Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the fiscal year ended December 31, 2006
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, 2006 (computed by
reference to the closing price of such stock on The Nasdaq Capital Market on
such date) was approximately $8,632,475.
The
number of shares outstanding of the registrant's common stock, $0.01 par value,
as of March 14, 2007 was 9,346,966 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's proxy statement for the registrant's 2007 annual meeting
of
shareholders to be filed with the SEC in April 2007 are incorporated by
reference into Part III, Items 10-14 of this Form 10-K.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some
of the statements contained in this report are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the
Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties and other factors which may cause our or our industry's
actual results, performance or achievements to be materially different from
any
future results, performance or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to statements regarding:
·
|
the
sufficiency of our capital
resources;
|
·
|
market
acceptance of our products and
services;
|
·
|
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;
|
·
|
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;
|
·
|
the
availability of debt and equity
financing;
|
·
|
general
economic conditions;
|
·
|
trends
relating to our results of operations;
and
|
·
|
our
ability to service our debt
obligations.
|
In
some cases, you can identify forward-looking statements by terms such as "may,"
"will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our estimates and assumptions only as of the date of this
report. Except as otherwise required by law, we expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained in this report to reflect any change in
our
expectations or any change in events, conditions or circumstances on which
any
of our forward-looking statements are based. Factors that could cause or
contribute to differences in our future financial results include those
discussed in the risk factors set forth in Item 7 below as well as those
discussed elsewhere in this report. We qualify all of our
forward-looking statements by these cautionary
statements.
PART
I
ITEM
1 - BUSINESS
We
design, produce, market, sell, and support broadband and dial-up modems, Voice
over Internet Protocol or "VoIP" products and services, and other
communication-related products. Our primary objective is to build upon our
position as a leading producer of Internet access devices, and to take advantage
of a number of trends in communications including enhanced Internet access,
higher data rates, and voice calls traveling over the Internet.
Dial-up
modems were Zoom®'s highest revenue category for many years. Generally our sales
of dial-up modems have been declining and other product categories have become
increasingly important.
Our
dial-up modems connect personal computers and other devices to the local
telephone line for transmission of data, fax, voice, and images. Our dial-up
modems enable personal computers and other devices to connect to other computers
and networks, including the Internet and local area networks, at top data speeds
up to 56,000 bits per second.
In
response to increased demand for faster connection speeds, we have expanded
our
product line to include DSL modems, cable modems, and related broadband access
products. Our Asymmetric Digital Subscriber Line modems, known as ADSL modems
or
DSL modems, provide a high-bandwidth connection to the Internet through a
telephone line that typically connects to compatible DSL equipment in or near
the central telephone office. Zoom® is shipping a broad line of DSL modems,
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 VoIP products which enable broadband users to make phone
calls through the Internet, potentially lowering the cost of the call and
providing other benefits such as the ability to manage and track calls using
a
Web browser. 2005 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. Some of our
VoIP
products are targeted for sale to service providers, and some others are
targeted for sale through our sales channels to end-users. Some of the products
aimed at end-users include Zoom’s Web-based Chooser, which allows an end-user to
easily select a VoIP service and configure the Zoom hardware for that service.
Some of Zoom’s first VoIP products do not allow use of a Chooser, and these
products benefit from Zoom's Global Village™ VoIP service. Global Village's VoIP
service enables an end-user to make free VoIP phone calls to end-users of
several VoIP service providers, including Global Village, and also allows a
user
to pay to call almost any phone in the world. Zoom also has a private-label
VoIP
service called VoIP ASAP, which enables a service provider to offer VoIP service
using that service provider’s name and logo.
Zoom’s
product line includes wireless products, including wireless-G network products
and Bluetooth®
products. Generally Zoom’s revenues for wireless products have been growing.
We
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.
Products
General
The
vast
majority of our products facilitate communication of data through the Internet.
Our dial-up modems can also link computers, point-of-purchase terminals, or
other modem-equipped devices to each other through the traditional network
without using the Internet. Our cable modems use the cable-TV cable and our
DSL
modems use the local telephone line to provide a high-speed link to the
Internet. Our wireless-G network products typically communicate with a broadband
modem for access to the Internet. Some of our Bluetooth wireless products,
such
as our Bluetooth modem, are designed for Internet access. Our dialers can be
used to route voice calls to a VoIP network that may include the Internet.
Our
modems and dialers typically connect to a single phone line in a home, office,
or other location.
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 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 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
2004,
2005,and 2006 our dial-up modems and related products accounted for
approximately 52%, 40%, and 48% of our net sales, respectively.
DSL
Modems
Our
DSL
modems incorporate the ADSL standards that are currently most popular worldwide,
including ADSL2/2+, G.dmt, G.Lite, and ANSI T1.413 issue 2. In 2000 we designed
and shipped our first DSL modems, an external USB model and an internal PCI
model. In 2002 we introduced new USB and PCI models, and also introduced an
Ethernet model and a USB/Ethernet model with router features. In 2003 we
introduced a DSL modem with a built-in router, a USB port, and four switched
Ethernet ports. In September 2004 Zoom began shipping its first DSL modem with
built-in VoIP, which also included a router, a 4-port switch, and a firewall.
During the fourth quarter of 2004 Zoom introduced new modem hardware designs
for
its USB, Ethernet, Ethernet/USB, and 4-port router models, shifting to newer
modem chipsets and lowering Zoom's cost of goods. In March 2005 Zoom introduced
a DSL modem with wireless networking using the 802.11b and 802.11g standards,
a
4-port switching hub, router, and firewall. In 2006 Zoom began shipping a
software Install Assistant with most of its DSL modems to simplify end-user
installation. In January 2007 Zoom began shipping QOS Quality-of-Service
capability with some of its DSL modems, to provide a “fast lane” for
bandwidth-sensitive applications such as VoIP, gaming, and video. During 2007
Zoom expects to add QOS to more of its DSL products, to add other features
including TR-69 to some of its DSL products, and to continue Zoom’s efforts
toward lowering the cost of goods for its DSL products.
The
maximum speed for the ADSL standard is 8 megabits per second for short phone
lines, with lower speeds for longer phone lines. In 2005 Zoom began shipping
some models with hardware that supports the ADSL 2 and 2+ standards. These
modems work with central site equipment incorporating the ADSL standard, and
typically offer enhanced functionality for central site equipment incorporating
the ADSL 2 and ADSL 2+ standards. This enhanced functionality includes speeds
up
to 24 megabits per second for short phone lines, generally higher speeds for
most phone line lengths, the ability to transmit at high speeds for longer
phone
lines (extended "reach"), and other features including lower overall power
consumption and better diagnostics. Zoom now ships ADSL products with ADSL
2/2+
for Ethernet, Ethernet/USB, 4-port switch, and wireless models.
In
2004,
2005, and 2006 our DSL modems and related products accounted for approximately
38%, 53%, and 44% of our net sales.
Bluetooth®
Modems and Adapters
In
2003
we began shipping a Bluetooth modem, a Bluetooth USB adapter, and a Bluetooth
PC
Card adapter. Bluetooth is a wire-elimination technology that is increasingly
popular for mobile phone and computer products. In 2006 we introduced our
iHiFiTM
line of
Bluetooth products for transmission of music and other audio from one device
to
another - for instance, from an iPod or other sound source to a stereo or
powered speakers. In 2007 we plan to introduce a number of new iHiFi products,
including Bluetooth headphones and a transmitter that works for any iPod that
has an iPod docking station.
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
2006
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. Sales through the retail channel have been handicapped
by a
number of factors, including the fact that most cable service providers offer
cable modems with their service and the fact that some cable service providers
do not provide a financial incentive to a customer who purchases his own modem
rather than leasing it from the cable service provider. However, Zoom has been
expanding the number of U.S. retail outlets carrying Zoom’s cable modems, and we
should be positioned for increased cable modem sales in 2007.
Voice
over Internet Protocol
In
2004
we introduced a line of products that support VoIP or "Voice over Internet
Protocol". Our first VoIP products used the standards-based Session Initiation
Protocol, or SIP protocol, and are thus compatible with a wide range of other
SIP-compatible VoIP products and services. SIP allows devices to establish
and
manage voice calls on the Internet. Zoom’s VoIP product line includes the X5v,
the V3, and a line of Analog Telephone Adapters. The X5v includes a DSL modem,
a
router, a firewall, a 4-port switching hub, Zoom’s TelePort, and other features.
The V3 has the same features as the X5v, except instead of having a built-in
DSL
modem, the V3 has an Ethernet port for connecting to the Ethernet port of an
external DSL modem or cable modem. Zoom’s Analog Telephone Adapters connect to a
router’s Ethernet port and to one or more telephones to provide those phones
with VoIP capabilities. Some of Zoom’s Analog Telephone Adapters include
TelePort.
Zoom’s
Teleport™ phone port lets an end-user plug in a normal phone to place and
receive voice calls over the Internet, or to place and receive calls over the
familiar switched telephone network. Because the TelePort typically routes
emergency calls over the familiar switched telephone network, those calls are
handled correctly without relying on proper handling by a VoIP service provider.
In addition, the TelePort can be used to provide a “second phone line” and to
provide other advantages.
Some
versions of these VoIP products are bundled with Global Village phone service,
a
Zoom-developed SIP-based service that includes a free VoIP phone service and
an
optional paid service for communicating with phones that can be reached through
the switched phone network. Other versions of Zoom’s VoIP products do not come
with Global Village service, since they are designed to be used by service
providers offering some other VoIP service. Global Village has a wide array
of
features for routing calls, recording voice mail, conference calling, and
tracking customer usage and costs. Global Village phone service helps Zoom
to
address the specific needs of its end-user, retailer, and service provider
customers. For instance, Zoom makes Global Village available in a number of
different languages and with a number of payment options to address specific
market needs. Global Village can be offered to end-users, but it can also be
offered to service providers either under the Global Village brand or as a
private-label VoIP service.
Some
of
our Analog Telephone Adapters (ATAs) for end-users include a Web-based Chooser
that allows the end-user to shop for a suitable VoIP service, select it, and
then automatically configure the ATA for that service. This is consistent with
Zoom’s goal of providing freedom of choice to its VoIP customers.
Zoom
devoted significant resources to the VoIP product area in 2004 through 2006,
and
we continue to devote considerable resources to VoIP hardware, firmware, and
test, and to Zoom's Global Village phone service.
In
2007
Zoom expects to improve and extend its VoIP product line by improving the
performance of its existing SIP products, introducing new multiple-phone-port
SIP products, and introducing its first SkypeTM
products. While SIP has been the most successful approach to VoIP for enterprise
use and for VoIP offerings by telephone companies, Skype has been most
successful for end-users using personal computers. We believe that Skype has
tens of millions of active users worldwide. In 2007 we expect to introduce
at
least two Skype products. One is an adapter that plugs into the USB port of
a PC
and allows the use of a normal corded or cordless phone, and one is a wireless
PC headset that lets a user switch easily between phone calls and
music.
Wireless
Local Area Networking
In
2005
Zoom began shipping DSL modems with Wireless-G local area network capability
and
introduced other Wireless-G products, including USB and PC Card clients, a
wireless access point, and a wireless gaming adapter. In late 2006 Zoom
introduced a Wireless-G router and a Wireless-G PCI client. Zoom is considering
extensions of its wireless local area network product line, and is also
considering other local area network products including powerline networking
products.
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 needed to change their manufacturing processes and component
choices to conform to RoHS. Zoom has completed the work required to affect
this
change for products where it is practical to make this change, including almost
all of Zoom’s high-volume products.
CEC
Appliance Efficiency Regulations
The
California Energy Commission (CEC) has rules that will affect many of our
products manufactured on or after July 1, 2007. These rules apply to our
products with power cubes, which typically plug into an AC outlet and provide
low-voltage AC or DC to a modem or other device. CEC rules will require that
the
power cubes used in our products be highly efficient, so that most of the input
energy is used by our device and not dissipated as heat. This typically requires
a power cube that costs about $1.50 more per unit than the power cubes we
currently use, resulting in a smaller, lower-weight power cube that will reduce
the customer’s energy usage for the power cube. Because California is the
largest state in the US and because many of our customers have sales outlets
in
California, we are planning to meet the CEC rules for all our significant US
products. This may negatively impact our gross profit per unit, and may reduce
our shipping costs for some customers.
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
2006 one customer, Dixon’s Store Group, accounted for 10% or more of our total
net sales. Two customers each accounted for 9% of total net sales. Together
these three customers accounted for 30% of our total net sales.
Distributors
and Retailers outside North America
In
markets outside North America we sell and ship our products primarily to
independent distributors and retailers. Our European high-volume retailers
include Dixons Store Group, a major customer, and many others. Our revenues
from
sales outside North America were $17.4 million in 2004, $14.0 million in 2005,
and $8.0 million in 2006. Approximately 47%, 37%, and 46% of our net sales
outside North America in 2004, 2005, and 2006, respectively, were to customers
in the United Kingdom. Sales to Turkey accounted for 28%, 40%, and 17% of our
net sales outside North America in 2004, 2005, and 2006, respectively. We
believe sales growth outside North America will continue to require substantial
additional investments of resources for product design and testing, regulatory
approvals, native-language instruction manuals and software, packaging, sales
support, and technical support. We have made this investment in the past for
many countries, and we expect to make this investment for many countries and
products in the future. Areas of focus include Western Europe, Eastern Europe,
the Middle East, and Latin America.
North
American High-volume Retailers and Distributors
In
North
America we reach the modem retail market primarily through high-volume
retailers. Our North American retailers include Staples, a major customer,
and
many others. Our revenues from sales in North America were $14.0 million in
2004, $11.6 million in 2005, and $10.3 million in 2006. Although we offer a
number of our products, including DSL modems and cable modems, through
high-volume retailers in North America, 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, and in early 2007 we began supplying a cable
modem and a DSL modem to Best Buy.
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 our major customers
Ingram Micro and Tech Data, and several others.
Internet
and Telephone 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 will continue to offer some of our VoIP products and services to telephone
service providers.
System
Integrators and Original Equipment Manufacturers
Our
system integrator and OEM customers sell our products under their own name
or
incorporate our products as a component of their systems. We seek to be
responsive to the needs of these customers by providing on-time delivery of
high-quality, reliable, cost-effective products with strong engineering and
sales support. We believe 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 office 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, Web advertising, trade shows, and public
relations.
We
attempt to develop quality products that are user-friendly and require minimal
support. We typically support our claims of quality with product warranties
of
one to seven years, depending upon the product. To address the needs of those
end-users of our products who require assistance, we have our own staff of
technical specialists who currently provide telephone support six days per
week.
Our technical support specialists also maintain a significant Internet support
facility that includes email, firmware and software downloads, and the
SmartFacts™ Q&A search engine. In 2001 we expanded our European technical
support to enable users in other countries to access support in languages other
than English. This support is generally provided by our support staff in Boston
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 modems and other chipsets that
incorporate sophisticated technology from third parties, thereby eliminating
the
need for us to develop this technology in-house. As of December 31, 2006 we
had
14 employees engaged primarily in research and development. Our research and
development team performs electronics hardware design and layout, mechanical
design, prototype construction and testing, component specification, firmware
and software development, VoIP service development, product testing, foreign
and
domestic regulatory approval efforts, end-user and internal documentation,
and
third-party software selection and testing.
During
2004, 2005, and 2006 we expended $2.9 million, $2.7 million, and $2.2 million
respectively on research and development activities.
Manufacturing
and Suppliers
Our
products are currently designed for high-volume automated assembly to help
assure reduced costs, rapid market entry, short lead times, and reliability.
High-volume assembly typically occurs in China, Taiwan, or Korea. Our contract
manufacturers and original design manufacturers typically obtain some or all
of
the material required to assemble the products based upon a Zoom Technologies
Approved Vendor List and Parts List. Our manufacturers typically insert parts
onto the printed circuit board, with most parts automatically inserted by
machine, solder the circuit board, and in-circuit test the completed assemblies.
Functional test and packaging are sometimes performed by the contract
manufacturer. For the United States and many other markets, functional test
and
packaging are more commonly performed at our manufacturing facilities in North
America, allowing us to tailor the packaging and its contents for our customers
immediately before shipping. We also perform circuit design, circuit board
layout, and strategic component sourcing at our North American facility.
Wherever the product is built, our quality systems are used to help assure
that
the product meets our specifications.
In
late
2006 we moved our North American manufacturing facility from Boston,
Massachusetts to Tijuana, Mexico. This was a highly challenging move, since
it
dramatically changed our personnel, facilities, infrastructure, and logistics.
The reason we made the move was to reduce our personnel cost, facilities cost,
and the costs associated with shipping from Asia to North America. This move
caused production delays during the latter part of 2006, and these delays forced
us to incur high costs for air freight. While we continue to experience
challenges associated with the Tijuana facility, it is running fairly smoothly
now and we are cautiously optimistic that this facility will lower our future
cost of goods.
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 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 RoHS and CEC rules discussed above, which affect component
sourcing, product manufacturing, sales, and marketing.
