accrual for an estimated
lag
in processing at the redemption centers. Our estimates for store rebates are
comprised of actual credit requests from the eligible customers. The estimate
for mail-in and store rebates is recorded as a reserve against accounts
receivable and a reduction of net sales in the same period that the rebate
obligation was triggered. Reductions in our net sales due to the consumer
rebates were $2.1 million in 2003, $1.4 million in 2004, and $0.8 million in
2005. The decline in 2005 was primarily due to lower retailer
sales.
To
ensure
that the sales, discounts, and marketing incentives are recorded in the proper
period, we perform extensive tracking and documenting by customer, by period,
and by type of marketing event. This tracking includes reconciliation to the
accounts receivable records for deductions taken by our customers for these
discounts and incentives.
Accounts
Receivable Valuation.
We
establish accounts receivable reserves equal to the above-discussed net sales
adjustments for estimates of product returns, price protection refunds, and
consumer and store rebates. These reserves are drawn down as actual credits
are
issued to the customer's accounts.
Our
bad-debt write-offs were not significant in 2003 and 2004. A major customer
in
the United Kingdom, Granville
Technologies, Ltd. went into “administration,” a U.K. form of receivership, in
June, 2005, and its charter has subsequently been terminated with no repayments
to unsecured creditors. In connection with Granville’s administration, we wrote
off $0.6 million of uncollectible Granville Technologies’ accounts receivable in
2005. The Granville accounts receivable charge was recorded to general and
administrative expense.
Inventory
Valuation and Cost of Goods Sold.
Inventory is valued on a standard cost basis where the material standards are
periodically updated for current material pricing. Reserves for obsolete
inventory are established by management based on usability reviews performed
each quarter. Our reserves against the inventory of a particular product range
from 0% to 100%, based on management's estimate of the probability that the
material will not be consumed or that it will be sold below cost. Our valuation
process is to compare our cost to the selling prices each quarter, and if the
selling price of a product is less than the "if completed" cost of our
inventory, we write-down the inventory on a "lower of cost or market" basis.
In
2003, 2004 and 2005 we recorded charges against inventory of $0.3 million,
$0.0
million and $0.0 million, respectively, as a result of lower of cost or market
valuation issues.
Valuation
and Impairment of Deferred Tax Assets.
As part
of the process of preparing our consolidated financial statements we are
required to estimate our income tax expense and deferred income tax position.
This process involves the estimation of our actual current tax exposure together
with assessing temporary differences resulting from differing treatment of
items
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included in our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant
management judgment is required in determining our provision for income taxes
and any valuation allowance recorded against our net deferred tax assets. We
have recorded a 100% valuation allowance against our deferred tax assets. It
is
management's estimate that, after considering all the available objective
evidence, historical and prospective, with greater weight given to historical
evidence, it is more likely than not that these assets will not be realized.
If
we establish a record of continuing profitability, at some point we will be
required to reverse the valuation allowance and restore the deferred asset
value
to the balance sheet, recording an equal income tax benefit which will increase
net income in that period(s).
On
December 31, 2005 the Company had federal net operating loss carryforwards
of
approximately $31,854,000. These federal net operating losses are available
to
offset future taxable income, and are due to expire in years ranging from
2018 to 2025. The Company had state net operating loss carryforwards of
approximately $22,253,000. These state net operating losses are available to
offset future taxable income, and are primarily due to expire in years ranging
from 2006 to 2010.
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 of InterMute in June 2005,
the
Company received a payment of approximately $3.5 million, also in June 2005,
in
exchange for its investment. The Company recorded a non-operating, after-tax
gain of $3.5 million in its second quarter ended June 30, 2005. The Company
may
also receive up to $3.0 million in additional payments in 2006 if certain
conditions and performance targets are met. The recording of gains from these
additional payments will not be made until and unless they are fully
earned.
Results
of Operations
The
following table sets forth certain financial data for the periods indicated
as a
percentage of net sales:
|
|
Years
Ended
|
|
|
|
December
31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
69.4
|
|
|
74.3
|
|
|
81.7
|
|
Gross
profit
|
|
|
30.6
|
|
|
25.7
|
|
|
18.3
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
15.8
|
|
|
15.3
|
|
|
15.9
|
|
General
and administration
|
|
|
9.3
|
|
|
11.5
|
|
|
13.9
|
|
Research
and development
|
|
|
8.3
|
|
|
9.3
|
|
|
10.6
|
|
Total
operating expense
|
|
|
33.4
|
|
|
36.1
|
|
|
40.4
|
|
Operating
profit (loss)
|
|
|
(2.8
|
)
|
|
(10.4
|
)
|
|
(22.1
|
)
|
Other
income (expense), net
|
|
|
0.8
|
|
|
0.6
|
|
|
13.8
|
|
Loss
before income taxes
|
|
|
(2.0
|
)
|
|
(9.8
|
)
|
|
(8.3
|
)
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(2.0)
|
|
|
(9.8)
|
|
|
(8.3)
|
%
|
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
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,
2005 with the year ended December 31, 2004.
Net
Sales.
Our
total net sales declined year-over-year by 18.7%. In 2005, we primarily
generated our sales by selling broadband modems to the electronics after-market
via distributors and retailers and to Internet Service Providers. The dial-up
modem market has continued to decline and Zoom sales of dial-up modems declined
due to reductions of both unit sales volume and, to a lesser extent, average
selling prices. Our broadband modem category did not grow sufficiently in 2005
to offset the decline in our dial-up modem sales, and our total net sales
decreased 18.7% to $25.6 million in 2005 from $31.4 million in
2004.
As
shown
in the table below, our net sales for dial-up modems declined $6.1 million,
or
37.2%, to $10.3 million in 2005 from $16.5 million in 2004. This decline was
primarily attributable to both lower unit sales and lower prices, reflecting
the
declining retail market for these modems. Our DSL net sales increased $1.7
million, or 14.2%, to $13.4 million in 2005 from $11.8 million in 2004. This
increase was primarily attributable to increased unit sales of DSL modems,
particularly in Turkey and other countries. Net sales in our other product
sales
categories, which included cable modems, cameras, ISDN modems, telephone
dialers, and wireless networking equipment, declined 44.4%, to $1.8 million
in
2005 from $3.1 million in 2004, primarily due to decreased emphasis on many
of
these products.
|
|
Year
2004
|
|
Year
2005
|
|
Change
|
|
Change
|
|
|
|
Sales
$000
|
|
Sales
$000
|
|
$000
|
|
%
|
|
Dial-up
|
|
$
|
16,456
|
|
$
|
10,332
|
|
$ |
(6,124
|
)
|
|
(37.2
|
)%
|
DSL
|
|
|
11,777
|
|
|
13,453
|
|
|
1,676
|
|
|
14.2
|
%
|
Other
Products
|
|
|
3,179 |
|
|
1,766
|
|
|
(1,413 |
) |
|
(44.4
|
)%
|
Total
Net Sales
|
|
$
|
31,412
|
|
$
|
25,551
|
|
$ |
(5,861
|
)
|
|
(18.7
|
)%
|
As
shown
in the table below our net sales in North America declined $2.5 million, or
17.5%, to $11.6 million in 2005 from $14.0 million in 2004. Our net sales in
Turkey were $5.6 million in 2005 compared to $4.9 million in 2004, a 13.9%
increase. The growth of our sales in Turkey primarily reflect increased sales
of
DSL modems to our Turkish Distributor. Our
net
sales in the UK were $5.2 million in 2005 compared to $8.2 million in 2004,
a
36.3% decline. The sales decline in North America and the UK primarily reflect
our declining sales of dial-up modems. In addition, our UK sales were also
significantly reduced by the result of the business failure of Granville
Technologies, Ltd., a major customer. Our net sales in all other countries
were
$3.2 million in 2005 compared to $4.3 million in 2004, a 26.4% decline. The
sales decline in all other countries was primariy in dial-up
modems.
|
|
Year
2004
|
|
Year
2005
|
|
Change
|
|
Change
|
|
|
|
Sales
$000
|
|
Sales
$000
|
|
$000
|
|
%
|
|
North
America
|
|
$
|
14,027
|
|
$
|
11,575
|
|
$
|
(2,452
|
)
|
|
(17.5
|
)%
|
Turkey
|
|
|
4,922
|
|
|
5,608
|
|
|
686
|
|
|
13.9
|
%
|
UK
|
|
|
8,164
|
|
|
5,202
|
|
|
(2,962
|
)
|
|
(36.3
|
)%
|
All
Other
|
|
|
4,299
|
|
|
3,166
|
|
|
(1,133
|
)
|
|
(26.4
|
)%
|
Total
Net Sales
|
|
$
|
31,412
|
|
$
|
25,551
|
|
$
|
(5,861
|
)
|
|
(18.7
|
)%
|
In
2005
our two largest customers were our Turkish Distributor and a large North
American retailer, accounting for 22% and 12% of total net sales, respectively.
Because of our significant customer concentration, our net sales and operating
income could fluctuate significantly due to changes in political or economic
conditions or the loss, reduction of business, or less favorable terms for
any
of our significant customers. For example, we expect our ongoing net sales
to be
adversely affected by the business failure of Granville Technologies in 2005.
Granville Technologies accounted for 5% and 4% of our total net sales in 2004
and 2005, respectively.
Gross
Profit.
Our
gross profit was $4.7 million in 2005 compared to $8.1 million in 2004. Our
gross profit as a percentage of net sales decreased to 18.3% in 2005 from 25.7%
in 2004. The primary reason for this decline was a shift in the sales mix from
dial-up modems to broadband modems, lower total sales, and the negative effect
of fixed manufacturing costs spread over lower total sales. Zoom’s
sales of dial-up modems are predominantly to the retail market, which have
higher gross profit margins and selling expenses than sales of our broadband
modems, which are predominately sold to distributors, internet service provider,
and OEM customers.
Operating
Expense.
Total
operating expense decreased by $1.0 million to $10.3 million in 2005 from $11.3
million in 2004. Total operating expense as a percentage of net sales increased
to 40.4% in 2005 from 36.1% in 2004. The table below shows total operating
expense and its three major categories: selling expense, general and
administrative expense, and research and development expense.
|
|
Year
2004
|
|
%
Net
|
|
Year
2005
|
|
%
Net
|
|
Change
|
|
%
|
|
Operating
Expense
|
|
Sales
$000
|
|
Sales
|
|
Sales
$000
|
|
Sales
|
|
$000
|
|
Change
|
|
Selling
Expense
|
|
$
|
4,800
|
|
|
15.3
|
%
|
$
|
4,059
|
|
|
15.9
|
%
|
$ |
(741
|
)
|
|
(
15.4
|
)%
|
General
and Administrative Expense
|
|
|
3,620
|
|
|
11.5
|
%
|
|
3,553
|
|
|
13.9
|
%
|
|
(67
|
)
|
|
(
1.9
|
)%
|
Research
and Development Expense
|
|
|
2,927
|
|
|
9.3
|
%
|
|
2,699
|
|
|
10.6
|
%
|
|
(228
|
)
|
|
(
7.8
|
)%
|
Total
Operating Expense
|
|
$
|
11,347
|
|
|
36.1
|
%
|
$
|
10,311
|
|
|
40.4
|
%
|
$
|
(1,036
|
)
|
|
(
9.1
|
)%
|
Selling
Expense.
Selling
expense decreased to $4.1 million in 2005 from $4.8 million in 2004. Selling
expense as a percentage of net sales was 15.9% in 2005 and 15.3% in 2004. The
$0.7 million decrease in selling expense was primarily due to reductions in
personnel costs due to reduced employee headcount ($0.3 million) estimated
European Value Added Tax expense ($0.1 million), outbound freight ($0.1
million), and other selling costs related to lower overall sales volume and
lower sales in the retail channel.
General
and Administrative Expense.
General
and administrative expense was $3.6 million in 2004 and 2005. General and
administrative expense as a percentage of net sales was 13.9% in 2005 and 11.5%
in 2004. In 2005, general and administrative expense decreased in most
categories, but the expense reductions were offset by an increase of $ 0.7
million in bad debt expense, primarily the result of the business failure of
a
major U.K. customer, Granville Technologies, Ltd. in 2005. The general and
administrative expense reductions in 2005 included reductions in personnel
costs
($0.3 million), medical and general insurance expense ($0.3 million), and legal,
audit and bank fee expense ($0.2 million).
Research
and Development Expense.
Research
and development expense decreased to $2.7 million in 2005 from $2.9 million
in
2004. Research and development expense as a percentage of net sales increased
to
10.6% in 2005 from 9.3% in 2004. The $0.2 million decrease in research and
development expense was primarily due to reduced personnel costs ($0.2 million)
and government approvals and licenses ($0.1 million).
Other
Income (Expense).
Other
income, net increased to $3.5 million in 2005 from $0.2 million in 2004. The
significant increase was the result of a non-operating gain recorded for the
$3.5 million gain and payment in June, 2005 by Trend Micro, Inc. to Zoom in
exchange for our investment in an affiliate, Intermute. Zoom may also receive
up
to $3.0 million in additional payments in 2006 if certain conditions and
performance targets are met. The recording of gains from these additional
payments will not be made until and unless they are fully earned.
Income
Tax Expense (Benefit).
We did
not record any income tax expense in 2004. We recorded a $0.09 million net
income tax expense in 2005 for a U.K. income tax on interest income, which
was
not subject to our net loss carryforwards. The net deferred tax asset balance
at
December 31, 2005 is zero. This accounting treatment is described in further
detail under the caption "Critical Accounting Policies and Estimates" above
and
in note 11
to the
consolidated financial statements.