Competition
The
communications network access industry is intensely competitive and
characterized by aggressive pricing practices, continually changing customer
demand patterns and rapid technological advances and emerging industry
standards. These characteristics result in frequent introductions of new
products with added capabilities and features, and continuous improvements
in
the relative functionality and price of modems and other PC communications
products. Our operating results and our ability to compete could be adversely
affected if we are unable to:
·
|
successfully
and accurately anticipate customer
demand;
|
·
|
manage
our product transitions, inventory levels, and manufacturing processes
efficiently;
|
·
|
distribute
or introduce our products quickly in response to customer demand
and
technological advances;
|
·
|
differentiate
our products from those of our competitors;
or
|
·
|
otherwise
compete successfully in the markets for our
products.
|
Some
of
our primary competitors by product group include the following:
·
|
DSL
modem competitors:
2Wire, 3Com, Actiontec, Airties, Asus, Aztech, Cisco Systems (Linksys
division), D-Link, Netgear, Netopia, Sagem, Siemens (formerly Efficient
Networks), Thomson, US Robotics, Westell, Xavi, and ZyXEL
Communications.
|
·
|
Dial-up
modem competitors:
Best Data, Creative Labs, Lite-On, Sitecom, and US
Robotics.
|
·
|
Cable
modem competitors: Arris
Systems, Cisco Systems (Linksys and Scientific Atlanta divisions),
D-Link,
Hon Hai Network Systems (formerly Ambit Microsystems), Motorola,
Netgear,
SMC Networks, Terrayon, and Thomson
|
·
|
VoIP
hardware competitors:
Cisco Systems (Linksys division), Digium, D-Link, Draytek, Grandstream,
Mediatrix, Snom, Zyxel, and 8x8.
|
Many
of
our competitors and potential competitors have more extensive financial,
engineering, product development, manufacturing, and marketing resources than
we
do.
The
principal competitive factors in our industry include the
following:
·
|
product
performance, features, reliability and quality of
service;
|
·
|
product
availability and lead times;
|
·
|
size
and stability of operations;
|
·
|
breadth
of product line and shelf space;
|
·
|
sales
and distribution capability;
|
·
|
technical
support and service;
|
·
|
product
documentation and product warranties;
|
·
|
relationships
with providers of broadband access services;
and
|
·
|
compliance
with industry standards.
|
We
believe we are able to provide a competitive mix of the above factors for
dial-up modems, particularly when they are sold through retailers, computer
product distributors, and small to medium sized Internet service providers
and
system integrators. We are less successful in selling directly to large
telephone companies and other large providers of broadband access
services.
DSL
and
cable modems transmit data at significantly faster speeds than dial-up modems,
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 large cable service providers. We
believe a small fraction of new US cable modem placements in 2006 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 DSL modem models
into
retailer Dixons Store Group.
Successfully
penetrating the broadband modem market presents a number of challenges,
including:
·
|
The
current limited retail market for broadband
modems;
|
·
|
The
relatively small number of cable, telecommunications and Internet
service
providers that make up the majority of the market for broadband
modems;
|
·
|
The
significant bargaining power of these large volume
purchasers;
|
·
|
The
time-consuming, expensive and uncertain approval processes of the
various
cable and DSL service providers; and
|
·
|
The
strong relationships with service providers enjoyed by some incumbent
equipment providers, including Motorola and Cisco Systems for cable
modems.
|
The
use
of the Internet to provide voice communications services is a relatively recent
market development. A substantial number of companies have emerged to provide
VoIP products and services, and many of these companies have more extensive
financial, engineering, product development, and marketing resources than we
do.
The principal competitive factors in the VoIP market include: price, brand
recognition, service and support, features, distribution, and reliability.
Competitors for our current VoIP hardware products are listed above. Competitors
for our Skype VoIP products will include a large number of companies worldwide,
including Actiontec, Cisco Systems (Linksys division), D-Link, Motorola,
Sennheiser, TeleVoIP, and U.S. Robotics.
Competitors
for our VoIP service include AT&T, iConnectHere, Net2Phone, Voicepulse,
Vonage and 8x8, as well as incumbent telephone carriers and other providers
of
traditional telephone service. Many of our competitors have greater name
recognition and resources than we have and may be better positioned to more
aggressively develop, promote and sell their products, including by offering
more attractive pricing policies and bundled service arrangements. In addition,
if telecommunications rates continue to decrease, any competitive pricing
advantage of our services may be diminished or eliminated. We cannot assure
that
we will be able to compete effectively.
Intellectual
Property Rights
We
rely
primarily on a combination of copyrights, trademarks, trade secrets and patents
to protect our proprietary rights. We have trademarks and copyrights for our
firmware (software on a chip), printed circuit board artwork, instructions,
packaging, and literature. We also have nine patents. The patents that have
been
issued expire between 2011 and 2015. We cannot assure that any patent
application will be granted or that any patent obtained will provide protection
or be of commercial benefit to us, or that the validity of a patent will not
be
challenged. Moreover, we cannot assure that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop comparable or superior technologies.
We
license certain technologies used in our products, typically rights to bundled
software, on a non-exclusive basis. In addition we purchase chipsets that
incorporate sophisticated technology. We have received, and may receive in
the
future, infringement claims from third parties relating to our products and
technologies. We investigate the validity of these claims and, if we believe
the
claims have merit, we respond through licensing or other appropriate actions.
Certain of these past claims have related to technology included in modem
chipsets. We forwarded these claims to the appropriate vendor. If we or our
component manufacturers were unable to license necessary technology on a
cost-effective basis, we could be prohibited from marketing products containing
that technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action taken
against it. Where possible we attempt to receive patent indemnification from
chipset suppliers and other appropriate suppliers, but the extent of this
coverage varies and enforcement of this indemnification may be difficult and
costly.
Government
Regulation
Regulatory
Approvals, Certifications and Other Industry Standards
Our
modems and related products sold in the U.S are required to meet United States
government regulations, including regulations of the United States Federal
Communications Commission, known as the FCC, which regulates equipment, such
as
modems, that connects to the public telephone network. The FCC also regulates
the electromagnetic radiation and susceptibility of communications equipment.
In
addition, in order for our broadband products to be qualified for use with
a
particular broadband Internet service, we are often required to obtain approvals
and certifications from the actual cable, telephone or Internet service provider
and from CableLabs® for cable modems. In addition to U.S. regulations, many of
our products sold abroad require us to obtain specific regulatory approvals
from
foreign regulatory agencies for matters such as electrical safety,
country-specific telecommunications equipment requirements, and electromagnetic
radiation and susceptibility requirements. We submit products to accredited
testing laboratories and, when required, to specific foreign regulatory
agencies, to receive approvals for our products based on the test standards
appropriate to the target markets for a given product. We expect to continue
to
seek and receive approvals for new products to allow us to reach a large number
of countries throughout the world, including countries in the Americas, Europe,
Asia, and Africa. The regulatory process can be time-consuming and can require
the expenditure of substantial resources. We cannot assure that the FCC or
foreign regulatory agencies will grant the requisite approvals for any of our
products on a timely basis, if at all.
United
States and foreign regulations regarding the manufacture and sale of electronics
devices are subject to change. On July 1, 2006 changes were implemented by
the
European Union to reduce the use of hazardous materials, such as lead, in
electronic equipment. As discussed above, the implementation of these
requirements caused Zoom and other electronics companies to change or
discontinue many of its European products. As discussed above, the California
Energy Commission’s Appliance Efficiency Regulations will affect the power cube
supplied with some of Zoom’s US products.
In
addition to reliability, quality and content standards, the market acceptance
of
our products and services is dependent upon the adoption of industry standards
so that products from multiple manufacturers are able to communicate with each
other. Our products and services, particularly our VoIP products and services,
rely heavily on a variety of communication, network and voice compression
standards to interoperate with other vendors' equipment. There is currently
a
lack of agreement among industry leaders about which standard should be used
for
a particular VoIP application, and about the definition of the standards
themselves. There is significant and growing consensus to use SIP for VoIP
telephony, but there are important exceptions. One exception is Skype, which
uses a proprietary protocol. Another exception is Packet Cable, which is popular
with cable service providers. Another complication is that some VoIP services
continue to evolve. The failure of our products and services to comply with
various existing and evolving standards could delay or interrupt volume
production of our VoIP telephony or other new products and services, expose
us
to fines or other imposed penalties, or adversely affect the perception and
adoption rates of our products and services, any of which could harm our
business.
Internet
Telephony Services
The
use
of the Internet and private IP networks to provide VoIP services is a relatively
recent development. Although providing such services is currently permitted
and
largely unregulated within the U.S., several foreign governments have adopted
laws and regulations that could restrict or prohibit the providing of VoIP
services. More aggressive domestic or international regulation of the Internet
in general, and Internet telephony providers and services specifically, may
adversely affect our ability to introduce and market our VoIP services and
products successfully.
Our
ability to provide VoIP communications services on the terms we currently
provide arise in large part from the fact VoIP services are not currently
subject to the same regulation as traditional telephony. Because these services
are not currently regulated to the same extent as traditional telephony, VoIP
providers can currently avoid paying charges that traditional telephone
companies must pay. Local exchange carriers are lobbying the FCC and the states
to regulate VoIP on the same basis as traditional telephone services. The FCC
and several states are examining this issue. If the FCC or any state determines
to regulate VoIP, they may impose surcharges, taxes or additional regulations
upon providers of Internet telephony. These surcharges could include access
charges payable to local exchange carriers to carry and terminate traffic,
contributions to the Universal Service Fund (USF) or other charges. Regulations
requiring compliance with the Communications Assistance for Law Enforcement
Act
(CALEA), or provision of the same type of 911 services as required for
traditional telecommunications providers could also place a significant
financial burden on us depending on the technical changes required to
accommodate the requirements. The imposition of any such additional fees,
charges, taxes and regulations on IP communications services could materially
increase our costs, require us to modify our service, delay our products, or
impair our ability to offer competitive pricing.
In
many
countries outside the U.S. in which we operate or our services are sold, the
status of the laws that may relate to our VoIP services is unclear. We cannot
be
certain that we will be able to comply with existing or future requirements,
or
that we will be able to continue to be in compliance with any such requirements.
Our failure to comply with these requirements could have a material adverse
affect on our ability to continue to offer our VoIP service in these
jurisdictions.
Regulation
of the Internet
In
addition to regulations addressing our modems and related products and our
Internet telephony services, other regulatory issues relating to the Internet
in
general could affect our ability to provide our services. Congress has adopted
legislation that regulates certain aspects of the Internet, including online
content, user privacy, taxation, liability for third-party activities and
jurisdiction. In addition, a number of initiatives pending in Congress and
state
legislatures would prohibit or restrict advertising or sale of certain products
and services on the Internet, which may have the effect of raising the cost
of
doing business on the Internet generally.
Federal,
state, local and foreign governmental organizations are considering other
legislative and regulatory proposals that would regulate the Internet. We cannot
predict whether new taxes will be imposed on our services, and depending on
the
type of taxes imposed, whether and how our services would be affected
thereafter. Increased regulation of the Internet may decrease its growth and
hinder technological development, which may negatively impact the cost of doing
business via the Internet or otherwise harm our business.
Backlog
Our
backlog as of March 7, 2007 was $0.7 million, and on March 8, 2006 was $0.7
million. Many orders included in backlog may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of our net sales for any future
period.
Employees
As
of
December 31, 2006 we had 69 full-time employees compared to 127 as of December
31, 2005. Of the decline of 58 employees, 47 were related to the outsourcing
of
our final assembly manufacturing operation to Mexico. The manufacturing
personnel in Mexico are employees of a third-party maquilidora and are not
included in our 2006 headcount. Of the 2006 total, 14 were engaged in research
and development, 19 were involved in purchasing, assembly, packaging, shipping
and quality control, 24 were engaged in sales, marketing and technical support,
and the remaining 12 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
|
|
58
|
|
Chief
Executive Officer, President and Chairman of the Board
|
Peter
R. Kramer
|
|
55
|
|
Executive
Vice President and Director
|
Robert
A. Crist
|
|
63
|
|
Vice
President of Finance and Chief Financial Officer
|
Terry
J. Manning
|
|
55
|
|
Vice
President of Sales and Marketing
|
Dean
N. Panagopoulos
|
|
49
|
|
Vice
President of Network Products
|
Deena
Randall
|
|
53
|
|
Vice
President of Operations
|
Frank
B. Manning
is a
co-founder of our company. Mr. Manning has been our president, chief executive
officer, and a director since May 1977. He has served as our chairman of the
board since 1986. He earned his BS, MS and PhD degrees in Electrical Engineering
from the Massachusetts Institute of Technology, where he was a National Science
Foundation Fellow. From 1998 through late 2006 Mr. Manning was also a director
of the Massachusetts Technology Development Corporation, a public purpose
venture capital firm that invests in seed and early-stage technology companies
in Massachusetts. Mr. Manning is the brother of Terry Manning, our vice
president of sales and marketing.
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. In December 2006 we sold our headquarters buildings to a third
party, with a two-year lease-back of approximately 25,000 square feet of the
62,000 square foot facility. Our net sale proceeds were approximately $7.7
million of which approximately $3.6 million was repaid to our mortgage holder,
eliminating the mortgage debt on our balance sheet ended December 31, 2006.
In
August
1996 we entered into a five-year lease for a 77,428 square foot manufacturing
and warehousing facility at 645 Summer Street, Boston, MA. On February 28,
2001
we exercised our option to extend this lease for an additional five years.
The
term of this lease expired in August 2006 and we began the planned move of
our
manufacturing and warehousing facility to Tijuana, Mexico. In August 2006 we
signed a lease for a 35,575 square foot manufacturing and warehousing facility
in Tijuana, Mexico with an initial lease term from October 2006 to May 2007,
with five two-year options thereafter. In February, 2007 we renegotiated the
first renewal term and signed a one-year extension starting in May 2007, with
five two-year options thereafter. 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, 2006
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.75
|
|
$
|
1.28
|
|
Second
Quarter
|
|
$
|
1.51
|
|
$
|
1.05
|
|
Third
Quarter
|
|
$
|
1.14
|
|
$
|
0.91
|
|
Fourth
Quarter
|
|
$
|
2.80
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
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
|
|
As
of
March 14, 2007, there were 9,346,966 shares of our common stock outstanding
and
314 holders of record of our common stock.
Recent
Sales of Unregistered Securities
We
did
not sell any unregistered securities during the fourth quarter of
2006.
Dividend
Policy
We
have
never declared or paid cash dividends on our capital stock and do not plan
to
pay any cash dividends in the foreseeable future. Our current policy is to
retain all of our earnings to finance future growth.
Repurchases
by the Company
During
2006 we did not repurchase any shares of our common stock on our own behalf
or
for any affiliated purchaser.
Equity
Compensation Plan Information
The
information required by this Item 5 regarding securities authorized for issuance
under our equity compensation plans is set forth in Part III, Item 12 of this
report.
Performance
Graph
The
following graph compares the annual change in Zoom’s cumulative stockholder
return for the five (5) year period from December 31, 2001 through December
31,
2006 based on the market price of Zoom’s common stock with the cumulative total
return on the Standard & Poor’s 500 Stock Index and the Standard &
Poor’s Information Technology Composite Index for that period.
The
Performance Graph assumes the investment of $100 on December 31, 2001 in Zoom’s
Common Stock, the Standard & Poor’s 500 Stock Index, and the Standard &
Poor’s Information Technology Composite Index, and the reinvestment of any and
all dividends
ITEM
6 - SELECTED FINANCIAL DATA
The
following data has been derived from our consolidated financial statements.