Year
Ended December 31, 2004 Compared to Year Ended December 31,
2003
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,
2004 with the year ended December 31, 2003.
Net
Sales.
Our
total net sales declined year-over-year by 5.8%. In 2004, we primarily generated
our sales by selling dial-up modems to the electronics after-market via
distributors and retailers. The market and Zoom’s sales of dial-up modems
continued to decline in 2004. Our broadband modem category did not grow
sufficiently in 2004 to offset the decline in our dial-up modem sales, and
our
total net sales decreased 5.8% to $31.4 million in 2004 from $33.3 million
in
2003.
As
shown
in the table below our net sales for dial-up modems declined $7.7 million,
or
32.0%, from $24.2 million in 2003 to $16.5 million in 2004, primarily
attributable to both lower unit sales and lower prices. Our broadband net sales
increased $6.1 million, or 91.7%, from $6.6 million in 2003 to $12.7 million
in
2004. This increase was primarily attributable to increased unit sales of DSL
modems, particularly in markets outside North America. Our DSL sales increased
161% from $4.5 million in 2003 to $11.8 million in 2004. Net sales in our other
product sales categories, which included wireless networking equipment, ISDN
modems, cameras, and telephone dialers declined 10.3%, from $2.5 million to
$2.3
million.
|
|
Year
2003
Sales
$000
|
|
Year
2004
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
Dial-up
|
|
$
|
24,198
|
|
$
|
16,456
|
|
$
|
(7,742
|
)
|
|
(32.0
|
)%
|
Broadband
|
|
|
6,629
|
|
|
12,706
|
|
|
6,077
|
|
|
91.7
|
%
|
Other
Products
|
|
|
2,508
|
|
|
2,250
|
|
|
(258
|
)
|
|
(10.3
|
)%
|
Total
Net Sales
|
|
$
|
33,335
|
|
$
|
31,412
|
|
$
|
(1,923
|
)
|
|
(
5.8
|
)%
|
As
shown
in the table below our net sales in North America decreased by 23.0% to $14.0
million in 2004, compared to our net sales in 2003. Our 2004 net sales outside
North America increased by 15% to $17.4 million, compared to our net sales
in
2003. These changes reflect our declining sales of dial-up modems worldwide,
our
stronger broadband sales in the markets outside North America, and the positive
currency translation impact, for converting British Pounds and Euros to dollars
(a $0.9 million benefit), of a significant portion of our sales outside North
America. Our sales outside North America benefited from strong growth in
Turkey,
primarily relating to DSL modem sales, accounting for 28% of our total 2004
sales outside North America.
|
|
Year
2003
Sales
$000
|
|
Year
2004
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
North
America
|
|
$
|
18,212
|
|
$
|
14,027
|
|
$
|
(4,185
|
)
|
|
(23.0
|
)%
|
Outside
North America
|
|
|
15,123
|
|
|
17,385
|
|
|
2,262
|
|
|
15.0
|
%
|
Total
Net Sales
|
|
$
|
33,335
|
|
$
|
31,412
|
|
$
|
(1,923
|
)
|
|
(5.8
|
)%
|
Gross
Profit.
Our
gross profit was $8.1 million in 2004 compared to $10.2 million in 2003.
Our
gross profit as a percentage of net sales decreased to 25.7% in 2004 from
30.6%
in 2003. The primary reason for this decline was a shift in the sales mix
from
dial-up modems, our highest margin product category, to broadband modems,
which
have lower margins.
Operating
Expense.
Total
operating expense increased by $0.2 million to $11.3 million in 2004 from
$11.2
million in 2003. Total operating expense as a percentage of net sales increased
to 36.1% in 2004 from 33.5% in 2003. The table below shows total operating
expense and its three major categories: selling expense, general and
administrative expense, and research and development expense.
Operating
Expense
|
|
Year
2003
Sales
$000
|
|
%
Net
Sales
|
|
|
Year
2004
Sales
$000
|
|
Net
Sales
|
|
|
Change
$000
|
|
%
Change
|
|
Selling
Expense
|
|
$
|
5,270
|
|
|
15.8
|
%
|
|
$
|
4,800
|
|
|
15.3
|
%
|
|
$
|
(470
|
)
|
|
(
8.9
|
)%
|
General
and Administrative Expense
|
|
|
3,118
|
|
|
9.4
|
%
|
|
|
3,620
|
|
|
11.5
|
%
|
|
|
502
|
|
|
16.1
|
%
|
Research
and Development Expense
|
|
|
2,767
|
|
|
8.3
|
%
|
|
|
2,927
|
|
|
9.3
|
%
|
|
|
160
|
|
|
5.8
|
%
|
Total
Operating Expense
|
|
$
|
11,155
|
|
|
33.5
|
%
|
|
$
|
11,347
|
|
|
36.1
|
%
|
|
$
|
192
|
|
|
1.7
|
%
|
Selling
Expense.
Selling
expense decreased to $4.8 million in 2004 from $5.3 million in 2003. Selling
expense as a percentage of net sales was 15.3% in 2004 and 15.8% in 2003. The
$0.5 million decrease in selling expense was primarily due to reduced outbound
freight ($0.2 million), marketing costs ($0.1 million), personnel costs ($0.1
million), and sales commissions ($0.1 million) as a result of lower overall
sales volume and lower sales in the retail channel. These decreases were
partially offset by an adjustment to our estimated European Value Added Tax
expense ($0.1 million).
General
and Administrative Expense.
General
and administrative expense increased to $3.6 million in 2004 from $3.1 million
in 2003. General and administrative expense as a percentage of net sales were
11.5% in 2004 and 9.4% in 2003. The $0.5 million increase in general and
administrative expense was primarily due to acquisition-related expense for
a
non-consummated transaction ($0.3 million) and salaries and benefits for
increased personnel costs for Information Systems and Sarbanes-Oxley compliance
($0.1 million).
Research
and Development Expense.
Research
and development expense increased to $2.9 million in 2004 from $2.8 million
in
2003. Research and development expense as a percentage of net sales increased
to
9.3% in 2004 from 8.3% in 2003. The $0.16 million increase in research and
development expense was primarily due to increased personnel costs ($0.1
million) and related expense.
Other
Income (Expense).
Other
income, net declined to $0.21 million in 2004 from $0.27 million in 2003. The
decline was primarily the result of an increased foreign exchange loss and
the
sale in 2003 of a web domain name, partially offset by increased interest income
on our cash investments.
Income
Tax Expense (Benefit).
We did
not record any net tax expense or benefit in 2004 or 2003.
Liquidity
and Capital Resources
On
December 31, 2005, we had working capital of $8.3 million including $9.1 million
in cash and cash equivalents.
In
2005
operating activities used $3.9 million in cash. Our net loss in 2005 was $2.1
million which was comprised of an operating loss of $5.6 million and a
non-operating gain from investing activities of $3.5 million. Sources of cash
from operations included a reduction of accounts receivable of $0.6 million,
an
increase of accounts payable and accrued expense of $0.6 million, non-cash
depreciation and amortization expense of $0.3 million, and a decrease of prepaid
expense of $0.2 million. Our decrease in accounts receivable reflected our
lower
sales, a $0.6 million bad debt write-off
for a
major customer, Granville Technologies, Ltd., and a higher mix of sales with
shorter payment terms. Our increase in accounts payable was primarily related
to
the timing of inventory receipts.
In
2005
our net cash provided by investing activities was $3.3 million, which included
the $3.5 million received from our sale of an affiliate, Intermute, to Trend
Micro, Inc., a U. S. subsidiary of Trend Micro Japan. This was partially offset
by our $0.2 million investment in property, plant and equipment. Zoom may also
receive additional payments of up to approximately $3 million in 2006 in
connection with the InterMute sale if certain conditions and performance targets
are met.
In
2005
cash was provided by financing activities of $0.2 million consisting of proceeds
from the exercise of employee stock options of $0.4 million, partially offset
by
$0.2 million for monthly principal payments on our $6.0 million mortgage on
our
headquarters facility. Our mortgage is a 5-year balloon mortgage that is
amortized on a 20-year basis. The interest rate is adjusted annually in January
of each year based on the Federal Home Loan Bank rate plus 2.5% per annum.
In
2004 the interest rate was 3.99%. As of January 10, 2005 the rate of interest
changed to 5.80%. We renegotiated the rate to 5.0% effective February 10, 2005.
As of December 31, 2005 $4.872 million was outstanding on this loan. The loan
was scheduled to be paid in full on January 10, 2006 and the final payment
was
deferred during negotiations for a new mortgage. On March 30, 2006 we paid
the
lender $1.166 million to pay down the then balance of $4.841 million, and
refinanced the balance of $3.675 million with a new mortgage with a 15 year
amortization for one year and a Maturity Date of April 10, 2007. The new
mortgage rate is equal to the federal prime rate, which is 7.75% as of March
30,
2006, and the rate will adjust along with the federal prime rate. At Zoom’s
option, the mortgage may be extended for an additional year to April 10, 2008.
The lender has retained a payment reserve account equal to six months of
principal and interest in a Certificate of Deposit. The mortgage contains
certain financial and non-financial covenants. We also believe that we should
be
able to sell our owned buildings on favorable terms if we require additional
liquidity. If we were to sell the portion of our owned buildings that includes
our principal headquarters, we believe we would be able to lease back a portion
of the sold property or otherwise find suitable space for our principal
headquarters on satisfactory terms.
On
March
16, 2005 we entered into a one year Loan and Security Agreement with Silicon
Valley Bank that provides for a revolving line of credit of up to $2 million.
The revolving line of credit can be used to (i) borrow under revolving loans
for
working capital and general corporate purposes, (ii) issue letters of credit,
(iii) enter into foreign exchange forward contracts, and (iv) support certain
cash management services. Revolving loans bear interest at a floating rate
of
interest equal to Silicon Valley Bank’s prime rate plus 0.5%. This interest rate
will be increased to Silicon Valley Bank’s prime rate plus 1.0% if we record two
consecutive quarters of combined losses. The rate at December 31, 2005 was
8.25%, based on the prime rate plus 1.0%. The revolving line of credit
terminated, as scheduled, on March 15, 2006. There were no borrowings under
the
line for the entire one year contract. We are currently negotiating a new one
year line with Silicon Valley Bank. There can be no assurance as to the outcome
of these negotiations.
To
conserve cash and manage our liquidity, we have implemented cost cutting
initiatives including the reduction of employee headcount and overhead costs.
The employee headcount was 154 at December 31, 2004 and has been reduced to
127
at December 31, 2005. 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 December 31, 2006. However, if we are unable to increase
our revenues, reduce or otherwise adequately control our expenses, or raise
capital, our longer-term ability to continue as a going concern and achieve
our
intended business objectives could be adversely affected. Moreover, our
liquidity could be significantly impaired if we are not able to refinance all
or
a significant portion of the mortgage and we are not otherwise able to sell
our
owned buildings for adequate consideration. See “Risk Factors” below, for
further information with respect to events and uncertainties that could harm
our
business, operating results, and financial condition.
Contractual
Obligations
The
following table summarizes our contractual obligations as of December 31,
2005.
|
|
TOTAL
|
|
LESS
THAN 1 YEAR
|
|
1-3
YEARS
|
|
3-5
YEARS
|
|
AFTER
5 YEARS
|
|
Purchase
Obligations (1)
|
|
$
|
2,634,217
|
|
$
|
2,634,217
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Long
Term Debt (2)
|
|
|
4,889,927
|
|
|
4,889,927
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
Leases (3)
|
|
|
584,696
|
|
|
510,050
|
|
|
74,646
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
8,108,840
|
|
$
|
8,034,194
|
|
$
|
74,646
|
|
$
|
-
|
|
$
|
-
|
|
(1)
|
Represents
obligations primarily with subcontractors and suppliers of inventory,
all
in the ordinary course of business.
|
(2)
|
Represents
the mortgage on our corporate headquarters, including estimated interest
payments at 5%. On March 30, 2006 we paid the lender $1.166 million
to pay
down the then balance of $4.841 million, and refinanced the balance
of
$3.675 million with a new mortgage with a 15 year amortization for
one
year and a Maturity Date of April 10, 2007. At Zoom’s option, the mortgage
may be extended for an additional year to April 10, 2008.
|
(3)
|
Represents
minimum lease payments, excluding executory costs to be made under
leases
for our manufacturing facility in Boston, MA, our office facility
in
Fleet, Hants, U.K., and our technical support facility in Boca Raton,
FL.
|
RISK
FACTORS
This
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our objectives, expectations and intentions. The
cautionary statements made in this report should be read as applicable to all
forward-looking statements wherever they appear in this report. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this report.
We
may continue to incur net losses if we are unable to increase sales of our
broadband modems.
Our
net
sales have been declining primarily due to the decline in the dial-up modem
market, continuing decreases in the average selling prices of dial-up modems,
and the trend toward faster connection speeds and broadband access products.
Despite numerous cost reductions over the last few years, we have continued
to
incur significant net losses primarily due to our continuous decline in net
sales from dial-up modems. We believe that the future of our business is largely
dependent on the success of our broadband modems and other products. Although
we
believe that we have sufficient resources to fund our planned operations over
the next year, if we fail to increase our net sales of our broadband modems
and
other products, our longer-term ability to stay in business and to achieve
our
intended business objectives could be adversely effected. Our continuing losses
could also adversely affect our ability to fund the growth of our business
should our strategies prove successful.