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,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
thousands except per share amounts)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
37,274
|
|
$
|
33,335
|
|
$
|
31,412
|
|
$
|
25,551
|
|
$
|
18,322
|
|
Cost
of goods sold
|
|
|
27,937
|
|
|
23,120
|
|
|
23,346
|
|
|
20,885
|
|
|
15,720
|
|
Gross
profit
|
|
|
9,337
|
|
|
10,215
|
|
|
8,066
|
|
|
4,666
|
|
|
2,602
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
5,848
|
|
|
5,271
|
|
|
4,800
|
|
|
4,059
|
|
|
3,631
|
|
General
and administrative
|
|
|
3,405
|
|
|
3,118
|
|
|
3,620
|
|
|
3,553
|
|
|
2,847
|
|
Research
and development
|
|
|
3,527
|
|
|
2,767
|
|
|
2,927
|
|
|
2,699
|
|
|
2,158
|
|
|
|
|
12,780
|
|
|
11,156
|
|
|
11,347
|
|
|
10,311
|
|
|
8,636
|
|
Operating
profit (loss) before gain on sale of real estate
|
|
|
(
3,443
|
)
|
|
(
941
|
)
|
|
(
3,281
|
)
|
|
(
5,645
|
)
|
|
(
6,034
|
)
|
Gain
on sale of real estate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,752
|
|
Operating
profit (loss)
|
|
|
(
3,443
|
)
|
|
(
941
|
)
|
|
(
3,281
|
)
|
|
(
5,645
|
)
|
|
(
1,282
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of investment in InterMute, Inc.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,496
|
|
|
2,105
|
|
Other,
net
|
|
|
67
|
|
|
273
|
|
|
209
|
|
|
41
|
|
|
153
|
|
Total
other income (expense)
|
|
|
67
|
|
|
273
|
|
|
209
|
|
|
3,537
|
|
|
2,258
|
|
Income
(loss) before income taxes
|
|
|
(
3,376
|
)
|
|
(
668
|
)
|
|
(
3,072
|
)
|
|
(
2,108
|
)
|
|
977
|
|
Income
tax expense (benefit)
|
|
|
2,015
|
|
|
-
|
|
|
-
|
|
|
9
|
|
|
(53
|
)
|
Income
(loss) before extraordinary item
|
|
|
(
5,391
|
)
|
|
(
668
|
)
|
|
(
3,072
|
)
|
|
(
2,117
|
)
|
|
1,030
|
|
Extraordinary
gain on elimination of Negative goodwill
|
|
|
255
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
|
($
5,136
|
)
|
|
($
668
|
)
|
|
($
3,072
|
)
|
|
($
2,117
|
)
|
$
|
1,030
|
|
Earnings
(loss) per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before extraordinary item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
($
0.68
|
)
|
|
($
0.08
|
)
|
|
($
0.36
|
)
|
|
($
0.23
|
)
|
$
|
0.11
|
|
Extraordinary
gain on elimination of negative goodwill
|
|
|
0.03
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
($
0.65
|
)
|
|
($
0.08
|
)
|
|
($
0.36
|
)
|
|
($
0.23
|
)
|
$
|
0.11
|
|
Diluted
|
|
|
($
0.65
|
)
|
|
($
0.08
|
)
|
|
($
0.36
|
)
|
|
($
0.23
|
)
|
$
|
0.11
|
|
Weighted
average common and Common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,861
|
|
|
7,883
|
|
|
8,590
|
|
|
9,206
|
|
|
9,347
|
|
Diluted
|
|
|
7,861
|
|
|
7,883
|
|
|
8,590
|
|
|
9,206
|
|
|
9,349
|
|
|
|
Years
Ended December 31,
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
15,341
|
|
$
|
15,647
|
|
$
|
14,837
|
|
$
|
8,267
|
|
$
|
12,430
|
|
Total
assets
|
|
|
22,633
|
|
|
21,974
|
|
|
21,052
|
|
|
19,687
|
|
|
16,249
|
|
Long-term
obligations excluding current portion
|
|
|
5,342
|
|
|
5,096
|
|
|
4,872
|
|
|
-
|
|
|
-
|
|
Total
stockholders' equity
|
|
$
|
13,485
|
|
$
|
13,470
|
|
$
|
12,668
|
|
$
|
10,868
|
|
$
|
12,322
|
|
ITEM
7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the consolidated financial statements included
elsewhere in this report and the information described under the caption "Risk
Factors" below.
Readers should also be cautioned that results of any reported period are often
not indicative of results for any future period.
Overview
We
derive
our net sales primarily from sales of Internet-related communication products,
principally broadband and dial-up modems and other communication products,
to
retailers, distributors, Internet Service Providers and Original Equipment
Manufacturers. We sell our products through a direct sales force and through
independent sales agents. Our employees are primarily located at our
headquarters in Boston, Massachusetts, our support office in Boca Raton,
Florida, our sales office in the United Kingdom, and our new production facility
in Tijuana, Mexico. We typically design our hardware products, though we do
sometimes use another company’s design if it meets our requirements. Electronic
assembly and testing of the Company’s products in accordance with our
specifications is typically done in China or Taiwan.
For
many
years we performed most of the final assembly, test, packaging, warehousing
and
distribution at a production and warehouse facility on Summer Street in Boston,
Massachusetts, which has also engaged in firmware programming for some products.
On June 30, 2006 we announced our plans to move most of our Summer Street
operations to a dedicated facility in Tijuana, Mexico commencing approximately
September 1, 2006, and we have implemented that plan. Our lease for our Summer
Street facility expired in August 2006, and we completely vacated the facility
on September 30, 2006.
Since
1983 our headquarters has been near South Station in downtown Boston. Zoom
has
owned two adjacent buildings which connect on most floors, and which house
our
entire Boston staff. In December 2006 we sold our headquarters buildings to
a
third party, with a two-year lease-back of approximately 25,000 square feet
of
the 62,000 square foot facility. Our net sale proceeds were approximately $7.7
million of which approximately $3.6 million was repaid to our mortgage holder,
eliminating the mortgage debt from our balance sheet.
For
many
years we derived a majority of our net sales from the retail after-market sale
of dial-up modems to customers seeking to add or upgrade a modem for their
personal computers. In recent years the size of this market and our sales to
this market have declined, as personal computer manufacturers have incorporated
a modem as a built-in component in most consumer personal computers and as
increasing numbers of consumers world-wide have switched to broadband Internet
access. The consensus of communications industry analysts is that after-market
sales of dial-up modems will probably continue to decline. There is also
consensus among industry analysts that the installed base for broadband Internet
connection devices, such as cable modems and DSL modems, will grow rapidly
during the decade. In response to increased and forecasted worldwide demand
for
faster connection speeds and increased modem functionality, we have invested
and
continue to invest resources to advance our product line of broadband modems,
both DSL modems and cable modems.
We
continually seek to improve our product designs and manufacturing approach
in
order to improve product performance and reduce our costs. We pursue a strategy
of outsourcing rather than internally developing our modem chipsets, which
are
application-specific integrated circuits that form the technology base for
our
modems. By outsourcing the chipset technology, we are able to concentrate our
research and development resources on modem system design, leverage the
extensive research and development capabilities of our chipset suppliers, and
reduce our development time and associated costs and risks. As a result of
this
approach, we are able to quickly develop new products while maintaining a
relatively low level of research and development expense as a percentage of
net
sales. We also outsource aspects of our manufacturing to contract manufacturers
as a means of reducing our costs of production, and to provide us with greater
flexibility in our production capacity.
Over
the
past several years our net sales have declined. In response to declining sales
volume, we have cut costs by reducing staffing and some overhead costs. Our
total headcount of full-time employees, including temporary workers, went from
127 on December 31, 2005 to 69 on December 31, 2006. Of the decline of 58
employees, 47 were related to the outsourcing of our final assembly
manufacturing operation to Mexico. The manufacturing personnel in Mexico are
not
included in our 2006 headcount. Of the 69 employees on December 31, 2006, 14
were engaged in research and development, 19 were involved in purchasing,
assembly, packaging, shipping and quality control, 24 were engaged in sales,
marketing and technical support, and the remaining 12 performed accounting,
administrative, management information systems, and executive functions.
Generally
our gross margin for a given product depends on a number of factors including
the type of customer to whom we are selling. The gross margin for retailers
tends to be higher than for some of our other customers; but the sales, support,
and overhead costs associated with retailers also tend to be higher. Zoom’s
sales to certain countries, including Turkey, Vietnam, and Saudi Arabia, are
currently handled by a single master distributor for each country who handles
the support and marketing costs within the country. Gross margin for sales
to
these master distributors tends to be low, since lower pricing to these
distributors helps them to cover the support and marketing costs for their
country. Our gross margin for broadband modems tends to be lower than for
dial-up modems for a number of reasons, including that retailers are currently
a
more significant channel for our dial-up modems than for our broadband modems,
that a higher percentage of our DSL sales come from low-margin countries, and
that there is stronger competition in the broadband market than in the dial-up
market.
In
2006
our net sales were down 28.3% compared to 2005. The main reason for the sales
decrease was the decline in DSL modem and dial-up modem sales. Until the second
quarter of 2006 we had generally experienced growth in our DSL modem sales.
Zoom
has had a relatively high share of the small but growing DSL market in Turkey,
but these sales have been declining. We attribute this decline to a number
of
factors including increased competition and actions by Turkish Telecom to
dramatically increase their bundling of DSL modems with their service. We are
seeing growth in some areas, including DSL sales to U.S. Internet Service
Providers, and we are continuing our efforts to expand our DSL customer base
and
product line. Because of our significant customer concentration, however, our
net sales and operating results have fluctuated and in the future could continue
to fluctuate significantly due to changes in political or economic conditions
or
the loss, reduction of business, or less favorable terms for any of our
significant customers.
Since
1999 we had a minority interest in a privately held software company, InterMute,
Inc. In June 2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary
of Trend Micro Japan. In connection with the acquisition, in June 2005 we
received a payment of approximately $3.5 million which we recorded as a
non-operating gain in our second quarter of 2005. We realized in cash an
additional contingent gain of $869,750 during the quarter ended September 30,
2006, representing our portion of an earnout payment paid by the buyer as a
result of the achievement of a performance milestone. On November 11, 2006
we
received a second and final performance milestone payment, also of $869,750.
In
December 2006 we received a return of our escrow deposit of approximately
$365,933. There will be no further payments from the sale of InterMute. Total
net proceeds from the sale of our minority interest in InterMute were $5.6
million, received over 2005 and 2006.
Our
cash
and cash equivalents balance at December 31, 2006 was $7.8 million, down from
$9.1 million at December 31, 2005. This reduction was due primarily to our
operating loss for the year, an increase in accounts receivable and a decrease
in accounts payable, partially offset by net proceeds from the sale of our
headquarters building, the receipt of proceeds from the sale of the Company's
investment in InterMute, and the reduction of inventory.
Critical
Accounting Policies and Estimates
Following
is a discussion of what we view as our more significant accounting policies
and
estimates. As described below, management judgments and estimates must be made
and used in connection with the preparation of our consolidated financial
statements. We have identified areas where material differences could result
in
the amount and timing of our net sales, costs, and expenses for any period
if we
had made different judgments or used different estimates.
Revenue
(Net Sales) Recognition. We
primarily sell hardware products to our customers. The hardware products include
dial-up modems, DSL modems, cable modems, voice over IP products, and wireless
and wired networking equipment. We earn a small amount of royalty revenue that
is included in our net sales, primarily from internet service providers. We
generally do not sell software. We began selling services in 2004. We introduced
our Global Village VoIP service in late 2004, but sales of those services to
date have not been material.
We
derive
our net sales primarily from the sales of hardware products to four types of
customers:
·
|
computer
peripherals retailers,
|
·
|
computer
product distributors,
|
·
|
Internet
service providers, and
|
·
|
original
equipment manufacturers (OEMs)
|
We
recognize hardware net sales for our customers at the point when the customers
take legal ownership of the delivered products. Legal ownership passes from
Zoom
to the customer based on the contractual FOB point specified in signed contracts
and purchase orders, which are both used extensively. Many of our customer
contracts or purchase orders specify FOB destination. We verify the delivery
date on all significant FOB destination shipments made during the last 10
business days of each quarter.
Our
net
sales of hardware include reductions resulting from certain events which are
characteristic of the sales of hardware to retailers of computer peripherals.
These events are product returns, certain sales and marketing incentives, price
protection refunds, and consumer mail-in and in-store rebates. Each of these
is
accounted for as a reduction of net sales based on detailed management
estimates, which are reconciled to actual customer or end-consumer credits
on a
monthly or quarterly basis.
Our
2006
VoIP service revenues were recorded as the end-user-customer consumed billable
VoIP services. The end-user-customer became a service customer by electing
to
sign up for the Global Village billable service on the Internet. Zoom recorded
revenue either when billable services were consumed or when a monthly flat-fee
service was billed.
Product
Returns.
Products are returned by retail stores and distributors for inventory balancing,
contractual stock rotation privileges, and warranty repair or replacements.
We
estimate the sales and cost value of expected future product returns of
previously sold products. Our estimates for product returns are based on recent
historical trends plus estimates for returns prompted by, among other things,
announced stock rotations and announced customer store closings. Management
reviews historical returns, current economic trends, and changes in customer
demand and acceptance of our products when estimating sales return allowances.
The estimate for future returns is recorded as a reserve against accounts
receivable, a reduction in our net sales, and the corresponding change to
inventory reserves and cost of sales. Product returns as a percentage of total
shipments were 8.9% and 6.9%, respectively, for 2006 and 2005. The 2006 figure
does not include the impact of the start of the consignment arrangement in
2006
at a major retailer customer.
Price
Protection Refunds.
We have
a policy of offering price protection to certain of our retailer and distributor
customers for some or all their inventory. Under the price protection policies,
when we reduce our prices for a product, the customer receives a credit for
the
difference between the original purchase price and our reduced price for their
unsold inventory of that product. Our estimates for price protection refunds
are
based on a detailed understanding and tracking by customer and by sales program.
Estimated price protection refunds are recorded in the same period as the
announcement of a pricing change. Information from customer inventory-on-hand
reports or from direct communications with the customers is used to estimate
the
refund, which is recorded as a reduction of net sales and a reserve against
accounts receivable. Reductions in our net sales due to price protection were
$0.1 million in 2004, $0.2 million in 2005, and $0.1 million in 2006.
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 $1.3 million in 2004, $1.1 million in
2005,
and $0.8 million in 2006.
Consumer
Mail-In and In-Store Rebates.
Our
estimates for consumer mail-in and in-store rebates are based on a detailed
understanding and tracking by customer and sales program, supported by actual
rebate claims processed by the rebate redemption centers plus an accrual for
an
estimated lag in processing at the redemption centers. The estimate for mail-in
and in-store rebates is recorded as a reserve against accounts receivable and
a
reduction of net sales in the same period that the rebate obligation was
triggered. Reductions in our net sales due to the consumer rebates were $1.4
million in 2004, $0.8 million in 2005, and $0.7 million in 2006.
To
ensure
that the sales, discounts, and marketing incentives are recorded in the proper
period, we perform extensive tracking and documenting by customer, by period,
and by type of marketing event. This tracking includes reconciliation to the
accounts receivable records for deductions taken by our customers for these
discounts and incentives.
Accounts
Receivable Valuation.
We
establish accounts receivable valuation allowances equal to the above-discussed
net sales adjustments for estimates of product returns, price protection
refunds, consumer rebates, and general bad debt reserves. These allowances
are
reduced as actual credits are issued to the customer's accounts. Our bad-debt
write-offs were less than $0.1 million for 2006.
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. Allowances for obsolete
inventory are established by management based on usability reviews performed
each quarter. Our allowances 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. In 2006 we
recorded an additional $0.6 million charge for inventory reserves related to
obsolete and slow-moving products.
Valuation
and Impairment of Deferred Tax Assets.
As part
of the process of preparing our consolidated financial statements we estimate
our income tax expense and deferred income tax position. This process involves
the estimation of our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. We then
assess the likelihood that our deferred tax assets will be recovered from future
taxable income. To the extent we believe that recovery is not likely, we
establish a valuation allowance. Changes in the valuation allowance are relected
in the statement of operations.
Significant
management judgment is required in determining our provision for income taxes
and any valuation allowances. We have recorded a 100% valuation allowance
against our deferred income tax assets. It is management's estimate that, after
considering all the available objective evidence, historical and prospective,
with greater weight given to historical evidence, it is more likely than not
that these assets will not be realized. If we establish a record of continuing
profitability, at some point we will be required to 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, 2006 the Company had federal net operating loss carryforwards
of
approximately $32,570,000. These federal net operating losses are available
to
offset future taxable income, and are due to expire in years ranging from
2018 to 2026. The Company had state net operating loss carryforwards of
approximately $13,363,000. These state net operating losses are available to
offset future taxable income, and are primarily due to expire in years ranging
from 2007 to 2011.
Valuation
of Investment in Affiliates.
Since
1999 the Company had a minority interest in a privately held software company,
InterMute, Inc., which the Company had been accounting for under the equity
method of accounting. The Company made its original investment in 1999, at
the
time of Intermute’s formation, and subsequently made additional investments.
Under the equity method of accounting, the Company's investment was increased
or
decreased, not below zero, based upon the Company's proportionate share of
the
net earnings or losses of InterMute. As a result of the losses incurred by
InterMute subsequent to the Company's investments, the Company's investment
balance was reduced to zero during 2002. The Company discontinued applying
the
equity method when the investment was reduced to zero and did not provide for
additional losses, as the Company did not guarantee obligations of the investee
and was not committed to provide further financial support.
In
June
2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary of Trend
Micro Japan. In connection with the acquisition, in June 2005 the Company
received a payment of approximately $3.5 million which was recorded as a
non-operating gain in the Company’s second quarter of 2005. The Company realized
in cash an additional contingent gain of $0.9 million during the quarter ended
September 30, 2006, representing its portion of an earnout payment paid by
the
buyer as a result of the achievement of a performance milestone. On November
11,
2006 the Company received a second and final performance milestone payment,
also
of $0.9 million. In December 2006 the Company received a return of its escrow
deposit of approximately $0.4 million. All of the payments were recorded as
non-operating gains, a total of approximately $2.1 million in 2006. There will
be no further payments from the sale of InterMute. Total
net
proceeds from the sale of our minority interest in InterMute were $5.6 million,
received over 2005 and 2006.
Results
of Operations
The
following table sets forth certain financial data as a percentage of net sales
for the periods indicated:
|
|
Years
Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of goods sold
|
|
|
74.3
|
|
|
81.7
|
|
|
85.8
|
|
Gross
profit
|
|
|
25.7
|
|
|
18.3
|
|
|
14.2
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
15.3
|
|
|
15.9
|
|
|
19.8
|
|
General
and administration
|
|
|
11.5
|
|
|
13.9
|
|
|
15.5
|
|
Research
and development
|
|
|
9.3
|
|
|
10.6
|
|
|
11.8
|
|
|
|
|
36.1
|
|
|
40.4
|
|
|
47.1
|
|
Operating
profit (loss) before sale of real estate
|
|
|
(10.4
|
)
|
|
(22.1
|
)
|
|
(32.9
|
)
|
Gain
on sale of real estate
|
|
|
-
|
|
|
-
|
|
|
25.9
|
|
Operating
profit (loss)
|
|
|
(10.4
|
)
|
|
(22.1
|
)
|
|
(
7.0
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of investment in InterMute, Inc.
|
|
|
-
|
|
|
13.7
|
|
|
11.5
|
|
Other,
net
|
|
|
0.6
|
|
|
0.1
|
|
|
0.8
|
|
Total
other income (expense)
|
|
|
0.6
|
|
|
13.8
|
|
|
12.3
|
|
Loss
before income taxes
|
|
|
(9.8
|
)
|
|
(8.3
|
)
|
|
5.3
|
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
-
|
|
|
(
0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(9.8
|
%)
|
|
(8.3
|
%)
|
|
5.6
|
%
|
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
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,
2006 with the year ended December 31, 2005.
Net
Sales.
Our
total net sales declined year-over-year by $7.2 million or 28.3%, including
a
$1.2 million sales reduction resulting from our new consignment arrangement
with
a significant retailer customer. In 2006 we primarily generated our sales by
selling dial-up and broadband modems via distributors, retailers, and Internet
Service Providers. The dial-up modem market has continued to decline, and Zoom
sales of dial-up modems declined $1.5 million due primarily to the new
consignment arrangement as well as the decline of the dial-up modem market.
Our
DSL broadband modem category declined $5.5 million primarily as a result of:
(i)
a $4.2 million decrease of DSL sales to our Turkish distributor due to actions
by Turkish Telecom which dramatically increased their bundling of DSL modems
with their service offerings, (ii) the business failure in June 2005 of a major
U.K. customer, Granville Technologies, Ltd., and (iii) reduced DSL sales to
our
distributor in Vietnam. Net sales in our other product sales categories, which
included cable modems, cameras, ISDN modems, telephone dialers, and wireless
networking equipment, declined 15.6% to $1.5 million in 2006 from $1.8 million
in 2005. The following table illustrates this change in net sales.
|
|
Year
2005
Sales
$000
|
|
Year
2006
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
Dial-up
|
|
$
|
10,332
|
|
$
|
8,851
|
|
|
($
1,481
|
)
|
|
(14.3
|
%)
|
DSL
|
|
|
13,453
|
|
|
7,981
|
|
|
(5,472
|
)
|
|
(40.7
|
%)
|
Other
Products
|
|
|
1,766
|
|
|
1,490
|
|
|
(276
|
)
|
|
(15.6
|
%)
|
Total
Net Sales
|
|
$
|
25,551
|
|
$
|
18,322
|
|
|
($7,229
|
)
|
|
(28.3
|
%)
|
As
shown
in the table below our net sales in North America declined $1.3 million or
11.2%, to $10.3 million in 2006 from $11.6 million in 2005, primarily the result
of the $1.2 million sales reduction from our new consignment arrangement with
a
significant North American retailer customer. Our net sales in Turkey were
$1.3
million in 2006 compared to $5.6 million in 2005, a 75.8% decrease. The dramatic
decline of our sales in Turkey resulted from decreased DSL sales to our Turkish
distributor due to actions by Turkish Telecom which dramatically increased
their
bundling of DSL modems with their service offerings. This action significantly
reduced the retail market for DSL modems in Turkey. Our net sales in the UK
were
$3.7 million in 2006 compared to $5.2 million in 2005, a 28.5% 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 reduced by the decision
in the third quarter of 2005 of a large U.K retailer to discontinue carrying
most of our DSL product line. Our net sales in all other countries were $3.0
million in 2006 compared to $3.2 million in 2005, a 6.3% decline. The sales
decline in all other countries was primarily due to declining sales of dial-up
modems and DSL modems.
|
|
Year
2005
Sales
$000
|
|
Year
2006
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
11,575
|
|
$
|
10,279
|
|
|
($1,296
|
)
|
|
(11.2
|
%)
|
Turkey
|
|
|
5,608
|
|
|
1,359
|
|
|
(
4,249
|
)
|
|
(75.8
|
%)
|
UK
|
|
|
5,202
|
|
|
3,717
|
|
|
(1,485
|
)
|
|
(28.5
|
%)
|
All
Other
|
|
|
3,166
|
|
|
2,967
|
|
|
(199
|
)
|
|
(6.3
|
%)
|
Total
Net Sales
|
|
$
|
25,551
|
|
$
|
18,322
|
|
|
($7,229
|
)
|
|
(28.3
|
%)
|
In
2006
our only customer accounting for 10% or more of our total net sales was a large
retailer in the United Kingdom. An electronics distributor and a large office
retailer in the United States each accounted for 9% of total net sales. Because
of our customer concentration, our net sales and operating income could
fluctuate significantly due to changes in political or economic conditions
or
the loss, reduction of business, or less favorable terms for any of our
significant customers.
Gross
Profit.
Our
gross profit was $2.6 million in 2006 compared to $4.7 million in 2005. Our
gross margin percentage of net sales decreased to 14.2% in 2006 from 18.3%
in
2005. The primary reason for this decline was lower total sales and the negative
effect of fixed manufacturing costs spread over lower total sales. Both
our fixed and variable manufacturing costs were lower in the second half of 2006
compared to the first half of 2006 as a result of the third quarter move of
production to Mexico. This cost reduction served to partially offset the
negative gross margin impact from the large sales decline.
Operating
Expense.
Total
operating expense excluding the gain on sale of real estate decreased by $1.7
million to $8.6 million in 2006 from $10.3 million in 2005. Note that total
operating expense in 2006 included $0.3 million of expense for stock options
under FAS 123(R) compared to no expense for stock options in 2005 under APB
25.
Total operating expense excluding the gain on sale of real estate as a
percentage of net sales increased to 47.1% in 2006 from 40.4% in 2005. The
table
below illustrates the change in operating expense.
Operating
Expense
|
|
Year
2005
Sales
$000
|
|
%
Net
Sales
|
|
Year
2006
Sales
$000
|
|
%
Net
Sales
|
|
Change
$000
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expense
|
|
$
|
4,059
|
|
|
15.9
|
%
|
$
|
3,631
|
|
|
19.8
|
%
|
|
($428
|
)
|
|
(10.5
|
%)
|
General
and Administrative Expense
|
|
|
3,553
|
|
|
13.9
|
%
|
|
2,847
|
|
|
15.5
|
%
|
|
(706
|
)
|
|
(19.8
|
%)
|
Research
and Development Expense
|
|
|
2,699
|
|
|
10.6
|
%
|
|
2,158
|
|
|
11.8
|
%
|
|
(541
|
)
|
|
(20.0
|
%)
|
Total
Operating Expense excluding the gain on sale of real
estate
|
|
$
|
10,311
|
|
|
40.4
|
%
|
$
|
8,636
|
|
|
47.1
|
%
|
|
($1,675
|
)
|
|
(16.2
|
%)
|
Selling
Expense.
Selling
expense decreased to $3.6 million in 2006 from $4.1 million in 2005. Selling
expense as a percentage of net sales was 19.8% in 2006 and 15.9% in 2005. The
$0.4 million decrease in selling expense was primarily due to reductions in
personnel costs due to reduced employee headcount ($0.3 million), lower
commission expense due to lower sales ($0.1 million), lower sales promotion
and
travel expense ($0.1 million), and reduced facility expense ($0.1 million),
partially offset by higher customer delivery costs ($0.1 million), advertising
($0.1 million) and stock option expense.
General
and Administrative Expense.
General
and administrative expense was $2.8 million in 2006 and $3.6 million in 2005.
General and administrative expense as a percentage of net sales was 15.5% in
2006 and 13.9% in 2005. In 2006 compared to 2005, general and administrative
expense decreased primarily due to a decline in bad debt expense ($0.7 million)
and reductions in personnel costs ($0.2 million), partially offset by the
increase in stock option expense ($0.1 million). In 2005, general and
administrative expense included $0.7 million in bad debt expense, primarily
for
the business failure of a major U.K. customer, Granville Technologies,
Ltd.
Research
and Development Expense.
Research
and development expense decreased to $2.2 million in 2006 from $2.7 million
in
2005. Research and development expense as a percentage of net sales increased
to
11.8% in 2006 from 10.6% in 2005. The $0.5 million decrease in research and
development expense was primarily due to reduced personnel costs ($0.4 million),
consulting costs ($0.1 million), equipment depreciation ($0.1 million), and
facilities expense and outside services, partially offset by the increase in
stock option expense ($0.1 million).
Gain
on Sale of Real Estate. In
2006
we recognized a gain in operations on the sale of real estate of $4.8 million.
The gain as a percentage of net sales was 32.9% in 2006. In December 2006,
we
sold the real estate housing our corporate headquarters and concurrently entered
into a leaseback arrangement for a portion of the property. The leaseback
arrangement is for two years. A gain of $5.5 million was realized on the sale.
However, a portion of the gain ($0.7 million) has been deferred and will be
recognized in operations over the term of the lease ($0.37 million in 2007
and
$0.36 million in 2008). The gain deferred is the estimated present value of
the
minimum lease payments under the leaseback arrangement.
Other
Income (Expense).
Other
income, net decreased to $2.3 million in 2006 from $3.5 million in 2005. The
$3.5 million other income in 2005 and $2.1 million of the $2.3 million other
income in 2006 were payments received from Trend Micro, Inc. to Zoom in exchange
for our investment in an affiliate, InterMute. The income was spread over two
years due to the earn-out provision in the 2005 agreement. There will be no
further payments from the sale of InterMute.
Income
Tax Expense (Benefit).
We
recorded a favorable $0.05 million net income tax benefit in 2006 resulting
from
changes in prior years’ estimates. The net deferred income tax asset balance at
December 31, 2006 was zero. This accounting treatment is described in further
detail under the caption "Critical Accounting Policies and Estimates" above
and
in note 10 to the consolidated financial statements.
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
Sales
$000
|
|
Year
2005
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
|
|
|
|
|
|
|
|
|
|
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 primarily in dial-up
modems.
|
|
Year
2004
Sales
$000
|
|
Year
2005
Sales
$000
|
|
Change
$000
|
|
Change
%
|
|
|
|
|
|
|
|
|
|
|
|
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.
Operating
Expense
|
|
Year
2004
Sales
$000
|
|
%
Net
Sales
|
|
Year
2005
Sales
$000
|
|
%
Net
Sales
|
|
Change
$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.
Liquidity
and Capital Resources
On
December 31, 2006 we had working capital of $12.4 million including $7.8 million
in cash and cash equivalents. On December 31, 2005 we had working capital of
$8.3 million including $9.1 million in cash and cash equivalents. Our current
ratio at December 31, 2006 was 4.5 compared to 1.9 at December 31, 2005. This
significant improvement was primarily the result of the sale of our headquarters
real estate and the payment of our related mortgage debt.
In
2006
operating activities used $6.2 million in cash. Our net income in 2006 was
$1.0
million which was comprised of an operating loss of $6.0 million before the
sale
of our headquarters building, a gain of $4.8 million from the building sale,
and
a non-operating gain from investing and financing activities of $2.3 million.
Sources of cash from operations included a decrease in inventory of $0.6 million
and non-cash depreciation and amortization expense of $0.1 million. Uses of
cash
from operations included an increase in accounts receivable of $0.6 million
and
a decrease of accounts payable and accrued expenses of $0.7 million.
In
2006
our net cash provided by investing activities was $9.8 million, which included
the proceeds from the sale of our headquarters building of $7.7 million and
$2.1
million of final payments 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 $0.04 million investment in property, plant and equipment.
In
2006
cash was used by financing activities of $4.6 million, comprised of $4.9 million
for the 2006 principal payments including the full repayment of the mortgage
on
our headquarters building less $0.3 million proceeds from the exercise of
employee stock options.
On
March
16, 2005 we entered into a one year Loan and Security Agreement with Silicon
Valley Bank that provided for a revolving line of credit of up to $2 million.
The revolving line of credit could 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 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. As a result of improved liquidity from the sale of
our
building and our efforts to minimize expenses, we are not currently pursuing
a
renewal of the credit line.
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 127 at December 31, 2005 and 69 at December 31,
2006.
Forty-seven of this total reduction of 58 resulted from the closing of our
Boston manufacturing facilty in August 2006. Our production activity was
outsourced to a lower-cost factory in Tijuana, Mexico. We plan to continue
to
assess our cost structure as it relates to our revenues and cash position,
and
we may make further reductions if the actions are deemed necessary.
Management
believes we have sufficient resources to fund our normal operations over the
next 12 months, through at least December 31, 2007. However, if we are unable
to
increase our revenues, reduce or otherwise adequately control our expenses,
or
raise capital, our longer-term ability to continue as a going concern and
achieve our intended business objectives could be adversely affected. See “Risk
Factors” below, for further information with respect to events and uncertainties
that could harm our business, operating results, and financial
condition.
Contractual
Obligations
The
following table summarizes our contractual obligations as of December 31,
2006.
|
|
Payments
due by period
|
|
Contractual
Obligations
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
3-5
years
|
|
More
than
5
years
|
|
Purchase
Obligations (1)
|
|
$
|
4,618,939
|
|
$
|
4,618,939
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations (2)
|
|
$
|
1,130,681
|
|
$
|
669,820
|
|
$
|
460,861
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,749,620
|
|
$
|
5,288,759
|
|
$
|
460,861
|
|
|
|
|
|
|
|
(1)
|
Represents
obligations primarily with subcontractors and suppliers of inventory,
all
in the ordinary course of business.
|
(2)
|
Represents
minimum lease payments, excluding executory costs to be made under
leases
for our headquarters offices in Boston, MA, our office facility in
Fleet,
Hants, U.K., our Mexico manufcaturing facility, and our technical
support
facility in Boca Raton, FL.
|
ITEM
1A. RISK
FACTORS
This
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our objectives, expectations and intentions. The
cautionary statements made in this report are applicable to all forward-looking
statements wherever they appear in this report. Our actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed below, as well as those discussed
elsewhere in this report.
To
stay in business we may require future additional funding which we may be unable
to obtain on favorable terms, if at all.
Over
the
next twelve months we may require additional financing for our operations either
to fund losses beyond those we anticipate or to fund growth in our inventory
and
accounts receivable. Our revolving credit facility expired on March 15, 2006
and
we currently have no line of credit from which we can borrow. Additional
financing may not be available to us on a timely basis if at all, or on terms
acceptable to us. If we fail to obtain acceptable additional financing when
needed, we may not have sufficient resources to fund our normal operations
and
we may be required to further reduce planned expenditures or forego business
opportunities. These factors could reduce our net sales, increase our losses,
and harm our business. Moreover, additional equity financing could dilute the
per share value of our common stock held by current shareholders, while
additional debt financing could restrict our ability to make capital
expenditures or incur additional indebtedness, all of which would impede our
ability to succeed.
Industry
analysts believe that the market for our dial-up modems will continue to
decline. If we are unable to increase demand for and sales of our broadband
modems, we may be unable to sustain or grow our business. The market for
high-speed communications products and services has a number of competing
technologies. For instance, Internet access can be achieved
by:
· |
using
a standard telephone line and appropriate service for dial-up modems;
|
· |
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, our most successful
products have historically been our dial-up modems. The introduction of new
products by competitors, market acceptance of products based on new or
alternative technologies, or the emergence of new industry standards have in
the
past rendered and could continue to render our products less competitive or
even
obsolete. For example, these factors have caused the market for our dial-up
modems to shrink dramatically. If we are unable to increase demand for our
broadband modems, we may be unable to sustain or grow our
business.
Delays,
unanticipated costs, interruptions in production or other problems in connection
with the transfer of our manufacturing operations to Mexico or the continuing
operation of that facility could harm our business.
In
September 2006 we transferred most of our manufacturing operations from Boston,
Massachusetts to Tijuana, Mexico. As a result of moving our manufacturing
options to Mexico, we experienced delays and interruptions in production and
may
experience additional delays and interruptions as well as unanticipated costs
and other problems. We incurred approximately $280,000 in costs in connection
with the move of our manufacturing operations to Mexico. Delays, interruptions
in production or other problems related to the move could lead to increased
or
unexpected costs, reduced margins, delays in product deliveries, order
cancellations, and lost revenue, all of which could harm our business, results
of operation, and liquidity. Our conduct of business in Mexico is subject to
the
additional challenges and risks associated with international operations,
including those related to integration of operations across different cultures
and languages, currency risk, and economic, legal, political and regulatory
risks.
Capacity
constraints in our Mexican operations could reduce our sales and revenues and
hurt customer relationships.
We
now
rely on our Mexican operations to finish and ship most of the products we sell.