Our
liquidity may be significantly impaired if we repay our mortgage prior to the
maturity of our mortgage with our current sources of cash and are not able
to
refinance all or a significant portion of our mortgage or otherwise sell our
owned buildings for adequate consideration.
On
March
30, 2006 we paid our mortgage lender $1.166 million to pay down the then balance
of $4.841 million of our previous mortgage, and refinanced the balance of $3.675
million with a new mortgage with a 15 year amortization for one year and a
Maturity Date of April 10, 2007. The new mortgage rate is equal to the federal
prime rate, which is 7.75% as of March 30, 2006, and the rate will adjust along
with the federal prime rate. At Zoom’s option, the mortgage may be extended for
an additional year to April 10, 2008. The lender has retained a payment reserve
account equal to six months of principal and interest in a Certificate of
Deposit. The
mortgage contains certain financial and non-financial covenants.
We
also
believe that we should be able to sell our owned buildings on favorable terms
if
we require additional liquidity. If we were to sell the portion of our owned
buildings that includes our principal headquarters, we believe we would be
able
to lease back a portion of the sold property or otherwise find suitable space
for our principal headquarters on satisfactory terms.
Our
liquidity could be significantly impaired if we are not otherwise able to sell
our owned buildings for adequate consideration.
To
stay in business we may require future additional funding which we may be unable
to obtain on favorable terms, if at all.
In
addition to obtaining funds to refinance or repay our mortgage, over the next
twelve months we may require additional financing for our operations either
to
fund losses beyond those we anticipate or to fund growth in our inventory and
accounts receivable. Our credit facility expired on March 15, 2006. We are
currently in negotiations for a new one-year line of credit. Additional
financing may not be available to us on a timely basis if at all, or on terms
acceptable to us. If we fail to obtain acceptable additional financing when
needed, we may be required to further reduce planned expenditures or forego
business opportunities, which could reduce our net sales, increase our losses,
and harm our business. Moreover, additional equity financing could dilute the
per share value of our common stock held by current shareholders, while
additional debt financing could restrict our ability to make capital
expenditures or incur additional indebtedness, all of which would impede our
ability to succeed.
Our
net sales and operating results have been adversely affected because of a
decline in average selling prices for our dial-up modems and because of the
decline in the retail market for dial-up modems.
The
dial-up modem industry has been characterized by declining average selling
prices and a declining retail market. The decline in average selling prices
is
due to a number of factors, including technological change, lower component
costs, and competition. The decline in the size of the retail market for dial-up
modems is primarily due to the inclusion of dial-up modems as a standard feature
contained in new PCs, and the advent of broadband products. Due to these factors
and others, one of our significant retail customers has notified us that they
want to purchase on a consignment basis for their dial-up modem category. That
customer has also indicated that they plan to reduce the number of brands of
dial-up modems they sell, and that they cannot assure that they will continue
to
sell our products. Less advantageous terms of sales, decreasing average selling
prices and reduced demand for our dial-up modems have resulted and may in the
future result in decreased net sales for dial-up modems. If we fail to replace
declining revenue from the sales of dial-up modems with the sales of our other
products, including our broadband modems, our business and results of operation
will be harmed.
Our
reliance on a limited number of customers for a large portion of our revenues
could materially harm our business and prospects.
Relatively
few customers have accounted for a substantial portion of our net sales. In
2005, our net sales to two companies each constituted over 10% of our net sales
and together these two customers accounted for 33% 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, reduction of
business, or less favorable terms for any of our significant customers. A
reduction or delay in orders from any of our significant customers, or a delay
or default in payment by any significant customer could materially harm our
business and prospects.
Our
operations outside North America are subject to a number of risks inherent
in
activities outside North America.
Our
sales
outside of North America continue to represent an increasingly significant
portion of our sales. Sales outside of North America have increased from 40%
of
net sales in 2002 to approximately 55% of our net sales in 2005, including
20%
in the UK and 22% in Turkey. Currently our operations are significantly
dependent on our operations outside North America, particularly sales of our
DSL
modems, and may be materially and adversely affected by many factors
including:
·
|
regulatory
and communications requirements and policy changes outside North
America;
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|
·
|
favoritism
toward local suppliers;
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|
·
|
delays
in the rollout of broadband services by cable and DSL service
providers;
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|
·
|
local
language and technical support requirements;
|
|
|
·
|
difficulties
in inventory management, accounts receivable collection and the
management
of distributors or representatives;
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|
|
·
|
difficulties
in staffing and managing foreign operations;
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|
·
|
political
and economic changes and disruptions;
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·
|
governmental
currency controls;
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|
·
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shipping
costs;
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|
·
|
currency
exchange rate fluctuations; and
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|
·
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tariff
regulations
|
We
anticipate that our sales outside North America will continue to account for
a
significant percentage of our net sales. If foreign markets for our current
and
future products develop more slowly than currently expected, our sales and
our
future results of operations may be harmed.
We
believe that our future success will depend in large part on our ability to
more
successfully penetrate the broadband modem markets, which have been challenging
markets, with significant barriers to entry.
With
the
shrinking of the dial-up modem market, we believe that our future success will
depend in large part on our ability to more successfully penetrate the broadband
modem markets, DSL and cable, and the VoIP market. These markets have been
challenging markets, with significant barriers to entry that have adversely
affected our sales to these markets. Although some cable and DSL modems are
sold
at retail, the high volume purchasers of these modems are concentrated in a
relatively few large cable, telecommunications, and Internet service providers
which offer broadband modem services to their customers. These customers,
particularly cable services providers, also have extensive and varied approval
processes for modems to be approved for use on their network. These approvals
are expensive, time consuming, and continue to evolve. Successfully penetrating
the broadband modem market therefore presents a number of challenges
including:
·
|
the
current limited retail market for broadband modems;
|
|
|
·
|
the
relatively small number of cable, telecommunications and Internet
service
provider customers that make up a substantial part of the market
for
broadband modems;
|
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|
·
|
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 Scientific
Atlanta.
|
Our
sales
of broadband products have been adversely affected by all of these factors.
Sales of our broadband products in European countries have fluctuated and may
continue to fluctuate due to approvals and delays in the deployment by service
providers of cable and DSL service in these countries. We cannot assure that
we
will be able to successfully penetrate these markets.
Our
failure to meet changing customer requirements and emerging industry standards
would adversely impact our ability to sell our products and
services.
The
market for PC communications products and high-speed broadband access products
and services is characterized by aggressive pricing practices, continually
changing customer demand patterns, rapid technological advances, emerging
industry standards and short product life cycles. Some of our product and
service developments and enhancements have taken longer than planned and have
delayed the availability of our products and services, which adversely affected
our sales and profitability in the past. Any significant delays in the future
may adversely impact our ability to sell our products and services, and our
results of operations and financial condition may be adversely affected. Our
future success will depend in large part upon our ability to:
·
|
identify
and respond to emerging technological trends and industry standards
in the
market;
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|
·
|
develop
and maintain competitive products that meet changing customer demands;
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·
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enhance
our products by adding innovative features that differentiate our
products
from those of our competitors;
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·
|
bring
products to market on a timely basis;
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|
|
·
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introduce
products that have competitive prices;
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|
·
|
manage
our product transitions, inventory levels and manufacturing processes
efficiently;
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|
·
|
respond
effectively to new technological changes or new product announcements
by
others; and
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|
·
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meet
changing industry standards.
|
Our
product cycles tend to be short, and we may incur significant non-recoverable
expenses or devote significant resources to sales that do not occur when
anticipated. Therefore, the resources we devote to product development, sales
and marketing may not generate material net sales for us. In addition, short
product cycles have resulted in and may in the future result in excess and
obsolete inventory, which has had and may in the future have an adverse affect
on our results of operations. In an effort to develop innovative products and
technology, we have incurred and may in the future incur substantial
development, sales, marketing, and inventory costs. If we are unable to recover
these costs, our financial condition and operating results could be adversely
affected. In addition, if we sell our products at reduced prices in anticipation
of cost reductions and we still have higher cost products in inventory, our
business would be harmed and our results of operations and financial condition
would be adversely affected.
We
have been selling our VoIP service for a limited period and there is no
guarantee that this service will gain broad market
acceptance.
We
have
only recently introduced our VoIP service. Given our limited history with
offering this service, there are many difficulties that we may encounter,
including technical hurdles, multiple and changing regulations and industry
standards, and other problems that we may not anticipate. To date, we have
not
generated significant revenue from the sale of our VoIP products and services,
and there is no guarantee that we will be successful in generating significant
revenues.
We
may be subject to product returns resulting from defects, or from overstocking
of our products. Product returns could result in the failure to attain market
acceptance of our products, which would harm our business.
If
our
products contain undetected defects, errors, or failures, we could
face:
·
|
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
may be unable to produce sufficient quantities of our products because we depend
on third party manufacturers. If these third party manufacturers fail to produce
quality products in a timely manner, our ability to fulfill our customer orders
would be adversely impacted.
We
use
contract manufacturers to partially manufacture our products. We use these
third
party manufacturers to help ensure low costs, rapid market entry, and
reliability. Any manufacturing disruption could impair our ability to fulfill
orders, and failure to fulfill orders would adversely affect our sales. Although
we currently use four contract manufacturers for the bulk of our purchases,
in
some cases a given product is only provided by one of these companies. The
loss
of the services of any of our significant third party manufacturers or a
material adverse change in the business of or our relationships with any of
these manufacturers could harm our business. Since third parties manufacture
our
products and we expect this to continue in the future, our success will depend,
in part, on the ability of third parties to manufacture our products cost
effectively and in sufficient quantities to meet our customer
demand.
We
are
subject to the following risks because of our reliance on third party
manufacturers:
·
|
reduced
management and control of component purchases;
|
·
|
reduced
control over delivery schedules, quality assurance and manufacturing
yields;
|
·
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lack
of adequate capacity during periods of excess demand;
|
·
|
limited
warranties on products supplied to us;
|
·
|
potential
increases in prices;
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·
|
interruption
of supplies from assemblers as a result of a fire, natural calamity,
strike or other significant event; and
|
·
|
misappropriation
of our intellectual property.
|
We
may be unable to produce sufficient quantities of our products because we obtain
key components from, and depend on, sole or limited source
suppliers.
We
obtain
certain key parts, components, and equipment from sole or limited sources of
supply. For example, we purchase most of our dial-up and broadband modem
chipsets from Conexant Systems, Agere Systems, and Analog Devices. Integrated
circuit product areas covered by 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. We believe the market for chipsets is currently experiencing
shortages and there are increased lead times for some chipsets. If we are unable
to obtain a sufficient supply of components from our current sources, we 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.
The
market for high-speed communications products and services has many competing
technologies and, as a result, the demand for our products and services is
uncertain.
The
market for high-speed communications products and services has a number of
competing technologies. For instance, Internet access can be achieved
by:
·
|
using
a standard telephone line and appropriate service for dial-up modems;
|
·
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ISDN
modems, or DSL modems, possibly in combination;
|
·
|
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, the market for
high-speed communication products and services is fragmented and evolving.
The
introduction of new products by competitors, market acceptance of products
based
on new or alternative technologies, or the emergence of new industry standards
could render and have in the past rendered our products less competitive or
obsolete. If any of these events occur, we may be unable to sustain or grow
our
business. Industry analysts believe that the market for our dial-up modems
will
continue to decline. If we are unable to increase demand for and sales of our
broadband modems, we may be unable to sustain or grow our business.
We
face significant competition, which could result in decreased demand for our
products or services.
We
may be
unable to compete successfully. A number of companies have developed, or are
expected to develop, products that compete or will compete with our products.
Furthermore, many of our current and potential competitors have significantly
greater resources than we do. Intense competition, rapid technological change
and evolving industry standards could result in less favorable selling terms
to
our customers, decrease demand for our products or make our products
obsolete.
Changes
in the accounting treatment of stock options may adversely affect our results
of
operations.
In
December 2004 the Financial Accounting Standard Board (FASB) issued Statement
of
Financial Accounting Standards (SFAS) No. 123R, “Share Based
Payment”,
which
is a revision of SFAS 123. SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values and does
not
permit pro forma disclosure as an alternative to financial statement
recognition. SFAS 123R will be effective for us beginning in the first quarter
of 2006. The adoption of the SFAS 123R fair value method may have a significant
adverse impact on our reported results of operations because the stock-based
compensation expense will be charged directly against our reported earnings.
On
October 26, 2005, we accelerated the vesting of all stock options previously
awarded to employees and officers that were scheduled to vest on or before
May
6, 2006. These stock options had exercise prices in excess of $1.76, the closing
price of our Common Stock on October 26, 2005, the effective date of the
acceleration. As a result of the acceleration, stock options to purchase 317,500
shares became exercisable immediately. These accelerated stock options represent
33% of the total outstanding unvested stock options and approximately 25% of
the
total outstanding stock options. The weighted average exercise price of the
accelerated stock options is $2.44 per share.
The
primary purpose of the acceleration of the vesting of these stock options is
to
reduce our future reported compensation expense upon the planned adoption of
SFAS 123R, “Share Based Payment” effective January 1, 2006. As a result of the
acceleration, there was no impact to our reported financial results through
December 31, 2005 and we expect to reduce the stock option expense we otherwise
would be required to record by approximately $130,000 total for the first two
quarters of 2006. We expect to incur stock compensation expense, a
non-cash charge, in the range of $220,000 to $650,000 during fiscal year
2006.
Changes
in existing regulations or adoption of new regulations affecting the Internet
could increase the cost of our products or otherwise affect our ability to
offer
our products and services over the Internet.
Congress
has adopted legislation that regulates certain aspects of the Internet,
including online content, user privacy, taxation, liability for third-party
activities and jurisdiction. In addition, a number of initiatives pending in
Congress and state legislatures would prohibit or restrict advertising or sale
of certain products and services on the Internet, which may have the effect
of
raising the cost of doing business on the Internet generally. Federal, state,
local and foreign governmental organizations are considering other legislative
and regulatory proposals that would regulate the Internet. We cannot predict
whether new taxes will be imposed on our services, and depending on the type
of
taxes imposed, whether and how our services would be affected thereafter.
Increased regulation of the Internet may decrease its growth and hinder
technological development, which may negatively impact the cost of doing
business via the Internet or otherwise harm our business.
New
regulations to reduce the use of hazardous materials in products scheduled
to be
implemented in 2006 could increase our manufacturing costs and harm our
business.
The
European Union and the US have announced plans to reduce the use of hazardous
materials, such as lead, in electronic equipment. The implementation of these
new requirements, currently scheduled to begin in Europe in 2006 and the US
in
2007, would require us and other electronics companies to change or discontinue
many products. We believe that our transition process to comply with these
new
requirements is difficult, and will typically increase our product costs by
from
zero to $.50 per unit, depending on the product. In addition, we may incur
additional costs involved with the disposal of inventory or with returned
products that do not meet the new requirements, which could further harm our
business.
Changes
in current or future laws or governmental regulations and industry standards
that negatively impact our products, services and technologies could harm our
business.
The
jurisdiction of the Federal Communications Commission, or the FCC, extends
to
the entire United States communications industry including our customers and
their products and services that incorporate our products. Our products are
also
required to meet the regulatory requirements of other countries throughout
the
world where our products and services are sold. Obtaining government regulatory
approvals is time-consuming and very costly. In the past, we have encountered
delays in the introduction of our products, such as our cable modems, as a
result of government certifications. We may face further delays if we are unable
to comply with governmental regulations. Delays caused by the time it takes
to
comply with regulatory requirements may result in cancellations or postponements
of product orders or purchases by our customers, which would harm our
business.
In
addition to reliability and quality standards, the market acceptance of our
VoIP
products and services is dependent upon the adoption of industry standards
so
that products from multiple manufacturers are able to communicate with each
other. Standards are continuously being modified and replaced. As standards
evolve, we may be required to modify our existing products or develop and
support new versions of our products. The failure of our products to comply,
or
delays in compliance, with various existing and evolving industry standards
could delay or interrupt volume production of our products, which could harm
our
business.
Future
legislation or regulation of Internet telephony could restrict our VoIP
business, prevent us from offering service, or increase our cost of doing
business.
VoIP
services currently have different regulations from traditional telephony in
most
countries including the US. Regulatory bodies including the FCC and regulators
in various states and countries may impose surcharges, taxes or new 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. The
imposition of any such additional fees, charges, taxes and regulations on IP
communications services could materially increase our costs and may limit or
eliminate our competitive pricing. 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. In May 2005 the
FCC
issued an order requiring interconnected VoIP providers to deliver 911 calls
to
the customer’s local emergency operator as a standard feature of the service. We
believe our VoIP products are capable of meeting the FCC requirements. In the
event our VoIP products do not meet the FCC requirements, we may need to modify
our products, which could increase our costs.
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 various Asian currencies including
the
Chinese renminbi could increase our product costs.
Our
future success will depend on the continued services of our executive officers
and key product development personnel.
The
loss
of any of our executive officers or key product development personnel, the
inability to attract or retain qualified personnel in the future, or delays
in
hiring skilled personnel could harm our business. Competition for skilled
personnel is significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition, the loss
of Frank B. Manning, our president and chief executive officer, or Peter Kramer,
our executive vice president, some other member of the senior management team,
a
key engineer or salesperson, or other key contributors, could harm our relations
with our customers, our ability to respond to technological change, and our
business.
We
may have difficulty protecting our intellectual property.
Our
ability to compete is heavily affected by our ability to protect our
intellectual property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements to
protect our intellectual property. The steps we take to protect our technology
may be inadequate. Existing trade secret, trademark and copyright laws offer
only limited protection. Our patents could be invalidated or circumvented.
We
have more intellectual property assets in some countries than we do in others.
In addition, the laws of some foreign countries in which our products are or
may
be developed, manufactured or sold may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. This
may
make the possibility of piracy of our technology and products more likely.
We
cannot assure that the steps that we have taken to protect our intellectual
property will be adequate to prevent misappropriation of our
technology.
We
could infringe the intellectual property rights of others.
Particular
aspects of our technology could be found to infringe on the intellectual
property rights or patents of others. Other companies may hold or obtain patents
on inventions or may otherwise claim proprietary rights to technology necessary
to our business. We cannot predict the extent to which we may be required to
seek licenses. We cannot assure that the terms of any licenses we may be
required to seek will be reasonable. We are often indemnified by our suppliers
relative to certain intellectual property rights; but these indemnifications
do
not cover all possible suits, and there is no guarantee that a relevant
indemnification will be honored by the indemnifying.
ITEM
7A.
We
invest
our cash in short-term money market instruments and certificates of deposit.
These investments are generally denominated in U.S. dollars and U.K. pounds.
Due
to the conservative nature of these instruments, we do not believe that we
have
a material exposure to interest rate or market risk. The investment portfolio
is
used to preserve our capital until it is required to fund operations or
acquisitions. None of these instruments are held for trading purposes. We do
not
own derivative financial instruments.
We
are
exposed to interest rate risk in the ordinary course of business. Our new
mortgage, effective March 30, 2006, has an interest rate equal to the federal
prime rate, which is 7.75% as of March 30, 2006, and the rate will adjust along
with the federal prime rate.
ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM
TECHNOLOGIES, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
Page
|
|
|
Index
to Consolidated Financial Statements
|
39
|
Report
of Independent Registered Public Accounting Firm
|
40
|
Consolidated
Balance Sheets as of December 31, 2004 and 2005
|
41
|
Consolidated
Statements of Operations for the years ended December 31, 2003,
2004, and
2005
|
42
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Loss for the
years
ended December 31, 2003, 2004, and 2005
|
43
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2003,
2004, and
2005
|
44
|
Notes
to Consolidated Financial Statements
|
45-60
|
Schedule
II: Valuation and Qualifying Accounts for the years ended December
31,
2003, 2004, and 2005
|
61
|
ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
were no changes in or disagreements with our accountants on accounting or
financial disclosure during the period covered by this report.
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, 2005 we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer
and
Chief Financial Officer, of the effectiveness of the design and operation of
our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934. Based upon that evaluation, our
Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in enabling us to record, process,
summarize and report information required to be included in our periodic SEC
filings within the required time period.
There
have been no changes in our internal control over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM
9B - OTHER INFORMATION
Our
corporate headquarters are located at 201 and 207 South Street, Boston,
Massachusetts. Approximately 11,000 square feet of this 62,000 square foot
facility is leased to third parties. We purchased these buildings in April
1993.
In January 2001 we received $6.0 million in financing by securing a mortgage
on
this property. On March 30, 2006 we paid the lender $1.166 million to pay down
the remaining balance of $4.841 million, and refinanced the balance of $3.675
million with a 15 year amortization for one year and a Maturity Date of April
10, 2007. At Zoom’s option,
the
mortgage may be extended for an additional year to April 10, 2008.
PART
III
ITEM
10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information
required by this item appears under the caption "Our Executive Officers" in
Part
1, Item 1 -- Business, and under the captions "Election of Directors", "Board
of
Directors" Meetings and Committees; Audit Committee", "Code of Ethics" and
"
Section 16(a) Beneficial Ownership Compliance " in our definitive proxy
statement for our 2006 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 2006 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, 2005
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our stockholders, and (ii) were
not
approved by our stockholders.
Equity
Compensation Plan Information.
|
|
Number
Of Securities
|
|
|
|
Number
Of Securities
|
|
|
|
To
Be Issued Upon
|
|
Weighted-Average
Exercise
|
|
Remaining
Available For
|
|
|
|
Exercise
Of
|
|
Price
Of Outstanding
|
|
Future
Issuance Under Equity
|
|
|
|
Outstanding
Options,
|
|
Options,
|
|
Compensation
Plans (excluding
|
|
Plan
Category
|
|
Warrants
And Rights
|
|
Warrants
And Rights
|
|
securities
reflected in column [a])
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plansapproved by security
holders(1)
|
|
|
744,000
|
|
$
|
2.3569
|
|
|
775,646
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders(2)
|
|
|
493,700
|
|
|
2.3646
|
|
|
190,100
|
|
Total....
|
|
|
1,237,700
|
|
$
|
2.3599
|
|
|
965,746
|
|
(1)
|
Includes
the following plans: 1990 Employee Stock Option Plan and 1991 Directors
Stock Option Plan, each as amended. Please see note 10 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 1,200,000 shares of our common stock have been authorized
for
issuance under the 1998 Plan.
|
The
additional information required by this item is incorporated by reference to
the
section entitled "Security Ownership of Certain Beneficial Owners and Management
" in our definitive proxy statement for our 2006 annual meeting of stockholders
to be filed with the SEC within 120 days after the close of our fiscal
year.
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Any
information required by this item may appear under the caption "Certain
Relationships and Related Transactions" in our Definitive Proxy Statement for
our 2006 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 2006 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 * [EXHIBITS
TO BE UPDATED. INCLUDE ANY AMENDMENTS TO MORTGAGE OR CREDIT
FACILITY]*
(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, filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (Reg. No. 333-126612) filed
with the
Commission on July 15, 2005. *
|
|
|
|
|
|
**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, filed as Exhibit 99.1
to the
Company's Registration Statement on Form S-8 (Reg. No. 333-97573),
filed
with the Commission on August 2, 2002. *
|
|
|
|
|
|
10.4
|
|
Lease
between Zoom Telephonics, Inc. and "E" Street Associates, filed
as Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter
ended June 30, 1996 (the "June 1996 Form 10-Q"). *
|
|
|
|
|
|
10.5
|
|
Form
of Indemnification Agreement, filed as Exhibit 10.6 to the June
1996 Form
10-Q. *
|
|
|
|
|
|
**10.6
|
|
Employment
Agreement, filed as Exhibit 10.9 to the Company's Annual Report
on Form
10-K for the fiscal year ended December 31, 1997. *
|
|
|
|
|
|
10.7
|
|
Mortgage,
Security Agreement and Assignment between Zoom and Wainwright Bank
&
Trust Company, filed as Exhibit 10.1 to the Company's Quarterly
Report on
Form 10-Q for the fiscal quarter ended March 31, 2001 (the "March
2001
Form 10-Q"). *
|
|
|
|
|
|
10.8
|
|
Commercial
Real Estate Promissory Note, between Zoom and Wainwright Bank & Trust
Company, filed as Exhibit 10.2 to the March 2001 Form 10-Q.
*
|
|
|
|
|
|
10.9
|
|
Form
of Non-Qualified Stock Option Agreement for Executive
Officers.*
|
|
|
|
|
|
10.10
|
|
Summary
of Directors' Compensation.*
|
|
|
|
|
|
10.11
|
|
Loan
and Security Agreement with Silicon Valley Bank, filed as Exhibit
10.1 to
the Company's Current Report on Form 8-K filed on March 22, 2005.
*
|
|
|
|
|
|
10.12
|
|
Letter
of Transmittal for Surrender of Capital Stock of Intermute, filed
as
Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2005.*
|
|
|
|
|
|
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.
|
|
Consent
of KPMG LLP, independent registered public accounting
firm.
|
ITEM
15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(Continued)
|
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. |
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 31, 2006 |
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 indicated.
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/
Frank B. Manning
|
|
Principal
Executive Officer and Chairman of the Board
|
March
31, 2006
|
Frank
B. Manning
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert A. Crist
|
|
Principal
Financial and Accounting Officer
|
March
31, 2006
|
Robert
A. Crist
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Peter R. Kramer
|
|
Director
|
March
31, 2006
|
Peter
R. Kramer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Bernard Furman
|
|
Director
|
March
31, 2006
|
Bernard
Furman
|
|
|
|
|
|
|
|
|
|
|
|
/s/
J. Ronald Woods
|
|
Director
|
March
31, 2006
|
J.