Since moving our manufacturing operations to our Mexican facility we have
experienced and may continue to experience constraints on our manufacturing
capacity as we address challenges related to operating our new facility, such
as
hiring and training workers, creating the facility’s infrastructure, developing
new supplier relationships, complying with customs and border regulations,
and
resolving shipping and logistical issues. Our sales and revenues may be reduced
and our customer relationships may be impaired if we continue to experience
constraints on our manufacturing capacity. We are working to minimize capacity
constraints in a cost-effective manner, but there can be no assurance that
we
will be able to adequately minimize capacity constraints.
Our
reliance on a business processing outsourcing partner to conduct our operations
in Mexico could materially harm our business and
prospects.
In
connection with the move of most of our manufacturing operations to Mexico,
we
rely on a business processing outsourcing partner to hire, subject to our
oversight, the production team for our manufacturing operation, provide the
selected facility described above, and coordinate some of the start-up and
ongoing manufacturing logistics relating to our operations in Mexico. Our
outsourcing partner’s related functions include acquiring the necessary Mexican
permits, providing the appropriate Mexican operating entity, assisting in
customs clearances, and providing other general assistance and administrative
services in connection with the start-up and ongoing operation of the Mexican
facility. Our outsourcing partner’s performance of these obligations efficiently
and effectively will be critical to the success of our operations in Mexico.
Failure of our outsourcing partner to perform its obligations efficiently and
effectively could result in delays, unanticipated costs or interruptions in
production, delays in deliveries to our customers or other harm to our business,
results of operation, and liquidity. Moreover, if our outsourcing arrangement
is
not successful, we cannot assure our ability to find an alternative production
facility or outsourcing partner to assist in our operations in Mexico or our
ability to operate successfully in Mexico without outsourcing or similar
assistance.
Our
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
2006, our net sales to three companies constituted 30% of our total net sales.
Our customers generally do not enter into long-term agreements obligating them
to purchase our products. We may not continue to receive significant revenues
from any of these or from other large customers. Because of our significant
customer concentration, our net sales and operating income could fluctuate
significantly due to changes in political or economic conditions or the loss
of,
reduction of business with, or less favorable terms for any of our significant
customers. For example, in 2006, DSL sales to our Turkish distributor, one
of
our large customers, declined significantly from $5.6 million in 2005 to $1.3
million in 2006. We attribute this decline due to a number of factors including
increased competition and plans by Turkish Telecom to dramatically increase
their bundling of DSL modems with their service. We cannot guarantee that we
will increase our sales to our Turkish distributor. A reduction or delay in
orders from any of our significant customers, or a delay or default in payment
by any significant customer could materially harm our business, results of
operation and liquidity.
Our
net sales, operating results and liquidity have been and may in the future
be
adversely affected because of the decline in the retail market for dial-up
modems.
The
dial-up modem industry has been characterized by declining average selling
prices and a declining retail market. The decline in average selling prices
is
due to a number of factors, including technological change, lower component
costs, and competition. The decline in the size of the retail market for dial-up
modems is primarily due to the inclusion of dial-up modems as a standard feature
contained in new PCs, and the advent of broadband products. Decreasing average
selling prices and reduced demand for our dial-up modems have resulted and
are
likely to continue to result in decreased net sales for dial-up modems. If
we
fail to replace declining revenue from the sales of dial-up modems with the
sales of our other products, including our broadband modems, our business,
results of operation and liquidity will be harmed.
Less
advantageous terms of sale of our products could harm our
business.
The
Company entered into a consignment arrangement with a significant retailer
customer in October 2006. In connection with this arrangement ownership of
all
unsold products previously purchased from the Company reverted to the Company
in
November 2006. The new arrangement resulted in an accounting adjustment that
reduced the Company’s net sales in 2006 by $1.1 million and reduced cost of
sales and other directly related expenses by $0.5 million, which reduced the
net
profit for 2006 by $0.6 million. Under the consignment arrangement we are not
able to recognize revenue from the sale of a product until the retailer actually
sells such product to its customer. The consignment arrangement also results
in
a delay in the dating of invoices, the recognition of accounts receivable,
and
the due dates for payment by the retailer for goods sold. If additional
significant customers adopt similar arrangements or otherwise change the terms
of sale, our business, results of operation and liquidity will be
harmed.
We
believe that our future success will depend in large part on our ability to
more
successfully penetrate the broadband modem markets, which have been challenging
markets, with significant barriers to entry.
With
the
shrinking of the dial-up modem market, we believe that our future success will
depend in large part on our ability to more successfully penetrate the broadband
modem markets, DSL and cable, and the VoIP market. These markets have
significant barriers to entry that have adversely affected our sales to these
markets. Although some cable and DSL modems are sold at retail, the high volume
purchasers of these modems are concentrated in a relatively few large cable,
telecommunications, and Internet service providers which offer broadband modem
services to their customers. These customers, particularly cable services
providers, also have extensive and varied approval processes for modems to
be
approved for use on their network. These approvals are expensive, time
consuming, and continue to evolve. Successfully penetrating the broadband modem
market therefore presents a number of challenges including:
· |
the
current limited retail market for broadband modems;
|
· |
the
relatively small number of cable, telecommunications and Internet
service
provider customers that make up a substantial part of the market
for
broadband modems;
|
· |
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;
|
· |
develop
and maintain competitive products that meet changing customer demands;
|
· |
enhance
our products by adding innovative features that differentiate our
products
from those of our competitors;
|
· |
bring
products to market on a timely basis;
|
· |
introduce
products that have competitive prices;
|
· |
manage
our product transitions, inventory levels and manufacturing processes
efficiently;
|
· |
respond
effectively to new technological changes or new product announcements
by
others; and
|
· |
meet
changing industry standards.
|
Our
product cycles tend to be short, and we may incur significant non-recoverable
expenses or devote significant resources to sales that do not occur when
anticipated. Therefore, the resources we devote to product development, sales
and marketing may not generate material net sales for us. In addition, short
product cycles have resulted in and may in the future result in excess and
obsolete inventory, which has had and may in the future have an adverse affect
on our results of operations. In an effort to develop innovative products and
technology, we have incurred and may in the future incur substantial
development, sales, marketing, and inventory costs. If we are unable to recover
these costs, our financial condition and operating results could be adversely
affected. In addition, if we sell our products at reduced prices in anticipation
of cost reductions and we still have higher cost products in inventory, our
business would be harmed and our results of operations and financial condition
would be adversely affected.
Our
international operations are subject to a number of risks that could harm our
business.
Currently
our business is significantly dependent on our operations outside the United
States, particularly sales of our products and the production of most of our
products. All of our manufacturing operations except our rework operations
are
now located outside of the United States. In 2005, sales outside of North
America were 55% of our net sales. In 2006, sales outside North America were
44%
of our net sales. The inherent risks of international operations could harm
our
business, results of operation, and liquidity. The types of risks faced in
connection with international operations and sales include, among
others:
· |
regulatory
and communications requirements and policy changes;
|
· |
favoritism
toward local suppliers;
|
· |
delays
in the rollout of broadband services by cable and DSL service providers
outside of the United States;
|
· |
local
language and technical support requirements;
|
· |
difficulties
in inventory management, accounts receivable collection and the management
of distributors or representatives;
|
· |
reduced
control over staff and other difficulties in staffing and managing
foreign
operations;
|
· |
reduced
protection for intellectual property rights in some
countries;
|
· |
political
and economic changes and disruptions;
|
· |
governmental
currency controls;
|
· |
currency
exchange rate fluctuations, including, as a result of the move of
our
manufacturing operations to Mexico, changes in value of the Mexican
Peso
relative to the US dollar; and import, export, and tariff
regulations.
|
We
may be subject to product returns resulting from defects, or from overstocking
of our products. Product returns could result in the failure to attain market
acceptance of our products, which would harm our business.
If
our
products contain undetected defects, errors, or failures, we could
face:
· |
delays
in the development of our products;
|
· |
numerous
product returns; and
|
· |
other
losses to us or to our customers or end
users.
|
Any
of
these occurrences could also result in the loss of or delay in market acceptance
of our products, either of which would reduce our sales and harm our business.
We are also exposed to the risk of product returns from our customers as a
result of contractual stock rotation privileges and our practice of assisting
some of our customers in balancing their inventories. Overstocking has in the
past led and may in the future lead to higher than normal returns.
Our
failure to effectively manage our inventory levels could materially and
adversely affect our liquidity and harm our business.
Due
to
rapid technological change and changing markets we are required to manage our
inventory levels carefully to both meet customer expectations regarding delivery
times and to limit our excess inventory exposure. In the event we fail to
effectively manage our inventory our liquidity may be adversely affected and
we
may face increased risk of inventory obsolescence, a decline in market value
of
the inventory, or losses from theft, fire, or other casualty. We incurred a
$0.3
million inventory obsolescence charge in 2006 for inventory reserves related
to
some slow-moving VoIP products.
We
may be unable to produce sufficient quantities of our products because we depend
on third party manufacturers. If these third party manufacturers fail to produce
quality products in a timely manner, our ability to fulfill our customer orders
would be adversely impacted.
We
use
contract manufacturers 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;
|
· |
lack
of adequate capacity during periods of excess demand;
|
· |
limited
warranties on products supplied to us;
|
· |
potential
increases in prices;
|
· |
interruption
of supplies from assemblers as a result of a fire, natural calamity,
strike or other significant event; and
|
· |
misappropriation
of our intellectual property.
|
We
may be unable to produce sufficient quantities of our products because we obtain
key components from, and depend on, sole or limited source
suppliers.
We
obtain
certain key parts, components, and equipment from sole or limited sources of
supply. For example, we purchase most of our dial-up and broadband modem
chipsets from Conexant Systems, Agere Systems, and Ikanos Communications.
Integrated circuit product areas covered by at least one of these companies
include dial-up modems, DSL modems, cable modems, networking, routers, and
gateways. In the past we have experienced delays in receiving shipments of
modem
chipsets from our sole source suppliers. We may experience similar delays in
the
future. In addition, some products may have other components that are available
from only one source. If we are unable to obtain a sufficient supply of
components from our current sources, we would experience difficulties in
obtaining alternative sources or in altering product designs to use alternative
components. Resulting delays or reductions in product shipments could damage
relationships with our customers, and our customers could decide to purchase
products from our competitors. Inability to meet our customers’ demand or a
decision by one or more of our customers to purchase products from our
competitors could harm our operating results.
We
face significant competition, which could result in decreased demand for our
products or services.
We
may be
unable to compete successfully. A number of companies have developed, or are
expected to develop, products that compete or will compete with our products.
Furthermore, many of our current and potential competitors have significantly
greater resources than we do. Intense competition, rapid technological change
and evolving industry standards could result in less favorable selling terms
to
our customers, decrease demand for our products or make our products
obsolete.
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
environmental regulations recently implemented or scheduled to be implemented
in
2007 may increase our manufacturing costs and harm our
business.
The
Federal government has 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 2007, may require us and other
electronics companies to change or discontinue many products. We believe
compliance with these new requirements will be difficult, and will typically
increase our product costs by up 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. In addition the State of California has implemented
regulations requiring the use of highly efficient power cubes. These new
requirements will effect many of our products and may result in an increase
in
our product costs.
Changes
in current or future laws or governmental regulations and industry standards
that negatively impact our products, services and technologies could harm our
business.
The
jurisdiction of the Federal Communications Commission, or the FCC, extends
to
the entire United States communications industry including our customers and
their products and services that incorporate our products. Our products are
also
required to meet the regulatory requirements of other countries throughout
the
world where our products and services are sold. Obtaining government regulatory
approvals is time-consuming and very costly. In the past, we have encountered
delays in the introduction of our products, such as our cable modems, as a
result of government certifications. We may face further delays if we are unable
to comply with governmental regulations. Delays caused by the time it takes
to
comply with regulatory requirements may result in cancellations or postponements
of product orders or purchases by our customers, which would harm our
business.
In
addition to reliability and quality standards, the market acceptance of our
VoIP
products and services is dependent upon the adoption of industry standards
so
that products from multiple manufacturers are able to communicate with each
other. Standards are continuously being modified and replaced. As standards
evolve, we may be required to modify our existing products or develop and
support new versions of our products. The failure of our products to comply,
or
delays in compliance, with various existing and evolving industry standards
could delay or interrupt volume production of our products, which could harm
our
business.
Regulation
of VoIP services is developing and is therefore uncertain. Future regulation
of
VoIP services could increase our costs and restrict the grown of our VoIP
business.
VoIP
services currently have different regulations from traditional telephony in
most
countries including the US. The US, various states and other countries may
impose surcharges, taxes or new regulations upon providers of VoIP services.
The
imposition of any such surcharges, taxes and regulations on VoIP services could
materially increase our costs, may limit or eliminate our competitive pricing
and may require us to restructure the VoIP services we currently offer. For
example, regulations requiring compliance with the Communications Assistance
for
Law Enforcement Act (CALEA) or provision of the same type of 911 services as
required for traditional telecommunications providers could place a significant
financial burden on us depending on the technical changes required to
accommodate the requirements. In 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 the Mexican Peso and various Asian
currencies including the Chinese renminbi could increase our product costs.
Our
future success will depend on the continued services of our executive officers
and key product development personnel.
The
loss
of any of our executive officers or key product development personnel, the
inability to attract or retain qualified personnel in the future, or delays
in
hiring skilled personnel could harm our business. Competition for skilled
personnel is significant. We may be unable to attract and retain all the
personnel necessary for the development of our business. In addition, the loss
of Frank B. Manning, our president and chief executive officer, or 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 party.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We
own
financial instruments that are sensitive to market risks as part of our
investment portfolio. The investment portfolio is used to preserve our capital
until it is required to fund operations, including our research and development
activities. None of these market-risk sensitive instruments are held for trading
purposes. We do not own derivative financial instruments in our investment
portfolio. The investment portfolio contains instruments that are subject to
the
risk of a decline in interest rates. Investment Rate Risk - Our investment
portfolio consists entirely of money market funds, which are subject to interest
rate risk. Due to the short duration and conservative nature of these
instruments, we do not believe that it has a material exposure to interest
rate
risk. Our market risks have not changed substantially since December 31,
2005.
ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ZOOM
TECHNOLOGIES, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
Page
|
|
|
Index
to Consolidated Financial Statements
|
33
|
Report
of Independent Registered Public Accounting Firms
|
40-41
|
Consolidated
Balance Sheets as of December 31, 2005 and 2006
|
42
|
Consolidated
Statements of Operations for the years ended December 31, 2004, 2005,
and
2006
|
43
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Loss for the
years
ended December 31, 2004, 2005, and 2006
|
44
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2005,
and
2006
|
45
|
Notes
to Consolidated Financial Statements
|
46-57
|
Schedule
II: Valuation and Qualifying Accounts for the years ended December
31,
2004, 2005, and 2006
|
58
|
ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We
changed our independent registered public accounting firm in 2006 as previously
disclosed. There were no changes in or disagreements with our independent
accountants on accounting or financial disclosure matters 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, 2006 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 during
the
most recent quarter that have materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
In
December the SEC 2006 issued guidance for the previously announced
Sarbanes-Oxley 404 compliance requirement for 2007. The SEC invited comments
regarding their guidance and announced a comment period extending into February
2007. The SEC stated that after the end of the comment period the SEC would
issue final and more detailed guidance and that the SEC would consider a further
compliance deadline extension if the detailed guidance was thought to be too
late for proper compliance for 2007. Because of the potential changes in SOX
404
requirements and the cost of implementing SOX 404 requirements, Zoom has elected
to minimize expenditures on SOX 404 compliance work until the SEC provides
final
guidance.
PART
III
ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
required by this item appears under the caption "Our Executive Officers" in
Part
1, Item 1 -- Business, and under the captions "Election of Directors", "Board
of
Directors”, "Code of Ethics" and " Section 16(a) Beneficial Ownership Compliance
" in our definitive proxy statement for our 2007 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 2007 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, 2006
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.
Plan
Category
|
|
Number
Of Securities
To
Be Issued Upon
Exercise
Of
Outstanding
Options
|
|
Weighted-Average
Exercise
Price
Of Outstanding
Options
|
|
Number
Of Securities
Remaining
Available For
Future
Issuance Under Equity
Compensation
Plans (excluding
securities
reflected in column (a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security
holders(1)
|
|
|
802,000
|
|
$
|
1.77
|
|
|
717,646
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security
holders(2)
|
|
|
551,000
|
|
$
|
1.85
|
|
|
132,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
1,353,000
|
|
$
|
1.80
|
|
|
850,446
|
|
(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 2007 annual meeting of stockholders
to be filed with the SEC within 120 days after the close of our fiscal
year.
ITEM
13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Any
information required by this item may appear under the caption "Certain
Relationships and Related Transactions" and “Board of Directors” in our
Definitive Proxy Statement for our 2007 annual meeting of Stockholders to be
filed with the SEC within 120 days after the close of our fiscal year and is
incorporated herein by reference.
ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
required by this item appears under the caption “Principal Accountant Fees and
Services” in our Definitive Proxy Statement for our 2007 annual meeting of
stockholders to be filed with the SEC within 120 days after the close of our
fiscal year and is incorporated herein by reference.