Ronald Woods
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Joseph Donovan
|
|
Director
|
March
31, 2006
|
Joseph
Donovan
|
|
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
40
|
Consolidated
Balance Sheets as of December 31, 2004 and 2005
|
41
|
Consolidated
Statements of Operations for the years ended December 31, 2003,
2004, and
2005
|
42
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Loss for the
years
ended December 31, 2003, 2004, and 2005
|
43
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2003,
2004, and
2005
|
44
|
Notes
to Consolidated Financial Statements
|
45-60
|
Schedule
II: Valuation and Qualifying Accounts for the years ended December
31,
2003, 2004, and 2005
|
61
|
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, 2004 and 2005, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss, and
cash
flows for each of the years in the three-year period ended December 31, 2005.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with 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. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Zoom Technologies, Inc.
and
subsidiary as of December 31, 2004 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2005 in conformity with U.S. generally accepted accounting
principles.
|
|
|
|
|
/s/
KPMG LLP |
|
|
|
Boston,
Massachusetts
March
31,
2006
|
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
ASSETS
|
|
2004
|
|
2005
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,438,596
|
|
$
|
9,081,122
|
|
Accounts
receivable, net of reserves for doubtful
|
|
|
|
|
|
|
|
accounts,
returns, and allowances of $1,359,455 in
|
|
|
|
|
|
|
|
2004
and $1,294,637 in 2005 (note 12)
|
|
|
3,349,781
|
|
|
2,630,859
|
|
Inventories
(note 5)
|
|
|
5,030,478
|
|
|
5,073,178
|
|
Prepaid
expense and other current assets
|
|
|
529,989
|
|
|
301,265
|
|
Total
current assets
|
|
|
18,348,844
|
|
|
17,086,424
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net (note 6)
|
|
|
2,703,208
|
|
|
2,600,660
|
|
Total
assets
|
|
$
|
21,052,052
|
|
$
|
19,687,084
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,006,819
|
|
$
|
3,140,593
|
|
Accrued
expense
|
|
|
1,275,088
|
|
|
788,427
|
|
Current
portion of long term debt (note 9)
|
|
|
229,555
|
|
|
4,889,928
|
|
Total
current liabilities
|
|
|
3,511,462
|
|
|
8,818,948
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion (note 9)
|
|
|
4,872,298
|
|
|
-
|
|
Total
liabilities
|
|
|
8,383,760
|
|
|
8,818,948
|
|
|
|
|
|
|
|
|
|
Commitments
(note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (note 10):
Common
stock, $0.01 par value.
|
|
|
|
|
|
|
|
Authorized
25,000,000 shares; issued 8,935,516 shares;
|
|
|
|
|
|
|
|
outstanding
8,927,116 and issued 9,355,366; outstanding
|
|
|
|
|
|
|
|
9,346,966
shares at December 31, 2004 and December 31, 2005,
respectively
|
|
|
89,355
|
|
|
93,554
|
|
Additional
paid-in capital
|
|
|
30,572,727
|
|
|
31,015,977
|
|
Retained
earnings (accumulated deficit)
|
|
|
(18,510,181
|
)
|
|
(20,627,318
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
523,713
|
|
|
393,245
|
|
Treasury
stock, at cost
|
|
|
(7,322
|
)
|
|
(7,322
|
)
|
Total
stockholders' equity
|
|
|
12,668,292
|
|
|
10,868,136
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
21,052,052
|
|
$
|
19,687,084
|
|
See
accompanying notes to consolidated financial statements.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2003, 2004 and 2005
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
sales (notes 12 and 16)
|
|
$
|
33,335,209
|
|
$
|
31,411,781
|
|
$
|
25,551,179
|
|
Cost
of goods sold
|
|
|
23,120,573
|
|
|
23,345,918
|
|
|
20,885,254
|
|
Gross
profit
|
|
|
10,214,636
|
|
|
8,065,863
|
|
|
4,665,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
5,270,585
|
|
|
4,800,165
|
|
|
4,059,318
|
|
General
and administrative
|
|
|
3,117,764
|
|
|
3,619,480
|
|
|
3,552,985
|
|
Research
and development
|
|
|
2,766,967
|
|
|
2,927,225
|
|
|
2,698,449
|
|
Total
operating expense
|
|
|
11,155,316
|
|
|
11,346,870
|
|
|
10,310,752
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(940,680
|
)
|
|
(3,281,007
|
)
|
|
(5,644,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
87,427
|
|
|
149,381
|
|
|
235,424
|
|
Interest
expense
|
|
|
(211,165
|
)
|
|
(211,213
|
)
|
|
(253,797
|
)
|
Other,
net
|
|
|
396,363
|
|
|
270,991
|
|
|
3,555,197
|
|
Total
other income (expense), net
|
|
|
272,625
|
|
|
209,159
|
|
|
3,536,824
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(668,055
|
)
|
|
(3,071,848
|
)
|
|
(2,108,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)(note 11)
|
|
|
-
|
|
|
-
|
|
|
9,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(668,055
|
)
|
$
|
(3,071,848
|
)
|
$
|
(2,117,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share (note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.08
|
)
|
$
|
(0.36
|
)
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
7,883,400
|
|
|
8,590,092
|
|
|
9,206,179
|
|
See
accompanying notes to consolidated financial statements.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
Retained
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Earnings
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid
In
|
|
(Accumulated
|
|
Comprehensive
|
|
Treasury
Stock
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit)
|
|
Income
(Loss)
|
|
Shares
|
|
Amount
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
7,860,866
|
|
$
|
78,608
|
|
$
|
28,166,607
|
|
$
|
(14,770,278
|
)
|
$
|
11,755
|
|
|
2,600
|
|
$
|
(2,196
|
)
|
$
|
13,484,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(668,055
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(668,055
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
322,854
|
|
|
-
|
|
|
-
|
|
|
322,854
|
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(345,201
|
)
|
Exercise
of stock options (note 10)
|
|
|
223,750
|
|
|
2,238
|
|
|
333,814
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
336,052
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,800
|
|
|
(5,126
|
)
|
|
(5,126
|
)
|
Balance
at December 31, 2003
|
|
|
8,084,616
|
|
|
80,846
|
|
|
28,500,421
|
|
|
(15,438,333
|
)
|
|
334,609
|
|
|
8,400
|
|
|
(7,322
|
)
|
|
13,470,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,071,848
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,071,848
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
189,104
|
|
|
-
|
|
|
-
|
|
|
189,104
|
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,882,744
|
)
|
Exercise
of stock options (note 10)
|
|
|
850,900
|
|
|
8,509
|
|
|
2,072,306
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
2,080,815
|
|
Balance
at December 31, 2004
|
|
|
8,935,516
|
|
|
89,355
|
|
|
30,572,727
|
|
|
(18,510,181
|
)
|
|
523,713
|
|
|
8,400
|
|
|
(7,322
|
)
|
|
12,668,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,117,137
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,117,137
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(130,468
|
)
|
|
-
|
|
|
-
|
|
|
(130,468
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,247,605
|
)
|
Exercise
of stock options (note 10)
|
|
|
419,850
|
|
|
4,199
|
|
|
443,250
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
447,449
|
|
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
|
|
See
accompanying notes to consolidated financial statements.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2003, 2004 and 2005
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(668,055
|
)
|
$
|
(3,071,848
|
)
|
$
|
(2,117,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Non-operating
gain on refund of deposit
|
|
|
(40,237
|
)
|
|
-
|
|
|
-
|
|
Gain
on sale of investment in Intermute
|
|
|
-
|
|
|
-
|
|
|
(3,495,516
|
)
|
Depreciation
and amortization
|
|
|
617,781
|
|
|
405,158
|
|
|
324,208
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
106,881
|
|
|
771,767
|
|
|
632,589
|
|
Inventories
|
|
|
2,011,334
|
|
|
(259,262
|
)
|
|
(45,887
|
)
|
Prepaid
expense and other current assets
|
|
|
643,276
|
|
|
(95,295
|
)
|
|
219,135
|
|
Accounts
payable and accrued expense
|
|
|
(430,629
|
)
|
|
97,969
|
|
|
626,798
|
|
Net
cash provided by (used in) operating activities
|
|
|
2,240,351
|
|
|
(2,151,511
|
)
|
|
(3,855,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of investment in Intermute
|
|
|
-
|
|
|
-
|
|
|
3,495,517
|
|
Purchases
of property, plant and equipment
|
|
|
(50,855
|
)
|
|
(189,381
|
)
|
|
(223,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(50,855
|
)
|
|
(189,381
|
)
|
|
3,271,541
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
(213,788
|
)
|
|
(217,966
|
)
|
|
(211,926
|
)
|
Exercise
of nonqualified stock options
|
|
|
336,052
|
|
|
2,080,815
|
|
|
447,449
|
|
Payments
to acquire treasury stock
|
|
|
(5,126
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
117,138
|
|
|
1,862,849
|
|
|
235,523
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(14,524
|
)
|
|
12,255
|
|
|
(8,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2,292,110
|
|
|
(465,788
|
)
|
|
(357,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
7,612,274
|
|
|
9,904,384
|
|
|
9,438,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
9,904,384
|
|
$
|
9,438,596
|
|
$
|
9,081,122
|
|
See
accompanying notes to consolidated financial statements.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2003, 2004 and 2005
(1)
INCORPORATION AND NATURE OF OPERATIONS
Zoom
Telephonics, Inc. (the "Company") was incorporated under the federal laws of
Canada (Canada Business Corporations Act). Its principal business activity,
the
design, production, and marketing of broadband and dial-up modems and other
communication-related products, is conducted through its wholly-owned
subsidiary, Zoom Telephonics, Inc. ("Zoom US"), a Delaware corporation based
in
Boston, Massachusetts.
In
February 2002 the Company completed a transaction in which it changed its
jurisdiction of incorporation from Canada to the State of Delaware effective
March 1, 2002. In connection with the change in jurisdiction, the Company
changed its name to Zoom Technologies, Inc. These changes were accomplished
through a process called a continuance under the laws of Canada and a
domestication under the laws of the State of Delaware, and were approved by
the
Company's shareholders at a stockholders' meeting on February 15,
2002.
As
part
of the continuation, each share of Zoom Telephonics, Inc. was automatically
converted into one share of Zoom Technologies, Inc.
(2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Presentation and Use of Estimates
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and are stated
in
US dollars.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results may differ from those estimates. Significant estimates made by the
Company include the useful lives of property, plant and equipment, the
recoverability of long-lived assets, the collectibility of accounts receivable,
the valuation allowance for deferred tax assets, the valuation of sales returns
and allowances, the reserves for obsolete and slow moving inventory, and the
write-downs of inventory valuation for the lower of cost or market.
(b)
Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Zoom Telephonics, Inc. All intercompany balances and
transactions have been eliminated in consolidation.
(c)
Cash and Cash Equivalents
The
Company considers all investments with original maturities of less than 90
days
from date of purchase to be cash equivalents.
(d)
Inventories
Inventories
are stated at the lower of cost or market, cost being determined using the
first-in, first-out (FIFO) method.
(e)
Property, plant and equipment
Property,
plant and equipment is stated and recorded at cost. Depreciation of property,
plant and equipment is provided by using the straight-line method at rates
sufficient to amortize the costs of the fixed assets over their estimated useful
lives.
(f)
Accounting for Impairment of Long-Lived Assets
The
Company uses the provisions of Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or asset group
may
not be recoverable.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset 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 the fair value of the assets. Assets
to be
disposed of are reported at the lower of the carrying amount or fair value
less
cost to sell.
(g)
Income Taxes
The
Company accounts for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carry forwards. Deferred tax assets
and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h)
Earnings (Loss) Per Common Share
Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
loss per share is computed by dividing net income by the weighted average number
of common shares and dilutive potential common shares outstanding during the
period. Under the treasury stock method, the unexercised options are assumed
to
be exercised at the beginning of the period or at issuance, if later. The
assumed proceeds are then used to purchase common shares at the average market
price during the period.
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
7,883,400
|
|
|
8,590,092
|
|
|
9,206,179
|
|
Net
effect of dilutive potential common
shares outstanding, based on
the treasury stock method
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diluted
weighted
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding
|
|
|
7,883,400
|
|
|
8,590,092
|
|
|
9,206,179
|
|
Potential
common shares for which inclusion would have the effect of increasing diluted
earnings per share (i.e., antidilutive) are excluded from the computation.
The
dilutive effect of options to purchase 206,414, 769,790 and 187,438 shares
of
common stock at December 31, 2003, 2004, and 2005, respectively, were
outstanding, but not included in the computation of diluted earnings per share
as their effect would be antidilutive.
(i)
Revenue Recognition
The
Company 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 earns a small amount of royalty that is included in its net sales,
primarily from internet service providers. The Company generally does not sell
software. The Company began selling services in 2004. The Company introduced
its
Global Village VoIP service in late 2004, but sales of those services in 2004
and 2005 were not material.
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 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 its 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.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
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 new product introductions, announced stock
rotations, announced customer store closings, etc. Management analyzes
historical returns, current economic trends, and changes in customer demand
and
acceptance of the Company's products when evaluating the adequacy of sales
return allowances. The Company's estimates for price protection refunds require
a detailed understanding and tracking by customer, by sales program. Estimated
price protection refunds are recorded in the same period as the announcement
of
a pricing change. Information from customer inventory-on-hand reports or from
direct communications with the customers is used to estimate the refund, which
is recorded as a reserve against accounts receivable and a reduction of current
period revenue. The Company's estimates for consumer mail-in rebates are
comprised of actual rebate claims processed by the rebate redemption centers
plus an accrual for an estimated lag in processing. The Company's estimates
for
store rebates are comprised of actual credit requests from the eligible
customers.
The
Company's VoIP service revenues were recorded as the end-user-customer consumed
billable VoIP services. The end-user-customer became a services customer by
electing to sign up for the Global Village billable service on the internet.
The
Company recorded revenue either as billable services were consumed or as a
monthly flat-fee service was billed.
(j)
Financial Instruments
Financial
instruments of the Company consist of cash and cash equivalents, accounts
receivable, accounts payable, accrued expense, and borrowings. Due to the short
term nature of these instruments or the corresponding variable interest rate
attached to the debt, the carrying amount of these financial instruments
approximates fair value.
(k)
Stock-Based Compensation
The
Company accounts for stock-based compensation under Statement of Accounting
Financial Standards (“SFAS”) No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). As permitted by SFAS 123, the Company measures compensation cost
in
accordance with Accounting Principles Board Opinion (APB) No. 25 (APB 25),
"Accounting for Stock Issued to Employees," and Financial Accounting Standards
Board (FASB) Interpretation No. 44 (FIN 44). Accordingly, no accounting
recognition is given to stock options granted at fair market value until they
are exercised. Upon exercise, net proceeds, including tax benefits realized,
if
any, are credited to equity.
The
following table illustrates the effect on net income (loss) and earnings (loss)
per share if the Company had applied the fair value recognition provisions
of
SFAS 123 to stock-based compensation.
|
|
YEAR
ENDED DECEMBER 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
income (loss), as reported
|
|
$
|
(668,055
|
)
|
$
|
(3,071,848
|
)
|
$
|
(2,117,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation
|
|
|
|
|
|
|
|
|
|
|
expense
determined under fair value based method
|
|
|
|
|
|
|
|
|
|
|
for
all awards, net of related tax effects
|
|
|
(372,009
|
)
|
|
(591,459
|
)
|
|
(782,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
$
|
(1,040,064
|
)
|
$
|
(3,663,307
|
)
|
$
|
(2,899,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
-- as reported
|
|
$
|
(0.08
|
)
|
$
|
(0.36
|
)
|
$
|
(0.23
|
)
|
Basic
- pro forma
|
|
$
|
(0.13
|
)
|
$
|
(0.43
|
)
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
-- as reported
|
|
$
|
(0.08
|
)
|
$
|
(0.36
|
)
|
$
|
(0.23
|
)
|
Diluted
- pro forma
|
|
$
|
(0.13
|
)
|
$
|
(0.43
|
)
|
$
|
(0.31
|
)
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
Weighted-average
assumptions: 2003-expected dividend yield 0.00%, risk-free interest rate of
1.82%, volatility 124% and an expected life of 2.0 years; 2004-expected dividend
yield 0.0%, risk-free interest rate of 2.32%, volatility 110% and an expected
life of 2.0 years; 2005-expected dividend yield 0.0%, risk-free interest rate
of
3.6%, volatility 91% and an expected life of 2.47 years.
(l)
Advertising Costs
Advertising
costs are expensed as incurred and reported in selling, general, and
administrative 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)
Investments in Affiliates
Investments
in which the Company has no significant influence over the investee are
accounted for under the cost method of accounting. Investments in which the
Company exercises significant influence but which the Company does not control
are accounted for under the equity method of accounting. Under the equity
method, investments are stated at cost and are adjusted for the Company's share
of earnings and losses, contributions and distributions
(n)
Foreign Currencies
The
Company generates a portion of its revenues in markets outside North America
and
principally in transactions that are denominated in foreign currencies, which
subjects its operations to exposure to foreign currency fluctuations. The impact
of currency fluctuations can be positive or negative in any given period. The
Company has no involvement with 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 (loss).
(o)
Warranty Costs
The
Company provides currently for the estimated costs that may be incurred under
its standard warranty obligations.
(p)
Shipping and Freight Costs
The
Company records the expense associated with customer-delivery shipping and
freight costs in selling expense. Approximately $5.5 million, $4.7 million,
and
$4.9 million of customer-delivery shipping and freight costs were included
in
selling expense in 2003, 2004, and 2005, respectively.
(3)
LIQUIDITY
On
December 31, 2005, we had working capital of $8.3 million including $9.1 million
in cash and cash equivalents.
In
2005
operating activities used $3.9 million in cash. Our net loss in 2005 was $2.1
million which was comprised of an operating loss of $5.6 million and a
non-operating gain from investing activities of $3.5 million. Sources of cash
from operations included a reduction of accounts receivable of $0.6 million,
an
increase of accounts payable and accrued expense of $0.6 million, non-cash
depreciation and amortization expense of $0.3 million, and a decrease of prepaid
expense of $0.2 million. Our decrease in accounts receivable reflected our
lower
sales, a $0.6 million bad debt write-off for a major customer, Granville Technologies,
Ltd., and a higher mix of sales with shorter payment terms. Our increase in
accounts payable was primarily related to the timing of inventory
receipts.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
In
2005
our net cash provided by investing activities was $3.3 million, which included
the $3.5 million received from our sale of an affiliate, Intermute, to Trend
Micro, Inc., a U. S. subsidiary of Trend Micro Japan. This was partially offset
by our $0.2 million investment in property, plant and equipment. Zoom may also
receive additional payments of up to approximately $3 million in 2006 in
connection with the InterMute sale if certain conditions and performance targets
are met.
In
2005
cash was provided by financing activities of $0.2 million consisting of proceeds
from the exercise of employee stock options of $0.4 million, partially offset
by
$0.2 million for monthly principal payments on our $6.0 million mortgage on
our
headquarters facility. Our mortgage is a 5-year balloon mortgage that is
amortized on a 20-year basis. The interest rate is adjusted annually in January
of each year based on the Federal
Home Loan Bank rate plus 2.5% per annum. In 2004 the interest rate was 3.99%.
As
of January 10, 2005 the rate of interest changed to 5.80%. We renegotiated
the
rate to 5.0% effective February 10, 2005. As of December 31, 2005 $4.872 million
was outstanding on this loan. The loan was scheduled to be paid in full on
January 10, 2006 and the final payment was deferred during negotiations for
a
new mortgage. On March 30, 2006 we paid the lender $1.166 million to pay down
the then balance of $4.841 million, and refinanced the balance of $3.675 million
with a new mortgage with a 15 year amortization for one year and a Maturity
Date
of April 10, 2007. The new mortgage rate is equal to the federal prime rate,
which is 7.75% as of March 30, 2006, and the rate will adjust along with the
federal prime rate. At Zoom’s option, the mortgage may be extended for an
additional year to April 10, 2008. The lender has retained a payment reserve
account equal to six months of principal and interest in a Certificate of
Deposit. The mortgage contains certain financial and non-financial covenants.
We
also believe that we should be able to sell our owned buildings on favorable
terms if we require additional liquidity. If we were to sell the portion of
our
owned buildings that includes our principal headquarters, we believe we would
be
able to lease back a portion of the sold property or otherwise find suitable
space for our principal headquarters on satisfactory terms.
On
March
16, 2005 we entered into a one year Loan and Security Agreement with Silicon
Valley Bank that provides for a revolving line of credit of up to $2 million.
The revolving line of credit can be used to (i) borrow under revolving loans
for
working capital and general corporate purposes, (ii) issue letters of credit,
(iii) enter into foreign exchange forward contracts, and (iv) support certain
cash management services. Revolving loans bear interest at a floating rate
of
interest equal to Silicon Valley Bank’s prime rate plus 0.5%. This interest rate
will be increased to Silicon Valley Bank’s prime rate plus 1.0% if we record two
consecutive quarters of combined losses. The rate at December 31, 2005 was
8.25%. The revolving line of credit terminated, as scheduled, on March 15,
2006.
There were no borrowings under the line for the entire one year contract. We
are
currently negotiating a new one year line with Silicon Valley Bank. There can
be
no assurance as to the outcome of these negotiations.
To
conserve cash and manage our liquidity, we continue to implement cost cutting
initiatives including the reduction of employee headcount and overhead costs.
The employee headcount was 154 at December 31, 2004 and has been reduced to
127
at December 31, 2005. 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 December 31, 2006. However, if we are unable to increase
our revenues, reduce or otherwise adequately control our expenses, or raise
capital, our longer-term ability to continue as a going concern and achieve
our
intended business objectives could be adversely affected. Moreover, our
liquidity could be significantly impaired if we are not able to refinance all
or
a significant portion of the mortgage and we are not otherwise able to sell
our
owned buildings for adequate consideration.
The
Company's total current assets at December 31, 2005 were $17.1 million and
current liabilities were $8.8 million. The Company did not have any long-term
debt at December 31, 2005. Management believes it has sufficient resources
to
fund its planned operations over the next 12 months. However, if the Company
is
unable to increase its revenues, reduce its expense, raise capital or sell
its
headquarters facility, 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
December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 123 (R), ” Share Based Payment: an amendment of FASB Statements
No. 123 and 95 ” (“SFAS No. 123R”). FASB Statement 123R requires companies to
recognize in the income statement, effective for annual periods beginning after
June 15, 2005, the grant-date fair value of stock options and other equity-based
compensation issued to employees, but expresses no preference for a type of
valuation model. Our financial position and results of operations will be
impacted in periods subsequent to 2005. We expect to incur stock compensation
expense in the range of $220,000 to $650,000 during fiscal year 2006
resulting from the adoption of SFAS No. 123R beginning January 1, 2006.
In
March
2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the
Staff’s interpretation of SFAS No. 123R. This interpretation provides the
Staff’s views regarding interactions between SFAS No. 123R and certain SEC rules
and regulations and provides interpretations of the valuation of share-based
payments for public companies. The interpretive guidance is intended to assist
companies in applying the provisions of SFAS No. 123R and investors and users
of
the financial statements in analyzing the information provided. We will follow
the guidance prescribed in SAB No. 107 in connection with our adoption of SFAS
No. 123R.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment
of
ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No.
43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new standard requires that items such
as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company in the first quarter of fiscal 2006, beginning
on
January 1, 2006. The Company expects that the adoption of SFAS 151 will not
have
a material impact on its consolidated results of operations
In
June 2005, the FASB issued Staff Position (“FSP”)
No. 143-1, Accounting
for Electronic Equipment Waste Obligations,
which
provides guidance on accounting for historical waste obligations associated
with
the European Union Waste, Electrical and Electronic Equipment Directive (“WEEE
Directive”). FSP No. 143-1 is effective for the Company upon adoption of the
WEEE Directive into law by the applicable European Union member country.
Individual European Union Member countries are in various stages of adopting
the
steps necessary to enact the legislation. These steps include, among others,
(i)
fully enacting their national laws relating to WEEE, (ii) completing
implementation of their administrative measures and programs, (iii) clarifying
the scope of products considered WEEE, an/or (iv) establishing pricing for
recycling of WEEE. No reserves were recorded at December 31, 2005 because we
believe that the impact of historical obligations were not material to the
Company.
(5)
INVENTORIES
Inventories
consist of the following at December 31:
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,595,730
|
|
$
|
2,333,949
|
|
Work
in process
|
|
|
920,075
|
|
|
648,034
|
|
Finished
goods
|
|
|
1,514,673
|
|
|
2,091,195
|
|
Inventory
|
|
$
|
5,030,478
|
|
$
|
5,073,178
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
(6)
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
309,637
|
|
$
|
309,637
|
|
|
-
|
|
Buildings
and improvements
|
|
|
2,767,517
|
|
|
2,842,766
|
|
|
31.5
years
|
|
Leasehold
improvements
|
|
|
483,039
|
|
|
492,617
|
|
|
5
years
|
|
Computer
hardware and software
|
|
|
3,624,027
|
|
|
3,677,616
|
|
|
3
years
|
|
Machinery
and equipment
|
|
|
1,837,064
|
|
|
1,836,453
|
|
|
5
years
|
|
Molds,
tools and dies
|
|
|
1,591,114
|
|
|
1,605,119
|
|
|
5
years
|
|
Office
furniture and fixtures
|
|
|
275,516
|
|
|
275,516
|
|
|
5
years
|
|
|
|
|
10,887,914
|
|
|
11,039,724
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(8,184,706
|
)
|
|
(8,439,064
|
)
|
|
|
|
|
|
$
|
2,703,208
|
|
$
|
2,600,660
|
|
|
|
|
(7)
COMMITMENTS AND CONTINGENCIES
(a)
Lease Obligations
The
Company leases a manufacturing and warehousing facility in Boston,
Massachusetts, an office facility in Fleet, United Kingdom, and a technical
support facility in Boca Raton, Florida. The Boston, Massachusetts lease expires
in August 2006. In September 2005 the Company entered into a two year office
lease at 2 Kings Road, Fleet, Hants, U.K In September 2002 we entered into
a
five year lease, as a tenant, for approximately 3,500 square feet at 951 Broken
Sound Parkway, Boca Raton, Florida, which expires in August 2007. Total rent
expense, under non-cancelable operating leases, was $757,821, $795,102, and
$733,760 for the years ended December 31, 2003, 2004 and 2005,
respectively.
The
Company's estimated future minimum rental payments, excluding executory costs,
under these operating leases are set forth in the table below.
Year
|
|
Total
|
|
|
|
|
|
2006
|
|
$ |
510,050
|
|
2007
|
|
$ |
74,646
|
|
(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 pending matters will not
materially and adversely affect the Company's business, financial position,
results of operations or cash flows. The Company had no Letters of Credit
outstanding at December 31, 2005.
(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.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
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)
COMPREHENSIVE INCOME (LOSS)
The
components of comprehensive income (loss), net of tax, are as
follows:
|
|
2003
|
|
2004
|
|
2005
|
|
Net
income (loss)..............……………………
|
|
$
|
(668,055
|
)
|
$
|
(3,071,848
|
)
|
$
|
(2,117,137
|
)
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
adjustment....................………………………
|
|
|
322,854
|
|
|
189,104
|
|
|
(130,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)....……………...
|
|
$
|
(345,201
|
)
|
$
|
(2,882,744
|
)
|
$
|
(2,247,605
|
)
|
Foreign
currency translation adjustment represented the entire balance within
accumulated other comprehensive income (loss) at December 31, 2003, 2004, and
2005.