PART
IV
ITEM
15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES *
(a)
|
|
Financial
Statements, Schedules and Exhibits:
|
|
|
|
|
(1),(2)
|
The
consolidated financial statements and required schedules are indexed
on
page F-1.
|
|
|
|
|
(3)
|
Exhibits
required by the Exhibit Table of Item 601 of SEC Regulation S-K.
(Exhibit
numbers refer to numbers in the Exhibit Table of Item
601.)
|
|
|
|
|
3.1
|
Certificate
of Incorporation, filed as Exhibit 3.1 to Zoom Technologies, Inc.
Current
Report on Form 8-K dated February 28, 2002, filed with the Commission
on
March 4, 2002 (the "March 2002 Form 8-K"). *
|
|
|
|
|
3.2
|
By-Laws
of Zoom Technologies, Inc., filed as Exhibit 3.2 to the March 2002
Form
8-K. *
|
|
|
|
|
**10.1
|
1990
Stock Option Plan, as amended, 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, filed
as
Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2004..*
|
|
|
|
|
**10.10
|
Summary
of Directors' Compensation, filed as Exhibit 10.10 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2004.*
|
|
10.11
|
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.*
|
|
|
|
|
10.13
|
Loan
Modification Agreement dated March 30, 2006, by and between Zoom
Telephonics, Inc. and Wainright Bank and Trust Company, filed as
Exhibit
10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.*
|
|
|
|
|
10.14
|
Amendment
to Security Documents dated March 30, 2006, by and between Zoom
Telephonics, Inc. and Wainright Bank & Trust Company, filed as Exhibit
10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.*
|
|
|
|
|
10.15
|
Letter
agreement dated August 4, 2006, filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006.*
|
|
|
|
|
10.16
|
Purchase
and Sale Agreement dated August 31, 2006, filed as Exhibit 10.1 to
the
Company’s Current Report on Form 8-K on September 20,
2006.*
|
|
|
|
|
**10.17
|
Form
of Non-Qualified Stock Option Agreement for Named Executive Officers,
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on
December 12, 2006.*
|
|
|
|
|
10.18
|
Standard
lease by and between 201-207 South Street LLC and Zoom Technologies,
Inc.
on December 22, 2006 to lease space for 24 months for headquarters
offices.
|
|
|
|
|
21.
|
Subsidiaries,
filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
the
fiscal year ended December 31, 2000. *
|
|
|
|
|
23.1
|
Consent
of UHY LLP, independent registered public accounting
firm.
|
|
|
|
|
23.2
|
Consent
of KPMG LLP, independent registered public accounting
firm.
|
|
|
|
|
31.1
|
CEO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
31.2
|
CFO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
32.1
|
CEO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
ITEM
15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(Continued)
|
32.2
|
CFO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
*
|
In
accordance with Rule 12b-32 under the Securities Exchange Act of
1934, as
amended, reference is made to the documents previously filed with
the
Securities and Exchange Commission, which documents are hereby
incorporated by reference.
|
|
|
|
|
**
|
Compensation
Plan or Arrangement.
|
|
|
|
(b)
|
|
Exhibits
- See Item 15 (a) (3) above for a list of Exhibits incorporated herein
by
reference or filed with this Report.
|
|
|
|
(c)
|
|
Schedules
- Schedule II: Valuation and Qualifying Accounts. Schedules other
than
those listed above have been omitted since they are either inapplicable
or
not required.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
ZOOM
TECHNOLOGIES, INC.
(Registrant)
|
|
|
|
Date:
March 30, 2007
|
By: |
/s/
Frank B. Manning
|
|
Frank
B. Manning, President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Frank B. Manning
|
|
Principal
Executive Officer and Chairman of
|
|
March
30, 2007
|
Frank
B. Manning
|
|
the
Board |
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert A. Crist
|
|
Principal
Financial and Accounting Officer
|
|
March
30, 2007
|
Robert
A. Crist
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Peter R. Kramer
|
|
Director
|
|
March
30, 2007
|
Peter
R. Kramer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Bernard Furman
|
|
Director
|
|
March
30, 2007
|
Bernard
Furman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
J. Ronald Woods
|
|
Director
|
|
March
30, 2007
|
J.
Ronald Woods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Joseph Donovan
|
|
Director
|
|
March
30, 2007
|
Joseph
Donovan
|
|
|
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
Page
|
|
|
Report
of UHY LLP, Independent Registered Public Accounting Firm
|
40
|
Independent
Registered Public Accounting Firm
|
41
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
42
|
Consolidated
Statements of Operations for the years ended December 31, 2004, 2005,
and
2006
|
43
|
Consolidated
Statements of Stockholders' Equity and Comprehensive (Loss) Income
for the
years ended December 31, 2004, 2005, and 2006
|
44
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2005,
and
2006
|
45
|
Notes
to Consolidated Financial Statements
|
46-57
|
Schedule
II: Valuation and Qualifying Accounts for the years ended December
31,
2004, 2005, and 2006
|
58
|
REPORT
OF UHY LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Zoom
Technologies, Inc.:
We
have
audited the accompanying consolidated balance sheet of Zoom Technologies, Inc.
and subsidiary as of December 31, 2006 and the related consolidated statements
of operations, stockholders' equity and comprehensive (loss) income, and cash
flows for the year then ended. Our audit also included the financial statement
schedule for 2006. These consolidated financial statements and schedule are
the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these consolidated financial statements and schedule based on our
audit.
We
conducted our audit 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 audit provides 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, 2006 and the results of their operations and
their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule for 2006, when considered in relation
to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therin.
As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2006, the Company adopted Financial Accounting Standards Board Statement
No.
123 (Revised 2004) - “Share-Based Payment”.
|
|
|
|
|
|
|
|
/s/
UHY LLP
|
|
|
|
|
|
|
|
Boston,
Massachusetts
March
27, 2007
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Zoom
Technologies, Inc.:
We
have
audited the accompanying consolidated balance sheet of Zoom Technologies, Inc.
and subsidiary as of December 31, 2005, and the related consolidated statements
of operations, stockholders' equity and comprehensive loss, and cash flows
for
each of the years in the two-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, 2005, and the results of their operations and
their cash flows for each of the years in the two-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
|
|
|
2005
|
|
|
2006
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,081,122
|
|
$
|
7,833,046
|
|
Accounts
receivable, net of allowances of $1,294,637 in 2005 and
$915,969 in 2006
|
|
|
2,630,859
|
|
|
3,385,280
|
|
Inventories
|
|
|
5,073,178
|
|
|
4,511,814
|
|
Prepaid
expense and other current assets
|
|
|
301,265
|
|
|
269,301
|
|
Total
current assets
|
|
|
17,086,424
|
|
|
15,999,441
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
2,600,660
|
|
|
249,221
|
|
Total
assets
|
|
$
|
19,687,084
|
|
$
|
16,248,662
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,140,593
|
|
$
|
2,639,935
|
|
Accrued
expense
|
|
|
788,427
|
|
|
562,349
|
|
Deferred
gain on sale of real estate
|
|
|
-
|
|
|
367,245
|
|
Current
portion of long term debt
|
|
|
4,889,928
|
|
|
-
|
|
Total
current liabilities
|
|
|
8,818,948
|
|
|
3,569,529
|
|
|
|
|
|
|
|
|
|
Deferred
gain on sale of real estate
|
|
|
-
|
|
|
357,373
|
|
Total
liabilities
|
|
|
8,818,948
|
|
|
3,926,902
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
Common
stock, $0.01 par value:
|
|
|
|
|
|
|
|
Authorized
- 25,000,000 shares; issued - 9,355,366 shares, including shares
held in
treasury
|
|
|
93,554
|
|
|
93,554
|
|
Additional
paid-in capital
|
|
|
31,015,977
|
|
|
31,275,169
|
|
Accumulated
deficit
|
|
|
(20,627,318
|
)
|
|
(19,597,296
|
)
|
Accumulated
other comprehensive income -currency translation
adjustment
|
|
|
393,245
|
|
|
557,655
|
|
Treasury
stock (8,400 shares), at cost
|
|
|
(7,322
|
)
|
|
(7,322
|
)
|
Total
stockholders' equity
|
|
|
10,868,136
|
|
|
12,321,760
|
|
Total
liabilities and stockholders' equity
|
|
$
|
19,687,084
|
|
$
|
16,248,662
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2004, 2005 and 2006
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
31,411,781
|
|
$
|
25,551,179
|
|
$
|
18,322,301
|
|
Cost
of goods sold
|
|
|
23,345,918
|
|
|
20,885,254
|
|
|
15,720,574
|
|
Gross
profit
|
|
|
8,065,863
|
|
|
4,665,925
|
|
|
2,601,727
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
4,800,165
|
|
|
4,059,318
|
|
|
3,631,340
|
|
General
and administrative
|
|
|
3,619,480
|
|
|
3,552,985
|
|
|
2,846,862
|
|
Research
and development
|
|
|
2,927,225
|
|
|
2,698,449
|
|
|
2,157,529
|
|
|
|
|
11,346,870
|
|
|
10,310,752
|
|
|
8,635,731
|
|
Operating
profit (loss) before gain on sale of real estate
|
|
|
(3,281,007
|
)
|
|
(5,644,827
|
)
|
|
(6,034,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
|
-
|
|
|
-
|
|
|
4,752,625
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(3,281,007
|
)
|
|
(5,644,827
|
)
|
|
(1,281,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
:
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
149,381
|
|
|
235,424
|
|
|
226,015
|
|
Interest
expense
|
|
|
(211,213
|
)
|
|
(253,797
|
)
|
|
(306,867
|
)
|
Gain
on sale of investment in InterMute, Inc.
|
|
|
-
|
|
|
3,495,546
|
|
|
2,105,433
|
|
Other,
net
|
|
|
270,991
|
|
|
59,651
|
|
|
233,515
|
|
Total
other income, net
|
|
|
209,159
|
|
|
3,536,824
|
|
|
2,258,096
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(3,071,848
|
)
|
|
(2,108,003
|
)
|
|
976,717
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (benefit)
|
|
|
-
|
|
|
9,134
|
|
|
(
53,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
($3,071,848
|
)
|
|
($2,117,137
|
)
|
$
|
1,030,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share
|
|
|
($0.36
|
)
|
|
($0.23
|
)
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,590,092
|
|
|
9,206,179
|
|
|
9,346,966
|
|
Diluted
|
|
|
8,590,092
|
|
|
9,206,179
|
|
|
9,349,381
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME (LOSS)
|
|
Common
Stock
|
|
Additional
Paid In
|
|
Accumulated
|
|
Accumulated
Other Comprehensive
|
|
Treasury
Stock
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Income
(A)
|
|
Shares
|
|
Amount
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,030,022
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,030,022
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
164,410
|
|
|
-
|
|
|
-
|
|
|
164,410
|
|
Comprehensive
income (loss)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,194,432
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
259,192
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
259,192
|
|
Balance
at December 31, 2006
|
|
|
9,355,366
|
|
$
|
93,554
|
|
$
|
31,275,169
|
|
|
($19,597,296
|
)
|
$
|
557,655
|
|
|
8,400
|
|
|
($7,322
|
)
|
$
|
12,321,760
|
|
(A)
Consists exclusively of foreign currency translation adjustments.
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2004, 2005 and 2006
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
($3,071,848
|
)
|
|
($2,117,137
|
)
|
$
|
1,030,023
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of investment in InterMute, Inc.
|
|
|
-
|
|
|
(3,495,516
|
)
|
|
(2,105,433
|
)
|
Gain
on sale of real estate
|
|
|
|
|
|
|
|
|
(4,752,625
|
)
|
Depreciation
and amortization
|
|
|
405,158
|
|
|
324,208
|
|
|
140,540
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
259,192
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
771,767
|
|
|
632,589
|
|
|
(629,677
|
)
|
Inventories
|
|
|
(259,262
|
)
|
|
(45,887
|
)
|
|
573,902
|
|
Prepaid
expense and other current assets
|
|
|
(95,295
|
)
|
|
219,135
|
|
|
37,084
|
|
Accounts
payable and accrued expense
|
|
|
97,969
|
|
|
626,798
|
|
|
(
702,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(2,151,511
|
)
|
|
(3,855,810
|
)
|
|
(6,149,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of Investment in InterMute, Inc.
|
|
|
-
|
|
|
3,495,517
|
|
|
2,105,433
|
|
Proceeds
from sale of real estate
|
|
|
|
|
|
|
|
|
7,733,970
|
|
Purchases
of property, plant and equipment
|
|
|
(189,381
|
)
|
|
(223,976
|
)
|
|
(43,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(189,381
|
)
|
|
3,271,541
|
|
|
9,795,760
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
(217,966
|
)
|
|
(211,926
|
)
|
|
(4,889,929
|
)
|
Exercise
of stock options
|
|
|
2,080,815
|
|
|
447,449
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
1,862,849
|
|
|
235,523
|
|
|
(4,889,929
|
)
|
Effect
of exchange rate changes on cash
|
|
|
12,255
|
|
|
(8,728
|
)
|
|
(4,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(465,788
|
)
|
|
(357,474
|
)
|
|
(1,248,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
9,904,384
|
|
|
9,438,596
|
|
|
9,081,122
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
9,438,596
|
|
$
|
9,081,122
|
|
$
|
7,833,046
|
|
See
accompanying notes.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2004, 2005 and 2006
(1) NATURE
OF OPERATIONS
Zoom
Technologies,, Inc. and subsidiary (collectively, the "Company") design,
produce, and market broadband and dial-up modems and other communication-related
products
(2) SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Presentation and Use of Estimates
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (US
GAAP).
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenue and
expense during the reporting period. Actual results may differ from those
estimates. Significant estimates made by the Company include: 1) asset valuation
allowances for accounts receivable (collectibility and sales returns) and
deferred income tax assets; 2) write-downs of inventory for slow-moving and
obsolete items, and market valuations; 3) stock based compensation; 4) the
useful lives of property, plant and equipment; and 5) the recoverability of
long-lived assets .
(b)
Principles of Consolidation
The
consolidated financial statements include the accounts of Zoom Technologies,
Inc. and its wholly owned subsidiary, Zoom Telephonics, Inc. All intercompany
balances and transactions have been eliminated in consolidation.
(c)
Cash and Cash Equivalents
All
highly liquid investments with original maturities of less than 90 days from
the
date of purchase are classified as cash equivalents. Cash equivalents consist
exclusively of money market funds. The Company has deposits at a limited number
of financial institutions with federally insured limits. Balances of cash and
cash equivalents at these institutions are normally in excess of the insured
limits. However, the Company believes that the institutions are financial sound
and there is only nominal risk of loss.
(d)
Inventories
Inventories
are stated at cost, determined using the first-in, first-out method, or
market.
(e)
Property, plant and equipment
Property,
plant and equipment is stated and recorded at cost. Depreciation of property,
plant and equipment is provided using the straight-line method, with
amortization over the estimated useful lives of the assets.
(f)
Impairment of Long-Lived Assets
Long-lived
assets are reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset or asset group to undiscounted future net cash flows expected to
be
generated by the asset or asset group. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the
carrying amount of the assets exceeds 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
Deferred
income taxes are provided on the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and on net operating loss and tax credit carry forwards. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that
includes the enactment date.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial
Statements(Continued)
(h)
Earnings (Loss) Per Common Share
Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
loss per share is computed by dividing net income by the weighted average number
of common shares and dilutive potential common shares outstanding during the
period. Under the treasury stock method, the unexercised options are assumed
to
be exercised at the beginning of the period or at issuance, if later. The
assumed proceeds are then used to purchase common shares at the average market
price during the period. A summary of the denominators used to compute basic
and
diluted earnings (loss) per share follow:
|
|
2004
|
|
2005
|
|
2006
|
|
Weighted
average shares outstanding - used to compute basic earnings (loss)
per
share
|
|
|
8,590,092
|
|
|
9,206,179
|
|
|
9,346,966
|
|
Net
effect of dilutive potential common shares outstanding,
based on the treasury stock method
|
|
|
-
|
|
|
-
|
|
|
2,415
|
|
Weighted
average shares outstanding - used to compute diluted earnings (loss)
per
share
|
|
|
8,590,092
|
|
|
9,206,179
|
|
|
9,349,381
|
|
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 769,790 and 187,438 shares of common
stock at December 31, 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 generally does not sell software.
The
Company derives its net sales primarily from the sales of hardware products
to
computer peripherals retailers, computer product distributors, and original
equipment manufacturers (OEMs). The Company sells a very small amount of its
hardware products to direct consumers or to any customers via the
internet.
The
Company recognizes hardware net sales for all four types of customers at the
point when the customers take legal ownership of the delivered products. Legal
ownership passes to the customer based on the contractual FOB point specified
in
signed contracts and purchase orders, which are both used extensively. Many
customer contracts or purchase orders specify FOB destination. The Company
verifies the delivery date on all significant FOB destination shipments made
during the last 10 business days of each quarter.
The
Company's net sales of hardware are reduced by certain events which are
characteristic of the sales of hardware to retailers of computer peripherals.
These events are product returns, certain sales and marketing incentives, price
protection refunds, and consumer and in-store mail-in rebates. Each of these
is
accounted for as a reduction of net sales based on careful management estimates,
which are reconciled to actual customer or end-consumer credits on a monthly
or
quarterly basis.
The
estimates for product returns are based on recent historical trends plus
estimates for returns prompted by announced stock rotations, announced customer
store closings, etc. Management analyzes historical returns, current economic
trends, and changes in customer demand and acceptance of the Company's products
when evaluating the adequacy of sales return allowances. The Company's estimates
for price protection refunds require a detailed understanding and tracking
by
customer, by sales program. Estimated price protection refunds are recorded
in
the same period as the announcement of a pricing change. Information from
customer inventory-on-hand reports or from direct communications with the
customers is used to estimate the refund, which is recorded as a reserve against
accounts receivable and a reduction of current period revenue. The Company's
estimates for consumer mail-in rebates are comprised of actual rebate claims
processed by the rebate redemption centers plus an accrual for an estimated
lag
in processing. The Company's estimates for store rebates are comprised of actual
credit requests from the eligible customers.
(j)
Financial Instruments
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, accrued expense, and, until December 2006 when the Company paid off
its
mortgage, 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.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
(k)
Stock-Based Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123 (R), “Accounting for Stock
Based Compensation” using the modified-prospective method. Under this method,
compensation cost is recognized for all share-based payments granted, modified
or settled after January 1, 2006, as well as for any unvested awards that were
granted prior thereto. Compensation cost for unvested awards granted prior
to
January 1, 2006 is recognized using the same estimate of the grant-date fair
value and the same attribution method used to determine the pro forma
disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation.”
Compensation cost for awards granted after January 1, 2006 is based on the
estimated fair value of the awards on their grant date and is generally
recognized over the required service period. Prior to January 1, 2006, the
Company accounted for its stock option plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees”, and related Interpretations. No
stock-based compensation expense was recognized in operations for these plans,
since all options granted under them had an exercise price equal to the market
value of the underlying common stock on the date of grant. The effect of
adopting SFAS No. 123(R) was to increase compensation cost and reduce reported
net income for the year ended December 31, 2006 by $259.2 thousand, or $0.03
per
basic share and $0.03 per diluted share. Stock based compensation cost is
generally deductible for income tax reporting purposes; there was no effect
on
cash flows.
The
unrecognized stock-based compensation cost related to non-vested stock awards
as
of December 31, 2006 was $250.1 thousand. Such amount will be recognized in
operations ratably over a remaining period of two years.
Pro
forma
information as if the Company had applied the fair value method to recognize
stock based compensation cost follows:
|
|
Year
ended December 31
|
|
|
|
2004
|
|
2005
|
|
Net
loss, as reported
|
|
|
($3,071,848
|
)
|
|
($2,117,137
|
)
|
|
|
|
|
|
|
|
|
Stock-based
employee compensation expense determined using fair value
|
|
|
(591,459
|
)
|
|
(782,618
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
|
($3,663,307
|
)
|
|
($2,899,755
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share, as reported - Basic and diluted
|
|
|
($0.36
|
)
|
|
($0.23
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share, pro forma - Basic and diluted
|
|
|
($0.43
|
)
|
|
($0.31
|
)
|
Weighted-average
assumptions: 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 and 2006 -expected dividend yield 0.0%, risk-free interest rate
of
4.59%, volatility 58.6% and an expected life of 2.22 years.
(l)
Advertising Costs
Advertising
costs are expensed as incurred and reported in selling expense in the
accompanying consolidated statements of operations and include costs of
advertising, production, trade shows, and other activities designed to enhance
demand for the Company's products. There are no deferred advertising costs
in
the accompanying consolidated balance sheets.
(m)
Foreign Currencies
The
Company generates a portion of its revenues in markets outside North America
and
principally in transactions that are denominated in foreign currencies, which
exposes the Company to risks of foreign currency fluctuations. Foreign currency
transaction gains and losses are reflected in operations and were not material
for any period presented. The Company does not use derivative financial
instruments.
The
Company considers the local currency to be the functional currency for its
U.K.
branch. Assets and liabilities denominated in foreign currencies are translated
using the exchange rates as of the balance sheet date. Revenues and expenses
are
translated at average exchange rates prevailing during the year. Translation
adjustments resulting from this process are charged or credited to accumulated
other comprehensive income.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
(n)
Warranty Costs
The
Company provides currently for the estimated costs that may be incurred under
its standard warranty obligations.
(o)
Shipping and Freight Costs
The
Company records the expense associated with customer-delivery shipping and
freight costs in selling expense.
(3)
LIQUIDITY
On
December 31, 2006 the Company had working capital of $12.4 million including
$7.8 million in cash and cash equivalents. On December 31, 2005 the Company
had
working capital of $8.3 million including $9.1 million in cash and cash
equivalents. The Company’s current ratio at December 31, 2006 was 4.5 compared
to 1.9 at December 31, 2005. The significant improvement was primarily the
result of the sale of the Company’s headquarters net of the payment of the
related mortgage debt.
In
2006
operating activities used $6.2 million in cash. The Company’s net income in 2006
was $1.0 million which included an operating loss of $6.0 million before the
gain on the sale of the headquarters of $4.8 million and net non-operating
income of $2.3 million, including a $2.1 million gain on the sale of the
investment in InterMute, Inc. Sources of cash from operations included a
decrease in inventory of $0.6 million and non-cash depreciation and amortization
expense of $0.1 million. Uses of cash from operations included an increase
in
accounts receivable of $0.6 million and a decrease of accounts payable and
accrued expenses of $0.7 million.
In
2006
the Company’s net cash provided by investing activities was $9.8 million, which
included the proceeds from the sale of its headquarters building of $7.7 million
and $2.1 million of final payments received from the sale of InterMute, Inc..
This was partially offset by our $0.04 million investment in property, plant
and
equipment.
In
2006
$4.9 million cash was used by financing activities for the full repayment of
the
mortgage on the Company’s headquarters building.
On
March
16, 2005 the Company entered into a one year Loan and Security Agreement with
Silicon Valley Bank that provided for a revolving line of credit of up to $2
million. 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.
As a result of the building sale and our efforts to minimize expenses, we are
not currently pursuing a renewal of the credit line.
To
conserve cash and manage our liquidity, the Company has implemented cost cutting
initiatives including the reduction of employee headcount and overhead costs.
The employee headcount was 127 at December 31, 2005 and 69 at December 31,
2006.
Forty-seven of this total reduction of 58 resulted from the closing of the
Company’s Boston manufacturing facility in August 2006. The Company’s production
activity was outsourced to a lower-cost maquiladora factory in Tijuana, Mexico.
The Company plans to continue to assess its cost structure as it relates to
revenues and cash position, and the Company may make further reductions if
the
actions are deemed necessary.
The
Company's total current assets at December 31, 2006 were $16.0 million and
current liabilities were $3.6 million. The Company did not have any long-term
debt at December 31, 2006. Management believes it has sufficient resources
to
fund its planned operations through at least December 31, 2007. However, if
the
Company is unable to increase its revenues, reduce its expense, or raise capital
the Company's longer-term ability to continue as a going concern and achieve
its
intended business objectives could be adversely affected.
(4)
NEW
ACCOUNTING PRONOUNCEMENTS
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, and disclosure. This pronouncement
is
effective for fiscal years beginning after December 15, 2006, and the Company
will adopt FIN 48 effective the beginning of fiscal 2007. Differences between
the amounts recognized in the adoption will be accounted for as a
cumulative-effect adjustment. The Company is currently assessing the impact
of
FIN 48 on its financial statements. The Company does not believe that the
adoption of FIN 48 will have a significant impact on its financial
statements.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosure
requirements regarding fair value measurement. This statement simplifies and
codifies fair value related guidance previously issued and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company does not believe
that
SFAS 157 will significantly impact its financial statements.
In
June
2006, the FASB issued Emerging Issues Tax Force Issue No. 06-3, or EITF 06-3,
How Sales Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation). EITF 06-3 requires disclosure of accounting policy regarding
the gross or net presentation of point-of-sales taxes such as sales tax and
value-added tax. If taxes included in gross revenues are significant, the amount
of such taxes for each period for which an income statement is presented should
also be disclosed. EITF 06-3 will be effective for the first annual or interim
reporting period after December 15, 2006. The Company will adopt this
pronouncement beginning in the first quarter of 2007 and does not expect the
adoption of EITF 06-3 to have a material impact on its financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides
guidance on the consideration of the effects of prior year unadjusted errors
in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 requires registrants to apply the new guidance the first
time that it identifies material errors in existence at the beginning of the
first fiscal year ending after November 15, 2006 by correcting those errors
through a one-time cumulative effect adjustment to beginning-of-year retained
earnings. The Company’s financial statements were not effected by SAB
108.
(5)
INVENTORIES
Inventories
consist of the following at December 31:
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Materials
|
|
$
|
2,333,949
|
|
$
|
2,969,375
|
|
Work
in process
|
|
|
648,034
|
|
|
522,307
|
|
Finished
goods (including $563,000 held by a customer at December 31, 2006)
|
|
|
2,091,195
|
|
|
1,020,132
|
|
Total
|
|
$
|
5,073,178
|
|
$
|
4,511,814
|
|
(6) PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following at December 31:
|
|
2005
|
|
2006
|
|
Estimated useful
lives
|
|
Land
|
|
$
|
309,637
|
|
$
|
-
|
|
|
-
|
|
Buildings
and improvements
|
|
|
2,842,766
|
|
|
-
|
|
|
31.5
years
|
|
Leasehold
improvements
|
|
|
492,617
|
|
|
6,100
|
|
|
5
years
|
|
Computer
hardware and software
|
|
|
3,677,616
|
|
|
3,706,110
|
|
|
3
years
|
|
Machinery
and equipment
|
|
|
1,836,453
|
|
|
1,905,434
|
|
|
5
years
|
|
Molds,
tools and dies
|
|
|
1,605,119
|
|
|
1,607,669
|
|
|
5
years
|
|
Office
furniture and fixtures
|
|
$
|
275,516
|
|
$
|
277,337
|
|
|
5
years
|
|
|
|
$
|
11,039,724
|
|
$
|
7,502,650
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
|
(8,439,064
|
)
|
|
(7,253,429
|
)
|
|
|
|
Total
Property, plant and equipment, net
|
|
$
|
2,600,660
|
|
$
|
249,221
|
|
|
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
(7)
COMMITMENTS
AND CONTINGENCIES
(a)
Lease Obligations
The
Company leases its headquarters’ offices in Boston, Massachusetts, a
manufacturing facility in Tijuana, Mexico, a sales office facility in Fleet,
United Kingdom, and a technical support facility in Boca Raton, Florida. In
December, 2006, the Company sold its owned headquarters buildings in Boston,
Massachusetts and leased back 25,000 square feet for two years expiring December
2008 (see Note 8). In September 2006 the Company moved out of its leased
manufacturing facility in Boston, Massachusetts and moved into a leased
manufacturing facility in Tijuana, Mexico. The Mexico lease expires on April
30,
2008 with five two year option renewals thereafter. 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 $795,102, $733,760, and $576,477 for the years ended
December 31, 2004, 2005 and 2006, 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
|
|
2007
|
|
$
|
669,820
|
|
2008
|
|
$
|
460,861
|
|
(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.
(c)
Concentrations
The
Company participates in the PC peripherals industry, which is characterized
by
aggressive pricing practices, continually changing customer demand patterns
and
rapid technological developments. The Company's operating results could be
adversely affected should the Company be unable to successfully anticipate
customer demand accurately; manage its product transitions, inventory levels
and
manufacturing process efficiently; distribute its product quickly in response
to
customer demand; differentiate its products from those of its competitors or
compete successfully in the markets for its new products.
The
Company depends on many third-party suppliers for key components contained
in
its product offerings. For some of these components, the Company may only use
a
single source supplier, in part due to the lack of alternative sources of
supply. If the supply of a key material component is delayed or curtailed,
the
Company's ability to ship the related product or solution in desired quantities
and in a timely manner could be adversely affected, possibly resulting in
reductions in net sales. In cases where alternative sources of supply are
available, qualification of the sources and establishment of reliable supplies
could result in delays and possible reduction in net sales.
In
the
event that the financial condition of the Company's third-party suppliers for
key components was to erode, the delay or curtailment of deliveries of key
material components could occur. Additionally, the Company's reliance on
third-party suppliers of key material components exposes the Company to
potential product quality issues that could affect the reliability and
performance of its products and solutions. Any lesser ability to ship its
products in desired quantities and in a timely manner due to a delay or
curtailment of the supply of material components, or product quality issues
arising from faulty components manufactured by third-party suppliers, could
adversely affect the market for the Company's products and lead to a reduction
in the Company's net sales.
(8) SALE/LEASEBACK
AND MORTGAGE DEBT
In
December 2006, the Company sold real estate housing its corporate headquarters
and concurrently entered into a leaseback arrangement for a portion of the
property. The leaseback arrangement is for two years. Net proceeds from the
sale
were $7,733,970 of which a portion was used to retire related outstanding
mortgage debt. A gain of $5,477,243 was realized on the sale. However, a portion
of the gain ($724,618) has been deferred and will be recognized in operations
over the term of the lease (2007 - $367,245 and 2008 - $357,373). The gain
deferred is the estimated present value of the minimum lease payments under
the
leaseback arrangement. The gain recognized in operations in 2006 was
$4,752,625.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
(9)
STOCK
OPTION PLANS
At
December 31, 2006 the Company had three stock option plans as 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 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. Option activity under
this plan follows:
|
|
Number
of shares
|
|
Weighted
average exercise
price
|
|
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
|
|
Granted
|
|
|
335,000
|
|
$
|
1.03
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(301,000
|
)
|
$
|
1.95
|
|
Balance
at December 31, 2006
|
|
|
670,000
|
|
$
|
1.74
|
|
The
weighted average grant date fair value of options granted was $2.45 in 2005
and
$1.03 in 2006.
The
following table summarizes information about fixed stock options under the
Employee Stock Option Plan outstanding on December 31, 2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual
Life
|
|
Weighted
Average Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.03
|
|
|
335,000
|
|
|
2.9
|
|
$
|
1.03
|
|
|
0
|
|
$
|
0
|
|
$2.45
|
|
|
335,000
|
|
|
1.3
|
|
$
|
2.45
|
|
|
167,500
|
|
$
|
2.45
|
|
$1.03
to $2.45
|
|
|
670,000
|
|
|
2.1
|
|
$
|
1.74
|
|
|
167,500
|
|
$
|
2.45
|
|
In
1991
the Company established the Director Stock Option Plan (the "Directors Plan").
Shares of common stock were registered for issuance under this plan in
accordance with the Securities Act of 1933. The Directors Plan was established
for all directors of the Company except for any director who is a full-time
employee or full-time officer of the Company. In 2003, the Directors Plan was
amended to provide that, each eligible director is automatically granted an
option to purchase 12,000 shares of common stock on July 10 and January 10
of
each year, beginning July 10, 2003. The option price is the fair market value
of
the common stock on the date the option is granted. There are 450,000 shares
authorized for issuance under the Directors Plan. Each option expires two years
from the grant date. Option activity under this plan follows:
|
|
Number
of shares
|
|
Weighted
average
exercise
price
|
|
Balance
at December 31, 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
|
|
Granted
|
|
|
72,000
|
|
$
|
1.275
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(48,000
|
)
|
$
|
3.81
|
|
Balance
at December 31, 2006
|
|
|
132,000
|
|
$
|
1.93
|
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
The
weighted average grant date fair value of options granted was $3.81 in 2004,
$2.82 in 2005 and $1.275 in 2006.
The
following table summarizes information about fixed stock options under the
Directors Plan on December 31, 2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual
Life
|
|
Weighted
Average Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00-$1.75
|
|
|
72,000
|
|
|
1.3
|
|
$
|
1.275
|
|
|
36,000
|
|
$
|
1.47
|
|
$1.75-$3.50
|
|
|
60,000
|
|
|
0.3
|
|
$
|
2.71
|
|
|
60,000
|
|
$
|
2.71
|
|
$1.08-$3.31
|
|
|
132,000
|
|
|
0.8
|
|
$
|
1.93
|
|
|
96,000
|
|
$
|
2.24
|
|
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. Under this
plan, stock options may be granted at the discretion of the Compensation
Committee of the Board of Directors at an option price determined by the
Compensation Committee. All options under this plan have been issued at fair
market value on the date of the grant. The options are exercisable in accordance
with terms specified by the Compensation Committee. Option activity under this
plan follows:
|
|
Number
of shares
|
|
Weighted
average
exercise
price
|
|
Balance
at December 31, 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
|
|
Granted
|
|
|
273,000
|
|
$
|
1.03
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(
215,700
|
)
|
$
|
1.97
|
|
Balance
at December 31, 2006
|
|
|
551,000
|
|
$
|
1.85
|
|
The
weighted average grant date fair value of options granted was $3.64 in 2004,
$2.42 in 2005 and $1.03 in 2006.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
The
following table summarizes information about fixed stock options under the
1998
Plan outstanding on December 31, 2006:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual
Life
|
|
Weighted
Average Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00-$1.75
|
|
|
273,000
|
|
|
2.9
|
|
$
|
1.03
|
|
|
0
|
|
$
|
0
|
|
$1.75-$3.50
|
|
|
226,000
|
|
|
1.2
|
|
$
|
2.42
|
|
|
123,000
|
|
$
|
2.43
|
|
$3.50-$5.25
|
|
|
52,000
|
|
|
0.7
|
|
$
|
3.70
|
|
|
52,000
|
|
$
|
3.70
|
|
$1.03-$4.83
|
|
|
551,000
|
|
|
2.0
|
|
$
|
1.85
|
|
|
175,000
|
|
$
|
2.81
|
|
On
October 26, 2005, the Company 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
represented 33% of the total outstanding unvested stock options and
approximately 25% of the total outstanding stock options as of October 26,
2005.