(9)
LONG-TERM DEBT
On
January 10, 2001 the Company obtained a mortgage for $6 million on the real
estate property located at 201 and 207 South Street, Boston, Massachusetts.
The
loan was scheduled to be paid in full on January 10, 2006 and the final payment
was deferred during negotiations for a new mortgage. On March 30, 2006 we paid
the lender $1.166 million to pay down the then balance of $4.841 million, and
refinanced the balance of $3.675 million with a new mortgage with a 15 year
amortization for one year and a Maturity Date of April 10, 2007. The new
mortgage rate is equal to the federal prime rate, which is 7.75% as of March
30,
2006, and the rate will adjust along with the federal prime rate. At Zoom’s
option, the mortgage may be extended for an additional year to April 10, 2008.
The lender has retained a payment reserve account equal to six months of
principal and interest in a Certificate of Deposit. The mortgage contains
certain financial and non-financial covenants.
Future
minimum principal payments are due as follows at December 31, 2005.
Year
|
|
|
Total
|
|
|
|
|
2006
|
|
$ |
4,889,928
|
Total
|
|
$ |
4,889,928
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
(10) STOCK
OPTION PLANS
At
December 31, 2005 the Company had three stock option plans, which are described
below:
Employee
Stock Option Plan
The
Employee
Stock Option Plan (the "Employee Stock Option Plan") is for officers and certain
full-time and part-time employees of the Company. Non-employee directors of
the
Company are not entitled to participate under this plan. The Employee Stock
Option Plan provides for the availability of 3,300,000 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. Options outstanding
under this plan are as follows:
|
|
Number
of shares
|
|
Weighted
average exercise price
|
|
Balance
at December 31, 2002
|
|
|
1,248,000
|
|
$
|
3.54
|
|
Granted
|
|
|
310,000
|
|
|
1.95
|
|
Exercised
|
|
|
(37,000
|
)
|
|
1.65
|
|
Expired
|
|
|
(322,000
|
)
|
|
7.49
|
|
Balance
at December 31, 2003
|
|
|
1,199,000
|
|
|
2.13
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(631,000
|
)
|
|
2.67
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2004
|
|
|
568,000
|
|
|
1.52
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
335,000
|
|
|
2.45
|
|
Exercised
|
|
|
(267,000
|
)
|
|
1.03
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2005
|
|
|
636,000
|
|
$
|
2.21
|
|
The
following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding on December 31, 2005:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Price
|
|
$
1.95
|
|
|
301,000
|
|
|
0.80
|
|
$
|
1.95
|
|
|
301,000
|
|
$
|
1.95
|
|
2.45
|
|
|
335,000
|
|
|
2.30
|
|
|
2.45
|
|
|
167,500
|
|
|
2.45
|
|
$
1.95 to $ 2.45
|
|
|
636,000
|
|
|
1.60
years
|
|
$
|
2.21
|
|
|
468,500
|
|
$
|
2.13
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
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. Prior to the amendment to the Directors
Plan, eligible directors were automatically granted an option to purchase 6,000
shares of common stock on July 10 and January 10 of each year, beginning on
July
10, 1991. 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.
Options outstanding under this plan are as follows:
|
|
Number
of shares
|
|
Weighted
average
exercise
price
|
|
Balance
at December 31, 2002
|
|
|
72,000
|
|
$
|
2.21
|
|
Granted
|
|
|
54,000
|
|
|
0.95
|
|
Exercised
|
|
|
(36,000
|
)
|
|
1.18
|
|
Expired
|
|
|
(36,000
|
)
|
|
3.26
|
|
Balance
at December 31, 2003
|
|
|
54,000
|
|
|
0.94
|
|
Granted
|
|
|
72,000
|
|
|
3.81
|
|
Exercised
|
|
|
(30,000
|
)
|
|
0.85
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2004
|
|
|
96,000
|
|
|
3.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
72,000
|
|
|
2.82
|
|
Exercised
|
|
|
(24,000
|
)
|
|
1.05
|
|
Expired
|
|
|
(36,000
|
)
|
|
3.64
|
|
Balance
at December 31, 2005
|
|
|
108,000
|
|
$
|
3.20
|
|
The
following table summarizes information about fixed stock options under the
Directors Plan on December 31, 2005:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
Remaining
|
|
Weighted
Average
|
|
Number
|
|
Weighted
Average
|
|
Exercise
Prices
|
|
Outstanding
|
|
Contractual
Life
|
|
Exercise
Price
|
|
Exercisable
|
|
Exercise
Price
|
|
$2.32
|
|
|
36,000
|
|
|
1.5
|
|
$
|
2.32
|
|
|
0
|
|
$
|
0
|
|
3.07
|
|
|
24,000
|
|
|
0.5
|
|
|
3.07
|
|
|
24,000
|
|
|
3.07
|
|
3.31
|
|
|
24,000
|
|
|
1.0
|
|
|
3.31
|
|
|
24,000
|
|
|
3.31
|
|
4.55
|
|
|
24,000
|
|
|
0.1
|
|
|
4.55
|
|
|
24,000
|
|
|
4.55
|
|
$
2.32 to $ 4.55
|
|
|
108,000
|
|
|
0.9
years
|
|
$
|
3.20
|
|
|
72,000
|
|
$
|
3.64
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
1998
Employee Equity Incentive Stock Option Plan
The
1998
Employee Equity Incentive Stock Option Plan (the "1998 Plan") was adopted by
the
Board of Directors to attract and retain employees and provide an incentive
for
them to assist the Company to achieve long-range performance goals, and to
enable them to participate in the long-term growth of the Company. Non-employee
directors of the Company and certain officers of the Company are not entitled
to
participate under this plan. The authorized number of shares available for
issuance under the 1998 Plan is 1,200,000 shares of common stock. Shares of
common stock were registered for issuance under the 1998 Plan in accordance
with
the Securities Act of 1933. Under this plan, stock options may be granted at
the
discretion of the 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.
Options outstanding under this plan are as follows:
|
|
Number
of shares
|
|
Weighted
average
exercise
price
|
|
Balance
at December 31, 2002
|
|
|
780,500
|
|
$
|
3.16
|
|
Granted
|
|
|
240,000
|
|
|
1.85
|
|
Exercised
|
|
|
(150,750
|
)
|
|
1.54
|
|
Expired
|
|
|
(287,700
|
)
|
|
5.77
|
|
Balance
at December 31, 2003
|
|
|
582,050
|
|
|
1.76
|
|
Granted
|
|
|
68,500
|
|
|
3.64
|
|
Exercised
|
|
|
(189,900
|
)
|
|
1.95
|
|
Expired
|
|
|
(
70,075
|
)
|
|
2.19
|
|
Balance
at December 31, 2004
|
|
|
390,575
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
2.42
|
|
Exercised
|
|
|
(128,850
|
)
|
|
1.14
|
|
Expired
|
|
|
(
68,025
|
)
|
|
2.34
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
493,700
|
|
$
|
2.36
|
|
The
following table summarizes information about fixed stock options under the
1998
Plan outstanding on December 31, 2005:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
Remaining
|
|
Weighted
Average
|
|
Number
|
|
Weighted
Average
|
|
Exercise
Prices
|
|
Outstanding
|
|
Contractual
Life
|
|
Exercise
Price
|
|
Exercisable
|
|
Exercise
Price
|
|
$
1.85
|
|
|
168,700
|
|
|
0.8
|
|
$
|
1.85
|
|
|
168,700
|
|
$
|
1.85
|
|
2.42
|
|
|
268,000
|
|
|
2.3
|
|
|
2.42
|
|
|
131,750
|
|
|
2.42
|
|
2.77
|
|
|
5,000
|
|
|
1.7
|
|
|
2.77
|
|
|
2,500
|
|
|
2.77
|
|
3.56
to 3.59
|
|
|
47,000
|
|
|
1.9
|
|
|
3.59
|
|
|
23,500
|
|
|
3.59
|
|
4.83
|
|
|
5,000
|
|
|
1.1
|
|
|
4.83
|
|
|
2,500
|
|
|
4.83
|
|
$
1.85 to $ 4.83
|
|
|
493,700
|
|
|
1.8
years
|
|
$
|
2.36
|
|
|
328,950
|
|
$
|
2.23
|
|
On
December 31, 2005 there were 965,746 additional shares available for issuance
under all three stock option plans. The per share weighted-average fair value
of
stock options granted during, 2003, 2004, and 2005 was $1.14, $2.18, and $1.35
respectively, on the date of grant using the Black Scholes option-pricing model
(see note 2).
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
On
October 26, 2005, we accelerated the vesting of all stock options previously
awarded to employees and officers that were scheduled to vest on or before
May
6, 2006. These stock options had exercise prices in excess of $1.76, the closing
price of our Common Stock on October 26, 2005, the effective date of the
acceleration. As a result of the acceleration, stock options to purchase 317,500
shares became exercisable immediately. These accelerated stock options represent
33% of the total outstanding unvested stock options and approximately 25% of
the
total outstanding stock options. The weighted average exercise price of the
accelerated stock options is $2.44 per share.
The
primary purpose of the acceleration of the vesting of these stock options is
to
reduce our future reported compensation expense upon the planned adoption of
Statement of Financial Accounting Standards (SFAS) No. 123R, “Share Based
Payment” effective January 1, 2006. As a result of the acceleration, there was
no impact to our reported financial results through December 31, 2005 and we
expect to reduce the stock option expense we otherwise would be required to
record by approximately $130,000 total for the first two quarters of 2006.
We expect to incur stock compensation expense, a non-cash charge, in the range
of $220,000 to $650,000 during fiscal year 2006.
(11)
INCOME TAXES
Income
tax expense (benefit) consists of the following:
|
|
Current
|
|
Deferred
|
|
Total
|
|
Year
Ended December 31, 2003:
|
|
|
|
|
|
|
|
US
federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
State
and local
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$ |
- |
|
$
|
-
|
|
$
|
-
|
|
Year
Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
US
federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
State
and local
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$ |
- |
|
$
|
-
|
|
$
|
-
|
|
Year
Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
US
federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
State
and local
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
|
|
$
|
9,134
|
|
|
-
|
|
$
|
9,134
|
|
|
|
$
|
9,134
|
|
$
|
-
|
|
$
|
9,134
|
|
Income
tax expense (benefit) for the years ended December 31, 2003, 2004, and 2005,
and
differed from the amounts as computed by applying the US federal statutory
tax
rate of 34% to pretax loss as a result of the following:
|
|
2003
|
|
2004
|
|
2005
|
|
Computed
"expected" US tax benefit
|
|
$
|
(227,139
|
)
|
$
|
(1,044,428
|
)
|
$
|
(716,721
|
)
|
Increase
(reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
and local income taxes, net of federal income
tax benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Increase
(reduction) in federal valuation allowance
|
|
|
219,215
|
|
|
1,023,535
|
|
|
730,525
|
|
Other,
net
|
|
|
7,924
|
|
|
20,893
|
|
|
(4,670
|
)
|
Income
tax expense (benefit)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
9,134
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and deferred tax liabilities at December 31, 2003, 2004,
and
2005 are presented below:
|
|
2003
|
|
2004
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Inventories,
primarily non-deductible reserves
|
|
$
|
2,409,923
|
|
$
|
1,861,978
|
|
$
|
1,654,471
|
|
Accounts
receivable, primarily returns
|
|
|
|
|
|
|
|
|
|
|
and
allowances
|
|
|
483,057
|
|
|
270,041
|
|
|
303,392
|
|
Accrued
expenses, principally provisions
|
|
|
|
|
|
|
|
|
|
|
not
currently deductible
|
|
|
141,157
|
|
|
166,487
|
|
|
152,852
|
|
Net
operating loss carryforwards and credits
|
|
|
9,132,219
|
|
|
11,325,988
|
|
|
11,770,977
|
|
Depreciation
and amortization
|
|
|
1,340,233
|
|
|
1,616,459
|
|
|
988,263
|
|
Other
|
|
|
102,594
|
|
|
118,526
|
|
|
115,624
|
|
Total
gross deferred tax assets
|
|
|
13,609,183
|
|
|
15,359,479
|
|
|
14,985,579
|
|
Less
valuation allowance
|
|
|
(13,609,183
|
)
|
|
(15,359,479
|
)
|
|
(14,985,579
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
On
December 31, 2005 the Company had federal net operating loss carryforwards
of
approximately $31,854,000. These federal net operating losses are available
to
offset future taxable income, and are due to expire in years ranging
from 2018 to 2025. The Company had state net operating loss carryforwards
in various states of approximately $22,253,000. These state net operating losses
are available to offset future taxable income, and are primarily due to expire
in years ranging from 2006 through 2010. The Company recorded a deferred tax
asset valuation allowance against the portion of the deferred tax assets that
management believes may expire unused. The valuation allowance reduces deferred
tax assets to reflect the estimated amount of deferred tax assets, which will
more likely not be realized. The Company has recorded a valuation allowance
against its deferred tax assets because management believes that, after
considering all the available objective evidence, historical and prospective,
with greater weight given to historical evidence, it is more likely than not
that these assets will not be realized.
Subsequently
recognized tax benefits relating to valuation allowances for deferred tax
assets, if any, will be allocated as follows: $14,199,000 to continuing
operations and $787,000 to additional paid-in capital which is attributable
to
the exercise of employee stock options.