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 was
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 the
action reduced the stock option expense we otherwise would have recorded by
approximately $130,000 for 2006.
In
2006
there were no options exercised for the above referenced plans. The aggregate
intrinsic value of all options outstanding as of December 31, 2006 was $54,720.
On
December 31, 2006 there were 850,446 additional shares available for issuance
under all three stock option plans. The per share weighted-average fair value
of
stock options granted during, 2004, 2005 and 2006 was $2.18, $1.35 and $0.3928
respectively, determined as of the date of grant using the Black Scholes
option-pricing model.
(10) INCOME
TAXES
Income
tax expense (benefit) consists of:
|
|
Current
|
|
Deferred
|
|
Total
|
|
Year
Ended December 31, 2005:
|
|
|
|
|
|
|
|
US
federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
State
and local
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
|
|
$
|
9,134
|
|
$
|
-
|
|
$
|
9,134
|
|
|
|
$
|
9,134
|
|
$
|
-
|
|
$
|
9,134
|
|
Year
Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
US
federal
|
|
$
|
47,483
|
|
$
|
-
|
|
$
|
47,483
|
|
State
and local
|
|
|
(100,006
|
)
|
|
-
|
|
|
(100,006
|
)
|
Foreign
|
|
$
|
(882
|
)
|
$
|
-
|
|
$
|
(882
|
)
|
|
|
$
|
(53,405
|
)
|
$
|
-
|
|
$
|
(53,405
|
)
|
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
A
reconciliation of the expected income tax expense or benefit to actual
follows:
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Computed
"expected" US tax (benefit)
|
|
|
($1,044,428
|
)
|
|
($716,721
|
)
|
$
|
333,455
|
|
Change
resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
and local income taxes, net of federal income tax benefit
|
|
|
-
|
|
|
-
|
|
|
(66,004
|
)
|
Federal
valuation allowance
|
|
|
1,023,535
|
|
|
730,525
|
|
|
406,594
|
|
Non-deductible
items
|
|
|
|
|
|
|
|
|
38,251
|
|
Change
in estimate for prior years’ provisions
|
|
|
|
|
|
|
|
|
46,601
|
|
Other,
net
|
|
|
20,893
|
|
|
(4,670
|
)
|
|
887
|
|
Income
tax expense (benefit)
|
|
$
|
-
|
|
$
|
9,134
|
|
$
|
(53,405
|
)
|
Temporary
differences at December 31 follow:
|
|
2004
|
|
2005
|
|
2006
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,861,978
|
|
$
|
1,654,471
|
|
$
|
1,511,389
|
|
Accounts
receivable
|
|
|
270,041
|
|
|
303,392
|
|
|
253,501
|
|
Accrued
expenses
|
|
|
166,487
|
|
|
152,852
|
|
|
97,565
|
|
Net
operating loss and tax credit carry forwards
|
|
|
11,325,988
|
|
|
11,770,977
|
|
|
12,410,482
|
|
Plant
and equipment
|
|
|
1,616,459
|
|
|
988,263
|
|
|
656,327
|
|
Other
|
|
|
118,526
|
|
|
115,624
|
|
|
2,056
|
|
Total
deferred income tax assets
|
|
|
15,359,479
|
|
|
14,985,579
|
|
|
14,920,466
|
|
Valuation
allowance
|
|
|
(15,359,479
|
)
|
|
(14,985,579
|
)
|
|
(14,920,466
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
On
December 31, 2006 the Company had federal net operating loss carry forwards
of
approximately $32,570,000 which are available to offset future taxable income.
They are due to expire in varying amounts from 2018 to 2026. The
Company had state net operating loss carry forwards of approximately $13,363,000
which are available to offset future taxable income. They are due to expire
in
varying amounts from 2007 through 2011. The Company recorded a deferred income
tax asset valuation allowance for the portion of the deferred income tax assets
that management believes may expire unused. The valuation allowance reduces
deferred income tax assets to reflect the estimated amount of deferred tax
assets, which will more likely not be realized after considering all the
available objective evidence, historical and prospective, with greater weight
given to historical evidence.
Subsequently
recognized tax benefits relating to valuation allowances for deferred income
tax
assets, if any, will be allocated as follows: $14,155,000 to continuing
operations and $765,000 to additional paid-in capital which is attributable
to
the exercise of employee stock options.
(11) SIGNIFICANT
CUSTOMERS
The
Company sells its products primarily through high-volume distributors and
retailers, Internet service providers, telephone service providers, value-added
resellers, PC system integrators, and original equipment manufacturers ("OEMs").
The Company supports its major accounts in their efforts to discern strategic
directions in the market, to maintain appropriate inventory levels, and to
offer
a balanced selection of attractive products.
Relatively
few customers have accounted for a substantial portion of the Company’s net
sales. During 2006 the Company’s top customer which accounted for 10% or more of
its total net sales was Dixon’s Store Group, a major retailer in the U.K. Two
other customers each accounted for 9% of total net sales. Together these three
customers accounted for 30% of the Company’s total net sales and 56% of net
accounts receivable. Two customers each comprised approximately 10% or more
of
net sales for the year ended December 31, 2005. Three customers each accounted
for approximately 10% or more of net sales for the years ended December 31,
2004. 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.
The
Company’s customers generally do not enter into long-term agreements obligating
them to purchase products. The Company may not continue to receive significant
revenues from any of these or from other large customers. A reduction or delay
in orders from any of the Company’s significant customers, or a delay or default
in payment by any significant customer could materially harm the Company’s
business and prospects. Because of the Company’s significant customer
concentration, its net sales and operating income could fluctuate significantly
due to changes in political or economic conditions, or the loss, reduction
of
business, or less favorable terms for any of the Company's significant
customers.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
(12) GAIN
ON SALE OF INVESTMENT IN INTERMUTE
Since
1999 the Company had a minority interest in a privately held software company,
InterMute, Inc., which the Company had been accounting for under the equity
method of accounting. The Company made its original investment in 1999, at
the
time of the company’s formation, and subsequently made additional investments.
Under the equity method of accounting, the Company's investment was increased
or
decreased, not below zero, based upon the Company's proportionate share of
the
net earnings or losses of InterMute. As a result of the losses incurred by
InterMute subsequent to the Company's investments, the Company's investment
balance was reduced to zero during 2002. The Company discontinued applying
the
equity method when the investment was reduced to zero and did not provide for
additional losses, as the Company did not guarantee obligations of the investee
and was not committed to provide further financial support.
In
June
2005 InterMute was acquired by Trend Micro Inc., a U.S. subsidiary of Trend
Micro Japan. In connection with the acquisition of InterMute in June 2005,
the
Company received a payment in exchange for its investment of approximately
$3.5
million, also in June 2005. The Company realized in cash an additional gain
of
$2.1 million during 2006, representing its portion of an earnout paid by the
buyer as a result of the achievement of a performance milestone. Total net
proceeds from the sale of the Company’s minority interest in InterMute were $5.6
million, received over 2005 and 2006. There will be no further payments from
the
sale of InterMute.
(13) SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
paid during year for interest
|
|
$
|
210,941
|
|
$
|
252,797
|
|
$
|
306,867
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during year for income taxes
|
|
$
|
-
|
|
$
|
4,253
|
|
$
|
-
|
|
(14) DEPENDENCE
ON KEY SUPPLIERS AND CONTRACT MANUFACTURERS
The
Company produces its products using components or subassemblies purchased from
third-party suppliers.
Currently
a substantial percentage of our manufacturing is performed by 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 six other
vendors to manufacture various products.
(15) SEGMENT
AND GEOGRAPHIC INFORMATION
The
Company's operations are classified as one reportable segment. Substantially
all
of the Company's operations and long-lived assets reside primarily in the United
States. Net sales information follows:
|
|
2004
|
|
Percent
|
|
2005
|
|
Percent
|
|
2006
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
14,026,601
|
|
|
45%
|
|
$
|
11,575,212
|
|
|
45%
|
|
$
|
10,278,545
|
|
|
56%
|
|
Outside
North America
|
|
|
17,385,180
|
|
|
55%
|
|
|
13,975,967
|
|
|
55%
|
|
|
8,043,756
|
|
|
44%
|
|
Total
|
|
$
|
31,411,781
|
|
|
100%
|
|
$
|
25,551,179
|
|
|
100%
|
|
$
|
18,322,301
|
|
|
100%
|
|
(16) RETIREMENT
PLAN
The
Company has a 401(k) retirement savings plan for employees. Under the plan,
the
Company matches 25% of an employee's contribution, up to a maximum of $350
per
employee per year. Company matching contributions charged to expense in 2004,
2005, and 2006 were $23,654, $20,953, and $16,750 respectively.
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
(Continued)
(17)
|
SELECTED
QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA,
UNAUDITED)
|
The
following table depicts selected quarterly financial information. Operating
results for any given quarter are not necessarily indicative of results for
any
future period.
|
|
2005
Quarter Ended
|
|
2006
Quarter Ended (1)
|
|
|
|
Mar.
31
|
|
Jun.
30
|
|
Sept.
30
|
|
Dec.
31
|
|
Mar.
31
|
|
Jun.
30
|
|
Sept.
30
|
|
Dec.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
6,436
|
|
$
|
6,524
|
|
$
|
5,309
|
|
$
|
7,282
|
|
$
|
5,281
|
|
$
|
4,518
|
|
$
|
3,579
|
|
$
|
4,944
|
|
Costs
of goods sold
|
|
|
4,904
|
|
|
5,143
|
|
|
4,790
|
|
|
6,048
|
|
|
4,315
|
|
|
4,295
|
|
|
3,338
|
|
|
3,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,532
|
|
|
1,381
|
|
|
519
|
|
|
1,234
|
|
|
966
|
|
|
223
|
|
|
241
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,120
|
|
|
1,074
|
|
|
978
|
|
|
887
|
|
|
904
|
|
|
878
|
|
|
782
|
|
|
1,067
|
|
General
and administrative
|
|
|
823
|
|
|
1,731
|
|
|
314
|
|
|
686
|
|
|
849
|
|
|
698
|
|
|
689
|
|
|
610
|
|
Research
and development
|
|
|
749
|
|
|
696
|
|
|
664
|
|
|
589
|
|
|
632
|
|
|
557
|
|
|
521
|
|
|
448
|
|
|
|
|
2,692
|
|
|
3,501
|
|
|
1,956
|
|
|
2,162
|
|
|
2,385
|
|
|
2,133
|
|
|
1,992
|
|
|
2,125
|
|
Operating
loss before gain of sale of
real estate
|
|
|
(1,160
|
)
|
|
(2,120
|
)
|
|
(1,437
|
)
|
|
(928
|
)
|
|
(1,419
|
)
|
|
(1,910
|
)
|
|
(1,751
|
)
|
|
(953
|
)
|
Gain
on sale of real estate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(1,160
|
)
|
|
(2,120
|
)
|
|
(1,437
|
)
|
|
(928
|
)
|
|
(1,419
|
)
|
|
(1,910
|
)
|
|
(1,751
|
)
|
|
3,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net (2)
|
|
|
(145
|
)
|
|
3,541
|
|
|
62
|
|
|
78
|
|
|
44
|
|
|
53
|
|
|
919
|
|
|
1,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(1,305
|
)
|
|
1,421
|
|
|
(1,375
|
)
|
|
(850
|
)
|
|
(1,375
|
)
|
|
(
1,857
|
)
|
|
(832
|
)
|
|
5,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(
53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
($1,305
|
)
|
$
|
1,421
|
|
|
($1,375
|
)
|
|
($859
|
)
|
|
($1,375
|
)
|
|
($1,857
|
)
|
|
($832
|
)
|
$
|
5,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
($0.15
|
)
|
$
|
0.16
|
|
|
($0.15
|
)
|
|
($0.09
|
)
|
|
($0.15
|
)
|
|
($0.20
|
)
|
|
($0.09
|
)
|
$
|
0.55
|
|
Diluted
|
|
|
($0.15
|
)
|
$
|
0.15
|
|
|
($0.15
|
)
|
|
($0.09
|
)
|
|
($0.15
|
)
|
|
($0.20
|
)
|
|
($0.09
|
)
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common equivalent Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,967
|
|
|
9,164
|
|
|
9,341
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
Diluted
|
|
|
8,967
|
|
|
9,397
|
|
|
9,341
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,347
|
|
|
9,357
|
|
(1)
Effective January 1, 2006, the Company adopted Financial Accounting Standards
Board Statement No. 123 (Revised) - “Share-Based Payment”. Stock based
compensation expense charged to operations was approximately $65 thousand for
each quarter of 2006.
(2)
Includes gain on sale of investment in InterMute, Inc. of $3,496 thousand during
the quarter ended June, 2005 and $870 thousand and $1,236 thousand during the
quarters ended September 30, 2006 and December 31, 2006,
respectively.
Schedule
II
ZOOM
TECHNOLOGIES, INC. AND SUBSIDIARY
VALUATION
AND QUALIFYING ACCOUNTS
Years
Ended December 31, 2004, 2005 and 2006
Description
|
|
Balance
at Beginning
of
year
|
|
Charged
to
Expense
|
|
Deductions
charged
Against
Accounts
Receivable
|
|
Balance
at
end
of
year
|
|
Allowance
for doubtful accounts
|
|
$
|
121,914
|
|
$
|
37,184
|
|
$
|
40,906
|
|
$
|
118,192
|
|
Allowance
for price protection
|
|
|
109,561
|
|
|
145,697
|
|
|
236,529
|
|
|
18,729
|
|
Allowance
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
or doubtful accounts
|
|
$
|
118,192
|
|
$
|
761,703
|
|
$
|
650,041
|
|
$
|
229,854
|
|
Allowance
for price protection
|
|
|
18,729
|
|
|
213,913
|
|
|
209,566
|
|
|
23,076
|
|
Allowance
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
229,854
|
|
$
|
(49,828
|
)
|
$
|
(2,794
|
)
|
$
|
182,819
|
|
Allowance
for price protection
|
|
|
23,076
|
|
|
63,909
|
|
|
83,571
|
|
|
3,415
|
|
Allowance
for sales returns
|
|
|
607,183
|
|
|
2,871,120
|
|
|
3,090,989
|
|
|
387,314
|
|
COOP
advertising and other allowances
|
|
|
434,524
|
|
|
1,826,128
|
|
|
1,918,231
|
|
|
342,421
|
|
Year
ended December 31, 2006
|
|
$
|
1,294,637
|
|
$
|
4,711,329
|
|
$
|
5,089,996
|
|
$
|
915,969
|
|
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, filed
as
Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2004..*
|
|
|
|
|
**10.10
|
Summary
of Directors' Compensation, filed as Exhibit 10.10 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2004.*
|
|
|
|
|
10.11
|
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.*
|
|
|
|
|
10.13
|
Loan
Modification Agreement dated March 30, 2006, by and between Zoom
Telephonics, Inc. and Wainright Bank and Trust Company, filed as
Exhibit
10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.*
|
|
|
|
|
10.14
|
Amendment
to Security Documents dated March 30, 2006, by and between Zoom
Telephonics, Inc. and Wainright Bank & Trust Company, filed as Exhibit
10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.*
|
|
|
|
|
10.15
|
Letter
agreement dated August 4, 2006, filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006.*
|
|
|
|
|
10.16
|
Purchase
and Sale Agreement dated August 31, 2006, filed as Exhibit 10.1 to
the
Company’s Current Report on Form 8-K on September 20,
2006.*
|
|
10.18
|
Standard
lease by and between 201-207 South Street LLC and Zoom Technologies,
Inc.
on December 22, 2006 to lease space for 24 months for headquarters
offices.
|
|
|
|
|
**10.17
|
Form
of Non-Qualified Stock Option Agreement for Named Executive Officers,
filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on
December 12, 2006.*
|
|
|
|
|
21.
|
Subsidiaries,
filed as Exhibit 21 to the Company's Annual Report on Form 10-K for
the
fiscal year ended December 31, 2000. *
|
|
|
|
|
23.1
|
Consent
of UHY LLP, independent registered public accounting
firm.
|
|
|
|
|
23.2
|
Consent
of KPMG LLP, independent registered public accounting
firm.
|
|
|
|
|
31.1
|
CEO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
31.2
|
CFO
Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
32.1
|
CEO
Certification, Pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002.
|