(12)
SIGNIFICANT CUSTOMERS
Relatively
few customers have accounted for a substantial portion of the Company’s net
sales. Two customers each comprised approximately 10% or more of net sales
for
the year ended December 31, 2005. Three customers each comprised approximately
10% or more of net sales for the years ended December 31, 2004 and 2003. In
the
year 2005 two customers comprised approximately 33% of net sales and, on
December 31, 2005, 19% of net accounts receivable. In the year 2004, three
customers comprised approximately 38% of net sales and, on December 31, 2004,
38% of net accounts receivable.
Zoom’s
third largest customer in the first six months of 2005 was Granville
Technologies, Ltd., which in late July 2005 went into “administration,” a U.K.
form of receivership. No sales to Granville were recorded in the third or
fourth
quarters of 2005. The administrators have decided to discontinue the company
as
a going concern and sell the business assets to help satisfy creditors. The
bad
debt write-off for 2005 was $0.6 million.
The
Company’s customers generally do not enter into long-term agreements obligating
them to purchase our products. The Company may not continue to receive
significant revenues from any of these or from other large customers. A
reduction or delay in orders from any of the Company’s significant customers, or
a delay or default in payment by any significant customer could materially
harm
the Company’s business and prospects. Because of the Company’s significant
customer concentration, its net sales and operating income could fluctuate
significantly due to changes in political or economic conditions, or the loss,
reduction of business, or less favorable terms for any of the Company's
significant customers.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
(13)
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 recorded a non-operating after-tax
gain
of $3.5 million in its second quarter ended June 30, 2005. The Company may
also
receive up to $3.0 million in additional payments in 2006 if certain conditions
and performance targets are met. The recording of the contingent gains from
these additional payments will not be made until and unless they are fully
earned.
(14)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
2003
|
|
2004
|
|
2005
|
|
Cash
paid during year for interest
|
|
$
|
215,571
|
|
$
|
210,941
|
|
$
|
252,797
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during year for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,253
|
|
The
tax
benefit of the exercise of stock options resulted in no increases to additional
paid-in capital in 2003, 2004 or 2005, since the Company believes that it is
more likely than not that these deferred tax assets will not be realized.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
(15)
DEPENDENCE ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS
The
Company produces its products using components or subassemblies purchased from
third-party suppliers.
Beginning
in 2002 the Company entered into supply arrangements with suppliers of some
components that included price and other concessions, including no-charge
components, for meeting certain purchase requirements or commitments. Under
these arrangements, the Company was committed to certain purchase requirements
over a period of approximately 30-months that commenced on January 1, 2002,
provided that those components were offered at competitive terms and prices.
At
December 31, 2004, those commitments had been met. In connection with these
arrangements, the Company became entitled to receive at least $3.0 million
of
no-charge components, based upon the supplier's market price for the components
in late 2001 and early 2002, and other pricing concessions based on our purchase
volumes. The Company received $1.2 million of these no-charge components in
the
fourth quarter of 2001. The Company received the remainder of the no-charge
components in the first quarter of 2002. The Company entered into a two-year
supply agreement with a major supplier in December 2004. The agreement runs
from
October 2, 2004 to September 29, 2006. Under these arrangements, the Company
is
entitled to receive no-charge product if certain purchase requirements or
commitments are met. In conjunction with this agreement, the Company received
$.2 million in no-charge components in the first quarter of 2005. The favorable
impact to the Company's statement of operations was calculated as a purchase
discount over the estimated total number of components acquired through the
supply agreements and recognized on a delayed basis as the products employing
the acquired components involved in the supply arrangements were sold. This
method of accounting was consistent each year, covering 2002 through 2005.
Currently
a substantial percentage of our manufacturing is performed by SameTime
Electronics ("SameTime”). 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 Arcadyan,
Asus Tech, Aztech, Billionton, Taicom, and Xavi to manufacture various
products.
(16)
SEGMENT AND GEOGRAPHIC INFORMATION
The
Company's operations are classified into one reportable segment. Substantially
all of the Company's operations and long-lived assets reside primarily in the
United States. The Company's net sales in North America and net sales to
locations outside North America for 2003, 2004, and 2005 were comprised as
follows:
|
|
2003
|
|
%
of Total
|
|
|
2004
|
|
%
of Total
|
|
|
2005
|
|
%
of Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
18,212,110
|
|
|
55
|
%
|
|
$
|
14,026,601
|
|
|
45
|
%
|
|
$
|
11,575,212
|
|
|
45
|
%
|
Outside
North America
|
|
|
15,123,099
|
|
|
45
|
%
|
|
|
17,385,180
|
|
|
55
|
%
|
|
|
13,975,967
|
|
|
55
|
%
|
Total
|
|
$
|
33,335,209
|
|
|
100
|
%
|
|
$
|
31,411,781
|
|
|
100
|
%
|
|
$
|
25,551,179
|
|
|
100
|
%
|
(17)
RETIREMENT PLAN
The
Company established a 401(k) retirement savings plan for employees in January
1996. Under the provisions of the plan, the Company matches 25% of an employee's
contribution, up to a maximum of $350 per employee per year. Total Company
contributions and expense in 2003, 2004, and 2005 were $29,587, $23,654, and
$20,953, respectively.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements (Continued)
(18)
SELECTED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA,
UNAUDITED)
The
following table sets forth selected quarterly financial information for the
years ended December 31, 2004 and 2005. The operating results for any given
quarter are not necessarily indicative of results for any future
period.
|
|
2004
Quarter Ended
|
|
2005
Quarter Ended
|
|
|
|
Mar.
31
|
|
Jun.
30
|
|
Sept.
30
|
|
Dec.
31
|
|
Mar.
31
|
|
Jun.
30
|
|
Sept.
30
|
|
Dec.
31
|
|
Net
sales
|
|
$
|
7,792
|
|
$
|
8,091
|
|
$
|
7,143
|
|
$
|
8,386
|
|
$
|
6,436
|
|
$
|
6,524
|
|
$
|
5,309
|
|
$
|
7,282
|
|
Costs
of goods sold
|
|
|
5,480
|
|
|
5,841
|
|
|
5,646
|
|
|
6,379
|
|
|
4,904
|
|
|
5,143
|
|
|
4,790
|
|
|
6,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
2,312
|
|
|
2,250
|
|
|
1,497
|
|
|
2,007
|
|
|
1,532
|
|
|
1,381
|
|
|
519
|
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,226
|
|
|
1,171
|
|
|
1,115
|
|
|
1,288
|
|
|
1,120
|
|
|
1,074
|
|
|
978
|
|
|
887
|
|
General
and administrative
|
|
|
954
|
|
|
1,064
|
|
|
780
|
|
|
822
|
|
|
823
|
|
|
1,731
|
|
|
314
|
|
|
686
|
|
Research
and development
|
|
|
678
|
|
|
665
|
|
|
722
|
|
|
862
|
|
|
749
|
|
|
696
|
|
|
664
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expense
|
|
|
2,858
|
|
|
2,900
|
|
|
2,617
|
|
|
2,972
|
|
|
2,692
|
|
|
3,501
|
|
|
1,956
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(546
|
)
|
|
(650
|
)
|
|
(1,120
|
)
|
|
(965
|
)
|
|
(1,160
|
)
|
|
(2,120
|
)
|
|
(1,437
|
)
|
|
(928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
(12
|
)
|
|
70
|
|
|
92
|
|
|
59
|
|
|
(145
|
)
|
|
3,541
|
|
|
62
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(558
|
)
|
|
(580
|
)
|
|
(1,028
|
)
|
|
(906
|
)
|
|
(1,305
|
)
|
|
1,421
|
|
|
(1,375
|
)
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(558
|
)
|
$ |
(580
|
)
|
$ |
(1,028
|
)
|
$ |
(906
|
)
|
$ |
(1,305
|
)
|
$
|
1,421
|
|
$ |
(1,375
|
)
|
$ |
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.07
|
)
|
$ |
(0.07
|
)
|
$ |
(0.12
|
)
|
$ |
(0.10
|
)
|
$ |
(0.15
|
)
|
$
|
0.16
|
|
$ |
(0.15
|
)
|
$ |
(0.09
|
)
|
Diluted
|
|
$ |
(0.07
|
)
|
$ |
(0.07
|
)
|
$ |
(0.12
|
)
|
$ |
(0.10
|
)
|
$ |
(0.15
|
)
|
$
|
0.15
|
|
$ |
(0.15
|
)
|
$ |
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,136
|
|
|
8,466
|
|
|
8,791
|
|
|
8,900
|
|
|
8,967
|
|
|
9,164
|
|
|
9,341
|
|
|
9,347
|
|
Diluted
|
|
|
8,136
|
|
|
8,466
|
|
|
8,791
|
|
|
8,900
|
|
|
8,967
|
|
|
9,397
|
|
|
9,341
|
|
|
9,347
|
|
Schedule
II
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended December 31, 2003, 2004 and 2005
|
|
Balance
at
|
|
Charged
|
|
Deductions
charged
|
|
Balance
|
|
|
|
Beginning
|
|
to
|
|
against
|
|
at
end
|
|
Description
|
|
of
year
|
|
Expense
|
|
Accounts
Receivable
|
|
of
year
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for doubtful accounts
|
|
$
|
59,406
|
|
$
|
210,006
|
|
$
|
147,498
|
|
$
|
121,914
|
|
Reserve
for price protection
|
|
|
664,332
|
|
|
168,095
|
|
|
722,866
|
|
|
109,561
|
|
Reserve
for sales returns
|
|
|
914,014
|
|
|
3,260,578
|
|
|
3,404,030
|
|
|
770,562
|
|
COOP
advertising and other allowances
|
|
|
1,008,656
|
|
|
2,648,885
|
|
|
2,869,373
|
|
|
788,168
|
|
Year
ended December 31, 2003
|
|
$
|
2,646,408
|
|
$
|
6,287,564
|
|
$
|
7,143,767
|
|
$
|
1,790,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for doubtful accounts
|
|
$
|
121,914
|
|
$
|
37,184
|
|
$
|
40,906
|
|
$
|
118,192
|
|
Reserve
for price protection
|
|
|
109,561
|
|
|
145,697
|
|
|
236,529
|
|
|
18,729
|
|
Reserve
for sales returns
|
|
|
770,562
|
|
|
2,658,411
|
|
|
2,822,674
|
|
|
606,299
|
|
COOP
advertising and other allowances
|
|
|
788,168
|
|
|
2,989,145
|
|
|
3,161,078
|
|
|
616,235
|
|
Year
ended December 31, 2004
|
|
$
|
1,790,205
|
|
$
|
5,830,437
|
|
$
|
6,261,187
|
|
$
|
1,359,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for doubtful accounts
|
|
$
|
118,192
|
|
$
|
761,703
|
|
$
|
650,041
|
|
$
|
229,854
|
|
Reserve
for price protection
|
|
|
18,729
|
|
|
213,913
|
|
|
209,566
|
|
|
23,076
|
|
Reserve
for sales returns
|
|
|
606,299
|
|
|
1,887,899
|
|
|
1,887,015
|
|
|
607,183
|
|
COOP
advertising and other allowances
|
|
|
616,235
|
|
|
2,258,906
|
|
|
2,440,617
|
|
|
434,524
|
|
Year
ended December 31, 2005
|
|
$
|
1,359,455
|
|
$
|
5,122,421
|
|
$
|
5,187,239
|
|
$
|
1,294,637
|
|
EXHIBIT
INDEX
(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, filed as Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (Reg. No. 333-126612) filed
with the
Commission on July 15, 2005. *
|
|
|
|
|
|
**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, filed as Exhibit 99.1
to the
Company's Registration Statement on Form S-8 (Reg. No. 333-97573),
filed
with the Commission on August 2, 2002. *
|
|
|
|
|
|
10.4
|
|
Lease
between Zoom Telephonics, Inc. and "E" Street Associates, filed
as Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter
ended June 30, 1996 (the "June 1996 Form 10-Q"). *
|
|
|
|
|
|
10.5
|
|
Form
of Indemnification Agreement, filed as Exhibit 10.6 to the June
1996 Form
10-Q. *
|
|
|
|
|
|
**10.6
|
|
Employment
Agreement, filed as Exhibit 10.9 to the Company's Annual Report
on Form
10-K for the fiscal year ended December 31, 1997. *
|
|
|
|
|
|
10.7
|
|
Mortgage,
Security Agreement and Assignment between Zoom and Wainwright Bank
&
Trust Company, filed as Exhibit 10.1 to the Company's Quarterly
Report on
Form 10-Q for the fiscal quarter ended March 31, 2001 (the "March
2001
Form 10-Q"). *
|
|
|
|
|
|
10.8
|
|
Commercial
Real Estate Promissory Note, between Zoom and Wainwright Bank & Trust
Company, filed as Exhibit 10.2 to the March 2001 Form 10-Q.
*
|
|
|
|
|
|
10.9
|
|
Form
of Non-Qualified Stock Option Agreement for Executive
Officers.*
|
|
|
|
|
|
10.10
|
|
Summary
of Directors' Compensation.*
|
|
|
|
|
|
10.11
|
|
Loan
and Security Agreement with Silicon Valley Bank, filed as Exhibit
10.1 to
the Company's Current Report on Form 8-K filed on March 22, 2005.
*
|
|
|
|
|
|
10.12
|
|
Letter
of Transmittal for Surrender of Capital Stock of Intermute, filed
as
Exhibit 99.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2005.*
|
|
|
|
|
|
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.
|
|
Consent
of KPMG LLP, independent registered public accounting
firm.
|
|
|
|
|
|
31.1
|
|
CEO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
EXHIBIT
INDEX (CONTINUED)
|
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
|